As a result of the current pandemic, many businesses will be seeking to renegotiate their contractual arrangements with key customers and suppliers, whether changes to pricing, payment terms, minimum order commitments or whatever. You might think you’ve agreed a change but beware – failure to follow correct procedure could mean that the change isn’t binding and your customer or supplier could subsequently refuse to honour the agreed change and insist on its strict rights under your original contract.
What does the contract say about variation?
Many contracts will include specific variation provisions, stating how any variation needs to be agreed and documented. It might, for example, call for a variation to be set out in writing and signed by authorised representatives of the two parties. It might also distinguish between major and minor variations, with major variations needing a formal, signed variation and minor variations being able to be agreed less formally. You must follow the procedure set out in the variation clause to ensure your variation is binding.
You’ve got to give something to get something
An agreement to vary a contract is just like any other form of agreement. That means that, in general terms, both parties need to give consideration for the agreement to be binding, otherwise the variation is just an unenforceable promise to vary. For example, in a contract where a customer has minimum order commitments, the supplier might agree to reduce the minimum order commitments in return for an increased price. If the supplier agreed to a reduction in minimum order commitments without getting anything in return, then that agreement wouldn’t be binding.
However, there is a way around this. It’s a quirk of English law that any variation (or other contract) set out in a deed will be binding whether or not both parties are giving something. A deed is a special form of contract that meets certain requirements, including the way in which it is signed and who can sign it.
If you’re not certain whether both parties are getting anything out of an agreed variation, you should always document the change in a deed of variation for certainty.
Third party rights
Less commonly, your contract might be enforceable by third parties who are not themselves signatories to the contract. In this situation, unless your contract explicitly states that consent of those third parties is not required, any change that affects those third parties might not be effective without them also giving their consent.
What if it’s too late?
If you’ve already agreed a variation but haven’t followed the principles set out above, and your customer or supplier tries to insist on enforcing the original (unvaried) contract, you might be able to rely on an English law principle known as estoppel. If it would be unfair for a party to rely on the original contract where it knows that the other party has made changes following an informally-agreed variation (for example, by making changes to its business or its other contractual arrangements as a result of the variation) then it may be possible to argue that the original party may not rely on the original contract. However, the Supreme Court has made clear that this will apply in quite narrow circumstances and, for example, if a contract states that it should only be varied in writing, then any argument that estoppel should override this requirement is likely to face an uphill battle.
If you need advice on varying any of your existing contracts, please do not hesitate to contact Matt Worsnop on 0116 281 6235 or by email on email@example.com.
Categorised in: Corporate and Commercial, Covid-19, NewsTags: Commercial Agreements, Company Law, Contracts, Coronavirus