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Varying a contract
As time marches on, relationships evolve often reflecting outside influences that affect those associations. Business relationships, in particular, often change direction to suit fluctuating markets, new competitors and ever diversifying customer bases. To keep one step ahead of, or at least in step with, such changes, prudent businesses may want to consider updating their commercial contracts and potentially altering their terms.
The most widely accepted way to effectively and validly change the terms of a contract is to record those agreed changes in written format and obtain the signed agreement of all parties to the original contract, in the new document. It is usual practice for commercial contracts to contain a 'no oral modification' clause. This is a term that expressly provides that the only way to vary the contract is in writing and with the agreement of all parties to that contract.
As a general rule, all parties to a contract should agree to any changes prior to these taking effect. However, there are a number of different ways that a contract may be varied:
There is an exception to the general rule that all parties to a contract should agree to any variations of that contract. Unilateral variation occurs where one party only has the right to make changes. This type of variation is usually only valid under specific circumstances, where it applies to particular provisions of the contract and where it has been agreed by the parties in advance. Furthermore, the scope of the potential variations permitted will usually be restricted by the contract. An example of a unilateral variation is where a lender has the right to change minor terms of a loan contract unilaterally, such as the rate of interest payable on the amount owing under that contract. However, parties should be cautious, as any term, that forms part of your standard terms and gives too much scope to one party to vary a contract could be void under the Unfair Contract Terms Act 1977 due to unreasonableness.
Variation by conduct
This type of variation often applies to contracts where one party has specific deadlines to meet under the terms of a contract. If the party subject to the deadline is hindered or restricted from meeting that deadline due to the actions and/or omissions of another party to the contract, it would be unconscionable for the party with the deadline to be found to be in breach of the contract. In such circumstances it may be an implied term of the original contract for the original deadline to be extended by a reasonable period to enable the hindered but otherwise compliant party to carry out the work/services required.
Waivers and continued minor breaches
Parties to a contract should be cautious of waiving their rights under the contract. The risk of one party agreeing to waive certain rights, for any period of time, is that, once this is agreed (verbally or otherwise), that party may be bound by such acquiescence even if it changes its mind. Often commercial contracts include a boilerplate ‘no waiver’ clause, which usually provides that:
- waivers must only be in writing;
- a party’s failure/delay in exercising certain of its rights under the contract does not constitute a waiver by that party;
- only partially exercising any rights under the contract will not prevent a party from later being able to rely on that right to a fuller extent.
Similarly to waivers, parties to a contract should be wary of continually accepting minor contractual breaches carried out by the other party. Where one party has engaged in business practices that are outside the parameters of the contract, but have not been challenged by the other party, such acquiescence may be considered by the courts to be a form of acceptance of that behaviour. For example, if a contract specified that payments of invoices were to be made on the 1st of every month but payments were regularly made on the 20th of every month and this was consistently accepted, it may be argued that a new payment date has been agreed as the 20th of the month.
Whilst contracts may be formed, and varied, by way of oral agreement, these types of agreements are more likely to result in disputes as a result of the lack of certainty and detail of the precise terms of such agreements. As a result, contracts will often stipulate that any variations to the contract must be in writing.
In the case of Rock Advertising Limited v MWB Business Exchange Centres Ltd  UKSC 24, the Supreme Court ruled that a no oral modification (“NOM”) clause did prevent the parties from varying the contract containing the clause by way of oral agreement.
The facts of that case involved a licensee (Rock) of managed office space that was owned by MWB. Rock defaulted on the monthly licence fees due to MWB. Consequently, MWB served notice on Rock to terminate the licence, evicted Rock from the premises and issued a claim for the arrears. Rock argued that it had reached an oral agreement with MWB to make the outstanding and overdue payments in monthly instalments. A schedule had been prepared citing instalments of a lower rate for a number of months, which would later increase to a higher rate for the remainder of the licence period. However, MWB stated that, whilst this schedule had been considered as a proposal in negotiations, it was ultimately rejected. Furthermore, MWB relied on the fact that the licence agreement had a NOM clause.
Lord Sumption gave the leading judgment in the Supreme Court and concluded that the law “should and does give effect to contractual provisions requiring specified formalities to be observed for a variation.” Lord Sumption opined that the Court of Appeal’s assertion to the contrary was misguided. In his view, autonomy may operate in negotiations between the parties right up to the point that a formal contract is made, but, once the contract is formed, it may only operate to the extent that the contract allows.
The outcome of the Rock v MWB case confirmed that NOM clauses legitimately:
- prevent attempts to undermine written agreements by informal means;
- clarify, for the avoidance of doubt, the formal procedure for agreeing variations so there can be little or no question as to whether a variation was intended;
- make it easier for businesses to self-govern their own rules relating to restrictions on the authority to agree variations.
Whilst NOM clauses (like many other boilerplate clauses) may be taken for granted and may have little attention paid to them in drafting, they are nevertheless an important part of commercial contracts. The purpose and intention of such clauses is to achieve certainty of contract and help management to maintain control of contract terms as well as avoid litigation.
If the arrangements between you and a supplier or customer have evolved since the contract was signed, you may want to consider formally varying the contract to prevent any dispute later about what changes have been agreed. If you would like to discuss any of these matters, get in touch with either Jon Rathbone or call us on 01242 574244