In the whirl of business, written agreements sometimes fail to track commercial developments; and when disputes then arise, parties may find that their contracts do not say what they thought they did, or reflect their actual practice. This can be frustrating and lead to uncertainty - are the parties bound to their original bargain, or has the contract been varied?
In this article, we consider the ways in which a contract can be varied, and the factors that the courts will look at when considering whether a valid variation has taken place.
What is variation?
In simple terms, a contract variation occurs when the parties agree to do something differently from the way they originally agreed, whilst the remainder of the contract otherwise operates unchanged.
For example, in a contract for the supply of goods, the parties might agree that the delivery time for the goods should be reduced by one week in exchange for an increase in payment, with the other terms remaining the same. Such an agreement, if valid, would amount to a variation of the existing contract.
What are the necessary elements of a valid variation?
A valid variation usually has four key elements.
- The parties must usually mutually agree to alter or modify the contract. In some circumstances the underlying contract might give one party a unilateral right to make certain limited changes, but agreement is normally necessary.
- The parties must intend the alteration/modification permanently to affect their rights. If there is no such intention, then the change is likely to amount only to a temporary forbearance or concession, rather than a permanent variation of the contract.
- The parties must comply with any requirements as to the form of the variation. These could be specified by legislation, or set out in the original contract which is being varied.
- The agreement to vary a contract will need to be supported by consideration - something of value must be given in exchange for the alteration. If there is no such consideration, then the variation will need to be effected by deed.
In the event of dispute as to whether parties have reached a valid agreement to vary their contract, the court will determine the issue by considering the relevant facts in light of the usual rules of contractual interpretation.
How can parties vary a contract?
In general, a contract can potentially be varied in the same ways that parties can form any contract, i.e.:
- in writing - this could be by way of formal variation agreement, a side-letter, or a less formal exchange of emails;
- orally - for example, where a variation is agreed verbally at a meeting; or
- by conduct - where in practice the parties do something different from what was originally agreed.
As always though, there are exceptions to the rule. For example, the law prescribes that certain types of contracts must be in writing. Variations to those contracts must also therefore be in writing. Examples include contracts for the sale of land, assignments of the benefit of a contract, guarantees and transfers of intellectual property rights. Further, the parties' original agreement may expressly provide that it can only be varied in writing (as to which, see below).
How might parties vary a contract through conduct?
Where parties vary a contract in writing, it will normally be straightforward for a party asserting its rights to evidence the agreed variation by pointing to a variation agreement or exchange of emails. Similarly, a party asserting an oral variation should be able to identify how the variation agreement was reached. However, where one party asserts that a contract has been varied by conduct, matters can be somewhat more complex.
In this case, the party arguing that the contract has been varied will need to show that there has been a clear pattern of behaviour that is inconsistent with the terms of the original contract, and consistent only with the parties having agreed to vary those terms. Put another way, a party will be unable to establish a variation by conduct if the parties would or might have acted exactly as they did in the absence of any such agreed variation. Establishing that a contract has been varied by conduct is therefore often very challenging, and so it is prudent for parties to record variations in writing so as to avoid disputes as to the terms governing their relationship.
What if the underlying contract says that it cannot be varied except in writing?
Sometimes, varying a contract in writing is not just prudent, but essential. Commercial contracts often contain a clause that provides that a variation is effective only if it is in writing and is signed by all parties. This type of clause is designed to strike a balance between flexibility and certainty. While it allows the parties to vary their agreement (thus giving the parties flexibility to reflect later developments and changes in practice), it means the parties should always have a definitive record of the agreed terms (as varied over time) and can therefore avoid disputes about the terms which govern their relationship.
Until very recently though, there was some uncertainty as to whether such clauses were binding. Notwithstanding the clear wording of such variation clauses, they had given rise to conflicting decisions in the English courts. In one case, the Court of Appeal held that parties could vary their agreement orally or by conduct, even if the agreement expressly stated that variations had to be in writing. In essence, the Court's view was that where parties orally agreed to vary a substantive part of their agreement, they also impliedly agreed that the 'variation in writing' clause would no longer apply. Following a Supreme Court decision in May 2018 though, this approach is no longer good law. Now, parties can have more confidence that, if their contract says it may be varied only in writing, courts are likely to uphold that provision. There may however be limited exceptions where one party relies on the other's representation that an oral variation will be valid notwithstanding the presence of such a clause. In such cases, the doctrine of estoppel may prevent the party seeking to enforce the "variation in writing" clause.
How much can parties vary a contract?
Variation can be a Ship of Theseus (or, depending on your frame of reference, Trigger's Broom) problem - how far can the parties vary their contract before it ceases to be the same contract?
This distinction may be important - if the varied agreement departs from the original contract in an essential way, it may be considered by the court to be a new agreement, such that the original contract is rescinded. That could have unforeseen consequences if a party seeks to rely on a provision of the original contract which may not have been reproduced in the new agreement.
Practical points when managing contracts
Those responsible for managing contracts should bear in mind the following summary points:
- If seeking to vary the terms of an agreement, it is best to do so in writing to avoid disputes over what terms have been agreed. Sometimes it is also essential in order for the variation to be binding.
- When considering any proposed variation, the parties should be mindful of the effect of the proposed revisions on other existing provisions, and ensure that they document any necessary consequent variations accordingly.
- Do not rely on being able to argue that a contract has been varied by conduct - although possible, this is a challenging argument to run under English Law (particularly if the agreement provides it may be varied only in writing).
Read the original article on GowlingWLG.com.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.