Have you amended a contract recently? The UK Supreme Court in Cobalt v HMRC has said that whether a contract has been varied, or replaced, depends on the parties' common intention, objectively ascertained. So if you are altering a contract, assuming the issue is important, you will want to make it as clear as possible whether you intend the original contract to persist whilst being varied, or, whether you want the original contract to end and new contract to be entered into in its place. There are limits, at the extremes, to what you can agree.
Background - tax breaks
The UK government used to provide tax breaks for funding new industrial buildings in specified locations. To qualify for relief the developer had to enter into a construction contract within 10 years of a location being included.
Cobalt executed a qualifying contract, but later amended it. HMRC said the amendments were so significant that the parties had actually entered into a new contract, after the 10-year period.
The Supreme Court decided the tax break was not available for other reasons but still considered what test should apply when considering whether a contract has been replaced or simply varied.
To vary or not to vary? That is the question
The court observed that, most of the time, parties probably do not care whether a contract has been varied or replaced. If they do, they have quite a bit of freedom to choose and express that choice. Ultimately what they have chosen is to be assessed objectively. There are limits, however. The court felt that at some point it would bring the law into disrepute if the parties specified that some change in their contractual relations should take effect as a variation rather than a replacement even though that was utterly absurd.
Although it did not need to decide (and stressed that it was not in fact deciding) the court was inclined to say that trying to get a tax advantage through an admittedly significant series of amendments, was not so absurd that it would bring the law into disrepute. The court preferred to see it as a variation on the basis that the common law respects party autonomy and that the the tax context was important in ascertaining the parties intention.
Judgment: Cobalt v HRMC
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.
