Whilst it is not unusual for lawyers to labour over the minutia of contractual construction for hours on end, it is important to realise that contracts are rarely set in stone and a change in the commercial realities of businesses can warrant a contract modification.
In most cases, contracts will include variation clauses, which provide for a mechanism by which the parties can agree to alter its terms after signing. The most basic form that this clause will usually take permits a variation provided that it is agreed in writing by both parties. Depending on the circumstances though, contracts can contain complex and lengthy procedural requirements. It is rare that much time will be spent considering how this clause may influence the parties’ relationship in the future, despite how vital they may be for the flexibility, and in turn the longevity, of the relationship. If the parties informally agree to a variation in the terms of the contract, perhaps by way of an oral modification, contrary to the terms of the variation clause, it is easy to see how problems can arise.
Why are variation clauses important?
There are numerous reasons why a business may want to modify the terms of an existing contract. The likelihood of a variation of terms being required will to a large extent depend upon the length of term of the contract. In the case of long-term trading relationships, it is of course likely that circumstances will change and parties will agree to an alternative way of operating, but then fail to realise that this breaches the terms of their existing contract.
MWB v Rock Advertising
There have been a number of cases in which courts have deemed relatively informal exchanges sufficient to effect a variation of a contract, despite a written variation clause purporting to limit variations to those agreed in writing and signed by both parties. This has led to some questioning the usefulness of written variation clauses, if their effectiveness is going to be limited to such an extent.
However, in this recent case the Supreme Court upheld the formalities required in the variation clause in the contract, which provided that all variations must be “agreed, set out in writing and signed on behalf of both parties”. The court therefore declined to enforce a purported oral variation of the contract, which had not even been documented.
While relatively unsurprising, such a practice is not uncommon within the context of long-term business relationships – particularly those in which the relevance of their contractual relationship is often neglected.
Is this good news for businesses?
The good news is that this decision provides an increased level of certainty for businesses. It is easier to manage risk when you can be confident that a contract cannot be varied through informal correspondence.
However, businesses do need to be flexible, especially over extended periods of time, and this will require an awareness of the requisite steps needed to implement a contractual change. If this is not done in accordance with the variation clause, a party could easily find themselves in breach.
If anything is to be taken away from this decision, it should be that if a contract contains an explicit process for modifying its terms, the parties should be careful to follow (and ensure that their staff follow) that process as opposed to relying on a tenuous assumption of oral variation.
If you are looking for commercial contract advice and would like to discuss how we can help you and your business, please contact Simon Porter in BakerLaw’s Corporate & Commercial Department or call 01252 730754.
This article is not a definitive statement of the law. It is designed as a free update on the law at the time of publishing. It is not a substitute for legal advice on specific facts and circumstances. BakerLaw LLP and/or the writer accepts no liability or responsibility for reliance on this article and recommends that you seek independent legal advice on your specific circumstances prior to taking any steps.