Are contract amendments made in an economic downturn legally binding?
03 February 2023
Performing obligations in commercial contracts in the current downturn is a serious challenge for some businesses. Sometimes that challenge will be so great that it is the catalyst for a breakdown of a business relationship. But where there is a common desire to get through these tough times, the focus may be on how contractual terms might be varied to ensure that both parties are able to survive.
However, contracting parties should exercise care; amending the terms of a contract requires careful thought and precise execution – a business will not wish to survive the economic downturn only to discover later that amendments to a commercial contract it thought had been agreed are of no legal effect.
Generally, contracting parties can make legally enforceable variations to their contract by mutual agreement provided that:
- there is “consideration” for the variation (unless the variation is made by a properly executed deed); and
- the parties comply with the terms of the existing contract specifying how variations may be made; and
- the variations comply within any applicable law.
Any business proposing variations to a commercial contract should have regard to these three key points.
An essential element of contract law is that the recipient of a promised benefit must have given something of value in return for that promise. If A promises to do something for B, then B can only force A to deliver what was promised if B has promised to give something in return. Without the promise from B, there is no consideration and a court will not order A to fulfil his promise.
Promises of performance given by the contracting parties do not need to be of equal value, but they do both need to have some value. This is why you will often see contracts containing words along the lines of: “in consideration for the payment of £1 by A to B, B agrees to do X, Y and Z”.
Usually, simply agreeing to do the things a party is already obliged to do under the contract will not amount to “good consideration”. That is commonly referred to as “past consideration”. If A fails to give “good consideration” it may not be possible to compel B to deliver anything promised by a variation which was in addition to the things B was already obliged to do under the contract.
But a note of caution – things are rarely that simple and “usually” means that there will be instances when what appears to be “past consideration” is found to be “good consideration”. For example: if A has good reason to doubt that B will perform his obligations under the terms of the existing contract and offers to pay a bonus if B will complete his obligations within the timeframe specified in the contract – B may be able to demand payment of that bonus. Provided A received some benefit or avoided a detriment (such as being liable to pay a penalty to a third party under a related contract if B didn’t perform its obligations on time) then a court may order the bonus payment to be made even though B simply complied with the original contract.
Variations should be made in accordance with existing contractual requirements
When contemplating amending a commercial contract, it is important to consider whether the contract contains express terms detailing procedures the parties agreed to follow when amending any term of the contract.
It is not uncommon for contracts to include a provision along the lines of: “the terms of this contract can only be amended if the amendment is agreed in writing and signed by the parties”. The rationale for such clauses is usually that both parties had a desire to prevent variations being “agreed” by unauthorised representatives and wished to ensure that a written record of all variations was created to avoid disputes about the precise terms of any variations. Such clauses, often called “No Oral Modification” or “NOM” clauses have been upheld and courts have refused to enforce variations when the parties have not complied with the requirements of the contract.
Nevertheless, it is fair to say that a failure to comply with the formal requirements of the contract may not be fatal to the enforceability of the variation, especially where a party acts in accordance with the variation or where the parties never dispute what they agreed. However, failure to comply with the requirements of the contract carries the risk that A is dependent on B not taking a technical point in the future.
Wherever possible parties should avoid putting themselves in the position of being forced in the future to deal with a dispute concerning a variation. Such disputes can be expensive, time consuming and may require a party to contend that the variation is so fundamental that it is in reality a new contract rather than a variation, or that it is inequitable for one party to resile from a variation that has been acted on by the other party.
The law requires some variations to be made in a particular way
In most cases, contractual variations may, as a matter of law, be made orally. However, the law does require certain contracts, and any variations to those contracts, to be in writing and sometimes to be by deed rather than a simple contract. It isn’t practical to try and identify each and every scenario in which the law imposes such conditions. As a starting point, if an agreement is made by a deed it will be worth spending a little time checking why this is the case. Is it, for example, to avoid the risk of the terms being unenforceable due to a lack of consideration or is it because it is required by law?
Some contracts must be in writing, and therefore any variations must also be in writing. These include:
- contracts for the sale of land (which must be in a deed)
- leases (if they exceed a term of 3 years)
- the appointment of trustees
- a legal assignment for the benefit of a contract
- any assignment of most intellectual property rights
Although these circumstances are potentially limited, it is prudent to check the position so that any agreed variation isn’t unenforceable because it wasn’t made in the required format.
Contract variation: key questions
We know times are difficult, and we recognise that there can be short-term and long-term gains for contracting parties who co-operate to ensure they are able to continue operations during a downturn. However, an apparent spirit of co-operation during difficult times may not carry over to the harsh realities of the commercial world when the economy picks up again. It is therefore worth adopting a measured approach and to ask three simple questions when contemplating contractual variations:
- Is there “good consideration” passing between the parties?
- Are there existing contractual requirements to vary the terms?
- Does the law require the variation to be made in a particular way?
If we can assist in relation to any contemplated variations, we would be very happy to do so and would encourage consideration of our “LS Unlock” initiative setting out the financial possibilities on which we may be able to provide advice. LS Unlock comprises a free initial assessment of significant commercial claims together with a menu of alternative fee arrangements which can reduce and, in certain cases, eliminate the upfront cost of pursuing a claim. This initiative has been designed specifically to assist clients in this uncertain economic climate and is part of our commitment to working with clients to help them survive its effects.
Also in our economic downturn series…
Commercial dispute resolution: navigating the economic downturn06 February 2023
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How can I recover unpaid debts?03 February 2023
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