Very often, these customer or supplier relationships are subject to complex written contracts that regulate the way in which the business is to be carried out. Many temporary trading arrangements that impact on the formal contractual relationship may be made in haste, either orally reflecting an "understanding" between the parties or by an exchange of emails.
It is important that, before the parties agree any variation to their contractual relationships, they consider the potential impact on the formal contractual position.
While the common law allows contracts to be varied by agreement, which can be oral or written, most contracts contain formal variation clauses. These clauses are meant to prevent inadvertent oral or informal amendments to contracts and consequently require any changes to the contract to be in writing and signed by both parties to the contract.
There is a danger therefore that any temporary trading arrangements agreed between the parties, but not made in compliance with any variation clause in the contract, could be meaningless if a dispute subsequently arises. For example, one party may act to their detriment in complying with what they thought was an agreed temporary variation only to discover that they may be completely unable to enforce it.
In the leading case of Rock Advertising Limited v MWB Business Exchange Centres Limited, the Supreme Court held that the law gives effect to contractual provisions requiring specified formalities to be observed for a variation. Once a contract has been signed, the parties can only agree variations to that contract insofar as the contract itself allows. The court stated that it could not be right that the court could override the parties’ express intentions to validly restrict their own ability to vary or amend the terms of the contract at some later date.
Another factor that may be overlooked is consideration. Any agreement that varies the terms of an existing contract must either be supported by consideration or be executed as a deed. In simple terms, something of value must be given in exchange for the proposed variation.
One of the risks of identifying consideration in the variation of the terms of an existing contract is that, while party A might be required to undertake an additional act to his detriment or benefit, Party B might be required to do nothing other than to adhere to the terms of the existing contract.
In Williams v Roffey Bros, however, the Court of Appeal held that, except in the case of economic duress or fraud, performance of an existing duty may provide consideration if it confers a practical commercial benefit, such as a saving of time or inconvenience in securing replacement performance, on the promisor.
Arguably therefore, a variation that relieves Party A from supply because of issues in the supply chain caused by coronavirus may well suffice if it confers a practical commercial benefit on Party B, for example by relaxing Party B’s strict payment obligations.
Key points to remember
When considering varying the terms to a commercial contract, the parties should bear in mind the following practical points:
- It is important that parties read the contract carefully or seek advice in order to identify whether there is a formal variation clause in the contract. If there is a variation clause, the parties must comply with the requirements of that clause if the variation is to be enforceable.
- Consider drafting any written variations by deed or by expressly referring to the payment of a nominal sum by way of consideration in order to minimise the risk of the court not upholding any written variation for lack of consideration.
- The agreed variation(s) should be set out as clearly as possible to avoid any dispute as to what was agreed at a later date.
- The parties should be mindful of the impact of any amendments on the remaining clauses in the contract as it may be necessary to make consequential amendments to other clauses.
- Be as clear as possible in the written variation as to the duration of the agreed amendment. For example, an agreement to vary terms for "the duration of the coronavirus pandemic" is likely to be considered unclear. Who decides when the pandemic is at an end and does the clause refer to the local, national or international end to the pandemic? It would be best to limit the variation to a specific date or for example the date that the Government revokes a specific piece of legislation, such as the Health Protection (Coronavirus Restrictions) (England) Regulations 2020.