Contents: When is a contract variation appropriate?; What is a contract variation?; What are the methods of varying a contract?; Written variation; Oral variation; Variation by conduct; Unilateral variation; Waiver; Sustained minor breach; Varying deeds; Varying business-to-consumer contracts; Changes in law and variation of contracts
When is a contract variation appropriate?
It is a commercial reality that parties doing business together do not simply enter into self-contained discrete contracts with each other but engage in a business relationship that evolves over time. This can lead to the need to make changes to contracts already in place.
Variations to contracts may arise and be proposed for many reasons, including:
A contract variation request from one party may indicate an underlying problem in that party’s ability to perform its obligations as originally anticipated. In such circumstances, the other party should consider its options and satisfy itself that a variation is the most suitable solution.
Most variations will have an impact on cost, time or quality and this can potentially impact the viability of a contract for either party. As such, an assessment of the impact of a proposed variation should be carried out and any unintended consequences identified, and the appropriate sign-off should be sought from the business before a variation is concluded.
A contract variation is a subsequent change to an original contract. The parties to the original contract may agree the change at the time of the variation, or a future variation could have been provided for by the parties at the time of the original contract through the identification of trigger points or processes resulting in change (such as price escalation provisions or interest rate changes).
Not all changes to a contractual relationship amount to an effective or valid variation. Sometimes the changes are such that the end result is not a varied contract, but a rescinded, assigned or novated contract.
Variation v rescission
It can sometimes be difficult to tell whether a variation is a variation or a rescission of the original contract. The effect of rescinding a contract is to extinguish it and restore the parties to their pre-contractual positions.
Rescission of a contract may be implied where the parties have entered into a new contract entirely or to an extent going to the very root of the first contract inconsistent with it (Morris v Baron). Therefore, a purported rescission of a contract which does not ‘go to the root of the contract’ is a variation only
Variation v novation
Rather than effecting a change to an existing contract, a novation involves the transfer of rights and obligations of one party under an original contract to a new incoming party, in effect creating a new contract between the remaining party to the original contract and the new incoming party in substitution for the original contract. The parties may novate the original contract as is or make amendments to the contract being novated as part of the novation.
Parties, whose rights under a contract may be lost if a variation is validated, have sought to argue that the purported variation constituted a discharge of the original contract and the creation of a new contract with different parties, equivalent to a novation (Langston Group Corpn v Cardiff City Football Club). To date, this argument has not been successful but highlights the uncertainty regarding variation. Drafters should objectively appraise their efforts to ensure rights and obligations under the contract are not inadvertently varied or discharged.
Variation v assignment
An assignment involves the transfer of a right or benefit under an existing contract to a third party (rather than amending that right or benefit). Unlike novation, the original contract is retained and, since the contracting parties remain the same, an assignment does not provide a release of liability for any party.
What are the methods of varying a contract?
Contracts can be varied in several ways:
An existing contract may be varied in writing, provided that the variation satisfies the usual requirements for the creation of a binding agreement—ie offer, acceptance, consideration and contractual intention of the parties.
Variation provisions in existing contract
Where the original contract is in writing, it is common practice for a term to be included which provides that any amendment or variation of that agreement is to be made in writing and signed by all parties or their authorised representatives.
Some written contracts go further and provide that the parties must discuss and negotiate a proposed variation only within the confines of a prescribed process and in a pre-agreed format (eg a change control procedure).
It is therefore important to check whether the parties to the original contract have agreed any contractual terms pertaining to future variations of it.
A Supreme Court case provided some examples of legitimate commercial reasons for including a clause which requires that contractual variations are to be in writing:
Where the original contract was formed orally, it is unlikely that the parties will have made specific provision for future variations; however, the existence of any agreed term (if there is one) governing future variations should be verified.
Consideration
A contractual variation will itself be a contract between the parties to the existing agreement and therefore consideration must be provided for the variation to take effect.
Consideration can take a number of forms, such as payment of a nominal sum. The parties’ mutual abandonment of existing rights, the conferment of new benefits by each party on the other or the assumption of additional obligations will usually also be sufficient consideration.
A promise to fulfil an existing contractual duty towards the other contracting party is not good consideration. Additionally, a ‘practical expectation of benefit’ has also been held as not constituting good.
Where the amendments favour one party only, the variation will not generate its own consideration and it may therefore be more difficult to establish an effective binding contract. If there is any doubt, wording such as the following could be inserted:
‘In consideration of the parties mutually agreeing to waive the enforcement of any outstanding rights existing at the date hereof, the parties agree to [vary the agreement, with effect from [insert date] as follows: OR terminate the agreement with effect from the date of [insert date]].’
Past consideration is generally not good consideration but there are exceptions.
Consideration is not required where the variation is:
Variation by deed
To avoid the need for consideration, the variation could instead be executed as a deed.
If executing as a deed, ensure that you comply with any statutory requirements. Be aware that agreements that are executed as deeds have an extended limitation period (12 years, rather than the six years under contract).
Deeds do not have to be varied by way of a further deed, but variation of a deed should at least be in writing and consideration supplied.
It is possible to vary a contract orally. For an oral variation to be valid, it must meet the same requirements as apply to written variations—ie it must satisfy the usual requirements for the creation of a binding agreement. However, there are some exceptions:
contracts which are required by law to be evidenced in writing (eg contracts for the sale or other disposition of an interest in land, contracts regulated by the Consumer Credit Act 1974 (CCA 1974), guarantees)—any variations to such contracts must also be in writing or may otherwise only take effect as a waiver or by way of estoppel (or as a collateral contract independent of the main contract)
contracts which contain a ‘no oral modification’ (NOM) clause, prescribing that a contract cannot be amended except in writing.
Contracts can be varied by conduct, and such conduct may be an act or omission. Asserting that a contract has been varied by conduct can be more difficult than asserting a written or oral variation.
Variation by conduct often occurs with construction contracts or contracts where a supplier or contractor is obliged to complete performance by a certain date. The variation will normally be to the time required for performance.
Generally a contract cannot be unilaterally varied by a party, but a contract may validly grant one party a unilateral power of variation. In such circumstances:
In the law of contract, the term ‘waiver’ is most commonly used to denote the granting of a concession or forbearance by one party to a contract (without consideration), whereby it does not insist on the precise performance by the other party of a duty under the contract, whether before or after any breach of the term being waived. Alternatively, waiver is seen as a party giving up its rights to take action or enforce its rights under a contract, thereby obliging the other party to perform its obligations.
A waiver can be distinguished from a contractual variation as a variation must be supported by consideration (or executed as a deed) and cannot be retracted unilaterally. Conversely, a waiver is provided without consideration and may (at least in theory) be retracted unilaterally.
A waiver can be made orally even where a contract is one which is required by law to be evidenced in writing. Conversely, where the new agreement in respect of such a contract is a variation, it must be in writing or otherwise can only take effect as a waiver or by way of estoppel (or as a collateral contract independent of the main contract).
Where there is no apparent written or oral variation of a contract, equity can nonetheless play its part. Linked very closely with waiver, a party that has persistently accepted minor breaches by the other party may be prevented from claiming that there has been no variation; while the courts do not treat such events as a genuine variation, they will not allow the history of the parties’ actions or inactivity to pass unnoticed (Hazel v Hassan Akhtar).
There is no requirement that a deed necessarily be varied by a deed, but there are specific considerations when altering or varying a deed itself. It will be necessary to consider the existing status of the deed document, the nature of the proposed amendment and the impact which the amendment will have on either the party entitled or the party liable under the deed.
Varying business-to-consumer contracts
When varying, or drafting a variation clause for, a business-to-consumer (B2C) contract, it is important to be aware of consumer protection legislation. For example, the power to vary a B2C contract unilaterally may amount to an unfair term prohibited under the Consumer Rights Act 2015 (CRA 2015), or a variation of a consumer credit contract may be subject to the provisions of the CCA 1974.
An unfair term or notice of a consumer contract is not binding on the consumer. A term or notice is unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations under the contract to the detriment of the consumer.
The CRA 2015, Sch 2 Pt 1 contains an indicative and non-exhaustive list of terms in consumer contracts that may be regarded as unfair. The power of the trader to vary a B2C agreement may amount to an unfair term, in particular where it has the object or effect of allowing the trader to:
The Competition and Markets Authority (CMA) has provided specific guidance on variation clauses in B2C contracts. It advises that the right for one party to alter the terms of the contract after it has been agreed, regardless of the consent of the other party, is under strong suspicion of unfairness and may well, in any case, be blacklisted for the purposes of Part 1 of the CRA 2015.
Furthermore, if a right to cancel is to be of any value in connection with the use of a variation clause, generally consumers need to be given notice of a proposed variation in good time so that they can consider their position before deciding whether to accept it or to end the contract.
By the publications team at: Contracts-Direct.com with the assistance of the referenced third parties (Lexis Nexis).
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