Commercial contract variations - key points

Changing a contract

Contract variations take place all the time and for many reasons. Changes are the source of many disputes. Allegations that a commercial contract has been varied are also often used as part of a defence to a claim, sometimes as a tactic to muddy the water and avoid a quick outcome to legal proceedings.

Is it legal to vary a contract?

The starting point legally is that a contract can only be varied with the consent of both parties. Sometimes, the original contract itself will contain consent to vary the contract in the future. A good example of this is retail contracts, such as gym memberships, where there is  a term in the contract allowing for future price increases.

With some forms of contract, a variation, to be legally binding, must comply with statutory requirements. This is generally the case with property based contracts, such as long commercial or residential leases. Usually, a deed of variation will be required.

What does the contract say about variations?

If the parties really want to make clear that they do not envisage agreed future variations they will usually include a clause stating expressly that any agreed variations must be by deed. This is the most formal method.

If the contract is silent about variation, the general starting point is that any party arguing there has been a variation still needs to show consent of the other party. However, in the event of a dispute as to whether a variation has occurred (see below) the party arguing that there has been a  variation stands a better chance where the contract says nothing rather than if there is a process. The latter will indicate to a court that the parties agreed in the original contract to ensure variations were formal.

Reasons for varying a contract

Some of the more common reasons for contracts to be varied include :-

• changes in the applicable laws or regulations.
• Error or lack of clarity in the original agreement.
• Inability of 1 party to fully deliver what was originally agreed.
• Agreement to extend a time period in the contract such as a deadline for delivery or payment or where some form of notice needs to be given.

In some situations where the requested change is based on breach or potential breach of contract, the preferred option will often be a limited waiver of rights instead of a  variation, whilst generally reserving rights to hold the other party strictly to the existing terms of the contract in the future.

Implied variations to contract

If the contract does not provide a method and process for future variation, the main ways a variation can occur tend to be implied by some form of communication between the parties. In other words agreement by conduct. A variation can occur by a simple conversation, by email, text message or letter. Variation can occur where both parties behave in a way inconsistent with the agreed written terms.

The most obvious example is where the contract states that payment is due within a certain time after delivery of invoice.  If for example, invoicing is monthly and payment is due within 14 days but over a period of 6 consecutive months invoices are only paid 90 days after submission, this could constitute an implied variation of the contract by conduct.

Can email exchanges vary a contract?

Yes and in fact this is quite common. This is precisely the kind of common interaction that can take place where sales or other staff are ignorant of the exact written terms of an agreement between businesses. To avoid this kind of issue, clear clauses stating that the contract can only be varied in a more formal way are important. It’s also important to educate staff about the dangers of inadvertently varying a contract. Another way of reducing risk is to ensure that only designated senior staff are permitted to discuss variations as part of the contractual terms.

Summary and tips to avoid disputes

Our top recommendations based on  experience include :-

• The more high value or important a contract is, the more you should take care to ensure that contract variations cannot happen by accident or without senior management consent
• Be aware that it is common for alleged variations to contracts to be advanced as part of a  defence to what may appear to you to be a straightforward breach of contract or debt recovery matter.
• Where you agree a 1 off variation to an aspect of an ongoing contract, be careful not to waive your contractual rights in the future
• Where the contract needs to be varied or amended because of a mistake, it is generally important, to do it in a formal way, generally by a deed of variation.
• Make sure you and your staff are familiar with not only your own standard contracts but any important contract you enter into which has been created by the other party. If you do not understand a contract and/or are not familiar with it’s terms, this increases the risks you will end up somehow agreeing to vary it in ways which are not to your benefit.
• Ensure you set up procedures and educate your staff to minimise the risk of any variation which is not at the very least, documented in writing.

We can help

Our lawyers are experienced and expert in drafting, advising and reviewing all types of commercial contracts. We ensure that any potential variations to existing contracts are based on clear process to mitigate risks to you. We also deal with contract disputes including disputes where 1 party claims the contract has been varied. Please get in contact to discuss your situation and how we can help.