Commercial Contracts

But we varied our contract, didn’t we?

Something about making contracts, particularly business to business contracts, which is often forgotten by the parties is that, while the UK tradition is you have freedom of contract, your freedom is curtailed the moment the contract terms are agreed. If I can prove you agreed to sell a particular thing to me (say a piece of plant) for an agreed price at an agreed time, you no longer have freedom to sell it to anyone else- because I can sue you for breach of contract.

A common feature in written business contracts is a clause forbidding variation of the contract unless the variation is recorded in a particular way e.g. by a further written exchange signed by the parties. So what happens if the parties seem to vary what was agreed, but only by acting in a different way to what is recorded in their written contract? For example, informally, a licensor of serviced offices does not strictly insist on a set instalment of the licence fee being paid by the licensee at a fixed time (monthly, quarterly or whatever)? Arrears build up and the licensor seeks to enforce the strict terms of the licence. This is what happened in a case decided this month by the UK Supreme Court, where the licensee claimed the licence contract had been varied informally.

In essence, the licensee’s argument was the parties to the contract can always agree between themselves to do things differently (after all they are the same parties). The fact no written variation of the sort contemplated by the contract was signed did not matter. This argument was firmly rejected and the earlier decision of the Court of Appeal overturned (showing even very senior judges can get it wrong sometimes).

In short, the judicial reasoning is (a) such clauses prevent attempts to undermine written agreements by informal means, which may be open to abuse; (b) oral agreements can give rise to misunderstandings as to the nature of the variation, something which such clauses avoid; and (c) formality in recording variations makes it easier for businesses to regulate their own management team’s authority to agree variations with the other party. The Supreme Court considered these to be legitimate commercial reasons for agreeing, and expecting the courts to enforce, what are, after all, the parties’ own freely chosen rules on variation; it is not the role of the law of contract to obstruct the legitimate intentions of businesspeople.

So be careful. If your contract has a procedure for regulating variations and you believe the other party has agreed some important change to your contract, do not wait for the dispute you think will never happen, get the variation documented and signed as required by your contract.

Even if there is no control on variation, remember the courts always start by looking at the written terms agreed by the parties. If those are clear, the courts will be reluctant to accept the parties have orally, or by their acts/omissions, varied the written contract. If you are facing such a set of circumstances, but it is now too late to get a written agreement documenting the variation, at the very least look for all the evidence you can produce to convince the court (1) the parties agreed to vary their contract and (2) as to what the detailed variation was.

Finally, if you fail to prove the parties varied the deal, you might at least have an argument that the other party is personally barred by their actions or omissions from enforcing the original contract against you (but that is very difficult to do and a subject for another day)

Stephen Cotton, Partner

 

If you would like to discuss any contract queries you have please contact Stephen Cotton or Emma Arcari