At times it can be hard work to negotiate a contract. The very last thing you may want to do is think about changing a signed deal, but there are times when varying a contract is either sensible business planning or a critical step if you want to safeguard your interests and maintain profitability. In this guide our commercial solicitors discuss when changing the terms of a contract should be on your agenda and how to go about agreeing to vary a contract.
- Can you change the terms of an existing contract?
- What situations might require a variation in contract?
- Variation of contract or termination and replacement?
- Agreements to vary a contract
- How can you vary a contract?
- Varying a contract by email
- Disputes over contract variation
- Protecting your business: tips on changing the terms of a contract
Can you change the terms of an existing contract?
We are living in a very different world to pre-Brexit and pre-pandemic UK. It is therefore inevitable that some older contracts no longer meet requirements. Ignoring UK politics and world events, your contracts may need changing because of your own altered business circumstances. In 2019, you may have been a start-up with no financial clout or brand reputation to rely on, but with a growing online business you may be in a totally different league in 2022 with scale-up plans. The opposite can equally be true, and that’s why contracts need reviewing and varying.
You can change the terms of a contract. How easy it is to do so depends on:
- How agreeable the other party or parties to the agreement are to varying the terms of the contract
- The existing contractual terms
- The relevant law applicable to the contract
- Your bargaining position
In the right circumstances, it can be relatively straightforward to vary the terms of a contract. Failure to review and vary may cost your business money so it’s well worth spending the time investigating if your contracts need reviewing and making variations happen.
It is trite to say but sometimes the biggest improvements to profitability can be cumulatively managing the ‘little things’ to get maximum profit and advantage from each contract, as well as developing the latest product or service to scale-up your business.
Remember, you have to consider if you are negotiating a variation or what is in effect a new contract. After all, for a contract variation to amount to a ‘variation’, elements of the original contract must remain in place. In simple terms, a supply contract cannot morph into a franchise agreement, but you can vary the supply terms by way of a contract variation.
What situations might require a variation in contract?
The situations that require or justify a variation in contract are numerous. Commercial solicitors find that businesses ask for help with varying contracts in cases where:
- Established terms of business need to be reviewed and varied if there is a change in legislation, regulations or the standards required by an industry specific regulatory body have changed.
- There is a sales and distribution contract with provision for variable pricing in the contract. Both parties to the agreement may prefer a variation to a fixed price structure to provide greater certainty. The seller may be happy to vary the contract on price to secure a longer contract period or changes in what are now perceived as onerous distribution terms.
- A joint venture agreement may need a rethink if the parties to the joint venture are to remain committed to working together. For example, at the outset of the agreement, it was anticipated party A would supply the digital expertise, party B would supply the funding, whilst party C would provide the IP. Things change and party A’s contribution is vastly in excess of that originally agreed. To prevent a joint venture dispute, or the early termination of the agreement, a variation to bring in the contribution of an additional party D or an adjustment to the reward structure may be necessary. Without a variation of the joint venture agreement all parties risk the agreement imploding as the terms are no longer fair to one party.
- With a supply of goods agreement, the contract may require review if the supplier can no longer source the goods because of international supply issues or the purchaser’s business model and purchase requirements have had to adapt because customer preferences have changed.
Best practice is to review all contracts on a regular basis so you are not reactive to business change but ahead of the game and spotting opportunities and avoiding issues before they become problems. Without reviewing your contracts, and varying them as necessary, a minor issue can escalate into a full-blown dispute, something that might have been avoided with a proactive approach to contract management.
With any company there is a business life cycle and that is equally the case with a contract life cycle. For more information on contract life cycles read our articles:
- Contract lifecycle management: what you should be doing
- Why you should regularly update your commercial contracts
Variation of contract or termination and replacement?
The decision on whether to vary a contract or to terminate and replace is a combination of commercial legal advice and business acumen. If your company:
- Has the grounds to give notice to terminate the contract or the contract will expire automatically on a fixed date; and
- Believes major changes are needed to the contract; and
- Is in a strong bargaining position if the contract is ended as there are a wide range of alternate parties looking to do business with you at competitive prices and all able to meet the specifications and standards you require.
Then termination and replacement contract may be your best option to secure the most advantageous contractual arrangements. If the opposite is the case, and the other party would prefer the contract to end, because of your preferential terms (in comparison to the current standard contractual terms and available terms with other contractors) then your commercial solicitors may advise you to either:
- Do nothing as you do not want the other party to realise that they have a right to terminate the contract, leaving you to try and negotiate a new contract on at least as good terms or
- Only suggest variations to the current contract that are essential tweaks, such as changing currency payments or making reference to adherence to new regulations.
Whether to terminate and replace or vary requires the business to work with a commercial solicitor to decide on the best strategy, because you don’t want to:
- Terminate the contract if you don’t have the grounds to do so. This involves checking the exit and termination clause in the current contract.
- Terminate the contract if the timing of termination is not in your best interests. For example, you may want to sort out seasonal orders before terminating a contract or make sure you are terminating the contract at the other parties ‘quiet time’ when they are traditionally hungrier for business and willing to negotiate a good deal.
- Expose your business to any disruption by terminating the contract and not being able to negotiate a new deal with the current provider, or alternate third party, before the notice period on your current contract expires.
- Ruin a great business relationship with a contracting third party unless the financial and economic reasons justify your actions.
For more information about contract termination take a look at our article: Terminating a commercial contract.
Agreements to vary a contract
Varying a legally binding contract can only be done by agreement between the parties to the contract. It can't be done unilaterally unless the original contract says one party can make changes without first seeking the agreement of the other party. For example, a contract may say that the supplier can vary the contract to change the contractual obligation from the supply of red balls to blue ones. However, no variation clause is every negotiated that allows one party to unilaterally vary significant parts of the contract, such as the price or delivery timescale of the product.
A commercial solicitor will normally advise against giving the other party any ability to unilaterally vary any aspect of the contract as, for example, your business may have entered into a contract to supply red balls to a customer and not included a right to unilaterally vary the colour of the ball supplied so your business end up in breach of contract.
With agreements to vary, the reality is that if either party to the contract has the grounds to terminate the contract and the bargaining power, the party seeking the contract variation, can use the threat of exercising the right to terminate and their position of power to get the other party to agree to vary the contract.
Consideration to vary a contract
An agreement to vary a contract should be supported by consideration. For example, by agreeing to improve delivery times to two instead of three days the other party will agree to increase the size of the order or the price of the unit. If the variation is not supported by consideration, to be effective, the variation document needs to be a deed rather than a quick email exchange or even formal document labelled ‘contract’.
Does a contract have to be varied by deed?
A contract does not necessarily have to be varied by deed. It all depends on whether consideration is being given and the nature of the contract. If you are unsure about whether a deed is necessary it is best to speak to a commercial solicitor as you do not want to inadvertently not vary the contract by failure to sign a deed. Nor do you want to end up in the position where you have rescinded the original contract by your actions but failed to implement the variation.
How can you vary a contract?
The law on how you can vary a contract depends on the nature of the contract. For example:
- The contract may say that a variation is only effective if a supplemental deed is entered into.
- The law may say a contract can only be varied by deed. For example, the sale of land.
- The contract may originally have been a verbal contract.
Methods of varying a contract include:
- By deed.
- By formal written supplemental contract document.
- By exchange of email.
- Verbally but this can lead to contract disputes over whether there was a verbal agreement to vary or not.
- By course of conduct. For example, by a supplier sending blue rather than red balls to their buyer and the buyer raising no objection. Variation by course of conduct is fraught with issues because if there is a dispute over whether a variation was agreed or not the court may need to assess the evidence leading to lengthy, and potentially expensive, court litigation that could have been avoided by supplemental contract or by an exchange of email, provided the email exchange was intended to vary the contract.
Varying a contract by email
It is possible to enter a binding contract by email. It is therefore equally possible to vary a contract by email. However, it is important to remember to check the original email exchange to see what the email exchange had to say about whether and how the contract could be varied. The fact that the contract was entered into with a degree of informality by email does not necessarily mean the contract can be varied just as informally as it was entered into.
For more information on contracting by email read our article Are emails enforceable contracts?
Disputes over contract variation
Disputes over whether a contract has been varied, and the extent of the variation should be avoided as they are an unnecessary business distraction.
For a variation of contract to amount to a legally binding variation of contract you need to be able to show that:
- The parties agreed to vary the contract or one party had the unilateral right to do so.
- The variation was not a one-off concession but a permanent change. For example, it was agreed that the product colour would change from red to blue on an indefinite basis.
- The variation has been executed properly. The correct execution method may be by deed but, in other situations, a document or even email exchange may be satisfactory.
- Consideration was exchanged for the variation or, if no consideration was provided, the variation was made by execution of a deed.
If there is a contractual dispute over whether a contract was varied or not, and the impact of the attempt to vary on the validity of the original contract, then commercial dispute solicitors will advise on your options.
The start point will be to look at what the original contract said about contract variation and dispute resolution. The original contract may specify alternate dispute resolution (ADR) as the method to resolve the dispute. If a contract variation dispute ends up in court litigation, the court will apply rules of contract interpretation. Any aspect of interpretation results in litigation risk, which is why it is so important to check the procedure for variation of contract.
For additional reading on contract disputes take a look at:
- How to avoid commercial disputes and minimise litigation risk
- Contract dispute resolution: an overview
Protecting your business: tips on changing the terms of a contract
Our commercial solicitors top tips on changing the terms of a contract include:
- Don’t rush in and assume that a contract needs varying just because the other party requests a change in contractual terms.
- Look at your contract termination rights and the wider picture. How will a variation of one clause in the contract affect the remaining contractual provisions? How will the variation in a contract with one contractor affect your other contracts and contractual relationships? Contracting is like a jigsaw puzzle – all the pieces need to fit.
- Review contracts on a regular basis so you can spot where contracts require variation and proactively manage them.
- Be careful and take legal advice where necessary. That’s because you may inadvertently rescind or terminate a contract rather than vary it.
- Make sure any contract variation is in writing. There is then less chance of a contract dispute over whether a variation was made verbally or through the acceptance of a course of conduct.