When is a contract written in stone?

Andrew Cromby, Partner at Weightmans LLP, considers whether the terms of any contract can truly be said to be fixed.

Those of us that practise as litigation solicitors know that the true value of a contract is only determined when a dispute arises. The vast majority of contracts lie in drawers or sit on dusty shelves and little regular notice is taken of them.  It is only when something has gone wrong that the effectiveness of the document in protecting their interests becomes known. 

More often than not, two parties to a contract record the terms on which they intend to deal with each other at the outset of their relationship but, as time passes, the terms on which the parties actually deal with each other evolve. Sometimes the commercial relationship between two parties can stray far from the original terms envisaged. One of the most common examples of an inconsistency between the written and actual terms of dealing between two parties is payment terms. Often the parties start on a prudent commercial basis, say payment within 30 days of receipt of goods, or even cash on delivery.

What happens when, after an extended period, the parties are trading on different terms — say payments are received on a 60 day basis, or the place of delivery of the goods has changed?  Suppose that one of the parties, for whatever reason, suddenly appreciates that the trading relationship is no longer either in line with the original contract or convenient and that party wishes to return to its original trading terms.  At that stage, the question often asked is whether the original terms of the contract can be enforced, or whether it has been varied by what has taken place.

Varying contracts - the starting point

The staring point in this situation is that the parties to a contract are at liberty to vary its terms by agreement provided that there is some form of value (“consideration”) for this and also that any necessary formalities which are set out in the contract are observed. 

A variation might take place by an oral agreement, a written agreement or even by conduct, as in the scenario referred to above. 

When drafting contracts, prudent commercial solicitors typically include standard wording which provides that any variation to the terms of the contract shall be in writing. Often this is coupled with a clause which states that there should be no waiver of the rights of any party, simply because it delays in asserting any of its contractual rights. All of that is aimed at a party being able to argue that, no matter what they have subsequently done contrary to the terms of the contract, their rights, as originally recorded, remain enforceable - even at much later date. But does that work?

At the heart of English contract law is the principle that the parties to a contract may agree any (lawful) terms they see fit.

On that basis, if the parties to a contract have agreed that there should be no variation to its terms, except in writing, why should a variation which takes place, by conduct, be permitted?

The problem is that the principle works both ways; if it is clear that, despite what is written in the contract, the parties have happily varied its terms and have been performing their duties on a different basis, that same principle can be applied to negate the earlier (but abandoned) requirement that a variation should be agreed and recorded in writing.

Where there is a dispute, the way in which the principle will take the parties is ultimately determined by the judge.  There have been a number of cases over the years considering this point.  Clarification was helpfully provided in I-Way Ltd v World Online Telecom Limited [2002] EWCA Civ 413, where the Court expressed the view that the purpose of a clause stating that variations to a contract would only be effective if agreed in writing was not to prevent the recognition of all variations “…but rather, casual and unfounded allegations of such variations being made”. 

In Energy Venture Partners Limited v. Malabu Oil & Gas Limited [2013] EWHC 2118, the Court took the view that it is possible for there to be an oral variation to a written contract, notwithstanding the existence of a clause requiring variations to be in writing, where it is more likely than not that a variation was concluded other than in writing.

More recent still is the case of MWB Business Exchange Centres Limited v. Rock Advertising Limited [2016] EWCA Civ 553 in which the Court of Appeal held that a clause preventing variations other than in writing did not preclude a variation of the agreement by other means.

Conclusion

Where does that leave us?  Even where a contract provides for there to be no variation, except in writing, it is possible (in the right circumstances) for the parties to vary a contract by conduct.  What the cases show is that there has to be clear, unequivocal, conduct as a consequence of which it can be demonstrated that the parties agreed to a variation. 

Can a contract ever be considered to be immutable - written in stone?  Much will depend on the facts of each case and the Judge who decides it, but the answer appears to be not always. This highlights the need for businesses to be clear in the original drafting of their contracts and to take stock periodically, as to whether a formal, written variation is needed to put the parties’ respective rights beyond any doubt.

Andrew Cromby is a Partner and specialist in commercial litigation and dispute resolution at national law firm Weightmans LLP

Andrew.Cromby@weightmans.com

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