Varying a contract (changing it) can be done orally or in writing. However, most commercial contracts contain a clause which states that any changes made to a contract are ineffective unless made in writing and signed by or on behalf of both parties. This is called a variation clause or no oral variations clause. This generally means, therefore, that in the majority of cases when varying a contract, a written agreement needs to be in place between the parties to effect such a change. Read this blog to find out more about the law concerning varying a contract.
Varying a contract – consideration
Any agreement that varies the terms of an existing contract must either be supported by “consideration” or be executed as a deed.
What does “consideration” mean? In contract law it is required that some form of reciprocity takes place between the two parties to a contract i.e. one party cannot enforce a contract unless he has promised to deliver something to the other. Put another way, in order for a contractual relationship to exist there must be some form of exchange taking place in which each party agrees to give something to the other. The most obvious example of an agreement that is not supported by consideration, and therefore unenforceable, is an agreement to make a gift, that is, an agreement to provide a benefit with no act being required of the recipient.
Therefore, it follows that when varying a contract, in order for the variation of the agreement to be enforceable, it needs to be supported by consideration. This becomes complicated because it can often be the case that, when varying a contract, only one party is promising to do something new whilst the other party is simply re-affirming its obligations in the original agreement. One way of getting round this issue is by executing the variation agreement as a deed.
Varying a contract – execution as a deed or nominal consideration
Practically speaking, many commercial contractual parties vary contracts by deed and therefore negate the need to take consideration (as described in the last section) into account. This is because deeds are generally enforceable despite a lack of consideration. Deeds require additional formalities such as witness signatures and are used when varying a contract to avoid the potentially complex law around whether each party has given consideration to the other.
Another way of getting round the consideration problem is by referring in the written document, which is varying the contract, to the payment of a small sum. Such small sum will amount to consideration.
How to execute a deed?
- In writing. A deed must be writing.
- Face value requirement. It must be clear from the face of the instrument that it is intended to take effect as a deed.
- A deed must be delivered. A deed becomes binding on the date of delivery, not from the date of execution.
- By affixing the common seal of the company; or more practically, by the signatures of two authorised signatories (such as a director or secretary of the company); or the signatures of a director of the company attested by a witness.
- By following any other formalities which a company may have in place for the execution of deeds.
Varying a contract – third party rights
Under the Contracts (Rights of Third Parties) Act 1999, where a third party has a right to enforce a contract term, the parties cannot vary it so as to extinguish or alter the third party’s right without its consent. However, the parties to the contract may expressly provide that no consent is required from third parties for varying a contract.
Unilateral right to vary
Unless the parties have agreed that one party should have such a right, a unilateral notification by one party to the other cannot constitute a variation of a contract. However, contract terms may give a party the unilateral right to vary obligations under a contract. It is important to check the terms of a contract on this point!
Varying a contract – some case law
Here are some relevant cases concerning the law around varying a contract:
Facts: Rock fell into arrears with MWB and, in a phone call, put forward an amended payment schedule. When MWB sought to terminate the relationship because of the arrears Rock argued that, in fact, the parties had varied the contract by agreeing the amended payment schedule in the phone call. Rock Advertising had paid an agreed sum of £3,500 on the same day as the phone call in accordance with this revised (varied) agreement. But then MWB went on to deny any revised agreement and stated a) variation of the original written contract had to be in writing since oral variation was denied by the terms of the contract (the contract included a no oral variations clause) and b) any variation would be unenforceable for lack of consideration.
Ruling: The supreme court found in favour of MWB on the basis that the no oral variations clause was effective and by doing so ensured commercial certainty between the parties. This was after the County Court ruled in favour of MWB and the Court of Appeal in favour of Rock! This shows this was a contentious case but also upholds the eventual strength of no oral variations clauses. It was mentioned by the judge Lord Briggs that if in the telephone call the parties had explicitly stated that the no oral variations clause did not apply to this new agreement varying the contract then it would have been effective! So be careful when discussing the relevance of such a clause.
Facts: This case concerned the existence of a unilateral right for varying a contract clause favouring Paragon. Mr & Mrs Nash obtained a mortgage from Paragon Finance. The mortgage agreement allowed Paragon to vary the rate of interest ‘at their discretion’. After the Bank of England base rate of interest dropped, Paragon failed to match the drop in interest and continued varying the contract and charging a significant amount above this rate. The Nash’s failed to make their payments and Paragon applied for an order of possession of their home.
Ruling: Under the Consumer Credit Act 1974 the rates could not be capricious, dishonest, improper or unreasonable. The court held that the rate was not applied in an unreasonable or unfair manner by Paragon and so the clause allowing discretion to unilaterally vary the contract was not void. Whilst the lenders had not reduced their interest rates in line with other lenders, they had a commercially legitimate objective in doing so, and so the court deemed Paragon to have acted ‘reasonably’ in line with the Consumer Credit Act 1974 and the unilateral right for varying the contract clause was deemed valid.
Facts: And finally, a blast from the past. Decided over 200 years ago, this case explored the relationship between consideration and varying a contract. Stilk was contracted to work on a ship owned by Myrick for £5 a month, promising to do anything needed in the voyage regardless of emergencies. After the ship docked at Cronstadt two men deserted (constituting an ‘emergency’), and after failing to find replacements the captain promised the crew the wages of those two men divided between them if they fulfilled the duties of the missing crewmen as well as their own. After arriving at their home port, the captain refused to pay the money he had promised them.
Ruling: It was found that Stilk (and the rest of the crew) were under an existing duty to work the ship back to London and had agreed to submit to all the potential emergencies that could arise along the way. Therefore Stilk (and the crew) had not given any consideration for the promise of extra money by the captain. And so, they were not entitled to anything. This highlights the importance of looking at exactly what your obligations are in an agreement before assuming you have performed consideration for the variation of that contract. If you have not gone beyond the scope of your original obligations, then no consideration has taken place and varying the contract has been ineffective. (Of course, you can use a deed to get round this problem as described above).
Keeping it simple
The simplest way to vary a contract, and therefore the most used method in practice, is by executing a deed. It is also important to check if a no oral variations clause is contained in your contract (as will be in the majority of cases), especially when looking to rely upon informal arrangements, which alter contractual terms, during its performance.