April 14, 2020

As businesses continue to grapple with how to respond to the COVID-19 outbreak, many won’t want to turn immediately to the back of their contracts and invoke force majeure clauses or argue that the contract is frustrated. Instead, they will get on the phone and try to find a way that allows the contract to continue to be performed, but with reasonable adjustments made in light of the current circumstances.

With that in mind, it’s a good idea to remind ourselves of the legal requirements for varying a contract.

Mutual Agreement

The starting point is that any variation to a contract must be mutually agreed between the parties. On rare occasions, a contract may allow one party to vary obligations on its own, but even then a court might imply that such changes must not be arbitrary, unreasonable, or capricious.

Formalities

It is important to ensure that you check whether there are any requirements as to what form a variation must take. Perhaps most importantly, does it have to be in writing?

It is always a good idea to record any variation in writing in any event – that way there is no doubt as to what is being varied and what isn’t. But, beyond good business practice, some variations must be made in writing, otherwise they are invalid:

• If the contract is required by law to be in writing, any variation to that contract must also be in writing;
• If the contract contains a clause which forbids verbal variations (so-called “No Oral Modification” clauses) no variation can be made unless it is in writing. Of course, if it is impractical or impossible to put everything down in writing all the time, the parties can agree to vary or remove the No Oral Modification clause, but that agreement must be in writing.

Consideration

A variation to a contract must be supported by consideration (the necessary benefit and burden or “quid pro quo” of any binding contract), unless it is by deed.

In the current circumstances, a party may be prepared to accept less than initially bargained for in the contract, on the basis that something is better than nothing. However, this practical benefit may not pass the test of being “something of value” and therefore consideration for the variation. So, it’s important to ensure that both parties agree either mutually to abandon existing rights or to confer new benefits on each other.

Variation, Forbearance, or Rescission?

You may not want or need to go as far as varying a contract and risk being caught by the rules relating to formalities and consideration: a temporary forbearance, or giving up of a strict legal right, can be made orally without consideration. But, again, it must be mutually agreed and, even if it is not required by law, it is good business practice to record it in writing anyway.

On the other end of the spectrum, you should take care not to vary the contract too much so as to drastically change its nature. If any variations or changes go to the “very root of the contract”, the original contract might be deemed rescinded such that parties can no longer rely on its terms.

Practical Points to consider:

• Make any variations in writing. You may not strictly have to by law or under the terms of the contract, but it is always sensible to do so since it records what both parties have understood the variation to mean.
• Ensure that you provide consideration of some form for the variation.
• Take care not to vary too much so as to rescind the original contract.
• Make sure that any changes made to a particular contract do not affect any other obligations within the contract itself or affect any obligations under contracts made with other parties.