Check your contracts and stick to the rules

If you vary a written contract, make sure you document and sign it, says Stephen Cotton

Adam Smith told us man is an animal that makes bargains. However, something about making bargains, particularly business-to-business contracts, is often forgotten because,

while the UK tradition is freedom of contract, your freedom is curtailed the moment the contract terms are signed. If you agreed to sell a particular thing to me, 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. So what happens if the parties seem to differ – perhaps on a construction site, or during a telephone call or at a meeting, or even by email or SMS – on what was agreed, then go on to act in a different way to that recorded in their written contract?

What if, 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. The licensee claims the licence contract had been varied informally. In a case, called Rock Advertising v MWB Business Exchange Centres, decided in May by the UK Supreme Court, our judges answered the question.

In essence, the licensee’s argument was that the parties to the contract can always agree between themselves to do things differently (assuming no third parties have been given rights in the contract, they are the same parties and no-one else suffers any detriment). The fact no written variation of the sort contemplated by the contract was signed did not matter. This argument was firmly rejected.

In short, the Supreme Court’s judicial reasoning was (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. These were 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, as recorded in their contract.

The ramifications of this in sectors like construction and IT (where various standard form contracts very much limit oral or informal variations)

are likely to be very significant. Few lawyers will not have been consulted about situations where, for example, a main contractor ‘tells’ a sub-contractor to ‘get on with it’ despite various contractual formalities not being observed first. Guess what happens when the sub-contractor then seeks payment for the extra hours/work?

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, don’t 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 express contractual control on variations, remember the courts always start by looking at written terms agreed by the parties. If those are clear, the courts might still be reluctant to accept the parties have orally, or by their acts/omissions, varied the written contract.

Like so many significant decisions in the higher courts, it is likely to take years to work through the effects of the Rock decision and see if there is any ‘rowing back’ on it. However, the message is clear: don’t become the expensive test case and future tutorial study. Check your contracts and adhere to the rules they lay down.

Stephen Cotton is a Partner with CCW Business Lawyers