Contractual Variations – Ensure Enforceability and Avoid a Dispute
As the economic consequences from the COVID-19 pandemic unfold, unfortunately consensus appears to be mounting that a global recession is underway. The Organisation for Economic Co-operation and Development (OECD) recently forecasted that global GDP growth may drop below 1.5%, satisfying the IMF definition of a global recession.
This economic disruption, both generally and to specific sectors including retail and travel in particular, will inevitably lead to parties looking to renegotiate their contractual arrangements in order to ensure their future is sustainable.
Should the parties seek to vary their pre-existing contractual obligations, it is important these variations are binding and enforceable in order to avoid a future dispute.
One of the fundamental tenets of the law of contract is that for an agreement to be legally binding, there must be consideration. Consideration means both parties exchanging reciprocal obligations e.g. party A agreeing to pay £1 and part B reciprocally agreeing to give something to party A in exchange for that £1. The existence of consideration distinguishes a legally binding agreement from a mere unenforceable promise.
Importantly, for a contractual variation to be valid, there must be consideration for that variation to ensure legal enforceability. Alternatively, if there is no obvious and clear consideration supporting the variation, the variation must satisfy the requirements of a deed i.e. be in writing in the form of a deed, signed and witnessed.
The takeaways from the above are that commercial parties seeking to make a variation should either ensure there is clear consideration for the variation or to vary the contract by a deed of variation. In any event any type of variation should ideally be in writing to ensure certainty and not leave the door open for a dispute.
The COVID-19 pandemic is of course not the first time an external event has caused economic disruption prompting parties to vary contracts. The seminal case of Central London Property Trust Ltd v High Trees House Ltd [1947] provides a useful historical reference point. In High Trees, the tenants renegotiated a reduced rate of rate due to the economic disruption caused by the outbreak of World War 2. Importantly, this re-negotiation was without consideration and specified no duration. Post war, the landlord wrote to the tenant claiming rent arrears for the period in which the tenant paid the reduced rent. The landlord issued a claim to recover arrears of the fully agreed amount upon the elapsing of the war-time period.
The judgment in High Trees found that the full rental amount was payable in the post war period. Interestingly however, whist not a matter directly in issue, Lord Denning held that had the landlords brought an action to recover the arrears for the war time period in which the tenant paid reduced rent, the landlords would have been precluded from recovering these arrears due to the doctrine of promissory estoppel.
High Trees therefore demonstrates that in the case where a party has attempted to vary a contract in relying on a promise, there may be a remedy to protect that party from the other party subsequently trying to enforce their strict legal rights.
However, making out the requirements of promissory estoppel would likely be a costly and lengthy legal process. The requirements of promissory estoppel being beyond the scope of this article.
In summary, the most commercially prudent way for a party to protect their position in varying a contract is to:
- Renegotiate in writing;
- Ensure legal enforceability by the presence of consideration or by executing as a deed.
If you would like advice in relation to this topic please contact our litigation team.
