Contractual risk: practical tips for agreeing changes in contractual performance
Covid-19 is disrupting contractual performance at scale and in fundamental ways. Where a contractual counterparty can no longer perform in accordance with the contract, to agreed milestones or at all, various factors come into play.
A legal risk assessment is required to assess what the liability is, where it sits, whether force majeure or other contractual or common law rights should be invoked and to consider termination and enforcement risks. These considerations need to be part of the strategy; however, it is not always appropriate to reach solely for the legal option. Whilst rights should be preserved on an open basis and formal contractual process may need to be invoked, there is considerable merit in dialogue between counterparties aimed at, if possible, agreeing amended performance. This approach may be key to assisting businesses that are trying to weather the Covid-19 storm and maintain commercial relationships and contracts for calmer future times.
In terms of how you negotiate with a counterparty there are some key considerations to bear in mind and some particular pitfalls to avoid.
Importantly, formal contract amendments should comply with the contractual variation provisions. Following the recent Supreme Court decision in Rock Advertising Ltd v MWB Business Exchange Centres Ltd  UKSC 24, it is essential that you look to the contract itself and check any requirements on how formal contract variations must be effected. If you agree altered performance outside of any such mechanism then pursuant to Rock Advertising it is almost certain that the change will not be valid or enforceable.
The Covid-19 pandemic is an exceptional situation. Leaving aside the question of the contractual variation mechanism, an additional difficulty is that it simply may not be possible to agree the precise terms of a contractual variation or not in the time available. The global situation is changing quickly and it is hard to foresee the future ramifications of Covid 19. Particularly in complex contracts, there may be a temptation for counterparties to acknowledge a change in performance is required – but leave the details for later. However, businesses should bear in mind that courts may well not enforce an ‘agreement to agree’. The more the parties can document in writing, the greater the prospects that the courts will find the change to be binding and the more likely it will fill in missing details. Something akin to a binding heads of terms will offer better protection. The further from this the parties move; the greater the risks.
There is a flip-side to this scenario. A contracting party may not want to formally agree a variation. In that situation considerable comfort can be taken from Rock Advertising; but it is not fail-safe. Rock Advertising does not preclude an argument that an urgent variation was by necessity impliedly agreed by the parties. The success of that argument will depend on the facts. Even for a Covid-19 driven change it may not be straight-forward to argue that there was the requisite ‘urgency’ (albeit the change may be a fundamental one).
Rock Advertising also raises the possibility of an estoppel argument (namely, that although not compliant with the contractual variation mechanism, an agreed variation cannot be disclaimed as contractually binding by reason of that non-compliance by Party A where Party A unequivocally represented that it was agreed to and Party B has relied upon that variation to its detriment). The parameters of this estoppel argument are still being tested in the courts. No Rock Advertising estoppel defence has succeeded to date. Having said that, where the situation is such that the contractual variation mechanism does not work in a practical sense and the parties acknowledge that fact and that those mechanisms are being deviated from, estoppel might be possible. Recording any accord in writing and preferably in a formal notice or letter will likely assist the prospects here.
In short, parties should:
- Follow the contractual variation mechanism and use that to record the precise terms of the variation to performance;
- If that is not possible, then agree to deviate from the contractual variation mechanism but still record at least the key terms of the variation and do this in writing and preferably as a formal letter/document.
Find all our Covid-19 related advice here.
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