Variations to contracts are often required to tackle new issues which have arisen during the course of a project, to ensure continuity of service. However, these are often the subject of dispute.
Failure to properly vary a contract can have serious consequences, including:
- No contractual obligation to perform the additional duties, meaning no claim against the other party if things go wrong.
- A court determining the existing contract was technically rescinded and a new contract entered into (see recent case of R (on the application of Cobalt Data Centre 2 LLP and another) v Revenue and Customs Commissioners [2024] UKSC 40.
Check the contract
The first step is to check the requirements of any variation clause. If the contract explicitly requires variations to be made by Deed, or for the variation to be in writing and signed by the parties, then this should be complied with to avoid a potential dispute.
Deed versus Contract – check if there is consideration
Execution of a variation by Deed, even where potentially not required by law, can limit the risk of any future dispute between the parties. However, it is not always commercially viable for a company to execute a Deed for every variation to a contract, particularly if the normal signatories are not available. For a company, a Deed needs to be executed by two officers signing, or a director signing in the presence of a witness (or more unusually by company seal).
Where a Deed is not used, parties must ensure there is effective consideration given instead. In practice, it can be difficult to determine what constitutes consideration, as it can take various forms. Parties often give consideration as a payment for the additional service, but it can also be less obvious, such as the possible detriment or benefit to a party.
The Court of Appeal has previously held that performance of an existing contractual duty can amount to consideration, if that performance gives a practical commercial benefit to the promisor. For example, if you promise to make a bonus payment in exchange for a service being completed on time to avoid a late completion penalty that you would be liable for under another contract, consideration is given by the benefit that you have obtained by avoiding that penalty, despite the service being the same as under the original contract (see Willams v Roffey Bros and another [1989] EWCA Civ 5). In this instance no Deed is required.
As a recent example, our client entered into a contract which contained a right to terminate a certain element of the service within 90 days (allowing them to trial a service before fully committing). Our client found that 90 days was not sufficient to make a commitment to the ongoing service and sought to terminate the contract as a precaution. We came to an agreement that the cancellation period could be extended to 120 days, as a variation to the contract. This was not executed as a deed and consideration given was our client choosing not to exercise their contractual right to terminate the contract.
However, relying solely on the performance of an existing contractual duty as consideration is risky business. It will only apply in nuanced and fact specific circumstances, and in many cases, reliance of performance of an existing contractual duty may not be enough to constitute good consideration. If a Deed is not used, then payment of some kind as consideration, even if it is merely payment of £1.00, is highly advisable where is a variation to contractual terms.
Variation or a new contract?
The recent Supreme Court decision in R (on the application of Cobalt Data Centre 2 LLP and another) v Revenue and Customs Commissioners [2024] UKSC 40 gives valuable insight into another risk of varying contracts. In that case, a contract had been entered into between a developer and a contractor to construct data centre buildings within an enterprise zone. Substantial tax benefits under Section 298 of the Capital Allowances Act 2001 hinged on whether there had been a variation to the original contract, or a replacement of the original contract with a new one. The
The Supreme Court held that whilst the adjustment and further expenditure had been described as a variation, they were in reality a: “fundamental change to their contractual relationship”. This meant the original contract had been rescinded, with a new contract entered into – losing the potential tax benefits.
This decision is particularly important for those in the construction industry, whose contractual provisions will often interplay with statutory regime. If additional services are fundamentally different to the original contract, merely framing this as a variation will not necessarily be binding that the result would be contrary to public interest and statutory regime.
The take home points
Variations are often fast-paced and direct responses to urgent commercial needs. Whilst Deeds are often seen as the gold standard for avoiding disputes, they are not always practical or cost-efficient. If a Deed is not used (and that is permissible under the contract and any relevant statutes) then the parties should clearly communicate what the intended consideration is.
Where it is important to preserve the existence of the original contract (for example, due to tax reasons), parties must ensure any “variation” is genuine and does not fundamentally change the original contract.
At Trethowans, our advice is always strengthened by the collaborative approach taken between our Commercial Contracts and Dispute Resolution teams. This ensures all angles are considered from the outset and helps avoid disputes occurring to begin with.
Should you require any assistance, or want a second opinion, please contact Louise Thompson (Commercial Contracts) or Maxine Read (Dispute Resolution).
Disclaimer
This information is intended for general informational purposes only and does not constitute legal advice. We recommend seeking professional advice before taking any action on the information provided. If you would like to discuss your specific circumstances, please feel free to contact us on 0800 2800 421.
