The list of possible departures from the contractual terms and conditions in an array of circumstances is endless.
Adam GraySenior Associate,Transport & Insurance
The contract is signed, the terms and conditions are agreed, English law applies. However, as is so often the case in the fast-paced world of shipping, trading and logistics, when the contract gets underway, laycan deadlines are missed; financing delays jeopardise the deal; the consignee is refusing to take delivery of the cargo and the demurrage bill has become larger than expected without any security or guarantee; or the deposit due under the Norwegian Sale Form Memorandum of Agreement should have been paid already. The list of possible departures from the contractual terms and conditions in an array of circumstances is endless. Invariably in such situations, a party is found in breach and often the contracting parties get on the phone or call an emergency meeting to iron-out the details and keep the transaction alive. They strike a new agreement, or so they think. A few vague emails are exchanged, littered with ambiguous messages which, to the objective onlooker, could reflect a new agreement or not. The deal continues based on the telephone call, their conduct at least would suggest so, but problems persist and the deal collapses and becomes a bitter dispute. The lawyers get involved and try to piece together what was agreed and when. More importantly, they are tasked with advising on the legal implications.
This is an all-too-common occurrence. Legally, a mutually agreed amendment to a contract is termed “variation”. Variation has the effect of creating a new binding side-agreement which modifies the existing agreement. Technically, there are not two agreements, but one original modified contract.
Variation may be made in writing (such as an addendum) or orally (such as during a phone call or in a physical meeting). But the original contract will often contain a clause outlining the procedure for how variation may be validly achieved between the parties. For example, it may require that variation be agreed in writing. The Supreme Court confirmed in a 2018 judgment that the law does give effect to a contractual provision requiring specified formalities to be observed for a variation. Therefore, the effect would likely be that any new agreement made orally is not validly binding where the original contract requires an amendment to be agreed in writing.
Conversely, where variation by writing is not required, variation of the contract may be made orally, supported by evidence of the oral agreement and subsequent action by the parties consistent with the purported oral variation. Additionally, even informal email exchanges can evidence the intention of the parties to vary the original contract, despite the absence of a formal addendum or side agreement. Our observation though is that often parties do not create written records of the content of phone calls or physical meetings. This makes it difficult to subsequently establish that a new agreement was reached, especially where a ‘no oral variation’ clause exists. This trend is particularly prevalent amongst traders because the negotiations and agreements are often pursued via telephone, leaving gaps in the written record.
In some circumstances, parties go ahead and act upon an invalid oral agreement. In such situations, the party who has acted on the invalid new agreement to their detriment may argue that the other party is prevented, or ‘estopped’, from relying on the original terms. However, the ability to rely on estoppel is limited and there is a high evidential bar to clear for the party seeking to rely on it. Additionally, generally estoppel can only be used as a defence to a claim rather than the ground upon which to advance a claim, or in other oft-quoted words, “as a shield not a sword”.
Additionally, an agreement varying the terms of an existing contract must either be supported by consideration (something of value in the eyes of the law) or be executed as a deed. Consideration can be problematic to establish, especially where one party takes on an additional obligation and the other simply promises to do what it already promised to do. Consideration does not have to be adequate or even monetary, but it does need to be present. If unsure, it is important to take legal advice on the validity of any consideration before you attempt to vary the original contract. Without good consideration, the agreement may be unenforceable.
Lastly, our clients sometimes inform us of discussions and agreements which occurred prior to execution of the contract. Further, parties often believe such discussions or prior agreements form operative parts of the contract even though the contract is silent on that particular content. Usually, a contract will include an ‘Entire Agreement’ clause, the effect of which is to ensure that the terms and conditions of the contract preclude all prior agreements, whether made orally or in writing. English law will uphold these clauses, even if the outcome feels unfair or as a result of ‘bad faith’ intentions by one party.
We suggest parties wishing to vary the terms of their contracts consider the following points which are frequently overlooked:
Start by looking at the original contract. What does it say about the procedure for amending the contract? Can it be done unilaterally or not? Does it require any amendment to be in writing or not?
Make a record of all telephone calls and physical meetings. Send telephone recap emails or minutes of meeting to the other party with a request for acknowledgment and confirmation of the record. This will ensure that any evidence of agreement between the parties to vary the terms of the contract is secured in the event of a dispute. It’s also good practice generally to keep records of inter-party communications.
Consider whether new consideration is being given and take legal advice if it is unclear.
Before sending an email, consider whether its effect is to change the terms of your original contract. If it departs from the original agreement, are you content for that departure to be permanent even if the intended consequences of that variation do not play-out as expected?
Ensure all aspects of the agreement are recorded in the original contract or varied agreement. Otherwise, an ‘Entire Agreement’ clause would likely render any previous agreements as unenforceable.
For further information, please contact Adam Gray.
Published in November 2022
