Contracts are often amended to take account of changed circumstances. But care is needed to avoid the pitfalls.
Think about the rest of the contract
Where the proposed change only relates to one or two provisions of the contract, it's easy to overlook the potential knock-on effects on other provisions.
For example, in Unaoil v Leighton (2014), a dispute arose over a contract for oil infrastructure in Iraq. The original contract price was about $75 million, with a liquidated damages clause providing for recovery of about $40 million in the event of breach. However, when the price was later reduced to $55 million, no corresponding adjustment was made to the $40 million liquidated damages figure. This led to a finding that the liquidated damages clause was “extravagant and unconscionable” and could not be enforced, based on the rule against penalties. It is therefore critical to consider the impact of any changes on other provisions which may also need adjustment, such as:
- Termination provisions;
- Liability provisions (including liquidated damages clauses);
- Payment provisions; and
- Service levels/standards.
Avoid "informal" variations
Many contracts specify that all variations must be in writing, signed by both parties. However, in MWB Business Exchange Centres v Rock Advertising (2016), the Court of Appeal confirmed that such clauses will not prevent a variation made orally from being effective. Similarly, it is also possible for informal variations to be accepted by conduct (e.g. where both parties have been performing the contract in a manner at odds with what the agreement says). As a result, is it still worth including such a clause? We believe it is - because as the following case demonstrates, there are sound practical reasons for adopting a reasonable degree of formality when dealing with variations: