Commercial Contracts | Varying and Replacing Existing Agreements
Changes in circumstances arising subsequent to the formation and implementation of a commercial contract frequently require contracting parties to amend their contract to accommodate the revised situation.
Where the parties are agreed upon the necessary changes, the procedure is comparatively simple. The common law provides freedom to make almost any alteration to the existing relationship by adopting a further agreement containing the agreed revisions. This is normally achieved by variation of the contract by altering one or more of its terms or replacement by terminating the existing contract and substituting a new one.
Where required and appropriate, either procedure may contain retrospective amendments. Such amendments apply to events that occurred before the amendments’ enactment but only affect the future consequences of those past events i.e. it adjusts the ongoing effects of a past action. They do not undo completed transactions or extinguish rights or liabilities, such as tax obligations, that have already vested.
Retrospective amendments may have special relevance in commercial and tax contexts in that they may seek to adjust contractual obligations to reflect past events or agreements that were overlooked or need adjustment for legal, financial, or operational reasons.
In the recent case of R (on application of Cobalt Data Centre 2LLP and another) v Revenue and Customs Commissioners [2024] UKSC 40 the court considered at great length the distinctions between contract variations and replacements and provided important rulings affecting them.
Stuart Southall of KANGS comments upon contract variation and the recent court guidance.
Variation of a Contract or Written Agreement
Whilst contracts governing virtually any purpose may be either oral or in writing, save for the sale of real property in particular which must be written, commercial contracts should be recorded in writing to reduce the prospects of a contract dispute at a later date.
It is not unusual for contracting parties to wish to change the terms of the contract but such variation will probably require as much thought and attention as the original contract to ensure that it accurately reflects their intentions. A variation represents a contract in itself and must meet the requirements of contract law.
Where the parties are in complete agreement, a Contract Variation Agreement may be concluded to change virtually any aspect of the original Agreement should they so wish such as for example:
- the scope of goods and services,
- contract charges or rates,
- time limits imposed,
- resources required.
When considering varying a contract, attention should be given, amongst other aspects, to the following:
- do all the other parties actually agree with the proposal, as, if not, no variation will be valid?
- does the existing contract make provision for the manner in which any variation should be exercised?
- is the original contract actually still valid or has the stated period expired? In the latter scenario, a new contract will be required,
- if no further consideration is to be given, the document must be by way of a deed.
Replacing an Existing Agreement
Alternatively, the extent and nature of the variations to be made may be so extensive and fundamental that the parties simply decide to abandon the existing contract and enter into an agreed replacement, probably formed following discussions and negotiations similar to those preceding the signing of the original agreement.
Retrospective Amendments
Whatever manner is adopted to amend a contract, the parties may agree to introduce one or more provisions which have a retrospective intent in that they apply to events that occurred before the adoption of the amendment but only affect the future consequences of those past events i.e. the ongoing effects of a past action are adjusted. They do not undo completed transactions or extinguish rights and liabilities that have already vested.
However, such amendments may potentially fail as the result of rules governing enforceability and fairness. Whilst the common law recognises retrospective changes if both parties consent, statutory requirements or public policy considerations may prevent their operation.
The Case in Focus:
R (on application of Cobalt Data Centre 2LLP and another) v Revenue and Customs Commissioners [2024] UKSC 40
This was an extremely technical dispute involving HMRC which came before the Supreme Court concerning the extent to which certain contractual amendments which affected tax liability were valid.
The case revolved, amongst other issues, around whether the contractual changes should be regarded as variations or replacements of the original contract and how they should be treated for tax purposes.
After much discussion and consideration, the court ruled in favour of HMRC that the changes in question amounted to more than a mere variation of the original contract and constituted a replacement which was fundamental in context to the operation of the applicable tax regime.
Amongst many observations which formed part of the extensive Judgment were the following:
‘Where parties to an original contract later agree to make alterations to their rights and obligations, they do not usually care whether those alterations are characterised as variations of the original contract or as a replacement of it. As a practical matter, nothing normally turns on that. All that matters is that the parties have moved from one set of contractual rights and obligations to another.’
‘An exceptional case where it matters whether the parties have chosen to bring about an alteration to their contractual relationship by the mechanism of variation or of replacement is where the interposition of some statutory regime in effect hangs upon that outcome. If the parties are aware of that statutory regime, then they may well mind very much which mechanism is chosen to effect their desired alteration’.
‘The Court states that whether a change amends the principal agreement or discharges and replaces it depends on the intention of the parties. However, it is possible for there to be exceptional cases where the Court will not give effect to the parties’ intention if it brings the law into disrepute and damages its legitimacy in the eyes of the public.’
How Can We Assist?
KANGS brings extensive experience gained from years of representing clients in all types of commercial disputes, including those related to contract retrospective variations.
The team at KANGS will support you throughout the entirety of any Civil Dispute and Litigation, seeking to achieve the most satisfactory outcome available as quickly and economically as possible.
If we can be of assistance, please do not hesitate to contact our team using the details below:
Tel: 0333 370 4333
Email: info@kangssolicitors.co.uk
We provide initial no obligation discussion at our three offices in London, Birmingham, and Manchester. Alternatively, discussions can be held through live conferencing or telephone.
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