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Adapting to change is good business practice – but has your flexibility varied your contract?

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09/05/2014

Boilerplate clauses are the trusty backbone of a contract: they comprise those reliable, operative terms that appear in most commercial contracts. They set out which law applies, how notices should be served and whether assignment is allowed, to highlight but a few of the terms they cover.

The recent Virulite case [1] is a reminder that these common clauses should not be taken for granted and can be varied by the contracting parties’ post contract behaviour.

In a changing economic climate, parties must adapt quickly to market forces. Those who change their methods of doing business – whether verbally, in correspondence or by doing things differently – should consider the consequent effect on their contract terms – and, if necessary adapt the contract too.

Case Summary
In Virulite, the parties had entered into a distribution agreement (the Contract) for a medical product. The Contract included common boilerplate clauses such as an entire agreement clause [2] and a term requiring any variations to the Contract to be effected by the parties signing a written instrument [3]. In the event, the parties agreed informally to delay payments until after regulatory approval for the product was obtained. In doing so they varied the payment terms and also ignored the Contract’s boilerplate clauses by not complying with the formalities the Contract required for variation.

The defendant later terminated the Contract on the ground that the claimant had not made payments in accordance with the Contract. The claimant argued that the defendant’s termination was wrongful because their informal agreement to delay the payments had varied the Contract and the payments were not due at the time of termination.

The Court agreed with the claimant and found that the parties’ intentions on how to make variations to the contract had changed. As a result, the defendant had no right to terminate and is liable for damages to recompense the claimant for its loss of profit.

Lessons for Business
In Virulite, the parties’ informal agreement to delay a payment resulted in there being a contract variation despite the fact that they did not use the appropriate contract variation formalities.

The judge considered the parties’ switch from a formal to an informal method of agreeing contract changes in the Virulite case to be an example of ‘the flexibility that is common among those who are attempting to work cooperatively, even in business relationships which are subject to some strain’ [4].

The judge highlights a common issue for contracting parties in this ever changing and demanding economic environment: circumstances change and your contractual terms may lose relevance or appropriateness. For example, payment terms might need changing, delivery dates might have to be brought forward or postponed or reductions to orders might be needed.

In such cases, it is essential to adapt to the changed circumstances. If this requires a different approach, consider:

  • is your new approach compliant with your contract? If not…
  • is a contract variation needed? If yes…
  • does the contract set out a formal method to vary the contract? If yes…
  • comply with that method – or formally agree a new method.

Even if your contract does not stipulate a formal method of agreeing a contract variation, you should always record any contract changes by writing to the other party. This minor administrative step could save future arguments with your commercial partners, not to mention the costs and discomfort of going to court to work out which terms apply.

[1] Virulite LLC v Virulite Distribution Ltd and another [2014] All ER (D) 37 (Mar). In this report, we deal only with the contract variation issues and not the other issues dealt with in the judgment relating to estoppel and waiver and the defendant’s rights to serve default notice and to terminate
[2] “Upon full execution, this Agreement shall contain the entire Agreement between [the claimant] and [the defendant]… and shall supersede any negotiations or prior Agreements, (written or oral) regarding the subject matter of this Agreement…”
[3] “This Agreement shall not be modified in any way except by a subsequent written instrument signed by both parties…”
[4] Paragraph 67 of the judgment

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