A Little Less Conversation, A Little More Contracts Please

When does conversation stop being just that, and instead drifts toward a variation of the contract?

The Supreme Court has helped by confirming that where a contract (such as a loan agreement or commercial contract) states that it can only be varied in writing, then any proposed change agreed orally has no effect. However, typically there are some limitations to this:

  1. The original agreement must state that the contract can only be varied in writing.
  2. If the parties have agreed orally, whether during a face-to-face conversation or over the phone, that the terms have changed and they proceed to act as if those changes were effective, they may be prevented from later arguing that the original contract terms stand.

Whilst this isn’t new law, it is a useful reminder of best practice. Of course, businesses do not want to rely on a conversation and act on purported changes, only to have to resort to the courts to decide what the terms of the contract now are.

A conversation between Mike Ashley and his (then) friend and colleague Jeffrey Blue, was deemed as not legally binding by the court. Mr Ashley is supposed to have said that he would pay Mr Blue £15 million if Sports Direct’s shares rose to £8 per share, which Mr Blue took as a binding agreement. The court was unconvinced and put the conversation down to drink-fuelled “banter” rather than a business proposal.

While it is good to talk agreements, it is always best practice to follow them up in writing, making it clear exactly what was discussed and what the agreement will be. The court has reiterated that discussions about changing the terms of a contract should be followed up in writing, recording what has been agreed and being acknowledged by both parties.

Some changes have the potential to bring the original agreement to an end and create a new one, and any security or guarantee that’s in place could be impacted. Written agreement and acknowledgement therefore of alterations keep the parties clear about what the terms are, and what changes to those terms have been made specifically.

If you have any questions about drafting contracts for your business, or would like assistance on any other commercial law matter; contact John Pickervance, Associate Solicitor within the Commercial department by email john.pickervance@forbessolicitors.co.uk or phone 0333 207 1134.  Alternatively, send any question through to Forbes Solicitors via our online Contact Form.

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