Being in control of your contracts is key to avoiding disputes in respect of them. Understanding the principles of waiver and variation are crucial to this process.
Waiver allows a party to give up its legal (usually contractual) rights. For example, a contract may provide for a particular mode of performance. If party A to the contract is unable to meet the precise mode of performance fixed by the contract it may request party B not to insist on performance in this way. If that request is accepted by party B, it is likely to have waived its right to require that performance takes place in the particular way provided for by the contract.
Waiver can arise in a number of ways. A right may be waived by contract or deed. Alternatively, a party may seek to waive its rights by election. A common instance where waiver by election arises is where an innocent party, following a repudiatory breach of contract by another party, has to choose whether to terminate the contract or to affirm it. For more on repudiatory breaches and termination, please see part 9 of our 'Before you charge in' series: At the heart of it: repudiatory breaches and termination. In other situations, a party may behave in such a way that it would be fair to treat it as having made a deliberate choice to waive, whether or not it has. This is often referred to as waiver by estoppel.
Given the issues that are thrown up by waiver, it is common for agreements between parties to provide a 'no waiver' clause. The rationale behind such a clause is to give assurances that failure to enforce contractual rights, whether intentionally or by oversight, does not result in the waiver of rights and remedies for their breach. However, a party with the right to terminate an agreement for the other party's breach can lose that right even if that agreement contains a 'no waiver' clause.
Does a no-waiver clause really mean what it says on the tin?
The case of Tele2 International and others v Post Office Limited provided a stark warning as to how careful you need to be when rights arise under a contract. In that case, a right to terminate the contract arose, yet the Post Office did nothing to act upon that right for around 12 months. It then sought to terminate the contract. Tele2 sought to argue that, when the right arose, the Post Office had to either exercise that right or affirm the contract. By continuing to act consistently with the contract, the Post Office had affirmed the contract. This was notwithstanding a 'no waiver' clause in the contract to the effect that no delay, neglect or forbearance on a party in enforcing a provision of the contract would be, or be deemed to be, a waiver of the contract or any of its provisions. The Court of Appeal found that the 'no waiver' clause did not prevent the Post Office from affirming the contract by election.
Lessons to be learnt from the warning provided by the Tele2 case
- Whenever a right to terminate a contract arises (either contractually or at common law), be clear exactly what you have to do to avoid losing that right.
- Make sure you know your contracts. By doing so, you will be able to make decisions when rights arise, rather than starting the decision process at that point, and risking delay that might lead to the affirmation of the contract and the loss of the right, by effluxion of time.
- If a right does arise, and you do want to take your time to consider whether or not to exercise that right, make sure that you explicitly reserve your right to terminate in writing, and before taking any acts consistent with the contract continuing.
- Consider drafting contracts so that rights to terminate arise more than once per breach. For example, could you justify a right to terminate at the end of any agreed period if certain criteria aren't satisfied? That way, if you lose the right to terminate one right, at least there may be another one round the corner.
Parties to an agreement may vary its terms by mutual agreement, provided that consideration is given (unless the variation is executed as a deed) and any necessary formalities are complied with.
Similar to a 'no waiver' clause, a variation clause (sometimes referred to as a 'no variation' clause) is designed to exclude informal or unintended oral variations being made to an agreement by requiring the parties to follow a prescribed procedure when varying the agreement. For example, a variation clause may require any variations to be in writing and signed by the parties to be effective.
Whether a variation clause will be effective in practice is, however, a different issue. In I-Way Ltd v World Online Telecom Ltd, the Court of Appeal held there was no binding authority on whether parties could prevent oral variations of a contract through the use of such a clause. Furthermore, a party to an agreement may not be protected by such a clause if it has engaged in conduct that amounts to a clear and unambiguous representation that it agrees to a variation which is then acted upon by the other party to the agreement.
Uncertainty (and therefore the potential for disputes) arises most often in contracts that have been varied. You might spend many thousands of pounds in legal costs negotiating the original agreement but too many people lose control of those contracts once they are underway.
What, then, are our key tips to avoid losing control?
- Be wary of inadvertent amendments to a contract by those on the ground. An exchange of emails has just as much contractual effect as a heavily negotiated agreement. Make sure that informal variations have the clarity that you require.
- Check your contract for the variation provisions. You don't want to think you have varied a contract (in your favour or otherwise) and find that it was not validly varied.
- Likewise, always bear in mind that a variation (unless it is executed as a deed), like any other contract, requires consideration to make it effective. Simply just agreeing to do the same for more may lack consideration and be unenforceable.
- Make a record of all variations and keep them in the same place. This means that in the unfortunate event that a dispute does arise you have all the papers ready to quickly and comprehensively instruct your lawyers.
- If you think a contract is going to be varied, build some realistic and straightforward variation provisions into it when drafting it.
- Never overlook the effect that a variation of a contract might have on a guarantee. The general position is that if a contract is varied then the guarantor is discharged.