A contract is defined as an agreement between parties creating obligations that are enforceable or otherwise recognizable at law. For such recognition in law to be attained, its formation must consist of an offer, acceptance, consideration, competent parties, intention to create binding relations and mutuality of obligation.
Thus, a contract is generally based on the parties' intention which the court will enforce. The guiding principle in this regard is the the legal maxim “Pacta sunt servanda”, which means contracts are to be kept. An even better and more incisive maxim is, “Pacta convent quae neque contro leges neque dolo malo inita sunt omni modo observando sunt”, which means that agreements which are neither contrary to the law nor fraudulently entered into, should be adhered to in every manner and in every detail.
However, upon the execution of a contract, there are unanticipated situations which may arise and therefore require parties to revisit the contract; especially where one of the parties alleges a change in economic circumstances, and seeks to have certain terms in the contract modified for the purpose of maintaining the commercial intention of the parties at the time of signing the original contract. In the event this happens, parties may agree to renegotiate and modify the terms of their contract to suit the new exigencies.
The Concept of Renegotiation
The concept of renegotiation of contract is based on the legal maxim “rebus sic stantibus” (things thus standing); a legal doctrine that allows a contract to become inapplicable because of a fundamental change of circumstances which may warrant revisiting a contract and renegotiating some terms therein. . In other words, it helps parties to avoid the effect of the principle of ‘pacta sunt servanda’ on their contract.
Basis for the Renegotiation of Contracts
Despite the parties' reduction of their full understanding of their transaction in writing, in actual fact, this may be not be the case, especially because parties are unable to predict all the events and conditions that may affect the transaction in the future. To this extent, events which may not have been contemplated such as a sudden fall in commodity prices, the development of a new technology, or unexpected increase in costs may force the parties back to the negotiation table. Indeed, in such circumstances, a party may request renegotiation when it is realizes that the cost of complying with the original contract is adversely greater than the cost of abandonment.
In other words, rather than abandon such contract by reason of frustration, parties have an opportunity to renegotiate the terms of their contracts, and salvage an agreement which has otherwise become onerous or impracticable.
Effect of Renegotiation of Contract
Upon renegotiation of a contract by parties, the intention of the parties are typically reflected in any of the following manner:
In law, parties are at liberty to mutually agree, orally or in writing, to dissolve, annul, add to, subtract from, vary, or qualify former agreements, and therefore enter into a new one.
In Wayne (W.A.) Limited v Ekwunife, the Supreme Court held as follows:
"Now it has not been disputed that parties to a contract may effect a variation of the contract by modifying or altering its terms mutual agreement... In such cases, mutual abandonment of the existing rights of the parties under the agreement as distinct from forbearance to suit, is sufficient consideration."
Effectively therefore, a variation is the creation of a new contract through revision of an existing agreement by the mutual consent of the parties. A variation is normally permanent except where the parties indicate that it should apply for only for a limited period. Being a new agreement, the usual components of a contract, that is – offer, acceptance, intention to create legal relations and consideration must be present, for it to binding on both parties.
Novation is the act of substituting an old obligation for a new one that either replaces an existing obligation with a new obligation or replaces an original party with a new party.
In his exposition of the term “Novation”, the great jurist Fatayi Williams in the case of Grover v International Textile Industries Ltd stated:
“The law is well settled that a later Agreement by the parties to an original contract to extinguish the rights and obligations that the original contract has created is itself a binding contract, provided that the later Agreement is either made under seal or is supported by consideration. Consideration raises no difficulty if the original contract sought to be extinguished is still executory. This is because each party by the later agreement is deemed to have agreed to release his rights under the original contract in consideration of a similar release by the other. Such bilateral discharge may take the form of dissolution plus replacement. Thus, the parties may extinguish the original contract but substitute an entirely new agreement in its place.”
As with variation of contract, for novation of a contract to be effective, there must be a subsisting contract and there must be mutual agreement between the parties as to the rights and obligations which are to be altered.
The term ‘waiver’ generally refers to circumstances where a party agrees to voluntarily forfeit a claim without the other party being liable.
In the recent case of Architect Hudu Ibrahim Mamonu v Joseph D. Mato Dikat the Supreme Court held that:
"By way of a general definition, waiver - the intentional and voluntary surrender or relinquishment of a known privilege and right, it therefore, implies a dispensation or abandonment by a party waiving of a right or privilege which at his option, he could have insisted upon.”
In Fasade v. Babalola the Supreme Court set out the conditions which must exist for the principle of waiver to apply; thus
- The party against whom the doctrine is raised must not be under a legal disability that contradicts voluntary abandonment of a right or privilege in question.
- The said party must have knowledge or be aware of the act or omission which constitutes the waiver.
- The said party must have done some unequivocal act to adopt or recognize the act or omission.
- The waiver must be in respect of a private right for the benefit of a particular person or party in contradistinction to a public right intended for the public good or affairs.
Thus, a party would be required to indicate by conduct that he will not exercise a remedy available to him for breach of contract by the other party or will not insist on his contractual rights without any consideration given for that promise by the other party.
It is important to note that although a party who waives his right may appear bound by the waiver, he may however free himself by withdrawing the waiver upon giving reasonable notice. This is especially applicable where the other party did not give consideration or anything in return for the waiver and so the party waiving cannot be perpetually bound by it.
It must always be borne in mind that a waiver may be inferred/implied by the courts from a conduct that is inconsistent with the continuance of a right on minimum or slight evidence.
In a worst-case scenario, parties may agree to rescind their earlier agreement. This is often described as the unmaking of a contract. On the meaning and effect of rescission of contract, the Court of Appeal held in Aondo v Benue Links (Nig) Ltd as follows:
"…Where a contract is executory on both sides, that is to say, where neither party has performed whole of his obligations under it, it may be rescinded by mutual agreement, express or implied. The consideration for the discharge is found in the abandonment by each party of his right to performance or his right to damages, as the case may be. A rescission of this nature must be distinguished from a repudiation by one party which the other party may elect to treat as a discharge of the obligation, and from the right to rescind which is given to one party in cases of fraud, misrepresentation, duress and undue influence, and in certain cases of mistake. It depends upon the consent of both parties, to be gathered from their words or conduct and not upon the intimation by one of them that he does not intend to be bound by the agreement. A contract which is rescinded by agreement is completely discharged and cannot be revived. The parties will usually make express provision for the restoration of money paid or for payment for services performed under the contract prior to rescission. But in the absence of such provision (express or implied) money paid in pursuance of the abortive contract can be recovered by an action for money had and received, although it is more doubtful whether a claim could be made for payment not yet due in respect of services rendered."
Thus, renegotiation of contract may lead to the unilateral cancellation of a contract by the agreement of both parties. In doing so, parties are relieved of further performance of any contractual obligations previously agreed.
Scope of Uncertainty and Triggering Events under Renegotiation Clauses
In a bid to carry out the mutual understanding to renegotiate or alter the provisions of a contract, there may be some confusion between parties as to the scope of uncertainty and triggering events which ultimately leads to the renegotiation of the contract. Where the contract in question already contains a renegotiation clause, the problem is half solved. Parties may, however, still find it difficult to agree that a trigger event for renegotiation has occurred. Also, there may be the issue of whether a party’s duty to renegotiate is discharged by the mere fact that an attempt at negotiation has been made or whether there is a further duty imposed to try to negotiate and compromise in good faith with the adversely affected party so that a consensus may be reached.
An enlightening case in this regard is the case of Associated British Ports v Tata Steel UK Ltd. Here, the parties created a 25-year license which provided in clause 22 that:
“… in the event of any major physical or financial change in circumstances … either party may serve notice on the other requiring the terms of this License to be renegotiated...The parties shall immediately seek to agree amended terms reflecting such change in circumstances and if agreement is not reached within a period of six months from the date of the notice the matter shall be referred to an Arbitrator…” (underlining added for emphasis).
Tata later sought to give notice of a “major financial change in circumstances” and asked ABP to negotiate amendments to the license including a halving of the license fee paid by Tata. ABP however refused and sought declaratory relief from the High Court, arguing that clause 22 was void for uncertainty in two respects:
- the “triggering event” - “any major physical or financial change in circumstances” as contained in the license, was too uncertain to be enforced; and
- there were no objective criteria to guide an arbitrator as to the precise amendment(s) of the License terms, and as such, Clause 22 was akin to an ‘agreement to agree’, such agreements not being enforceable under English law.
In giving judgment, the Court noted that the wording of Clause 22 did not leave the scope of the trigger entirely open-ended. This was because the plain meaning of the words used suggested what would fall within the scope of major physical or financial change in circumstance. The Court found that Clause 22 was a binding obligation to refer a dispute to arbitration and the trigger was not too uncertain to be enforced (although whether a triggering event had occurred was a matter for the arbitrator).
The above decision although merely persuasive in the Courts in Nigeria, demonstrates the courts’ reluctance to find contractual clauses unenforceable for uncertainty. Where an agreement provides for a third party to settle new terms without setting parameters for those terms, the third party can be guided by the contract itself and the circumstances surrounding the contract.
Thus, the following important points can be inferred:
- The Courts would strive to give effect to contractual terms (and contracts) wherever possible, particularly when faced with long-term contracts that have been substantially performed.
- Where a clause requiring future renegotiation is needed, parties should consider including appropriate processes for the conduct of the renegotiation. In particular:
- whether, in the event of non-agreement, the issue can be referred to a third party for determination (e.g. an arbitrator or an ‘expert’);
- what the triggering event(s) for the clause and/or the subsequent referral would be and how such event(s) can be measured/assessed, if appropriate; and
- whether parameters can be stipulated to provide guidance to the determining third party as to appropriate terms/evidence to be considered.
When Parties may Renegotiate Commercial Contracts.
Commercial contracts may be renegotiated during the life of the agreement or after its termination in the following manner:
- Intra Deal: This type of renegotiation occurs within the life of the contract, with one party seeking relief of its commitments, due to its failure or inability to fulfil its obligations. This may be necessary, for example, due to a company’s limited capacity to meet high-quality standards, produce large quantities, or meet strict delivery dates, therefore forcing them to renegotiate. Where there is an initial agreement to renegotiate due to unforeseen events, such renegotiations are likely to be smoother and go a long way towards reducing tensions and misunderstandings between the parties.
- Scheduled reviews: Parties may also renegotiate when both parties establish specific dates or time frames to review their contract. Especially in the case of a long-term contract, parties may decide to meet at regular and specific intervals to review the performance of their respective obligations. This would help parties identify potential issues that may arise from new market conditions.
- Post deal: Parties may decide to wait for the expiration of the term of a renewable contract before entering into new negotiations. This may be done to reflect a change in existing business strategies or indicate that one party is no longer convinced of the benefits in continuing the contractual relationship. As with the other types of renegotiations, open communications and continuous monitoring will be critical to success.
The reality of contractual negotiation is that parties enter into agreements based on a perceived understanding of what is, or what will be in respect of the effects and implications of their agreed terms. As a result of their inability to entirely foresee all contractual risks and contingencies that may arise, parties should specify mechanisms for reviewing the terms, as new information about relevant benefits and costs become apparent.
Although Nigerian law does not specifically recognize the duty to renegotiate outside of the contractual provisions, there is the use of the “contract equilibrium” model of stabilization clauses, which requires parties to renegotiate to achieve the same economic effect operative before the change. Many Nigerian oil and gas contracts, especially those involving the Nigeria LNG Limited and International Oil Companies, have such stabilization provisions.
Be that is it may, for best results, the following suggestions should be considered by parties when considering a renegotiation:
- Avoid hostility as the other side would typically have determined preexisting beneficial interests which would require compromise.
- Weigh claims against the value of the relationship. If the relationship is worth more than a claim, then parties should ordinarily be willing to renegotiate terms. However, where the claim deemed to be more valuable, then parties may insist on contractual rights to the point of resorting to litigation.
- Create value in the renegotiation and create an atmosphere whereby problem solving can take place and raise new prepositions that will benefit both sides.
- Fully assess the risks of failure of renegotiation; especially in relation litigation, hence parties should have a realistic evaluation of alternatives to a successful renegotiation.
- Involve all necessary parties, such as labor unions, creditors, suppliers, and government agencies, amongst others, who subsequently gained an interest from the initial agreement.
- Involve professional third parties such as mediators, conciliators, or advisers, who may assist in renegotiation by building and preserving business relations and resolving disputes without the need for litigation.
In all, the objective of renegotiation should be for parties to protect themselves through appropriate contractual changes and secure their investments against volatile market changes and risks where any unforeseen change in law, regulation, policy, or the likes adversely and materially affect the economic rights of the parties.
Finally, it is important to note that generally, sometimes the terminology used to describe the renegotiation may influence its success. Hence, rather than use the label "renegotiation," which could conjure negative images of a drastically rewritten contract in the mind of the parties, parties may consider calling the process a "review," "restructuring," "rescheduling," or "contract clarification."