In a recent chat with a client, a typical scenario was mentioned: a phone conversation between lender and borrower about the current state of the loan facility.

As the story unfolded, we started to talk about "when does a conversation stop being just a conversation and stray into the area of variation of the contract?"

The Supreme Court was somewhat helpful in the recent case of Rock Advertising1 by confirming that where a contract (whether it be a loan agreement or a commercial contract) states that it can only be varied in writing, then any purported change that is agreed orally is of no effect. Of course, there are, as you might expect, some caveats:

  • The original agreement must state that it can only be varied in writing. For various and often good reasons, this is not always agreed at the outset;
  • If the parties have agreed orally - whether in a face to face conversation or on the 'phone - that the terms are changed, and they proceed to act (or one of them allows the other party to act) as if those changes were effective, then they may well be prevented from later arguing that the original contract terms stand.

This is not new law, but it is a useful reminder of best practice: You certainly don't want to rely on a conversation, act on purported changes, and then resort to the courts to decide what the terms of the contract now are:

  • Where you discuss the terms of an existing contract with the other party or parties to that contract, you should follow-up in writing, recording exactly what change has been agreed, or stating that no change to the contract has been agreed unless and until there is a written variation, and ideally get the other party to acknowledge in writing;
  • Alongside that, you should make it clear that a change in the actions of one party - perhaps to repay at a different time or amount - is not acceptable and must be agreed in writing before it is acceptable;
  • Better still, get it formally documented: there are often other considerations when an agreement is changed that might mean that more formal (or replacement) documentation is required. That way, everyone is clear what the terms are, whether there has been any change to those terms, and if so exactly what those changes are;
  • Also, if you don't know for sure that it won't impact more widely, then get it checked out - not least, some changes will bring the original agreement to an end and create a new one, or could impact any security or guarantee that's in place.

Another case2 has also come along on the topic of conversations and contracts: The court decided that the conversation between Mike Ashley and his (then) friend and colleague, Jeffrey Blue, in the Horse and Groom pub was not a binding contract. In that conversation, 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, and Mr. Blue took that as a binding agreement. The court was unconvinced and put it down to drink-fuelled "banter", and not a business proposal. It was perhaps a bit of wishful thinking, but it took the time and cost of a court case to resolve the misunderstanding.

So, the moral of the tale: it's good to talk, but always follow it up in writing if it was about a business arrangement, making it clear what the agreement is, and make sure that you don't confuse business and pleasure.