There comes a time when every contract will come to an end; however, what happens when the parties don’t want that to happen but there are no provisions in the contract dealing with extension rights? In this blog we analyze good practices in relation to extending contracts where there is no express right of extension.
Old Contract or New Contract
Consider whether the intention of the parties is merely an extension of the period under which the current terms are to continue or whether, in addition to an extension of such period, the parties intend to make other changes to the contract. If the circumstances point to the latter, parties should consider whether a new contract is more appropriate. Some considerations for moving to a new contract may include updates to pricing or other business terms, a reset of any liability caps or accrued rights under the current contract, and a clear delineation between liabilities under the current contract and those under the new contract.
Do What the Contract Says
When negotiating the contract, the parties may decide to make contract variations a simple process or, conversely (and as is often the case for large outsourcing and services agreements), a more complex and structured process ensuring that all necessary points are considered and agreed prior to the variation taking effect. As a minimum the parties should ensure that their contract contains a variation clause that permits contract variations only upon written agreement of the parties. Such clauses introduce certainty into the variation procedure (including any extension negotiations) and will mitigate the risks of the actions or words of one party being deemed to vary the contract.
It is important to follow the correct variation procedure set out in the terms of the contract when agreeing an extension. If the correct procedure is not followed, the parties risk that the amended contract will be unenforceable.
Pay the Price (Or Use a Deed)
Under English law a variation to the terms of a contract must be supported by consideration to be effective, unless a document is executed as a deed. If the document amending the term of an agreement is executed as a simple contract, additional payment by Party A will constitute valid consideration for the increased obligations of Party B performed under the contract during the extension period. Alternatively, if an extension to the term is not coupled with an additional payment, the parties may want to consider entering into a deed of variation or an agreement with a nominal consideration in order to prevent any future disputes over the validity of the consideration given.
Draft Carefully
How should you go about drafting an amendment to the term of your contract? The following practical drafting tips may prove useful:
- Before you begin drafting, identify the parties’ commercial needs and objectives in respect of extending the contract.
- Ensure that you understand the operation of the existing term provision and that an amendment to the duration of the contract is in fact required.
- Double-check whether (and, if so, how) any other provisions in the agreement may be impacted by the proposed extension clause. If you do not want the variation to affect certain key terms of your agreement, you will need to specify this expressly in the deed of variation or the amendment agreement.
- Do not leave the wording of the extension clause open to interpretation or future agreement (the so-called “agreement to agree”) – use clear and precise language showing exactly what the intention of the parties is with respect to the extension. The below questions may be of help:
- What kind of extension is required (fixed period, rolling)?
- If a rolling extension is a possibility, how should any consecutive extensions be agreed? (auto-renewal or one party’s option to extend)?
- Does the contract need to be extended until a particular date (e.g., 31 December 2020) or can a relative date be used instead (e.g., “one year from the Effective Date”)?
Keep Calm and Carry On?
If, following the expiry of the contract without an agreement to extend, the parties continue to perform their respective contractual obligations, it is likely that there will be an implied contract between the parties on the terms of the expired contract. In order to avoid uncertainty in relation to the terms of such an implied contract, parties should cease any actions under the contract upon expiry until an extension or new formal contact is agreed or, as a minimum, prioritize agreement of an extension to the term and which also covers the period following expiry.
If, after the contract has expired, the parties continue to perform some, but not all, aspects of the contract or are performing additional aspects, a variation agreement extending the lapsed term may not be the most appropriate solution as it may not accurately cover the rights and obligations of the parties under the implied contract. In such circumstances, the parties should consider entering into a new standalone agreement.
Consider Additional Requirements
Finally, certain types of contracts are subject to additional variation procedures prescribed by legislation. A prime example in England is public contracts subject to the Public Contracts Regulations 2015 (PCR). Under English law, in order to validly extend the term of a public contract without triggering a requirement to conduct a fresh tender process, the parties must show that the reasons justifying such extension fall into one of the categories described in Regulation 72 of the PCR.
Additionally, parties to contracts concluded with entities operating in highly regulated sectors are encouraged to assess any applicable regulatory restrictions on, or requirements pertaining to, the variation process before negotiating a term extension.