Legal Briefing

Variation of contractual terms

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Corporate and commercial | 01 June 2010

The modernisation of business practice dictates that companies need to adapt quickly to their business environments. As a result, parties to long-term contracts may need to change or modify their contractual rights for them to have a continued commercial effect. This can be done in one of two ways.

One option is for the parties to consent to the termination of the original contract and enter into an entirely new one. Thus, all of the contractual rights of the parties under the original contract will cease and the parties will only be able to rely on the rights as governed by the new contract. However, this can be expensive, time consuming and impractical. Where large and complex commercial contracts are involved, the parties will often only wish to change a certain number of terms, while keeping the majority of original terms in existence. In this situation, it is far more suitable to vary the existing contract to give effect to the new commercial needs of the parties.

However, as the recent BMS Computer Solutions Ltd v AB Agri Ltd [2010] demonstrates, ill-thought out variations can lead to unintended consequences.

Facts

Under the terms of a licence agreement between the parties, BMS granted a software licence to AB Agri for a period of ten years (the licence agreement). The parties simultaneously entered into a support agreement that granted AB Agri the right to technical support in relation to the licensed software (the support agreement). A termination provision in the licence agreement provided that:

‘In the event that the [support agreement] is terminated for any reason whatsoever this agreement [the licence agreement] shall be terminated forthwith (the termination provision).’

A variation agreement inserted a provision that varied the licence agreement period from ten years to one of ‘perpetual’ duration (the variation agreement). Several years after this variation, AB Agri terminated the support agreement. One issue before the court was whether the termination of the support agreement still had the effect of terminating the licence agreement, notwithstanding that the term of the licence agreement had been varied to last for a period of perpetual duration.

AB Agri submitted that the termination provision was incompatible with the term in the variation agreement, providing for a perpetual licence, and that therefore the licence agreement remained in effect. BMS disagreed and argued that the licence agreement and the support agreement were linked and should be read in conjunction with one another. As such it submitted that the licence agreement was validly terminated.

Decision

The judge at first instance, Sales J, basing his decision on general construction principles, favoured the submissions of BMS. He found the term ‘perpetual’ to mean ‘operating without limit of time’, and on that interpretation found that there was no incompatibility between the variation of the licence agreement and the disputed termination provision. He gave the following reasons for this decision:

    1. On an objective approach to construction, the variation agreement:

‘Was plainly not intended to wholly displace the licence agreement… the choice of words “will be extended” rather than a phrase such as “will be replaced by” indicate[d] that it [was] the same licence as in the licence agreement.’

  1. The omission by the variation agreement of references to all of the termination provisions in both the licence agreement and the support agreement indicated that those unmentioned provisions were intended to remain in force.
  2. There was a clear link between the continuation of the support agreement and the practical effect of the licence agreement. The variation agreement contemplated that the termination provisions of the support agreement would continue to operate. This implied that the termination provision in the licence agreement would also continue to operate.
  3. It would require ‘clear and explicit language’ to indicate that the contrary outcome was intended and that the termination of the support agreement was intended to have no effect on the licence agreement.

The effect of the judge’s ruling was that the licence agreement was terminated along with the support agreement. Clearly, this was not the outcome AB Agri had intended when it terminated the support agreement.

Comment

The decision in BMS highlights the importance of the need to consider the effect that a contract variation can have on all original contract terms. Express reference to the intent of a variation on terms that are important to the contractual relationship as a whole is the only safe way to avoid unintended outcomes.

 

drafting tips when varying contracts

  • Identify the commercial needs of the client and their objectives in making the variations.
  • Review all original terms of the contract with variation in mind.
  • Analyse the effect of the variations. Do they render any existing provisions incompatible?
  • Ask yourself whether the variations express the intentions of the parties.
  • If your client does not want/intend particular key terms to be impacted by the variation, state this expressly in the variation agreement.
  • Be thorough and precise with the language used.