Welcome again to my ongoing 20 Contract Questions series. The most recent two posts were on learning about what a contract means and how to negotiate a contract. In this post, we’ve now put the contract in place, but want to know more about changing or renewing it.
Let’s start by explaining why you need to know more about what’s seemingly an obviously answered question…
Why would you ever need to amend or change a contract?
Contracts aren’t meant to be a static, dead document. They are a living expression of the bargain which you are striking with the other side – whether that be a supplier, a business partner, an employee or a consumer (I’m going to use a little legalese and call the other side to the contract the ‘counterparty’). If the bargain changes or if the business circumstances around the bargain change, then the contract should change. If the contract DOESN’T change, then you risk all kinds of problems, most of all that the contract will no longer mean what you want it to mean. As we discussed previously, this can blow a hole in your plans, to put it mildly: what’s the point of a contract which you can’t rely on?
So, depending on the circumstances you might want to change a previously agreed contract. Flipping it around: what happens when you have negotiated a deal that’s good for you, but the counterparty tells you – AFTER the ink has dried on the signed contract – that it needs to change the terms? What rights do you have?
Real world example 1: a developer and a publisher reach a publishing agreement for a new game which involves a revenue share. The platform in the meantime changes its standard royalty rate (hypothetically let’s say from 30% to 25%). The developer will want to renegotiate the contract to deal with the 5% it otherwise loses out to the publisher.
Real world example 2: a digital media studio gets a licence for a series of comic characters to go into its new transmedia project. The comic later decides it gave too much away: it wants to change the deal to remove a few characters (but the developer won’t want that).
Why would you want to renew a contract?
That’s more straightforward: if it’s working for you, you might well want to extend the deal. Let’s say you’re a games publisher and you’ve been distributing a game for 4 years out of a 5 year contract, with both you and the developer being happy about how things have turned out. Why not make it a 10 year deal and keep the money rolling in for everyone?
The legal basics: everyone needs to agree to the contract change or renewal
The foundation stone of contract systems worldwide is that a bargain has to be consensual to be legally enforceable: you can’t dictate changes to a contract after it has been agreed. Unilateral changes are unenforceable. Why is that? Answer: we go back to the original post, about what a contract is: it is a mutual bargain between two people which involves a specific, identifiable offer and acceptance of that offer. If you change the deal terms and don’t ask for the counter party’s approval, that isn’t ‘offer and acceptance’, so it’s not an enforceable contract (in fact, in law it’s not a contract at all).
So, you CAN write to the counterparty proposing to make a change to the contract and explaining why they’re needed. They can then agree or not, as the case may be. What you CAN’T do is write to the counterparty, notify them of changes to the contract and then just put those changes into place without getting their response. In that latter situation, the counterparty would be entitles to just refuse to accept your changes and if necessary take you to court to make you comply with the original contract.
Real world example: a games publisher tells a games developer that going forwards its royalty payments for a published game will be paid to it 60 days after each calendar quarter, not the 30 day period that was in the contract. This means the developer has to wait a month longer for its royalty payments, which could be a big cashflow issue. The developer should be able to refuse the change.
Sounds simple, doesn’t it? Actually, not really. The devil is always in the detail…
What if there are clauses in the contract saying that I/they can change provisions unilaterally?
Generally, a clause like that (which is rare) is going to legally unenforceable, or at least liable to very severe questioning by a judge. Again, it goes back to contract basics: if you don’t give the counterparty the ability to accept your offer, there is no meeting of minds and therefore no contract. So, you should push back HARD against a clause like that if the counterparty wants it from you, or if you are the side wanting it then you need to understand its risks. In either situation, be prepared for a fight over it.
All these legal niceties are…nice, but what if the economic reality is that I don’t have a choice?
I see this fairly regularly with clients: either they have the bargaining power to force a contract change, or they have to submit to a contract change by a stronger counterparty. There are no easy answers here I’m afraid, where the law faces off against economic realities. From a purely legal perspective, being forced into accepting contract changes which you don’t like could potentially constitute duress (or what in the US is sometimes known as contracts of adhesion) and be challenged in court – but that doesn’t happen often. In reality, most of the time you have to make the best of a bad deal. If you’re in that situation, read my post about negotiating a contract: it applies equally to contract variations as to contract formation. Basically, it’s worth thinking about what you can get in return for having to agree to contract changes which otherwise you’d oppose.
Let’s say for example that you’re the developer in the above example and you feel under pressure to accept net 60 days for royalty payments instead of net 30 days as per the original contract. Even though legally you could challenge it, maybe you could offer 45 days instead? Or maybe you accept 60 days provided you get a 30% royalty instead of a 25% royalty? Either you’ll get a sweetener for the deal, or you’ll get the original demand revoked, or at the very least you won’t have taken a unilateral change lying down.
What happens if the contract contains a mistake?
It happens more than you might think. A royalty clause refers to a 2.5% developer/production company revenue share instead of 25%; the contract is entered into by a company which technically no longer exists (instead of its successor company); the contract accidentally says that the publisher retains all IP rights in the product instead of saying that the publisher retains NO IP rights in the product; or two joint developers don’t know that neither of them has the IP rights to what they want to co-develop anymore. These are all examples I’ve seen over the years. What do you do?
[Important caveat for the rest of this section : the laws in this area depend heavily on the law of the country governing the contract (I’m going to talk about governing law later in this series; for now I’ll assume we’re talking about UK/US/Commonwealth legal systems).]
Usually, these types of situations involves the law of mistake. There can be a mistake of law or of fact; the mistake can be unilateral (only one side has made the mistake) or it can be common (both sides have made the mistake). Essentially, the law says that if you have made a bad bargain and the counterparty knows about it, then under some situations the contract can be set aside if it involved an innocent mistake. But not always: sometimes if you made a bad bargain you have to live with it (especially if the counterparty is acting reasonably when trying to exploit that bad bargain). If on the other hand the contract involved a common mistake (e.g. both developers thought they each had rights which actually they didn’t), then the contract could be ‘set aside’ (i.e. torn up) . Or, if the parties agree to it, then the contract could keep going but be amended to correct the mistake (this is called ‘rectification’). However, often these situations involve legal challenge because one party tries to gain an advantage at the other party’s expense, which obviously wouldn’t thrill the losing party.
In practice, if you end up in this situation, you should do two things: (i) take legal advice about what your options are; and (ii) play a straight bat (sorry, that’s a rather British expression for being straightforward!) to the counterparty and explain what went wrong and why it needs to change, unless your lawyer tells you do otherwise ofc. But be aware the counterparty might not play ball…
How can I make sure that no changes to the contract will be made without my consent?
Legal answer: Put it in the contract. A well drafted contract will include wording which expresses something like the following basic summary: “No variation to this agreement will be made unless in writing and agreed by all the parties”.
Once you have that kind of wording in a contract, it serves to stop ANYONE (including you) from amending the contract without the counterparty giving its approval. If the counterparty isn’t asked, or refuses to give approval, then going ahead with the amendment would be a breach of contract putting the person making the change at risk of legal action.
Business answer: if someone tries that on you, and you find out about it, your business person makes it politely but firmly clear to their business person that if they try that trick again, there will be no further business between the companies and everyone else will find out about it too. (I’ve seen this work once or twice, though having it backed up by a legal letter never hurts; it’s a variation on the nice cop/nasty cop routine I talked about previously).
How do I set out a contract change or variation?
DO NOT JUST MARK UP THE ORIGINAL CONTRACT. DON’T IT, SERIOUSLY. I’ve seen it happen and it never comes to good.
Real world example: I saw a film distribution deal in which the 5 year term was crossed out and replaced with the number 8. Two years later the parties fell out because only one of them had actually made the manuscript change; the other party hadn’t made the change and had already given the film rights to someone else.
You are far better off creating a separate piece of paper which is supplemental to the main contract. Sometimes this is a list of the changes agreed, signed by both parties. That’s usually called something like a ‘variation agreement’ or ‘letter of variation’. It is a contract in its own right but it exists to show how the parties have agreed to change their main contract.
This approach is fine legally and it’s quick – you just stick down what you want to change and then put some other contract niceties around it. The problem is that the variation agreement makes no sense unless you have the original agreement with you, so you end up swapping back and forth trying to make sense of the text – especially if over the life of the contract you end up with 2 or 3 variation agreements on top of the original agreement.
So there’s another way: you can ‘restate’ the agreement. Basically, you use the original contract wording but you change the terms you want to change and then both resign a document that’s explicitly marked as a restatement. Often you’ll redline the changes to make them clear. This can be more time and costs intensive, but it makes understanding the changes you made a few months or years down the road.
The point is: getting the contract change or renewal you want is important, but so is the process of putting it down on writing as a reliable, legally enforceable record of what you got.
TL;DR summary / pulling all this together:
- Legally, changing a contract or renewing a contract has to have the approval of all the parties to the contract.
- Legally therefore, you can’t force a change on someone and they can’t force on you.
- But in practice bargaining power is a big factor, so if you have to swallow a change you don’t like, NEGOTIATE!
- If a contract contains a mistake, take legal advice in case you can use legal rights to make it say what you think it should.
- DOCUMENT properly the change or renewal you’ve obtained – otherwise just negotiating it will have been useless in the long term.
As always, drop me a tweet or comment below if you have any follow-up queries/comments and I’ll happily update this post. In the next post in this series, we’re going to start talking about the specifics of contracts. First up is the so called ‘operational sections’: saying what you’ll do and what the other guy will do, but all nice and legal.