Modifying a contract after it has been signed
Brexit, Coronavirus, a financial crisis: these are all events that can have major implications on the execution of contracts. For example, a contract can become unenforceable because the agreed delivery times are no longer realistic. But what can you do in these cases? What legal tools are there that can give you the right to change a contract?
Changing a contract after it has been signed is often difficult, but not necessarily impossible. An appeal to “unforeseen circumstances” can offer a solution.
Why is it so difficult to change a contract?
When entering into a contract with another party, you normally focus on things such as price, scope, payment and delivery terms. You normally don’t negotiate about possible global events and how this may affect the execution of the contract. Doing business in such a way would be very difficult because major events are impossible to predict. Thus the customer and supplier normally trust that contracts can be carried out as normal.
Furthermore, the law assumes that parties are allowed to agree on what they want and that they are then bound to this. Judges don’t interfere with what you agreed upon. This is good for doing business with ease, but it can also become a problem if circumstances change significantly. In such cases the contract may still be useful for one party, but no longer for the other.
When can a contract not be changed?
It would be unreasonable if a contracting party would be able to get out from under a contract with every change in circumstances. Therefore a contract usually cannot be terminated with a change in circumstances. Some things are part of the normal contract risk.
For example: With a purchasing contract, the risk of a price increase after the contract has been signed is usually for the seller. Vice versa, the purchaser cannot cancel a contract if a machine quickly becomes obsolete after its purchase. These are all matters that fall under contract risk.
The examples above are risks that the entrepreneur normally takes into account when entering into a contract. But there are also things that entrepreneurs do not take into account, for example unpredictable events such as Brexit and the COVID-19 pandemic. These events are not discounted in the contract price and are not reflected in the contract terms. In such cases there is the clause ‘unforeseen circumstances’.
When can a contract be changed?
The law states that a contract may be terminated or changed due to unforeseen circumstances, if it is expected that a contract cannot reasonably be upheld.
So there are two conditions:
- There are new circumstances that are not foreseen in the contract, and
- It is therefore unreasonable for the contract to remain unaltered.
Unforeseen means that the risk of new circumstances has not been taken into account in the original contract. For example: A pandemic has not been taken into account, but the position of the parties under the contract is affected by it.
This mainly concerns developments that surpass the individual situations of the parties. If a future situation is not taken into account, unforeseen circumstances cannot always be invoked. The second condition is a reasonableness test. This means that, according to societal views, some situations must remain at the risk of the parties.
For example: When purchasing goods with an objective market value – such as gold, oil, shares, commodities etc. the risk of the price falling will be for the trader who has purchased the goods at a high price and has to sell them at a lower price. This is a normal entrepreneurial risk of trading.
In this reasonableness test it may also be important how foreseeable a future circumstance is. Travel restrictions due to the COVID-19 pandemic can now be called a foreseeable future circumstance. If parties forget to take this into account, this can legally be called an “unforeseen circumstance”. However, it can still be unreasonable if a contracting party demands changes in the contract on the basis of: The no-deal Brexit was foreseeable. A dissolution or revision of the contract would be going too far.
How does an appeal to unforeseen circumstances work?
According to Dutch law, unforeseen circumstances are adjudicated by the court. In other words, only the court can apply the regulation, unlike for example a normal dissolution of contract, which can be realized by sending a simple letter by one party to another.
The claiming contracting party must clearly indicate what is being demanded. Whether it concerns a dissolution of the entire agreement, a partial dissolution or an amendment of the conditions.
But beware: The judge can award damages to the other party. It is therefore important that the party that sets the claim makes a proper cost / benefit assessment of the risks of the procedure.
In a normal situation of unforeseen circumstances, the parties will first talk to each other. During these conversations, it’s good to take into account the possibility of invoking unforeseen circumstances. This could possibly be used as leverage during negotiations.
It is clear that invoking unforeseen circumstances is not easy and thus you should be careful when appealing a contract. When entering into contracts it’s always a good idea to think about other options, such as:
- The possibility of early termination
- A price adjustment mechanism
- A proper arrangement of suspension or dissolution in force majeure situations
If you foresee any risks, do not settle for a standard contract. Contact a contract specialist who can help guide you.
Do you have any questions about changing a contract or about contract law? The specialists with Crowe Peak can help answer any questions.