Renegotiation of Contracts

Introduction

Most parties entering a contract do so believing the contract will be fit for purpose for the duration of the contractual relationship. However, circumstances can change sometimes quite quickly, and the terms originally agreed may need to be altered. This could be for a variety of reasons including changes in the parties’ operations, the commercial landscape, supply chain disruption, or regulatory change. In those circumstances, renegotiation of the contract may be required.

This often raises two practical questions: is renegotiation legally possible, and how can it be done without unintentionally exposing your business to new risks?

Are Parties Legally Required to Renegotiate?

Generally, once signed, a contract is binding on those terms only and there is no general obligation on parties to a contract to renegotiate the terms at any point. However, at the time of entering the original contract, the parties may agree to incorporate a provision which allows other terms to be varied or renegotiated in the future.

If the parties wish to renegotiate the terms of the contract, they will have to reach agreement as to those new terms and enter into either an amendment to the original contract, or a new contract entirely which reflects the renegotiated terms and which replaces the original agreement.

Any amendment can only take place if all parties to the original contract agree to the new proposed terms. This can be a significant practical hurdle. For example, if the original contract benefits one party more than the other, that party may see little incentive to agree to the amendments. Renegotiation is therefore usually driven by commercial realities and bargaining power, rather than legal entitlement.

Exceptions

As indicated above, amendments to a contract can be made if the contract includes express provisions allowing for variation or renegotiation. If the contract does include such provisions, they will often be tied to certain triggers, for example after a set period, or following a defined trigger event such as a percentage increase in price indexes. If parties want the ability to revisit a certain aspect of the contract such as pricing or scope, that flexibility should be included from the start. It is therefore important to seek good legal advice at the outset.

In long term or relational contracts, there may also be an implied expectation that parties will cooperate as circumstances evolve. In practice, this may encourage discussions about renegotiation where the circumstances justify doing so. However, that expectation does not impose a legal obligation to renegotiate, and doing so would always be at the discretion of each party, subject to any express exception.

In reality, where the commercial relationship is important, the parties may agree to renegotiation to preserve that relationship. This would be a commercial decision, not a legal requirement.

Express Contractual Clauses That Enable Renegotiation

A renegotiation will be more straight forward where the original contract contains mechanisms for such variation. Therefore, it is necessary to carefully consider your original contract to see if it includes any of these common mechanisms for variation or renegotiation:

Variation clauses

Variation clauses set the rules for changing the contract. Most commercial contracts require any variation to the terms to be agreed in writing and signed by the parties, and courts generally enforce these requirements strictly. If the process is not followed, any attempted amendment to the contract may not be effective. In that case, the parties would still be bound by the terms of the original contract.

Price review mechanisms

Price review mechanisms are often used in commercial contracts and allow pricing to be revisited without reopening the entire contract. They may operate by reference to fixed review dates or defined triggers such as certain increases in raw materials costs, or in a specified price index.

Where a contract is sensitive to inflation, currency variation, or volatile input costs, these mechanisms can help manage risks. They also provide the parties with more certainty about when pricing can change and how the changes will be calculated.

Force majeure

Force majeure clauses exist to provide relief where parties would otherwise be liable under the agreement but are prevented from or delayed in fulfilling their obligations by circumstances beyond their control. The exact scope of events covered by a force majeure clause (or whether one is included at all) will depend on the drafting of the original contract.

Force majeure clauses are intended to deal with exceptional events. They will not normally provide parties with a ‘get out of jail free’ card to renegotiate or exit a contract simply because it has become less profitable or more difficult to perform due to changes in commercial conditions.

Where they do apply, force majeure clauses can offer temporary relief for parties hindered by exceptional events, creating some breathing space for the parties to discuss practical solutions such as revised delivery arrangements or interim measures.

Hardship clauses

Hardship clauses apply where performance is still possible, but the economic balance of the contract has shifted significantly often due to sustained increases in costs or market changes. Unlike force majeure, hardship clauses focus on restoring balance rather than excusing performance. They typically require the parties to engage in discussions and may include a backup position if agreement cannot be reached. They can be particularly relevant in longer-term arrangements as the risk of disruptions such as market volatility or global issues over longer time periods is naturally higher.

If your contract doesn’t include any of these options but you still want to renegotiate certain terms, the best way to achieve this aim is to enter a dialogue with the other party to the contract. Preparing a clear commercial rationale, and using “without prejudice” discussions where appropriate, can help to keep negotiations focused and constructive, especially where continuity of supply or service is critical.

Legal Pitfalls to Avoid

Renegotiation can introduce legal risk if it is handled informally or under pressure, and, as noted above, changes may not be enforceable if the new terms are not documented properly.

Consideration

A contract variation generally requires the payment of fresh consideration (something of value), in addition to the sums paid under the original contract, in order to be legally binding (even if that value is nominal, such as £1). Alternatively, the parties can execute the variation as a deed, which removes the need for fresh consideration, but brings additional formalities for signature which must be followed. If this is overlooked, there is a risk that the revised terms may not be legally enforceable. For this reason, renegotiations are often recorded as deeds of variation.

Mistake

Renegotiations often move quickly, sometimes alongside ongoing performance of the contract. This increases the risk of mistakes, such as signing the wrong version, misunderstanding what has been agreed, or failing to update related documents. These mistakes can undermine what the parties believed they had agreed. We recommend obtaining legal advice on all contracts, including variations, to reduce this risk.

Economic duress

A party wishing to renegotiate terms must ensure they do not apply pressure on the other party which could be deemed to be illegitimate. This usually involves threats or demands that leave the other party no choice but to enter into the new terms. This is different from ordinary commercial pressures the parties may experience at the time of renegotiation.

Documenting the New Terms

Once new terms are agreed, they should be documented as soon as possible. Whether the outcome is recorded in an amendment agreement, a deed of variation or another agreed format, any contractual procedure for changes, including “no oral modification” clauses, must be strictly followed.

It is also important to ensure that any updated terms are reflected across related documents such as schedules, statements of work or ancillary agreements. So, it is also important to consider how any updated terms will affect such associated documents. Clearly documenting any changes will help to ensure that the renegotiation resolves issues, rather than creating new ones further down the line.