The dire economy is prompting many parties to alter their contracts with supplemental agreements. But if you’re not careful, they may be worse than nothing

One consequence of the economic turmoil is that many contracts and transactions are being wholly or partly renegotiated. Sometimes this is because of commercial pressures and sometimes as a matter of choice. However, there are several issues the parties need to consider before deciding on their new agreement.

First, the parties would be well advised to consider whether or not they want the original agreement to stay in place and simply be supplemented or modified by the new agreement. If they do, the difficult question of which document should operate in priority over the others in the event of a conflict needs to be considered. It is also important at that stage that any document purporting to amend the previous agreement adopts, in so far as it is possible, the same terminology so as to be consistent with the previous agreement and clear as to what is intended by the supplemental agreement.

Second, the parties need to think about what lawyers call the “consideration” for the bargain. The consideration is what each party is putting into the deal, and it is what the court will enforce if called on to do so. Normally, this is looked at in terms of positive actions, the obligation to do something or to pay for something. However, in this difficult market, it can involve what we call forbearance – not doing something or not enforcing a right or entitlement that would otherwise be enforced. By its nature, that kind of agreement needs to be drafted with care.

The third issue thrown up is how any supplemental agreement will be executed. One of the ways of avoiding the problem identified above – namely, whether there is any consideration or value for the bargain in a supplemental agreement – is to have that supplemental agreement executed as a deed by the parties.

There may, however, be other reasons why execution of a supplemental agreement by deed is a good step to take in such circumstances. One might be because the underlying contract is itself a deed and there is an argument that a deed can only be amended by deed rather than a mere contract. The second reason a deed might be more appropriate is if the parties are negotiating and compromising rights and entitlements under more than one contract. In those circumstances, a formal deed arrangement is likely to be more sensible in the long run.

Sometimes the supplemental agreement is a mere exchange of letters and the focus is on resolving the immediate problem rather than making sure the rest of the project runs smoothly

The fourth issue is to check that there are no prohibitions on amending the existing agreement with a side agreement. One example is the type of agreement clauses that seek to exclude any other documents from having legal effect.

The next issue that the parties should consider is the impact of any supplemental agreement on rights and remedies, and, in particular, dispute resolution machinery. All too often supplemental agreements are drafted without properly considering what will happen to the project in future. Sometimes the supplemental agreement consists of a mere exchange of letters and all too often the focus is on resolving the immediate problem rather than making sure the rest of the project runs smoothly. For example, problems may occur over extensions of time, variations or additional works. There is a risk that the extent or implications of the supplemental agreement will be unclear if delays arise or variations are ordered.

Finally, it is worth thinking about dispute resolution. A supplemental agreement may not be considered a construction contract for construction operations. This can mean an adjudicator cannot determine disputes in relation to it. This can be overcome by careful drafting and a consideration of this point before any dispute arises.

Supplemental agreements are far from a quick fix for particular problems or commercial imperatives. They must be carefully thought out, considered and drafted if they are not to be the cause of more problems than they resolve. In a sense, nothing is worse than a dispute about a settlement agreement or a supplemental agreement because, by its nature, the parties were seeking to agree and conclude matters and not to spend money and management time arguing issues. Beware of the exchange of letters or agreement on the back of a fag packet that does not settle or resolve anything.

James Bessey is a partner in Cobbetts