Much legal time and attention is lavished upon the drafting and negotiation of outsourcing or managed services transactions prior to their signature – often with very senior customer management taking an active interest in the formation of a relevant deal. Such attention is understandable – and indeed inevitable, given the investment in technology and resources that a typical enterprise will have to make when undergoing an outsource and the often difficult management decisions that have to be made to make such deals operational reality. However, in many cases such wonderfully crafted deals are simply thrown in the IT manager’s archetypal filing cabinet and forgotten post signature, the inevitable (and often incorrect) assumption being that they are ‘cast in stone’.
Attention given post signature to changes to many such deals proves inversely proportional to that prior to signature – at best, such changes are effected by use of IT services methodologies, such as change control and change amendment procedures, and, at worst, undocumented changes in service provision are made by simple word of mouth. This article examines the legal effect of such changes, and how best to avoid inadvertently falling into the pitfalls created by haphazard post-signature change.
A typical service-based scenario
Consider the following scenario. A customer has been suffering steadily degrading service levels on its outsourcing services deal with an external services provider, to the point where actual service levels fall below those stated in the main contract.
The service provider complains that the cause of the degradation is due to a restructuring in the customer’s business in the period since the deal was signed, and asks for time to bring them back up to acceptable contract levels. We are assuming for the purposes of this article that the usual range of contractual options are open to the customer, such as termination or the levying of appropriate service credits, or even perhaps the right to ‘step in’ and manage the deal with an alternative service provider. However, as is the case in the real world, rather than the world of IT lawyers, the customer chooses to adopt a pragmatic approach, and opts to relax the service levels either permanently or for an indeterminate period ‘to be reviewed’ at a future date. This service-based relaxation is usually done in a couple of ways:
- informal word of mouth, or
- implementation of a ‘change’ under the operational change control/change amendment procedures of the main contract.
Before we examine how each of these different responses is likely to be treated at law, it is worthwhile replaying some fundamental, and really rather basic, contract law principles. We all understand the fundamentals of a contract at their simplest levels to be Offer, Acceptance, Consideration and an intention to be bound by legal relations. I do not propose to rehearse the legal principles behind these concepts, suffice it to say that it is helpful in our analysis of post-contract changes to hold these elements in one’s mind, if only to understand whether a post-contract variation, as I will describe it below, is a ‘contract’ in its own right, and thus benefits from all of the attributes of a contract, such as an enduring binding nature and a range of contractual remedies to rely upon.
The Informal ‘Word of Mouth’ Approach
If you are acting for a customer who fails to appreciate the necessity of even basic operational IT process methodologies, such as change control, then it might be worthwhile recommending a suitably eminent firm of consultants to help. Notwithstanding the relatively narrow legal issues covered by this article, the customer that relies at an operational level on the ‘Gentleman’s Agreement’ in today’s sophisticated IT market is likely to end up in evidential knots about what was agreed by whom and when. Such a deal will very likely prove impossible to enforce and even more expensive to litigate over.
Having issued the de rigueur dire warning however, what has the customer agreed to at law in adopting such an approach? To answer this question we need to examine two separate doctrines, one of equity and the other of commonlaw. Although I have noted that for legal purposes these doctrines are treated as separate, it is very much the trend of the courts to consider them together in a unified manner. Firstly, however, we need to consider if a post-contract variation in the sense described above has occurred (if only to discount it).
Post-contract Variation
I noted above that, in order for a purported change to an agreement to have effect as a contract in its own right – or in other terms, in order for it to unequivocally permanently change the terms and conditions to which it relates, it must itself have the attributes of a contract.
In our first example, a mere oral ‘relaxation’ of performance is unlikely to have these attributes. It will have been made unilaterally, rather than with the express assent which is needed by both parties if it is to take effect as a contract. It may also suffer the additional problem of absence of consideration. There is fairly well established case law that a purported contract variation which may prejudice or benefit either party is sufficient to constitute consideration for contractual purposes,1 but the law is less clear where the purported variation can benefit only one party to the deal.2
Waiver
It is much more likely in our first example that the customer has ‘waived’ its entitlement to performance of the agreement as drafted.
There are many instances in English law where the term waiver is used, but I am referring to perhaps the most common usage, which where one party has failed to insist upon strict performance of a contractual obligation by the other party.3 This concept is often referred to as ‘forebearance at common law’ to distinguish it from other types of waivers. I discuss forbearance in equity, or promissory estoppel, below.
A waiver in the sense that I have described above is almost always made unilaterally – and as such is incapable usually of permanently amending the terms and conditions of the agreement to which it relates (notwithstanding this fact, many lawyers take the prudent approach of prohibiting such conduct by means of a boilerplate no-waiver provision). A waiver, unlike a post-contract variation, usually only has suspensory effect. That is to say, the grantor will expect that the concession granted will end at some point in time.
There are limited circumstances where a waiver is likely to have permanent effect (or in legal terms, become irrevocable) and these will be driven by the facts of the particular concession granted. The rule seems to be that a waiver will not be capable of revocation where it becomes factually impossible for the party relying on the concession to perform the contract as initially intended. So to take our outsourcing analogy, where a concession has been granted in relation to the performance of a particular service level, it is entirely possible, as a matter of fact, for the performance of this service level to be enhanced at a later date to the original contracted levels. However, if our outsourcing provider had originally contracted with the customer for the creation of a deliverable by a particular date, and the waiver in question had extended the date for delivery of such deliverable, then, post the original contractual delivery date, it would be impossible for the supplier to comply with the contract as originally drafted. At law, the waiver would become irrevocable.4
I should also perhaps point out that, even if, in our present example, the oral concession granted by our customer was only suspensory in effect (ie was capable of revocation), it would not be open to the customer to immediately withdraw it. This is an especially important point in our current scenario, because it is quite usual for customers granting relief from performance of service levels in these circumstances to expect an immediate return back to the pre-concession levels. The law requires in these circumstances that reasonable notice be given of any intention to revoke a waiver.5
Promissory Estoppel
Promissory estoppel or, as I note above, forbearance in equity was equity’s approach to promises made having the effect of potentially amending or affecting legal relationships. As I mentioned earlier on in this article, despite the legal differences in the equitable and common-law doctrines, the approach of the courts is to increasingly treat them in a unified manner.6 My advice is therefore to adopt the same approach in any analysis of a purported change made to an outsourcing agreement.
The difference between the two doctrines is that whereas common-law waiver or forbearance focusses on the intention of the party granting the concession the equitable doctrine looks more to the effect of the concession on the party seeking to rely on it.7 It is also largely defensive in nature, being referred to as ‘a shield and not a sword’8 (in other words, whereas it may be used as a defence to an action, it cannot be used as a claim in its own right).
There are several aspects to the doctrine which we need to consider when looking at the oral concession granted by our customer in the current scenario. Given what is mentioned above, a discussion of the doctrine is only likely to apply when a party claims that the other is ‘estopped’ from going back on their promise, so we would in essence be looking at a situation where the supplier granted the service level concession was arguing that it was unfair for the customer to seek to revert back to the originally agreed levels.
It is this unfairness, or to be more precise ‘inequity’, which forms a key part of the doctrine, so that the party seeking to rely on the concession must have acted in reliance on that concession to the extent that he cannot be restored to the position which he held prior to so acting. Usually, but not in every case, prejudice will have been suffered as a result. There are parallels with the common-law doctrine that we discuss above, so that, for example, in any case where a concession was granted reducing service levels for a limited period, it is unlikely that it would be ‘inequitable’ for the customer to reverse such a concession because the supplier could potentially revert to the pre-concession position. Conversely, where the concession involves the movement of a delivery date, it would be ‘inequitable’, because it would be impossible for the supplier to be returned to the pre-concession position.9
Implementation of a ‘change’ under operational Change Control Procedures
What then is the position if our hypothetical customer has agreed to a change to the service levels by means of the issuing of a change notice or a change request form (ie the change is implemented via the change control procedure in the agreement?
At the very least our customer in this scenario has had the common sense to document the change in writing. There are however some interesting considerations to be borne in mind.
Post-contract Variation
It would seem likely in this situation that the customer has in fact executed a post-contract variation. However, remember the rule that we discussed at the beginning of this article: that is to say, a change request form is only likely to be considered a post-contract variation at law if it has the characteristics of a contract in its own right.
On our previous analysis, a change notice which has been signed by both parties and contains some form of consideration (whether monetary or otherwise) will likely satisfy these requirements. However, a unilateral notice on the part of the customer and/or one which is made in the absence of consideration will not.
Waiver and Promissory Estoppel
On the basis that a change notice does not have the characteristics of a contract and cannot (at law) be considered as a post-contract variation, then it is likely to take effect in an inchoate fashion under the combined doctrines of waiver and promissory estoppel. In this case, there are some interesting effects which should be borne in mind.
Firstly, such a change notice is only likely to have suspensory effect. We have discussed earlier the circumstances in which waivers have permanent effect. Consideration should accordingly be given to whether such potential suspensory effect is understood by the parties and whether it is in the interests of the party to whom you are providing advice. In some circumstances, such a position may benefit the customer receiving the services; in others it may benefit the supplier providing them.
Secondly, in the event of a breach of any commitment contained within such a document, it may be difficult to bring into play the full range of remedies that one would expect in relation to a contract, such as damages, specific performance and/or injunctions, particularly when one bears in mind the defensive nature of promissory estoppel. Indeed, on an analysis of our outsourcing scenario, a breach of an obligation contained within such a document is likely only to be actionable defensively by reference to the original unmodified obligation in the initial agreement, that is to say it will not give rise to a new cause of action per se.10
Approaches to Post-signature Change
We have seen that changes to agreements which are made orally or by way of established operational change control procedures can have some undesireable (and often unsought) legal effects. What can be done practically to at least mitigate these effects?
I try to make the distinction in this section of my article between those changes which are made ostensibly to vary the terms and conditions of any agreement and those which are intended to change the services provided under such agreement. This is because usual commercial practice in the IT sector dictates that such changes are classified in this way.
Of course, in legal terms there is a very fine (if non-existent) line between the two types of change – each is seeking to vary an obligation which has contractual effect it is just that one type resides in the terms and conditions of an agreement and the other in its schedules. The ‘purist’ (and non-prevailing) view would be to treat each type of change in the same way and either not have a change control process at all or have one that applies to all changes made to the agreement. In reality, however, this does not happen, for a variety of reasons (not least a prevailing wish on the part of supplier and customer to avoid the further and often expensive involvement of lawyers !).
Permanent Changes
As was noted above, very often it is in the interests of the parties to amend an agreement in an irrevocable fashion. In this case the parties should consider reflecting the change in either a deed of variation or a side letter supported by consideration. In this case it will be clear that the change has taken effect as a post-contract variation, and there will be no doubt as to its permanent effect or indeed as to the availability of contract remedies to enforce the obligations contained within it.
Temporary Changes
On the other hand, if the parties are clear that the change is only temporary (such as our earlier example of a relaxation in service levels), then this should be supported by a written unambiguous letter of waiver setting out the terms of the concession granted and the timescales within which it may be revoked.
The Change Control Process
Operationally, of course, it is the change control process which sits at the heart of service change, particularly in the types of outsourcing and managed services agreements which define the IT sector. Practically speaking, it will be difficult to avoid this process in any scenario where the services provided under an outsourcing agreement are to be changed. It is entirely possible however for the lawyers at the outset to consider the legal problems inherent in the use of such a procedure and cater for them to some extent in the drafting and structure of the original agreement.
So, for example, consideration should be given to making change control notices bilateral (ie both parties) rather than unilateral (one party). In addition the parties may describe in a contractual provision the consideration for any changes made and providing that they are intended to take effect as amendments which alter the contractual obligation of one party to the other. It may also be useful to state expressly that such changes are made without prejudice to the right of one party to enforce any contractual rights it may have against the other.
Conclusion
In summary, it is worth pointing out that many of the issues presented in this article are solvable by pinpointing precisely what it is the parties are seeking to change – and indeed whether or not that change is intended by them to be a temporary concession or to have permanent effect. It is then that the most appropriate legal method to effect the change can be adopted.
The worst that can be done in any case is simply to use the most expedient method of reflecting the requested change or one which is presented by either the supplier or the customer as applicable.
A little foresight in drafting is also required – not after the event (ie post signature) but around the negotiating table when the original contract is being created. With at least some creative thought, post-signature changes can be carried out by use of a robust change control process which enables the parties to exercise those remedies which they would normally expect to exercise.
Finally, in those situations where a temporary concession is being granted, make certain it is documented – to ensure not only that the parties understand its precise scope but also to ensure clarity as to when it may be revoked.
John Buyers is a Director in KLegal’s London Technology Department.
Endnotes
John C. Buyers is a Director in KLegal’s London Technology department, specialising in large-scale IT and outsourcing deals. Prior to joining KLegal, John Buyers was Cap Gemini Ernst & Young’s senior international transaction lawyer.
1. See, for example, W.J. Alan & Co. Ltd v El Nasr Export & Import Co. [1972] 2 QB 189.
2. For a fuller debate of these issues, see paragraph 3-075 of Halsbury’s Laws.
3. See, for example, Banning v Wright [1972] 1 WLR 972; Charles Rickards Ltd v Oppenhaim [1950] 1 KB 616.
4. Toepfer v Warinco A.G. [1978] 2 Lloyds Rep 569.
5. Charles Rickards Ltd v Oppenhaim, supra.
6. See, for example, Union Eagle v Golden Achievement Ltd [1997] AC 514.
7. Hughes v Metropolitan Railway (1877) 2 App. Cas. 439; Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130.
8. Combe v Combe [1951] 2 KB 315.
9. See, for example, by analogy Societe Italo-Belge pour le Commerce et l’industrie v Palm & Vegetable Oils (Malaysia) Sdn. Bhd (The Post Chaser) [1981] 2 LR 695.
10. See Combe v Combe, above.
