Renegotiate terms to avoid contract breaches
Change they say is the only constant thing in life and this applies to agreed terms of a contract. Sometimes, the conditions and situations leading to a contract may change making it impossible or difficult on the part of a party or both parties to perform the obligations under the contract. When this occurs, the parties are encouraged to renegotiate the terms to obtain more favourable terms rather than abandoning or neglecting performance in breach of the contract.
What is a contract?
A contract may be defined as an agreement (whether oral or written) between two or more parties that are intended to be legally binding. In law, an agreement is legally binding if it has all of these elements; offer and acceptance, consideration, intention to create legal obligations, and capacity. Most contracts are bilateral meaning both parties agree on the terms or contractual arrangements and a contract so agreed upon is enforceable by the courts for all intents and purposes.
Renegotiation
To renegotiate simply means to go back to the discussion or contract drawing table to re-examine the terms with the view to eliminating or modifying provisions that are no longer favourable. As markets and supply chains shifts, or where there is new information, business interests change creating the need to look for new and better opportunities.
Parties to a contract are always advised to ensure that their contracts do not forbid renegotiations and amendment of terms. A renegotiation or amendment clause should be incorporated in agreements prior to signing to allow for changes from time to time. Simple renegotiation clauses in contracts may read as follows:
“Right to Renegotiate – Either party may notify the other in writing of its intention to renegotiate and the parties shall in good faith, renegotiate and amend the agreement as appropriate”.
Or
“Amendment – This agreement may be amended or modified only by a written instrument executed by both parties under the agreement”
Why is Renegotiation Necessary?
Parties to an agreement are usually encouraged to treat renegotiation as an ongoing part of an active and engaged relationship with business partners. Here are some examples of when a renegotiation is necessary:
1. Change in Circumstances
It is an indisputable fact that the current economic conditions have led to a change in business conditions and needs. With the general increase in prices of goods and services, businesses are unable to afford the cost in prior agreed contracts. New technology, changes in process, and altered budgets with new expenses have also been identified by Forbes as changing circumstances requiring contract renegotiation. Foreseen or unforeseen circumstances are both good reasons for renegotiating contract terms.
2. There are Flaws in the Contract
As much as we may try to get it right at first, there will always be flaws in a contract that may require renegotiation or amendment. According to Forbes, there could be an improper balance of power between the parties or there could be unclear terms that the parties may find hard to follow. Also, parties in the performance of a contract may find other suitable or convenient ways of performance than those agreed upon.
3. When the Contract Ends
Contract renegotiation is mostly necessary when the contract ends. Where, during the existence of the contract, parties’ expectations were not met, the contract could not adequately resolve some problems, or there were challenges with the contract execution or implementation, the parties must renegotiate the terms prior to any renewal.
4. Obtaining New Information
Information regarding every aspect of a party and the intended contract is very vital in the conclusion and performance of every contract. Parties are advised to conduct pre and post-transactional due diligence to identify relevant information that can impact the contract and make adequate provisions prior to or during the persistence of the contract.
What to Consider When Renegotiating a Contract in Ghana
There is no statutory regime for renegotiating contracts in Ghana. Parties may contractually agree to renegotiate the terms of their contract, however, some Common Law Doctrines such as promissory estoppel; good faith; force majeure; material adverse change; and/or frustration must be considered when renegotiating a contract. A failed renegotiation may lead to the termination of the contract and/ or litigation if there are some rights to be protected in court. Contracts also thrive on business relationships. It is therefore important that you do not break or destroy long-term or potential long-term business relationships when intending to or during a renegotiation.
Making the Deal
According to Forbes, the dynamics of renegotiating contracts often incur a high level of risk and complexity. As such, it is important to follow some best practices during renegotiation including but not limited to:
a. being cooperative – Don’t approach renegotiation with an adversarial mindset. Doing so typically engenders resistance and conflict;
b. focusing on solving problems and creating value – focus on solving problems and creating value for all parties involved.
c. carefully evaluating risks and benefits – it is important to consider what is at stake. Carefully consider the risks of failure such as expense and time in litigation and lost business relationship, etc.
d. knowing your alternative – put yourself in a strong negotiating position and know your alternatives should the deal be called off.
Other considerations suggested by the Harvard Law School include:
a. avoiding hostility;
b. weighing your claim against the value of your relationship;
c. creating value in your renegotiation;
d. designing the right forum and process; and
e. hiring a mediator.
Examples of contracts that may need review and renegotiation from time to time
Except for regulated contracts or contracts restricted by the agreed terms, almost all contracts may be reviewed or renegotiated from time to time, notably: (a) tenancy agreements; (b) supply agreements; (c) construction agreements; (d) distribution agreements; (e) franchise or licence agreements; (f) joint-venture agreements; (g) business purchase agreements; (h) employment contracts; and (i) loan and facility agreements.
Risk of Breach
The risk of breach occurs to anyone who enters a legal agreement. Since contracts are legally binding, an aggrieved party will be entitled to remedies under law such as an order for specific performance, damages or compensation, injunction, etc. where the other party fails to perform or breaches any term of the contract. Renegotiation, rather than abandonment or suspension, is therefore advisable for anyone who finds performance difficult or the terms of a contract unfavourable to avoid suffering the repercussions for a breach of contract.
Conclusion
As the saying goes, a contract is a living organism subject to change. Parties to a contract are advised to evoke renegotiation as a means of keeping their contracts relevant to meet the ever-changing circumstances and business needs.
