As always, before reading this blog post, please review my disclaimer by following the link above or by clicking on this link. As always, any legal principles discussed apply only to the Commonwealth of Virginia.
Introduction
When we sign contracts, usually we intend to obey them, but the fundamental problem with contracts is that we do not always know what the future holds. Sometimes events beyond our control stop us from meeting our contractual obligations, sometimes a contract proves a good idea in theory but not in practice, and sometimes a contract just becomes outdated. Whatever the reason, sometimes it becomes unreasonable or impossible for you to obey a contract you signed. Rather than just breaching the contract and waiting to be sued, however, you have another avenue available - attempt to renegotiate the contract.
In today's blog post, I'll cover some of the basic pitfalls and advantages surrounding renegotiation of contracts.
The Defaults Have Changed
Perhaps it is obvious, but the reality is renegotiating a contract is not the same as negotiating an initial contract. Perhaps the biggest difference is that the default arrangement (what occurs without an agreement) is different. Initially, if talks break down, there's no relationship developed, and each party can go on their way. In a renegotiation, if talks break down, then the original contract is still in force. This tends to cause the party wanting the renegotiation to be at a bit of a disadvantage - you have to convince the other party that a new contract is better for them than the old contract, not just better for you.
In many cases, however, this is not as hard as it may seem. Litigation is expensive, and collecting judgments takes a great deal of time and effort (see my blog post on collecting judgments for more on that). Worse yet, if one of the issues is that you are becoming insolvent, the other party knows you could always declare bankruptcy, and they'd be stuck with nothing. So you can overcome this disadvantage, but it's important you know at the outset that you are at an inherent disadvantage.
The Rules for Determining if a Contract Exists May Have Changed
You probably know that there are two types of contracts: written and oral. There is actually a third type as well, an implied in fact contract (where there was never an express agreement between the parties in writing or orally, but the conduct of both parties indicates that they both understood a contract to exist [or, maybe one party made an offer, and the other, instead of accepting the offer, acted in a manner to indicate he had accepted the offer]). Normally, all three types of contracts are fully valid and enforceable by a court so long as you can prove that the contract exists (and your suit was filed within the relevant statute of limitations).
Many written contracts, however, especially more complicated ones, have modification clauses. These modification clauses lay out the rules for how that contract can be modified. A typical modification clause will say that the modification "must be in writing signed by the party against whom enforcement is sought." This means an express oral agreement, or an implied in fact agreement, which changes the original contract is automatically invalid. Instead, the party against whom you are trying to prove the original contract was changed must have signed a written modification.
Some modification clauses go even further and require that it "must be in writing signed by all parties." In those cases, even a writing signed by the other party is insufficient. Some go even further and say "must be in writing signed by all parties under the same formality as this agreement." So, if you have that and the original contract required all parties to sign in front of a notary, the modification is not valid unless all parties sign it, too, in front of a notary.
Your modification clause (if there is one) is very important to know when you renegotiate a contract. You need to make sure it is followed, otherwise all your hard work to renegotiate may be for nothing.
Offering Concessions
The reality is, if you want to renegotiate a contract, you need to be prepared to make some serious concessions, especially if the other party does not really want a renegotiated contract. So, if your problem is that you cannot pay, for example, then you probably need to give up some of what you are paying for. A common renegotiation I see in the landlord/tenant context occurs when a tenant can no longer afford rent. Rather than go through the cost of litigation, if you have a cooperative tenant, it can be quite beneficial to renegotiate that tenant's lease such that the tenant is paying what he or she can afford (so you aren't getting nothing), while agreeing to allow you to terminate the lease pretty much immediately upon finding a new tenant. This is an especially popular approach to disputes in the commercial landlord/tenant field.
Conclusion
When a contract no longer becomes practical or possible to follow, renegotiation is usually a better option than a straight breach. You benefit from avoiding the stress of being sued while the other party benefits from avoiding the hassle. You just have to accept that the other party always has the right to say no. If you are involved in a contract that you cannot continue to obey and want to attempt to renegotiate it, feel free to call (703)281-0134 or e-mail me at sleven@thebaldwinlawfirm.com to set up a consultation. Our initial consultations are free for up to half an hour!
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