Clause encounters of the varied kind (Cobalt Data Centre)

Background: A tax dispute with broader commercial implications

The Court’s judgment provides meaningful clarification on how contractual evolution is assessed, reinforcing the primacy of the parties’ common intention and the importance of contextual interpretation. For businesses engaged in long-term or complex commercial arrangements, the implications are significant, both in terms of operational governance and legal risk.

Two investment limited liability partnerships (“LLPs”) were involved in a property sale and leaseback contractual arrangement for data centres. The purpose was to allow the LLPs to claim capital allowances — a kind of tax relief for buying certain assets like equipment or long-term assets.

A set of contracts were put in place between the LLPs to support this structure but after signing, the LLPs made a number of changes to the payment terms, timing, and charges. In assessing this transaction, HMRC said these changes went too far, arguing that the original agreements had been replaced, not just varied.

Why does that matter? Because under the tax rules, the LLPs could only claim allowances if the original contract stayed in place.

The question was critical

If the original contracts had been replaced (and not varied), the LLPs' tax position collapsed.

That distinction matters not just for tax purposes, but in many areas — like insurance, finance, regulation, and enforcement. If a contract has been replaced, any rights or obligations under the original version that are not transferred into the new version may disappear.

As such, the Court’s analysis extended far beyond the tax context, addressing a key contractual question: how should courts determine whether an agreement has been varied or replaced?

The legal issue: variation or replacement?

The Court ruled in favour of the LLPs – the contracts had been varied, not replaced. According to the judgment, the objective intention of the parties is paramount. Despite the substantial changes, the parties intended to continue under the original agreement, just with updated terms.

This position builds on the longstanding authority in RTS Flexible Systems Ltd v Müller [2010] UKSC 14, where the Court held that “the parties’ conduct can establish the existence and terms of a contract, even in the absence of signed documents.” Similarly, in Cobalt, the Supreme Court emphasised that form is not decisive. What matters is what the parties, viewed objectively, intended to do — and how they acted upon that intention.

In doing so, the Court distanced itself from overly formalistic readings, reinforcing a contextual approach rooted in commercial substance. The doctrine of common intention, tested against the factual matrix, remains central to determining the legal character of an evolving agreement.

Key clarifications from the court

1. Substantial variations do not necessarily replace a contract.
   Even where terms are significantly restructured, if the parties clearly proceed on the basis that the original agreement continues to govern their relationship, the original contract survives.
2. Objective intention overrides formal categorisation.
   Whether parties believe they are creating a new contract is less important than what their words and conduct objectively demonstrate.
3. The inquiry is practical, not theoretical.
   The Court’s approach aligns with commercial expectations: businesses are often pragmatic, and expect flexibility without unintended legal resets

This position subtly develops, the reasoning in Rock Advertising Ltd v MWB Business Exchange Centres Ltd [2018] UKSC 24, where Lord Sumption highlighted the tension between freedom of contract and the enforceability of informal variations. In Cobalt, the emphasis is not on how the variation is executed (e.g. orally or in writing), but on whether the contract is continuing in substance.

Commercial implications for businesses

1. Form does not control outcome
   Simply calling a document an "amendment" or "variation" will not be conclusive. Businesses must ensure the commercial logic, conduct, and records surrounding the arrangement clearly support their intended legal characterisation.
2. Contract management should align with conduct
   The parties’ conduct — such as how invoices are issued, obligations performed, or disputes handled — can indicate continuity or termination. Internal practices must be consistent with contractual intentions.
3. Be cautious in tax-sensitive structuring
   Transactions designed to achieve tax outcomes will be scrutinised not just for legal form, but for their commercial substance. Cobalt reminds us that HMRC and the courts will analyse whether the actual behaviour of the parties aligns with the claimed contractual structure.
4. Develop protocols for mid-term contract changes
   Companies should implement internal controls for contract variations that include:

• Legal review of all substantive changes;
• Assessment of whether the changes are consistent with prior agreements; and
• Clear records of each party’s intentions, particularly where agreements are revisited multiple times.

Conclusion: AA practical, contextual approach prevails

Cobalt reinforces a key principle in English contract law: the classification of contractual modifications is not determined by labels or drafting alone, but by a holistic assessment of intention and conduct. For businesses, the lesson is clear: contracts are not merely textual artefacts, but living documents shaped by practice and expectation.

In an environment where flexibility is often essential, this decision brings reassurance that courts will respect commercial continuity, but only where the parties’ conduct, and context support it.

Co-authored by Gabriella Rasiah.