Every day, individuals and organizations around the world enter into millions of contracts. They range from the simplest through to complex and highly negotiated arrangements that require an army of lawyers and other advisers to complete.
These contracts do share a common feature. They reflect the parties’ agreement – a meeting of their minds – at a single point in time.
As everybody who has experienced living and working through the events of 2020 will appreciate – situations can change. Contracts that made sense at one time can quickly become out of date. That can mean the parties need to amend their contract.
In this article, we look at everything you need to consider when it comes to amending a contract.
Why might you amend a contract?
There are various reasons to want to amend a contract. These include:
- Changing the scope of the contract.
- Adding new clauses to deal with a change in the law (for example, when GDPR was introduced).
- Amending the clauses because of a change in circumstances (as we all saw with Covid-19).
- Correcting an error. Although modern contract review software makes this less likely, an incorrect cross-reference or definition might still need to be fixed.
Amending a contract before it is signed
Many contracts are simply accepted “as is”, without any amendment. Goods or services might be of low value or be supplied to many people (as with consumer contracts). In these cases, it is not generally worth the effort of individually negotiating and amending the contract.
In other cases, you might wish to amend the text of a contract before you sign. Each party is free to suggest changes, and to accept or reject the other party’s changes, as part of negotiations. Ultimately, it’s up to the parties to decide if they want to go ahead with the contract.
Contracts are increasingly signed (or “executed”) electronically, although it’s still not unusual for a paper copy to be signed. Even when a contract has been printed as a paper copy and is ready for signing, it’s not too late to make amendments. Usually, a last-minute change can be fixed with a hand-written amendment. The parties should initial any change so it’s clear later that they both agreed to it.
Amending a contract after it is signed
The parties can always agree to amend a contract later, even after it has been signed. There will be a couple of issues to consider:
- Check if there any limitations or procedures in the original contract as to how the contract can be amended. This is usually in the form of a “variation clause”.
- Consider how the amendment should be documented.
- Check whether any other requirements apply in that jurisdiction.
Check for a variation clause
The first step is to look at the original contract to see if there is a variation clause. This type of clause is commonly included. The purpose is to prevent disputes about whether later conversations or correspondence varied the original contract.
Variation clauses therefore attempt to impose different restrictions on how the contract can be amended. Common restrictions include:
- Requiring that any amendment must be in writing and signed by each party.
- Setting out an amendment procedure that has to be followed.
- Requiring that any amendment only be made by a particular person or class of people. This is to prevent other employees – who might not know all the background to the contract – from inadvertently amending it.
In many contracts, the variation clause might be found tucked away in the “boilerplate” clauses and treated as a standard item.
However, in some types of contracts, the ability to amend the contract becomes more important. For example, when entering a long-term supply contract or an outsourcing arrangement, the parties might believe, from the start, that changes will likely be required over the term of the contract. Likewise, in a construction contract, the parties might expect the design or specification to change over time. In these types of contracts, the parties might include a detailed “change control” procedure.
If the parties now want to make an amendment, it’s important to check if it falls within the scope of any variation clause or change control procedure. If so, be sure to comply with these clauses.
Decide how best to document the amendments
So, the parties have decided to make an amendment. They have checked if any procedural restrictions apply. Even if the original contract doesn’t require it, they also know it’s a good idea for the amendment to be put in writing. There is now a decision to make about how to document the amendments.
The main options are:
- Option #1 – show any additions or deletions in a redline format:
For example: “Amend clause 3 as follows: The buyer must pay for the goods within
14 days of the date of invoice 28 days of delivery”
- Option #2 – describe the amendments:
For example: “In clause 3, delete the words ‘14 days of the date of invoice’ and replace with ‘28 days of delivery”.
- Option #3 – consolidate all the amendments and replace (or “restate”) the agreement. This replaces the entire original contract and replaces it with a new document (incorporating the amendments).
What is the best way to document the amendment?
The decision is normally determined by the number and complexity of changes required. For example, options #1 and #2 can be quick and easy if there are only a limited number of minor amendments to make.
However, options #1 and #2 can quickly become difficult to follow if there are multiple changes to be made. Anybody who wants to understand the agreement later will have to read both the original contract and the amendments together, side by side. This can be a frustrating and time-consuming exercise. It can also lead to errors in interpreting and understanding the correct position.
This problem can quickly get out of control when there is more than one round of amendments!
Another problem here is that somebody in an organization might not know the history of the contract. They could pick up the original but not know that there have been later amendments. Likewise, somebody might only have a copy of the amendments – which will make no sense without access to the original contract.
If these are likely to be problems, then option #3 might become a more attractive option – even if it takes a bit more time and effort upfront.
Consider if amendments might lead to unintended consequences
Tread carefully when amending a contract and check whether any of your amendments might have an unintended impact elsewhere. It can be a common source of problems – and disputes – if the parties agree an amendment without thinking through all the effects.
- Agreeing to amend a definition. Check each instance of that definition to make sure the amendment makes sense in all contexts.
- Transactions that involve multiple documents. It’s not unusual for one agreement to define words or phrases by reference to another document. If one agreement is amended – does that mean other deal documents also need to be changed?
- Linked clauses. For example, the parties might agree a price change, but forget to consider their contract already includes an annual price review clause. Should the next review go ahead under the original agreement? Likewise, there might be a minimum purchase commitment. Should that also be revised to reflect the new pricing?
- Third-party consent or guarantees. Check if any third-party consent is required before the contract is amended. For example, a bank financing a project might need to give its consent before the project contracts are amended. Likewise, if one party’s obligations are guaranteed by a third party, amending the contract could unwittingly discharge the guarantor’s obligations.
Check for any other requirements
Depending on which country’s law applies to the agreement (check the choice of law clause), there can be other requirements to consider.
The agreement to amend an original contract is itself treated as a contract in common law jurisdictions. This means it needs to comply with the basic requirements of contract law, including offer, acceptance and consideration. When amending a contract in some jurisdictions, problems can arise if one party is not agreeing to do anything more than they have already promised in the original contract. The traditional position is that a promise to perform an existing obligation does not amount to consideration. This is why, in some jurisdictions, amendments are often executed in the form of a “Deed of Variation” which gets around this problem.
Likewise, some jurisdictions have laws that protect consumers or small businesses. These laws might limit the types of amendments that can be made to a contract. For example, they might prohibit or limit clauses that allow businesses to make amendments unilaterally. They might also seek to prevent a business from forcing through changes where the other smaller business is left with no choice to accept. It’s important to consider the whole context when amending a contract – not just the contract wording.
Get served with quality reads
Sign up for our emails to get a careful monthly selection of our blog articles.