Contract Variations – how to implement them correctly
Parties may agree to vary the terms of a contract by mutual agreement, one party may have the unilateral right to amend some or all of the terms, or there may be a contractual process that the parties are required to follow in order to make changes – this will depend on the terms of the relevant contract.
However, in many cases where changes are to be made by agreement of the parties, the agreed changes may not be legally binding or enforceable in the absence of a correctly implemented variation document – it is therefore important that the parties consider the variation requirements and implement variations in line with the applicable contract terms. Doing so will reduce the scope for time consuming and costly disputes in the future.
What formalities must be complied with?
In most cases, a commercial contract will include an express clause setting out whether one or more of the parties to the agreement can amend its terms and what procedure must be followed to vary the contract – for example, whether a variation needs to be in writing and signed by all the parties to the contract.
The purpose of a variation clause is to prevent attempts to undermine the written agreement by informal means, and to avoid disputes about whether a variation was intended and about its exact terms. Such clauses are commonly found in commercial contracts, and in the Rock Advertising case of 2018 the courts confirmed that the law will give effect to such clauses.
In addition, any agreement that varies the terms of an existing contract should either be supported by consideration or be executed as a deed in order to comply with the rules of contract formation.
What additional points should be considered?
- How substantial is the variation? – parties should consider whether the contract is being varied, or whether the changes are so substantial that the original agreement is effectively being extinguished and a new one if being entered into.
- Will it impact any other terms in the contract? – when varying a commercial contract it is important to consider the effect that one change has on other terms of the contract, and that the changes are correctly flowed throughout the contract terms.
- Does a third party have the right to enforce the contract? – if a third party has a right to enforce the contract terms, the contracting parties may need consent from the third party to vary the contract terms unless the contract expressly provides that no consent is required from third parties to vary the contract.
- Is there a guarantee? – if there is a guarantor in relation to the contract, the parties should assess whether the variation is varying the underlying obligation under the contract – if so, care must be taken to avoid inadvertently discharging the guarantor from its lability under the guarantee.
How can we help?
For strategic advice on how to correctly vary a contract and your rights under the contract, please contact the commercial team at Herrington Carmichael LLP using the details provided below.
This reflects the law at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought as appropriate in relation to a particular matter.
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