Contract Amendments Explained
Contract amendments are changes made to existing contracts, and they are not just common, but also essential to good contract management. Contracts are dynamic documents, and change over their lifecycles is the norm – an increase in scope, an adjustment in cost, the replacement of an outdated term, the closure of a contract in part or in whole, and so on. Contract amendments ensure change is executed in an orderly fashion.
Contract amendments take two forms. One type, unilateral amendments, is one-sided and legally binding on the affected party, while the other bilateral amendment type requires negotiation by two (or more) parties to a contract . Any contract may contain provisions for modification, but there is no requirement to do so. Without such a provision, contract amendments require the consent of the affected parties. Contracting parties can only amend contracts they have the authority to modify, and must possess contractual authority to do so. Lastly, contract amendments must be drafted as carefully as the original contract, to ensure continued clarity and intent. Ambiguity can result in the addition of new risk to both contracting parties.
The Essential Components of a Contract Amendment
When a contract is first created, there are standard components it must have to serve its purpose. In the same way, a contract amendment should include some of the same details to be legally binding. Primarily, the parties must agree to the changes and an amendment must be signed by the relevant parties.
The original contract is typically referenced in an amendment so that it is clear what contract the parties are amending. This reference includes the date on which the original contract was signed and the assigned number of the original contract if applicable. The major component of any contract amendment is the details of what is being changed the contract. It’s important for the parties to carefully word each change so there is no ambiguity in what the amendment intends to express. A contract amendment also needs to specify its effective date, or the date on which the changes will be enacted. In most cases, an amendment’s effective date will be the same as the original contract, but there can be circumstances in which it changes, such as backdating to provide for an agreed-upon previous date for the changes.
When Is a Contract Amendment Appropriate?
There are several times when a contract amendment is appropriate instead of creating a new contract. The most obvious situation is when you are adding to or modifying an existing contract. In that case, you really only need to address the specific items that are subject to modification.
In addition, you may want to create a contract amendment even if you are adding new elements that are not directly tied to the existing contract or situation. Perhaps you have a client who you generally work with on a word-of-mouth basis, but you want to have a formal non-disclosure agreement in place. In that case, you would likely have them sign your general NDA, but adding a line in that agreement telling them that it amends your initial contract could be a good idea.
The only situation where you should avoid using a contract amendment is if you need to make substantial changes or revisions to the contract. That is likely a good time to start a new contract altogether.
How to Amend a Contract Safely
Amending a contract in the right way is essential if you want a legally-binding updated contract. That’s why it’s important to follow these steps to help ensure that the process is completed correctly and legally.
- Check whether your contract contains a clause detailing how it can be amended. This will usually be found in the section that deals with variations to the contract. In the absence of an amendment clause, you can still amend or change the contract, but it will simply be a matter of looking at the terms of your agreement with the other party.
- Especially for more complex contracts, obtain consent from the other party or parties that are involved in the contract. It’s important that everyone agrees to the amendments being made, as even basic contract amendments can be subject to the same contract law as the original contract. If a dispute were to arise, a court may refuse to uphold the amendment.
- Put the contract amendment in writing. This can take the form of a separate document identifying the contract and setting out the amendments in full. You could draft a new contract with the entire amended agreement set out, but in most cases this isn’t necessary and might make the contract more complex than it needs to be.
- Ask for the consent of all parties. This can include a signature, electronic or otherwise, or even a simple reply by email. If you draft a new contract, you can include a signature section in the agreement, checking all parties sign the document.
Common Pitfalls of Contract Amendments
Legal validity and enforceability of contract amendments is a recurring theme of the UK Payment Practices Regulations 2017. But even where the Regulations do not apply there are common mistakes in the drafting of amendments to contracts that can render them unenforceable. Alternatively, the amendment may be valid but it could contain provisions that mean that the business does not get the benefit that it intended from the amendment.
Failure to reserve the right to change terms
Many contracts allow either party a unilateral right to change the terms. This is not unlawful in the consumer context although there are rules about the form the change must take in order to be "clear and comprehensible". In the business context, the court would generally enforce a provision of this kind but there is an obvious risk to the party with no change rights: even if it gets notice it may not be practical to implement the new terms in time to comply with the notice period. For example, if a supplier changes its prices on 2 weeks’ notice but your internal controls require 4 weeks for processing then the supplier would be within its rights in enforcing a price change with inadequate notice. Larger businesses therefore often try to negotiate the right to change contract terms and the other party may not appreciate the commercial reasons for this. The party with change rights should also be aware that contractual rights to vary the terms may not be legally binding.
Contractual process
In many commercial contracts there is a contractual process for agreeing variations. Those processes vary and should be checked before seeking to amend the agreement to ensure that the amendment process complies with the agreed process and that the substantive provisions being amended or supplemented have been approved by the relevant individuals or at the appropriate management levels as required by that process.
Which agreement?
Where there are multiple agreements regulating the relationship between the parties it can be tempting to specify the paragraph or schedule of one of those agreements that is to be amended . This is generally unadvisable because the different agreements need to be considered in the round. For example, under one agreement an indemnity may be given by company X to the bank but under another agreement the indemnity may be given by company Y. In this case company Y may not want to be giving an indemnity to the bank and X may not want to be providing an indemnity on behalf of Y. The parties would need to negotiate to ensure they are giving the right indemnity to the right company.
Part payment of a debt
There is a risk in agreeing to accept part payment of a debt. There is an established rule that in such a scenario the creditor is treated as having released the debtor from the entirety of the debt unless the creditor can show that the benefit conferred on him was different from the sum owed. It is sometimes possible contract out of the rule but the wording must be clear and appropriate legal advice should be sought. The other way of getting around the rule is to insert an express reservation of rights.
Is the change a variation or waiver?
Some changes may be regarded as varying the contract and others as waiving a right under the contract. For example, varying the length of the notice period would be a variation of the contract whilst agreeing to ignore a late notice period would be a waiver of the right to rely on it. Leaving aside for a moment the different legal consequences of this distinction, waiver and variation are both ways of changing the terms of a contract or the operation of its terms. It may therefore not be easy for the parties themselves (or worse, the author of the amendment) to understand whether the change is a variation or a waiver. Contracting parties should therefore refer to the process in the contract for amending terms and follow that to ensure that the variation is valid or ensure that the amendment provides details of the waiver in order to evidence the parties’ intention.
Free Sample Contract Amendment Template
For example:
AGREED AND ACCEPTED BY:
[Name of Employee, Consultant, Independent Contractor or Other Associated Party] ____________________________________ [Signature]
[Title] _____________________________________________ (if applicable)
[Name of Employer/Company] ____________________________________ [Signature and Title]
Second, if you are amending an employer-employee contract, you should definitely reference the original contract (and your contract amendment should be written in accordance with the original contract):
This Employment Agreement is made effective as of the [date] by and between [the name of the employee or other party] (the "Employee") and [the name of the employer/company] (the "Employer"). This Agreement shall amend and restate the prior Employment Agreement between the Employee and Employer dated [date of original Contract]. This Agreement shall replace in its entirety, and the prior agreement shall be deemed void and of no further force or effect.
For changes that impact the timing of the agreement, you might want to say something like this:
This Contract Amendment becomes effective on [date], and shall remain effective through [date].
For changes that impact the scope (or amount of money) of the agreement, you should specifically note the previous amount:
All other terms and conditions remain as originally set forth in [the name of the initial contract]. This Contract and all terms hereof shall expire on [date], unless sooner terminated pursuant to the terms hereof.
All good contract amendments should include a provision that says that the new contract supercedes all previous contracts with the same parties:
This Contract constitutes the entire agreement between the parties related to the subject matter hereof, and supersedes all prior negotiations, representations or agreements thereof.
Conclude the change with a signature line, including a witness line.
What to Consider when Making Contract Amendments
When considering the amendments to be made to a contract, the existing terms of the contract must be reviewed. Some contracts will require an amendment or modification in a particular form, such as in writing or signed by both parties. Many contracts will require that an amendment be executed with the same formalities as the original contract to be enforced. Parties may want to consider a specific amendment process or procedure and make it specific to any future amendments. For example, this may include a process in which notice of an intended amendment is given before the amendment may be made. If the contract requires a written amendment, a verbal indication of the amended terms may not be effective to amend the contract.
A critical requirement associated with amending a contract is consideration. The amendment should be supported by another form of consideration that at least as burdensome as the original consideration. An amendment with no consideration will normally need to be supported by a showing of some tort or breach to overcome the statute of frauds , or will be rejected as a gift. This consideration must be determined under the contract law applicable to the parties. Contract law is determined by the jurisdiction with the closest relationship to the parties or the agreement.
Contract law varies from jurisdiction to jurisdiction. Certain areas of the country impose stricter requirements than others for contract formation. Many states require the provision of the agreement must benefit both parties, that the amendment itself be signed by both parties, and that the amendment be supported by a new or independent consideration. Other jurisdictions allow parties to amend their agreements regardless of consideration and regardless of the form of the amendment. Some jurisdictions are much more liberal allowing a partial performance to satisfy any potential statute of frauds.