Did you know? Amending contracts - tips to avoid common mistakes

It's not unusual for parties to want to vary the terms of an existing contract. There is not one single way to vary a contract that will work in all circumstances. Letter agreements won't always work. Deeds are not always required. Sometimes, a handshake is enough.

Varying a contract takes a little effort to make sure you get it right. By failing to get it right, the variation may be ineffective and the original terms of the contract could continue to apply, potentially with unwanted effects. A variation is, at law, a contract in itself. It must therefore meet all the requirements of any contract.

This article sets out some useful tips designed to help ensure that variations made to a contract are effective and binding.

Tip 1: Is the proposed variation a lawful variation?

Not every problem in a contract can be cured by a variation. For example, changing a party to a contract is not properly the subject of a variation. Make sure that what is intended can be achieved by way of a variation.

Tip 2: Do what the contract says

Contracts will often contain a clause setting out form and substance requirements for how the contract may be varied. A common example is a requirement that a variation be in writing signed by the parties. These requirements will need to be followed.

Parties should carefully check a contract for any provisions directing how variations are to be made, and ensure such directions are complied with.

Tip 3: Confirm who should agree to the variations and who can sign a variation

Contracts very rarely permit one party to unilaterally make variations (ie. without the other party's consent). All current parties to the contract will normally have to agree to any changes, whether they are affected by the changes or not.

Also, having the right person sign a variation is essential to ensure its validity and enforceability. A person responsible for the day-to-day management of a contract may not necessarily have authority to agree to variations. For example, sometimes director approval may be needed.

Tip 4: Consider if a deed should be used

As a variation is a contract in itself, either consideration is required for the variation to be effective or the variation must be by way of a deed. Also, contracts (or variations) relating to the sale of land will need to be done by a deed.

In a recent Supreme Court decision[1], when one party asserted that an agency agreement had been varied so the agent's commission was reduced from 60% to 40%, one of the reasons the court refused to uphold the alleged variation was that the agent received no consideration for the reduction in commission.

Tip 5: Make sure the contract is still alive

A common mistake is for parties to attempt to vary a contract when it has already expired. This can arise when a contract has a fixed expiration date, however the tasks to be completed under the contract run over schedule.

Often parties will attempt to vary the contract by inserting a new expiration date in order to keep the original contract on foot. While this may seem to be the most convenient method, it is unlikely to work.

Once a contract has expired, it cannot then be varied. In these circumstances, a new contract is required.

Tip 6: Make sure that the contract as varied is internally consistent

Any variation should be certain on its terms and should fit seamlessly with the remainder of the contract. Avoid sweeping expressions. Descending to detail in the terms of the variation can remove the uncertainty of reconciling inconsistent terms at a later date.

To sum up …

There can be serious consequences for parties attempting to vary a contract if they do not carefully consider exactly how such variations should be implemented.

All variations should be in writing and agreed to by every party to the contract. Parties should comply with any relevant directions given in the contract, and consider whether any consent or approval is required from third parties.

Having the parties execute a deed of amendment or variation is often the best option. Not only is this more appropriate when no consideration is involved, it offers a lot more certainty about what changes were made and which parties have agreed to them.

Taking the extra time to consider these issues can help prevent future challenges to or questions about the enforceability of variations to a contract.