- 24 Dec 2024
- •
- 4 min read
Contract focus On: Contract Variations
Who is this article intended for?
This article series is aimed at new or junior lawyers and can also be shared by in-house legal teams with their commercial colleagues who deal with contracts. The aim of the series is to provide a foundational understanding of common contracts businesses will enter into, offering insights into why they are important and what key legal aspects need to be considered. Whether you are just starting in the legal field or need to ensure that your business colleagues are well-informed about contract essentials, this guide will help with navigating the complexities of commercial agreements effectively.
What is a contract variation?
A contract variation allows the terms of an agreement to be changed after it has been signed. These variations can take many forms, such as contract extensions, renewals, variation agreements or change requests. Whether the variation involves a minor amendment or a significant restructuring, it is vital to document these changes properly to avoid future disputes or misunderstandings.
How to document a contract variation
Once a contract has been negotiated and signed it is often filed away and forgotten about. However, there are situations in which the contract may need to be looked at again including where:
- The original term of the contract has ended and the parties both wish it to continue and so they have agreed to extend or renew the term.
- The commercial relationship has changed and the parties wish to reflect that change in the contract.
Some contracts provide a specific mechanism for the parties to agree a change to the contract (often in a ‘change control’ clause) whereby party A gives notice of a proposed change to party B, the parties discuss and seek to agree the change over a specified number of days and then document it. In other situations the contract may just have a ‘variation’ clause which says any change to the signed contract terms must be agreed by the parties in writing and signed on behalf of each party.
For short term, low risk and/or low value contracts, a requirement for the parties to go through a formal change control process to document contractual changes may be excessive. However, for longer term, higher risk and/or higher value contracts, such as complex IT outsourcings, the discipline of going through a formal change control process can be very important in order to ensure that both parties are clear as to the changes that have been agreed and their impact. With these important contracts, variations should not be agreed informally with a handshake or through emails because the details of the agreed changes can easily be lost or misinterpreted, particularly if the person in your business who originally agreed the changes leaves your business. This sort of scenario can result in a lot of contractual uncertainty, with the potential for disputes, which can be easily avoided by following a formal change control process.
Documenting what seems to be a fairly small amendment to a contract is often considered low risk and in many businesses they are signed off without legal input. However, it is important for the business to remember that this type of document is a contract in itself and it can detrimentally impact the original contract which the business and their legal team may have spent many months meticulously negotiating to ensure it has appropriate protections and risks are suitably addressed. It is important to make sure that contractual amendments can only be signed off by someone within your business with the appropriate level of authority.
Choosing the right approach
Before drafting a variation document, consider the nature and scope of the changes. If the amendments are straightforward and limited, such as extending the term or a change to the pricing schedule, a simple variation agreement may be sufficient. However, if the changes are complex and affect multiple provisions of the original contract, it may be more practical to create a restated version of the agreement. Incorporating changes directly into the contract text can often be quicker and more effective than drafting a detailed variation agreement. Restating the contract ensures that all amendments are clear, easy to understand and accessible in a single document. This approach reduces the risk of misunderstandings and ensures consistency across all contractual terms.
Key considerations when considering a contract variation
1.Reference the original contract: The variation must clearly reference the original contract being amended.
2. Verify parties involved: The parties to the variation should match those in the original agreement.
3. Clarify the changes: Clearly outline the amendment, including any conditions under which it applies.
4. Assess knock on effects: Consider whether the change impacts other terms, such as pricing, deadlines or delivery obligations.
5. Review termination clauses: If the variation includes a new fixed term, ensure termination clauses are adequate and updated if needed.
6. Guard against unintended changes: Check the variation isn’t adding, changing or removing clauses to the original contract where this isn’t intended (as the variation is a binding contract this is the perfect time for a party to try and change unfavourable terms agreed in the past in the original contract!).
7. Confirm commercial accuracy: Ensure the business has checked the commercial terms are correct.
8. Choose the right format: Consider the nature and number of the changes and whether it’s appropriate to document them in a variation agreement or whether it would be more appropriate to restate the original contract with the agreed changes incorporated within it. Also consider whether the variation can be a simple contract or whether it needs to be a deed.
Special considerations for statements of work or order forms
When issuing a new statement of work or order form under an existing contract, ensure it references the negotiated terms and conditions, rather than defaulting to the party’s standard terms. This prevents potential conflicts or inconsistencies.
A litigator’s view
Variations are often the source of disputes, particularly when parties have been operating outside the terms of the original contract. While some variations reflect the natural evolution of a business relationship, others may arise from unforeseen circumstances that prevent one party from fulfilling their obligations.
In such cases, a properly executed variation can help avoid costly disputes and preserve the relationship between the parties. It is critical to follow the variation process outlined in the original contract (if there is one), address any unintended consequences and ensure the changes are executed correctly. Legal input can be invaluable at this stage, reducing the risk of disputes and ensuring the variation aligns with both parties’ intentions.
Disclaimer
This information is intended for general informational purposes only and does not constitute legal advice. We recommend seeking professional advice before taking any action on the information provided. If you would like to discuss your specific circumstances, please feel free to contact us on 0800 2800 421.
