CONTRACT VARIATION

Business relations are often changing and given that these relations are mostly summed up in a contract, it is often the case that contracts are amended to reflect these changes. Care is however needed to avoid pitfalls

What is contract variation?

Contract variation is what happens when parties to a contract agree to do something in a contract, differently from the way they originally agreed, while the rest of the contract remains the same.

Here are some of the things to consider when making some changes (varying) to a contract

MAKE SURE YOU HAVE THE NATURE OF THE ENTIRE CONTRACT IN MIND

The change a party is proposing could seem to be affecting only one or even two provisions in the contract but that could lead to consequences in other parts of the contract.

You need to look at the effect of contract variation on

• Service levels
• Payment provisions
• Liability provisions, e.g. liquidated damages clauses
• Termination clauses etc.

Example:

Imagine getting into a contract in which the original contract price is something like $300,000 and you have liquidated clause providing for recovery of about $200,000 in the event of breach.

Let’s say later you agree to reduce the price to $210,000 but you do nothing about the liquidated damages. If the contract is breached the issues of the $200,000 in liquidated damages may look “extravagant” and courts could fail to enforce it.

This was the issue in the case of unaoil v Leighton (2014)

SAY NO TO INFORMAL CONTRACT VARIATION

Most properly done contracts will have it such that all changes must be in writing, signed by both parties. In fact in the case of Rock Advertising v. MWB (2018) the Supreme Court ruling showed that verbal variation are not regarded as valid.

You have to understand that with business, parties are always trying to minimize their risks and accepting oral variations in a contract makes it easy for the other party not to be bound by the said change in a contract.

DON’T FORGET THE PRICE I.E “QUID PRO QUO”

Without consideration, that is, the price a party pays for the promise made by the other, the contract is void. The rule with contracts is fairly straight forward, that is, quid pro quo (something for something), therefore every contract variation must be accompanied by consideration.

At times consideration may be sufficient if the parties are agreeing to go beyond what they were originally required to do.

But there are cases where parties are agreeing to give up rights, rather than take new obligations. In such cases it is practical to include “token payments” for instance $5 (to be paid by any party which is not agreeing to undertake additional obligation)

Remember variation by deed doesn’t require consideration

MAKE SURE YOU HAVE A VERSION OF ALL THE AMENDMENTS PRODUCED

This is especially useful if you are looking at amendments and you need quick reference