Contract Variation Agreement
A contract variation agreement is an agreement used to amend or vary the terms of an existing contract by mutual consent of all parties to the original agreement.
What is a Contract Variation Agreement?
A contract variation agreement is an agreement used to amend or vary the terms of an existing contract by mutual consent of all parties to the original agreement. In other words, where the parties agree to do something differently from what was originally agreed, whilst the remainder of the original agreement terms remain the same.
When should you use a Contract Variation Agreement?
Commercial arrangements occasionally do not progress in the way that was originally envisaged at the beginning of the relationship. A contract variation agreement provides for a flexible yet clear arrangement for the parties to continue the relationship even when changes in circumstances arise. Whilst amendments or variations to contracts do not strictly need to be in writing, we would strongly recommend that agreed changes be in writing to ensure clarity and transparency. It is often also a specified term in commercial agreements that any amendment or variation to that agreement needs to be in writing and signed by all parties.
All parties to the original agreement must be party to the contract variation agreement as every party will need to agree to any amendment or variation. If this is not possible, then two or more parties could, for example, have a side letter to govern the relationship between them instead. However, the rights and obligations of the original party who does not sign the side letter would be maintained.
Why is a Contract Variation Agreement important?
As mentioned above, it is often a requirement and therefore essential, to use a contract variation agreement to amend or vary the terms of a contract. Even if it is not a requirement in the original agreement, the variation agreement which will be agreed and signed by all parties to the original agreement will ensure that any variation to the original “plan” is spelt out clearly in the agreement to avoid any misunderstandings and potential disputes. Unless otherwise specified in the original agreement, parties could, for example, vary the original agreement orally or by way of conduct. However, such informal variation is strongly discouraged due to the uncertainty and difficulty in proving the agreed changes.
What are the common pitfalls of a Contract Variation Agreement?
It is very common for parties to only amend or vary specific terms without considering other clauses in the original agreement. As contracts are often like jigsaw puzzles where the mechanics or procedure of one term would often feed into or affect the function or outcome of other terms in the contract, it is very important to think about the rest of the original agreement and consider the consequences for other terms when varying or amending specific clauses. Sufficient details should be included to make sure that the variation or amendment as well as the remainder of the original agreement would continue to work.
As specific commercial scenarios emerge, parties often agree to do something differently to what was originally agreed in a casual manner i.e. via email, verbally or simply by action. This is often not a problem until it is a problem. When a dispute arises, without a written contract variation agreement, it is often difficult to prove an agreement to the variation or amendment consequently creating substantial risks and costs (for both time and money) to the parties.
If the amendments or variations are substantial, the parties should consider if a new agreement should be entered into instead of this contract variation agreement. Care should be taken if a new agreement is entered into to replace the original agreement, especially if rights, performance and/or liability of the parties should be “transferred” to the new agreement.
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