Contract variation is a change to the terms and conditions of an existing contract that is signed between the parties involved but does not terminate the said contract. The necessary requirements for a contract variation to be legally binding are: (1) mutual consent (unless there is provision in the contract for a unilateral variation), (2) knowledge and intention, which means that all the parties to the contract must be aware that their intentions will be changed and (3) consideration (or execution as a deed if there is no consideration) and (4) observance of the necessary formalities stipulated in the original contract, for example, "no oral modification" provisions requiring changes to be in writing.
Circumstances keep changing in the business landscape. Your current needs may fail to align with what you signed and agreed to in a contractual agreement. Businesses need modifications, amendments, or addenda. Let us say, for example, that your executed vendor agreement specifies N units of a particular product. What should you do if the agreed-upon quantity is higher or lower than the current customer demand?
You cannot continue on with the current contract if you wish to reduce your losses or take advantage of the situation. This is because there is always room for slight modification of the vendor agreement to suit your own purposes without completely terminating the contract. Contract variation is what makes that possible. It gives both parties the freedom to change the contract as per commercial changes without any quarrel. Here is more about it.
Contract Variation involves the alteration of terms that have been agreed upon in the contractual arrangement. It allows the parties involved to modify the terms, conditions, or obligations of the existing agreement without having to terminate or amend the entire contract.
Ideally, consent from both the parties is necessary for the modification to become legally binding. Under certain circumstances, the contractual arrangement itself may provide for unilateral variation, which means only one of the parties needs to vary the terms. Types of variations include:
Contract terms refer to the specific provisions contained in an enforceable arrangement among two or more parties. They are what form the basis of rights, duties, and obligations of all parties involved in the relationship. Term variation refers to the ability of the parties involved in an agreement to make changes to the terms and conditions of the agreement such as the duration, product/service, payment, renewal and termination.
The term variation is used to refer to the changes made on the operative provisions of an agreement which contain the obligations of the parties involved in an agreement. Term variations include but not limited to; extending the duration of the contract, amending the payment terms and amount, adjusting the notice period, changing the standards of performance and changing the jurisdiction provision. The term variation is the most common form of contract change as commercial relationships are always changing even after the formation of the agreement.
A variation of a term requires that it be expressly documented in order to be binding: which term is being varied, what the new terms will be, and when those new terms come into effect should all be specified. Otherwise, there can be ambiguity as to whether the variation has taken place and what its terms require.
The contract scope specifies the details and boundaries of the work, services, or products to be delivered as outlined in a contractual agreement. They outline the limits of the engagement. They provide a basis for all stakeholders involved to understand what is expected of each of them. Scope variations are used by all the stakeholders involved to adjust the nature or extent of the goods or services as outlined in the contractual agreement.
The variation of a contract means that there is any agreed modification made to an existing legally binding contract after the signing of the contract. The variations could affect prices, delivery date, payments, delivery of goods or services, scope of work, obligations of the parties and even any other provision in the contract. Importantly, a variation of contract is not a termination of the original contract, rather, it just modifies some provisions of the contract without changing the rest of the contract. The basic definition of a contract provided by Cornell Law LII stipulates that any modification must meet the elements of contract formation: offer, acceptance, and consideration.
Variation of scope refers to the changes in the kind, amount, or scope of work to be performed according to the contract that does not change the way of carrying out the work. In a professional service or construction industry, scope variation may sometimes be referred to as change orders or variation orders. Variation of scope includes additions of extra deliverables in software development contract, extension of facilities management contract for covering extra buildings, reduction of quantity of things in manufacturing supply contract, or even removal of an unnecessary phase from a consultancy contract.
The risk of variation of scope in contract management is very high because it impacts the other areas such as cost, time, or resource allocation. The best approach to deal with it would be to treat each variation of scope as an amendment to contract and document it in writing after getting approval from the concerned authority of both sides. One of the most common reasons behind disputes in contract management is variation of scope when there is no documentation of it.
Similar to every other step in the contracting process, variations must meet a legitimacy standard. Just because any involved parties alter the original contract doesn’t automatically make the revised version legally binding. The contracting parties must fulfill a few requirements for a variation to be enforceable.
For a variation to be legally valid, all the parties must agree to it. Since both parties had to approve the original contract and conditions, it must be the same process for variations. It allows them to avoid breaches and disputes down the line. In unilateral variations, mutual agreement isn’t necessary. Nevertheless, mutual consent is vital in most business contracts in which all parties have equal status.
Mutual assent, which entails the full agreement of all the contracting parties regarding the proposed variation, is crucially important for any valid contract variation under common law. This concept is equivalent to the offer and acceptance requirement that is needed to create a contract from scratch. It is impossible to change the terms of a contract in any way and compel the other party to agree to the new terms without the latter’s consent unless there is something else stipulated in the contract. All the parties’ assent to a variation can either be expressed in a form of a variation agreement or document signed by all the contracting parties or be implied through their actions where the actions could have been made only because of a variation of the contract. However, implied assent is highly controversial in most cases. Indeed, according to the definition of a contract offered by Cornell Law LII, there should be a mutual assent ("meeting of the minds") not only in creating a contract but also in modifying it.
For these changes to be a valid part of the contract, both parties must be aware of the changes and have the intention of making permanent changes to the contract. For the performance to take place, there should be no breach of contract. All the stipulated requirements should be fulfilled.
These two conditions of awareness and intention play important roles in varying the contracts. Awareness is where the parties must be aware of the changes that have been done and aware of the changes that have been done. Parties cannot be bound by the changes which they are not aware of. Intention is where the parties must agree to the changes which have been done as a means of changing the terms of the contract permanently.
The judiciary has consistently distinguished between individuals who have made an actual decision to change their contractual obligations from individuals who are just negotiating or adjusting to each other without any intentions to change their contractual obligations. The requirement of awareness and intent will be met if all such changes are made in written form, identified as a modification of the contract and authorized by individuals who are authorized to make legally binding decisions on behalf of their organization.
Any agreement to vary a contract must include consideration. In return for the modification, both parties should provide something of value. Organizations can use deeds to make the change if there is no exchange. Consideration can take various forms, including money, goods or services, forbearance, and a promise to perform.
In the common law system, consideration, namely an exchange of something of value from both parties in exchange for the promise of the other party, is not only required for the formation of a contract but also for variations in contracts that already exist. This implies that a one-sided variation, namely when one party gets more or gives less without providing anything in return as a consideration, may not be valid unless there is any consideration or deed execution. In most cases, consideration for the modification of contract will usually take the form of a mutual variation of the contract terms, for example, more work from the supplier in exchange for higher prices from the client. In case of pure one-sided variation, like reduction of prices without getting any benefit from the party reducing the price, the variation can be enforced either through deed execution (there is no need for consideration in deed execution) or through an agreement on consideration from both parties even when the consideration is nominal.
The variations will change the terms and conditions of the contract but not the entire contract. Consequently, organizations will need to be cautious in their effort to make any changes to the contractual agreement such that the changed agreement remains within the ambit of the original agreement. The agreement will need to be legally binding and will not run contrary to the existing terms of the contract.
The amendment will need to meet the guidelines set out in the contract with respect to the formality of the process. It is indeed an important matter from a practical perspective. Most commercial contracts will contain the ‘no oral modification’ (NOM) clause, which states that any changes to the contract must be made in writing and signed by authorized persons from both sides. According to English law, NOM clauses can be enforced following the Supreme Court judgment of Rock Advertising Ltd v MWB Business Exchange Centres Ltd [2018] UKSC 24.
This applies as well in many parts of America that operate under common law, where the courts tend to enforce NOM agreements on a regular basis. In essence, this implies that an oral agreement to vary a contract that contains a NOM agreement may fail irrespective of whether both parties agree on this matter. This calls for companies to put up tight policies regarding any variations to a contract.
Variations offer business contracts the flexibility to keep up with changing circumstances and needs. Creating a new one from scratch or discarding the old one to meet the requirements each time is hardly practical. That is when modifying an existing contract with the acceptance of all parties becomes necessary.
If there is a change in the project scope or requirements, it often necessitates a contract variation. It could be due to new information, evolving business needs, or unforeseen circumstances. That is why it is common for construction or employment contracts to have variations. Alterations in technical specifications or requirements may also require modifying contract terms.
Change of requirements will result in a contract variation when the need for something by one party from the other is much different from the one that was initially agreed on in the original scope or specification of the contract. The first question that needs to be addressed in this regard is whether the change of requirements is within the original scope of the agreement or whether it goes beyond that. When the original scope of the agreement is well defined and the change of requirement lies out of the original scope, then there should be a process of variation so as to avoid cases where the performer offers additional value without any way of getting payment, while the requesting party gets the additional service without having any way of ensuring quality standards. Requirements change due to: changes in regulations; changes in organization; changes in technology or systems; market situations affecting prices and availability; and complexity of the project that only becomes clear after signing of the contract.
There can be external influences which are beyond the control of the involved parties, such as legal changes, changes in the economic status, or force majeure events which can require a contract variation. Contract variation is important to the extent that it helps to make sure that the contract serves its intended purpose. Variations are important in addressing any changes in the business environment or market conditions.
Contract variation can be done due to changes in circumstances which have led to events being out of the control of any of the involved parties which in turn make the commercial arrangements of the contract impracticable. Typical examples include force majeure, which can be natural calamities, epidemics, and government interventions; increased cost caused by supply disruption; change of the relevant law affecting the cost or method of performance; and foreign exchange fluctuation which makes it uneconomical for international business transactions.
Where there is a change in circumstances, variation will only be allowed if both the parties agree. There is no common law principle in place where a party can ask for variation of the contract because of the increase in difficulty of performance of the contract. The doctrines of frustration and impossibility, which allow termination of a contract under extraordinary circumstances, are very distinct from and much more difficult to prove than variations. As per Cornell Law LII, the frustration doctrine consists of the event making the performance of the contract vastly different from what was anticipated.
Varying a contract includes the same principles and processes as creating one. There are written, oral, and conduct variations. While all these are legally binding options, it’s up to the parties to decide the mode of operation. Contract complexities and specifications can affect the choice.
Some contracts enable the parties to agree on changes orally. It becomes legally binding if all parties verbally consent to the modifications, whether over the phone, in person, or through Zoom meetings. It is the easiest way to vary a contract. However, it is difficult to demonstrate its validity in disputes and breaches because there is no official record.
Variations in verbal contracts may theoretically be legally binding in the context of common law as long as they fulfill all the necessary requirements of mutual consent, consideration, and intention. However, there are two main legal obstacles to changing contracts verbally. First, the fact of the "no oral modification" (NOM) clause being present in the initial contract makes any subsequent verbal agreements not legally binding for the parties despite whatever has been apparently agreed – as per the UK Supreme Court decision in Rock Advertising Ltd v MWB Business Exchange Centres Ltd [2018] UKSC 24, which is followed generally by common law courts of the USA. Second, even without the NOM clause, proving the existence of the verbal variation of the contract becomes highly complicated in case of dispute as the parties involved may have very different ideas of what exactly they have agreed on, what terms have been modified and from what time the new terms came into effect. According to Cornell Law LII, the terms of the contract, including the variation, must be definite enough to be legally binding.
In such cases, the parties communicate the difference in their understanding of the contract through email or a written agreement. Such kind of variations is seen as the most preferred and reliable form because there is evidence in paper on how such modifications were done. In addition, some legal systems and laws, or contracts, do not allow oral modifications and thus, a written modification of the contract must be present.
A written variation of the contract is the most preferred way of varying a contract by the contract manager because this makes it easier for one to know clearly all the details of modification in the contract, the time that the modification was done, and by whom. Through this, it will be easy for one to avoid any confusion on such modifications since everything about the contract modification will be known clearly.
Here, the actions of the parties will demonstrate that they are ready to vary the agreement. This means that they should behave in line with the varied conditions and not the conditions stipulated in the original agreement. Just like oral variations, variations made in this manner are very hard to prove legally.
Variation by conduct may take place where there is no NOM clause which requires that any change in the contract must be in writing. Variations made in this manner require actions of the parties to be clear, consistent, and certain, indicating that they want to vary the conditions of the contract in a permanent manner. Some of the variations made in this way include accepting payments that do not conform to those stipulated in the contract.
This is actually a considerable legal danger because evidence of an intention to make a legally binding variation of the contract via conduct can only be established where both parties have mutual intention, which is often a question of fact. On the question of variations of contract via conduct, Cornell Law LII explains that all the circumstances surrounding the situation will be considered by the court to see whether there is a legally binding variation via conduct. This implies that even though the parties have been operating under the variation for a while now, it is advisable to put it in writing.
Variations are an inevitable part of business contracts. Hence, businesses must be ready to include them in the contract lifecycle at any given time. Here are some best practices to vary a contractual agreement effortlessly:
Firstly, you must have a process to decide how to carry out contract variation. Organizations should determine the workflow, approvers, and version history before executing the changes. Most contract management software offers automated workflows, enabling users to set relevant approvers and deadlines. They can also keep track of who made what changes with their extensive version control system.
All the parties must explicitly agree to the variation to make it legally enforceable. Whether it’s orally, in writing, or through conduct, organizations must seek the approval of all the relevant parties when varying a contract. It helps to avoid breaches and disputes down the line.
Disputes and misunderstandings will always occur in any business transaction. However, failure to have a right strategy and system may result in much more serious problems for everyone involved. For this reason, companies have to keep records of every stage in the life cycle of contracts, including modifications. The use of written variation should always be the first choice in every contractual arrangement.
Contract variations empower parties to change the scope of work, payments or pricing, dates, and so on without ending it. But they shouldn’t undermine the original purpose of the contract. Because of this, companies have to carefully consider how a modification will impact the current terms, conditions, and objectives before agreeing to it.
There is not much time for thorough planning when you are in the thick of things and need to modify the contract to fit your needs or circumstances. Variation clauses that outline a business's requirements must, therefore, be a part of all business agreements. These clauses protect your interests during the variation process. Similar to the differences in a Memorandum of Understanding (MOU) versus contracts, variation clauses ensure that any changes to the agreement are well understood and legally binding.
Variance is common, and currently, they have made their way into business contracts. Variance is helpful for corporations since it ensures that their contracts are profitable despite any changes in circumstances and requirements. Corporations can ensure that they make variances that are always profitable through appropriate strategies and variance clauses. It gives them the ability to decide how and when to vary.
Get a free demo now and find out how our Dock contract management system can help you vary using its advanced features like pre-approved clauses and templates, workflow approval, and versioning.
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