Where the parties to an already existing contract later on want to change the terms of the contract they can do so in one of two ways. One option is for the parties to consent to the termination of the original contract and enter into an entirely new one. However, this is expensive and time consuming especially where large and complex commercial contracts are involved. Another option is to create a Variation Agreement to change the existing contract by only varying a certain number of terms, while keeping the majority of original terms in existence.
Thus, a Variation Agreement should be used where the parties to an existing contract want to change one or more provisions of a contract/agreement that has already been signed and is in effect.
Common law allows for a written contract to be changed by subsequent mutual agreement from both parties, whether oral or written. However, it is common in commercial contracts to include a variation clause providing that that any changes made to a contract are ineffective unless made in writing and signed by or on behalf of both parties. This clause is intended to prevent informal or inadvertent oral variations. Thus it is important to check if the original contract has a variation clause because if this is the case then oral variations will generally be ineffective. Furthermore, to ensure that there is no dispute over what has been agreed it is advisable to always attempt to document any variation, as oral variations are hard to prove.
In order for a Variation Agreement to be effective certain elements must be presents. There must be:
- a valid agreement between the parties (mere notification by one party to the other is not effective); and
- some form of consideration supporting the agreement.
Consideration could take many forms, for example: mutual abandonment of existing rights; new benefits being granted by each party to the other party; assumption and/or release of obligations. In the absence of consideration, a variation can be effected by deed.
Generally, in order to avoid problems it is always advisable to execute a Variation Agreement as a deed; especially where an agreement amending an earlier contract is all in one party’s favour and/or there appears to be no consideration.
A Variation Agreement should be drafted in accordance with the terms of the underlying contract. Thus if any third-party rights or interests have been granted and/or whether any obligations of the underlying contract are guaranteed by a third party then that third party should also sign the Variation Agreement.
Please note that a Variation Agreement should only be used to change the terms of an existing contract and it should not be used to change the parties to the contract. If you want to change the parties to the contract you should use a Novation Agreement.
To change the terms of an Employment Contract visit: Deed of Variation – Employment Contract
