Changing the terms of a signed contract

People enter contracts every day.  But what happens when they want to change a term of a signed contract?  In most instances, there is nothing stopping the parties agreeing to vary its terms and it will be legally binding even if it was just agreed ‘with a handshake’.  However informal and/or undocumented changes can often have unintended consequences.

A common problem is that if the relationship sours, the other party may disagree on the terms of or even the fact that a change was agreed.  For instance, in MacFarlane v Independent Real Estate Ltd a real estate agent denied a client’s claim that it had agreed over the phone to reduce its commission from $135,000 to $50,000.  The Court found in favour of the real estate agent as there was no independent documentary evidence to support that a commission reduction had been agreed.

Another common problem is what can seem like a simple change, can have unintended consequences.  In a United Kingdom case, BMS Computer Solutions Ltd v AB Agri Ltd there were two agreements in relation to the licensing of computer software, a licence agreement and a support agreement.  The licence agreement had a term of 10 years and contained a provision which stated that it would be terminated if the support agreement was terminated.  At some point the parties agreed that the licence was to be extended to a term of perpetual duration. The licensee eventually started to develop its own software and no longer needed the support agreement. However, it still needed the licence agreement so it could use the software.  It terminated the support agreement assuming that the licence agreement would remain in place. However, the licensor and eventually the Court took the view that the termination provision still applied and therefore the licence agreement had been terminated as well.

A further consideration is whether the contract contains a clause that states that variations will not be valid unless they are recorded in writing. While sometimes a Court will enforce an oral variation even when there is a no oral modification clause, Courts try to respect the terms that the parties agreed so strong compelling evidence is required to displace such a clause.

Similarly, some contracts and their variations are required to be in writing by statute in order to be effective.  An example is the Property Law Act 2007, which requires guarantees and contracts for the sale and purchase of land to be in writing in order to be enforceable.

The variation also needs to benefit both parties.  If it only benefits one party, for example, reduces the rent payable in a lease with no other change to the terms, the variation needs to be recorded in a deed.  A deed has specific requirements in order to be binding such as the signatories need to have their signatures witnessed.

It is always important to ensure that all the parties have agreed to the change – a variation will not be valid unless all signatories agree.  Multi-party contracts are very common, especially in the construction sector.  While the change may only directly affect two parties, unless it can be shown that all parties have consented, the variation may not be enforceable.

This is also important in the situation where there is a guarantor to the contract.  Although the guarantor is not necessarily one of the principal parties to the contract, the guarantor is nonetheless affected by it, and so should be consulted as to a material or substantial alteration in the agreement.  In Dunlop NZ Limited v Dumbleton the Court held that in circumstances where the debtor and creditor failed to bring a substantial contractual variation to the knowledge of the guarantor, the guarantor was discharged from its obligations.

In summary, if the contract does not involve land or guarantees, the changes are simple and agreed to by all parties, it is probably safe to rely on the handshake.  However, you should thoroughly re-read your original contract (or talk to us) to make sure there are no unintended consequences.  In all other circumstances, we recommend having the change documented.

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Rebecca Scott
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