How is a contract varied or changed?
Ok, so you have signed a contract with another party and you are performing under the contract.
But this is where you need to be very careful, because a contract can be varied during the performance of a contract.
How can a contract be varied?
A signed contract can be varied or changed in one of three ways, either through:
- a written variation;
- a verbal variation; or
- variation by conduct.
Written Variations to a Contract
Generally most contracts set out the process for varying a contract. In most contracts there is clause that says something like ‘this contract can only be varied in writing and that variation must be signed by all parties to the contract’. This is a simple way to vary a contract and the parties will put in a place a Deed of Variation (i.e. a written document) in order to give effect to the change.
Verbal Variations to a Contract
In a similar manner, i.e. by mutual agreement between the parties, a contract can be varied verbally, i.e. ‘I know the contract says to do ‘X’ and ‘Y’, but forget that, just do ‘Z’. We don’t recommend varying or changing a contract in this way, as there is no written record of the variation and so it is up for debate as to how exactly the contract was varied and when that variation came into effect.
Example of Varying a Contract Verbally
A contract requires a contractor to dig holes to 2 metres deep so as to plant 20,000 new trees. The site manager comes along and says not to worry about that, tree holes only need to be dug to a depth of 1 metre. This verbal variation is not recorded. 6 months to a year later most of the trees have died and the site owner sues. Large costs are incurred trying to prove that the contract was varied such that holes to a depth of 1 metre were all that were contractually required.
Varying a Contract by Conduct
The area that arises most often with long term contracts is the following happens:
- the contract is negotiated and signed
- the contract is then ‘securely stored’ (i.e. placed in someone’s bottom drawer)
- the parties start performing under the contract
- the parties, whilst performing under the contract, move away from, or perform their obligations under the contract in a way that is different to what was set out in the written contract
- A dispute arises between the parties – therefore bottom drawers all through the company are searched – pristine dust covered contract found
- Parties look to enforce their rights under the contract based on what is stated in the contract
- Court finds that the contract between the parties that was initially on paper has been varied by the conduct of the parties, such that the new conduct or way of operating under the contract is the new agreed method of performing under the contract. Thus newly found pristine but dust covered contract is essentially worthless.
The perils of varying a Contract by Conduct
Once a contract has been varied by conduct (because the ‘new’ conduct was agreed to by the other party), a strong argument can subsequently be raised that the written terms of the contract (that is now sitting safe in a bottom drawer, albeit dust covered) no longer apply and the parties are now proceeding under a new set of rights and obligations that may not necessarily have been written down.
Think it doesn’t happen? Think again. It is a very common scenario.
Here is one small example:
- A written contract has payment terms of 14 days, i.e. an invoice must be paid 14 days after it is issued.
- 6 months into the contract term, the recipient of the services starts paying 30 days after the invoice date.
- Provider of the service does not object to this and in fact appears to accept the arrangement in email correspondence.
- Invoices are then paid, nearly always, 30 days after they were issued.
- 2 years into the contract the provider of service has cash flow issues and has enough of the 30 day payment terms and tries to sue Recipient saying that ‘ you are contractually obligated to pay on 14 days’.
- Court says – ‘nice try’ – you the Provider, agreed to the course of conduct over a period of months and so the contract was varied by agreement such that the payment terms are now ’30 days after invoice date.’
Document Contract Variations
How do you deal with such variations? You should document and record any such variations immediately and, if necessary, formerly make variations to the strict terms of the contract in writing so that the parties understand what the new obligations are.
By understanding that a contract can be varied by conduct, and not just adopting a business-as-usual policy, you have a much better chance of avoiding lengthy and protracted disputes in the future.
If you need a lawyer for a contract dispute give us a call – 1800 355 455. We can help.