How do you vary contract terms?

There are many reasons why you might need to make changes to a contract, and when any of those reasons arise, it is important that you follow the correct formalities, to make sure the change is valid and enforceable in the future.

How to vary the terms of a contract

Sometimes, contract terms can be varied simply by the parties to the contract agreeing the change verbally. A waiver of rights to enforce certain terms (which, depending on the circumstances, can effectively amount to a short-term variation) can also be dealt with in the same way. This is fine provided that the contract does not specifically require a variation to be made in writing.

Where you do have a written contract and want to change the terms, the first thing you should do is look for a ‘Variation’ or ‘Amendments’ clause and make sure you follow its terms to ensure the change is valid and enforceable in the future.

Contracts that need to be made in writing

Some contracts are only valid if they are written down between the parties. Therefore, any variation of those contracts will usually also need to be in writing. These include:

• Property transfers and other contracts dealing with real property (i.e. land and buildings);
• Instruments to transfer shares (stock transfer forms);
• Powers of attorney;
• Assignments of the benefit of a contract;
• Assignment of intellectual property rights;
• Guarantees; and
• Settlement agreements between employers and departing employees.

Contracts that specifically state that variations must be in writing

Many contracts include express wording which requires any variation of their terms to be in writing. The purpose of such clauses is to exclude the possibility of informal, or even unintended, variations being made to an agreement.

In a Supreme Court decision in 2018, the Court confirmed the effectiveness of these so-called ‘no oral modification’ clauses. Therefore if the parties to a contract attempt to vary the terms without following the relevant formalities set out in that contract, that attempt will usually fail and not be binding.

How should a written variation be signed?

An agreement can either be signed ‘under hand’, which means it just needs to be signed by the relevant parties without further formality, or ‘as a deed’, which requires greater formality in the signature process (such as requiring a witness or, in the case of a company or LLP, the signature of two officers/ directors).

Historically, the courts have determined that a variation of any original contract which was set out in a deed must also be varied by way of a deed. However, the general concept of fairness between parties means that this is no longer absolutely required, provided that there is ‘consideration’ (i.e. “something” given in return for the variation).

Contracts usually only need to be signed as deeds in the first place in limited circumstances, such as if (a) legislation requires it (for example, section 1(1) of the Powers of Attorney Act 1971 in relation to granting powers of attorney); or (b) no consideration is given under the contract (i.e. someone is getting something whilst giving nothing in return).

Despite the equitable principle noted above, where legislation requires the original document to be signed as a deed, the prudent position normally taken by lawyers is that any variation will also be by way of deed.

Changing the articles of association of a company

If a company wants to change its articles of association, the procedure is different. Articles of association are automatically binding on all members of the company, and the terms can only be changed by way of a special resolution of the members of that company (i.e. requiring the approval of the holders of more than 75% of the voting rights in the company). As a public document, updated articles must also be filed with Companies House, together with a copy of the passed resolution, within 15 days of the resolution being passed.

Who has to agree to the change to a contract?

The default situation, in the absence of any terms to the contrary, is that all parties to an agreement must agree to any variation to the terms of that agreement. A variation is, in itself, a contract, and is therefore only binding on the parties to it. Therefore, if not all parties to the original contract sign the variation, only the parties that do will be subject to, or benefit from (as the case may be), the amended terms.

Sometimes, however, the original contract will provide for a variation to be capable of being agreed by only some of the parties to the original agreement, but with that variation being binding on all parties. This is common in the case of a shareholders’ agreement made between a large number of shareholders. Such terms may specify that members holding a specified percentage of shares can approve the change on behalf of all members. The intention here is to avoid a situation where one or more shareholders holding very small shareholdings can block a change that is otherwise approved by all other members.

However, if the effect of such a change is to vary the rights attaching to a class of shares, that will still require the approval of the holders of at least 75% of the issued shares in the affected class (whether by special resolution or by other written consent).

What should you do?

If you need to vary any of the terms in one of your contracts, or are planning to deviate from any provision as it is currently drafted, please do check the full terms of the agreement to see if there are any particular formalities you need to follow. If in doubt, you can contact the Corporate Team at Doyle Clayton, who will be happy to advise.