Understanding Contract Variation: What You Need To Know

Content

• What is contract variation?
• What are the necessary elements of a contract variation?
• When do we need contract variations?
• How do we vary a contract?
• Best Practices for Varying a Contract
• Conclusion

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. 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 can’t continue with the same contract if you want to cut losses or seize the opportunity. In such cases, you can alter the vendor agreement slightly to suit your needs without entirely abandoning it. That’s where contract variation comes in. It allows parties to adapt contracts to shifting commercial conditions and avoid disputes. They can do much more for you; read on to learn how, when, and why to vary a contract.

What is contract variation?

Contract variation refers to changing the already agreed-upon terms of a contractual agreement. It enables the involved parties to alter the original terms, conditions, or obligations without redrafting or ending the contract. 

Ideally, both parties must agree to the contract variations for them to be legally binding. In unique circumstances, the contractual agreement may explicitly permit unilateral variations, i.e., one party can make the changes without consensus. There are several types of variations, including:

Term variations

Contract terms are the specific provisions and conditions outlined in a legally binding agreement between two or more parties. These terms are the foundation for the parties' rights, obligations, and responsibilities throughout the partnership. Term variations allow parties to modify the terms and conditions of the contractual agreement, including duration, product or service specifications, payment, renewal, and termination.

Scope variations

The contract scope specifies the details and boundaries of the work, services, or products to be delivered as outlined in a contractual agreement. It defines the parameters and limitations of the project or engagement. They serve as a foundation for understanding the expectations of all parties involved. Scope variations enable stakeholders to modify the nature or extent of the goods or services specified in the contract. It can include changes in specifications, quantities, or the quality of deliverables.

What are the necessary elements of a contract variation?

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.

Mutual assent

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. However, mutual acceptance is essential in most business contracts where all parties have equal standing.

Awareness and Intent

For the modifications to be legally binding, both parties must first be aware of them and intend for them to change their rights and obligations permanently. Performance must follow acceptance and acknowledgment to avoid a breach of contract. The parties must comply with any requirements as part of the variation. 

Consideration

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. 

Compliance

Variations should only alter the terms and conditions of the contract, not wholly change it. Organizations must, therefore, take extra care to ensure that any changes made to the contractual agreement still adhere to the original contract. The revisions must be legally valid and shouldn’t contradict the existing terms.

When do we need contract variations?

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.

Change in Requirements

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 in Circumstances

Changes in external circumstances beyond the control of the parties involved, such as changes in legislation, economic conditions, or force majeure events, may necessitate adjustments to the contract. Parties must vary the contract to ensure it still serves the original purpose. Also, variations come in handy to accommodate changes in the operating environment or market conditions.

How do we vary a contract?

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.

Verbal

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.

Written 

In this instance, the parties expressly state and accept the variations through email exchanges or formal agreements. It is the most widely used and trustworthy method of contract modification because a thorough physical record is available. In addition, some jurisdictional laws or contracts (no oral modification clause) stipulate that a written variation is required.

Conduct

In this instance, the parties' actions should demonstrate that they agree to vary the contract. They must behave or perform duties according to the varied terms rather than the original ones. Like oral variations, these are quite hard to prove under the law.

Best Practices for Varying a Contract

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: 

• Design the process in advance

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.

• Ensure all involved parties are in consensus

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.

• Have a written record to avoid disputes

Disagreements and miscommunication are part of business arrangements. But without a proper strategy and system in place, it can lead to bigger financial, legal, and operational trouble for all parties. Therefore, organizations must carefully record and preserve every part of the contract lifecycle, including amendments. Written variation must be the top choice in all complex and high-value contractual agreements.

• Determine the effects of variation on existing terms

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. 

• Variation clauses

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.

Conclusion

Variations are common, and now they’re a part of business contracts. Varying can be helpful for organizations to ensure their contractual agreements remain profitable despite evolving circumstances and requirements. Businesses can guarantee that modifications are always advantageous by implementing strategic processes and adopting variation clauses. It enables them to decide when and how variations will take place.

Schedule a demo today to learn how Dock contract management software’s advanced features, like pre-approved templates and clauses, approval workflows, and version control, can help you streamline the varying process.