31 Jan 2023
23 Aug 2021
People often have second thoughts about the terms of the contract or wish to do something different from what was originally agreed. For example, people often suffer from buyer's remorse after making an expensive purchase or being persuaded to enter into a long-term plan on something they don’t really need. In addition, an employer often seeks to vary the terms of a contract on a unilateral basis.
Are the terms of a contract set in stone? Is it possible for the parties to amend or alter the terms of the contract which have already been concluded whilst the remainder of the contract remains unchanged?
Generally, a variation on a contract is permitted by mutual agreement. Like contract formation, the contract variation must be constituted by agreement, contractual intention, and consideration. The requirement and standard of agreement and contractual intention are similar to those in contract formation (please refer to 6 Essential Elements of a Valid Contract with Examples for further details).
A mutual agreement is required for the contract variation unless the contract confers the power to vary the contract on one of the parties unilaterally. Even so, such a party must not exercise power "dishonestly, for an improper purpose, capriciously or arbitrarily".
Generally speaking, the formality requirement for contract formation applies to contract variation too. Therefore, it can be written, orally or by conduct. Where a party asserts that a contract has been varied by conduct, it is relatively complex to demonstrate such a situation. Party has to show that there has been a clear pattern of behaviour that is inconsistent with the original terms and consistent with those original and unvaried terms. This might be very challenging to demonstrate such a pattern. Therefore, it is always wise to keep a copy of the record of the variation.
If one fails to comply with such formality, the variation will not have any contractual force. If the parties have agreed that any variation must be written and signed by the parties, then any failure to comply with such formalities will cause such variation to be invalid. It should be noted that the law prescribes those certain types of contracts that must be in writing, for instance, the sale of land. Variations to these types of contracts must be in writing.
Hurdles - variation after a breach is not permitted
If one party has already breached the contract, the legal liability cannot be avoided by varying the terms. Such variation is not allowed.
Sometimes, it may be possible that the variation is so huge that it deviates from the objective of the original contract. Some may then deny that they are still obligated to the terms of the contract. Therefore, it is essential to know how to distinguish between variation and termination of a contract. The distinction depends on the parties' intention, i.e. whether they want to depart from and terminate the original contract. Usually, the variation "goes to the very root of the original agreement" will terminate the original contract.
Consideration of variation is similar to those in contract formation, which consists of abandonment of existing rights and/or the conferment of new benefits. It is worth emphasizing that the benefit must be new. The position in law has changed significantly in recent years. Something less than a full consideration can now serve as consideration to support the contract variation. You can now receive consideration in the form of a practical benefit. For example, you wished to amend one of the terms on a purchase agreement, say, the transaction location from Tokyo to Kyoto. You also promised to pay $20k for such a change. This promise is a practical benefit to the other party, which constitutes a consideration that is sufficient for consideration. Mere performance of the contract cannot be a practical benefit; something more is needed. In this case, it is the promise to give further payment.
Employers may often not know if their employees' behaviours constitute a variation on a contract. There is no hard and fast rule on this matter. Generally speaking, some of the reasons include the conduct and capability of the employee to perform work. Some common examples of employee misconduct might be considered a variation of employment terms, such as disclosing confidential information and persistent dishonesty. These reasons can amount to variation to contract. If the situation is serious, this can also amount to summary dismissal.
What if it is the employer who wants to change the contract? Employers can change the terms of the employment contract as long as there is a term allowing such changes, usually called the flexibility clause. Just like any other kind of variation in a contract, mutual agreement is required. Therefore, employees' agreement is required for making such changes. Employers should meet with and consult with the employees before varying the contract. Employees should be given time to consider such a proposal. The variation cannot be unreasonable and impractical, such as requiring the employees to work 20 hours a day. If the change goes to the root of the contract, the resignation in response to such change is called "constructive dismissal".
Variation in a contract is quite common in today's commercial world. It is important to note that the requirement of variation in the contract is generally as strict as that of formation in the contract, except for consideration. The practical benefit is now sufficient to form consideration in a contract variation, which means additional benefits are enough for the variation. This blog also talks about the variation in an employment contract. Some misconduct or incapability of employees may constitute a variation of the employment contract. Meanwhile, the employers may amend the employment contract if there is a flexibility clause with the employees' consent. Both employers and employees should know their rights and obligation when varying a term on a contract.
Please note that this is a general summary of the position under common law and does not constitute legal advice. As the laws of each jurisdiction may be different, you may wish to consult your lawyer.
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