Understanding Contract Terms (Post 9): Amendments
We continue the Understanding Contract Terms series by explaining amendment clauses. Most contracts include some form of amendment clause. Amendment clauses are important to understand when determining your rights and liabilities under almost any contract and how those rights and liabilities can be amended.
When it Matters to Have a Well-drafted Amendments Clause
There are often times when circumstances change and the terms of a contract no longer accomplish the objectives of the parties. In those situations, it’s important to follow the process outlined in your amendments clause in order to modify the existing contract. An amendment does not replace the entire original contract, just the part that is being modified. Having a clear amendments clause in your contract will help reduce the hassle of amending a contract. Further, you can better understand how and when terms of the contract can be modified. The goal when creating an amendments clause is to be as specific and concise as possible. The clearer the clause, the clearer both parties will be on their rights.
Types of Amendments
Amendment clauses come in a variety of flavors. Here are some of the more common amendment clauses:
Bilateral Amendments: A bilateral amendment is an amendment that must be agreed to by both parties. This is functionally the same as a clause that does not allow amendments. This is the most common type of amendments clause you’ll see in contracts. A typical bilateral amendment reads:
- No amendment to this Agreement will be effective unless it is agreed to in writing by both parties
- We may amend the terms of this Agreement at any time by reasonable notice [including without limitation by posting revised terms on its website at www.entercompanyname.com], and the amended terms will be binding on You.
Authorized Person: Some amendment clauses provide for amendments only if approved by a specific person or position within the company. For example, an amendment may require the CEO of the company to approve the amendment for it to be binding. This type of amendment clause may be used in larger contracts that have a material effect on the companies. A typical amendment of this sort reads:
- The parties may not amend this Agreement, except by written agreement by the Chief Executive Officer of each party.
Enforceability of Unilateral Amendments
One of the more hotly contested areas of contract law surrounds unilateral amendments to contracts and whether those amendments are enforceable against the other party. In short, unilateral amendment clauses may be enforceable if there is reasonable notice and the parties continue to perform under the contract.
Unilateral amendment clauses that do not require notice are unenforceable. In Carey v. 24 Hour Fitness, the U.S. Court of Appeals for the Fifth Circuit ruled that an arbitration agreement was merely illusory because 24 Hour Fitness retained the right to amend the agreement at any time (without notice to the employee). The Court explained that in essence 24 Hour Fitness was allowed to hold its employees to the promise to arbitrate while reserving “it’s own escape hatch” because it had the ability to amend the agreement at any time. 24 Hour Fitness’ promise was illusory, and an illusory agreement is unenforceable.
“Required in Writing” May not Invalidate An Oral Amendment
Most amendment clauses require that the amendment be agreed to in writing. However, simply because a contract includes this clause it may not invalidate an oral agreement to modify an existing contract. A court may conclude that the parties to the written contract entered into a valid, enforceable, oral agreement to modify the requirement that amendments must be in writing. The famous Justice Cardozo once wrote:
- “Those who make a contract, may unmake it. The clause which forbids a change may be changed like any other…Every such agreement is ended by the new one which contradicts it…Whenever two men contract, no limitation self-imposed can destroy their power to contract again.”
The main idea is that just because you agree to only allow amendments in writing, you can later agree to change that term by agreeing (orally) to waive the writing requirement.
A Note on Modifications Prior to Executing a Contract
If the terms of a contract are changed prior to the parties signing it, the changes are not “amendments.” These changes are considered part of the original contract, even though they are often labeled amendments.
The amendments clause is often overlooked, but it can have serious impacts if your ability to amend a contract is restricted or if the other party can amend the contract at any time simply by providing you with notice. Understanding how amendments clauses operate in your contracts is another step you can take to better understand your rights and obligations under your contracts.
If you’d like to learn more about contract amendments or drafting concise contracts for your business, please comment below or contact us.