Contract variations: how to get them right

Contracting parties expect their relationship to evolve over time. Prices shift, deadlines move, scopes expand, but should the change be a variation of the existing contract or an entirely new agreement?

Getting this wrong can leave you with no enforceable change, or worse, an unintended release of security or third-party rights.

A valid variation amends the original contract, keeping it in force with the new terms. This differs from termination and replacement, where the first contract ends and a new one takes its place. Novation is another option, replacing the contract and substituting a new party for an outgoing one. These distinctions matter.

If the original contract sets out formalities for variation (for example, variations must be in writing or signed by a designated person), those rules apply only if the contract is being varied, not terminated and replaced.

But if the change is so extensive that it alters the contract’s commercial core, courts may treat it as a replacement regardless of how it’s labelled. There are limits to “freedom of contract”; the Supreme Court has made it clear that parties can’t disguise a fundamental overhaul as a simple ‘variation’.

To vary a contract effectively, two elements must be satisfied:

1. Form: Unless a deed is required by law or the contract, a written agreement signed by all original parties is sufficient. Beware of deeds originally required by statute (for example, certain transfers of registered land). If in doubt, consider varying by deed. If the underlying contract includes a ‘No Oral Modification’ clause, it will be upheld.
2. Consideration: A variation needs fresh consideration unless executed as a deed. When short on time, parties often include nominal consideration like “£1 and other good and valuable consideration”. Always make or acknowledge payment, or use a deed to bypass this issue entirely.

Real-world example in relation to form

A client recently told us about an issue they had suffered when trying to extend the term of a contract it had with a software supplier.

The contract provided that the term could be extended if they gave three months prior written notice to expire before the end of the original term. Timing was important but so were the required formalities. Despite complying with the three month notice period, the client failed to comply with the requirement to address their notice to a specific email address as detailed in the contract’s notices clause. The supplier remained silent for a while whilst the client thought there wasn’t an issue. The supplier later raised the issue about the failure to send the notice to the correct email address and told the client they would only extend the term of the contract if the client paid a significantly increased fee.

Moral of the story: be extra careful to ensure you adhere to any formalities set out in the contract.

To choose the right approach, ask:

1. Does the proposed change strike at the heart of the bargain?
   • If so, you should consider terminating and replacing.
2. Are third-party rights or guarantees likely to be affected?
   • If rights have crystallised under the Contracts (Rights of Third Parties) Act 1999, you’ll likely need the third party’s consent or an express contractual power to vary without it.
3. Do you need flexibility to make future changes unilaterally?
   • If so, negotiate an express variation power, drafted tightly enough to survive scrutiny under the Unfair Contract Terms Act 1977. In consumer contracts extra care should be taken.

Effective variation means:

• Deciding whether to vary or replace
• Choosing the right instrument (contract or deed)
• Ensuring fresh consideration or executing as a deed
• Complying with contractual formalities
• Checking for third-party or statutory constraints.

Done right, your contract will evolve with your business, not against it.