Key Contract Terms Part 4: Provisions for Modifications
Change happens. Just as circumstances may cause a change in vacation plans, dinner plans, and business plans, circumstances often change during the term of a contract, and modifications to the original agreement may become necessary or desirable to one or both parties. Because of this, it is important to have contract provisions in the original agreement that govern future modifications. These provisions provide the clarity and flexibility that is crucial to preserving the contract and avoiding confusion and costly legal disputes.
Provisions for contract modifications, should: 1) comply with the laws governing the contract type and subject matter, 2) account for the typical circumstances and foreseeable modifications relevant to the subject matter, and 3) address the specific parameters the parties desire for the transaction.
Legal Considerations for Contract Modifications
Every contract can be categorized as a contract for the sale of goods or a contract for the sale of services. In North Carolina, the Uniform Commercial Code (UCC) governs contracts for the sale of goods while common law governs contracts for the sale of services. Both UCC and common law statutes have specific requirements for creating enforceable contract modifications, so contracting parties must be sure to properly categorize their transaction and adhere to the relevant laws.
Modifications under the Uniform Commercial Code (UCC)
Generally, to comply with the UCC, contract modification provisions should require that all modifications are made in good faith. Beyond this, unless the contract says otherwise, the modification can be agreed to orally, in writing, or even by conduct.
An example of a modification under UCC is a contract for the sale of goods where the parties do not need new consideration to modify the contract, but they must do so in good faith. Imagine that a wife enters a written contract with a car dealer to buy her husband a rare classic car for his surprise 50th birthday party. The wife agrees to pay $100,000 for the classic car to be delivered on her husband’s birthday. The dealer calls the wife an hour before the party and tells her they can’t deliver the car for less than $120,000. The wife has already invited and told all the guests about the surprise party and classic car for her husband’s 50th birthday party and agrees to pay the $120,000. The dealer delivers the car, and then sends the wife a bill for $120,000. The wife sends payment for $100,000, the original contract price, to the dealer. The dealer sues for $20,000. Because the dealer attempted to modify the contract in bad faith, the court will not enforce the contract under the modified terms.
Modifications under Common Law
Under common law, contract modification provisions should require modifications to be: 1) made in writing, 2) signed by both parties, 3) made in good faith, and 4) supported by consideration (new benefits or detriments exchanged between the parties which induces each to enter the modification, frequently this is more money exchanged for more goods or services). Furthermore, the clause should also state that oral modifications will not be enforceable.
A service contract falls under common law, therefore both parties to a service contract usually need new consideration to modify the contract. For example, a company hires a well-known band to play at its annual holiday party for two hours for the price of $1,500. The band later calls and asks for $2,500 instead of $1,500 because they have another gig that will pay $3,000 on the same day. The company cannot change the date of the event and they have already promoted the well-known band booked, so they negotiate with the band. They tell them that they can modify the contract if they agree to play for an extra hour. Both parties agree to the new terms of the contract. This is a valid modification, because both sides exchanged new considerations: the extra $1,000 payment by the company and the band extending their performance by an hour.
Practice Area Specific Laws
After complying with the UCC or common law, modification provisions must consider the laws governing the specific subject matter. Residential construction contracts, commercial construction contracts, the sale of goods between merchants, the sale of goods between a merchant and customer—all these scenarios have specific laws governing how modifications must be made to be enforceable. Accordingly, it is vital to understand the current laws governing your contract type and subject matter when drafting contract modification provisions.
Practical Considerations for Contract Modifications
To have a contract modification provision that is not only legal, but also useful, you need to consider the foreseeable circumstances surrounding your contract and set clear timeframes, parameters, and deadlines regarding what, how, and when modifications can be made.
Finally, you should also clearly define who has the authority to initiate and approve modifications on behalf of each party. It is essential to designate individuals or positions within the organizations authorized to make changes. This prevents unauthorized modifications and ensures that modifications are made by individuals with the necessary decision-making authority power.
For example, does a project or store manager have the proper legal authority to bind the owners of the company that he works for to perform additional work for a client, or to pay an increased price to a supplier for materials needed to perform the work? The answer is that it depends on the terms of the contract between the company that the manager works for and the client. Not all employees have the proper legal authority to bind the company to modify a contract, even though the manager may have authority to perform the work required by the contract.
Takeaway
By considering these legal and practical factors, you can create clear, enforceable, and flexible contract modification provisions for managing the evolving circumstances that impact your contract.
If you need your contract reviewed for proper modification provisions or other legal considerations, or you need a strong legal contract drafted, please contact the business law attorneys at Skufca Law at (704) 376-3030.
Up Next: Contract Termination
Stay tuned for our next blog in the Business Law Series: Contract Termination where we will discuss how to prepare for possible termination of contracts and the details that need to be set forth if and when a contract termination occurs.