What is a Contract Addendum?
A contract addendum is an attachment or an extension that’s added onto a legal agreement or contract in order to modify, specify, add and/or remove specific terms. It may contain all the particulars of a supplemental or amended agreement, such as signatures of all other parties involved in the original contract, and is usually signed alongside the original contract by all signing parties in order to be considered binding by courts or other entities. Essentially , a contract addendum is a supplement for all intents and purposes.
A contract addendum is commonly used when the parties involved in an agreement wish to change some of the stipulations within their original contract, but do not wish to, or are unable to, write and sign a new document that outlines the new terms of the agreement.
Why are Addendums Important in a Contract?
The importance of addendums cannot be understated: if either party to a contract proposes a change then, as soon as the other party agrees, an addendum must be issued to reflect this. Without the introduction of an addendum the original contract stands with no scope for alteration; in other words, a primary contract cannot be amended. In fact, the only way to alter such a contract is to terminate it and create another. Obviously, this process is neither convenient nor less time consuming: this is where addendums are indispensable.
With the introduction of an addendum additional details and/or clarifications can be added to a primary contract. This gives both parties to a contract flexibility and allowances for when circumstances may dictate a need for change. Such change could be a transition period from a loan, to extra time provided for the completion of a project, to the amendments of a payment plan or the terms therein. The addendums allow the primary contract to stay in place whilst changing circumstances precipitate a need for change: flexibility is key here.
Addendums to Contracts are Common in Several Situations
Addendums can be useful in both personal and business contracts when situations arise that require an adjustment of the terms or conditions of the original contract. There are a number of situations that are binding and trigger the need for an addendum.
Changes in Terms: Changes in terms, such as a pay raise or an expanded scope, can create a trigger requiring an addendum. For example, if an employee is awarded a promotion, the pay rates and other benefits in their employment contract may need to be changed. While you could set a schedule for adding addendums when an employee is awarded a promotion, it is likely that this would become an administrative burden and addendums would not be prepared in a timely manner.
Scope: Any change in scope should probably be described in an addendum. This is especially true in service contracts. For example, a construction contract that provides for a specific number of hours of work will likely have to be amended through an addendum when the work exceeds that number. The client may wish to negotiate a lower labor rate for the additional hours and incorporate that into the addendum.
Pricing: Many contracts provide that an increase in pricing can be made on a specific date each year. Sometimes the contracts set a schedule for renegotiation of pricing. In either case, the existing contract will have to be added to or modified by an addendum.
Deadlines: As the deadlines approach for the performance of certain tasks, an addendum may become necessary. While you could simply insert the new deadline into the agreement without an addendum, you run the risk of a dispute with the other party over the original deadline.
These are just a few of the circumstances that can create a trigger for an addendum.
What is an Effective Addendum and How Do You Draft One?
To draft an effective addendum, it is important to first determine whether there is enough room in the original contract to accommodate the new provisions.
- If your contract does not contain sufficient extra room for the new terms, creating an addendum may not be the best option. If space is limited, your best bet is probably to draft a new contract and explain to your reader how the new contract relates to the previous one.
- If you decide to draft an addendum, make sure that it is written in very clear and direct language. Even the most minor details of an event can have serious legal implications, so just because it seems like a logical addition to you, does not mean it would be equally obvious to another person.
- In order to minimize the risk of ambiguity and confusion, each provision in an addendum should employ plain and general language. The more technical or involved your language is, the more likely it is that outside parties will become confused.
- One of the most common reasons people may become confused by an addendum is unnecessary use of legal jargon. This is only a problem if the addendum is being drafted by someone unfamiliar with the topic. If you have had to look up every third word in a legal dictionary while drafting your addendum, your opinions and directives are probably unclear. Each provision in an addendum should be brief and to the point. This allows third parties to easily locate and understand the specific terms the addendum covers.
- You should always write an addendum with an objective and impartial tone. If your addendum leans toward either contractual party or one that seems biased to favor one party over the other, it is likely to raise questions from the other party and any outside parties who need to read your addendum.
- Unless you plan to have the terms and conditions rewrote from scratch, which is not generally recommended when drafting an addendum, you need to find a way to integrate your new provision into your existing one. To do this, you can either specify the addition specifically (e.g., "Section 2.1 shall be amended to include the following clause…") or revise the section of the old contract (e.g., "The parties hereto do hereby agree to adopt the amendments in the following sections of the old contract…).
- After finishing your amends, revise your addendum as many times as necessary so that you are confident nothing has been left out of the addendum, and that no part of the old contract unknowingly contradicts any updates you have made.
Legal Aspect to Adding an Addendum
As with any contract, the first thing a judge will look for is to see if the contract itself is valid. So when creating an addendum, it is important to understand the legal considerations involved. There are also certain pitfalls to avoid, such as adding new terms to the existing contract. In some cases, changing a contract term in a way that one party believes is valuable can void the other party’s performance. Adding a new party is another way to make the addendum unenforceable-it is critical to have all parties agree to the terms within the addendum.
One example of an enforceable modification is when the original real estate contract requires 20% of the purchase price to be made as a deposit, and the addendum changes the deposit amount to 25%. Both parties signed the addendum, and no other clauses were modified, clearly demonstrating that the parties are in agreement to a short extension of the original contract. In most cases , neither party will forego performance of the contract.
An unenforceable change to a contract might be if the contract clause states "The buyer will assume half of the closing costs paid for by the seller." However, a buyer moves out of state before the closing has been finalized. The addendum created in his absence states that "The seller agrees to pay half of all closing costs." In this case, even if the parties have specified that they agree to this modification, the buyer has essentially walked away from the deal. The seller, therefore, cannot enforce the addendum because receipt of performance is a condition for maintaining the offer. This modification eliminates the buyer’s performance entirely.
It is important to remember that a judge will often presume any addendum that has not been legally tested to be unenforceable. The bottom line is that any change to a contract must come with consideration-a specified agreement must be made in exchange for the other party’s performance. If either party is unwilling to perform, then the addendum is voided.
Contract Addendum vs Contract Amendment
In contract management, both addendums and amendments can be useful tools, but they are not interchangeable. An amendment is a way to change one or more provisions in a contract. If both parties are in agreement, contract amendments for the most part do not require further consideration from either party. In contrast, an addendum provides an addition to a contract where new terms are being proposed, but the original terms remain intact. Whereas an amendment makes changes to existing terms, an addendum adds to the existing terms of the contract. If an addendum to an existing contract proposes a major change, a contract amendment may be needed as well. For example, when engaging the services of a subcontractor, you would need an addendum that adds necessary terms to the original contract. However, if the scope of work is significantly expanded, you would also need an amendment changing the terms of the original contract.
It’s important to note that when you’re drafting an addendum or an amendment, state laws may apply to your specific situation. Always consult an attorney to ensure proper procedures are being followed.
Contract Addendum Examples from Real Life
Case Study 1: Expanding Scope of Services
Consider a marketing consulting firm that has entered into a fixed-term agreement to provide strategic advice to a client. During the course of the contract term, both parties realize that the services originally envisioned are insufficient to meet the client’s evolving needs. In this scenario, an addendum can be drafted to expand the scope of services and the associated fees.
Such an addendum could read: "The parties hereto agree that the services to be provided under the September 1, 2018 contract shall be expanded to include additional marketing strategy consultations and presentations at the following fees and timelines: 1) a personal on-site presentation on November 12, 2018 for a fee of $15,000…".
This type of addendum is common where the original scope of services is not sufficient for the client’s purposes.
Case Study 2: Updating Provision For State Law Changes
A business situated in the State of California may have entered into a contract to purchase certain equipment from a vendor in another state. The price stated in the contract did not mention any sales taxes, but the State of California imposes a sales tax on the purchase of such equipment and therefore the buyer must pay the sales tax equal to 7.5% of the price, in addition to the agreed-upon purchase price.
If the contract does not address the issue of sales tax, the vendor would expect to receive the full contract price without adding the 7.5% sales tax, leaving the buyer without an avenue to recoup the amount it has already paid to the State of California. At the time the purchase order was made or the contract was signed, many times buyers are uninformed as to the applicability of the sales tax or do not have a clear understanding as to how that amount will impact the total cost of the goods or services they are purchasing.
A simple addendum can clarify the seller’s obligations to account for sales tax: "The price stated above is the net cost of the goods delivered and includes any applicable sales or use tax as required by California law or other taxing jurisdictions."
While addendums are very useful, if the new provisions are of great importance, it may also be prudent to consider whether a new contract should be drafted instead.
Tips to Managing an Addendum
Integrating an addendum into a contract or agreement is not always as simple as drafting the language and seeking a signature. The process requires careful consideration in regard to the future implications of an alteration to the original document. Reaching out to an experienced Arlington business law attorney or Texas attorney prior to the execution of an addendum can be useful in understanding these implications. However, below are some best practices to adopt when seeking to draft an addendum.
Put it in writing. Verbal agreements are difficult to enforce. In order to modify business contracts through the use of an addendum, it is essential to ensure there is a written record of the modification, signed by both parties.
Revisit the language. Once you have an addendum drafted , revisit the original contract and the proposed addendum. Ensure that the three are in sync with one another. If necessary, provide a small explanation of how the contract, the proposed addendum, and the executed addendum are aligned.
Consult with others. Even if your business or professional agreements are only between you and another party, having an attorney review proposed and executed addendums can be very helpful. Attorneys have experience dealing with contract disputes and can help you prevent future disputes by suggesting clear language and anticipating possible mistakes.
Enter into an addendum as early as possible. It can be costly and time-consuming to alter already executed contracts. In some cases, there are corporate "ratification" tasks that may need to be accomplished in order to "validate" an amendment.