Five Reasons for Using In-Writing-Only Contract Amendment Clauses
At their core, contracts are merely agreements between persons. There is nothing too mysterious about a contract. Contracts can be written out, can be made orally (“with a handshake”), or can be made via actions like “course of dealings.” This is equally true for changing or amending a contract. Unless otherwise stated, a contract made today can be changed or modified by future writings, future oral modifications, or future actions/courses of dealing. Almost anything can be the subject of a contractual agreement, including the method of amending/modifying a contract. Maybe the parties to a contract made today want to limit the methods that are allowed for amending the contract in the future. This is the purpose of including an “amendment clause.” With written contracts, a typical amendment clause will state that no amendment or modification will be binding unless the amendment is also in writing. A typical provision would be something like this:
“The parties to this Agreement agree and understand that no modification or amendment to this Agreement shall be binding or enforceable unless said modification or amendment is written and signed by and on behalf of the parties.”
There are other ways to phrase an amendment clause depending on what the parties want. For example, an amendment clause might be written to only bind one party to the agreement. An experienced San Diego corporate attorney can help draft an amendment clause that expresses what is intended in your unique business circumstances.
For good reason, most business contracts use “in-writing-only” amendment clauses and prohibit modifications that are oral or via course of dealing. These “in-writing-only” amendment clauses are often included in what is called the “boilerplate.” There are five main justifications for this:
- Honoring expectations and the value of time and effort
- Creating certainty
- Change of personnel
- Lower litigation costs
- Assuring proper authority and authorization
If a business contract has any sort of complexity, negotiating the contract takes a good amount of time and effort. With a very complex contract, like a contract with respect to buying or selling a business, the contract might have taken months to complete. All of that time and energy should not be undone by a quick and maybe not-well-considered oral modification.
Furthermore, one of the purposes of reducing contracts to writing is to create certainty as to what the parties’ obligations are. This helps business planning and thereby reduces risk that is created by uncertainty. Oral amendments are risky since memories can fade and the parties may mis-hear or misunderstand the words used. Just as importantly, if a dispute arises, one or more individuals involved in the oral modification may change jobs or no longer be available to identify what the modification was.
In addition to lowering risk, requiring that amendments be made in writing reduces litigation costs if there is a dispute that must be resolved in court. Written contracts and amendments can be presented to the court for the court to read; that is relatively low cost. However, if the contract or amendment is oral, then the court must hear the testimony of the respective individuals who said the words that created the oral amendment. That is high cost, certainly in comparison to having the court read a written contract. The cost is even higher if the individuals involved have changed jobs or are no longer available to give testimony.
Since many business contracts are made between corporate entities, requiring “in-writing-only” modifications ensures proper authority. In simple terms, you do not want the district manager binding the company with an oral modification when the CEO (and potentially the Board of Directors) should be making the modification. Since a written modification must be signed, this assures that the correct person with the proper legal authority is the individual who binds the company.
Contact San Diego Corporate Law
If you would like more information, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard provides legal services related to business law, contracts, corporate entity formations and maintenance, private securities offerings/sales, the sale/purchase of a business, and mergers and acquisitions. Mr. Leonard can be reached at (858) 483-9200 or via email. Like us on Facebook.