As we have discussed before, you should have contract for every type of relationship you have in your business. And, you should have a contract for every instance of a particular type of relationship in your business. That is why the Corporate Counsel Program is about reviewing contracts and making sure they continue to work in your business. There is something you need to know about contracts in your business, though. Even ones we work on together.
Contracts are never perfect. Contracts do not last forever. Your contracts have some type of term associated with them. Your customer agreement likely has a clause that allows you to cease working if your client doesn’t pay on time. What happens, though, when you need to change your contract? How do you go about adjusting the language? How do you change the scope of the work? Can you make the changes yourself, or does your client get the opportunity to agree or reject any changes to the agreement? When does any of this matter anyway?
Chances are, you have been through this. Possibly this past month. You worked with a lawyer to develop your contract. You know you should run any changes by your lawyer, but you need to adjust an agreement with a customer and don’t have time to run it past your lawyer.
As an entrepreneur, you should be comfortable taking those types of actions. To do that, you need to be confident you are still protected when you adjust your contract. So, let’s talk about some places where changing your contract can come up.
Change is necessary in contracts. You cannot predict everything in a contract. If you have a contract that renews automatically, there will likely be changes to your business, the relationship, or the law over the course of your contract. So, what happens when you need to change your contract? What is the process?
It depends on what the contract says.
Contracts are the representation of an agreement between two parties. If changes need to be made, they are often required to be changed in writing. This is often found in the Miscellaneous Section of a contract. If you do not put any changes in writing, how do you establish the change. The most common places this comes up in contracts is on the fees. How do you adjust your fees? Do you, the service provider, have the ability to change your fees at any time? It is very common to see a contract clause that simply says:
“This agreement may only be altered or amended in a writing signed by all parties.”
This clause can be effective if the contract is for a set term and does not renew. You do not want changes to happen unless they are in writing. If you created a contract that automatically renews, you should have a clause that permits you to adjust your fees with notice. Make sure you know what that notice is, so you can make your adjustments properly.
If you work as a service provider, you should consider having a document that outlines the work you are providing for your client that would be separate from the agreement itself. Think of this as the plan of your work. This should lay out the scope of the work you will perform with the associated fees. This document should change with each project, your legal contract should not. It can help cut down on drafting mistakes by sales staff when they are sending out contracts.
If you use a project plan, you should always have a billable rate for additional services that fall outside the scope of the plan included in the payment terms of your contract.
There are a few terms important to know before you start making contract amendments from the original language:
Amendments are changes to a contract. Typically, amendments are required to be in writing, but there are many other ways to create amendments in a contract, including a simple change in procedure. For instance, if your contract indicates payment is due on the 1st and late on the 5th, but the client consistently pays on the 6th with no late fees or comment of any kind from you. You will have a very difficult time two years later making a claim that you are owed late fees and interest for all of the late payments made. You have effectively amended the contract by changing the common practice of how you handle it. This is true even if your contract states it can only be amended in a writing. The problem is, this change needs to be proven in court. The best solution, if you make a simple change like this, is to document it in writing. This is one of the reasons, you want something more thorough than the clause I described above. Make sure you have a way to memorialize changes in writing without necessarily drafting official amendments to the contract. Your clause should incorporate certain notices that outline these changes.
Addendum means “something to be added”. An addendum is a supplement to a contract. An addendum is the writing required by the amendment clause. Sometimes, addendums are used, not because there is a desire to amend the contract per se, but simply to add something that was left out of a contract. This may have been an unintentional omission or it may have been something that is missing that was discovered later. You don’t need an addendum before a contract is signed. If something is missing, add it to the contract. Addenda are used to make additions, even minor ones, to contracts without creating a new contract. When drafting your contract, you should consider whether there are any circumstances for you to add an addendum that is not signed by both parties. Are there any changes you are permitted to make to your contract by simple notice? Can you adjust your fees? Can you adjust payment terms? Can you adjust the late fees?
There are some items, you will not be able to simply add to a contract because you forgot to include it in the first place, such as agreement to pay interest or attorneys’ fees. For that reason, it is important to do your homework before you draft your contract. It may also be a good idea to consider using an online agreement that can be modified and agreed to by continued use of your services (but only if you are not looking to have a definite term to your agreement).
In some cases, your contract may have given you the ability to add an addendum that is not signed by both parties. There any changes you are permitted to make unilaterally to your contract by simple notice to the other party. Take a look and make sure you know whether you can change it yourself and how much notice we required you to give.
Exhibits are items referred to in a contract that give additional information or help to more fully explain the contract. Exhibits are attached to a contract and incorporated into the contract by making a reference to the exhibit within the contract. Incorporating an exhibit by reference makes the exhibit a part of the contract. It becomes part of how the contract is interpreted. Exhibits may be other contracts, emails, or any other document that explains the agreement and should be incorporated into the written contract. Be careful before you just include all of your emails or other written documentation of the sales process. You may have made statements or promises (or they may have asked questions) that could nullify your contract. You don’t want to incorporate anything into a contract that could harm your agreement. Exhibits should more fully explain a contract in a way simply adding clauses or terms to your contract wouldn’t.
If the deal you are working on involves multiple agreements, make each agreement an exhibit to and referenced by the other agreements. That way, all of the contracts will be read together. This will help better explain the deal as a whole.
Project plans, like we talked about above, should be attached as an exhibit to your contract. Your reference to the project plan, that describes various aspects of your agreement that may change, should give you unilateral permission to amend the project plan, or to allow the plan to be amended and substituted as the referenced exhibit. This helps to make your service contract a document that changes with the relationship between you and your client without needing a new contract with each new project. It makes a virtually never-ending contract. That way, as long as the relationship is working, you don’t have to rock the boat by having your client sign an updated contract.
Make sure there is some definite term in your contract, even if it automatically renews. That way, you can make any needed changes to the contract language at the end of a term, without needing to create a new contract to achieve the same result.
Contracts are not just about the terms of the agreement. Contracts are about the what-ifs, and the unexpected occurrences. Deciding how to change your contract and knowing how to more fully explain an agreement using exhibits can be a very powerful tool in your contract drafting arsenal.