What Is a Contract Addendum?
A contract addendum is a document that is attached to a contract to note changes and additions. Often, changes to a contract are made after the contract has been signed. Instead of having to re-write the entire contract by crossing things out and writing in corrections that can get messy, the usage of a contract addendum can be simple. A contract addendum notes what will be new to the contract, and often includes other information related to the adjustments . It can also be used to clarify statements made in the original contract. An addendum is not an amendment, and is usually not as extensive as an amendment. An amendment changes something in the contract itself, but an addendum does not. For businesses and other types of organizations, a contract addendum can always be added to business contracts for the convenience and protection of the parties involved.
When to Use a Contract Addendum
Contract addendums can be a valuable tool in many situations. Perhaps the time period of a contract needs to be extended. Maybe terms of a contract need to be revised due to changes in the law. Or a change in personnel will require a change in contract terms. Many situations can arise where an addendum will supplement or supersede a portion of the original contract.
Addendums are beneficial in situations where a simple change is needed, but a brand new contract would be cumbersome and unnecessary. In states such as Oklahoma where an oral agreement may be held to be a contract, the addendum can also serve in making an oral agreement enforceable. For example, an individual may enter into a rental agreement where the agreement is verbal. If one of the parties agrees to reduce the rent by 25%, an addendum can be used to document that agreement and provide evidence in the event of a dispute.
While the general rule in contract law is that the revision of a contract discharges all prior rights and obligations under the previous contract, an addendum can be an effective way to include both the new term and the former term. In the event that the party who drafted the original agreement intended to get rid of the old term, it would be very important to include the language in the addendum. If that language is not included when, for example, a new price for a product or service is added to an agreement, the old price may be used until the problem is resolved.
Elements of a Contract Addendum
Though each contract addendum is written for a specific contract, there are several sections that you can expect to see in nearly every addendum.
- Purpose. This first section simply states the purpose for the addendum, and how it relates to the original contract. For example, the purpose could be an extension of a lease contract, or an amendment to the parties to a contract. Here you would simply explain, in a single sentence, the contents of the addendum.
- Reference to the Original. The next section of your contract addendum will usually contain some language referencing the original contract. It may be as simple as "This addendum is attached to and made part of the original contract dated X," or it may specifically mention a contract clause that is referenced in the addendum. This section helps to place the addendum in context with the original contract.
- Amendment. The amendment section outlines the specific changes and amendments to the contract that the addendum is making. It may be the most important section of the addendum, especially if multiple changes are being made, but it is also typically written in the most straightforward language. This is the "what" of the addendum.
- Ratification. The ratification section, also referred to as the "mutual agreement" section, usually comes at the very end of the addendum. It is a brief statement (usually a single sentence) which states that the addendum is made part of the original contract, which was previously signed by all parties. This section is a way for the parties to ratify their agreement to the addendum.
- Signature Block. The signature block is the final step required of a contract addendum, but is probably the most important. In order for a contract addendum to take effect, it must be signed by all parties who signed the original contract. All parties must sign and date the addendum, preferably in the presence of a witness, and need to have a copy of the entire addendum for their own records.
How to Write a Contract Addendum
It’s important for the language in a contract addendum to be clear, concise, and free of legalese. As is the case with contracts, the scope of the original contract need not be repeated. However, it should be clear from the beginning that the addendum is related to the original contract.
As stated in the first section of this article, an addendum modifies the original contract. Therefore, it is often as simple as simply stating that the original contract is being modified and specifying what is being modified.
Whether the original contract must be attached to the addendum or is incorporated into the agreement depends on the jurisdiction. However, it is good practice to attach a copy of the original contract to the addendum so that it is clear what sections are being modified. If the entire contract is being modified, this is particularly useful.
It also is important to be timely. Most jurisdictions require that a contract be performed within the time necessary to accomplish the subject matter of the contract. Therefore, an addendum should not permit performance of the subject matter of the contract indefinitely or even after the statute of limitations period has expired, otherwise it could be deemed unenforceable.
Legal Aspects of Contract Addendums
Contract addendums have various legal implications, which may differ by jurisdiction. Generally, a contract addendum becomes part of the original contract and is enforceable in the same manner as the original contract. For example, if an original contract requires that a written modification be signed in order for such a modification to be enforceable, then an addendum modifying such a contract must also be signed to be enforceable. Another legal consideration is whether a party can unilaterally add provisions without the consent of the other party. In most jurisdictions, a unilateral modification of a contract is not enforceable unless it is specifically permitted by the terms of the contract .
Many contracts have a merger clause that provides that the final document represents the complete agreement between the parties and any previous agreements or discussions are not effective to supersede the current document. The intent of a merger clause is to exclude the possibility of offering parol evidence to modify the terms of the document. However, a contract will not be viewed as merged and the exceptions to the parol evidence rule may still apply. An addendum is generally not considered to be the type of contract that is governed by the statute of frauds, except for those agreements that concern the sale of land, certain leases, and agreements or promises to enter into any agreement that cannot be performed within one year.
Typical Contract Addendum Mistakes
There are many instances where individuals or business owners try to modify a contract. In today’s age, electronic communication is the main source of communicating what you are trying to convey to the other party. What happens when the other party does not receive, or get confused, by what you were trying to say? One way to avoid this issue is to put it in writing and take extra steps to make sure that you and the other party understand what is being written and asked of them to do.
A common mistake my clients make is agreeing to a contract addendum without first reading the fine print of what the addendum actually is. Many times, the addendum is poorly written and asks for certain things to be done that were not previously part of the original contract. If one of your obligations is to inspect the property, and the addendum adds in another obligation to pay for the professional home inspection, then you should make sure you are not double paying to not fulfill the condition in the contract.
Another mistake is that clients may sign or initial off on the addendum, thinking that nothing will change. What clients fail to realize is that even if the addendum does not seem to make any material changes to the contract, it may very well. If the addendum states that certain funds will be released to one party, or funds will go towards repairs that were previously not in the contract, you may want to make sure that the terms of the addendum stay as is in the written form of the contract. If the addendum only states on the closing date that $500 will be paid to a bank towards repairs, then this should be written into the contract. The same goes for the release of funds at close and any other transfer of funds. Do not just assume that it will happen as is; make sure that the terms of the addendum are in writing.
An additional major mistake I find is that many people assume that verbal agreements are binding, discussing specifically the terms of the addendum agreement. It is very clear that verbal agreements are not binding, however, if the intent of the parties was to make an amendment to the contract, this will be treated as an amendment to the contract, and will be considered a valid contract.
Do not think that the hand shake between real estate agents shows good faith and acceptance. Unless all parties involved have signed the addendum and agreed to the terms, then they will not hold up against one another. If the addendum is not properly written, you could very well ask and agree to it, and then it falls through during the course of closing. Make sure that you are aware of all changes to the proposed contract and that these amendments are clearly set out in the final version of the contract.
Contract Addendum Samples
Contract addendums are used in a wide variety of industries. In the building and construction industry, for example, addendums are often utilized for change orders. In these scenarios, when a contract is entered into for the construction of a building, it will list among many other things the scope of the project. The owner then decides that they would like to make some additional changes to the project after the contract has been signed. Instead of effecting the original written contract, the parties rather enter into an addendum to modify certain details of their original agreement. Some of the things that the owner might want to change or modify by addendum may include: additional spaces, modifications to the size of the spaces, or different types of building materials to be used in construction.
Another example where contract addendums are often used is in the buying and selling of property. On residential property, once an offer has been accepted to purchase property, there are typically many addendums that can become part and parcel of the final agreement. These include things such as: financing contingencies, inspections, and additional conditions for the sale based on inspections or otherwise. If the buyer of the property is buying the home with other individuals (for example, as joint tenants or tenants in common), a common addendum will be a tenancy agreement that outlines what will trigger a sale when one of the co-owners does not agree with the terms of the sale requested by the other co-owner.
Contract Addendum Review Process
For contract addendums, a review process is essential for ensuring it meets all legal requirements. The review and approval process for an addendum should mirror the process for the original contract. The final form should be presented to the parties for their signatures.
A review committee should consist of people involved in the administration of the contract and advisors who are responsible for ensuring legal compliance. Such advisors might include risk management staff who will determine and quantify the risk associated with execution of the addendum as well as in-house or outside legal staff who will determine whether or not the proposed addendum will meet all legal criteria . Staff from related divisions or departments may also contribute. In any case, the committee members should have the appropriate level of technical or legal expertise.
The review and approval process should have an established timeline and specific milestones, such as the proposal submission date and the proposal closing date.
The final addendum should have no blanks, with all parties in agreement on when and how the addendum will take effect—typically, the effective date is designated as immediately upon signing or upon a specific date. An addendum that is incomplete runs the risk of being open to legal challenge. As with the original contract, all standard provisions for the grant and acceptance of authority should be completed.