Writing a contract addendum

When negotiating a contract or any agreement, no matter how meticulous the parties are, there are times when some important provisions are left out.

Contract addendums are the solution. As with any other legal document, it must comply with certain conditions for it to be legally binding and enforceable.

This article is for parties to a contract who want to introduce an addendum to their existing commercial or corporate contract. Lawyers may also use this article to educate clients on how to create a contract addendum according to standards and rules of Canadian laws.

What is a contract addendum?

Contract addendums are additions to an existing contract. They are legally binding documents added to contracts that currently exist between two or more parties.

Since it’s a separate document, it’s normally included as an attachment or an exhibit to the current contract.

The law says that it must abide by certain formalities for its proper execution and for it to become effective between the original parties.

Purpose of contract addendum

Contract addendums serve several purposes, such as:

1. Legally insert changes

By using a contract addendum, changes to the current contract can be made without violating the law.

It can make these changes effective, like extending the contract’s period, or adding the responsibilities of a party, within the law’s boundaries.

2. Original contract is not set aside

With a contract addendum, the original contract need not be entirely abandoned. The terms and conditions of the original or existing contract remain unchanged.

There is no need to write an entirely new contract, which could take a lot of time to finish.

3. Original contract is still in force

Another advantage of contract addendums is that the original or existing contract continues to be in force while it is being finalized.

It means that the rights and obligations of both parties, as established by the current contract, remain enforceable.

This is important in contracts where the continuity of the project is at stake, considering the large amounts of resources already used. In short, the contractual plan goes on, and the addendum just improves whatever is in the existing contract.

Example of a contract addendum

Contract addendums are often used in different industries or different practice areas of law.

Some examples are:

• labour and employment: when adding more conditions on an employment contract, such as when promotion (or demotion) arises
• insurance: where additional attachments are also called riders; it applies when the policy needs more clarification as to its coverage or premiums
• property, construction, and real estate: when original provisions must be added, such as the closing date, payment schedules, etc.
• wills and succession: when adding more testamentary provisions on a testator’s existing will, such as adding (or removing) a donee, heir, inheritance, or gift

A contract addendum is used when there’s a change in the situation of one of the parties under contract. It’s also used when there are updates in the law, and the current contract must reflect this change.

Other times, a contract addendum is used when problems arise during the implementation of the original contract, and both parties agree to the changes or modifications.

Watch this video for an example of a contract addendum in a real estate transaction:

To find out more resources and videos on Canadian laws and the top lawyers or law firms in Canada, check out our page on Multimedia under the Resources tab.

Contract addendums vs. contract amendments

A contract addendum must be differentiated from a contract amendment, since the two serve separate purposes.

Common to both addendum and amendment is that it generally “changes” the terms or conditions of the previously agreed contract.

Parties to a contract must not be confused with such technicalities as to its definition. What’s important – whether it’s an amendment or an addendum – is that it follows the legal procedure to make it legally binding and enforceable.

This video below further explains the difference between a contract addendum and a contract amendment:

What are the key components of contract addendums?

There are certain key components that must be considered when parties draft a contract addendum:

1. Same basic elements/conditions of a contract

Because a contract addendum is also considered a contract, it should also comply with the basic elements or conditions of a contract under Canadian law.

The exception to this is when the original or current contract provides otherwise, or when it states a different set of rules for the validity of a contract addendum. So long as these contractual stipulations are not contradictory to law.

Here are the basic elements of a contract under Canada’s contract law which contract addendums must also follow:

Consent

Parties to a contract addendum must consent to it before it becomes legally binding between them. This is based on the principle that a contract is a meeting of the minds of both parties; as such, both parties must consent and agree to it.

Usually, the signatures of the parties on the contract addendum signify consent. It may also be deduced from the acts of the parties, e.g. when one party has met their obligations according to the contract or to its addendum.

Consent, to be a valid condition of a contract, must be freely given and must be based on an informed decision. Otherwise, it can be declared null and void by the court. Some examples are:

• when the consenting party was forced by another
• when there’s undue pressure against the consenting party
• when fraud is employed by the other party
• when consent was obtained through error or false belief

Capacity

Parties to a contract (including its addendum) must have legal or contractual capacity. It means that they must be allowed by law to enter into contracts.

In Canada, legal capacity refers to a person’s age of majority (18 years old and above) and sound mind.

Being of a sound mind means that a person understands the transaction they are entering, along with its effects or consequences.

This is also related to consent – a person with mental capacity can give a valid and binding consent to a contract.

When inserting an addendum, the capacity of the parties to the previous contract must subsist. It’s presumed that the previous contract is valid because the parties are legally capacitated, so it must continue even up to the forming of a contract addendum.

Object

A contract is not valid if it does not have an object – the subject matter of the contract. The law also requires that the object of a contract must be legal.

Contract addendums cannot be valid if they don’t have a valid object. If it doesn’t have anything to add to the contract, the addendum is useless.

Illegal additional provisions to a contract through addendums are also void. In this case, the contract addendum does not have any effect, although the original contract (if its object is legal) is unaffected.

Cause/consideration

Cause or consideration is the purpose of entering into a contract. It must answer the question “What’s in it for the other party or for the existing contract?” It can be a monetary value in exchange for something, or a promise for it.

Formalities

Lastly, formalities of contracts must also be followed by contract addendums. In general, different kinds of contracts may require different kinds of formalities.

One of the most common formalities is that it must be in written form, which applies to addendums.

While oral or verbal contract addendums can be valid, having it written and signed by both parties will have a more binding effect.

When things go awry, and parties go to court, a written contract addendum is one of the strongest pieces of evidence of the parties’ intent. This will help the court decide on their dispute, keeping in mind what the parties really intended in the first place.

2. Elements of the current contract

In writing contract addendums, parties must also consider how the original contract was written. It must be at least related to the original or existing contract’s language and form.

For instance, a specific word in the previous contract, which has a particular meaning, must have the same meaning when used in the contract addendum.

The addendum must be consistent with how the original or existing contract is written.

3. The parties and the additional provisions

To be true to its purpose, an addendum must clearly specify the changes that it will make to the original or existing contract. It must also identify the parties to the contract, and the rights and obligations it wants to change after the adoption of the addendum.

If there’s a third party to be added to the contract, the third party must also be clearly identified.

What are the stages in making a contract addendum?

After considering its key factors, a proposing party must also be aware of the steps in creating a contract addendum:

1. create an initial contract addendum or a draft document
2. negotiate the draft contract addendum with the other party
3. revise the draft contract addendum, as needed
4. renegotiate, or present the final draft
5. sign the final contract addendum

While these rules are not set in stone, consulting with a lawyer would also be helpful.

Creating a contract

To guide a party in a contract who wants to propose a contract addendum, it may also follow the steps in creating a contract:

1. Offer: one party makes an offer to the other (in this case, one party offers to add a provision to the existing contract through a contract addendum)
2. Negotiation: parties may negotiate the contract (here, the parties to the original contract negotiate whether the addendum is necessary or fair)
3. Acceptance: legally creates the contract when the offer has been accepted (in case of a contract addendum, if it’s accepted by the other party, it becomes binding)

Is a contract addendum enforceable?

One of the questions surrounding contract addendums is whether it’s enforceable between the contracting parties.

In general, a contract addendum is enforceable once it has followed the formalities required by Canadian laws.

Most importantly, if it has been consented to by both parties, it must be complied with in good faith and becomes binding to all parties.

Head over to our Corporate Commercial Practice Area page to find similar articles related to commercial contracts or commercial laws in Canada.