In consideration of consideration…

Some things to bear in mind before changing or varying written contract terms

So firstly, well done in making sure that your contract is recorded in writing and secondly, well done for recognising it may need to be updated to keep up with the realities of the commercial arrangement.

Before you get out your red pen, there are some important things to bear in mind to make sure that any amendment or variation to your contract is enforceable.

The starting point is that a variation to a contract is a new agreement, and even though its sole purpose may be to vary one or more terms of an existing contract, it must still satisfy the requirements of a contract including the usual suspects:

  • offer and acceptance;
  • certainty of terms; and
  • consideration.

Why consider consideration?

Given the parties have agreed to change or vary terms, you could be forgiven for overlooking the need for consideration but as is required for any contract, there must be consideration given for the new agreement.

What if only one party’s obligations are varied?

Consideration is the value that each party to the contract provides to the other party in exchange for the other party’s promises under the contract.  Where only one party’s obligations are varied and the other party’s obligations remain as per the original contract, it is especially important to stop and consider what the consideration for that variation is and ask “What is it that each of the parties get from varying the bargain already struck?

The recent case of Hill v Forteng Pty Ltd [2018] FCA 1501, as affirmed on appeal by the full Court in Hill v Forteng [2019] FCAFC105, demonstrates the Court’s willingness to look at consideration in terms of the benefits received by a contracting party even where they are outside the terms of the contractual relationship.  This Federal Court case involved a group of directors/shareholders of a small professional services company.  They all agreed to change their remuneration from the set salary in their employment contracts to one varied in accordance with the company’s financial performance (salary and dividends) and the directors operated under that new regime for over three years.  Following the departure of one of the directors, that director made a claim for unpaid salary on the basis that there was no consideration provided by the company for the variation to his salary in his employment contract.

In this case, the Court determined that the departing director received consideration by way of the receipt of “practical benefits” (and the avoidance of detriments) in that the diverted salary was invested in the company’s business and improved his investment in the business.  The Court (and the Full Court) accepted that the departing director had benefitted from the new arrangement (with respect to his remuneration) in a manner that amounted to consideration.

If you have any queries or would like further information regarding this article, please contact:

Catherine Scott
Principal
M: 0438 283 129
E: cscott@pageseager.com.au

Published: 25 July 2019

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