When it comes to finalizing a contract, parties meticulously scrutinize each and every provision that will govern their rights and obligations. They engage lawyers, engage in word debates, and eventually reach compromises before signing the contract. Surprisingly, not as much attention is paid to the addendums that follow, even though a single word in an addendum could completely alter the contract’s meaning and the parties’ initial expectations.
This article aims to demonstrate the importance of drafting addendums with care and how the language used in both the contract and the addendum should be legally interpreted. Let’s delve into key aspects related to addendums and their significance in contract law.
What Exactly is an Addendum?
To start, let’s clarify what constitutes an addendum to a contract and why parties decide to enter into one. Essentially, an addendum is a new agreement between the parties, requiring a meeting of the minds (in the form of offer and acceptance) and signatures from authorized representatives. It’s important to note that the representative who signs the addendum may differ from the one who signed the initial contract, such as a new manager or someone with explicit power of attorney.
The Principle of Freedom of Contract
Under contract law, the principle of freedom of contract empowers parties to enter into agreements on a wide range of matters and on terms that suit their specific needs. This includes the ability for businesses to choose who they offer their goods or services to and who they wish to be supplied by. The freedom of contract allows parties to freely negotiate the terms of individual transactions. However, certain mandatory laws restrict this principle, such as specific contract form requirements for property rights on immovable property, guarantee contracts, sales of heritage properties, sales with buy-back clauses, and sales with advance payment of the price. There are also exceptions related to economic sectors that the state may exclude from open competition in the public interest, like concession contracts.
Pacta Sunt Servanda
Once a contract is concluded, the principle of freedom of contract transforms into the principle of pacta sunt servanda, which mandates compliance with the agreed terms. This principle allows for modification or termination of the contract by mutual agreement, including through the use of an addendum. All the requirements for contract formation, including form prerequisites, legal capacity of the parties, and compliance with mandatory provisions of the law, apply fully to addendums.
In Bulgarian law, any amendments to a contract must be made in the same form as the main contract to be valid. To ensure this, contracts often include explicit provisions such as “Any modification of this Contract may be made only by a writing signed by both Parties” or “Alterations to the above-indicated Time-schedule must be confirmed in writing by the other Party.” It’s important to note that a party may waive such a clause by its conduct if the other party reasonably relies on that conduct. For example, if an investor sends an email requesting a change to the contract, and the receiver of the email does not respond but instead orders the modified goods, it can be inferred that the amendment was implicitly agreed upon by both parties.
The Main Functions of an Addendum
According to Black’s Law Dictionary, an addendum is “A document attached to clarify or modify a part of a contract.” In essence, an addendum serves two primary functions: clarification and modification of the original intentions of the parties.
Clarification of the Contract
An addendum is often used by parties to avoid additional explanations in the main contract. For example, when parties are entering into a contract for services, they may define the scope of those services in an addendum. This approach is particularly useful in licensing agreements, franchise agreements, and online gambling agreements, where setting out the specific services, technical support, price calculations, and timeframe in an addendum proves beneficial.
Amendment of the Contract
In some cases, parties may wish to amend their initial arrangements by entering into an addendum, especially in long-term contracts. This is preferable to drafting an entirely new agreement because the parties are already familiar with the performance of the main contract, contact persons, delivery and acceptance terms, and previous practices. Additionally, when interpreting the contract, previous practices between the parties are considered.
Extending the Duration of the Contract
Extending the term of the main agreement by addendum is a common practice. Parties can simply amend a single article of the main contract and agree that all other provisions shall remain in force. To avoid ambiguity, it’s best for parties to clearly indicate the original wording of the provision and the effective amendment.
Amending the Scope of Services and Performance
The addendum can also modify the scope of services and the timeframe for their performance. This means that additional goods or services may be included through an addendum. Additionally, the addendum may change the delivery method or payment terms initially agreed upon in the main contract. Clear wording is crucial in such clauses, as seemingly minor changes in the addendum can have significant consequences when applied to the main contract. For example, parties could enter into a contract for the sale of goods with payment via a letter of credit and delivery by CIF (Incoterms 2010). If the buyer later wants to add more goods without drafting an entirely new contract, they might enter into an addendum specifying that the seller shall deliver the extra goods under EXW (Incoterms 2010). While the buyer may interpret the new clause to apply only to the additional goods, the seller might understand it as applying to all goods and deliver everything EXW. This discrepancy can lead to a claim for a fundamental breach of contract and damages.
Parties could also agree in the addendum to change the currency of payment, such as from EUR to USD. The exchange rates and payment method for the main contract and addendum need to be explicitly addressed to avoid misunderstandings.
Inclusion of an Arbitration Clause
An addendum can even incorporate an arbitration clause. It’s crucial to note that the formation of the addendum is essential because an arbitration clause in the main contract might not give the arbitral tribunal the authority to rule on matters covered by the addendum. Conversely, an arbitration clause that does not explicitly state its applicability to all disputes arising from the main contract will not grant the arbitral tribunal the power to render an award based on facts from the main agreement.
To illustrate, consider the appeal case 4A_452/2007 from the First Civil Law Division in Zurich regarding an arbitral award. The tribunal denied jurisdiction in part, and the appeal primarily focused on this issue. The parties had entered into an exclusive agreement for the delivery of Ferro Titanium (ELV 2000) and an additional exclusive agreement (ELV 2004) which became effective on January 1, 2004. Both contracts contained a clause stating that disputes should initially be settled through consultations, and if that failed, the forum would be Zurich. Subsequently, the parties concluded five contracts for successive deliveries that included a dispute resolution clause, explicitly subjecting all disputes arising from the performance of the contracts to the jurisdiction of the International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation (ICAC). On July 18, 2006, the parties agreed on Addendum No. 2 to the exclusive agreements, which stipulated that disputes arising from or in connection with the contract would be decided by an Arbitral Tribunal pursuant to the International Rules of Arbitration of the Swiss Chamber of Commerce. The arbitration clause in Addendum No. 2 did not mention the contracts for successive deliveries, leading to a dispute regarding the scope of the clause. Ultimately, the tribunal concluded that the arbitration clause in Addendum No. 2 specifically replaced the jurisdiction clause in the exclusive agreements ELV 2000 and ELV 2004, and therefore, did not extend to the contracts for successive deliveries.
This case highlights the importance of clear wording in contracts and addendums to avoid potential disputes and differing interpretations.
Grounds for Confusion
As demonstrated by the Zurich case, disputes concerning the interpretation and scope of an addendum frequently arise. When the language used in the contract and/or addendum is ambiguous, both parties tend to interpret the facts differently to support their respective positions. For example, in the aforementioned case involving the sale of goods, the seller might argue that the EXW delivery clause applies to the entire contract, asserting that they performed their obligations correctly and the buyer is not entitled to any damages. Conversely, the buyer could claim that the payment obligation was agreed upon in USD rather than EUR, and they made full payment accordingly, refuting any additional payment claims from the seller.
Interpreting the Addendum
In cases where disputes arise, the courts seek to interpret the will of the parties. Both parties strive to substantiate their positions by providing evidence that their interpretation aligns with the clause that best supports their needs. How do the courts proceed in such situations? How do they interpret the facts and determine which position should be upheld? Generally, courts should give preference to the party that proposed the clause or the party that would be significantly disadvantaged without it. However, this is not always straightforward. Here are some principles that aid in interpreting and clarifying addendums.
According to Bulgarian Law on Obligations and Contracts, Art. 20, the actual common will of the parties shall be sought when interpreting contracts. Individual provisions should be understood in their interrelation and in the context of the contract as a whole, taking into account the contract’s objective, usage, and good faith.
When the parties’ relationship is international (e.g., involving a German company and a Bulgarian company), the interpretation of their will should align with their explicit choice of law stated in the contract. In the absence of an explicit choice, the interpretation should be in accordance with the private international law provisions, leading to the application of some national law. The UNIDROIT Principles for International Commercial Contracts, 2010 can serve as a means of interpreting and supplementing international uniform law instruments. When questions arise concerning the precise meaning of individual provisions or in the presence of gaps, these principles can provide guidance for both international and domestic law. This approach is explicitly sanctioned in Art. 7 of the 1980 UN Convention on Contracts for the International Sale of Goods.
Importance of Established Practices
According to Art. 1.9 of the UNIDROIT principles, parties are bound by any usage they have agreed upon and by practices they have established between themselves. This means that if the seller and buyer consistently include a CIF clause in their contracts for the sale of goods, the EXW clause in the addendum would likely only apply to the goods specified in the addendum.
Reasonable Person Standard
Art. 4.1 of the UNIDROIT principles establishes that, in interpreting contract terms, preference should be given to the intention common to the parties. When that intention cannot be established, the contract should be understood based on the meaning that reasonable persons of the same kind as the parties would give it in the same circumstances. This principle uses a reasonable person test specific to the business category of the parties and the circumstances surrounding the contract. It takes into account factors such as preliminary negotiations, established practices, correspondence after the contract’s conclusion, the contract’s nature and purpose, the commonly understood meaning of terms in the trade, and applicable usages.
Other criteria may also be applied to clarify certain provisions of a contract in light of a party’s non-performance. These criteria include considering the contract or statement as a whole, ensuring that all terms are given effect, applying the contra proferentem rule (interpreting any ambiguities against the party who drafted the clause), and supplying any omitted terms.
In light of everything discussed, it becomes evident how crucial and challenging it is to draft contracts and addendums in a manner that prevents misinterpretation and provides some clarity regarding the parties’ rights and obligations. This is especially important when it comes to addendums, which can consist of just a few sentences yet significantly impact a perfectly constructed contract. While the principles mentioned above serve as guidance for interpreting the parties’ intentions, precise and concrete language is necessary to avoid potential disputes.