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How to handle changes in contracts

On Behalf of | Apr 22, 2024 | Business Law

Part of running a successful business in Arkansas depends on having good business contracts. But what happens if there is a change with one of your contract partners?

This is likely to happen at some point. As circumstances change, so do businesses. A company you do business with may experience a minor change, such as a change in name or management or a major change such as bankruptcy.

There is generally no right way to handle a situation involving a change in contract. What you do typically depends on the type of contract you have.

Ideally, your contracts should have clauses included that state what will happen if there is a change with one of the businesses. This makes your next steps relatively easy; you follow the steps outlined in your contract.

Novations and assignments

If your contracts do not have that type of language, you have a couple of different options. A novation substitutes one party or term of the contract for another. This is sometimes the best option when the change is minor.

A novation agreement is usually drafted at the time of the change and signed by both parties. When the change involves substituting one party for another, the novation agreement typically states that the old party gives up all its rights and obligations under the old contract.

Another option is an assignment, which involves transferring property, duties or responsibilities to another party.

Many contracts forbid assignments unless explicitly agreed upon. If a company you do business with wants to sell the responsibilities of one party to the contract to someone else, you can agree to the assignment.

One main difference between a novation and an assignment is a novation releases the original party from their obligations under the contract, since there is a substitution, while an assignment does not. There are other differences that you should consider before deciding which one is right for you.

The same options are available if a business is bought or sold. You can decide to substitute a new contract in from the old contract with the business that was sold.

What happens if the other side declares bankruptcy?

You may worry if you learn that a company you do business with declares bankruptcy, but you have rights in this situation. You are usually considered a debtor in the bankruptcy proceeding.

It is important to note that you are still legally obligated to perform your duties under the contract even if the other party declares bankruptcy. Failing to perform could mean you default under your terms of the contract.

Learn what type of bankruptcy the other party is filing. A Chapter 11 bankruptcy involves reorganizing a business. The reorganization might involve a new contract to replace your old contract.

Before you decide what to do, learn as much as you can about the situation. Consider how much the change will affect your business operations.