The recent Court of Appeal decision Teat v Willcocks [2013] NZCA 162 provides guidance as to when variation agreements will be enforceable and whether "consideration" remains necessary to support such a variation.
Mr Teat invited his long-standing friend, Mr Willcocks, to become involved in Mr Teat's air conditioning, under-floor heating and refrigeration business. Mr Willcocks agreed and started working for the company. Initially Mr Willcocks was paid a modest salary, and later, once the company became more successful, Mr Teat and Mr Willcocks split the profits of the company between them equally.
Mr Willcocks claimed that before he started working for the company, Mr Teat orally agreed that they would become equal partners in the business, and that Mr Willcocks would be given the opportunity to acquire 50% of the company's shares at book value. The alleged agreement was never formalised or implemented. Mr Teat later denied the existence of this agreement.
The parties did agree that a few years later they discussed the possible transfer of shares to Mr Willcocks. During this discussion, Mr Teat told Mr Willcocks that his accountant had advised him to delay the decision on whether to transfer the shares to Mr Willcocks until he was absolutely sure. Mr Willcocks took this to mean that there would be a trial period to see how they worked together as business partners, a view which the Court accepted.
The Court of Appeal accepted the High Court's finding that there was an oral agreement allowing Mr Willcocks to purchase 50% of the company's shares at book value. It also agreed with the High Court that the subsequent discussion constituted a variation to the original agreement, despite the fact that there was no consideration for this variation. The Court of Appeal adopted its own principle from Antons Trawling Co Ltd v Smith ([2003] 2 NZLR 23) that a variation does not require any consideration, provided the variation is agreed voluntarily and without illegitimate pressure. "[I]n the present case - a variation was proposed and willingly accepted, and the parties proceeded on that basis. In the context of an existing agreement supported by consideration, that seems to us to be sufficient to constitute a binding variation."
The Court of Appeal also upheld the High Court's determination that the variation was not void for uncertainty despite the trial period having no specific agreed timeframe, and concurred that it was appropriate to simply imply a reasonable timeframe. In any event the Court of Appeal agreed that the trial period condition must have been fulfilled or waived by the parties, because they kept working together for several years following the variation.
The key messages from this case are:
  •  Be careful when agreeing variations to contracts. Even oral variations that are not supported by consideration are likely to be deemed legally binding. However, when documenting a variation, until all doubt about the necessity of consideration is removed, it is prudent to ensure that there is consideration or that the variation is documented by a deed, so as to avoid any argument.
  •  If your friend offers to let you purchase 50% of the shares in their company if you work with him, get it in writing and make sure the shares are registered in your name!