What Is a Memorandum or Amendment Memorandum? How It Differs From a Contract and What to Check in Amendment Clauses

Hello, I'm Noriaki Asato, Representative Attorney at LegalAgent.

Memorandums are documents exchanged routinely in corporate legal practice. Even if you think of them as "not as weighty as a contract," if they change the fees or the scope of liability, you cannot afford to overlook that change. Because a memorandum is used to change the terms of an existing contract or to add conditions, depending on its content it can have the same legal effect as the main contract. Even with a short memorandum, start your review by reading it side by side with the original contract.

Where a company wants a lawyer to draft or review a memorandum amending an existing contract, it can use our legal outsourcing for ongoing contract review even if it is short of legal staff.

The Position of the Document and the Relevance of Its Title

A memorandum is a document that gives form to an agreement between the parties. Legally, a document titled "memorandum" is not less effective for that reason. Regardless of the title, if both parties have agreed with the intention of creating rights and obligations, it can have effect as a contract. For contracts that legally require a particular form, such as being in writing, check those requirements separately.

In practice, memorandums are prepared in situations that change an existing contract, such as extending the contract term, adding to the scope of services or revising fees and payment terms. Rather than dismissing them as formal correspondence, treat them as agreements that actually change the terms of the contract.

Document titles vary, such as contract, agreement or confirmation, but judging the legal effect by the formal title alone leads to misreading the substance. Check the content: who agrees to what with whom, and what rights and obligations it creates. Even if the title is "memorandum," if it changes the scope of liability or the fees, it carries the same weight as the main contract; and even a "letter of confirmation," if it includes an acknowledgment of debt or a grace period for the due date, affects the course of debt collection. Precisely because the document is short, take care not to leave the target contract or the scope of the change ambiguous.

Mapping Against the Original Contract and Checking the Amendment Clauses

When considering a memorandum, start by pinning down its relationship with the underlying contract. The memorandum alone often does not reveal the context, and you cannot make an accurate judgment without checking against the original contract which provisions it rewrites and how.

If the existing contract sets the cap on damages at the contract amount and a memorandum for additional work is concluded, the question arises whether the additional amount is included within the cap. Also, if work involving the handling of personal information is added to a transaction that originally did not contemplate personal information, check whether the existing provisions provide sufficient protection, and if they fall short, add or revise the necessary protective provisions.

Specifically, check the following items in order.

• Accuracy of the identification of the original contract concerned
• Consistency of the parties with the original contract
• Clarity of the provisions being amended and the amended wording
• The effective date and whether the change applies to past periods
• Preservation of the other provisions of the original contract
• The order of precedence between the memorandum and the original contract
• The authority of the signatories and the persons affixing seals
• Whether related internal approvals have been obtained

In identifying the original contract, make clear the contract date, the contract name and the names of the parties, and compare the article numbers being amended and the wording before and after the amendment. Also check without omission that provisions not being amended remain valid as they are, the order of precedence if the memorandum and the original contract conflict, and the impact on related schedules and SOWs. If services are being added, check the impact not only on fees but also on acceptance inspection and confidentiality. If the term is being extended, also review automatic renewal and the deadline for giving notice of non-renewal.

The Effective Date and a Sample Amendment

In a memorandum changing contract terms, when the change takes effect determines the outcome. This is because the timing of delivery, invoicing and the allocation of responsibility changes depending on the date from which the new rules apply. Particularly careful judgment is required where work has already begun or where the arrangement applies the change retroactively.

For a fee revision, specify from which month's invoice the new fee applies, and for additional work, make clear whether the work was started before the agreement or will be started after it is concluded. You must also look at the impact on past periods and the knock-on effects on existing delivery dates and payment due dates, the contract term and the termination provisions.

Even if the parties agree, not every change is freely permitted. Changes that harm the rights of third parties and agreements that violate mandatory laws are restricted. In transactions to which the Act on Ensuring Proper Transactions with Small and Medium-sized Entrustees (the former Subcontract Act) applies, reducing the price after placing an order when the contractor is not at fault is prohibited. The Japan Fair Trade Commission's Q&A (Japanese) also points out the problems with applying an agreement to reduce unit prices retroactively to orders already placed. When outsourcing to freelancers, also check, based on factors such as whether the parties use employees and the term of the engagement, whether the prohibition on price reductions and similar acts under the Freelance Act (Japanese) applies.

Here is a short sample for replacing a provision. Insert wording that reflects the actual transaction in the square brackets.

[Full legal name of Party A] and [Full legal name of Party B] agree as follows with respect to the [Contract name] dated [Date of the original contract] between them (the "Original Contract").

Article 1 (Amendment) Article [Article number], Paragraph [Paragraph number] of the Original Contract is amended as follows: "[Full text of the amended provision]"

Article 2 (Application Date) The amendment in the preceding Article applies from [Application date].

Article 3 (Other Terms) Except for the matters amended by this Memorandum, the provisions of the Original Contract remain in effect.

Even when using this sample provision, confirm the date of execution and authority in line with the amendment procedure under the original contract. The settlement of past periods and the treatment of individual contracts ordered before the application date are not settled by these three articles alone, so state them expressly in the memorandum as needed. If you are re-amending a provision already revised by a previous memorandum, identify that memorandum as well and then determine the scope of the change.

Keeping Track of Accumulated Memorandums and Contract Management

In long-term continuing transactions, term extensions and changes in conditions can pile up, and multiple memorandums can accumulate. In that case, you must understand chronologically which memorandum is the latest and which constitutes the current agreement. In some cases, the content of an older memorandum has been re-amended by a later one, and the current terms cannot be determined without checking the original contract against Memorandum 1, Memorandum 2 and Memorandum 3 in order.

If memorandums are stored separately from the original contract, the latest terms become unclear, and the past history has to be reexamined every time the contract is renewed or revised. In transactions with many overlapping memorandums, having AI organize the original contract and the set of memorandums chronologically can be a helpful aid. However, the scope of the changes and the effective dates must always be checked against the originals, and their legal validity must also be confirmed individually.

After a memorandum is concluded, carry through to reflecting it in the contract register and in business operations. Prevent inconsistencies such as the end date in the register remaining unchanged even though the term was extended, the invoice amount not being updated even though the fee was changed, or the outsourcee register not reflecting a personal information protection clause that was added. If the register and the memorandums are not linked, not only will renewal deadlines and invoices be mistaken, but the company will also be unable to show the actual state of its contracts correctly in due diligence for M&A or fundraising.

When exchanging memorandums, it is useful to keep an internal change memo recording what changes, why and from when, as well as a record of the negotiation history with the counterparty. Store the signed original or PDF linked to the original contract and share it with the department in charge. In the memo, distinguish the date of preparation from the date the change applies, and also record any conditions conceded and matters to be reviewed at the next renewal, so that a successor can confirm the reasons for the decisions.

Frequently asked questions

Is a memorandum a document with weaker legal effect than an ordinary contract?

It is not a document with weaker legal effect. Regardless of its title, if both parties have agreed with the intention of creating rights and obligations, it can have effect as a contract. Because memoranda are used to change the content of an existing contract or to add terms, it is understood that, depending on what is changed, a memorandum will have legal effect equivalent to the main contract.

What should we check when preparing a memorandum that changes the terms of an existing contract?

You should accurately check its relationship with the original contract and the scope of the changes. This is because a memorandum alone does not reveal the context, and without comparing it with the original contract you cannot judge its effect on the liability cap or other clauses. It is likely necessary to check the identification of the original contract concerned, the clarity of the clauses and wording being changed, the effective date, a statement that the clauses of the original contract that are not changed remain in effect, and the order of priority if the two documents conflict.

If the parties agree, can they freely reduce the price after an order is placed or change past transactions?

Not every change is freely permitted. Changes that harm the rights of third parties and agreements that violate mandatory provisions are restricted. In transactions to which the Act on Ensuring Proper Transactions with Small and Medium-sized Entrustees (Torihiki Tekiseika Act) applies, reducing the price after an order is placed without any cause attributable to the entrustee is prohibited, and under the Freelance Act as well, the prohibition on price reductions and similar acts may apply depending on the term of the engagement and other factors.