An addendum is something added to a previously existing written document – usually a contract. Typically, it is either a more detailed explanation of something already noted in a contract or a proposed change to the contract. The word addendum, or the plural addenda, is derived from the Latin word addere, which means “must be added.”
Ideally, an addendum is in the form of a separate signed agreement that is attached to the original contract. Since the purpose of an addendum is commonly clarification, preparing a separately signed document helps to avoid any confusion. Without signatures included, it might appear to be just part of a rough draft of the original contract that contains provisions that ultimately were not included in the final agreement.
There’s also the potential problem of fraud. One party could simply type up a document amending the terms of the contract – for instance, increasing the payment to be received for goods or services – and attach it. Getting both parties to sign each addendum avoids that potential problem.
Why Use an Addendum?
An addendum is a convenient way to make amendments to an existing agreement. Business or legal contracts are often lengthy, complicated documents. It would be time-consuming and tedious to rewrite an entire contract simply to add a short note of clarification or one or two additional performance clauses or terms of sale.
It is much simpler and quicker – and less wasteful of paper – to just write up an addendum that is then signed and attached to the original contract.
Examples of an Addendum
Real estate sales contracts often come with multiple addenda that are added as the buyer and seller agree on additional terms of the sale. For example, the seller of a house may agree – after the original sales contract has been written – to include certain pieces of furniture for an additional specified sum. Mortgage terms or the closing date for the sale are often amended in real estate transactions, with the change noted in an addendum.
Additional information may be attached to a will if the person creating the will (the testator) decides to make changes in regard to either beneficiaries or the disbursement of items in their estate. Such changes can easily be noted with an addendum while leaving the majority of the will intact. A common reason to add additional information to a will is for the purpose of designating a beneficiary to receive an inheritance of the testator’s property who was left out of the original will.
As a simple example, a testator may remember, after already completing their will, a coin collection that they own that they wish to leave to one of their grandchildren. The testator can easily make provisions for the asset with an addendum to the will.
Sales contracts may be amended with an addendum in any number of ways – such as changing the terms of payment, designating the manner and location for delivery of goods, or delineating additional services to be provided by the seller.
Addendums, Annexes, and Riders
An addendum is distinguished from other potential additional contract documents as follows:
An appendix contains supporting documentation, such as a bank statement, but does not materially alter the terms of the contract.
An annex provides additional information, often in the form of a table (such as a tax table) or a standardized form that supplements the contract.
A rider is used to add specific provisions or conditions to a standardized contract. Riders are most commonly associated with insurance policies. They may either expand basic coverage (e.g., a homeowner wants a rider attached to their homeowner’s insurance to specifically cover a valuable jewelry collection), or limit coverage (e.g., by excluding coverage for specific medical conditions).
Schedules are a type of addendum that deals specifically with numerical information – such as a pricing schedule.
Exhibits may be either an addendum, an appendix, or annex. Exhibits provide examples of standard forms or other information that helps one or more parties to a contract clearly understand their obligations under the terms of the contract.
For more learning, CFI offers a wide range of courses on accounting, financial analysis, and financial modeling. To keep learning and advancing your career, the following CFI resources will be helpful: