Posted on:Features, Glenn West Musings, Insights, Legal Developments, U.K., What's New on the Watch?
As every first year law student knows, and as every deal professional should know, the common law imposes very few formalities regarding the formation of a binding contract. Moreover, absent some specific statutory requirement (such as the Statute of Frauds’ requirement regarding a contract involving the sale of real estate or one of the other identified varieties of contracts requiring a writing), those few formalities can occur without the necessity of a signed written agreement. Indeed, recent postings to Weil’s Global Private Equity Insights blog have warned of the circumstances in which enforceable oral contracts may be deemed to have been made despite the parties expectation that a more formal written agreement was to be prepared at a later time. And, while it simply may be evidence of the Baader-Meinhof phenomenon at work, there seem to more and more cases involving alleged oral agreements than ever before. Just last week a federal judge in New Jersey ordered an oral settlement agreement to be enforced based on the “essential terms” found to have been orally agreed, notwithstanding the failure of the parties to finalize the written settlement documents (the unresolved terms in the written settlement documents being deemed to be mere issues of “implementation” or “mechanics”).
The ”Freedom of Contract” versus the “Sanctity of Contract”
But what about the situation where the parties have gone to the trouble of entering into a fully negotiated written agreement that unequivocally states that its provisions cannot be modified or amended without a further written agreement signed by the parties? Surely that written agreement means what it says and neither party can later claim that an oral modification purportedly made to that written agreement is valid, right? Umm, actually no. In fact, until a recent case was decided by the U.K. Supreme Court, Rock Advertising Ltd. v. MWB Business Exchange Centres Ltd.,  UKSC 24 (16 May, 2018), courts across the common-law world have almost universally held that, in the absence of a statutory constraint, a provision purporting to declare invalid any oral modification to a written agreement does not necessarily render unenforceable any such oral modification. Indeed, even in a state as contractarian as Delaware, then Vice Chancellor Strine was forced to concede, in 2006, that Delaware jurisprudence does not strictly enforce no oral modification clauses, but instead requires a higher standard of proof (clear and convincing evidence) when a party claims an oral modification has been made to a written agreement requiring any such modification to be in writing.
The rationale for a rule that strictly enforces written agreements according to their terms, yet allows claims that those written provisions were orally modified despite an express provision requiring a writing to so modify the agreement (an intellectual challenge that then Vice Chancellor Strine described as creating “cognitive dissonance”), was famously summarized in 1919 by then Judge Cardozo as follows:
Those who make a contract may unmake it. The clause which forbids a change, may be changed like any other. . . . Whenever two men contract, no limitation self-imposed can destroy their power to contract again.
In other words, the common law’s policy in favor of the parties’ absolute “freedom” to contract whenever and howsoever they choose, trumps the common law’s policy in favor to the “sanctity” of a previously made contract that purports to restrict that freedom. Thus, if a contract may be made orally in the first instance, the fact that the parties chose to evidence their agreement in writing does not change the fact that they have the “autonomy” to re-contract orally (by modifying the original written agreement despite the no oral modifications clause), as long as there are sufficient details and the required offer, acceptance and consideration have occurred. Proving the details of any such modifications, when they are made orally, of course, is inherently difficult. But claims of such modifications can potentially occur and create difficulty for a counterparty who does not share the same memory of the purported verbal modification.
The U.K. Supreme Court Changes the Rules
Earlier this month, in Rock Advertising, the U.K. Supreme Court departed from the common-law world’s consensus and declared emphatically that in the U.K. “the law should and does give effect to a contractual provision requiring specified formalities to be observed for a variation.” According to Lord Sumption, writing for a majority of the Court, the idea that the concept of “party autonomy” operates to invalidate any provision of a written agreement that purports to restrict the ability of the parties to vary that agreement is flawed:
Party autonomy operates up to the point when the contract is made, but thereafter only to the extent that the contract allows. Nearly all contracts bind the parties to some course of action, and to that extent restrict their autonomy. The real offence against party autonomy is the suggestion that they cannot bind themselves as to the form of any variation, even if that is what they have agreed. There are many cases in which a particular form of agreement is prescribed by statute: contracts for the sale of land, certain regulated consumer contracts, and so on. There is no principled reason why the parties should not adopt the same principle by agreement.
Thus, in the U.K. at least, the “cognitive dissonance” occasioned by the common-law’s conflicting concepts that written agreements should be enforced as so written, but that a written agreement may be orally modified in the face of a provision invalidating such an oral modification, has been resolved in favor of enforcing the written agreement. As a result, parties in the U.K. can now agree to (and the courts will enforce) a “private” Statute of Frauds respecting oral modifications to their written contract.
So, does that mean that U.K. private equity folks can rest comfortably knowing that their written contracts are sacrosanct and no longer subject to modification orally? Umm, yes, but. To the extent a counterparty has reasonably relied upon conduct of the other party that indicates that the other party is treating a modification as having been made notwithstanding that the formality of a writing has not been observed, the doctrine of estoppel may prevent that party from enforcing the no oral modifications clause. But, according to Lord Sumption: “the scope of estoppel cannot be so broad as to destroy the whole advantage of certainty for which the parties stipulated when they agreed upon terms including the No Oral Modification clause.” Rather, “at the very least, (i) there would have to be some words or conduct unequivocally representing that the variation was valid notwithstanding the informality; and (ii) something more would be required for this purpose than the informal promise itself . . . .”
The U.S. Approach—Modifications versus Waivers
The desire for certainty embodied in a no oral modifications clause has not gone unnoticed in the United States either, but rather than changing the common law through some court decision, certain states have adopted statutes that modify the common law rule that would otherwise invalidate a no oral modifications clause. In contracts over a specified amount involving the sale of goods, for example, the Uniform Commercial Code specifies that “[a] signed agreement which excludes modification or rescission except by a signed writing cannot be otherwise modified or rescinded… .” And New York has adopted a more broadly applicable provision modifying the common law that governs all contracts: “[a] written agreement or other written instrument which contains a provision to the effect that it cannot be changed orally, cannot be changed by an executory agreement unless such executory agreement is in writing and signed by the party against whom enforcement of the change is sought or by his agent.”
But like the modification of the common law rule by the U.K. Supreme Court, there are always exceptions to these statutory proscriptions. For example, the Uniform Commercial Code specifies that an oral modification that would otherwise fail because it was required to be in writing may nonetheless “operate as a waiver.” Similarly, even though New York’s statutory “no oral modifications” provision overrides the common law’s rule, it too is subject to the argument that the purported oral modification was instead a waiver (indeed it only covers a “change” to a contract, not a waiver). And a waiver is not a modification and vice versa.
So, even where a written contract contains a “no oral waivers” clause, in addition to a standard “no oral modifications” clause, an oral waiver, or one deemed to have occurred through a course of conduct, can apparently still be deemed valid even in a contract governed by New York law or subject to the Uniform Commercial Code. Moreover, concepts of estoppel remain applicable in New York just as in the U.K. As explained by the New York Court of Appeals:
[E]stoppel ‘is imposed by law in the interest of fairness to prevent the enforcement of rights which would work fraud or injustice upon the person against whom enforcement is sought and who, in justifiable reliance upon the opposing party’s words or conduct, has been misled into acting upon the belief that such enforcement would not be sought . . .’
And although waiver does not appear to have the same justifiable reliance element as does estoppel, as explained by the same New York Court of Appeals, “waiver ‘should not be lightly presumed’ and must be based on ‘a clear manifestation of intent’ to relinquish a contractual protection.” Thus, while the U.S. statutory proscriptions regarding oral variations of written agreement may make verbal or conduct-based variations to such written agreements more difficult to claim, they certainly do not preclude such claims.
So Where Are We?
Based on the reasoning of the majority opinion in Rockport Advertising, it would seem that the distinction between an oral waiver and an oral modification would not have much traction in the U.K., particularly in face of a specific no oral waiver clause (in addition to a no oral modifications clause), unless the necessary elements of estoppel were present. It would appear, therefore, that after Rockport Advertising the sanctity of the written agreement (and the no oral modification or waiver clause) is stronger in the U.K. than in New York (despite the New York statute), and certainly stronger than in other U.S. states without the benefit of a New York-like statute. In most U.S. states, without the benefit a statute validating no oral modifications or waiver clauses, you are pretty much left with the old common law rule derived from the original concepts inherited from England, even though the U.K. Supreme Court has now changed that common law rule.
It is important to note, however, that U.S. courts have been somewhat more receptive to the enforceability of specific “no oral waiver” clauses than they have been to more general “no oral waiver” clauses or to “no oral modifications” clauses. Specific no oral waiver clauses are those that specify specific conduct of the parties that would not be deemed a waiver. The rationale for the distinction, according to a recent Texas decision, is that when specific conduct is identified as not constituting a waiver in a no oral waiver clause (such as accepting late rent payments without protest), “engaging in the very conduct disclaimed as a basis for waiver is insufficient as a matter of law to nullify the nonwaiver provision.”
Mitigating the Dissonance
So, the common law rule creating the cognitive dissonance has now changed in the U.K., but not yet in the U.S. So, if you want to enforce no oral waiver and no oral modification clauses in the U.S. be as specific as possible in the drafting of those clauses regarding conduct that will not constitute a modification or waiver. Moreover, always insist on written modifications and waivers to a written agreement to create a consistent position regarding the need for written waivers and modifications; that should help avoid arguments that a party has engaged in a course of conduct that lulled the counterparty into the belief that a writing was not required. And, of course, use care in entering into what may be deemed an oral agreement in any other circumstances. After all, this last point continues to apply even in the U.K. with respect to any oral agreement that is not a purported modification to an existing written agreement containing a no oral modifications clause. Don’t forget the recent English case involving a purported oral agreement alleged to have been entered into over a few pints in a London pub.  While no oral agreement was found to have been made in that situation, it wasn’t because it couldn’t have been so made with a little less jocularity and more certainty as to the purported deal. “Let’s be careful out there.”
Thanks to summer associate Jennifer Chacon for her research assistance on this blog.
- See Glenn West, Your Word May Really Be Your Bond (and a Specifically Enforceable One to Boot), Weil Insights, Weil’s Global Private Equity Watch, December 19, 2017; Glenn West, A Real Beating or a Written Agreement—An English Case Provides a Good Reminder that Oral Agreements can be Binding, Weil Insights, Weil’s Global Private Equity Watch, August 21, 2017. And those warnings also apply to less formal written communications such as emails. See Glenn West & Kymberly Thoumaked, So You Think You Know What a “Definitive” Agreement Is?, Weil Insights, Weil’s Global Private Equity Watch, November 27, 2017; Glenn West, Contracting Accidentally through Preliminary Agreements—A Writing “Subject To Contract” May or May Not be a Contract, Weil Insights, Weil’s Global Private Equity Watch, March 8, 2017.↵
- See Kate Kershner, What’s the Baader-Meinhof phenomenon? (20 March 2015), HowStuffWorks.com.↵
- Kennedy v. Samsung Elecs. AM., Inc., and Orenstein v. Samsung Elecs. AM., Inc., No. CV 2:14-4987, 2018 WL 2296702 (D.N.J. May 21, 2018).↵
- See Rockport Advertising,  UKSC 24, at para. 8; see also Glenn West, What is the Deal with No Oral Modification/Waiver Clauses?, Weil Insights, Weil’s Global Private Equity Watch, July 17, 2017.↵
- See Eureka VIII LLC v. Niagara Falls Holdings LLC, 899 A.2d 95, 109-110 (Del Ch. 2006).↵
- Id. at 109.↵
- Beatty v. Guggenheim Exploration Co., 225 N.Y. 380, 387-88 (1919).↵
- Rockport Advertising,  UKSC 24, at para. 10.↵
- Id. at para. 11.↵
- Id. at para. 16.↵
- UCC §2-209(2).↵
- N.Y. Gen. Oblig. Law § 15-301.↵
- UCC §2-209(4).↵
- Fundamental Portfolio Advisors, Inc. v. Tocqueville Asset Management, L.P., 7 N.Y.3d 96, 106 (2006).↵
- Id. at 104.↵
- See e.g., Shields Limited Partnership v. Bradberry, 526 S.W.3d 471 (Tex. 2017), discussed in Glenn West, What is the Deal with No Oral Modification/Waiver Clauses?, Weil Insights, Weil’s Global Private Equity Watch, July 17, 2017.↵
- Id. at 484-85.↵
- See Blue v. Ashley,  EWHC 1928 (Comm), discussed in Glenn West, A Real Beating or a Written Agreement—An English Case Provides a Good Reminder that Oral Agreements can be Binding, Weil Insights, Weil’s Global Private Equity Watch, August 21, 2017.↵
- Sergeant Phil Esterhaus, Hill Street Blues (TV Series 1981-1987), discussed in Glenn West, Contract Drafting 101—It Doesn’t Matter What You Actually Meant by What You Said; It Only Matters What is Determined to be Meant by What You Actually Said, Weil Insights, Weil’s Global Private Equity Watch, September 19, 2016.↵