Supply Chain Survival Series: Contract Modification (Article #7)

In previous articles in the Supply Chain Survival Series, we discussed how contracts are formed and what UCC default terms apply in a Battle of the Forms scenario. We now turn our attention to how parties can modify contracts after formation. Because modifications to contracts for the sale of goods may not require consideration,¹ it is essential to understand when and how contracts can be modified.

Generally, contracts can be modified in three ways: (1) by written agreement, (2) by verbal agreement, or (3) by the parties’ course of performance.

Written Modification

The traditional way of modifying a contract is through writing, whether it’s an addendum, supplement, or revised contract. Contract modifications add or replace binding terms within an existing contract. As such, the Statue of Frauds applies to contract modifications. Any modification to contracts for the sale of goods priced over $500 must be in writing.² Parties can also include explicit clauses in a contract that require any modification to occur in writing.

If a contract requires that any modification be in writing, the contract can only be modified by mutual written consent of each party. So, if one party is reluctant to agree to a contract modification, it can be challenging to negotiate a written contract modification.

For example, let’s say ABC Corp. enters into a long-term agreement with XYZ Corp. to sell 100 widgets per month priced at $100/widget. At the time of formation, this is far above the market price for widgets. ABC Corp. agrees to cover the cost of shipping every month to strengthen the deal. Gas prices soar two years after entering the contract, and the widget market explodes. ABC Corp. wants to know: can it modify the agreement to account for the gas prices and market shift?

Because the Statute of Frauds requires this modification to be in writing, the most certain method for obtaining this price increase would be for ABC Corp. to get XYZ Corp. to agree to a written price increase or shipping fee (which XYZ Corp. will be understandably reluctant to do). As we discuss further with respect to course of performance modifications below, however, if the agreement does not include a provision requiring amendments to be in writing, ABC Corp. may try to unilaterally implement a price increase to put the burden on XYZ Corp. to object.

Verbal Modification and Waiver

In certain situations, parties can also modify a written contract verbally. If two parties enter a written contract that is not governed by the Statute of Frauds (e.g., the price of the goods is less than $500) and does not contain a “no oral modification clause,” and later verbally consent to a change in terms, even informally, courts will generally uphold the verbal modification. If a “no oral modification clause” or the Statute of Frauds bars verbal modification, courts will typically not allow verbal modifications, though they may still consider the attempted verbal modification to constitute a waiver.³

Many courts have held that UCC § 2-209(4) operates narrowly, however, and provides that a modification may operate as a waiver only if there is reliance on such waiver.⁴ In addition, the underlying contract must not contain a clause requiring all waivers to be in writing and signed by the waiving party. In other words, many courts may enforce an attempted verbal modification as a “waiver” despite the Statute of Frauds or a “no oral modification” clause if: (1) both parties made a verbal agreement to modify the contract and (2) the party attempting to enforce the modification relied on this verbal agreement to its detriment.

A significant disadvantage of pursuing a waiver argument is that under UCC § 2-209(5) an opposing party can unilaterally retract the waiver by providing reasonable notice to the party trying to enforce the waiver. Therefore, even if you can prevail on a waiver argument, the opposing party may retract the waiver with reasonable notice, which would prevent enforcement of the verbal agreement. In contrast, valid written or verbal modifications cannot be unilaterally retracted.

Course of Performance Modification

Finally, parties can modify a contract through performance. Under the UCC, the way parties act throughout a contract informs courts whether the parties have modified the agreement. Common examples include consistently higher prices charged on invoices or different manners of delivery or time for payment over a contract term. Even if an agreement contains a clause requiring that modifications be in writing, courts may hold that the parties’ performance evidenced an intent to waive compliance with that clause, and therefore modified the contract. When determining whether a party waived a contract’s no oral modification clause, a court may consider whether (1) the party waived the condition by agreeing in advance to actions that would not comply with the contractual requirement and (2) the party failed to object or assert remedies after the other party’s breach.⁵

Course of performance is crucial to helping courts determine the terms of any contract and whether those terms have been modified. For example, if ABC Corp. consistently sold XYZ Corp. 50 widgets per month even though the contract required 100 widgets, and XYZ Corp. accepted the deliveries without objection, XYZ Corp. may not be able to claim ABC Corp. breached the contract by only selling 50 widgets. In this example, a court might find that both parties agreed to modify the contract. Similarly, if ABC Corp. raised its prices and XYZ Corp. paid the higher prices without objection for an extended period, XYZ Corp. may not be able to return to the lower written prices later.

Ultimately, the UCC puts the burden on parties to object when the other party fails to live up to the terms of their agreement. As a result, companies should always send a written objection if they think the other party is not complying with the terms of a contract. Even if you do not intend to enforce all terms in certain situations, it is essential to preserve your contractual rights by sending a notice letter. If you fail to object, the other party may argue that the contract has been permanently modified based on the course of performance.

Now that we’ve discussed how the contract can be modified, we will discuss Demand for Adequate Assurances and Anticipatory Repudiation in our next article.

If you have any specific questions on this article, please contact your Quarles & Brady attorney:

• Brandon Krajewski: (414) 277-5783 /
  brandon.krajewski@quarles.com
• Patrick Taylor: (414) 277-5523 / patrick.taylor@quarles.com
• Hannah Schwartz: (414) 277-5551 / hannah.schwartz@quarles.com

Quarles & Brady attorneys Michael Chargo, Lauren Zenk and Elise Ashley also contributed to this article.


END NOTES

¹ UCC § 2-209.

² UCC § 2-202(1)

³ UCC 2-209(4) (“Although an attempt at modification or rescission does not satisfy the requirements of subsection (2) or (3) it can operate as a waiver.”).

⁴ See Wisconsin Knife Works v. Nat’l Metal Crafters, 781 F.2d 1280, 1287 (7th Cir. 1986) (discussing the narrow purpose of UCC § 2-209 (4)); see also Trad Indus. v. Brogan, 805 P.2d 54, 59 (Mont. 1991).See, however, BMC Indus., Inc. v. Barth Indus., Inc., 160 F.3d 1322, 1332 (11th Cir. 1998)).

⁵ Hovnanian Land Inv. Grp., LLC v. Annapolis Towne Ctr. at Parole, LLC, 421 Md. 94, 123, 25 A.3d 967, 984 (2011).

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