In today’s fast-paced world, it is not uncommon for an issue to arise that requires the immediate modification of an existing contract between parties. Oral modifications, which can be done in person, by phone, or through digital conferencing platforms such as Skype or FaceTime, are a popular tool for adjusting the terms of an agreement. The vast number of ways in which oral modifications can be executed provides great flexibility in location and time that may be of extreme value to busy parties. However, as with any legal method, there are certain drawbacks and traps to be wary of when determining how to modify an existing contract and whether an oral modification is appropriate.
Are Oral Contract Modifications Always Acceptable?
In a word: no. While oral contract modifications have, by and large, been a proper and reliable tool for contractually-bound parties in a variety of scenarios, there are limits to when and how they can be used. Certain types of contracts – and contract modifications – are legally required to be executed in writing.
If a party to a contract is considering a modification, it is important to consider the following factors when deciding whether or not an oral modification is appropriate:
- Is the contract for the sale of goods in excess of $500?
- Is one party assuming responsibility for another’s debt?
- Is the contract for the transfer or sale of land?
- Will performance of the contract take more than one year?
If the answer to any of the above questions is “yes,” then an oral modification is prohibited. Note too that if the original terms of the contract do not trigger any of the above but the modification itself would, then the contract’s modifications (more prudently, the entire contract) should be in writing.
No Oral Modification (NOM) Clauses
NOMs, or No Oral Modification Clauses, have become increasingly popular, and even standard, in contract agreements. The typical NOM reads something along the lines of “No amendments or modifications to this agreement shall be binding unless put forth in writing” and is intended to prevent a party from unilaterally shifting the terms of the agreement or engaging in fraud or criminal activity. NOMs can be a useful tool when attempting to create an agreement which seeks to provide transparency and equity to the relevant parties. However, in many cases, the clauses themselves have proven to be frivolous when challenged.
NOMs are not always binding on the parties, even when they are present in the signed document. Courts, when faced with the issue of whether or not to accept an oral modification, have historically given little weight to the presence of a NOM. Rather, courts look to a number of factors, including:
- Reliance of the parties on the terms of the modification;
- The exchange of consideration;
- Evidence pointing to a mutual agreement; and
Courts have proven to be more interested in the actions and intent of the parties. Evidence of any of the above factors has tended to render NOMs as mere excess verbiage in existing agreements.
What About Waivers?
One drafting intricacy to be wary of is the co-existence of a NOM and a non-waiver clause. In situations where both clauses appear in an agreement, mediating parties tend to take less liberty and freedom in reviewing oral modifications. Non-waiver clauses typically protect contractually-bound parties from unilaterally changing the terms of an agreement and provide that any modifications must be done in writing. The double-whammy of a NOM and a non-waiver clause tends to show the original intent of both parties that all modifications be done in writing. Courts have shown a level of respect for this evident intent and are less flexible when determining the applicability of an oral modification.
Courts Showing a Shift to Uniformity
There are no universal rules regarding oral modifications. This becomes even more evident when NOMs and non-waiver clauses are added to the mix. Courts across the country have taken different stances and offered varying opinions about when oral modifications are acceptable. This lack of uniformity has led to an increase in litigation over oral contract modifications, much to the courts’ dismay. In an attempt to reduce potential litigation, courts have begun to restrict the instances in which they find oral modifications to be acceptable. More courts have started to adopt the position that the existence of both a NOM and a non-waiver clause requires all modifications to be in writing. Others have restricted or even refused to accept certain evidence of oral modifications. In their explanations, most draw from the very purpose and intent of the NOM: to prevent fraud, unilateral changes to a binding agreement, or criminality. Absent clear and convincing evidence of mutual agreement and reliance on an oral modification, courts have slowly, but surely, started to show signs of reigning in the acceptance of oral modifications.
What to Know When Modifying Your Contracts
So, given the recent shift in how courts view oral modifications, are they ever a permissible and acceptable way to alter the terms of an existing agreement? It depends on the situation. When modifying a contract, it is prudent to put the terms in writing if at all possible. Having the modification in writing removes ambiguity, offers transparency of terms, and is more readily accessible should a party breach.
However, there are still instances which may not allow for a written modification – at least not immediately. If a written modification is not an option, keep in mind the following factors when executing an oral modification:
- Ensure the modification does not significantly alter the terms of the original contract in a way that would trigger the Statute of Frauds, which would require the contract to be in writing;
- Be sure that the modification is mutually beneficial;
- Retain proof of consideration exchanged by all parties;
- Be consistent. The intent of the parties in an agreement will reflect whether the modification is mutually agreeable and beneficial; and
- Be wary of NOM and non-waiver clauses that may be present in your current agreement. If both clauses are evident an oral modification may fail if challenged.
Limiting Problems Oral Modifications May Cause
The ease in which oral contract modifications can be executed makes them both a great tool for change on the run as well as a potential for disaster. If one member of a business or group can make changes to an established contract orally, it opens the door for many problems. Failure to communicate the modification could lead to misunderstandings. Lack of proof of the modification could lead to perceived deceit or fraud. Even worse, a party unaware of a modification could breach the updated contract without knowledge.
How can you be sure that your contracts are safe from unwanted, unnecessary, or inadvertent oral modifications? Keep the following in mind when drafting contracts and speaking with your team about how they handle any contracts you may have.
- Insert NOMs and non-waiver clauses in all contracts to reduce the probability of inadvertent or improper oral modifications being enforced;
- Reserve the power to modify contracts for a select few in your organization;
- Require employees to log details of any discussions they have about and/or work they do on a contract to catch any potential inadvertent modifications;
- Hold frequent meetings to discuss, among other things, the current status of any contracts you may have; and
- Communicate the information about oral contracts outlined above to all new employees to establish a baseline of knowledge about potential problems.
Following these simple steps – and communicating openly with your employees about the repercussions inadvertent contract modifications could have – can help to keep existing agreements in place.