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Avoiding Unintended Contract Modifications

By John Mucha.

One of the frustrating aspects of contractual agreements is how often seemingly ironclad language can be rendered null and void by verbal statements—even when the underlying contract contains language requiring contract modifications to be in writing.

One particular area of concern involves contracts that include anti-modification and anti-waiver provisions. Such clauses typically state that “this contract may only be modified if in writing signed by the parties.” Ironically, even though such provisions are specifically designed to prevent less formal contract changes, they are not watertight.

The idea behind an anti-modification or anti-waiver clause is to ensure that subsequent discussions and actions between employees of the parties do not cause a change in the legal rights of the parties that were so carefully defined in the written contract at the onset of the relationship.

No automotive dealer wants to expose itself to the possibility that comments or behavior by an employee implicitly or explicitly change the terms of an agreement in a way that could have a negative long-term impact on the company. Understandably, executives and decision-makers want the written contract to control, and to not be subject to unintended modification. The problem is, anytime you have multiple individuals involved in the administration of a contract, unpredictable things tend to happen. Even language expressly designed to forbid verbal modifications to the contract can itself be insufficiently protective.

To understand how and why this plays out—and what automotive decision-makers can do to minimize contractual uncertainty and protect their businesses and their bottom lines—consider the timeline of events in the following illustrative (theoretical) scenario:

  • An automotive dealer agrees to a contract with a supplier who will be providing a very specific type of product to be used at the dealership, with the knowledge that other similar products do not perform as well over time.
  • In an attempt to ensure that the other party does not try and claim that the terms of the contract have changed in the future because of something said by one of the dealer’s managers, officers or employees, the contract includes an anti-modification and anti-waiver clause that states “this contract may be modified or amended only by a written document signed by the parties.”
  • A year later, a dispute arises over the quality of the supplied materials. Unbeknownst to upper management, the company supplying the product has been allowed by one of the dealer’s employees to supply a substitute product that does not work as well over time. The supplier claims that the performance requirements under the contract have been changed by the words and actions of the dealer’s employees, and even points to an e-mail from that employee as evidence of the alleged contract change. The dealer confidently points to the previously mentioned anti-modification and anti-waiver provision, which states that the contract terms cannot be modified except by a signed writing, and the dealer feels like it is standing on strong legal ground.
  • After consultation with legal counsel, the dealer is shocked to discover that it may not be as fully protected by such anti-modification language as it thought.

Issues and implications

Why might such anti-modification language not be enough?  For several years, Michigan courts have found that such an anti-modification and anti-waiver clause, by itself, does not always protect against oral modifications of the agreement. In Quality Products & Concepts Co. v. Nagel Precision, Inc., 469 Mich 362; 666 NW2d 251 (2003), the Michigan Supreme Court held that, under the right circumstances, the anti-modification and anti-waiver clause can itself be treated as having been waived, based on the principle that parties should have the “freedom to contract.”

In other words, the prohibition against modification can itself be nullified by the conduct or language of the parties, if such conduct and language is considered (by a court) to be strong enough to show an intent to change the contract. As frustrating and counterintuitive as it might seem for a contract that states “no verbal modifications permitted” to subsequently be treated by a court as having been verbally modified nonetheless, there are additional steps you can take to protect yourself when drafting your contract.

Protection and perspective

The best way to reinforce the anti-modification protections in a contract (so that verbal statements and actions by an employee do not result in an unintended modification of the carefully crafted legal rights and obligations in the written agreement) is to expressly limit the number of persons with authority to modify the contract. While the mere existence of a written anti-modification clause, standing alone, may not be able to completely prevent the oral amendment of a contract, supplementing such a clause by selectively limiting authority to authorize a modification to only a specific individual or officer-holder makes it significantly harder to argue that the modification or waiver was legitimate.

A clause in a contract that provides “any modifications must be approved in writing by the president of the company,” for example, will render ineffective and unenforceable the alleged contract modification based on verbal or even written authorization by someone else in the company. In such circumstances, Michigan courts have rejected claims of alleged contract modification when the change was not approved by the person with the sole authority to do so. See, for example, Pepperman v Auto Club of Michigan Ins Group, 181 Mich App 519; 450 NW2d 66 (1989). The other party to your contract cannot claim reasonable reliance on the actions or statements by your employee if the contract is clear that such employee does not have the legal authority to modify your contract.

While these issues can arise in any industry that buys or sells a good or service, they tend to be more prevalent and problematic in large-volume, high-stakes relationships—where even small issues can have significant financial ramifications. It is important to recognize that while the Michigan cases cited above do not have national scope or precedent, they do point to the potential legal and professional uncertainties that can arise, and they highlight the importance of setting limitations on the authority to make contractual changes. With that in mind, automotive dealers would be wise to consult expert counsel before entering any contracts—even when those contracts appear to contain a sufficiently robust anti-modification or anti-waiver clause.

Read the original article in Digital Dealer.