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Manufacturer’s Corner: Don’t Fall For Your Own “No Oral Modification” Clause

First off, happy New Year!  After a light publication schedule over the past few weeks, the Manufacturer’s Corner is back in full force.  Glad to be here; glad you’re here.

Here’s a thing that probably appears in your standard terms and conditions: “This agreement cannot be modified or rescinded, except in writing signed by an authorized agent of [your company].”  You can go ahead and check.  It’s probably down toward the bottom, above the miscellaneous provisions like choice of law.

That provision is a smart thing to have.  Contracts for the sale of goods, unlike most contracts, can be modified without consideration – meaning that the parties don’t have to give anything up or make promises to one another to support a modification.  That makes it surprisingly easy to accidentally modify a sale-of-goods contract orally or by casual e-mail,[1] especially for small sales that do not implicate the statute of frauds.[2]

But here’s an important provision of the Uniform Commercial Code you should know: “except as between merchants such a requirement [that is, a written-modification-only requirement] on a form supplied by the merchant must be separately signed by the other party.”  Oh.

What does this mean?  Well, it means that for a large class of counterparties – non-merchants – your anti-modification clause is ineffective unless separately signed.  I do a lot of this work, and I can count on one hand the number of times I’ve seen that clause separately signed.

Of course, things might not be as bad as all that.  For one, when you’re dealing with large sales, the statute of frauds might save you by imposing an independent requirement of a signed writing (though I wouldn’t count on it, especially if the purported modification was made by e-mail).  For another, if you have a fully-executed integrated contract – by which I mean what most people think of as a contract, and not just a series of invoices and purchase orders – the “separately signed” requirement doesn’t apply.  Finally, and most obviously, if your counterparty is a merchant, you don’t have anything to worry about.

But when your contract is created by forms passing in the night, are you really sending different forms to merchants and non-merchants?  Do you even have the facts available to you to determine whether your purchaser is a merchant with respect to the goods at issue?  Are you sending different forms to people who are only buying goods that fall under the $500.00 statute of frauds threshold?

Of course not!  And if your company is like a lot of companies, the people who receive purchase orders and send invoices are not the same people who are handling customer complaints or requests for accommodation.  So the way I see it, this leaves you with two options: (1) require a signature on the anti-modification provision, or (2) train your employees not to make promises that deviate from the obligations under your forms unless they have specific approval to do so.

Number two is quite clearly better.  Your contract terms should be meaningful, so deviating from them should be the result of a deliberative process, not a snap decision made by an employee under fire by an irate customer.  And your employees shouldn’t be in the habit of promising things you’re not inclined to deliver.  Accordingly, number two is a win all around.

Here’s the short version of the story: assume your prohibition on oral modification is ineffective, and conduct yourself accordingly.

[1] Speaking of casual e-mail, “signed” as used in the UCC doesn’t mean what normal people think it means, and there’s plenty of authority that e-mail is a “signed” writing.  Your “signed writing” requirement for modifications could really use some tightening up.  Get with it, pal.

[2] I don’t really want to talk about the statute of frauds today, so let’s not.  We’ll save it for another post.