A recent Massachusetts Superior Court case serves as an important reminder that parties may amend a contract by their subsequent actions, even if the contract states that it may only be amended in writing. The court held that an exchange of e-mails between parties to a contract constituted a written amendment of the contract, even though the e-mails did not specifically mention the contract itself. As a result, parties to a contract should be cautious about making statements, verbally or by e-mail, that could later be interpreted as a waiver or amendment to the contract.
Most well drafted commercial contracts contain what is known as an "integration clause." An integration clause states that the written contract constitutes the entire agreement of the parties. It is usually accompanied by a provision that the parties can only amend the contract by a written instrument signed by both parties. The purpose of these clauses is to ensure that a court will look only to the terms of the contract when interpreting it, so that both parties understand that only the terms that ended up in the final contract will govern their relationship.
Read literally, these clauses appear to require a formal written agreement, manually signed by the parties, in order to effect an amendment. Massachusetts contract law, however, has long provided an exception to the "no oral amendment" requirement found in many contracts. Where courts have found that the parties to a contract have evinced a clear intent in verbal communications to modify their rights or obligations, courts will deem that the parties amended not only the applicable term of the contract but also the clause in the contract prohibiting oral amendments. The rule can apply in any situation if there is consideration to support the amendment and if the Statute of Frauds, which requires certain types of contracts to be in writing, is not violated.
The recent Massachusetts case, entitled David M. Tomer v. Hollister Associates, Inc. (Massachusetts Superior Court Civil Action No. 05-1672 BLS1, January 17, 2006), identifies another way in which a contract can be amended without a formal signed instrument. The case involved an executive's claim executive against his employer, a placement firm, for breach of his employment contract. The contract, executed in 2000, promised the executive an annual base salary of $400,000. The contract also contained an integration clause, which required that any amendment or waiver of the agreement be in writing and signed by both of the parties. Due to a slowdown in the business, the company reduced the executive's base salary to $320,000 in June 2001, and subsequently made two further reductions. The parties did not execute a written amendment to the employment contract to reflect any of the changes, and the executive ultimately sued the company for unpaid compensation after he resigned in 2004.
In its analysis, the court focused on an exchange of e-mails between the executive and the company's president that took place shortly before the first salary reduction. In the exchange, the executive acknowledged that he and others at the company were slated for a 20 percent reduction in salary, and also acknowledged that further salary reductions might be necessary. Although the exchange of messages, over a 26-minute period, did not make any express reference to the executive's employment contract, the court concluded that the messages had the effect of amending the employment contract. In the court's own words, "The integration clause here calls for a ‘writing signed by the parties.' In this modern age, this Court considers e-mail communications, in which the sender and recipient are clearly identified, to constitute writings. And when there is a string of e-mails, each signed off by two people, over a span of 26 minutes — like there was here between Tomer and Kip Hollister on June 14, 2001 — this Court considers the entire string to be a writing signed by both parties."
It is important to bear in mind that the court's decision is not binding in other cases, because the decision comes from a trial court rather than an appellate court. In addition, the fact that the executive continued to work for years after his salary was reduced without registering any objection undoubtedly influenced the court's interpretation of the facts. Nevertheless, the case highlights the risks of hastily written e-mail communications between parties to a contract.
Because e-mail messages create an electronic record that can survive for years, even if apparently deleted, a single exchange of messages can easily be used much later as evidence of a change in contractual terms. Given the widespread use of e-mail in the business world, it is not possible to monitor all communications that a company sends to the parties with which it has contractual relationships. There are, however, steps that a company can take to reduce the risk of unwittingly modifying a contract. In most cases, the best protection a company can adopt is to educate its personnel about the legal effect that an e-mail message (or other informal communication) can have and sensitize them to how their statements could later be interpreted. Moving forward, companies may also wish to insert provisions in their contracts that identify, by title, the officers who are authorized to approve any amendment. Contract administrators and others who communicate regularly with customers, vendors or other contractual parties could also consider including a statement in their e-mail signatures to the effect that their message shall not be construed as an actual or proposed contractual amendment.
This article is intended to serve as a summary of the issues outlined herein. While it may include some general guidance, it is not intended as, nor is it a substitute for, legal advice. Your receipt of Good Company or any of its individual articles does not create an attorney-client relationship between you and Sheehan Phinney Bass + Green or the Sheehan Phinney Capitol Group. The opinions expressed in Good Company are those of the authors of the specific articles.
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