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THE TENSION BETWEEN THE REAL AND THE PAPER DEAL CONCERNING “NO ORAL MODIFICATION” CLAUSES
Published online by Cambridge University Press: 12 January 2022
Abstract
This article proposes a new model for the regulation of no oral modification (NOM) clauses. First, the article seeks to offer a deeper understanding of the wishes of the parties in contracts from the perspective of parties' autonomy, distinguishing between intentions focused on the legal relationships and those focused on extra-contractual relations. Second, we explain how enforcement of NOM clauses may influence the parties' relations. Third, the article includes an economic analysis clarifying the roles of efficiency and institutional considerations in the NOM phenomenon. Applying the results of our analysis, we propose a comprehensive model for regulating NOM clauses. The key innovation of the model is context-dependent regulation differentiating among sophisticated and equally powerful parties, unsophisticated parties of equal power, and relationships with power disparities. Our model also offers an auxiliary test to help distinguish between parties' legal relationships and their extra-contractual relations.
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- Copyright © Cambridge Law Journal and Contributors 2022
Footnotes
*
Dr Elad Finkelstein, Ono Academic College.
**
Professor Shahar Lifshitz, Bar-Ilan University.
References
1 Restatement of Contracts 1981, s. 149.
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6 Pasas, “No Oral Modification Clauses”, 144–45. Wagner-von Pap, “European Contract Law”, 535–38.
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9 Vienna Convention on Contracts for the International Sale of Goods (CISG) (1980), art. 29(2).
10 UNIDROIT Principles of International Commercial Contracts (2016), art. 2.1.18.
11 Wagner-von Pap, “European Contract Law”, 528–33.
12 US Uniform Commercial Code, art. 2 – Sales (2002), Part 2 Modification, Recession and Waiver s. 2-209(2) (2002). For critical review, see D.V. Snyder, “The Law of Contract and the Concept of Change: Public and Private Attempts to Regulate Modification, Waiver and Estoppel” (1999) 607 Wisconsin Law Review 647; R.A. Hillman, “Standards for Revising Article 2 of the UCC: The NOM Clause Model” (1994) 35 William & Mary Law Review 1509.
13 N.Y. Consolidation Law GOB, s. 15–301(1) (McKinney 2010); Beekman, LLC v Ann/Nassau Realty, LLC 2013 WL 362816 N.Y. App. Div (2013).
14 MWB Business Exchange v Rock Advertising [2018] UKSC 24, [2019] A.C. 119; Luke Tattersall, “No Oral Modification Clauses: Contractual Freedom Under English And New York Law” (2019) 6(1) Journal of International and Comparative Law 117.
15 See MWB Business, ibid., at [11] (Lord Sumption, with whom Lady Hale, Lord Wilson and Lord Lloyd-Jones agreed). For academic support, see L. Dodd, “No Oral Modification Clauses: Solid as a Rock” (2019) 4 Juridical Review 342; J. Morgan, “Contracting for Self-denial: On Enforcing ‘No Oral Modification’ Clauses” [2017] C.L.J. 589; J. O'Sullivan, “Unconsidered Modifications” (2017) 133 L.Q.R. 191; McKendrick, “Legal Effect”.
16 MWB v Rock Advertising [2018] UKSC 24, [2019] A.C. 119, at [29] (Lord Briggs).
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18 See Tattersall, “No Oral Modification Clauses”, 121, 130–31. See also Oglind, B., “Modification of Clauses on the Basis of the Contractual Conduct of the Parties. Application of Estoppel Doctrine” (2014) 3 Perspectives of Law and Public Administration 184Google Scholar.
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22 Scott, R.E., “Formalism in Relational Contract” (2000) 94 North western University Law Review 847Google Scholar; Scott, R., Gilson, R. and Braiding, C. Sabel, “The Interaction of Formal and Informal Contracting in Theory, Practice, and Doctrine” (2010) 110 Columbia Law Review 1377Google Scholar.
23 See Collins, H., “Is a Relational Contract a Legal Concept?” in Degeling, S., Edelman, J. and Goudkamp, J. (eds.), Contract in Commercial Law (Toronto 2016)Google Scholar.
24 See Campbell, D., “Good Faith and the Ubiquity of the ‘Relational’ Contract” (2014) 77 M.L.R. 460CrossRefGoogle Scholar; Campbell, D., “The Relational Constitution of the Discrete Contract” in Campbell, D. and Vincent-Jones, P. (eds.), Contract and Economic Organisation: Socio-legal Initiatives (Dartmouth 1996)Google Scholar.
25 See D. Kimel, From Promise to Contract: Towards a Liberal Theory of Contract (Oxford 2003); D. Kimel, “The Choice of Paradigm for Theory of Contract: Reflections on the Relational Model” (2007) 27 O.J.L.S. 233.
26 E. Zamir, “Contract Law and Theory – Three Views of the Cathedral” (2014) 81 University of Chicago Law Review 2077.
27 See R. Brownsword, “After Investors: Interpretation, Expectation and the Implicit Dimension of the ‘New Contextualism’” in D. Campbell, H. Collins and J. Wightman (eds.), Implicit Dimensions of Contract (Portland 2003); R. Brownsword, Contract Law: Themes for the Twenty-first Century (Oxford 2006).
28 See J.M. Feinman, “Relational Contract Theory: Unanswered Questions A Symposium in Honor of Ian R. Macneil: Relational Contract Theory In Context” (2000) 94 North Western University Law Review 737; R.E. Speidel, “Relational Contract Theory: Unanswered Questions A Symposium in Honor of Ian R. Macneil: The Characteristics and Challenges of Relational Contracts” (2000) 94 North Western University Law Review 823.
29 See e.g. J. Kidwell, “A Caveat” [1985] Wisconsin Law Review 615; J. Gava, “False Lessons from the Real Deal” (2005) 21 Journal of Contract Law 182.
30 See R.E. Scott, “A Theory of Self-enforcing Indefinite Agreements” (2003) 103 Columbia Law Review 1641.
31 See S. Lifshitz and E. Finkelstein, “A Hermeneutic Perspective on the Interpretation of Contracts” (2017) 54 American Business Law Journal 519; R. Scott and A. Schwartz, “Contract Interpretation Redux” (2010) 119 Yale Law Journal 926; S.J. Burton, Elements of Contract Interpretation (New York 2009), 1.
32 See A.A. Schwartz, “A Standard Clause Analysis of the Frustration Doctrine and the Material Adverse Change Clause” (2010) 57 UCLA Law Review 789.
33 For initial application of the general dispute to the NOM Clause, see Morgan, “Contracting for Self-denial”.
34 See Lifshitz and Finkelstein, “A Hermeneutic Perspective”.
35 See R. Gilmore, The Death of Contract (Ohio 1974); P.S. Atiyah, The Rise and Fall of Freedom of Contract (Oxford 1979); R. Kreitner, Calculating Promises – the Emergence of Modern American Contract Doctrine (Stanford 2007).
36 S. Macaulay, “The Real and the Paper Deal: Empirical Pictures of Relationships, Complexity and the Urge for Transparent Simple Rules” (2003) 66 M.L.R. 46. But see C. Mitchell, “Contracts and Contract Law: Challenging the Distinction between the ‘Real’ and ‘Paper’ Deal” (2009) 29 O.J.L.S. 675.
37 See R. Macneil, “Contracts: Adjustment of Long-term Economic Relations under Classical, Neoclassical and Relational Contract Law” (1978) 72 North Western University Law Review 85; C. Mitchell, Contract Law and Contract Practice: Bridging the Gap between Legal Reasoning and Commercial Expectation (Oxford 2013), 7.
38 See Macaulay, “Non-contractual Relations in Business”; H. Beale and T. Dugdale, “Contracts between Businessmen: Planning and the Use of Contractual Remedies” (1975) 2 British Journal of Law and Society 45.
39 Macaulay, “Real and the Paper Deal”, 44–79. I. Bozovic and G.K. Hadfield, “Scaffolding: Using Formal Contracts to Build Informal Relations in Support of Innovation” (2015) USC CLASS Research Paper No. C12-3; USC Law Legal Studies Paper No. 12-16. at SSRN: http://ssrn.com/abstract=1984915 (last accessed 3 August 2021).
40 See e.g. D. Lewinsohn-Zamir, “More Is Not Always Better than Less: An Exploration in Property Law” (2008) 92 Minnesota Law Review 634, 710–11. For a critical review, see J. Morgan, Contract Law Minimalism: A Formalist Restatement Of Commercial Contract Law (Cambridge 2013), 189–253; J. Gava, “Taking Stewart Macaulay and Hugh Collins Seriously” (2016) 33 Journal of Contract Law 108.
41 See E. Zamir, “The Inverted Hierarchy of Contract Interpretation and Supplementation” (1997) 97 Columbia Law Review 1710, 1771–77.
42 See L. Bernstein, “Opting Out of the Legal System: Extralegal Contractual Relations in the Diamond Industry” (1992) 21 Journal of Legal Studies 115; L. Bernstein, “Private Commercial Law in the Cotton Industry: Creating Cooperation through Rules, Norms, and Institutions” (2001) 99 Michigan Law Review 1724; G. Miller and T. Eisenberg, “The Market for Contracts” (2009) 30 Cardozo Law Review 2073; cf. U. Benoliel, “The Course of Performance Doctrine in Commercial Contracts: An Empirical Analysis” (2018) 68 DePaul Law Review 1.
43 See L. Bernstein, “The Questionable Empirical Basis of Article 2's Incorporation Strategy: A Preliminary Study” (1999) 66 University of Chicago Law Review 710. See also R.E. Scott, “The Death of Contract Law” (2004) 54 University of Toronto Law Journal 369.
44 Adherents of relational contract theory reject neo-formalist sociological analysis. They claim that contractual parties typically expect all relations between them, in particular conduct that attests to solidarity and mutual consideration, be given contractual validity See E.J. Leib, “Contracts and Friendships” (2009–2010) 59 Emory Law Journal 649.
45 See Section I above.
46 See Lord Briggs's position in MWB v Rock [2018] UKSC 24, [2019] A.C. 119, at [24].
47 See Wagner-von Papp, “European Contract Law”, 18–19, 50–52, 63–65.
48 See Mitchell, Contract Law and Contract Practice, ch. 6.
49 See Alan Bates & others v Post Office Ltd (No. 3) [2019] EWHC 606 (Q.B.), at [702]–[736] (Fraser J.).
50 R.E. Barnett, “The Sound of Silence: Default Rules And Contractual Consent” (1992) 78 Virginia Law Review 821; Mitchell, Contract Law and Contract Practice, ch. 6.
51 See S. Macaulay, “Relational Contracts Floating on a Sea of Custom? Thoughts About the Ideas of Ian Macneil and Lisa Bernstein” (2000) 94 North Western University Law Review 775.
52 See Section II(A) above.
53 See Professional Insurance Corp. v Cahill [1956] 90 So. 2d 916, 918 (Fla.).
54 In many cases, these arguments are based on the rationale of estoppel. See A. Robertson, “Revolutions and Counterrevolutions in Equitable Estoppel” in S. Worthington, A. Robertson and G. Virgo (eds.), Revolution and Evolution in Private Law (Oxford, 2018), 161.
55 S. Baker and A.H. Choi, “Contract's Role in Relational Contract” (2015) 101 Virginia Law Review 559.
56 See Macaulay, “Relational Contracts Floating on a Sea of Custom”.
57 The neo-formalist opposition is based also on psychological research of the effect of crowding out, according to which, in some situations, external reinforcement of a particular behaviour eventually leads to its extinction. See U. Gneezy and A. Rustichini, “A Fine Is a Price” (2000) 29 Journal of Legal Studies 1. See also E.H. Atiq, “Why Motives Matter: Reframing the Crowding Out Effect of Legal Incentives” (2014) 123 Yale Law Journal 862.
58 See Section II(B) above.
59 See C.J. Goetz and R.E. Scott, “The Limits of Expanded Choice: An Analysis of the Interactions Between Express and Implied Contract Terms” (1985) 73 California Law Review 261. See also O.B. Shahar, “The Tentative Case against Flexibility in Commercial Law” (1999) 66 University of Chicago Law Review 781, 811–13.
60 Formal legal norms are more efficient and preferable to non-legal ones because they are clearer and easier to prove in court. See E.A. Posner, “A Theory of Contract Law Under Conditions of Radical Judicial Error” (1999) 94 Northwestern University Law Review 749.
61 See Goetz and Scott, “Limits of Expanded Choice”. See also Shahar, “Tentative Case against Flexibility in Commercial Law”, 811–13.
62 For example, when the contract terms are unclear, focusing merely on these terms might lead to litigation, while broadening the perspective to the parties’ actual behaviour may be easier to prove in practice. See F. Ellinghaus and T. Wright, “The Common Law of Contracts: Are Broad Principles Better than Detailed Ones? An Empirical Investigation” (2005) 11 Texas Wesleyan Law Review 377; see also Lifshitz and Finkelstein, “A Hermeneutic Perspective”.
63 See Mitchell, Contract Law and Contract Practice, 86–88. Leib, “Contracts and Friendships”, 670.
64 For an analysis of the economic logic underlying NOM clauses, see MWB v Rock Advertising [2018] UKSC 24 [2019] A.C. 119, at [12] (Lord Sumption).
65 For a similar conclusion, cf. Morgan, “Contracting for Self-denial”.
66 See ibid.
67 See R.J. Gilson, C.F. Sabel and R.E Scott, “Text and Context: Contract Interpretation as Contract Design” (2014) 100 Cornell Law Review 23.
68 See Morgan, “Contracting for Self-denial”, 112; J. Gava, “How Should Judges Decide Commercial Contract Cases?” (2013) 30 Journal of Contract Law 133; R.A. Hillman, “How to Create a Commercial Calamity” (2007) 68 Ohio State Law Journal 335. See also Alan Bates & others v Post Office Ltd (No. 3) [2019] EWHC 606 (Q.B.), at [715].
69 See W. Shaw, “Contracting Out of Contractual Freedom: No-oral Modification Clauses and Effecting Party Intention”, dissertation submitted in partial fulfilment of the degree of Bachelor of Laws (with Honours) at the University of Otago, October 2018.
70 A. Schwartz and R.E. Scott, Contract Theory and the Limits of Contract Law (2003–2004) 113 Yale L.J. 541.
71 For extensive use of this category in many contexts of customary law, see M.R. Miller, “Contract Law, Party Sophistication and the New Formalism” (2010) 75 Missouri Law Review 493.
72 See ibid.
73 See Schwartz and Scott, Contract Theory, 554: “(1) an entity that is organized in the corporate form and that has five or more employees, (2) a limited partnership, or (3) a professional partnership such as a law or accounting firm.”
74 See Section II(B)(3) above.
75 See A. Burrows, “Anti-oral Variation Clauses: Rock-solid or Rocky?” in P.S. Davies and M. Raczynska (eds.), Contents of Commercial Contracts: Terms Affecting Freedoms (Oxford, 2020), 35, 46–48.
76 See P. Frimpong-Manso and A. Nikas, “The Application of Post Tender Negotiation Procedure: A Public Sector Procurement Perspective in UK” (2016) 4(2) International Journal of Information Systems and Project Management 23.
77 See Section III(C) below.
78 See Gilson, Sabel and Scott, “Text and Context”. See also Shaw, “Contracting Out of Contractual Freedom”.
79 There are instances in which parties are not considered sophisticated might nevertheless be legally advised throughout their relationship. Since these are intermediate cases, they must be dealt with in accordance with the concrete circumstances.
80 See our analysis in Section II above.
81 MWB Business Exchange Centres Ltd. v Rock Advertising Ltd [2016] EWCA Civ 553, [2017] Q.B. 604. See also Globe Motors v TRW Lucas Varity Electric Steering Limited [2016] EWCA Civ 396 [2017] 1 All E.R. (Comm) 601, at [107] (Beatson L.J.): “thus, an oral agreement or the conduct of the parties to a contract containing such a clause may give rise to a separate and independent contract which, in substance, has the effect of varying the written contract.”
82 See Section IV(B) below.
83 A.A. Leff, “Unconscionability and the Code: The Emperor's New Clause” (1967) 115 University of Pennsylvania Law Review 485; N. Enonchong, “The Modern English Doctrine of Unconscionability” (2018) 34 Journal of Contract Law 211.
84 See Unfair Contract Terms Act 1977, s. 3(2)(b)(i). Cf. Morgan, “Contracting for Self-denial”, 612–14, raising the possibility of using the aforementioned subsection, but at the same time pointing to the difficulty in applying it in the event of equally balanced parties. While we agree that if the parties are of equal bargaining power, the NOM clause is less likely to be held to be unreasonable than if there is a disparity of bargaining power, we still believe that in some circumstances the clause should be held to be unreasonable even if the parties are of equal bargaining power.
85 See Section II(A) above.
86 A “consumer contract” is defined in the Consumer Rights Act 2015, s. 61(1) and (3) and is a contract between a “consumer” and a “trader” within the meanings those terms have in the Act.
87 See Consumer Rights Act 2015, s. 62(4).
88 See Consumer Rights Act 2015, s. 62(1).
89 Miller, “Contract Law”, proposes a similar definition of the distinction between experienced parties and parties characterised by power disparities.
90 See Section II(A)(2) above. As part of the trend suggested in the paper not to adhere to unequivocal binary definitions, we can imagine scenarios that would not be included in the formal definition of consumer contracts, but would still materially justify the possible invalidation of the NOM clause. In those cases, we believe, there is scope for more widespread application of the general doctrines. However, a complete and accurate analysis of existing case law on the question of whether it can be correlated to existing case law, or that current case law should be departed from and a new category developed, is beyond the scope of this paper.
91 See Wagner-von Papp, “European Contract Law”, 35. See also Energy Venture Partners Ltd. v Malabu Oil and Gas Ltd. [2013] EWHC 2118 (Comm) 274.
92 See Rose v Spa Realty Assoc. 42 N.Y.2d 338 (1977).
93 In the event that there is no NOM clause, these auxiliary tests will be significant for sophisticated parties as well in order to understand whether modification by conduct does indeed reflect a desire for significant change.
94 See Williams v Roffey Bros & Nicholls (Contractors) Ltd [1989] EWCA Civ 5, [1991] 1 Q.B. 1.
95 See Wagner-von Papp, “European Contract Law”, 39.
96 See Section II(B)(3) above.
97 For a new ruling in Israel in this spirit, see Judge Alex Stein's decision in: CA 7649/18 Bibi Roads Dirt and Development Ltd. v Israel Railways Ltd. (Posted in Nevo 20.11.2019) Judge Ofer Grosskopf, in this case, proposed another distinction that is focused more on the identity of the parties to the contract, a distinction reminiscent of that proposed by us in the chapter dealing with context. See Section IV(A) above.
98 See Section II(B)(3) above.
99 See E.A. Posner, “There Are No Penalty Default Rules in Contract Law” (2006) 33 Florida State University Law Review 563.
100 See Section VI(B)(3) above.
101 See Section II(B) above.
102 MWB Business Exchange v Rock Advertising [2018] UKSC 24, [2019] A.C. 119.
103 See Section III(B) above.
104 N.Y. Consolidation Law GOB, s. 15-301(1) (McKinney 2010); Beekman, LLC v Ann/Nassau Realty LLC [2013] WL 362816 (N.Y. App. Div.)
105 See M.J. Jimenez, “The Many Faces of Promissory Estoppel: An Empirical Analysis under the Restatement (Second) of Contracts” (2010) 57 UCLA Law Review 669.
106 See Robertson, “Revolutions and Counterrevolutions”, 161–75.
107 MWB Business Exchange v Rock Advertising [2018] UKSC 24 [2019] A.C. 119, at [16] (Lord Sumption).
108 See in the US: EMI Music Mktg. v Avatar Records, Inc., 317 F.Supp.2d 412, 421 (S.D.N.Y.2004).
109 See Robertson, “Revolutions and Counterrevolutions”, 10.
110 See Jimenez, “Many Faces of Promissory Estoppel”.
111 Note that the position presented here represents a middle ground between two fundamental approaches regarding estoppel and its ability to create a new right. Ibid., at 162.
112 See L.L. Fuller and W.R. Perdue, “The Reliance Interest in Contract Damages” (1937) 46 Yale Law Journal 373.
113 See Jimenez, “Many Faces of Promissory Estoppel”.