Reproduced with permission of Camilla B. Andersen & Ulrich G. Schroeter eds., Sharing International Commercial Law across National Boundaries: Festschrift for Albert H. Kritzer on the Occasion of his Eightieth Birthday, Wildy, Simmonds & Hill Publishing (2008) 48-61

Introduction
Termination or Modification of the Contract
   -   Basic Concept
   -   Control by the Courts
No Oral Modification Clause
   -   Enforceable
   -   Exception to Enforceability
Conclusion

INTRODUCTION

Al Kritzer and I first met at the UNCITRAL Congress on International Commercial Law in the spring of 1992. He had recently retired as a lawyer with the General Electric Company where he had been engaged in international contracting. A year prior to the Congress he had become affiliated with the Institute of International Commercial Law at the Pace Law School. He was already enthused about the CISG and what it could do to reduce the problems he had faced in practice. I too had retired a year before after more than 16 years on the staff of UNCITRAL. At the time of the Congress I was spending a year at Fordham Law School as a visiting professor. I was scheduled to join Pace Law School when the next academic year began. Little did either of us know that it would be the beginning of a long and fruitful friendship and collaboration.

One of the issues that can arise in any international contract involves the termination or modification of the contract by agreement of the parties. There are two quite separate issues. One of them is to assure that there are no doctrinal obstacles to amendment of the contract. It is a simple issue -in most circumstances. A separate issue concerns a provision in the contract that any modification or termination of the contract must be in writing.

This short article will compare the approaches to these two related issues in the Uniform Commercial Code (UCC) and the Restatement of Contracts (Second) (Restatement), both from the United States, the UNIDROIT [page 48] Principles of International Commercial Contracts (UNIDROIT Principles), the Principles of European Contract Law (PECL) and, most importantly, the United Nations Convention on Contracts for the International Sale of Goods (CISG).

TERMINATION OR MODIFICATION OF THE CONTRACT -- BASIC CONCEPT

It is a common occurrence that commercial contracts are modified by agreement during the course of performance. Specifications, delivery dates, even the price may be changed. It also happens that contracts are terminated by agreement. There is no controversy that the law should support the parties in their desire to change their mind about the contract or its terms if they so wish.

Analytically, a contract is terminated or modified by a new contract. For many legal systems that presents no difficulties. In other legal systems there are doctrinal problems to overcome in some situations. Specifically, common law countries require the existence of "consideration" to create a binding contract. In greatly simplified terms consideration is what the first party gives or promises to give to the other party in order to induce it to give or promise to give the counter-performance to the first party. There would, for example, be consideration if the quantity or specifications in a contract were modified along with a consequent change in the price. However, if the cost to the seller of performing the contract as originally agreed were to increase radically and the buyer agreed to an adjustment of the price so as to share the increased cost of performance, the seller would have given no counter-performance to the buyer for the buyer's agreement to pay the higher price, i.e. there would have been a failure of consideration. AI Kritzer and I shared the experience as law students of being taught that a seller in this example whose pre-existing duty to deliver the goods had not changed under the modified contract could not enforce the increased price that the buyer had promised. Only the original contract price could be enforced. Of course, there was no problem if the buyer in fact paid the increased price it had promised.

It was the case in the United States, and perhaps in other common law countries, that the courts often found ways around the lack of consideration in particularly appealing cases. However, litigation is expensive. A principled way to avoid the doctrine of consideration was desirable. The answer [page 49] was found first in Article II of the Uniform Commercial Code (UCC) dealing with the sale of goods. Section 2-209(1) says simply that "An agreement modifying a contract within this Article needs no consideration to be binding."

It is of no substantive importance, but it is interesting that Section 2-209 is within that part of Article 2, which treats the formation of a contract of sale. Basic contract doctrine was not displaced in that respect. Nevertheless, a modification of the contract can be accomplished by "agreement", a term defined in Section 1-201(3).

When one looks at the definition of "contract" and at the official comments to "agreement", it is made clear that an agreement need not meet the requirements to be a contract and it may or may not have legal consequences. Obviously an agreement to modify an existing contact of sale does have legal consequences.

Section 2-209 solved the principal doctrinal difficulty in the context of modifying contracts for the sale of goods. It also had a major impact on the law in the United States governing contracts in general. This is reflected in the Restatement of Contracts (Second), adopted in 1982, which provides in Section 89:

The formulation had changed in a significant way. A contract can be modified by a promise, according to the Restatement, while it requires an agreement according to the UCC. A promise is unilateral; an agreement is [page 50] bilateral even when the agreement does not rise to the juridical level of a contract.

The drafters of the UCC faced an additional difficulty arising out of the requirements for the formation of a contract of sale of goods. UCC Section 2-201 in its pre-2003 version required that a contract of sale of goods for more than $500 had to be in writing. Substitutes for a writing were available under the provision and it was not necessary that the entire contract be in writing, but the basic writing requirement or one of the listed substitutes was mandatory. Consequently, Section 2-209(3) required that the writing requirement had to be satisfied if the contract of sale as modified fell within the terms of Section 2-201.

Throughout much of the long and arduous effort to revise Article 2 of the UCC that eventuated in the 2003 text it was proposed to delete the writing requirement in Section 2-201. That would have brought it into line with American law for international sale of goods as found in the CISG. Since the writing requirement for contracts of sale in general was to be deleted, the requirement for a writing in Section 2-209 was also to be deleted. When the writing requirement in Section 2-201 was retained in the amended text as finally adopted in 2003, though with the monetary limit increased to $5,000, the requirement for a written agreement remained unchanged in Section 2-209, though the monetary limit was raised to $5,000 in Section 2-209 as well. However, no state has as yet adopted the 2003 amendments, so the limit in practice remains at $500.

Article 5.1.9 of the UNIDROIT Principles approaches the question in a somewhat different way. It provides that:

The comments to the provision make it clear that the provision is intended to cover a partial release of a right as well as the entire right. The example given is of a creditor that offers to release a portion of the amount due from a debtor in financial difficulties. It is interesting to note that the focus of the provision is on the rights held by the obligee and not on the contract between the obligee and the obligor. The example given in the comments seems to assume that the obligee has already performed its obligations under the contract [page 51] leaving only a duty to pay. Nevertheless, the provision would seem to be applicable to a contract that had not as yet been performed by either party.

The 1999 text of the Principles of European Contract Law (PECL) has no provision whatsoever authorizing the modification or termination of a contract. Presumably, the authors of the PECL were convinced that the existing rules on the formation of contracts were sufficient to provide for contracts that modified other contracts as would be the case in civil law countries.

The civil law background to the preparation of the Uniform Law on the International Sale of Goods (ULIS) or the Uniform Law on the Formation of Contracts for the International Sale of Goods, the predecessor texts to the CISG is probably the major reason why there was no provision concerning the modification or termination of a contract in either of them. They had both been prepared in UNIDROIT at a time when there was all but no participation in its activities by any common law country. The United States became a member of UNIDROIT in 1963, just in time to participate in the 1964 diplomatic conference in The Hague at which both ULIS and the Formation uniform law were adopted. However, the American delegation had come to the game at too late a stage to have much impact on the final text.

There was an additional reason why there would have been no provision on modifying or terminating contracts by agreement in the 1964 Hague texts. As noted, there were two separate uniform laws, each of which was attached to a convention. Although the two had been prepared by the same organization and had been adopted at the same diplomatic conference, it would have been strange for the Formation uniform law to contain a provision relating to the amendment of a contract subject to the ULIS. Conversely, it was analytically unthinkable that a provision on the conclusion of a contract would have been contained in ULIS, even though the contract would have been to amend a contract subject to the ULIS.

One of the first items on the agenda of UNCITRAL when it first met in 1968 was to consider whether ULIS and the Formation uniform law would be generally adopted. When it turned out that there were many objections to both of them, UNCITRAL began to determine the changes in the two uniform laws would be necessary to make them generally acceptable. UNCITRAL began by considering ULIS. By the time that work was completed in the Working Group on the International Sale of Goods in 1976, it had been decided that the revisions were so substantial that the revised text should be presented in the form of a new convention to replace ULIS. The work then [page 52] began to consider the changes that should be made in the Formation uniform law. It was understood that it too would be a Convention rather than a uniform law annexed to a convention. There was still nothing said in either text about modifying or terminating contracts by agreement.

The question was raised for the first time in a report prepared by the UNCITRAL Secretariat for the meeting of the Working Group on the International Sale of Goods that took place in January 1977.[1] A new provision was suggested as Article 3A of the Formation text. The first sentence of paragraph (1) of the proposed new Article provided that:

Since I was the secretary of the Working Group, I wrote the report, but after thirty years I have no recollection of having made the suggestion. It was not the kind of suggestion I would have made without some prodding. My guess is that the prodding came in the form of a letter from the American representative on the Working Group. The representative was Professor Alan Farnsworth of Colombia University. He had also been the Rapporteur for the Restatement of Contracts (Second).

In the Working Group "[t]he view was expressed that article 3A, since it did not strictly relate to the formation of contracts, did not belong in the draft Convention on formation."[2] A related suggestion was to refer proposed article 3A to the Commission for consideration in connection with the draft Convention on sales that had been preliminarily approved by the Commission the year before. In the end the Working Group decided to retain the provision in some form in the draft Convention on formation.

The discussion in the Working Group on the text of the first sentence of proposed article 3A centered on the requirement that the agreement to rescind or modify the contract be in good faith. The Commission and its Working Group on the International Sale of Goods were well aware by this time that "good faith" would not be interpreted the same in all countries. There was [page 53] an effort to find some other words, such as "freely" or "in conformity with fair dealing". Finally, however, in respect of the proposed first sentence of article 3A the Working Group decided to provide that

One could say that the Working Group had moved from a proposed text based on the Restatement of Contracts (Second) to one based on the UCC, though I am sure the delegates did not think of it that way.

The Working Group returned to consideration of the draft Convention on Formation in September 1977. The only discussion recorded in the report of the Working Group in regard to the first sentence of article 3A was a suggestion that the provision should "specifically include reference to the substitution of a new contract for the original contract".[3] The suggestion was not adopted as being unnecessary.

During the discussions at the eleventh session of the Commission in 1978 there was again the suggestion that the entire provision should be deleted, but there was not sufficient support to do so. As noted above, the revision of ULIS and the Formation uniform law had proceeded separately, starting with the texts that had been adopted in The Hague in 1964. At the eleventh session of UNCITRAL the two texts were brought together into a single text, the draft Convention on Contracts for the International Sale of Goods (CISG) submitted to the diplomatic conference two years later in 1980. As a consequence of the amalgamation of the two texts into a single text, what had begun as Article 3A of the Formation text was placed into Part III of the CISG. For most States that have become party to the CISG it is of little significance whether the provision is in Part II on the Formation of the Contract or in Part III. However, those States that utilized the option offered in Article 92 CISG to declare that they would not be bound by Part II of the Convention [4] nevertheless have adopted what is now Article 29 CISG. It is undoubtedly for that reason that the delegate of Norway suggested in the First Committee at the diplomatic conference that the entire text of what is now Article 29 [page 54] CISG should be moved to Part II and the delegate of Sweden suggested in the Plenary that at least what is now Article 29(2) CISG be moved. However, neither suggestion was adopted.

TERMINATION OR MODIFICATION OF THE CONTRACT -- CONTROL BY THE COURTS

Not every modification of termination of the contract should be enforced. A typical example arises when the buyer has contracted for components of a product to be delivered to its sub-buyer by a certain date. As that date approaches, the seller of the components may acquire a temporary but effective monopoly situation. If the seller of the components refuses to deliver the components unless the price is increased, the buyer of the components may not be able to turn to another supplier in time to complete manufacture and deliver the finished product to its buyer by its own contractual date.

So long as the modification of a contract is accomplished by a new contract, there is no need to articulate any grounds on which a court could refuse to enforce the modified agreement. The ordinary doctrines of good faith, fraud, duress and the like are sufficient. That would hold for the PECL. It is also undoubtedly for the same reason that the drafters of the UNIDROIT Principles saw no reason to limit the scope of an obligee's power to release a right.

The Restatement of Contracts providing for the modification of a contract stated the control

It will be remembered that the text of draft Article 3A that had been proposed to the Working Group on the International Sale of Goods provided that "[a]n agreement by the parties made in good faith to modify or rescind the contract is effective." Although it may be correct that there was apt to be [page 55] significant differences in the interpretation of good faith, at least it offered a means to a court to refuse to enforce an agreement. With the deletion of the requirement of good faith in the final text of Article 29 CISG, a court would have to look elsewhere for a means to control an amendment to a contract that should not be enforced. There are two possible solutions. One is to turn to the "good faith" language in Article 7(1) CISG. This would maintain the autonomous character of the interpretation of the CISG. However, it would repudiate the decision of the Working Group to delete "good faith" from the text of what became Article 29 CISG. Moreover, the scope of the "good faith" language of Article 7(1) CISG is itself controversial. The second solution would be to consider that it was a matter of the validity of the amendment to the contract and, therefore, outside of the CISG by virtue of Article 4(a) CISG. Neither solution is completely satisfactory, but one or the other must be used.

NO ORAL MODIFICATION CLAUSE -- ENFORCEABLE

There are several reasons why a company might wish to include in a contract, whether of sale or otherwise, a provision that any modification or termination of the contract had to be in writing. The purpose may be to specify who has the authority to agree to any modification. That would particularly be the case if the clause provided that the modification had to be signed by a particular person or holding a particular position. Modification of a contract often has cost or price consequences that the company may wish to consider before agreeing to the modification. Finally, and especially when the product or service is complicated, written agreements lead to documentation of the complete terms of the modified contract.

Under standard contract theory a "no oral modification" clause has little effect since the parties can modified that clause orally. It would be unlikely that commercial parties would in fact first agree orally to modify the "no oral modification" clause followed by an oral modification of the substantive provisions of the contract. Such formalism can be hypothesized in a law school classroom, but it is not the way that commercial parties act. However, if the substantive terms of a contract are modified orally, it would be legitimate to infer that there had been an understood oral modification of the "no oral modification" clause as well.

This dilemma was first considered in UCC, Section 2-209(2) [page 56]

There are three aspects of this provision that are worth noting. The first is that it has a certain regulatory role. Once the parties have signed an agreement with a "no oral modification" clause, they are bound by it. They cannot modify either it or the other provisions of the contract orally. The second aspect is that the provision differentiates between contracts between merchants and those in which a non-merchant, normally consumer, is a party. Although the UCC is labeled as a commercial law text, it governs consumer sales as well. The third aspect of note is that in the latter case there is a recognition that the "no oral modification" clause might appear in a form, i.e. in the general conditions of the merchant. Such a clause may still be binding under the UCC, but only if it brought to the attention of the non-merchant and separately signed.

The UNIDROIT Principles Article 2.1.18 have the same rule, except for the portion relating to non-merchants. Although the UNIDROIT Principles do not have a scope of application clause, the Preamble makes it clear that they are intended only for international commercial contracts.

Article 29(2) CISG, rather than UCC Section 2-209(2) was undoubtedly the source for Article 2.1.18 of the UNIDROIT Principles. Article 29(2) CISG provides that

This provision in a slightly different form was part of Article 3A of the Formation text as proposed by the Secretariat to the UNCITRAL Working Group on the International Sale of Goods.[5] It received general support when first proposed, though some members of the Working Group were of the opinion that it should be retained only if the first sentence relating to the right to modify the contract by simple agreement was also retained. Others were in favor because it gave supremacy to the written terms of the contract. At the [page 57] subsequent meeting of the Working Group some opposition was expressed on the grounds that "if the parties had in fact agreed to modify or rescind the contract, that agreement should be effective even if it was not in writing."[6] However, the view that the proposed text protected the need of some parties to preserve an adequate paper record of their transactions prevailed.[7]

There was no significant discussion of the proposed text in the Commission in 1978 when the Formation text was adopted and merged with the Sales text into the draft Convention submitted to the diplomatic conference in 1980. There were two suggestions of note in the diplomatic conference. One already mentioned above was that the text of what is now Article 29 CISG be moved to Part II of the CISG dealing with formation.

The second proposal introduced by the delegate of Italy was to add a new paragraph (3)

There was opposition both because this was just one example of the effect of general conditions and because the problem it attempted to ameliorate was particularly relevant to consumer contracts.[9]

NO ORAL MODIFICATION CLAUSE -- EXCEPTION TO ENFORCEABILITY

Enforcing no oral modification clauses runs into the mirror image of the problem that was faced in enforcing modifications of the contract without [page 58] consideration or other formalities. A no oral modification clause should be enforced except when it would not be appropriate to do so. There seems to be unanimous agreement to that proposition. The question is how to word the circumstances in which it would be appropriate not to enforce the clause.

UCC Section 2-209 devotes two paragraphs to defining the circumstances under which the no oral modification clause can be overcome.

One eminent scholar in the United States has described UCC Section 2-209 as a "commercial calamity" largely because of subparagraphs (4) and (5).[10] It is not necessary here to set forth his description as to what has led to that state of affairs. It is sufficient to say that neither Article 29 CISG nor the UNIDROIT Principles Article 2.1.18 follow all of the convolutions of the UCC Section 2-209.

Nevertheless, the Secretariat recommendation that began the discussion was in line with UCC Section 2-209(4) and (5), though the two paragraphs were combined into one paragraph.[11] The Working Group thought that the provision was too complex and unclear, which it was.[12] Consequently, the provision was shortened by leaving out any reference to an executory contract. Furthermore, since there were doubts about the advisability of the provision at all, it was left in square brackets.

Throughout the remaining meetings at which the provision was considered in the Working Group, the Commission and the Diplomatic Conference [page 59] there were minor textual amendments, but the provision was retained and Article 29(2) CISG, second sentence now provides that:

UNIDROIT Principles Article 2.1.18 reproduces the text of Article 29(2) CISG with the addition that the other party "has reasonably relied on that conduct".

The question arises under both Article 29(2) CISG and the UNIDROIT Principles as to what "conduct" of a party is referred to? Is the "conduct" simply agreeing to the oral modification, or must there be more? If the conduct referred to in the provisions is the agreement to the oral modification, all executed actions in conformity with the modified contract would be valid. Perhaps there must be more. In the comments to UNIDROIT Principles 2.1.18 the example is given of a construction contract in which the builder "completes the construction according to the modification, and [the owner], who has observed the progress of the construction without making any objections, only at this point objects to how the second floor has been constructed." A somewhat similar example is given in the comments to draft Article 27 CISG (the predecessor to Article 29 CISG) where there have been five deliveries of the goods as modified before the buyer refuses the sixth as not conforming to the unmodified contract.[13] It would seem that the drafters of both comments thought that the obligee had to have done something more than have orally agreed to the modification.

CONCLUSION

Modification of commercial contracts during the course of performance is a common event and should be supported by the legal system. That is accomplished by Article 29(1) CISG, and there would seem to be little controversy about the basic provision. There is some more difficulty in finding the proper tool for the courts or arbitral tribunals to control those modifications that are [page 60] brought about in an improper way. However, there is no doubt that a way will be found.

There is considerably more difficulty in regard to the treatment of no oral modification clauses. The purpose is well understood and laudable. However, there is some concern that such clauses in general conditions may not be thought about or be appropriate when the individual contract is entered into. While this concern is most prevalent in regard to contracts between a merchant and a consumer, the concern exists in regard to commercial contracts as well. Of course, the concern about general conditions is much broader than no oral modification clauses that may appear in them and it may well be appropriate that neither the CISG nor the UNIDROIT Principles has provided for them in this special case. More importantly, there will be oral modifications of contracts in spite of the no oral modification clause. One of the parties, usually the seller in respect of the CISG, will act in conformity with the modification. It is a difficult question as to whether a seller who makes only one delivery under the modified contract should have no rights arising out of the modification whereas a seller who makes multiple deliveries would be protected. [page 61]

FOOTNOTES

* Professor of Law Emeritus, Pace Law School; Secretary, United Nations Commission on International Trade Law (1985-1991); Director, Willem C. Vis International Commercial Arbitration Moot.

1. Report of the Secretary-General: formation and validity of contracts for the international sale of goods, A/CN.9/128, Annex II, (VIII) UNCITRAL Yearbook (1977), p 90.

2. Report of the Working Group on the International Sale of Goods on the work of its eighth session, A/CN.9/128, para 37, (V ) UNCITRAL Yearbook (1977), p 76.

3. Report of the Working Group on the International Sale of Goods on the work of its ninth session, A/CN.9/142, para 140, (IX) UNCITRAL Yearbook (1978), p 72.

4. The Nordic States of Denmark, Finland, Norway and Sweden have made declarations under Article 92 CISG.

5. Supra fn 2.

6. Report of the Working Group on the International Sale of Goods on the work of its ninth session, A/CN.9/142, para 146, (IX) UNCITRAL Yearbook (1978), p 72.

7. Ibid, para 147.

8. Document A/Conf.97/C.1/L.68, reproduced in (1981) United Nations Conference on Contracts for the International Sale of Goods, Vienna, 10 March-11 April 1980. Official Records: Documents of the Conference and Summary Records of the Plenary Meetings and of the Meetings of the Main Committees United Nations at p 101.

9. Ibid, pp 305-6.

10. Hillman, R (2007) 'How to Create a Commercial Calamity' (65) Ohio State Law Journal 335.

11. Supra fn I.

12. Supra fn 2, para 43.

13. As the Secretary of the Working Group I was the author of the comments to the draft CISG, but I don't remember what I had in mind at the time.

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Pace Law School Institute of International Commercial Law - Last updated February 17, 2009

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