NY Court of Appeals Addresses Interpretation of Contract with Conflicting Provisions Regarding Written Amendments
Life would be so much easier if parties who signed agreements that require written signed amendments really did sign written amendments, and, secondly, if parties signed agreements and modifications in their correct capacities.
That is the lesson that I learned from Israel v. Chabra which was handed down today by the Court of Appeals in response to a certified question from the Second Circuit. If you doubt the wisdom of my lesson, consider the fact that before the appeal to the Second Circuit, and the Court of Appeals briefing and argument, the trial court had awarded almost $300,000 in attorneys' fees to the plaintiffs after granting them summary judgment. Oh, and try to find a contract that doesn't say no oral modification, and/or that any amendment must be in a signed writing.
Frankly, I had to read the Second Circuit’s opinion as well as the Court of Appeals opinion to figure out what was going on here. This is not a slur on the opinion, which takes great care in analyzing the history of the statutory and common law in regard to “no oral modification” contract provisions law in New York.
Here is a greatly simplified view of the facts. Plaintiffs, father and son, were key employees of a business that was about to be sold. They each entered a three-year employment agreement, which was signed by the defendant Chabra, the president of the company, in his corporate capacity. Each also signed a “memorandum of intent” agreeing that, if the company were sold, he would be paid a bonus by defendant. (Yes, the dreaded retention bonus language is used, but I don’t think that Barney Frank or Andrew Cuomo could get too much press about this.)
A few months later, the agreements were modified and called “Amendment No. 1 to the Employment Agreement” and “Amendment No. 1 to Letter of Intent”. Key points are that the obligation to pay the bonuses was transferred from Chabra to the company, and that Chabra signed a personal guarantee stating that Chabra would cover any default of the current employer to pay a bonus installment. Critically, the guarantee said that the guarantor’s liability was absolute regardless of any “change in the time, manner, or place of payment.” The guarantee also said – in essence – that changes the Amendment No. 1 to the Employment Agreement had to be agreed to by the Guarantor (defendant, in his personal capacity) in writing.
A few years later, after payments had been missed, there was a “Second Amendment to the Employment Agreement," which changed the payment schedule. It was signed by defendant in his corporate capacity, but not his personal capacity.
Question: does NY General Obligations Law 15-301 mandate that the signed writing requirement trump the clause which creates an exception to a signed writing; if not, which of the conflicting provisions controls, the clause which says that changes in time, manner or place of payment would not alter the Guarantor’s obligation, or the clause that requires defendant, the guarantor, to agree in writing to changes from Amendment No. 1 to the Employment Agreement?
The court decides that NY General Obligations Law 15-301(1), permits the enforcement of contract clauses that require amendment in writing; however, it is not absolute; the statute doesn’t prohibit contractual interpretation if there are conflicting terms in the agreement. If the written amendment requirement conflicts with another term in the agreement, contract interpretation rules may be used to harmonize the clauses. (As an aside, anyone who has read the McKinneys’ volume on Statutory Interpretation knows that there is always at least one rule that goes your way.) Here, court declines to interpret the contract using the first clause governs rules. Back to the Second Circuit. Bleak House 21st Century style.
