contract modification and 2-209 and posner and easterbrook

This section ought to be a lot easier to understand than your reading might suggest. I say "ought," because the 7th Circuit, in the Wisconsin Knife case ended up confusing the analysis of what is, I think, a pretty clear statute. The purpose of this page is to exposit the flow of 2-209 and then look briefly at the two cases I asked you to read on it.

The Purpose and Language of the Statute

Just as the flow of 2-207 is easier to understand (though not crystal clear) when we realize that the issue is the relationship of the PO and AF, so 2-209 comes into focus when we realize that the Code is trying to "update" the CLC regarding the validity of contractual modifications. At common law, modification of contracts needed consideration to be binding. As Judge Posner said, this requirement was both underinclusive and overinclusive (p. 107 and his explanation). 2-209(1) permits contract modifications without additional consideration. [Note that this rule applies only for transactions in goods. When goods are not in question, the CLC might still require additional consideration for contract modification, such as in the employment or service context].

Almost all contracts for transactions in goods will have a contract modification clause (at least the contracts YOU will write!). 2-209(2) provides that when a clause forbidding modifcation except by signed writing is in a contract, any modification to the contract must also be made in writing. Note too the "separately signed" provision in 2-209(2) which I briefly explained in my essay on 2-205.

The difficulty, or pressure point, in the statute arises in (4) and (5). Here is the problem. The Code, as we know, is a "pro-commerce" document. Therefore it wants to encourage contracts to be made (and kept, of course). So, it will also want to encourage modifications. Having a strict rule requiring all modifications to be in writing (if a contract provision requires it) might seem to be a reversion to the technical formalities of the CLC which the Code wants to leave behind. So, (4) gives an alternative way in which modifications can be made even if the contract provides that written modification is the only way to modify. Read 2-209(4) in this context:

"(4) Although an attempt at modification or rescission does not satisfy the requirements of subsection (2) or (3) it can operate as a waiver."

Explaining 2-209(4) and (5)

Ok. One step at a time. (4) envisions an occasion where modification might not have followed the rules of (2). It "does not satisfy the requirements of subsection (2)..." But when might that be, or what situation does 2-209(4) assume to address? To me it is obvious that it refers to a series of oral and possibly written negotiations that contracting partners go through when someone has not delivered on time or according to the contractual specifications. The buyer can declare a breach and sue for damages, but often that isn't the best way to go. You are well into a project, perhaps the seller or manufacturer just needs a little more time, etc. So, you talk about how things can still happen. And, you often agree on new terms. Maybe you don't memorialize it with all the solemnity of a contract. It might have been in a handshake or minutes of a board meeting or notes that someone took at a meeting. These are the situations where you have not literally fulfilled the requirements of (2) but you still want to work together. Thus, your minutes or handshake or whatever it was "can operate as a waiver."

That is where (5) kicks in. Once you have made a waiver, possibly by agreeing to a later delivery date for the goods, "the party who has made a waiver" [note also that it concerns an "executory portion" of the contract--that is, the portion of the contract that still remains unfulfilled]..."may retract the waiver." You can say to the person, "Ok, you have until May 1 to deliver the goods (when the original contract delivery date was March 1)," but then you can think about it for a week and decide, "No, I really can't afford to wait this long. Deal is off!" You would be permitted to "retract the waiver" only if the other party had not detrimentally relied on your waiver. That is, if you gave the other party two more months to produce, and they immediately sprang into action by turning out widgets according to the contract, they would have been said to be in a "position of reliance" regarding your waiver, and you would not have been able to revoke your waiver.

On to the Cases

So, I think the statute is relatively straightforward, even if you have to take your time to work through its provisions. The big legal question will be "what constitutes a waiver?" or "did the facts of this case add up to a waiver?" Judge Posner's concern (and I, like many, disagree with his conclusion--that 2-209(4) requires reliance in order for there to be a waiver) was that if (4) can be easily invoked by saying that anything can act as a waiver, then you will have taken all the teeth out of 2-209(2). It would have become a dead letter. So, he would like to up the ante in order to invoke 2-209(4) by requiring a showing of reliance (but he doesn't explain who would rely--but I suppose it has to be the party not seeking the waiver).

I think that the best way to sort through the issues is actually not to read Wisconsin Knife first, but to read BMC first (p.116) and then read Judge Easterbrook's dissent in Knife. Both of these individuals/courts read the provision correctly, I think.

Judge Posner is correct, I believe, in remanding the case because the judge below applied the wrong rule of law in construing 2-209. That is, the judge below asked the jury to decide whether a oral modification was concluded and then whether the contract was breached (p.106). In fact, since all the negotiations for contract modification were oral, the decision could not be rendered under 2-209(2) but had to be considered under 2-209(4). Thus, on remand, the language of 2-209(4) had to be applied to the facts at hand. It looks like NMC had a good case, but Judge Posner was unwilling to dispose of the issue at summary judgment.

Conclusion

If you stay grounded on the purpose of 2-209 and understand the flow of the statute, the analysis in the cases and the conclusions will, I think, be more readily understandable. Generally, when you have contract modification negotiations, a court will hold that it is improper to decide on msj whether a waiver was in place and whether the waiver was revoked. Hence the remands. But reliance only seems to be a subset of the cases in (4), as Judge Easterbrook argues.