Relational Contracts and Modifications

So many businesses pursue long-term relationships for supply of products. A relational contract is generally thought of as an agreement of an ongoing nature between two or more parties that the parties modify to address changing business needs. U.C.C. section 2-209(2) expressly recognizes the enforceability of a contractual clause prohibiting subsequent oral modification. Recognizing the need for flexibility in commercial transactions that underlies the policy of the U.C.C., section 2-209(4) acknowledges that the parties may waive such a clause. Businesses often use the no-modification clauses as a matter of stock-terms and conditions. Yet, business practice may suggest that the parties actually desire more flexibility in their day-to-day dealings. The question becomes how much flexibility in defining the scope of the relationship do parties to formal agreements really desire in fact, especially in the face of a no-modification contract clause?

The tension between relational contracting and firm contract terms came up recently In Italverde Trading, Inc. v. Four Bills of Lading Numbered LRNNN 120950, LRNNN 122950, LRNN 123580, and MLSNV 254064, 485 F. Supp. 2d 187 (E.D.N.Y. 2007). After a freight forwarder seized a shipment of pasta in payment of a debt, the pasta manufacturer, Delverde SpA (“Delverde”), sought to establish that title to the pasta passed to the buyer, Italverde Trading, Inc. (“Italverde”), upon delivery to the shipper. The parties to the pasta sales agreement had a no modifications clause in their sales contract. The contract between Delverde and Italverde provided that Italverde would not gain title to the pasta until Italverde received the pasta in the United States, but Italverde argued that the parties waived this provision. First, the Delverde shipping invoices used the delivery term “CIF.” Ultimately, the court found this evidence inconclusive since the effect of the CIF term would depend on whether the parties understood the term as being used under the INCOTERMS, which does not govern title, or the U.C.C. section 2-320, which would. Second, the Italverde CEO testified that he understood that Italverde had title to the pasta when it was positioned on the ship. The court concluded that the inclusion of the CIF term on invoices, the lack of objection by Italverde and the testimony of the Italverde CEO were insufficient to establish as a matter of law that the parties had waived the no oral modifications provisions regarding title to the pasta. At trial, Italverde and Delverde would have the burden of proof to show the parties waived the transfer of title provision from the contract.

Perhaps this argument was created just to avoid the loss of the pasta to freight forwarder. But, on the other hand, title and risk of loss issues are often important to parties involved in shipping. If Deverde and Italverde did in fact change the contract’s title provisions through practice developed over time, as we might expect in a relational contract, then denial of the change undermines the intention of the parties. The common inclusion of non-modifications clauses as boilerplate in contracts may turn out to be a pitfall to parties to longer term contracts who often leave some of their contract terms behind as their business develops.