Not very, if your actions could be construed as an oral waiver
Many, probably most, contracts contain provisions that prohibit oral waivers of any of their terms. Language, such as that the paragraph below, is often included in a contract, to prevent a party from claiming that the other side orally agreed to waive a particular term or requirement of the contract:
Waiver. No waiver of any provision of this Agreement or any rights or obligations of either party hereunder shall be effective, except pursuant to written instrument signed by the party or parties waiving compliance.
Most people assume that this unambiguous provision, which contains no exceptions, is fully enforceable and precludes a claim of waiver. But, that it is not quite the case. Oral waivers are permitted if the court determines that the parties acted in a manner consistent with a waiver, such as not enforcing a contract provision.
In Kamco Supply Corp. v On the Right Track, LLC, Kamco agreed to purchase annual and monthly minimum volumes of products from defendants. It never came close to achieving these minimum volumes, but the parties kept working together under the contract anyway, until one day, the defendants declared Kamco in default for failing to purchase the minimum quantities mandated.
The Supreme Court held that the minimum requirements provisions had been waived, notwithstanding a “no waiver” clause in the contract. As for the “no oral waiver” clause, the court held that it was not dispositive, as “[t]he factual question of whether waiver occurred may be determined by consideration of words or conduct.”
The Appellate Division, Second Department affirmed, explaining:
The general principles relating to the law of waiver and estoppel in New York are well known. Once a contract is formed, the parties may of course change their agreement by another agreement, by course of performance, or by conduct amounting to a waiver or estoppel. Thus, [c]ontractual rights maybe waived if they are knowingly, voluntarily and intentionally abandoned, and [s]uch abandonment may be established by affirmative conduct or by failure to act so as to evince an intent not to claim a purported advantage. As the intentional relinquishment of a known right, a waiver should not be lightly presumed. Similarly, a party’s reluctance to terminate a contract upon a breach and its attempts to encourage the breaching party to adhere to its obligations under the contract do not necessarily constitute a waiver of the innocent party’s rights in the future.
A waiver, however, maybe proved by undisputed acts or language so inconsistent with [the party’s] purpose to stand upon his [or her] rights as to leave no opportunity for a reasonable inference to the contrary.” (internal citations and quotation marks omitted).
Waiver and election of remedies
In the Kamco case, the Second Department also explained the “interplay” between the concept of waiver and the doctrine of election of remedies:
Under the election of remedies doctrine, “when a party materially breaches a contract, the non-breaching party must choose between two options: it can elect to terminate the contract or continue it. If the non-breaching party chooses to continue to perform or accept performance, it loses its right to terminate the contract based on the prior breach.”
“[A]n election of remedies is merely a species of waiver. Thus, a party that continues to perform or accept performance despite the failure of a condition precedent established for its benefit may be said—provided that such party’s intent is clearly expressed—either to have elected to affirm the contract despite the failure of the condition, or to have waived the satisfaction of the condition. Whether viewed as an election or as a waiver, the result is the same: the party is barred from terminating the contract based on the failure of the condition precedent and may be held liable if it subsequently fails to perform.”
“However, in the case of a waiver that is deemed broad enough to apply prospectively to an executory obligation, the effect of such a waiver would arguably be broader than that of a mere election. Whereas an election to continue the performance of a contract despite the occurrence of a material breach would bar the right to terminate the contract based on that breach it would not preclude an action based on a subsequent breach. By contrast, a prospective waiver of the breached provision would . . . serve to bar an action based on a subsequent breach of that provision.”
The Appellate Division noted that determining whether a waiver occurred, notwithstanding a “no waiver” clause is very difficult, especially when it comes to “relational contracts” – those where there are repeated occasions for performance over the course of months or years, and “particularly when trying to gauge whether a waiver relates only to a contemporaneous or past obligation, or applies prospectively to executory obligations as well.” It continued, by stating:
In approaching this question, it is useful to recall that the roots of waiver lie firmly in equity, and are “designed to prevent the waiving party from lulling the other party into a belief that strict compliance with a contractual duty will not be required and then either suing for noncompliance or demanding compliance for the purpose of avoiding the transaction. (internal citations and quotation marks omitted).
The Appellate Division concluded that after months of waiving the minimum purchase requirements and after having concluded that Kamco could never meet them going forward, defendants’ waivers of past performance morphed into a waiver of future performance. As for the “no waiver" clause, it stated:
Finally, we agree with the Supreme Court that, under the facts presented, the agreements’ no-oral-waiver provision . . . does not compel a different result. As explained above, the Kamco parties’ persistent and repeated failure to meet minimum purchase requirements, coupled with [defendants’] continued acceptance of such conduct without any reservation or protest until a few weeks before the expiration of the agreements by which time it was, of course, too late to insist upon strict compliance with the terms of the agreements), equitably estops [defendants] from invoking the benefit of the no-oral waiver provision (internal citations and quotation marks omitted).
Lessons Learned
The Kamco case illustrates that parties to a contract should not rely on a “no waiver” clause when confronted by a default or variance in performance by the other party. It is critical, in addressing such defaults or variances, to be clear and explicit as to whether a waiver is intended, and if so what the extent of the waiver is. If the intent is to waive one failure to perform, but not future ones, this needs to be explicitly stated. Otherwise, a court, down the road, may conclude the opposite.