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When Tennessee Contracts May Be Modified Just By Conduct of the Parties

In Tennessee, contracts may be modified after they are made and after the parties have begun performing.  In fact, it happens all of the time. Tennessee law allows the modification of contracts, and a modified contract is as effective as the original contract.  Many Tennessee breach of contract cases result from the alleged breach of a term that was not a part of the parties’ original written contract, but which was allegedly agreed upon after the original contract was made.

A modification of a contract is defined as a change to one or more terms of the contract which adds something to the contract or which nullifies some part of the contract.  When a contract is modified, its general purpose and intent are left intact.  Technically, under Tennessee law, a modification creates a new contract, but the original terms which were not changed or nullified remain in effect.

To prove a modification, there has to be evidence sufficient to establish that both parties assented to the modification.  Under Tennessee law, a contract may be modified by verbal agreement or by written agreement.  Moreover, and very significantly, a contract may be modified by a course of conduct on the part of the parties. In other words, mutual assent can be found in the conduct of the parties alone.  Even more significantly, under Tennessee law, a contract may be orally modified or modified by a course of conduct even where the parties have agreed, in writing no less, to a clause that specifically says that the contract may only be modified by a writing signed by both parties.

Two Tennessee cases provide examples of when the course of the parties’ conduct does and does not amount to an enforceable modification of a contract.  In Song & Song v. Fine Art Construction Co., Inc. (Tenn. Ct. App. 2012), a contractor and a property owner signed a written contract for construction work.  The written contract provided that Owner would pay Contractor $90,000 for the work.  The contract also had a no oral modification clause which provided that it could not be modified except by a separate written agreement signed by Owner and Contractor.

After beginning work, Contractor and Owner discovered that substantially more work would be required to finish the project because fire dampers would need to be installed in duct work.  With Owner’s knowledge and at least its acquiescence, Contractor installed the necessary fire dampers, although the parties did not put anything in writing about the fire dampers.  Contractor admitted that there was never any agreement about the amount of money which Contractor would be paid for work related to the fire dampers, but testified that Contractor and Owner agreed that Owner would pay Contractor the amount billed for that work.

Owner paid the $90,000 as well as two invoices for the fire damper work before Owner terminated the contract.  After the contract was terminated, Contractor sent the final bill for the fire damper work, which Owner did not pay. Contractor filed a breach of contract lawsuit. 

The Court of Appeals of Tennessee in the Song & Song case held that Contractor was owed for the third and final invoice for the fire damper work because the parties, by their conduct, had modified the original contract.  To the court, there was no question that both Contractor and Owner had assented to the modification of the contract on the terms to which Contractor testified.

For a case in which a court held that the parties’ course of conduct did not amount to a modification of the original contract, take a look at Construction Crane and Tractor, Inc. v. Wirtgen America, Inc. (Tenn. Ct. App. 2010).  In that case, a distributor of road construction equipment sought to prove that the manufacturer with which it had a distributor agreement had modified the agreement to grant it an expanded territory.  Distributor argued that the contract had been modified because Manufacturer had allowed it to make sales in the expanded territory. There was no dispute that Manufacturer had allowed the same.

The court in the Wirtgen case held that the totality of circumstances showed that Manufacturer had not assented to a modification of the original contract.  Although Manufacturer had allowed Distributor to sell in the territory at issue, it had also made it clear, by letter, that it would not expand Distributor’s territory unless and until certain conditions were met.  Since those conditions were never met, the court held that there was no modification.