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What Happens When Your Conduct Does Not Match Your Contract?

What Happens When Your Conduct Does Not Match Your Contract?

One function of a contract is to establish certain rights between and among the parties. If the parties decline to enforce such rights, or modify them through their own conduct, a court can take such actions into consideration when hearing a breach of contract case. As one New York appeals court explained in a 2013 opinion, “the law is abundantly clear in New York that, even where a contract specifically contains a nonwaiver clause and a provision stating that it cannot be modified except by a writing, it can, nevertheless, be effectively modified by actual performance and the parties' course of conduct.”

Estate of Kingston v. Kingston Farms Partnership

Put another way, even if the written terms of a contract say one thing, a court may look at what the parties actually did before deciding whether or not the purpose of the contract has been fulfilled. Here is a recent example from an ongoing case. Three brothers formed a partnership to operate a farm in upstate New York. They signed a partnership agreement in 1998. Under the agreement's written terms, the brothers were to meet every year in March to reassess the value of the farm. This would become important in the event one of the brothers left the partnership, as this valuation would determine how much the other brothers would owe him.

In practice, the brothers never held any of the March meetings specified in the written agreement. Instead, they met each December to sign an end-of-year balance sheet for their lender, which included a current valuation of the farm. As of December 2011, the balance sheet reflected a valuation of just under $3 million.

The following November, one brother died. The partnership agreement said his estate was entitled to 90% of his share in the farm based on the value at the time of his death. The estate argued the December 2011 valuation was not proper, as it did not occur during the required March meeting, and asked a judge to order the partnership's accountant to revalue the business.

Livingston County Supreme Court granted the estate summary judgment on this issue and ordered the revaluation. But in a July 2 order, the Appellate Division, Fourth Department, reversed. Without deciding the merits, the appeals court said the Supreme Court must determine “whether the partners, by conducting an annual meeting in December and signing thereat a writing arguably reciting the Partnership Value, modified the partnership agreement through their course of conduct.” And if the brothers did effectively amend their agreement through their conduct, the trial court must further decide whether the December 2011 valuation remains valid.

Informal Practices v. Fine Print

None of this is to suggest you should not get business agreements in writing, or when appropriate sign written amendments to such contracts. But we all know in our day-to-day lives, our conduct does not always strictly adhere to the fine print. Especially when you are in a business relationship with family or friends, informal practices may come to override any prior written agreements. Still, when there are potential disagreements over how such conduct may affect your rights, it is a good idea to consult with an experienced New York business attorney. Contact our office today if you have any questions.

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