Second Circuit Considers "No Oral Modification" Clause in Helicopter Contract

HIGHLIGHTS:

• Parties to aircraft purchase agreements should recognize that there are potential exceptions to "no oral modification" clauses.
• Conduct that evidences an indisputable mutual departure from the written agreement may constitute a waiver.

The Second Circuit recently issued a summary decision¹ concerning the scope of a "no oral modification" clause in contracts governing the sale of helicopters. The underlying dispute involved three separate helicopter purchase agreements for Oceanic Capital Company Limited ("Oceanic") to purchase three helicopters from Aircraft Services Resales LLC ("Aircraft Services") in July and August 2008. Each agreement provided that any modification was to be made "by an instrument in writing executed subsequent to the date hereof by authorized representatives of both Parties."

In 2009, after the original delivery dates had passed and Oceanic had purchased only one of the three helicopters, Aircraft Services commenced suit in the Southern District of New York for breach of contract. The District Court held that Oceanic breached two of the agreements by failing to purchase the other two helicopters because the parties had orally modified the agreements to extend the closing date to July 2009.

Two Exceptions to No Oral Modifications Clauses

On appeal by Oceanic, the Second Circuit evaluated the exceptions to New York General Obligations Law §15-301(1), which provides that a contract containing a proscription against oral modification cannot be changed "unless such executory agreement is in writing and signed by the party against whom enforcement ... is sought."

• The first exception is that a party may be estopped from invoking the statutory bar on oral modifications if that party has induced the other party's significant and substantial reliance upon an oral modification. For such estoppel to be effective, the parties' conduct "must not otherwise be compatible with the agreement as written."
• The second exception occurs where there is partial performance on the oral modification sought to be enforced. For there to be a finding of partial performance, the parties' conduct must be unequivocally referable to the oral modification.

The Second Circuit held that the District Court correctly determined that the parties had made an enforceable modification to the closing date under both exceptions. After the scheduled closing date had passed, Oceanic communicated an intent to close in early 2009 and paid an additional good faith deposit applicable to the cost of the helicopters. When the transaction did not close in early 2009, Oceanic made representations to Aircraft Services that Oceanic was committed to completing the transactions and the parties discussed modifications to the helicopters. As a result of these communications and deposits, Aircraft Services kept the helicopters off the market. Accordingly, the court found that Oceanic breached the contract when it failed to consummate the purchase.

Neither Court Applied the New York Uniform Commercial Code

Interestingly, neither the District Court nor Second Circuit decision applied the New York Uniform Commercial Code (N.Y.U.C.C.) to the analysis. Arguably, as a sale of goods case, the provision of the N.Y.U.C.C. addressing modifications would apply to determine whether there was an oral modification. N.Y.U.C.C. Section 2-209(2) provides, in relevant part, that "a signed agreement which excludes modification or rescission except by a signed writing cannot be otherwise modified or rescinded." Prior decisions within the Second Circuit recognize the operative effect of such clauses.² In addition, N.Y.U.C.C. Section 2-209(3) provides that the requirements of the statute of frauds must be satisfied if the contract as modified falls within the statute's provisions.³

Application of the N.Y.U.C.C., however, may not have changed the ultimate result. N.Y.U.C.C. Section 2-209(4) provides that "although an attempt at modification or rescission does not satisfy the requirements of subsection (2) or (3) it can operate as a waiver." Thus, the statute recognizes that even if a contractual provision may not be modified in the absence of a writing, there are situations where the provision may be waived by course of conduct.

Importantly, for conduct to amount to a waiver under the N.Y.U.C.C. "it must not otherwise be compatible with the agreement as written. Rather, the conduct of the parties must evidence an indisputable mutual departure from the written agreement."⁴ Had the court applied such a waiver analysis, it likely would have determined that Oceanic's conduct operated as a waiver of the contracted-for delivery date and reached a similar result.⁵ Nevertheless, it is important to recognize the distinctions between the analyses under the General Obligations Law and the N.Y.U.C.C.

"No Oral Modification" Clauses May Result in False Security

The Oceanic case is a useful reminder of the importance of not being overly reliant on a "no oral modification" clause governed by New York law. Indeed, the provisions of and exceptions to the General Obligations Law and the N.Y. Uniform Commercial Code may result in a finding that conduct, performance, or representations that deviate from the terms of the written agreement constitute waiver or oral modification of the written agreement. In the context of aircraft transactions, parties should be especially mindful of deviations from delivery dates and delivery conditions to ensure that such deviations do not evidence an "indisputable mutual departure" from the written agreement.

Notes

¹Aircraft Services Resales LLC v. Oceanic Capital Co. Ltd., No. 13 Civ. 3738, __ Fed. Appx. __, 2014 WL 5032409 (2d Cir. Oct. 9, 2014). As a "summary decision," the decision does not have precedential effect but may be cited.

²See, e.g., Austrian Airlines Oesterreichische v. UT Finance Corp., 567 F. Supp. 2d 579, 592 (S.D.N.Y. 2008), aff’d, 336 Fed. Appx. 39, 2009 WL 1940715 (2d Cir. July 2, 2009) (the aircraft purchase agreement would have required a writing to modify the delivery date); Dallas Aerospace, Inc. v. CIS Air Corp., 352 F.3d 775 (2d Cir. 2003) (suggesting that N.Y. U.C.C. §2-209 would have applied if the agreement excluded modifications).

³ Under N.Y. U.C.C. 2-201, a contract for the sale of goods for the price of $500 or more is not enforceable in the absence of a sufficient writing signed by the party against whom enforcement is sought.

⁴See Austrian Airlines, 567 F. Supp. 2d at 593.

⁵Compare Austrian Airlines, 567 F. Supp. 2d at 593 (communications by an aircraft purchaser concerning possible extension of the delivery date did not evidence an "indisputable mutual departure" from the aircraft purchase agreement).

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