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Posted: March 24, 2017

Parties’ Course of Conduct Trumps No-Oral-Waiver Clause

On March 22, 2017, the Second Department issued a decision in Kamco Supply Corp. v. On the Right Track, LLC, 2017 NY Slip Op. 02025, holding that the parties’ course of conduct under an agreement can trump a no-oral-waiver clause, explaining:

In the context of relational contracts such as the subject agreements, where there are repeated occasions for performance over the course of months or years, the application of general principles of waiver and estoppel presents special difficulties, particularly when trying to gauge whether a waiver relates only to a contemporaneous or past obligation, or applies prospectively to executory obligations as well. And when no-oral-waiver clauses are thrown into the mix, the analysis becomes even more complex. . . .

Where, as here, a contract provides, among other things, for the long-term supply of goods, UCC 2-208 and 2-209 also come into play. . . .

Also relevant to this appeal is the interplay between the concept of waiver and the doctrine of election of remedies. Under the latter, 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.

While courts have occasionally attempted to draw a distinction between a waiver and an election of remedies, these distinctions are mostly a matter of semantic. In the ordinary case, an 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. By contrast, a prospective waiver of the breached provision would, unless effectively retracted in accordance with UCC 2-209(5), serve to bar an action based on a subsequent breach of that provision.

Applying the above principles to the facts at hand, we find that the record broadly supports the view that OTRT and SEM, by electing early on to continue the agreements despite the Kamco parties’ breach of the 2005 annual minimum purchase requirement, waived their right to terminate the agreements based on that initial breach. Contrary to the Kamco parties’ contentions, however, we do not find that such conduct, without more, evinced “a clear manifestation of intent” prospectively to waive any of the 2006 monthly or annual minimum purchase requirements. The same reasoning also applies to the Kamco parties’ continued failure, in early 2006, to meet the monthly minimum purchase requirements. Such conduct can reasonably be understood as a waiver of the 2006 monthly minimum purchase requirements as and when such obligations became due, but not as a prospective waiver of executory minimum purchase requirements, including the 2006 annual minimum purchase requirement.

As time went on, however, and OTRT and SEM continued to accept, month after month, and without any formal reservation of rights or notice of default, the Kamco parties’ continued failure to meet monthly minimum purchase requirements, the situation eventually reached a tipping point where the conduct of OTRT and SEM became so inconsistent with an intent to enforce the remaining 2006 minimum purchase requirements as to leave no opportunity for a reasonable inference to the contrary.

We need not decide precisely when that tipping point happened in this case, as it is clear from the record that it occurred well before OTRT and SEM first attempted formally to enforce their rights under the agreements by asserting counterclaims and the third-party action against the Kamco parties in November or December of 2006.

As early as July of 2006, OTRT had already conceded that there was no “realistic possibility” that the Kamco parties would be able to meet their annual minimum purchase requirement for 2006, yet neither OTRT nor SEM made any effort at that time to put the Kamco parties on notice of their default. On the contrary, OTRT even agreed to allow Kamco Supply Corp. to return $47,709.92 worth of Trakloc to SEM—conduct that is so fundamentally at odds with an intent to enforce the 2006 annual minimum purchase requirement that it would be difficult to characterize it as anything other than a prospective waiver of the annual minimum purchase requirement.

Moreover, by the end of 2006, the Kamco parties’ cumulative purchases of Trakloc amounted to barely more than 2% of the total minimum purchase requirements for 2005 and 2006, leaving a monumental shortfall of 175,770,331 linear feet. At the same time, SEM had only negligible inventories of Trakloc on hand, and its capacity to produce new product was limited to approximately 12 million to 18 million linear feet per month. Thus, even assuming that the Kamco parties had been willing to comply with the 2006 annual minimum purchase requirement in November 2006, it is unreasonable to believe that OTRT and SEM had the capacity to deliver such a large amount of Trakloc in less than two months’ time.

For all of the above reasons, we find that the Supreme Court properly concluded that, by the end of 2006, the affirmative conduct of OTRT and SEM over the previous weeks and months evinced an unmistakable intent to waive the remaining 2006 minimum purchase requirements, including the 2006 annual minimum purchase requirement.

. . .

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 OTRT’s and SEM’s 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 OTRT and SEM from invoking the benefit of the no-oral-waiver provision.

(Internal quotations and citations omitted).

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