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Contracts to Be Enforced as Written - or Not!
Tennessee Code Annotated § 47-50-112:
The title of Tenn. Code Ann. § 47-50-112 (2001 repl. vol.) is attractive for the simplicity of its promise: "Contracts to be enforced as written." This title, reminiscent of "plain language" enactments concerning insurance policies, suggests the replacement of historical sophistry subject to exclusive control and manipulation by the bench and bar with a true transparency for the benefit of the populace, or at least that segment of the populace that negotiates contracts. There is a promise in the phrase "enforced as written" of primacy of the contracting parties' chosen words, with judge-made doctrines and canons of construction relegated to lesser roles in contract litigation.
A subsection of the codified statute, § 47-50-112(c), renders effective a provision in "any ... security agreement, note, deed of trust, or other contract" that states "that no waiver of any terms or provisions thereof shall be valid unless such waiver is in writing." The subsection accomplishes this, or appears to do so, by a prohibition directed to the judiciary: if a contract contains a provision to the effect that no waiver of any terms or provisions of the contract shall be valid unless in writing, then "no court shall give effect to any such waiver unless it is in writing." (Emphasis added.)
Alas, the presence in a contract governed by Tennessee law of a clause that prohibits modification of that contract except by another writing signed by the contracting parties does not guarantee that a Tennessee court will not find that an enforceable oral agreement to modify the contract was made. According to Tennessee judicial decisions to date, the meaning of Tenn. Code Ann. § 47-50-112, regardless of what seems to be promised by "enforced as written," is more complicated than that contracts are to be enforced as written.
The purposes of this article are to provide an overview of the statute, Tenn. Code Ann. § 47-50-112, a brief review of Tennessee decisional law before the enactment of § 47-50-112 concerning construction of written agreements, a review of decisional law on the subject since the enactment of § 47-50-112, and suggestions for addressing the issue of oral modification of written contracts in Tennessee law and in written agreements governed by Tennessee law.
Tenn. Code Ann. §47-50-112(a)
The statute is divided into three subsections. The first two are very similar to one another, and dissimilar from the third, the main subject of this article. Paying some attention to the structure and language of subsections (a) and (b) highlights the distinctiveness of subsection (c), and in doing so, helps in understanding the meaning of subsection (c).
Subsection (a) of § 47-50-112 presents itself as an evidentiary provision. Using familiar language from the Statute of Frauds, this subsection states in part that "[a]ll contracts ... in writing and signed by the party to be bound, ... shall be prima facie evidence that the contract contains the true intention of the parties, and shall be enforced as written... ." The subsection includes a proviso, which states that "nothing herein" (which might refer to § 47-50-112(a), or to § 47-50-112 as a whole) shall limit the right of a party to contest an agreement on the basis that it was procured by fraud, or "to assert any other rights or defense provided by common law or statutory law in regard to contracts."
A reader of § 47-50-112(a) is provoked to wonder what the General Assembly believed that its enactment would accomplish. It was already statutory law that a contract in writing signed by the party to be bound is prima facie evidence of consideration. More to the point, Tennessee decisional law concerning the construction of contracts generally, and the parol evidence rule particularly, has long treated a written contract as the primary source for understanding the contracting parties' intention.
According to longstanding Tennessee decisional law, a court's chief task in construing a contract governed by Tennessee law is to determine the contracting parties' intention. Their intention "is to be gathered from the words used in their contract, read in the light of their negotiations, the circumstances of the making of the contract, and the practical construction of it by the parties themselves." The Supreme Court has given its imprimatur to this view that a written contract expresses its own meaning fully in the context of the deal to which it refers, as contrasted with a "four corners" view that a contract is to be, if it can be, read hermetically. "In reading and studying this contact we of course must construe it with reference to the situation of the parties, the business to which the contract relates and the subject matter as appears from the words used."
Justice Burnett's phrase in Petty v. Sloan, "as appears from the words used," reminds us elliptically that construing a written contract in the context of the deal memorialized by it, a context that appears from the language of the contract itself, is not the equivalent of considering parol evidence to understand the meaning of the contractual language. Tennessee appellate courts' decisions are filled with holdings that in a case that depends on construction of a written contract governed by Tennessee law, the language used in the contract, if clear, controls. The often-stated principle that the duty of the construing court is to determine the contracting parties' intention is almost as often coupled with the admonition that the "intention" to be determined is the one expressed in the written agreement, before a dispute or breach provided that irresistible inclination to remember an intention that happens to support a party's claim for relief. To return to Petty v. Sloan: "In getting at this intention we of course do not determine what the state of the mind was of the parties at the time the contract was executed but rather what their intention was as actually embodied and expressed in the instrument as written."
Judicial construction of a written contract governed by Tennessee law thus both construes an unambiguous document and constructs on the basis of its reading of the document an artificial intention, the one expressed in the document itself, untainted by any conscious or subconscious motive provoked by a dispute or breach. This aspect of what judges do, or ought to do, when addressing litigation premised on a written contract has been frequently expressed in terms of excluding from consideration extrinsic or parol evidence concerning the meaning of the document, since long before the enactment of § 47-50-112.
The "rule of strict construction" leads to the parol evidence rule and the rule of merger, which are interrelated. "When an agreement has been reduced to writing, its true interpretation and purpose must be determined from the terms of the instrument itself. All verbal agreements made on or before reduction to writing are merged in the written instrument." The parol evidence rule is a rule of substantive law, not merely a rule of evidence or of construction. When the rule applies " that is, when the parties' intention can be ascertained from the written contract itself " not even parol evidence of the parties' own construction of their contract can be considered.
To summarize then, Tennessee common law and statutory law from before the enactment of § 47-50-112, and of continuing vitality, teach that a written agreement governed by Tennessee law is prima facie evidence that it is supported by consideration; that judicial construction of such an agreement consists of determining the contracting parties' intention on the basis of the writing itself, viewed in its context of the underlying deal, the business to which the writing and the deal relate, and the subject matter disclosed by the writing; that this intention to be determined by a court is a constructed mutual intention, determined on the basis of the writing, while purposefully ignoring any extracontractual evidence of intention that comes into existence after the dispute that created the need for judicial determination; and that as long as the written agreement, considered in its context as stated above, is clear to the court charged with construction of it, it is error to consider other evidence proffered to show what the contracting parties believed they were doing in making the agreement. These rules, apart from § 47-50-112(a), accomplish the statutory subsection's stated purposes of rendering a written agreement "prima facie evidence that [it] contains the true intention of the parties" and insuring that such an agreement will be "enforced as written."
In short, § 47-50-112(a) did nothing more than restate some aspects of Tennessee contracts law; the subsection did not effect any change in the law. The proviso at the end of the subsection supports this reading; it preserved not only a fraud defense against asserted contractual liability, but also "any other rights or defense provided by common law or statutory law in regard to contracts."
In Tidwell v. Morgan Building Systems Inc., without stating so, the Court of Appeals treated the subsection as a restatement of existing legal rules. The Tidwell court stated that § 47-50-112 has a purpose "similar to that of the Parol Evidence Rule in that both seek to enforce contracts as written." The court then cited two earlier decisions, Beasley v. Metropolitan Life Ins. Co. and Farmers & Merchants Bank v. Petty, for traditional justifications for the parol evidence rule, that permitting a party to deny the express terms of a written agreement freely executed greatly undermines the value of all written agreements (Beasley v. Metropolitan Life Ins. Co.), and that allowing parol evidence to contradict the express terms of a written contract defeats the very purpose of having an agreement in writing (Farmers & Merchants Bank v. Petty).
Tenn. Code Ann. § 47-50-112(b)
Subsection (b) of § 47-50-112 mirrors subsection (a) to a great extent. Subsection (a) begins with a statement of its applicability to "[a]ll contracts, including, but not limited to, notes, security agreements, deeds of trust, and installment sales contracts." Subsection (b) begins with a similar litany: "[a]ny contract, security agreement, note, deed of trust, or other security instrument." Each of these subsections specifies that a contract within its scope must be "in writing and signed by the party to be bound"; subsection (b) adds to "signed" the phrase "or endorsed."
Subsection (a) declares the written, signed contract "prima facie evidence that the contract contains the true intention of the parties," and that it "shall be enforced as written." Subsection (b) states that the written, signed (or endorsed) contract "shall be deemed to evidence the true intentions of the parties, and shall be enforced as written." The statute taken as a whole does not indicate that there is a distinction between being prima facie evidence of contractual intent and being deemed to evidence such intent, suggesting that the latter phrase explains the meaning of the former one. Both subsections contain the proviso that preserves the right of a party to contest an agreement on the basis that it was procured by fraud, and that preserves "any other rights or defense provided by common law or statutory law in regard to contracts."
These similarities render § 47-50-112(b) of some use in understanding § 47-50-112(a). Subsection (b) is, however, much more limited in scope. This subsection declares enforceable an agreement "that provides that the security interest granted therein also secures other provisions or future indebtedness." In enacting this provision, the General Assembly intended to overrule prior law that limited the effectiveness of a future advance clause in a security agreement or deed of trust to obligations "of the same class" as those secured originally by the agreement or deed of trust. Subsection (b), then, unlike subsection (a), effected a change in the law by confirming the validity of certain kinds of agreements that had been of questionable validity before.
Tenn. Code Ann. § 47-50-112(c)
The main subject of this article, subsection (c) of the statute, does not share language and structure with subsections (a) and (b), except with respect to the phrase "any such security agreement, note, deed of trust, or other contract," which defines its scope. The echoes in this phrase of "[a]ll contracts," etc. in subsection (a) and of "[a]ny contract," etc. in subsection (b) indicate that the scope of subsection (c) includes any agreement in writing and signed by the party against whose interest the provision is invoked.
On its face, subsection (c) renders valid and enforceable "a [contractual] provision to the effect that no waiver of any terms or provisions [of the security agreement, note, deed of trust, or other contract] shall be valid unless such waiver is in writing." It appears to accomplish this by prohibiting courts from giving effect to an alleged unwritten waiver when such a written contractual provision exists. Unlike subsections (a) and (b), subsection (c) has no proviso that preserves the right of a party to contest an agreement on the ground that it was procured by fraud, or the right "to assert any other rights or defense provided by common law or statutory law in regard to contracts."
In Tidwell v. Morgan Building Systems Inc., the Court of Appeals for the Western Section treated § 47-50-112 as applicable to a contractual prohibition against modification other than in writing, which seems broader than a prohibition against an unwritten waiver, but then recognized an exception for rescission by mutual oral agreement. This exception has developed into one large enough to make § 47-50-112(c) of questionable significance.
In Tidwell, the plaintiff, an individual, through his spouse and agent, entered into a written agreement with the defendant, a vendor of portable buildings, to purchase such a building. (The facts recited in the Court of Appeals' opinion suggest that the defendant also manufactured the buildings sold by it.) The parties' written agreement, dated May 18, 1990, provided in plain and clear language that the requested date for delivery of the purchased building was an estimate only, not backed by an assurance from the defendant. It further provided, in language familiar to all who draft and read written agreements for a living, that the agreement and all contract documents "may not be modified other than in writing," and that any such modification, to be binding, had to be signed by all of the parties "and executed in the same manner as this agreement."
With an acknowledgement (or apology) to Paul of Tarsus, it must be confessed that what contracting parties agree that they will do, they do not. In Tidwell, a few days after May 18, 1990, Mrs. Tidwell changed her order and requested a larger building. The defendant completed a new purchase agreement, but did not require the plaintiff's spouse and agent to sign it. Mrs. Tidwell did, however, provide a check to cover the higher price for the larger building. The court's opinion tells us that a new delivery date, June 2, 1990, was requested, and that the defendant stated that it "more than likely" could meet this deadline. The opinion does not tell us whether the second purchase agreement repeated the statement in the first one that the requested delivery date was an estimate only, and not the subject of an assurance.
Delivery dates, every refrigerator buyer knows, are meant to be ignored. In Tidwell, June 2, 1990 came and went without delivery of a portable building. The Monday following, the plaintiff's spouse and agent demanded a refund, the defendant completed an order cancellation request, and the defendant told the plaintiff's spouse and agent that it would take three weeks for the plaintiff's money to be returned.
Three weeks " like June 2, 1990 " came and went, and the plaintiff had neither a portable building nor a refund. The defendant urged patience on Mrs. Tidwell for another three weeks, at the end of which this remarkably patient individual did telephone a different representative of the defendant, in Dallas. This representative confirmed that a refund was due. Later, another representative of the defendant in Dallas told Mrs. Tidwell that she would not be receiving a refund.
Unsurprisingly, the plaintiff Mr. Tidwell sued for the promised refund. Shockingly, and with apparent amnesia about every principle concerning customer service and a good public image, the defendant denied liability. Even more shockingly, and exhibiting that degree of common sense shown by drunken campers who play with rattlesnakes, the defendant counterclaimed.
Bitten in the trial court, the defendant in Tidwell argued on appeal that § 47-50-112 prevented the trial judge from finding that the parties had orally agreed to make June 2, 1990, a firm delivery date, excusing the plaintiff from performance when the portable building failed to appear on that date. The Court of Appeals disagreed. The Court of Appeals stated that "[t]he purpose of Tenn. Code Ann. § 47-50-112 is similar to that of the Parol Evidence Rule in that both seek to enforce contracts as written." The Court of Appeals then stated that because Mrs. Tidwell did not sign the second purchase agreement, the one for the larger portable building, "the language of the original contract would prevent this document from being a modification of the first agreement." The Court of Appeals found "clear" evidence that the parties agreed to rescind their first agreement and held that neither the "no oral modification" clause in the first agreement nor § 47-50-112 prohibited the parties from rescinding their written agreement by mutual oral agreement.
Then the Court of Appeals found a second instance of rescission by mutual oral agreement, when the parties rescinded the second purchase agreement. The evidence for this, the court held, was that the defendant's local store manager did not object when Mrs. Tidwell stated her desire to cancel the order when the building was not delivered on June 2, 1990; that this manager then completed an order cancellation request and told Mrs. Tidwell that she would receive a refund within three weeks; and that the defendant did not inform the plaintiff when the building arrived, and did not attempt to deliver the building to the plaintiff. "We hold that the preponderance of the evidence clearly shows that the parties effectively rescinded both purchase agreements."
The quick embrace in Tidwell v. Morgan Building Systems of a mutual oral agreement to rescind a written agreement as an exception to § 47-50-112(a) and (c) seems, with the admitted benefit of hindsight, to have created an unnecessarily large exception to the statutory rule. Setting aside the contractual language in the parties' first agreement which required any modification of that agreement to be "signed by all the parties ... and executed in the same manner as this agreement" (an apparent redundancy), all that subsection (c) of the statute requires is that when a written agreement requires that a waiver of its terms or provisions be in writing, such requirement of a writing be honored. Subsection (a) calls for a written agreement "signed by the party to be bound" to be "enforced as written." Was the signature of the defendant's employee on the second purchase agreement not sufficient under these statutory provisions to bind the defendant, the only party relying on the asserted nature of the original delivery date as "an estimate only"? If the requirements of the statute were satisfied in this transaction, why could not a court either have deemed Mrs. Tidwell to have signed, for the purpose of satisfying the requirements of the "subsequent modifications" paragraph of the first purchase agreement, the second purchase agreement that the defendant prepared at Mrs. Tidwell's request, or have held the defendant estopped to rely on the absence of Mrs. Tidwell's signature from the second purchase agreement, the defendant having prepared it at her request but having neglected to have her sign it? In the alternative, why did not the second purchase agreement and Mrs. Tidwell's (presumably signed) check for the additional price for the larger building together constitute a written modification signed by all parties?
The fact that the Court of Appeals in Tidwell did not address these questions has had the effect of importing the doctrine of mutual oral rescission into judicial analysis of issues presented under § 47-50-112(c). The contractual agreements and facts in a later case, The Realty Shop Inc. v. RR Westminster Holding Inc., presented the Court of Appeals for the Middle Section with intricate and difficult issues. It is unfortunate that in the course of deciding this complex case, the court treated § 47-50-112 as having had little impact on Tennessee law, and listed multiple theories by which a litigant can evade a requirement in a written agreement that it be modified only by a signed writing.
In The Realty Shop, the developer of, and owner's representative with respect to, a retail shopping center was experiencing financial problems before commencement of the project. Interested parties therefore devised a financing structure in which the project would be owned by a wholly owned subsidiary of the contractor's corporate parent, and the developer would have an option to purchase the subsidiary upon completion of the project. The subsidiary, as the owner of the project during the construction phase, and the contractor accordingly entered into a contract for construction of the project.
The construction contract included among the owner's, not the contractor's, responsibilities increases in construction costs due to delays not caused by the contractor, changes required by building codes, and equitable adjustment to the contract price for delays not caused by the general contractor. With respect to change orders, this contract acknowledged that it might be necessary for the contractor to proceed with changes upon verbal (i.e., unwritten) authorization from the owner or a representative of the owner, to be followed "[a]s soon as practicable" by written notice from the contractor of the cost of the change and the additional time, if any, necessary to complete the change.
In a separate option agreement between the developer/owner's representative and the corporate parent of the project owner, these parties agreed to a base price for the developer's purchase of the project, subject to adjustment for the actual cost of items identified in the indirect cost allowance portion of the project budget, and for any changes made to the project during the construction phase that added to the scope of the project beyond the scope contemplated in the base purchase price. What is significant for the purposes of considering the decision's impact on the construction of § 47-50-112, this agreement provided for an upward adjustment of the price for the purchase of the project for changes that added to the scope of the project "as and to the extent that such changes are identified in written change orders therefore and which are agreed to and signed by both Parties." (Emphasis added.) An effect of this provision was to add to the agreement between the project owner and the contractor concerning change orders an additional requirement, that if the developer were going to be required to pay more than the base purchase price for the completed project, then the developer and the parent corporation of the project owner had to agree in a signed writing or writings to the change orders. In addition, the option agreement "contained standard provisions requiring that changes in the agreement and waivers of any of the agreement's provisions be in writing."
It is not surprising that under this complicated arrangement, the project owner, under common ownership with the contractor throughout the construction phase, agreed with the requisite formalities to the contractor's change orders, but the record of the developer's acquiescence to the change orders was much less clear. The trial court relied on the requirement in the option agreement of a signed writing or writings indicating agreement to changes that added to the scope of the project to hold that the parent corporation of the project owner was bound to sell the project to the developer for a lower price, without adjustment for the changes to which the developer did not agree in a signed writing or writings.
On appeal, the Court of Appeals for the Middle Section read the option agreement and the construction agreement together, so that the definition of the scope of the project in the former was informed by the meaning of the "work" defined in the latter. With respect to those changes in the scope of the project (and corresponding adjustments to the base price for the project in accordance with the option agreement) for which the option agreement between the developer and the corporate parent of the project owner required a signed writing or writings, the Court of Appeals turned to the trial court's conclusion that § 47-50-112(c) and Burnett v. Willis prohibited either party to the option agreement from waiving the written (and signed) change order requirement in words or by conduct. The Court of Appeals stated three reasons why the trial court had erred in relying on § 47-50-112(c) and Burnett v. Willis.
For the first reason, 7 S.W.3d at 600-601 and n.27, the Court of Appeals noted that the Supreme Court, in denying permission to appeal in Burnett v. Willis, had recommended that the Court of Appeals' opinion in the case not be published, depriving the opinion of precedential weight. This reason, of course, has nothing to do with the statutory provision, which, as the court in Burnett v. Willis noted, the General Assembly and the Governor "published" in 1983. The court in Realty Shop v. RR Westminster Holding, perhaps acknowledging this implicitly, proceeded to a consideration of the statute itself.
The court first observed that apart from the analogy to the parol evidence rule stated in Tidwell v. Morgan Building Systems Inc., § 47-50-112(c) "ha[d] not figured prominently in many cases since its enactment" 16 years before. Besides the Tidwell court, the Court of Appeals noted, "few other courts have relied on the statute for more than the proposition that Tennessee courts will enforce written contracts according to their terms."
This portion of the opinion in Realty Shop causes some concern about the court's analysis of the applicability and effect of the statute. It is subsection (a), not subsection (c), of § 47-50-112 that calls for written contracts to "be enforced as written." Of greater concern, because "[t]he Legislative authority of this State" is vested in a General Assembly consisting of two houses, "both dependent on the people," it might be presumed that the force of a statute, once determined to be applicable, bears no relation to the number of times it is cited by litigants or even courts. Even if a legislative enactment can become obsolete, and thereby effectively repealed, through desuetude, one doubts that this can happen to one that became law as recently as 1983.
The court in Realty Shop v. RR Westminster Holding next pointed out that in similar cases, Tennessee courts had permitted litigants who had performed additional work to recover in the absence of contractually required change orders, relying on various theories. The court cited Tidwell v. Morgan Building Systems for the oral rescission theory in this regard, but for the theory of waiver by conduct cited Bannon v. Jackson; for the theory of a contract implied in fact cited Nicholson Company v. Transcon Investment and Financial Ltd. Inc.; and for the estoppel theory cited, in addition to a later, unpublished decision, Ford v. Whittle Trunk & Bag Company. None of the cited decisions can explain why § 47-50-112 might not require written, signed change orders for the upward adjustment in the option purchase price; they all were decided before the enactment of § 47-50-112. V. L. Nicholson Company v. Transcon Investment and Financial Ltd. Inc. is precisely the decision discussed in the unpublished opinion in Burnett v. Willis as having been superseded by the enactment of § 47-50-112.
Pressing on to construe the statute, the Court of Appeals in Realty Shop v. RR Westminster Holding ruled that § 47-50-112(c) is unambiguous and clear, and that its use of the phrase "to the effect" indicates a legislative intent "that the statute could be triggered by [contractual] provisions that did not incorporate the exact language in the statute. Rather, the General Assembly decided that provisions having the same import, significance, or meaning should be given the same effect."
Having so construed the statute, the Court of Appeals announced the second reason why the trial court had erred: the provision in the option agreement concerning written and signed change orders was not within the scope of § 47-50-112(c). The court reasoned that paragraph 16 of the option agreement, by providing that any of the terms or conditions of the agreement "may" be waived in writing, did not require that a waiver be in writing. Thus, the court apparently held, with little discussion of the relationship between this provision and other provisions of the option agreement, that this use of the word "may" in paragraph 16 of the option agreement opened the door to unwritten modification of the agreement's provision in another paragraph for an increase in the option purchase price in relation to changes that added to the scope of the project "as and to the extent that such changes are identified in written change orders ... agreed to and signed by both parties" (emphasis added). The court further held, it appears, that the use of the word "may" in paragraph 16 of the option agreement opened the door to oral modification of paragraph 13 of it, which provided that "[n]o change or modification of this Agreement shall be valid unless the same is in writing and signed by the parties to this Agreement."
The Court of Appeals' third stated reason for the trial court's error in relying on § 47-50-112(c): "even if the terms of the option agreement could only be waived in writing, the record contains at least three writings in which [the developer] stated that the parties would undertake a 'fair and equitable' adjustment of both the construction contract and the option agreement in light of the increased construction costs." These three writings "are written waivers for the purpose of Tenn. Code Ann. § 47-50-112(c)." The Court of Appeals in Realty Shop thus held that § 47-50-112(c) did not apply to the case at all, but just in case it did, the parties had fully satisfied its written waiver requirement anyway. In light of this, one questions the need for the court's analysis of the statute itself, and the authoritativeness of its commentary on the statute.
A more recent, unpublished appellate decision illustrates the continued ambivalence with which Tennessee courts consider and apply § 47-50-112. The written agreement in Crye-Leike Inc. v. Estate of Kenneth H. Earp concerned a listing of farm property for sale with a real estate agent. The owner decided, before the expiration of the listing agreement, not to sell the property. The facts showed that before receipt of an offer to purchase the property that met the terms of the listing agreement, the owner telephoned the husband and agent of the listing agent to state that he wanted to take the property off the market. The listing agreement included a provision that stated that it was the parties' entire agreement, no oral or implied agreement existed, and "[a]ny amendments ... shall be made in writing, signed by both parties." The evidence showed also that when the owner was first given the listing agreement to sign, he asked about later taking the property off the market, to which the listing agent and her husband responded, "Call us."
The Court of Appeals agreed with the trial court that the evidence showed an oral agreement to rescind or terminate the listing contract, citing, inter alia, Tidwell v. Morgan Building Systems. The Court of Appeals added, but without citation, "Neither the Parol Evidence Rule nor the Statute of Frauds is applicable when an oral agreement to rescind is established by clear and convincing evidence." Perhaps this statement, even though in an unpublished opinion, resolves the standard-of-proof issue created by the ambiguous language used in Tidwell v. Morgan Building Systems, discussed in endnote 22.
In support of its ruling in Crye-Leike v. Earp, the Court of Appeals cited no less an august authority than Williston on Contracts for the general teaching that parties to an executory written contract may by mutual consent agree by parol to terminate their obligations under the contract, and that such a parol rescission or abandonment or cancellation is not precluded by the statute of frauds even if the written contract was within the statute. What is omitted from the court's opinion is any explicit consideration of whether the General Assembly, in adding § 47-50-112(c) to a body of law that already contained a statute of frauds, intended to change in Tennessee the rule stated by Professor Williston.
Even if Tenn. Code Ann. § 47-50-112(a) did nothing more than restate existing law, it seems apparent that in enacting § 47-50-112(c), the General Assembly did intend to effect a change in Tennessee law governing written contracts. The citation to Williston on Contracts in Crye-Leike v. Earp indicates that a finding of a mutual oral agreement to rescind has long been an option available to a court concerned about the enforcement of a prohibition against oral modification of a written agreement when such enforcement might produce a seemingly unjust result in a particular case. Tidwell v. Morgan Building Systems, Realty Shop v. RR Westminster Holding and Crye-Leike v. Earp preserved the doctrine of mutual oral rescission in spite of the enactment of § 47-50-112(c). The facts in those cases, however, made findings of mutual oral rescission, or, in the case of Realty Shop, acknowledgment of the doctrine, unnecessary.
At least in cases involving commercial parties, an enforceable prohibition against oral modification of a written, signed agreement can provide the economic benefit of predictability upon the occurrence of a dispute or breach, and prevent or at least limit the costs associated with litigation over disputed "verbal" deals. A stronger dose of what § 47-50-112(c) states that it provides could therefore be a useful addition to the Tennessee law of contracts.
The unstated concern in Tidwell v. Morgan Building Systems and Crye-Leike v. Earp about the use of a prohibition against oral modification in a form contract against a consumer could be addressed by limiting the scope of a revised § 47-50-112(c) to contracts between commercial parties. In the alternative, the General Assembly might borrow from the Tennessee version of the Uniform Commercial Code (UCC) the concept that unless a written agreement is "between merchants" (a defined term in the UCC), a provision that excludes modification or rescission except by a signed writing must be separately signed. There does not appear to be any good reason to import into non-UCC law the provision in § 47-2-209(4) that an attempt at modification or rescission that does not comply with the requirements of § 47-2-209(2) might nonetheless operate as a waiver.
It is suggested that any revised § 47-50-112(c) begin with the phrase, "any provision in this section to the contrary notwithstanding," or a similar phrase, to avoid importing into any new subsection (c) the language in subsection (a) that preserves "any other rights or defense provided by common law or statutory law in regard to contracts." As has been seen, the doctrine of mutual oral rescission will not go away gently. Finally, it is suggested that the word "waiver" in § 47-50-112(c) be replaced with language such as "waiver or other modification or rescission," to codify the existing judicial understanding that the subsection makes effective a contractual prohibition against oral modification, even though the existing statutory language uses the narrower term "waiver."
Unless and until the proposed new model of § 47-50-112(c) makes an appearance in the code, one drafting an agreement with the intention to avoid litigation over an alleged oral modification of it might consider the following suggestions. It cannot hurt to recite that the parties, each represented by independent counsel, and each having participated fully in the negotiation and drafting of the written agreement, have carefully considered, and wish to avoid, the potential costs associated with litigation over any alleged unwritten waiver, modification, or rescission of their agreement or of any term or provision of it. After such a recitation, the parties might prohibit any waiver, modification, or rescission of the agreement or of any term or provision of it, except by a signed writing, any doctrine or provision of common or statutory law to the contrary notwithstanding. Depending on the terms and value of a particular transaction, consideration might be given to requiring that any such writing be contained in a single document, signed by both (or all) parties. Finally, in a contract that provides for arbitration, it is suggested that it be made express that no authority is conferred on the arbitrator (or panel of arbitrators) to make an award based in whole or in part on any alleged unwritten waiver, modification, or rescission of the written agreement.
1. A section heading in Tenn. Code Ann. is not to be construed as part of the law. Tenn. Code Ann. § 1-3-109 (2003 repl. vol.); Nave v. Nave, 173 S.W.3d 766, 772 (Tenn. Ct. App.), perm. app. denied, id. (Tenn. 2005). The phrase "shall be enforced as written" is found in the text of the statute, in § 47-50-112(a).
2. See, e.g., the Easy to Read Life and Health Insurance Policy Act, Tenn. Code Ann. Title 56, ch. 7, part 16 (2000 repl. vol.).
3. See, e.g., Tenn. Code Ann. § 29-2-101(a) (2007 supp.): "No action [within specified categories] shall be brought ... unless the promise or agreement, upon which such action shall be brought, or some memorandum or note thereof, shall be in writing, and signed by the party to be charged therewith, or some other person lawfully authorized by such party." (Emphasis added.) This language in the Tennessee version is closely similar to that in the original "act for prevention of Frauds and Perjuryes" passed by Parliament in 1677, 29 Car. II c. 3.
4. Tenn. Code Ann. § 47-50-103 (2001 repl. vol.) (derived from the 1858 code).
5. Springfield Tobacco Redryers Corporation v. City of Springfield, 41 Tenn. App. 254, 261, 293 S.W.2d 189, 192, cert. denied, id. (Tenn. 1956) (citations omitted).
6. Petty v. Sloan, 197 Tenn. 630, 640, 277 S.W.2d 355, 359 (1954) (citation omitted) (per Burnett, J., later C.J.).
7. 197 Tenn. at 642, 277 S.W.2d at 360.
8. Frumin v. May, 36 Tenn. App. 32, 43, 251 S.W.2d 314, 319, cert. denied, id. (Tenn. 1952) (citation omitted).
9. McQuiddy Printing Co. v. Hirsig, 23 Tenn. App. 434, 445, 134 S.W.2d 197, 204, cert. denied, id. (Tenn. 1939) (citations omitted) (quotation omitted).
10. Id. (citations omitted) (quotation omitted).
11. One considering the meaning and effect of § 47-50-112(a) must acknowledge that the phrase in the subsection, "prima facie evidence," can have a precise meaning. It is arguable, in fact, that the phrase has multiple precise meanings. In Pickard v. Berryman, 24 Tenn. App. 263, 271-72, 142 S.W.2d 764, 769, cert. denied, id. (Tenn. 1939), the Court of Appeals, relying to a great extent on WIGMORE ON EVIDENCE, stated two meanings of the phrase "prima facie case." The first is a case in which the uncontradicted evidence from unimpeached and credible sources mandates a judgment for the proponent of the evidence. The second is one in which the evidence is sufficient to survive a motion for a directed verdict, see Tenn. R. Civ. P. 50, "and to require the case to be submitted to the triers of fact for the purpose of having them pass upon the credibility of the witnesses and the sufficiency of the evidence." Id. at 271, 142 S.W.2d at 769 (citations omitted). In light of the outcome in Pickard v. Berryman, there is perhaps a third category of "prima facie case," one in which a plaintiff's evidence is sufficient to hold that if the opponent fails to rebut such evidence, the opponent's silence justifies the inference that evidence within the opponent's control but not presented would have supported a determination of liability. The Pickard v. Berryman court treated this "prima facie case" as within the category of such cases sufficient to withstand a motion for a directed verdict. It is beyond the scope of this article to address whether the phrase "prima facie case" has two or more meanings.
12. Tidwell v. Morgan Building Systems Inc., 840 S.W.2d 373 (Tenn. Ct. App.), perm. app. denied, id. (Tenn. 1992).
13. Id. at 376.
14. Beasley v. Metropolitan Life Ins. Co., 190 Tenn. 227, 232, 229 S.W.2d 146, 148 (1950), and Farmers & Merchants Bank v. Petty, 664 S.W.2d 77, 81-82 (Tenn. Ct. App.), perm. app. denied, id. (Tenn. 1983).
15. The term "security instrument" is not defined in the statute. One might presume from the context provided by § 47-50-112(b) that the legislative intent was to refer to a document that creates or conveys a security agreement. The current version of Article 9 of the Uniform Commercial Code, concerning secured transactions, in effect in Tennessee is careful to distinguish between an "instrument," Tenn. Code Ann. § 47-9-102(a)(47), and a "security agreement." Id., § 47-9-102(a)(73).
16. Willie v. First American National Bank (In re Willie), 157 B.R. 623 (Bankr. M.D. Tenn. 1993); see also Home Federal Bank FSB, of Middlesboro, Kentucky v. First National Bank of LaFollette, Tennessee, 110 S.W.3d 433, 436-37 (Tenn. Ct. App. 2002) (parties stipulated, in accordance with well-established law, that dragnet clauses, which are even broader in scope than future advance clauses, are valid, which the enactment of § 47-50-112(b) confirmed).
17. Tidwell v. Morgan Building Systems Inc., 840 S.W.2d 373 (Tenn. Ct. App.), perm app. denied, id. (Tenn. 1992), cited supra.
18. Romans 7:19.
19. With respect to these facts, the Court of Appeals' opinion in Tidwell proves once again, as if proof were needed, that the South Western Reporter is a source of humor that never runs dry. The court's opinion tells us that Mrs. Tidwell spoke with a representative of the defendant in Dallas named Watson, who confirmed that a refund was owed. The opinion continues, 840 S.W.2d at 374: "Mr. Watson told her he would call back in ten minutes but did not call back. Later Mrs. Tidwell called the Dallas office again and was told that Mr. Watson no longer worked for Defendant."
20. 840 S.W.2d at 376.
23. Id. The Court of Appeals' use of the adverb "clearly" in the quoted sentence, and its statement elsewhere in the opinion, 840 S.W.2d at 376 (citation omitted), that "rescission must be clearly expressed," cause confusion as to whether mutual oral rescission of a written agreement must be proved by something more than a preponderance, or whether a preponderance of the evidence is sufficient as long as it shows the existence of the disputed fact clearly. Can evidence that does not show clearly the existence of a disputed fact be characterized properly as a preponderance of the evidence? See Crye-Leike Inc. v. Estate of Kenneth H. Earp, 2004 Tenn. App. LEXIS 779, discussed below in this article, for a more straightforward handling of this burden-of-proof issue in the context of the Parol Evidence Rule and the Statute of Frauds.
24. The Realty Shop Inc. v. RR Westminster Holding Inc., 7 S.W.3d 581 (Tenn. Ct. App.), perm. app. denied, id. (Tenn. 1999).
25. 7 S.W.3d at 587.
26. Id. at 589.
28. Burnett v. Willis, 1990 Tenn. App. LEXIS 420.
29. Two of the Court of Appeals judges on the Burnett v. Willis panel were also on the Realty Shop v. RR Westminster Holding panel.
30. 1983 Tenn. Pub. Acts ch. 457, § 1.
31. Tidwell v. Morgan Building Systems Inc., 840 S.W.2d 373, 376 (Tenn. Ct. App.), perm. app. denied, id. (Tenn. 1992), § 47-50-112(c).
32. Realty Shop v. RR Westminster Holding, 7 S.W.3d at 601.
33. Realty Shop v. RR Westminster Holding, 7 S.W.3d at 601 (citations omitted).
34. TENN. CONST. art. II, § 3.
35. 7 S.W.3d at 601 n.30.
36. Id. n.28, citing inter alia, Bannon v. Jackson, 121 Tenn. 381, 392, 117 S.W. 504, 506 (1908).
37. 7 S.W.3d at 601 n.29, citing V.L. Nicholson Company v. Transcon Investment and Financial Ltd. Inc., 595 S.W.2d 474 (Tenn. 1980).
38. 7 S.W.3d at 601 n. 31, citing Ford v. Whittle Trunk & Bag Company, 12 Tenn. App. 486, 491, cert. denied, id. (Tenn. 1930).
39. 7 S.W.3d at 602 (citations omitted).
40. Quoted in 7 S.W.3d at 598.
41. Quoted in id. at 599.
42. 7 S.W.3d at 601.
43. Id. at 604.
44. Crye-Leike Inc. v. Estate of Kenneth H. Earp, 2004 Tenn. App. LEXIS 779.
45. Quoted in Id. at *14.
46. 2004 Tenn. App. LEXIS 779, at *18-*19.
47. 2004 Tenn. App. LEXIS 779, at *19-*20.
48. See Tenn. Code Ann. § 47-2-209(2) (2001 repl. vol).
FRANCIS L. LLOYD JR. is a partner in the Knoxville, Tennessee law firm Kramer Rayson LLP. He practices chiefly in the fields of commercial and other litigation, and defends persons charged with criminal offenses. Lloyd is a 1981 graduate of the University of Virginia Law School. He is admitted to practice in Virginia and Tennessee, and before the U.S. District Court for the Eastern District of Tennessee and the Court of Appeals for the Sixth Circuit. Lloyd is a past president of the Hamilton Burnett (Knoxville) American Inn of Court. He is on the panel of arbitrators of the District Court for the Eastern District of Tennessee. Lloyd served for some years as a federal district judge’s law clerk, and has served as a member of the adjunct faculty of the University of Tennessee College of Law.