Brief Summary: The terms of a contract can be modified by the subsequent actions of the parties to that contract. Further, evidence about these actions is not barred by the parol evidence rule.
Analysis: In the recent decision of The University Corporation v. Bruce Wring, No. W2011-01126-COA-R3-CV, 2012 WL 4078517 (Tenn. Ct. App. September 18, 2012) the Tennessee Court of Appeals discussed whether a written contract could be modified by the actions of the parties. This case involved a dispute over a contract pertaining to the repair, renovation and sale of foreclosed properties. The University Corporation at 1. A dispute arose between the parties as to appropriate compensation. The University Corporation at 1.
One of the parties argued that the course of conduct between the two parties modified the terms of the written contract. Specifically, the parties never required the production of documentation showing expenses despite the fact it was explicitly required in the contract. The University Corporation at 1. In response, the other party contended the merger clause in the contract and the parol evidence rule prevented any modification of the written agreement and therefore the requirement for documentation on expenses was required. Under Tennessee law "parol evidence is inadmissible to contradict or vary the terms of a written agreement." The University Corporation at 6. However, the Tennessee Court of Appeals found this fact does not necessarily end the inquiry. The court stated as follows:
But it is well settled that this rule does not prohibit the establishment by parol evidence of an agreement made subsequent to the execution of the writing, although such subsequent agreement may have the effect of adding to, changing, modifying or even altogether abrogating the contract of the parties as evidenced by the writing; for the parol evidence does not in any way deny that the original agreement of the parties was that which the writing purports to express, but merely goes to show that the parties have exercised their right to change or abrogate the same, or to make a new and independent contract.
(emphasis added) The University Corporation at 6. (citing Brunson v. Gladish, 125 S.W.2d 144, 147 (Tenn. 1939)).
The court therefore found that evidence of any subsequent modification of the written agreement between the parties is not barred by the parol evidence rule. The University Corporation at 6. Further, the court found that "the course of conduct between parties is the strongest evidence of their original intent. A party's agreement to a modification need not be express, but may be implied from a course of conduct; this is true even where the agreement expressly specifies, as in this case, that the parties may only modify the agreement in writing." The University Corporation at 6. As a result, the merger clause in the written contract did not prevent the court from looking at the conduct of the parties to see if there was a modification to the contract on that basis.
The Tennessee Court of Appeals went on to analyze the evidence before the trial court and found the parties operated in a manner that did not require certain expense documentation to be provided. The University Corporation at 9. This was in direct contradiction to the written agreement which required such documentation. The University Corporation at 9. As a result, the fact one party did not comply with the express terms in the contract requiring certain documentation did not cause a breach of the contract.