Legal Brief: The Legal Pitfalls of Contract Modifications

John sits in the kitchen with Mr. and Mrs. Smith. He had just installed a security system in their large home, and now it was time to secure their signature on the security services contract.

As John presented the contract for signature and explained some of its terms, the Smiths raised questions regarding the limitation of liability and other limiting terms. The Smiths even asked John to strike or edit portions of the contract before signing.

John was a great technician with vast expertise; however, he feared that if the Smiths refused to sign the contract, all of his hard work that day may have been in vain. Also, he never really understood why the limiting conditions in the contract were that important anyway.

So, John and the Smiths edited portions of the contract – by hand – and initialed the changes before signing. John left a copy of the contract, as modified, for the Smiths, and he took a copy back to the office for the company’s files.

Months later, Mr. and Mrs. Smith were victimized by a security breach and suffered substantial economic loss, personal injury and emotional distress. A million-dollar lawsuit followed against John’s company, and the enforceability of the contract, as modified, was among the critical issues for trial.

The Legal Issues at Hand

The circumstances described above are fictional; however, John’s story presents a variety of legal issues (indeed, too many to address here).

• Should security companies permit their technicians or sales personnel to explain, or worse, modify commercial or residential security service agreements?
• Did John have actual authority to modify the contract?
• If not actual authority, did John have apparent authority?
• Were the modifications of the contract enforceable against the company
• Does the contract contain a valid and enforceable merger and integration clause? It read: “This Agreement contains the full understanding of the parties and can be modified only by a writing signed by the parties. No handwritten changes or modifications to this Agreement shall be accepted by the Company and no such changes shall be enforceable.”

These questions and many others need to be confronted before, not after, someone like John makes what could be a material modification to a security services contract.

Who Can Modify a Contract?

As a general rule, technicians and sales personnel should be trained by the company and its lawyers on the contents and meaning of the company’s consumer contracts – particularly the limiting terms. Indeed, it is a good practice and can aid the enforceability of the contract if technicians and/or sales personnel are trained to point out certain key terms to the customer.

The systematic and in-person identification of such provisions makes them more prominent and conspicuous (as does bolding or underlining them) and, therefore, more enforceable.

However, modifying a contract is a far more consequential endeavor than pointing out some of its key terms. Bluntly, contract modifications should never be the province of technicians and sales personnel – unless you work in a very small company and your technician, sales staff, CFO, CEO and janitor are all the same person!

Instead, companies of any substantial size and sophistication should have very clear policies mandating that only a select few personnel have the authority to modify consumer contracts. These policies should be made known to all personnel so that, when confronted with a proposed change by a customer, technicians and sales personnel can readily state that they have no authority to modify the contract.

This is not to say that every proposed modification should be universally rejected; in fact, that would be foolish – as the standard for enforceability of a contract (particularly a consumer contract) is partially based on whether the contract represents the result of a bargained-for exchange. Contracts that are formed unilaterally are at risk of being deemed unenforceable – particularly where the relative bargaining power may be uneven.

Vesting select personnel with the authority to modify contracts does not mean that someone like John lacks apparent authority to modify the contract. Apparent authority is a doctrine that people like the Smiths can invoke to suggest that they relied, to their detriment, on the seeming authority of the person modifying the contract.

In this example, John was a representative of the company: he presented the contract, and he agreed to the modifications. The Smiths could argue that John’s actual authority was irrelevant – and that the company should be bound in any event. For what it is worth, apparent authority is circumstantial. Consider, for example, that the receptionist at my law firm probably has actual and apparent authority to bind the firm to a lunch order, but not to a building lease.

However, just because John had apparent authority does not mean that the contract modifications that he and the Smiths made are enforceable. There are a host of other factors to be considered – such as what was modified, whether the language used was clear and unambiguous, whether the changes conflict with any existing provisions, and whether the changes were made consistent with any terms specifying how the contract is to be modified (i.e., a merger and integration clause).

Ultimately, your company does not want to resort to these secondary arguments – but would be better protected if John made good choices. As he learned, contract modifications are tricky. So, train your people, seek advice from counsel, prepare sophisticated contracts…and keep John away from the Smiths.

Meet Timothy J. Pastore

Tim Pastore is the newest columnist to join the SD&I family. He is a Partner in the New York office of Montgomery McCracken Walker & Rhoads LLP (www.mmwr.com), where he is Vice-Chair of the Litigation Department. 

Before entering private practice, Mr. Pastore was an officer and Judge Advocate General (JAG) in the U.S. Air Force and a Special Assistant U.S. Attorney with the U.S. Department of Justice. As a JAG, in particular, Mr. Pastore was legal counsel to the Air Force Security Forces and Air Force Office of Special Investigations.

Mr. Pastore has represented some of the largest companies in the security industry, including Protection One, Comcast, Charter, Cox, Altice, Mediacom, IASG, CMS and others. He regularly provides counsel on risk management, contracting, operations, licensing, sales practices, etc. Mr. Pastore also has served as lead counsel in courts throughout the country in dozens of litigation matters involving the security industry.

Among other examples, Mr. Pastore led the successful defense at trial of cable giant Comcast in a home invasion case in Seattle, Washington. The case received significant press attention and was heralded by CVN as a top-ten defense verdict.

Mr. Pastore is a graduate of Bucknell University and Boston College Law School.

Reach him at (212) 551-7707 or by e-mail at [email protected].