Contractual Provisions Requiring Written Amendments: Not Always What They Seem
LGC Staff
Wed February 3, 2016
4:36 AM UTC

By Patrick Klingborg

In order to avoid unintentional or even unilateral amendments to contracts, parties often insert a contractual provision requiring any amendments to be in writing.  However, a recent California Court of Appeal case held that the conduct of parties to a contract effectively amended the contract despite the contract including a provision expressly requiring that all amendments to the contract be in writing.

In Epic Medical Management, LLC v. Paquette, M.D., the appellant, a doctor, contracted with the appellee, a medical management company, to provide medical management services to the doctor’s practice. For example, the company was required to implement a marketing plan for the doctor, provide non-physician personnel for the doctor, perform billing and accounting services for the doctor, and other services. In exchange, the contract stated the doctor would provide the company with compensation in accordance with a specific formula that was based on the costs the company actually incurred in providing the services to the doctor. The contract also included a provision stating that all modifications to the contract must be in writing.

Eventually, the doctor terminated the contract and a dispute arose over the amount of money the doctor still owed to the company. The dispute was submitted to arbitration pursuant to an arbitration provision in the contract. The arbitrator ultimately found that, all along, the doctor had actually been paying the company according to a formula that was different than the formula specified in the contract. The arbitrator’s monetary award to the company was based on this alternate formula, not the formula stated in the contract, because the conduct of the parties modified the contract to provide for the alternate formula, according the arbitrator.

In appealing the arbitrator’s award, the doctor argued, in part, that the arbitrator exceeded her powers in ruling that the contract was modified by the conduct of the parties because the contract expressly stated the contract could only be modified in writing. Thus, argued the doctor, without a written amendment, the conduct of the parties could not modify the contract so as to make the alternate compensation formula enforceable.

The Court of Appeal disagreed with the doctor and held the arbitrator did not exceed her powers. First, the Court noted that, as a general principle, parties can (through conduct alone) waive any requirement that a contract be amended only by a written amendment. Biren v. Equality Emergency Medical Group, Inc. (2002) 102 Cal.App.4th 125, 141.

Second, the language in the contract at issue did not limit the arbitrator’s authority to interpret the contract by, for example, considering extrinsic evidence. The Court contrasted the contract language at issue with the contract language in Bonshire v. Thompson (1997) 52 Cal.App.4th 803. Unlike in the present case, the contract language in Bonshire expressly stated that “no extrinsic evidence whatsoever may be introduced in any judicial or arbitration proceeding” in connection with a dispute over the contract. In Bonshire, the conduct of both parties (which was well-supported by extrinsic documentary evidence) was unquestionably inconsistent with the terms of the contract. Nevertheless, because the Bonshire contract language required both that 1) all amendments to the contract be in writing and 2) no extrinsic evidence could be introduced in a judicial or arbitration proceeding, the court ultimately held the conduct of the parties did not amend the contract and the contract had to be enforced literally because the arbitrator was not permitted to consider any extrinsic evidence (including evidence showing the conduct of both parties was inconsistent with the literal terms of the contract).

In Epic Medical Management, however, the contract did not preclude the arbitrator from considering extrinsic evidence when interpreting the contract. It was therefore proper for the arbitrator to consider such extrinsic evidence (showing the conduct of the parties) in concluding that the doctor and company waived the requirement that all amendments be in writing. As a result, the parties amended the compensation formula, without a written amendment, despite the contract requiring all amendments be in writing.

An important takeaway from Epic Medical Management is to consider drafting contract language to include a provision prohibiting the introduction of extrinsic evidence in judicial or arbitration proceedings involving the contract. Otherwise, other provisions requiring any amendment to the contract be in writing can be eviscerated by subsequent inconsistent conduct of the parties.

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