Business Transaction Newsletter – November of 2017

COURSE OF DEALING CAN CHANGE CONTRACT TERMS

In the case of Bull Market vs. Elrafei, the Court held that the terms of a promissory note were modified through course of conduct by the parties when the payee on the note accepted a pattern of late payments.  In the Bull Market case, Bull Market sold a convenience store to Elrafei.  An original promissory note was set up in conjunction with a Contract For Deed.  Several months later, the parties entered into a Contract For Deed Modification document agreeing to change the amount of the payments on the note.  However, no new promissory note was executed.

For a number of months, Elrafei made payments on the note.  The original note called for payments to be made on the first day of the month, and delinquent if not paid by the 15^th day of the month.  The timing of the monthly payments varied, all of which were done between the 13^th and 18^th day of each month.  On August 18, 2015, Bull Market’s attorney sent an email to Elrafei terminating the Contract For Deed and declaring it null and void on the basis that the payments were not made by the 15^th day of the month.  The General Sessions Court and the Circuit Court ruled in favor of Bull Market that the contract had been cancelled.  However, the Court of Appeals reversed, holding that the parties modified the promissory note with regard to the monthly amount and the payment date. The Court found that the day of the month when payments were due was revised through the parties course of conduct which began three years prior to Bull Market attempting to declare the Contract For Deed null and void.

The Court of Appeals wrote that after a contract is made, it may be modified by express agreement or by conduct that evidences the contracting party’s consent.  A party’s agreement to modify contract need not be express, but it may be implied by a course of conduct.  The party’s course of conduct in carrying out the contract is the best evidence of his original intent.  A new contract is created when a contract is modified, but the original contract is still in effect to the extent its terms have not been modified.

In the Bull Market case, the Court found that Elrafei had made every payment for the years 2009 through mid year 2015 around the middle part of the month.  Bull Market accepted all of those payments, and a Bull Market representative testified that the failure of Elrafei to make the August, 2015 payment on or before August 15^th was the event that caused the forfeiture proceeding.

MY RECOMMENDATION:   The parties to a contract need to be aware that Tennessee Courts have routinely allowed an implied modification of a contract based on the course of conduct or the course of dealing of the parties.  If the payee on a note intends to rely strictly on the payment terms and dates set forth therein, then the payee must comply with those requirements and not periodically accept partial payments or late payments, and then attempt to rely on one late payment as being an event of default.  There are ways to deal with late payment and partial payment issues as a payee, but it requires diligence and intentionality to establish a new course of conduct.

Yours very truly,

RAINEY, KIZER, REVIERE & BELL, P.L.C.

 William C. Bell, Jr., Attorney at Law