Website Maintenance Alert

Introduction

It is well-settled law in Virginia that the plain terms of contracts must be enforced as written. However, contracting parties “may evince a mutual intent to modify the terms of their contract” through a “course of dealing.”¹ That means that a party can argue that a court should not apply the written terms of an agreement when the parties have modified the contract terms through a course of conduct. To give effect to any alleged modification, however, the party asserting the change must satisfy several rigorous requirements. Additionally, once it is shown that a contract should be modified by a course of dealing, questions may remain as to the permissible scope of any modification. This article explores the effect of a “course of dealing” on contract modification practices in Virginia and how any such claims could be advanced and contested under Virginia law.

How can a course of dealing support a contract modification in Virginia?

Parties to a contract may prove a modification of a contract through a course of dealing. A course of dealing is “a sequence of conduct concerning previous transactions between the parties to a particular transaction that is fairly to be regarded as establishing a common basis of understanding for interpreting their expressions and other conduct.”²

A party to a contract that seeks to rely on a course of conduct to show a contract modification must satisfy a high burden and meet several requirements. The claimant must show (1) the contract is not subject to the statute of frauds;³ (2) the parties mutually intended to so modify the contract as evidenced by “clear, unequivocal and convincing evidence, direct or implied;”⁴ and (3) if the claimed modification would result in one party surrendering a right guaranteed to them under the contract, “either passage of valuable consideration, estoppel in pais, or waiver of the right.”⁵

For the first requirement, Virginia has codified its version of the Statute of Frauds, which lists nine categories of contracts that must be made and modified in writing and are thus not subject to a “course of dealing” modification through conduct.⁶ While that guidance is largely comprehensive, it is not encompassing of all forms of contracts. Virginia courts are left to resolve ambiguities when a contract does not clearly fall within the defined Statute of Frauds categories.⁷

As to the second issue, requiring the claimant to demonstrate the parties’ mutual intent to modify the contract through their course of dealing is a challenging burden to meet, as evidence of the other party’s claimed mutual intent will be heavily fact-dependent. The success of such a showing requires evidence that both parties consciously ignored the stated contractual terms for the purpose of establishing new ones.⁸ It is not enough that one party merely accepts less than what they are contractually owed without more.⁹ Some affirmative action on the part of both parties is necessary.¹⁰  In Reid v. Boyle, for example, two business partners converted an oral agreement to split profits “50/50” into a “written employment contract … [that] contained a specific methodology by which Reid would be compensated,” which was different from the equal split arrangement.¹¹ However, despite written terms that included certain tax adjustments for Reid’s share, the parties continued splitting the proceeds equally.¹² The court found that the evidence was sufficient to show that the parties had altered the terms of the contract.¹³ The parties actively choosing to provide Reid with half of the profits was an affirmative action that went beyond mere acquiescence to conduct contrary to the contract, supporting a finding of modification.

Third, if the claimed modification would result in one partysurrendering a right otherwise guaranteed to them under the contract, the claimant’s burden to establish a course of dealing modification is even higher.¹⁴ The party seeking to demonstrate the modification can satisfy that higher burden in one of three ways: (1) an exchange of consideration; (2) estoppel in pais; or (3) waiver.

Consideration: One option is to prove that the other party (or parties) surrendered the contractual right in exchange for valuable consideration.¹⁵ As consideration is “the price bargained for and paid for a promise,”¹⁶ each party to the contract must derive some benefit from the new terms to establish the contract’s modification. For example, in Cardinal Development Company v. Stanley Construction Company, the Supreme Court of Virginia found that “Cardinal’s [oral] agreement to pay for … additional work, along with Stanley Construction’s actual performance of that work, constitute[d] valuable consideration sufficient to modify the contract.”¹⁷

Estoppel in Pais: Alternatively, if a party cannot prove there was valuable consideration, the modification can be verified through a showing of “estoppel in pais.”¹⁸ Estoppel in pais is established when the claimant can show that “the party sought to be estopped . . . caused the [the claimant] to occupy a more disadvantageous position than that which he would have occupied except for the [other party’s] conduct.”¹⁹ More specifically, the claimant must establish that they were made to, and did so, rely on the “statements, conduct, action, behavior, concealment, or even silence” of the party to be estopped as to a material fact and were consequently “misled to [their] injury.”²⁰ The Virginia courts that discuss the issue have generally cited to National Linen Service v. McGuinn as “appl[ying] estoppel principles.”²¹ In that case, the court found that an employer’s payment of compensation benefits for 13 months without “execut[ing] [or] fil[ing] a memorandum of agreement with the [Industrial] [C]ommission” caused the compensated employee to “justifiably rel[y] upon the employer’s conduct” and misled the employee “into believing that he was entitled to total work incapacity payments during the period of his disability.”²² On those facts, the court stated that “the doctrine of estoppel may appropriately be invoked.”²³

Waiver: The last method is to establish that the other party waived the right guaranteed to them under the original contract is waiver.²⁴ Establishing a waiver requires proof that the party claimed to have waived its right had “both knowledge of the facts basic to the exercise of the right and the intent to relinquish that right.²⁵ It is not sufficient that the party merely failed to protest or object to conduct that did not satisfy what it was contractually owed; rather, it must be shown by “clear proof that [the party] intentionally and voluntarily chose to waive [its] rights.”²⁶ For example, in Virginia Polytechnic & State University v. Interactive Return Service, Inc., the Supreme Court of Virginia found that Virginia Tech waived its right to “prompt payment from IRS” under the contract because “Virginia Tech clearly knew of its contractual right … to receive prompt payment … of 80 percent of the research costs … and its right to stop the research project if IRS materially breached its obligations under the SRA” but “continued to conduct research” after acknowledging IRS’ inability to pay, and “agree[d] … to give IRS 90 days after receipt of a working prototype to pay the indebtedness."²⁷ These actions by Virginia Tech demonstrated that Virginia Tech had not “merely acquiesced in IRS’s failure to pay its indebtedness promptly,” but that Virginia Tech had affirmatively waived its right under the contract.²⁸

In sum, for a course of dealing to evidence contract modification, the claimant must show that the contract is not subject to the Statute of Frauds, that each party had a mutual intent to modify the contract, and that any loss of a right guaranteed by the contract was either freely given through valuable consideration, subject to estoppel in pais, or waived. If each of these requirements is met, the contract may be modified without any need for the modification to be made in writing.

How much of a contract can be modified by a course of dealing?

Once it is established that a modification occurred due to the conduct of the contracting parties, the Court must also determine the scope of that modification. While Virginia courts have not definitively spoken on this issue, there is some indication that courts will limit any modification to specific terms and specific parties.

Based on existing precedent, Virginia courts will likely limit any contract modification to the specific parties whose conduct evidenced a contract modification. As statutorily defined, a course of dealing refers only to “conduct between the parties to a particular transaction,” suggesting concern over modifying the contractual rights of additional parties not explicitly involved in the alleged course of dealing.²⁹ Indeed, one circuit court in Virginia identified contract modification through course of dealing as only relevant to the particular parties involved in the particular transaction, and it did not extend the modification to alter the terms as to a third party with whom there was “no prior course of dealing.”³⁰ Beyond Virginia, courts in other jurisdictions have concluded that modifications through the course of dealing apply strictly to the specific parties engaged in the course of dealing, and therefore should not be interpreted to be inclusive of “unrelated third parties.”³¹

Another issue is whether contract modification through the course of dealing should be interpreted as term-specific or can be applied to other similar terms within the contract. Although not expressly discussed in the caselaw, the rigorous requirements necessary to demonstrate a modification suggest that any modification must be term specific.³²

Indeed, previous cases in Virginia discussing modification evidenced by course of dealing have consistently resulted in term-specific modifications. For example:

• Gov’t Emps. Ins. Co. v. Hall,, 260 Va. 349, 533 S.E.2d 615 (Va. 2000) (concluding that the parties’ conduct waived an uninsured motorist coverage provision based on evidence of mutual intent).
• Stanley’s Cafeteria, Inc. v. Abramson, 226 Va. 68, 73–74, 306 S.E.2d 870, 873–84 (1983) (considering whether accepting lower monthly utilities payments modified the contract’s specific terms as to the amount owed for utilities).
• Va. Polytechnic Inst. & State Univ. v. Interactive Return Serv., Inc., 267 Va. 642, 595 S.E.2d 1 (2004) (holding that a party waived its contractual right to “prompt payment” for certain research costs by conduct because the party continued to conduct the research after learning the other party could not pay until later).

Thus, any contracting party that attempts to utilize a course of dealing to modify contract terms beyond those that were specifically the subject of the course of dealing will likely face an uphill battle.

Conclusion

Course of dealing can be used in Virginia as evidence of a contract modification, but several factual showings will be required to invoke that principle, and any modification will likely be narrowly construed. Parties to a contract should, therefore, be diligent in following the written terms of a contract, with the best practice remaining to place any requested modifications in writing.

¹Reid v. Boyle, 259 Va. 356, 370, 527 S.E.2d 137, 145 (2000).
²Va. Code Ann. § 8.1A-303.
³See Lindsay v. McEnearney Assocs., Inc., 260 Va. 48, 53, 531 S.E.2d 573, 575-76 (2000) (“[W]hen … a contract is required to be in writing pursuant to [the statute of frauds], any modification to that contract must also be in writing and signed by the party to be charged or his agent.”).
⁴Smith Dev., Inc. v. Conway, 79 Va. App. 362, 379, 896 S.E.2d 88, 97 (2024) (quoting Gov’t Emps. Ins. Co. v. Hall, 260 Va. 349, 356, 533 S.E.2d 615, 618 (2000)).
⁵Stanley’s Cafeteria, Inc. v. Abramson, 226 Va. 68, 73, 306 S.E.2d 870, 873 (1983).
⁶Va. Code. Ann. § 11-2.
⁷See e.g., TradeStaff & Co. v. Nogiec, 77 Va. Cir. 77 (2008) (considering whether at will employment is subject to the statute of frauds).
⁸Stanley’s Cafeteria, Inc., 226 Va. at 73, 306 S.E.2d at 873.
⁹Id.
¹⁰See Reid, 259 Va. at 370, 527 S.E.2d at 145.
¹¹Id. at 362, 527 S.E.2d at 140.
¹²See id. at 363-64, 370, 527 S.E.2d at 140-41, 145.
¹³See id.
¹⁴Stanley’s Cafeteria, Inc., 226 Va. at 73, 306 S.E.2d at 873.
¹⁵Reid, 259 Va. at 370, 527 S.E.2d at 145.
¹⁶Smith v. Mountjoy, 280 Va. 46, 53, 694 S.E.2d 598, 602 (2010) (quoting Dulany Foods, Inc. v. Ayers, 220 Va. 502, 511, 260 S.E.2d 196, 202 (1979)).
¹⁷Cardinal Dev. Co. v. Stanley Constr. Co., 255 Va. 300, 305, 497 S.E.2d 847, 851 (1998).
¹⁸Stanley’s Cafeteria, Inc., 226 Va. at 73, 306 S.E.2d at 873.
¹⁹Id., 306 S.E.2d at 874 n.3 (quoting Atl. Coast Line R.R. Co. v. Bryan, 109 Va. 523, 526, 65 S.E. 30, 31 (1909)).
²⁰Heath v. Valentine, 177 Va. 731, 737-38, 15 S.E.2d 98, 99-100 (1941).
²¹Roske v. Culbertson Co., 62 Va. App. 512, 521-22, 749 S.E.2d 550, 555 (2013) (citing Nat’l Linen Serv. v. McGuinn, 5 Va. App. 265, 362 S.E.2d 187 (1987)); see also Kelley v. Monticello Area Cmty. Action Agency, No. 1083-16-3, 2016 WL 7210150, at *5 (Va. Ct. App. Dec. 13, 2016) (citing Nat’l Linen Serv., 5 Va. App. at 271-72, 362 S.E.2d at 190).
²²Nat’l Linen Serv., 5 Va. App. at 266, 269-72, 362 S.E.2d at 189-90.
²³Id. at 271-72, 362 S.E.2d at 190.
²⁴Stanley’s Cafeteria, Inc., 226 Va. at 73, 306 S.E.2d at 873.
²⁵Id. (citing Emps. Com. Union Ins. Co. v. Great Am. Ins. Co., 214 Va. 410, 412-13, 200 S.E.2d 560, 562 (1973)).
²⁶Id. at 74, 306 S.E.2d at 874 (quoting May v. Martin, 205 Va. 397, 404–05, 137 S.E.2d 860, 865 (Va. 1964)).
²⁷Va. Polytechnic Inst. & State Univ. v. Interactive Return Serv., Inc., 267 Va. 642, 652, 595 S.E.2d 1, 6 (2004).
²⁸Id.
²⁹Va. Code Ann. § 8.1A-303 (emphasis added).
³⁰See Dominion Bank, N.A. v. Westside Station, Inc., 28 Va. Cir. 483, *7 (1992).
³¹See, e.g., Meckley v. United States, 2018 WL 10667306, at *8 (N.D. W. Va. July 26, 2018).
³²See Smith Dev., Inc., 79 Va. App. at 379, 896 S.E.2d at 97; Stanley’s Cafeteria, Inc., 226 Va. at 73, 306 S.E.2d at 873.

If you are a member of the Virginia State Bar and would like to submit an article for review, see Sidebar.