How to Waive a Contract Right! Without Even Trying!
A recent case from the 8th Circuit reinforces what happens when the parties conduct business without considering the contract. According to the court in Physical Distribution Services, Inc. v. R.R. Donnelley, Physical Distribution (PDS) entered into a contract with Parcel Shippers, a subsidiary of R. R. Donnelley & Sons in 2003. PDS was to provide drivers for Parcel Shippers. Parcel Shippers provided a draft contract to PDS. However, in the end no agreement was ever executed.
The draft contract had a term that provided that neither party could assign the agreement without the written consent of the other party. This is a fairly standard contract provision. Despite the lack of an executed agreement, PDS began supplying drivers to Parcel Shippers, and the payments for the services were made by Donnelley.
In October 2004, Donnelley sold Parcel Shippers to American Package Express. Parcel Shippers notified PDS. In November 2004, American Package began paying the PDS invoices. In February 2005, PDS began addressing the invoices to American Package.
You can guess what happened next. In January 2006, American Package stopped making payments, and in March, 2006 it filed for bankruptcy protection. PDS wanted to find someone to pay the $695,000 in unpaid invoices. PDS looks at the draft, unsigned contract, and finds the anti-assignment clause. So PDS sues Donnelley claiming that Donnelley had violated the contract, and therefore Donnelley owed PDS for the unpaid invoices.
This falls into the, "Nice try, but no cigar," department. The court ignored the question of whether the anti-assignment clause was even part of the contract. After all, the language was only in a draft contract that was never executed. Courts tend to find the simplest issue and use that to affirm or overturn a decision. In this case, the terms of the contract didn't matter. Even assuming that the Plaintiff was correct, and the anti-assignment clause was part of the verbal contract, it still loses. Why? Because the Plaintiff knew about the business sale to American Package, never objected, and continued to do business with the purchasing company. That is called a waiver.
In the law you can almost always waive your own rights. (There are some statutory exceptions, but they don't apply here.) In this case, the court impliedly said that even if the draft contract had been executed, the plaintiff's would lose because they waived their right to enforce the provision.
The lesson from this case is clear. Know what is in your contracts. Anti-Assignment clauses are a prudent provision to place into most contracts. Then, if there is a sale of a contracting party, it is prudent to at least consider whether you want to do business with the successor company. You can't fail to decide, continue to conduct business as usual with the new company, and later decide that you want to look to the old company for recovery.
Most businesses never even look at their contracts until there is problem. In the long term this is not a wise course of action. Just ask PDS.
