Oral Modifications to Written Contracts: A Trap for the Unwary

Contracts are ubiquitous. Every company is a party to numerous different contracts. Leases, purchase agreements, vendor agreements, supply contracts, and employment agreements are just a few of the contracts that a company typically enters in the normal course of business. The parties to a contract expect the other to live up to its obligations as set forth in the written contract. One important rule that many companies and business owners are not aware of, however, is that oral modifications to the terms of a contract can trump the written obligations in a contract, even if the contract expressly prohibits oral modifications.

The recent case of Miller UK Limited v. Caterpillar Inc. demonstrates the significant consequences of this rule. In Miller, the parties entered a written agreement in which Miller agreed that it would “not disclose to Caterpillar any confidential or proprietary information unless our two companies otherwise first agree in writing.” Subsequently, at a meeting between the companies, the parties orally agreed to keep any information shared at the meeting confidential. At that same meeting, Miller shared confidential and proprietary information with Caterpillar concerning technical specifications for a coupling system Miller had developed which allowed earthmover and excavator vehicles to attach shovels, buckets, and other attachments to their mechanical arms quickly without requiring the vehicle operator to leave its cab. Caterpillar later developed its own coupling system that was similar to Miller’s system.

Miller sued Caterpillar for breach of contract and violation of the Illinois Trade Secret Act (“ITSA”). A jury ultimately awarded Miller $16 million on its breach of contract claim and $74.6 million on its ITSA claim. After trial, Caterpillar sought to have the verdict vacated. Caterpillar argued that none of the information Miller shared at the meeting could be considered confidential because the parties’ written contract prohibited sharing confidential or proprietary information without first entering a written nondisclosure agreement. Consequently, Caterpillar argued, because the information was shared without such an agreement, Miller could not as a matter of law prove a trade secret misappropriation claim under ITSA—as proof that the plaintiff took appropriate steps to keep a trade secret confidential is a requirement of an ITSA claim.

The court, however, rejected Caterpillar’s arguments because they failed to consider the effect of the parties’ oral agreement to keep the information confidential. Although the parties’ written contract required an agreement in writing before sharing confidential information, the court explained, “Illinois law allows the terms of a written contract to be modified by a subsequent oral agreement notwithstanding contractual language to the contrary.” The parties orally modified this requirement in the written contract.

The implication behind this legal precedent is that a party’s oral agreements may be undermined and override the terms of the parties’ written obligations. Moreover, companies should avoid being lulled into a false sense of security simply because their agreements contain a “no oral modifications” provision. As an Illinois court in Caulfield v. Packer Engineering, a case involving an oral modification of an employment agreement, explained,  “the terms of a written contract can be modified by a subsequent oral agreement even though the contract precludes oral modifications.”

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