Avoiding Unintentional Waiver of a No-Waiver Clause

Majority View: Determining Waiver of a No-Waiver Clause Based on Course of Performance

The majority view is that strict adherence to nonwaiver clauses is disfavored. One may find the following general boilerplate no-waiver clause in their contract: “no waiver of one breach of any covenant herein contained shall be construed to waive or in any manner affect the covenants of this Lease.” Entrepreneur, Ltd. v. Yasumau, 498 A.2d 1151, 1164 (D.C. 1985). The majority views a no-waiver clause as “evidence of an intent not to relinquish the rights under the contract; however, ‘it does not necessarily control,’ because ‘[l]ike all contractual rights, the rights under the “no waiver” clause are themselves subject to waiver.’” Bernsen v. Innovative Legal Mktg., LLC, 885 F. Supp. 2d 830, 833 (E.D. Va. 2012) (quoting Perry Eng’g Co. v. AT&T Comm’cns, Inc., No. 92-2050, 1993 U.S. App. LEXIS 17432, at *14 (4th Cir. July 13, 1993)). Accordingly, these courts look to “conduct, acts, or a course of dealing.” Bernsen, 885 F. Supp. 2d at 833 (citation omitted). See also Westinghouse Credit Corp. v. Shelton, 645 F.2d 869 (10th Cir. 1981). Whether a no-waiver clause has been waived is generally a question of fact. Morrison v. Buffalo Bd. of Educ., 741 Fed. Appx. 827, 830 (2d Cir. July 17, 2018).

A common scenario in which no-waiver clauses are at issue are nonconforming payments pursuant to a loan or lease agreement, such as between a landlord and tenant. The lease may require rent by the fifth day of the month; however, the tenant doesn’t pay until the tenth day of the month. The tenant has breached the lease, but the landlord wants to be paid, so he accepts the nonconforming payment. In Olga’s Kitchen v. Papo, No. 85-1581, 86-1088, 1987 U.S. App. LEXIS 2205, at *13 (6th Cir. Feb. 16, 1987), the Sixth Circuit affirmed the district court’s holding that the landlord had waived the no-waiver clause by acquiescing to the tenant’s late payments “throughout almost the entire five year lease arrangement” and engaging in negotiations to exercise a purchase option under the lease. The majority position is that the parties’ course of performance should be examined to determine if the landlord’s acceptance of nonconforming payments amounts to a waiver of the no-waiver clause. In essence, the courts look to what is fair to the tenant under the circumstances.            

Courts may also find waiver of a no-waiver clause where the issue is performance of a condition precedent. In Entrepreneur, Ltd., the parties contemplated that the tenant would use the property as a business, but the tenant failed to apply for the required certificate of occupancy, justifying forfeiture of the lease. 498 A.2d at 1158. However, the tenant asserted, and the D.C. Court of Appeals agreed, that the landlord waived the breach, notwithstanding the lease agreement’s no-waiver clause, because the landlord knew full well that the tenant was operating a business without a certificate of occupancy and the landlord did nothing to enforce her rights for at least two years. Id. at 1163-64. See also Bott v. J.F. Shea Co., 388 F.3d 530, 534-35 (5th Cir. 2004) (the Court concluded that “Shea/Keefe waived the insurance requirement both by ‘intentional conduct inconsistent with claiming [the] right’ to have Shea/Keefe named as an additional insured, and by its ‘silence and inaction, for so long a period as to show an intention to yield the right to have Shea/Keefe named as an additional insured.’”).            

The threshold for a waiver of a no-waiver clause is decided on a case by case basis. Formall, Inc. v. Community Nat’l Bank, 360 N.W.2d 902, 905 (Mich. App. 1984). For example, compare Olga and Entrepreneur, where waiver was found based on the acquiescence of non-conforming payments for years, with cases where no-waiver was found, e.g., Ring v. Mpath Interactive, Inc., 302 F. Supp. 2d 301, 304-05 (S.D.N.Y 2004) (applying New York law to uphold anti-waiver provision in commercial lease to deny summary judgment where sublessor had accepted no rent in one month and partial payments in six other months); Monarch Coaches, Inc. v. ITT Indus. Credit, 818 F.2d 11, 13 (7th Cir 1987) (applying Illinois law to uphold anti-waiver provision in loan agreement where creditor had accepted two late payments); AMTRAK v. ExpressTrak, L.L.C., 2006 U.S. Dist. LEXIS 74922 (D.D.C. Oct. 16, 2006) (same).

Minority View: No-Waiver Clause Is Given Strict Construction          

Under the minority view, no-waiver clauses “‘may be strictly construed even when full compliance with the contract has not been required for a lengthy period of time.’” Roboserve, Inc. v. Kato Kagaku Co. Ltd., 78 F.3d 266, 277 (7th Cir. 1996) (quoting Transcraft Corp. v. Anna Indus. Dev. Corp., 584 N.E.2d 1033, 1035 (Ill. App. Ct. 1991)). See also Weigand Constr. Co. v. Stephens Fabrication, Inc., 929 N.E.2d 220 (Ct. App. Ind. 2010) (enforcing nonwaiver provision based on strict construction). Clear and convincing evidence is required to overcome “‘the weight of authority in Illinois…that Waiver Only in Writing provisions can be waived by [the] words and deeds of the parties.’” Roboserve, 78 F.3d at 277 (quoting Chicago College of Osteopathic Medicine v. George A. Fuller Co., 776 F.2d 198, 202 (7th Cir. 1985)). In Transcraft Corp., Transcraft leased a parcel of land to Anna pursuant to a lease agreement, which required Anna to pay taxes in the event they exceed $800.00 in a given year. The lease agreement contained a clause titled “NO WAIVER,” which stated: “The failure of either party, in any one or more instances, to demand strict performance or observance of any of the terms and conditions of the lease or to take advantage of any rights hereunder[] shall not operate or be construed as a waiver of any such terms and conditions or the relinquishment of any such rights but the same shall continue and remain in full force and effect.” Id. at 1035. Despite Anna failing to pay the excess taxes for 20 years, the Illinois Court of Appeals reversed the circuit court and directed that summary judgment be entered in favor of Transcraft because it concluded that Transcraft had not waived its right to sue in light of the NO-WAIVER clause, which was clear and unambiguous.            

Texas courts agree that a nonwaiver provision may be waived, but have recently reaffirmed that, “as a general proposition, nonwavier provisions are binding and enforceable” in light of Texas’ public policy “that competent parties ‘shall have the utmost liberty of contract, and that their contracts when entered into freely and voluntarily shall be held sacred and shall be enforced by Courts of justice.’” Shields Ltd. P’ship v. Bradberry, 526 S.W.3d 471, 481 (Tex. 2017). In Shields, the landlord brought eviction proceedings against its tenant for holdover. The tenant claimed waiver because the landlord had accepted late and partial rental payments for approximately seven months before and a year after the landlord’s broker sent the tenant a notice of default. The lease contained the following nonwaiver provision: “All waivers must be in writing and signed by the waiving party. Landlord’s failure to enforce any provisions of this Lease or its acceptance of late installments of Rent shall not be a waiver and shall not estop Landlord from enforcing that provision or any other provision of this Lease in the future.” Id. at 481. The Texas Supreme Court determined that the “lease explicitly precludes acceptance of rental payments as constituting waiver of [the landlord’s] enforcement rights,” and held that “engaging in the very conduct disclaimed as a basis for waiver is insufficient as a matter of law to nullify the nonwaiver provision in the parties’ lease agreement.” Id. at 484–85.

Recommendations

Notwithstanding forum selection, parties can do a couple things to attempt to gain more certainty in treatment of a nonwaiver clause. Where the obligor determines that accepting nonconforming payments is in its best interest for the time being, it can provide notice letters acknowledging the breach and reasserting that acceptance is not a waiver. Dunkin’ Donuts Franchised Rests. LLC v. Kev Enterprises, Inc., 634 F. Supp. 2d 1324 (M.D. Fla. 2009). In Dunkin’ Donuts, the franchisee failed to timely pay its franchise and advertising fees per the agreement over the course of a year before the franchisor issued notices to cure the payment defaults. The notices of franchisee’s financial defaults “specifically state that Plaintiffs do not waive Plaintiffs’ rights relating to any prior Notice of default” and “The Notices of Termination also include an anti-waiver and anti-acquiescence provision.” Id. at 1334. The district court concluded that the franchisee had not established waiver “[i]n light of the reservation of Plaintiffs’ rights in the notice letters, and Defendants agreement to the Non-Waiver provision of the Franchise Agreements.” Id.          

Parties may also attempt to narrow the scope of the nonwaiver clause to state specifically which potential breaches aren’t waived, such as late payment, as in the case of Shields. For example, in Martin-Janson v. JP Morgan Chase Bank, N.A., 536 Fed. Appx. 394 (5th Cir. 2013), the plaintiff appealed the district court’s dismissal of her declaratory judgment action that the bank’s delay in pursuing foreclosure was a waiver. The contract contained the following clauses regarding nonwaiver:

No Waiver by Note Holder
Even if, at a time when I am in default, the Note Holder does not require me to pay immediately in full as described above, the Note Holder will still have the right to do so if I am in default at a later time.

Borrower Not Released; Forbearance by Lender Not a Waiver.
Extension of the time for payment…shall not operate to release the original Borrower or Borrower’s successors in interest from Borrower’s obligations under the Note and this Security Instrument…Any forbearance by Lender in exercising any right or remedy shall not be a waiver of or preclude the exercise of any right or remedy.

Id. at 397. The Fifth Circuit affirmed the district court’s dismissal of the plaintiff’s claim for declaratory judgment that the bank had waived its right to foreclose because “the terms of the loan agreement make plain” that the bank did not intend to relinquish any rights to pursue foreclosure at any time. Id. at 397–98.            

As demonstrated by the foregoing, addressing waiver of a nonwaiver clause is far from a settled issue in the courts, and will depend on the jurisprudence of the forum as well as the actions taken by the party seeking to assert a nonwaiver position.

Julia K. Whitelock is senior counsel with Gordon Rees Scully Mansukhani, LLP, in Washington, D.C.

_{Copyright © 2019, American Bar Association. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association, the Section of Litigation, this committee, or the employer(s) of the author(s).}