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Commercial Division Rejects Attempt to Dismiss Two Alleged Verbal Agreements Despite Written Agreement’s Requirement that Contract Cannot Be Changed Except Upon Written Agreement of Parties

On August 18, 2016, in Obsessive Compulsive Cosmetics, Inc. v. Sephora USA, Inc., No. 652074/2015, 2016 BL 307244 (N.Y. Sup. Ct. Aug. 18, 2016), Justice Ramos handed down an order that allowed a plaintiff to proceed with claims for breach of two verbal agreements that were purportedly made after the parties had executed a written agreement stating that the contract cannot be changed except by written agreement of both parties.  

In Obsessive, plaintiff Obsessive Compulsive Cosmetics (“OCC”) alleged that it made two verbal agreements with Sephora USA, Inc. (“Sephora”) following a written agreement between the parties.  The written agreement, executed in May 2012, made Sephora a vendor for OCC products, with OCC responsible for 100% of fixture costs.  According to OCC, the parties then entered into a verbal agreement in July 2012 pursuant to which OCC made Sephora the exclusive non-online purchaser of OCC products in exchange for Sephora’s agreement to place orders sufficient to compensate OCC for orders from other retailers it was forced to decline.  OCC alleged the parties entered into a second verbal agreement in October 2013 pursuant to which Sephora agreed to share 50% of OCC’s fixture costs in exchange for OCC agreeing to place OCC products in dozens of new Sephora stores. 

OCC alleged that Sephora ultimately refused to share fixture costs and to place sufficient orders to compensate OCC for the purchase orders from other retailers that it declined. 

Sephora’s argument for dismissal of OCC’s complaint relied heavily on a “no modification” clause in the May 2012 written agreement.  The clause provided that the parties’ contract cannot be changed except in writing signed by both parties. 

Justice Ramos denied Sephora’s motion based upon an exception to the rule requiring enforcement of no modification clauses.  The court found that an oral agreement may be enforced, despite a no modification clause in a written agreement, when complete or partial performance of the subsequent oral modification has occurred and that performance is “unequivocally referable” to the oral modification and not the original written agreement.  The court reasoned that in such a situation the same concerns that ordinarily prohibit the acceptance of the verbal agreement do not exist.

Justice Ramos credited OCC’s allegation that it had unequivocally performed pursuant to both verbal agreements.  OCC declined purchase orders from other retailers before requesting Sephora compensate it for declining those orders; something that was only contemplated by the first verbal agreement.  Further, OCC declined to accept the purchase orders for Sephora’s new stores covered by the second verbal agreement until Sephora allegedly made its verbal agreement to cover 50% of fixture costs.  Neither course of performance by OCC was covered by or assignable to the original written contract.

The case demonstrates that even if the parties agree to no modification clauses in their agreements, subsequent verbal agreements could be enforceable if they satisfy the performance and referable criteria required by the courts.

Moreover, because neither course of performance was covered by the original written contract, Justice Ramos denied Sephora’s request to dismiss OCC’s promissory estoppel claims.  Sephora was able to have one claim—fraud—successfully dismissed because OCC failed to adequately plead scienter.

By William Schmedlin and Muhammad U. Faridi