Common Law Modification Rules: The “Preexisting Duty” Rule
Under the common law, a contract modification requires additional consideration UNLESS it falls into an exception listed in R § 89
If you are already obligated to do something under the law (positive or negative), that is NOT sufficient consideration for a modification of the contract
The Restatements focus on whether there is a prior legal existing duty to the PROMISOR
R § 73: Performance of a legal duty OWED to a PROMISOR which is neither doubtful nor the subject of honest dispute is NOT consideration; but a similar performance is consideration if it differs from what was required by the duty in a way which reflects more than a pretense of bargain
How do judges try to enforce this modified contract if there is this no additional consideration to make it enforceable?
(1) Say that the contract gives one person a legal benefit / something that is distinct
The other party is therefore obligated
(2) Exception for “mutual release”
Say that one party had given up a mutual right to rescission
(Common Law “Preexisting Duty” Rule / R §§ 73 & 89)
FACTS
A group of seamen (P) entered into contract w/ D to go from San Fran to Alaska on D’s ship to work as sailors and fishermen
In Alaska, P refused to continue work unless compensation increased to $100
D reluctantly agreed b/c unable to hire new crew in remote place
P finished work but D refused to honor the new contract
ISSUE
Is a promise to pay a man for performing a duty he is already under contract to perform, without consideration?
HELD
The performance of a preexisting legal duty guaranteed by contract is not sufficient consideration to support a promise
Consent to such a demand was based solely upon P’s agreement to render the exact same services, and none other, that they were already under contract to render
The new contract is unenforceable even though P completed their performance in reliance on it because a party cannot lay the foundation of an estoppel by his own wrong
Modification under the UCC and CISG
Under the UCC, a contract modification does NOT need additional consideration in order for the modification to be enforceable
One-sided modifications are okay
Divergence from the common law
UCC 2-209: Modification, Rescission and Waiver
(1) An agreement modifying a contract within this Article needs NO consideration to be binding
(2) A signed agreement which excludes modification or rescission except by a signed writing can NOT be otherwise modified or rescinded, but EXCEPT as between merchants such a requirement on a form supplied by the merchant must be separately signed by the other party
(3) The requirements of the statute of frauds section of this Article must be satisfied if the contract as modified is within its provisions
(4) Although an attempt at modification or rescission does not satisfy the requirements of subsection (2) or (3) it can operate as a waiver
(5) A party who has made a waiver affecting an executory portion of the contract may retract the waiver by reasonable notification received by the other party that strict performance will be required of any term waived, unless the retraction would be unjust in view of a material change of position in reliance on the waiver
“No Oral Modification” (N.O.M.) Clauses under the UCC
“No oral modification (NOM)” clauses = “this contract may NOT be modified, except in writing”
Often found in a contract together with a merger clause
Under UCC 2-209, If you try to orally modify a contract that has NOM clause in it, that modification will NOT be effective
BUT, a party can be assumed to have waived the NOM clause by orally agreeing to modify the contract
You may retract the waiver by reasonable notification unless the other party has materially changed his position in reliance on the waiver and allowing retraction would be unjust
CISG Article 29
(1) A contract may be modified or terminated by the mere agreement of the parties
(2) A contract in writing which contains a provision requiring any modification or termination by agreement to be in writing may not be otherwise modified or terminated by agreement. However, a party may be precluded by his conduct from asserting such a provision to the extent that the other party has relied on that conduct
Kelsey-Hayes Co. v. Galtaco Redlaw Castings Corp.
(No Additional Consideration Requirement under UCC 2-209 / Duress & Bad-Faith Defenses Still Available to Invalidate Modification )
FACTS
D supplied P w/ castings pursuant to a 3 yr. requirements contract, which were incorporated into brake assemblies sold to car manufacturers like Ford and Chrysler
Facing financial losses, D stopped producing castings but offered to keep operation for 30% price increase
P agreed for next 2 years, 30% extra each year, b/c could not find an alternative source
D sued when P didn’t pay
P claimed modifications made under duress b/c D threatened to breach its contract, stopping production and delivery of castings, unless P agreed to significant price increases
ISSUE
Is a subsequent contract or modification invalid when the subsequent contract was entered into under duress?
HELD
Economic duress and bad faith are available as defenses to contract modification enforcement, but lack of additional consideration will not invalidate a modification under the UCC
P did NOT argue that modifications were invalid under the preexisting duty rule b/c this case is governed by the UCC, which says that NO consideration is need for contract modification
Improper Threat→ Threat to breach its contract / go out of business was in bad faith
Reasonable Alternative→ Faced w/ imminent shutdown of its major customers, P may have had no alternative other than agreeing to D’s price hikes
Inducement→ P vigorously objected, a sign of protest that courts require to put seller on notice that modification is not freely entered into
Problem 8-3
(1) Is this a UCC or common law transaction?
(2) Can D rely on changes in circumstances occurring since the agreement was made to justify nonperformance on its part / excuse itself?
Impossibility?
Impracticability?
Frustration of Purpose?
Mistake?
(3) If P should agree to pay D a higher price for the tile work, could it later refuse to pay the amount of the increase, on the ground that its agreement to that increase either was void for lack of consideration or was entered into as a product of bad faith or duress on D’s part?
Honest dispute or bad-faith?
Modification enforceable?
Pre-existing Duty Rule
Exceptions-> R 89(a) & (c)
UCC 2-209
Duress?
(4) Even if an agreement to pay the increased price would otherwise be enforceable, if you can avoid putting it in writing, can P later refuse to pay?
