What is the role of consideration in the modification of existing contracts?

Two parties, a contractor and a homeowner, enter into a contract for the renovation of a house. A week later, the contractor becomes dissatisfied with how much he will be paid. He tells the homeowner that he will walk away from the project unless he is paid more for his services. Faced with the prospect of not having his desired work completed, the homeowner agrees. Under the pre-existing rule, the homeowner’s promise to pay the new amount is not enforceable because the contractor already had a pre-existing duty to perform the work requested at the original price. There has been no bargained-for-exchange for this modification and so the homeowner will not have to pay more.

Some critics argue that the rule can be too far-reaching because it makes contracts inflexible and impedes modification that make sense. For example, say a plumber agrees to replace all the piping inside a home with copper pipes, but before the project starts, the price of copper skyrockets and it is no longer financially feasible for the plumber to replace the pipe. The plumber might reasonably ask the homeowner for additional payment to cover the cost of the increase in the price of copper. However, even if the homeowner agrees to this modification, the modification may not be binding under the pre-existing duty rule since the plumber had a pre-existing duty to replace the piping with copper before the modification.

While the pre-existing duty rule applies today, these and other concerns have given rise to several exceptions to the rule.

·         Strikes;

·         Shortages;

·         Economic depressions;

·         War; and

·         Changed construction conditions

When parties, in response to these unanticipated emergencies, agree to modifications (generally increased payments) in good faith, the modifications are enforceable in spite of the fact that the called-for performance was pre-existing under the original agreement.

The Uniform Commercial Code, which applies to contracts for the sale of goods, also substantially modifies the pre-existing duty rule. The UCC modifies the rule because it wants to “assure contracting parties the ability to freely adapt to changing circumstances.” UCC’s Section 2-209(1) provides:

Modification generally has the same meaning in the law as it does in common parlance. The term has special significance in the law of contracts and the law of sales.

The parties to a completed and binding contract are free to change the terms of the contract. Changes to a preexisting contract are called contract modifications. If the parties agree to modify the contract, the modification will be enforceable in a court of law.

A contract modification may be either written or oral, with some exceptions. An oral modification is unenforceable if the contract specifies that modifications must be in writing (United States ex rel. Crane Co. v. Progressive Enterprises, Inc., 418 F. Supp. 662 [E.D. Va. 1976]). As a general rule, a modification should be in writing if it increases or decreases the value of the contract by $500 or more.

In contracts between parties who are not merchants, a modification should be supported by some consideration, which is the exchange of value, or something to solidify an agreement. Courts impose this requirement to prevent FRAUD and deception in the modification of contracts. Consideration operates as evidence that the parties have agreed to the modification. Without the requirement of consideration, a party to a contract could declare that the contract should be modified or canceled whenever such a demand was advantageous.

In contracts between merchants, a modification need not be supported by consideration. Derived from article 2, section 209, of the UNIFORM COMMERCIAL CODE, this rule is designed to honor the intent of commercial parties without requiring the time-consuming technicalities of consideration.

Like any non-merchant, a merchant is free to reject a proposed modification, but a merchant may waive the right to reject a modification by failing to object to the modification. For example, if an electrician doing work as a subcontractor notifies the general contractor that the electrical work will be more expensive than anticipated, the general contractor may be obliged to pay for the extra expenses if she fails to object before the electrician begins the work. There must be a legitimate commercial reason for such a contract modification, and the modification must be reasonable in light of the standards within the particular industry. Courts are free to strike down contract modifications that are brought about by duress or bad faith.

���� Consideration, which must be given in order to make a contract legally binding, is legally sufficient and bargained-for value, given by the promisor in return for the promisee performing or refraining from performing some act which results in a detriment to the promisee and/or a benefit to the promisor. � A bargained for exchange in which there is a legal determinant to the promisor or legal benefit to the promise.�

����� Legally Sufficient Value may be established by: [4316.08]

(1)�� promising to do something that the promisor has no prior legal duty to do (e.g., promising to pay money for the promisor�s goods);

(2)�� performing an action that the promisor is not otherwise obligated to undertake; or

(3)�� refraining from exercising a legal right which the promisor is otherwise entitled to exercise.

����� In a bargained-for exchange, the consideration given by the promisor must induce the promisee to incur a legal detriment and/or provide a legal benefit to the promisor, either or both of which are sufficient to induce the promisor to make the promise.

INSUFFICIENT CONSIDERATION [4316.07]

���� Pre-Existing Legal Duty: Under most circumstances, a promise to do (or refrain from doing) what one already has a legal duty to do (or refrain from doing) does not constitute legally sufficient consideration.

����� A commonly-recognized exception to the foregoing rule is the so-called �unforeseen difficulties� doctrine, which permits an existing contract to be modified to account for unforeseen difficulties that arise during the course of performance.

����� Past Consideration: Promises made in return for acts or events that have already taken place are unenforceable for lack of sufficient consideration.

����� Illusory Promises: If the terms of a contract call for performance in such uncertain terms that the promisor has not definitely promised to dQ (or refrain from doing) anything, the promise is unenforceable for lack of sufficient consideration.

�        Moral obligation: while you may feel morally obligated, it doesn�t mean there is a legal obligation�.

RESCISSION AND NOVATION

������ The unmaking of an existing contract and making of a new contract between the same parties (e.g., to account for unforeseen difficulties) are known, respectively, as rescission and novation.

����� Rescission: Canceling an existing contract, and returning the parties to their pre-contract states (i.e., stopping it before it goes further and going back to where you were before the contract.)

����� Novation: Replacing an existing contract with a new, superseding contract between the same partie (continuing)

ACCORD AND SATISFACTION 4326.06

������ Accord and Satisfaction: An agreement between an obligor (debtor) and obligee (creditor), by which the obligor agrees to pay the obligee some amount owed under the contract (generally less than the amount in dispute) in exchange for a discharge of all obligations owed by the obligor to the obligee.

����� For accord and satisfaction to occur, the amount of the obligor�s debt to the obligee must be in dispute, or unliquidated.

������ Liquidated Debt: A debt whose amount has been ascertained, fixed, agreed on, settled, or exactly determined.

������ Unliquidated Debt: A debt whose amount may be disagreed on by reasonable persons.

RELEASES AND COVENANTS NOT TO SUE 4326.08/.09

����� Release: An agreement whereby one party forfeits its rights to pursue a legal claim against another party.

����� Releases are generally binding if they are:

(1)�� given in good faith,

(2)�� stated in writing, and

(3)�� accompanied by consideration.

����� Covenant Not to Sue: An agreement to substitute a contractual obligation for some other type of legal action based on a valid claim.

PROMISSORY ESTOPPEL

������� Promissory Estoppel: When a promisor makes a clear and definite promise on which the promisee justifiably relies, the promisor is bound by the promise, even if it was insufficient to form the basis of a valid, legally binding contract.� This is equitable relief.

����� For the doctrine of promissory estoppel to be applied, the following elements must be established:

(1)�� the promise was clear and definite;

(2)�� the promisee justifiably relied on the promise;

(3)�� the promisee�s reliance was substantial and of a definite character; and

(4)�� enforcing the promise will serve the best interests of justice.

����� Other Promises Enforceable Without Consideration:

Courts may also enforce, despite the lack of consideration,

(1)�� promises to pay a debt, otherwise barred by limitations, made after limitations have run, and, in rare cases,

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