29. Contracts: Modification

>> This module deals with the issues
that can arise when one party

alleges the parties agreed to
modify an existing contract.

Classical contract doctrine treated

the modified agreement as a separate
contract from the original agreement.

To be enforceable, a modification required

its own manifestation of mutual
assent and consideration.

The need for separate consideration
often cause problems when

a modification changed only one
party's contractual obligations.

For example, let's say
a tailor was originally

employed to work for a
year for $90 a week.

Then six months later,

the tailor requested a raise and

his employer agreed to pay
him an extra $20 a week.

That modification changed the
employer's contract obligations.

The employer used to be
obligated to pay $90 a

week and is now obligated
to pay 110 a week.

But the tailor's contractual obligations
were not modified in any way.

Under the original agreement,

he was obligated to work and
under the modified agreement,

he is still obligated to
perform the same work.

Under classical contract doctrine,

the original consideration for

the original agreement could not

function as consideration
for the modification.

Consideration requires the promisee to do

something he is not already
legally obligated to do.

Performing under an existing
contract is a legal obligation.

In a hypo because the tailor was already
obligated to work for $90 a week,

his promise to do the same
work could not function as

consideration for the employers
promise of an extra $20.

This rule that a modification required

new consideration was called
the preexisting duty rule,

meaning that since the original
consideration was a preexisting duty,

it did not qualify as consideration
for the modification.

Classical contract doctrine did

recognize an exception to
the preexisting duty rule.

The exception applied if
the parties agreed to

rescind the original contract and mutually

release one another from

their preexisting contractual duties

before they entered into
the modified agreement.

In that case, the rescinded
contracts consideration would be

freed up and available to serve as
consideration for the new contract.

This was called a novation.

Sometimes the facts support the
notion that the parties intended to

cancel the old contract and

enter into a completely new
and different contract.

For example, the parties would tear
up the existing written contract.

But courts often found
an implied novation,

even in the absence of supporting facts.

That is, courts indulged in
a legal fiction that there

had been a novation whenever they
wish to enforce a modification.

This lead to inconsistent results.

See for example, the Alaska
Packers' case in your case book.

Which rule does the trial court use?

Which rule does the appellate court use?

In response both the UCC in
Section 2- 209 subsection

1 and the second
restatement in Section 89,

have jettison the requirement of
consideration for contract modifications,

at least under some circumstances.

The UCC does this explicitly.

Section 2-209 subsection 1
reads in its entirety and

agreement modifying a contract within

this article needs no
consideration to be binding.

The UCC still allows course to
police modifications, however,

but this is now done under
the rubric of Section 1-304,

which imposes a duty of good
faith on the performance and

enforcement of every contract
within the scope of the UCC.

If a court determines that a modification
is made in bad faith, for example,

one side uses its superior
bargaining power to intimidate the

other into agreeing into a modification
without any other justification,

it can refuse to enforce the modification.

The restatement section is less explicit

and all encompassing than the UCC rule,

but the result is often the same.

Consideration is not required for
a modification to be binding.

Section 89 is less broad because it

limits its application
to executory promises.

That is, promises under a contract that

are not fully performed on either side.

Under Section 89, modifications in

executory contracts are binding if one
of the three requirements are met.

One, the modification is fair and
equitable under the circumstances.

Two, a statute provides such
a modification is binding.

Or three, there has been a change of

position in justifiable
reliance on the modification.

The changes in the second
restatement do not mean that

the old classical contract doctrines
have been overruled however.

A recent case from the Seventh Circuit,

after concluding that a modification
was made in good faith, nevertheless,

refused to uphold the modification on
the basis of the preexisting duty rule.

That is, on the basis that there was
no consideration for the modification.

Under both the UCC and second restatement,

all of the typical contract
defenses such as duress,

undue influence, et cetera,

are available against modifications.

In any case where a party
could show that they

entered into a modification
under one of the defenses,

it seems pretty clear that a
court could refuse to enforce

the modification under either the
defense or under the good faith rule,

as any circumstances
that gave rise to one of

the defenses would also
certainly constitute bad faith.

But theoretically, at least a court
could find a party acted in bad faith,

even in situations that are not covered
by the typical contract defenses.

Oral modifications can
present additional issues.

Recall that the parole evidence rule
does not apply to modifications,

it only applies to prior or
contemporaneous extrinsic evidence.

But does the statute of frauds
apply to modifications?

The answer is maybe.

UCC Section 2-209 subsection 3 provides
that a modification must satisfy

the statute if the contract as

modified is for the sale of goods
above the statutory amount,

$5,000 under the current revision.

For example, suppose the original contract

was for less than $5,000 worth of goods,

and the modification adds more
goods to the order so that

the modified contract is
for more than $5,000.

In that case, the modified contract
must satisfy the statute of frauds,

even though the original contract
did not have to satisfy the statute.

Many courts have held that
this provision also bars

oral modifications of written
agreements that are within the statute.

Outside of the UCC,

many courts hold that any
material modification of

a written agreement within the
statute must also be in writing.

Moreover, parties to

a written contract may attempt
to create a private statute

of frauds by contractually providing that
any modification must be in writing.

These are sometimes called NOM
clauses for no oral modification.

Under the common law,

such clauses were usually held in valid,

thus allowing oral modifications.

UCC Section 2-209 subsection 2 attempts to

change this by explicitly providing
that such clauses are valid,

thus prohibiting oral modifications.

However, in section 2-209 subsection 4,

the UCC also provides that

an unenforceable oral modification might
instead be enforceable as a waiver.