WEBVTT

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

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alleges the parties agreed to
modify an existing contract.

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Classical contract doctrine treated

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

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To be enforceable, a modification required

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its own manifestation of mutual
assent and consideration.

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The need for separate consideration
often cause problems when

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a modification changed only one
party's contractual obligations.

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For example, let's say
a tailor was originally

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

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Then six months later,

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the tailor requested a raise and

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

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That modification changed the
employer's contract obligations.

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The employer used to be
obligated to pay $90 a

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week and is now obligated
to pay 110 a week.

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

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Under the original agreement,

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he was obligated to work and
under the modified agreement,

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he is still obligated to
perform the same work.

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Under classical contract doctrine,

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the original consideration for

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the original agreement could not

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function as consideration
for the modification.

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Consideration requires the promisee to do

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something he is not already
legally obligated to do.

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Performing under an existing
contract is a legal obligation.

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

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his promise to do the same
work could not function as

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consideration for the employers
promise of an extra $20.

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This rule that a modification required

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new consideration was called
the preexisting duty rule,

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meaning that since the original
consideration was a preexisting duty,

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it did not qualify as consideration
for the modification.

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Classical contract doctrine did

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recognize an exception to
the preexisting duty rule.

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The exception applied if
the parties agreed to

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rescind the original contract and mutually

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release one another from

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their preexisting contractual duties

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before they entered into
the modified agreement.

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In that case, the rescinded
contracts consideration would be

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

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This was called a novation.

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Sometimes the facts support the
notion that the parties intended to

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cancel the old contract and

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enter into a completely new
and different contract.

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

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But courts often found
an implied novation,

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even in the absence of supporting facts.

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That is, courts indulged in
a legal fiction that there

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

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This lead to inconsistent results.

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

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Which rule does the trial court use?

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Which rule does the appellate court use?

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In response both the UCC in
Section 2- 209 subsection

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1 and the second
restatement in Section 89,

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have jettison the requirement of
consideration for contract modifications,

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at least under some circumstances.

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The UCC does this explicitly.

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Section 2-209 subsection 1
reads in its entirety and

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agreement modifying a contract within

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this article needs no
consideration to be binding.

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The UCC still allows course to
police modifications, however,

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

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which imposes a duty of good
faith on the performance and

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enforcement of every contract
within the scope of the UCC.

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

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one side uses its superior
bargaining power to intimidate the

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other into agreeing into a modification
without any other justification,

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it can refuse to enforce the modification.

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The restatement section is less explicit

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and all encompassing than the UCC rule,

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but the result is often the same.

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Consideration is not required for
a modification to be binding.

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Section 89 is less broad because it

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limits its application
to executory promises.

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That is, promises under a contract that

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are not fully performed on either side.

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Under Section 89, modifications in

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

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

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Two, a statute provides such
a modification is binding.

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Or three, there has been a change of

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position in justifiable
reliance on the modification.

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The changes in the second
restatement do not mean that

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the old classical contract doctrines
have been overruled however.

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A recent case from the Seventh Circuit,

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

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

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

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Under both the UCC and second restatement,

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all of the typical contract
defenses such as duress,

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undue influence, et cetera,

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are available against modifications.

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In any case where a party
could show that they

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entered into a modification
under one of the defenses,

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it seems pretty clear that a
court could refuse to enforce

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

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as any circumstances
that gave rise to one of

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the defenses would also
certainly constitute bad faith.

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

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

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Oral modifications can
present additional issues.

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

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it only applies to prior or
contemporaneous extrinsic evidence.

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But does the statute of frauds
apply to modifications?

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The answer is maybe.

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

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the statute if the contract as

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

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$5,000 under the current revision.

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For example, suppose the original contract

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

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and the modification adds more
goods to the order so that

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

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

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

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Many courts have held that
this provision also bars

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oral modifications of written
agreements that are within the statute.

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Outside of the UCC,

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many courts hold that any
material modification of

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

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Moreover, parties to

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a written contract may attempt
to create a private statute

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

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These are sometimes called NOM
clauses for no oral modification.

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Under the common law,

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such clauses were usually held in valid,

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thus allowing oral modifications.

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UCC Section 2-209 subsection 2 attempts to

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change this by explicitly providing
that such clauses are valid,

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thus prohibiting oral modifications.

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However, in section 2-209 subsection 4,

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the UCC also provides that

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