>> 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In that case, the rescinded contracts consideration would be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.