-
>> 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In that case, the rescinded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.