Contracts Flashcards
(4 cards)
Preexisting duty rule
The general rule is that, to be enforceable, a promise must be supported by consideration. Under RESTATEMENT (SECOND) OF CONTRACTS § 71, a promise is supported by consideration if it is bargained for in exchange for a return promise or performance. However, under the “preexisting duty rule” (exemplified in RESTATEMENT (SECOND) OF CONTRACTS § 73 and Alaska Packers’ Ass’n v. Domenico, 117 F. 99 (9th Cir. 1902)), promise of performance of a legal duty already owed to a promisor which is neither doubtful nor the subject of honest dispute is not consideration.
Exception to the preexisting duty rule
However, an exception to the preexisting duty rule is sometimes applied in situations of unanticipated changed circumstances. Under RESTATEMENT (SECOND) OF CONTRACTS § 89, followed in many jurisdictions, a promise modifying a duty under a contract not fully performed on either side is binding even if not supported by consideration, if the modification is fair and equitable in view of circumstances not anticipated by the parties when the contract was made.
If a court applies the rule in Restatement § 89, the critical issues will be whether the modification was in fact “fair and equitable” and whether it can be justified in light of unanticipated circumstances. In many cases in which modifications have been upheld, a party encountered difficulties or burdens in performing far beyond what was knowingly bargained for in the original contract, with the result bordering on impracticability, such as having to excavate solid rock instead of soft dirt or having to remove garbage far in excess of the amounts contemplated. The conservatory would argue that the business’s performance difficulties were not of this sort at all—nothing about repairing the pipe organ itself was any different from or more difficult than originally contemplated, except that the business itself encountered financial distress unrelated to its burdens in performing its obligations under these contracts.
Good faith contract modifications
The contract to buy a new organ is a contract for the sale of goods and therefore is governed by Article 2 of the Uniform Commercial Code. UCC § 2-102. Under Article 2, unlike the common law, an agreement modifying a contract needs no consideration to be binding. UCC § 2-209(1). Section 2-209(1) thus obviates the preexisting duty rule entirely in contracts for the sale of goods.
Even though consideration is not required, modifications governed by § 2-209 must satisfy the obligation of good faith imposed by the UCC. UCC § 1-304. See also Official Comment 2 to UCC § 2-209. Good faith means “honesty in fact and the observance of reasonable commercial standards of fair dealing.” UCC § 1-201(b)(20). In this context, the obligation of good faith means that “[t]he effective use of bad faith to escape performance on the original contract terms is barred, and the extortion of a ‘modification’ without legitimate commercial reason is ineffective as a violation of the duty of good faith.” Official Comment 2 to Contracts Analysis
UCC § 2-209. Here, because the business’s financial reversals were serious and apparently unanticipated at the time that the business entered into the contract with the conservatory, and commitment of the extra money was needed to enable the business to perform, a court would likely find that the business acted in good faith. Thus, a court would likely uphold the enforceability of the conservatory’s promise to pay the additional $40,000.
Economic duress
Under the common law of contracts, parties may raise the defense of duress. This common law defense also applies to contracts governed by UCC Article 2. See UCC § 1-103(b).
A contract is voidable on the ground of economic duress by threat when it is established that a party’s manifestation of assent is induced by an improper threat that leaves the party no reasonable alternative. See RESTATEMENT (SECOND) OF CONTRACTS § 175. See also, e.g., Austin Instrument Inc. v. Loral Corp., 272 N.E.2d 533 (N.Y. 1971) (a threat to withhold essential goods can constitute duress). In order to void its agreement to pay the additional sum because of economic duress, the conservatory must demonstrate that (1) the business made a threat to the conservatory, (2) the threat was “improper” or “wrongful,” (3) the threat induced the conservatory’s manifestation of assent to the modification, and (4) the threat was sufficiently grave to justify the conservatory’s assent.
A mere threat to breach a contract is not, in and of itself, improper so as to support an action of economic duress or business compulsion. Something more is required, such as a breach of the duty of good faith and fair dealing, as was present in Austin Instrument Inc., supra. Because the business could not perform the original contract without the requested modification, the economic duress claim for the conservatory would likely fail for much the same reason that the business would be able to enforce the modification. At the time the modification was requested, the business was not trying to extort a price increase because of the conservatory’s vulnerability, but instead was simply stating the reality that the business could not perform without more money.
