Contracts Flashcards
Summary
There are two arguments that the conservatory can make to support the claim that it is not bound to pay the higher prices: lack of consideration and economic duress.
The organ repair contract is governed by the common law of contracts. Under the common law, the business would have difficulty recovering the additional $60,000 for the organ repair because, under the “preexisting duty rule,” the agreement of the conservatory to pay the extra price was not supported by consideration. However, the business might argue that the modification is enforceable under an exception to the preexisting duty rule for fair and equitable modifications made in light of unanticipated circumstances.
The organ sale contract is governed by Article 2 of the Uniform Commercial Code. The business would likely recover the additional amount under that contract because Article 2 provides that consideration is not required for a modification to be binding.
In both cases, the conservatory could seek to avoid its agreement on the grounds of economic duress, but that argument is not likely to succeed.
In the case of a service contract (governed by the common law of contracts), is a modification enforceable when a party agrees to pay more for the same performance than was originally promised?
The business probably cannot recover the additional $60,000 for the organ repair because the conservatory’s promise to pay more money was not supported by consideration.
Rule
The general rule is that, to be enforceable, a promise must be supported by consideration. Under RESTATEMENT (SECOND)OFCONTRACTS § 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)OFCONTRACTS § 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.
Application
If the business had promised the conservatory anything new or different in exchange for the agreement to pay the additional $60,000 (such as, for example, repairing the pipe organ more quickly or using better parts), that would constitute consideration, especially in light of the principle that courts do not inquire into the adequacy of consideration.
Here, however, the business already had a legal duty under the original contract and did not agree to do anything else in exchange for the conservatory’s promise to pay $60,000 more.
However, an exception to the preexisting duty rule is sometimes applied in situations of unanticipated changed circumstances. Under RESTATEMENT (SECOND)OFCONTRACTS § 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.
Even if the business satisfies that element of the rule in Restatement § 89, the business must also demonstrate that the circumstances that gave rise to the need to modify the contract were “unanticipated” at the time the original contract was made. Here, the facts suggest that when the business entered into the original contract, it expected that the price paid by the conservatory would enable it to perform. However, any evidence that the business knew or had reason to know at the time of execution that it would need more money from the conservatory to be able to perform would mean that the request to modify was not “unanticipated.”
In the case of a contract for the sale of goods (governed by Article 2 of the UCC), is a modification enforceable when a party agrees to pay more for the same goods than was originally promised?
The business can recover the additional $40,000 for the new organ because no consideration is required under Article 2 of the UCC for good-faith contract modifications.
Rule
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.
Application
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 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.
May a party avoid an agreement on the basis of economic duress?
The conservatory is unlikely to be able to defend against enforcement of its promises to pay additional money under the theory of economic duress, because the business probably did not make an improper threat.
Rule
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)OFCONTRACTS §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.
Application
Here, it appears that three of the four elements are likely satisfied. The business plainly made a threat. Moreover, the threat induced the conservatory’s assent to the modification, and the threat was sufficiently grave to justify thatassent. If the conservatory had not agreed to pay the business the extra amounts, the conservatory would have lost its entire $325,000 investment. In light of this potential loss, a court could easily conclude that the conservatory had no reasonable alternative.
However, the business has a strong argument that its threat (indicating that it would breach the contracts unless the prices were increased) was not wrongful or improper, but was instead nothing more than a communication of the reality of its own perilous situation to the conservatory.
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.
