Contracts: Modification Flashcards
Can contracts be modified?
UCC 2-209
Modifications are enforceable even without consideration so long as they are adopted in good faith, i.e., modification must be motivated by a legitimate commercial reason.
Restatement § 89
Modifications are enforceable even without consideration so long as they are “fair and equitable in view of circumstances not anticipated by the parties when the contract was made,” i.e., modification must be adopted through an uncoercive process for objectively demonstrable reason.
Rule: Original common law rule did not permit modifications without consideration. This rule was unsatisfactory because it precluded mutually satisfactory modifications.
Levine v. Blumenthal (pg 132)
Facts: Plaintiff decreased the amount of rent owed under a contract due to defendant’s inability to pay (Great Depression). Court did not enforce the modification and awarded the full amount.
Rule: To modify a contract there needs to be new consideration. Promising to perform on a preexisting duty does not constitute new consideration.
When is modification allowed without additional consideration for the modification ?
Rule: Modification without new consideration is allowed when (1) Unforeseeable circumstances (2) Reasonable modification (3) Done in good faith. (4) the modification is made before the contract is fully performed on either side. See Restatement §89
Angel v. Murray
Facts: Plaintiff was obligated to collect garbage for the entire municipality. There was an unforeseeable rate of growth in the municipality, thereby inflating Plaintiff’s obligation. Defendant agreed to pay plaintiff more than the original contract price. Court enforced the modification.
Will Modification be enforced for a change in bargaining power?
Alaska Packers Assoc. v. Domenico (pg 135-138)
Facts: Plaintiff threatened to breach unless terms were modified, leaving the defendant with no other way of getting the work done. Defendant agreed. After work was done the defendant paid only the original amount. Court did not enforce the modification. See also Duress
If a modification is made in bad faith, will it be enforced?
Roth Steel Products v. Sharon Steel Corp.
Facts: Due to unforeseen market changes, to maximize their profits (not to prevent a loss), Defendant threatened to breach if the plaintiff wouldn’t agree to pay more than the contract required. Defendant did not provide Plaintiff with the reasons why they were threatening to breach. Plaintiff agreed. Court did not enforce the modification
Rule: When a modification is made in bad faith its unenforceable. Not disclosing reasons for modification is bad faith because it will prevent the modification from reflecting the new circumstances.
What is the point of limiting modification?
1) Preventing hold up and the devaluation of contract.
2) Parties may not exploit a shift in bargaining power after the time of contract.
Why would a party ever agree to pay more for something to which she is already entitled?
Because of the institutional limits of law:
Obtaining legal remedy is expensive.
May not be able to prove full damages, especially if she attaches idiosyncratic value to performance.
There is a possibility that the other party will be excused from performance.
How do contracts protect the bargain made? Will it matter if the transactional surplus is not divided equally?
The total gains from trade are sometimes called the transactional surplus.
The parties’ relative bargaining power determines how much of the surplus each gets.
Contract law protects the bargain made: It prevents parties from taking more of the surplus than their initial bargaining power allowed them to obtain. It is indifferent to the initial distribution of bargaining power. Contracts lock in the parties at the time of formation.
