Chapter 6

Remaining Vitality of

Outdated Rule

The capacity of the preexisting duty rule to survive the onslaught of criticism and reform attempts over the past century is perhaps only surpassed by the impregnability of the underlying doctrine of consideration mandated for formation of the original contract. In this final chapter on the preexisting duty rule, there will be an overview analysis of the extent to which the reforms have failed to defeat the old rule and a discussion of ways to cure the rule’s remaining deficiencies. The discussion is divided into three parts: a comparison of when a modification is enforceable under the U.C.C. and Restatement Second, when the rule still applies today, and possible common law solutions.

COMPARISON OF U.C.C. AND RESTATEMENT SECOND POSITIONS

The Code and Restatement positions on the binding nature of contract modifications differ in two fundamental respects: one, the Code does not require consideration, and two, the good reasons the Code recognizes for the parties seeking a modification are not limited to cases of reliance or unanticipated circumstances. The Code’s rejection of the preexisting duty rule and subsequent caselaw did, however, influence the drafters of the Restatement Second to recognize exceptional relief, without the requirement of consideration, for cases of reliance and unanticipated circumstances.

As to unanticipated circumstances, the black letter text of Restatement Second Section 89(a) states the modification must be ‘‘fair and equitable,’’ and its Comment (b) ‘‘requires an objectively demonstrable reason for seeking a modification.’’ The text of U.C.C. Section 2–209 makes no

reference to good faith, though its Comment 2 states that there is a good faith requirement to give a ‘‘legitimate commercial reason’’ and further that between merchants, the observance of fair dealing in the trade is needed, which ‘‘may’’ require giving ‘‘an objectively demonstrable reason for seeking a modification.’’ Unanticipated circumstances would be a good reason, but any other legitimate commercial reason could also be a basis for a modification under the Code. Under Section 89(a), the judicial analysis invariably includes a focus on the affirmative duty of the plaintiff to establish that the modification was fair and equitable.1 However, under Section 2–209, unless the issue of bad faith is raised, it is not uncommon for the court to make no reference to good faith,2 even though the facts in some of these cases don’t particularly appear to suggest a very good motive for seeking the modification.3

Sales law has an advantage here over contract law generally because of two centuries of development of a tight body of legal doctrine, bolstered by the regularity of trade usage which includes the self policing mechanism of fair dealing in the trade.4 Good faith and mercantile fair dealing, along with the economic duress and unconscionability doctrines, provided control mechanisms to supplant the protective functions formerly performed by consideration.5 Given that there is no such developed standard of fair dealing for the sprawling field of general contract law, courts and, as a consequence, restaters have been more reticent to abandon the preexisting duty rule.

In attempting to decipher how far the common law, as reflected in the Restatement Second, has come in finding modifications binding, an analysis will now be made applying the Restatement’s rules to six selected cases covered earlier, five being well known English preexisting duty rule cases and the sixth being a modern American case. Four famous traditional English cases have been selected: Pinnel’s Case (1602),6 Stilk v. Myrick

(1809),7 Foakes v. Beer (1884)8 and Central London Property Trust v. High Trees House Ltd. (1947).9 The two more recent cases selected, one American and the latter English, are Farmland Services Coop v. Jack (1976),10 a Nebraska decision which involved a modification made because a farmer changed his mind about his sales agreement with a grain elevator company after the market price had increased, and Williams v. Roffey (1990),11 which involved a promise to increase the payment because a construction sub-contractor found himself in a losing project that he was reluctant to complete. Under the American common law, as reflected in Sections 73 and 89 of the Restatement Second, only the modification in the High Trees case would be binding both because the rent reduction modification was relied on and because the rent reduction was precipitated by the unanticipated circumstance of World War II. The modification in Stilk v. Myrick would probably not be enforceable, even if the desertions of two of the ship’s crew was found to be unanticipated, because of the coercive bad

faith of the remaining seamen in taking advantage of the ship captain’s vulnerable position. The modifications in the remaining four cases would not be enforceable because there was neither reliance nor a qualifying unanticipated circumstance.

Applying U.C.C. Section 2–209 to the six above selected cases, only the modification in Farmland Services Coop v. Jack would be binding because only that one involves a sale of goods; and, whether or not the farmer seemed to have a legitimate commercial reason, the court in fact upheld the modification. Were it not for the sale of goods factor, all of the modifications would be enforced under the Code’s approach, except for probably the arguably bad faith modification in Stilk v. Myrick. This little exercise exhibits how far the common law still is today from broadly enforcing voluntary consensual modifications. Until non-sales modifications receive a treatment similar to sales, many modifications will continue to be found wanting in the courts.

One way for the common law of contract to come in line with the Code would be for courts to use the common law reform technique of drawing an analogy to U.C.C. Section 2–209(1) as a vehicle for rationalizing abandonment of the preexisting duty rule. In fact, starting in the 1950s, many changes in principles from the first to the second Restatement reflected intervening judicial reform based on analogies to Code reforms.12 However, in order for a court to adopt the principle in Section 2–209(1), it must reject the sacred liability test of consideration for contract modifications, something only one common law court has ever had the courage to do over the past half millennium.13 Take the service contract modification case Angel v. Murray (1974)14 as an example of judicial reluctance to deviate from consideration-based precedent. The Rhode Island court approvingly made reference to the binding nature of contract modifications generally under Section 2–209(1), but, in the end, the court did not leave consideration’s domain, nor has that jurisdiction done so since. Instead the court in Angel v. Murray relied on a tentative draft of the Restatement Second to rationalize its holding under the unanticipated circumstances exception to the requirement of consideration. With the exception of promissory estoppel, U.C.C. Section 2–209(1) is perhaps the boldest nationwide rejection of consideration.

WHEN PREEXISTING DUTY RULE APPLIES TODAY

Despite all the judicial and legislative reforms, the preexisting duty rule can still present a formidable barrier for a party trying to enforce a noncoerced modification if it fails to fall under a statutory or common law reform. There is a significant array of exceptions and reforms, it’s true, but one doesn’t have to search hard in the reporter systems to find modern courts refusing to enforce modifications as courts pay obeisance to

the preexisting duty rule, as the sample of cases in the following endnote reflects.15 The Restatement Second’s doctrinal clarification of the rule has actually broadened the rule’s applicability in at least one jurisdiction.16

Briefly, when does the preexisting duty rule apply today? A reply to this question entails an overview summary of the gaps left by the reform attempts. In order to answer the question, the response has to be divided into contract subject matter and the exceptions to the rule. As to subject matter, non-sales transactions are still generally subject to the rule. When one contemplates the burgeoning service sector of the economy, it represents an enormous volume and range of contracts, but it’s more than just services. It encompasses contracts for transfers of interests in real property, security interests, licenses, franchises, transfers of intellectual property, royalties, sales of securities and the residual black hole of general contract subject matter.

A contract fitting within one of the above types of non-sales contracts is not, however, subject to the preexisting duty rule if it falls under one of the statutory or common law exceptions to the rule. Seven general categories of exceptions come to mind. One, there are a myriad of traditional exceptions to the rule, as discussed above, like a novelty or a bona fide dispute. Two, fictions, like rescission and importing consideration facilitate enforcement of voluntary modifications, but also run the risk of enforcing coerced ones. Three, four or five state supreme courts have largely abolished the common law rule for all types of contracts, though in all but one jurisdiction, consideration must still be rationalized present. Four, some state legislatures have tried to abolish the rule for all types of contracts, but one must read the wrinkles in a particular statute carefully since, for example, it may apply to decreases in obligations but not to increases and it may cover duties to pay money but not other types of obligations. Five, some state legislatures have provided that the preexisting duty rule does not apply if the modification agreement is in writing. These requirements of formality provide no solace for one claiming under the typical modification made in the form of an oral assurance given to induce a disheartened performer in a losing contract, e.g., ‘‘I’ll make sure you don’t lose if you finish the work’’ or ‘‘Keep on with the work and I’ll cover for your extra time and materials.’’ These special state statutes notwithstanding, the Statute of Frauds will usually require a written modification if the original contract must comply with the Statute. Also, U.C.C. Section 2–209(2) allows the parties to exclude oral modifications in the original contract. Six, courts will enforce a modification if there has been detrimental reliance on the modified promise. Even if the reliance facts do not qualify for promissory estoppel, they may help establish equitable estoppel or that the reliance facts are an indicator of detriment consideration. And, seven, if the modification was made on account of circumstances not anticipated by the parties when the contract was made,