When and how are contracts allowed to be modified? Under what circumstances should these modifications be enforced?
Rules for modification:
- Parties always have the right to modify a contract.
- Any modifications must be agreed to by all parties (unless otherwise provided)
- Modifications sometimes do not need to follow normal contract formation procedures
- Treat modifications as if you are drafting an original contract
Ultimately, what is the process for how to modify?
- Agree – meet contract formation standards
Without this simple two step process, so many avoidable problems can occur.
Alaska Packers’ Association v. Domenico
117 F. 99 (9th Cir. 1902).
Alaska Packers’ Association is the defendant who lost at trial and appealed.
Is the modified agreement enforceable?
A modification must meet the elements of contract formation. Specifically, there must be consideration. Otherwise, the contract is unenforceable.
In the new contract, a promise to perform the tasks specified in the original agreement is not sufficient consideration.
The modification is not enforceable. Thus, the ruling of the district court is reversed.
Alaska Packers’ Association hired several fisherman from San Fransisco to spend a summer fishing in Alaska. The agreement signed by the parties told the fisherman that they would receive 50 dollars pay plus 2 cents for every fish they took part in catching. However, once the fishermen made it to Alaska, they demanded their pay be increased to 100 dollars, instead of the 50. They threatened not to work unless the pay increased.
The superintendent at the fishing location had no means of getting approval for the contract change or to obtain new fishermen. This is because the season was short and any delay would mean a significant decrease in the season profitability. Under these circumstances, the superintendent changed the contract, but told the fishermen that he did not have the authority to do so.
Upon returning to San Fransisco, the fishermen demanded to 100 dollars based on the modified contract.
Here, there was no consideration. In the modified contract, the fishermen did not promise to do anything extra for a different contract. Instead, they promised to continue work under the old contract. Thus, consideration was lacking and the modification is not enforceable. Even if consideration was provided, there is a serious question whether the superintendent had the authority to make the modification. Based on the coercive nature of obtaining the change, and the lack of approval from the company, no modification should be enforced.
Lack of consideration may be a reason why a modification is not enforceable (but not always). First, we need to ask if a consideration requirement exists (See UCC). If there is a requirement for consideration, then we need to ask if there is consideration present (See Restatement).
- Under UCC § 2-209(1) there is no need for consideration for a modification to be binding. However, there may be a requirement for good faith.
- If the UCC does not apply, then we need to go towards the Restatement 2d Contracts § 89.
Consideration under the original contract does not transfer to the modification. There must be additional consideration for the modification. This is called the “pre-existing duty rule.”
Kelsey-Hayes Co. v. Galtaco Redlaw Castings Corp.
749 F. Supp. 794 (E.D. Mich. 1990).
Kelsey-Hayes is the plaintiff. Galtaco is the defendant filing a motion for summary judgment.
Whether there is a triable issue that the modification is barred because Kelsey-Hayes was under duress.
A superseding, inconsistent contract related to the same subject matter rescinds the original contract unless the superseding contract was made under duress.
There is a triable issue of fact. Therefore, summary judgment is not merited.
Kelsey-Hayes manufactures brakes for major automobile lines such as Ford and Chrysler. Galtaco is a company that specializes in the manufacture of a casting (mold) necessary for the brakes to be developed. In 1987, these two companies entered into an agreement where Galtaco would provide castings at a fixed price for 1987, then at lower prices for 1988 and 1989.
However, Galtaco was losing significant money for their production (working at a loss). Consequently, in 1989, Galtaco determined to shut down their casting line. But Galtaco wanted to be fair to their customers and told them that they would keep the line open for a considerable time if they agreed to a 30% price increase. The purpose of this was to provide their customers a reasonable time to find a different casting supplier. Kelsey-Hayes was defendant on these castings. Although they opposed the price increase, they recognized that they would have to take the deal or suffer significant losses. Later that year, Galtaco again went to Kelsey-Hayes for another price increase because they had not found a substitute supplier yet. Once again, Kelsey-Hayes took the goods at the price increase.
Despite taking in all the shipments, Kelsey-Hayes failed to pay for all of them (totaling about 2 million in orders). Thus, Kelsey-Hayes sued for breach of contract and Galtaco countersued for the costs.
Although the 1989 agreements would supersede the 1987 agreement, this is not so because there is a triable issue of whether Kelsey-Hayes was under duress. Duress occurs if one party’s assent is induced by an improper threat that would leave them with no alternative but to accept the offer. Here, Kelsey-Hayes was going to lose a lot of money from being Ford’s only supplier of brakes. Thus, they had to take the price increase (counter to the 1987 agreement) in order to avoid that significant loss.
Typically a modification will supersede the original contract. However, a modification made under duress is not enforceable.
Brookside Farms v. Mama Rizzo’s Inc.
873 F. Supp. 1029 (S.D. Tex. 1995).
Brookside Farms is the plaintiff. Both parties are seeking either partial or full summary judgment.
Are the modifications barred by the statute of frauds?
Normally, the statute of frauds will bar modifications that are required to follow (goods at the value of 500 dollars or more). However, if the statute of frauds can be exempted, then the modification will be legally sufficient.
Here, partial summary judgment related to the existence of a sound contractual modification is granted in favor of the plaintiff. The defendant’s motions regarding summary judgment are denied.
Brookside and MRI entered into a requirement agreement where Brookside would provide basil and MRI was required to accept a certain amount of basil with that range. Under this contract, the price of the basil would be 5/pound. After receiving the first shipment, MRI realized that the basil needed to have the stems removed. Consequently, the parties orally agreed to the price being increased to 5.50/pound for the additional service. Noting that any oral agreements were not valid under the agreement, MRI promised to provide a notation in their contract (to show that it was written).
Later, some situations occurred resulting in the price to increase from 5.50/pound to 6, then 6.25, then 6.75/pound. All of these changes were reflected on purchase orders made by MRI and invoices provided by Brookside. Additionally, MRI accepted and paid for all of these orders in accordance with the price. However, the check for the last 3,000 pounds bounced and Brookside sued for breach of contract.
Although it is true that any modifications need to follow the statute of frauds, there may be exceptions to the statute of frauds. Here, the exception of reliance and performance apply.
First, reliance. When MRI said that they would make the notation on the original contract, Brookside would rely that the change had been made. Any failure to make the notion at that point would be considered fraud.
Second, performance. MRI accepted the goods without argument. Additionally, they paid for all the accepted goods. This amount includes those pounds where the check bounced. Consequently, the statute of frauds does not need to apply to the modification because the parties essentially waived that right with their conduct.
Parties are allowed to agree how modifications are to be made (modification clause). In the present case, a modification must be done in writing. Even without this clause, if the statute of frauds apply, then the modifications must abide by the statute of frauds. If the modification does not meet statute of requirement rules, then an exception may need to apply.
These exceptions may include:
- Good faith
- See below
2.201(c)(3) Exception to Statute of Frauds for modification
“With respect to goods for which payment has been made and accepted or which have been received and accepted.”
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