Problems in Consideration - Bargain Promises and the Legal Duty Rule Part I


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Terms:


Public Duties:
An act that is within the scope of the official responsibilities of a public official.

Contractual Duties:
A duty arising under a particular contract.


The next exception to the bargain principal of consideration is the legal duty rule. The legal duty rule basically governs promises to perform acts that the promisor is already legally required to perform.

There are two kinds of pre-existing legal duties:

  1. public duties and,
  2. contractual duties.

As far as public duties are concerned, the legal duty rule says that neither the promise by an official to perform an act that is within the scope of his official duties nor the actual performance of the promise is valid consideration. See Gray v. Martino,  91 N.J.L. 462 (1918). For example:

Wendy owns a hamburger shop located on Main Street. Dave is a police officer whose daily beat includes Main Street. Dave promises Wendy that he will keep an eye on Wendy’s store if Wendy promises to pay Dave $100 a month. Wendy agrees. In this circumstance, Wendy’s promise is unenforceable because watching Wendy’s store is within the scope of Dave’s official duties to begin with.

Please note that the legal duty rule is applicable to a promise by an official whenever the action is within the scope of the official’s duties even if performance of the specific act is not legally required. For example:

Dave does not have a specific duty to watch Wendy’s store. Dave can walk his beat without paying attention to Wendy’s store and he may properly walk his beat without even walking on Main Street. However, the legal duty rule is applicable to Dave because protecting Wendy’s store is within the scope of Dave’s duty as a police officer.

The legal duty rule is not applicable if the promise or act by the official is not within the scope of his official duties even though the promised act may be similar to what his official duties usually are. For example:

Dave, a police officer in New York, decides to take a long overdue vacation to Las Vegas. During his first day in Las Vegas, Dave sees a local hamburger shop. Dave goes into the shop and promises the owner that he will spend two hours every day keeping his eye on the shop if the owner promises to give Dave free hamburgers.

Had Dave struck this bargain with Wendy in New York, it would have been unenforceable because keeping his eye on Wendy’s store is within Dave’s official duties as a police officer. However, because Dave has no official responsibilities as a police officer in Las Vegas, keeping his eye on the hamburger shop is not within any official duties that Dave has and, therefore, the promise is enforceable.

Please note that the legal duty rule cannot be avoided by a bargain that only pretends to call for performance outside the scope of an official’s duties. The difference between the official duties and the promised performance must be material. For example:

Dave promises Wendy that, in exchange for free hamburgers, he will not only keep an eye on her store but he will also check each night and make sure that the doors and windows of the restaurant are locked. This promise is not enforceable because, although checking the doors and windows are technically not within the scope of Dave’s official duties, the promise represents only a slight deviation from Dave’s duties and is not enough to make the promise enforceable.

If, however, Dave promises to travel across town each night and make sure that the doors and windows of Wendy’s home are securely locked, this deviation from Dave’s official duties would be enough to make the promise enforceable.

Performance of a public duty is treated the same way as performance of an official duty. For example:

Dave, a private citizen, is walking along Main Street one night when he sees Thomas breaking into Wendy’s hamburger shop. Thomas is arrested and brought to trial for the break-in. Before the trial, Dave promises Wendy that he will tell the truth on the witness stand if Wendy promises to give Dave free hamburgers for one year. Wendy agrees. When Dave is called as a witness, he tells the truth. After the trial, Wendy refuses to give him any free hamburgers. Dave sues Wendy for the free hamburgers. In this situation, Dave will lose because every citizen has a public duty to tell the truth as a witness. Therefore, Dave’s promise to tell the truth on the witness stand is not consideration under the legal duty rule.

Contractual Duties

As far as contractual duties go, the general rule is that a promise to perform a pre-existing contractual duty, or the actual performance of that duty, is not consideration for a new promise.

The legal duty rule is found in two different kinds of pre-existing contractual duty cases. The first kind of case is that in which one party is under a contractual duty to perform and the other party promises to pay more money for the same performance.

The general rule is that, where there is a pre-existing contract, a promise to pay more money for the same performance is unenforceable. For example:

Mike hires an architect to build a house. Mike agrees to pay the architect $1 million and the architect agrees to build the house according to the specifications that Mike lays out. Mike and the architect then agree to a modification of the contract under which the architect promises to build the house according to the same specifications that Mike originally laid out and Mike promises to pay $1.5 million. In this case, the architect has promised to render the same performance while Mike has agreed to pay more than the amount he originally agreed to pay. Under the legal duty rule, the architect’s new promise is not consideration for Mike’s promise to pay more money and, therefore, the architect cannot enforce this modification against Mike. See Lingenfelder v. Wainwright Brewery Co., 15 S.W. 844 (Mo. 1891).

There are, however, several exceptions to this rule:

The first exception is where the promise to pay more money is matched with a promise for different performance. That is to say, if the modification involves the performance of an act that is similar to, but not exactly the same as, the performance required under the pre-existing contract, there is consideration for a promise to pay more money. For example:

Mike hires a contractor to build a house. Mike agrees to pay the contractor $1 million and the contractor agrees to build the house according to Mike’s specifications. According to Mike’s specifications, the house is to be eight thousand square feet covering two floors. Mike and the contractor then modify the contract so that Mike agrees to pay $1.5 million and the contractor agrees to build a house that is nine thousand square feet. Here, the modification is valid because the contractor has promised different performance in exchange for Mike’s promise of more money.

Please note that a relatively small difference between the performance required under the first contract and the performance required under the modification will be enough for consideration. For example:

Mike hires a contractor to build him a house. Mike agrees to pay $1 million and the contractor agrees to build the house according to Mike’s specifications. According to Mike’s specifications, the windows in the house are to be made of ordinary glass. Mike and the contractor then modify the contract so that Mike promises to pay $1.5 million and the contractor agrees to use bullet proof glass for the windows. Here, although there is a very small difference between the old contract and the modification, the promise to use bullet proof glass instead of regular glass is enough to constitute consideration.

The second exception is where the pre-existing duty under the contract is owed to one person and a third party makes a promise based on that duty. Essentially, the legal duty rule does not apply if the pre-existing duty is owed to someone other than the person who makes the new promise. For example:

The Metro Opera House contracts with Andre Boccello to perform a concert on New Year’s Eve. Under the agreement, Metro will pay Andre $100,000 and Andre will give a two-and-a-half hour concert, singing highlights from four different operas. Lucciano, a Metro season ticket holder, is anxious to ensure that the concert will be performed. Lucciano promises to pay Andre $25,000 if Andre gives the two-and-a-half hour concert on New Year’s Eve. Andre gives the concert but Lucciano refuses to pay. In this case, the contract between Lucciano and Andre is enforceable and Lucciano will have to pay Andre the $25,000 because, at the time that Lucciano made the promise to Andre, Andre had a contractual duty to Metro but he had no pre-existing duty to Lucciano himself. See Joseph Lande & Sons, Inc. v. Wellsco Realty, Inc., 34 A.2d 418 (N.J. 1943).

The third exception to the legal duty rule is where the promisor has a valid defense for not fulfilling the original contract. In such a situation, the promisor is not legally obligated to render any performance under the first contract at all. Therefore, the promise under the new contract is enforceable because it is just that, a promise under a new contract. It is not a promise to perform a pre-existing legal duty. For example:

On December 1st, Bob promises to pay Peter $500 and Peter promises to provide Bob with one pound of marijuana. On December 5th, the government legalizes marijuana use. On December 8th, Bob promises to pay Peter $600 and Peter promises to give Bob one pound of marijuana. In this situation, Bob’s promise to pay the extra $100 is enforceable. Under the original contract, had Peter not provided Bob with the marijuana, he would have had a valid defense for breaching the contract because, at the time the contract was made, selling marijuana was illegal. Because performance of the contract was illegal, the contract was void and Peter was under no obligation to provide the marijuana to Bob. Thus, in the new contract, although Bob is agreeing to pay more money for the same performance by Peter, the contract is valid because this is not a promise to perform a pre-existing legal duty.

The fourth exception to the legal duty rule is where there is a “fair and equitable modification in light of unanticipated circumstances.” In other words, some courts now hold that the legal duty rule does not apply to a modification of an ongoing contract if the modification is based on unanticipated circumstances and is fair in view of those circumstances. For example:

Mike hires a contractor to build him a house. Mike and the contractor calculate that the cost of building materials will be $500,000 and the cost of labor will be $300,000. Mike agrees to pay the contractor $1 million to build the house, giving the contractor a profit of $200,000. During construction, the cost of materials unexpectedly doubles so that now, the cost of the materials is $1 million, and the cost of labor is still $300,000. Now, instead of making a $200,000 profit, the contractor will lose $300,000. Mike and the contractor modify the contract so that the contractor agrees to build the house exactly as the first contract required and Mike agrees to pay $1.5 million. Under the circumstances, this contract is enforceable.

Even though Mike is agreeing to pay more money for the same performance, this modification is based on the unanticipated increase in the price of building material and is a fair modification in light of the new circumstances. Therefore, the legal duty rule does not apply, and the modification is valid.

The fifth exception to the legal duty rule is where the contract being modified is for the sale of goods. Under the U.C.C., an agreement modifying a contract for the sale of goods is binding even without consideration. In other words, the legal duty rule does not apply at all to contracts for the sale of goods. However, the U.C.C. does insist that the modification be made in good faith. Therefore, a modification that is not fair or equitable would not be considered binding. 

The sixth exception to the legal duty rule is where the contract has been performed already. Once a contract is fully performed, even if it would have been considered unenforceable pursuant to the legal duty rule prior to complete performance, the legal duty rule has no application and the promisor cannot recover the extra money that he paid. However, if the new promise is made under economic duress he can recover the payments that are in excess of the original contract agreement. For example:

  1. Mike hires a contractor to build a house. Mike agrees to pay $1 million and the contractor agrees to build the house according to Mike’s specifications. Before the contractor begins the job, he informs Mike that he will not build the house for less than $1.5 million. At this point, construction has not yet begun, and Mike can find another contractor if he chooses to do so. However, Mike agrees to pay the extra money. The contractor builds the house and Mike pays him $1.5 million. Because other contractors were available at the time Mike made the new agreement and the contractor had completed performance at the time Mike paid, Mike was not under any economic duress either at the time he made the new agreement or at the time of payment. Even after Mike made the new agreement, he could have refused to pay the extra $500,000 under the legal duty rule because he agreed to pay more in exchange for the same performance. However, once he paid the full $1.5 million, he cannot recover the extra $500,000.
  2. Mike hires a contractor to build a house. Mike agrees to pay $1 million and the contractor agrees to build the house according to Mike’s specifications. The contractor begins the job but, in the middle of construction, he threatens to quit unless Mike pays an extra $500,000 immediately. At this point, a replacement contractor cannot be easily found, and Mike will endure a substantial economic hardship in looking for and hiring a new contractor. Under these circumstances, the payments made under the new agreement are made under economic duress and Mike will be able to recover the extra money he has paid.

Please note that certain jurisdictions have avoided the legal duty rule by saying that the modification of the old contract constitutes a mutual rescission of the old contract and the formation of a new contract. That is to say, when a modification is made, it is as if the old contract is torn up and the modification represents a fresh new contract.



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