Contract Consideration: The Pre-Existing Duty Rule




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Pre-existing Duty Rule

 

The pre-existing duty rule is a corollary to the requirement of consideration. Because consideration that makes contracts enforceable must be “bargained for,” consideration cannot consist of performance that the party had a pre-existing duty to perform. If the party was legally required to do something in any case, then agreeing to do that very thing is not new consideration that needs to have been “bargained for” by the other party.[1] Therefore, a party’s offer of a performance already required under an existing contract, employment term or law is insufficient consideration for a new contract or the modification of an existing contract.

As a practical matter, the pre-existing duty rule also maintains the integrity of a contract by preventing parties from using leverage to coerce the other parties into contract modifications.[2] Let’s look at an example:

Two parties, a contractor and a homeowner, enter into a contract for the renovation of a house. A week later, the contractor becomes dissatisfied with how much he will be paid. He tells the homeowner that he will walk away from the project unless he is paid more for his services. Faced with the prospect of not having his desired work completed, the homeowner agrees. Under the pre-existing rule, the homeowner’s promise to pay the new amount is not enforceable because the contractor already had a pre-existing duty to perform the work requested at the original price. There has been no bargained-for-exchange for this modification and so the homeowner will not have to pay more.

Some critics argue that the rule can be too far-reaching because it makes contracts inflexible and impedes modification that make sense. For example, say a plumber agrees to replace all the piping inside a home with copper pipes, but before the project starts, the price of copper skyrockets and it is no longer financially feasible for the plumber to replace the pipe. The plumber might reasonably ask the homeowner for additional payment to cover the cost of the increase in the price of copper. However, even if the homeowner agrees to this modification, the modification may not be binding under the pre-existing duty rule since the plumber had a pre-existing duty to replace the piping with copper before the modification.

While the pre-existing duty rule applies today, these and other concerns have given rise to several exceptions to the rule.

 The first exception occurs when one party acts after relying on another party’s modification of a contract.[3] Moving back to our plumber example, imagine that, after the homeowner agreed to pay a higher price, the plumber, in reliance of that assurance, hired a high-quality subcontractor to work on the piping. This good faith reliance on the modification may cause the modification to be enforceable.

The second exception to the rule is when unanticipated circumstances arise, leading to the parties to agree upon a reasonable contract modification.[4] Examples of unanticipated circumstances leading to required contract modification include:

·         Strikes;

·         Shortages;

·         Economic depressions;

·         War; and

·         Changed construction conditions

When parties, in response to these unanticipated emergencies, agree to modifications (generally increased payments) in good faith, the modifications are enforceable in spite of the fact that the called-for performance was pre-existing under the original agreement.

The Uniform Commercial Code, which applies to contracts for the sale of goods, also substantially modifies the pre-existing duty rule. The UCC modifies the rule because it wants to “assure contracting parties the ability to freely adapt to changing circumstances.” UCC’s Section 2-209(1) provides:

(1) An agreement modifying a contract within this Article needs no consideration to be binding.[5]

            Though modification of sales contracts does not require new consideration, all modifications must be made in good faith, which means “honesty in fact in the conduct or transaction concerned.”[6] Good faith, for example, does not occur when one party intentionally misled or deceived the other party when seeking a sale of goods contract modification.

As early as 1938, one judge called the pre-existing duty rule “one of the relics of antique law which should have been discarded long ago.”[7] Despite its shortcomings, the pre-existing duty rule does maintain contract integrity and can effectively regulate contract modifications and prevent abusive practice in renegotiations. To ensure that it remains useful, courts will continue to create exceptions to it and place qualifications on its application.[8]




Footnotes:

[1] Restat 2d of Contracts, § 89 (2nd 1981).

[2] Corneill Stephens, “Abandoning the Pre-Existing Duty Rule: Eliminating the Unnecessary”, 8 Hous. Bus. & Tax L.J. 355, (2008).

[3] Kevin Teevan, “A Legal History of Binding Gratuitous Promises at Common Law: Justifiable Reliance and Moral Obligation”, 43 Duq. L. Rev. 11, (2004).

[4]1A Arthur Corbin, Corbin on Contracts § 172 (1950).

[5] U.C.C. § 2-209 (2003).

[6] U.C.C. § 2-104. (2003).

[7] Rye v. Phillips, 282 N.W. 459, 460 (Minn. 1938).

[8] Michael Garrison and John Wendt, “Employee Non-competes and Consideration: A Proposed Good Faith Standard for the "Afterthought" Agreement”, 64 Kan. L. Rev. 409, (2015).