Formation of contracts - Modification of contracts

Learning Outcomes

After reading this article, you will be able to identify when a contract modification is enforceable under both common law and the UCC, distinguish the pre-existing duty rule from exceptions, and apply the correct standard for consideration in modification scenarios. You will also understand the requirements for good faith modifications under the UCC and recognize how these rules are tested on the MBE.

MBE Syllabus

For the MBE, you are required to understand the rules governing contract modification and their application to both common law and UCC contracts. This article addresses:

  • When a contract modification is enforceable under common law (pre-existing duty rule and exceptions).
  • The requirements for consideration in modifications.
  • The UCC approach to contract modification and the role of good faith.
  • The effect of no-modification clauses and the Statute of Frauds on modifications.
  • How to analyze modification scenarios in MBE-style questions.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

  1. Under common law, a contract modification is generally enforceable only if:
    1. It is in writing.
    2. Both parties are merchants.
    3. There is new consideration.
    4. The contract is for the sale of goods.
  2. Which of the following is true regarding contract modification under the UCC?
    1. Consideration is always required.
    2. Good faith is required, but new consideration is not.
    3. Only merchants may modify contracts.
    4. Modifications must be in writing regardless of the contract price.
  3. A builder agrees to construct a house for 200,000.Halfwaythrough,thebuilderdemands200,000. Halfway through, the builder demands 200,000.Halfwaythrough,thebuilderdemands20,000 more to finish. The owner agrees. The builder completes the house. Is the owner obligated to pay the extra $20,000 under common law?
    1. Yes, because the owner agreed.
    2. Yes, because the contract was modified in writing.
    3. No, because there was no new consideration.
    4. No, because the contract was for services.
  4. Under the UCC, a no-modification clause in a contract will:
    1. Always be unenforceable.
    2. Be enforceable even if the modification is made orally.
    3. Be enforceable if stated in writing.
    4. Only apply to contracts between non-merchants.

Introduction

Contract modification is a frequent topic on the MBE. You must know when a change to an existing contract is enforceable and how the rules differ between common law and the UCC. The exam often tests whether consideration is required for a modification, the effect of no-modification clauses, and the standards for good faith in sales of goods.

Common Law: The Pre-Existing Duty Rule

At common law, a modification to a contract is generally unenforceable unless supported by new consideration. This is known as the pre-existing duty rule: a promise to perform an act that one is already legally obligated to do is not valid consideration for a new promise.

Key Term: Pre-Existing Duty Rule Under common law, a party cannot demand additional compensation for performing a duty they are already contractually bound to perform; new consideration is required for a modification to be enforceable.

Exceptions to the Pre-Existing Duty Rule

There are several exceptions where a modification may be enforceable without new consideration:

  • Unforeseen Circumstances: If an unanticipated event occurs that makes performance substantially more difficult, a modification may be valid even without new consideration.
  • Third Party Promises: If a third party promises additional compensation, the modification may be enforceable.
  • Settlement of Honest Disputes: If there is a genuine dispute about the contract or its terms, a compromise may serve as valid consideration.

UCC Article 2: Good Faith Modifications

For contracts involving the sale of goods, the UCC rejects the pre-existing duty rule. Instead, a modification is enforceable if made in good faith, even if there is no new consideration.

Key Term: Good Faith Modification (UCC) Under the UCC, a contract for the sale of goods may be modified without new consideration, provided the modification is made in good faith.

No-Modification Clauses

The UCC allows parties to include a clause stating that modifications must be in writing. If such a clause exists, oral modifications are generally not enforceable.

Key Term: No-Modification Clause A contractual provision stating that any modification must be in writing to be effective; enforceable under the UCC if agreed to by both parties.

Statute of Frauds and Modifications

If the contract as modified falls within the Statute of Frauds (e.g., sale of goods for $500 or more), the modification must be in writing to be enforceable.

Worked Example 1.1

A painter agrees to paint a house for 5,000.Afterstarting,thepainterdiscoversthatthehousehasanextrafloornotvisibleatthetimeofcontracting.Theowneragreestopay5,000. After starting, the painter discovers that the house has an extra floor not visible at the time of contracting. The owner agrees to pay 1,000 more. Is the modification enforceable under common law?

Answer: Yes. The unforeseen extra floor is a circumstance not anticipated by the parties, so the modification is enforceable even without new consideration.

Worked Example 1.2

A supplier contracts to deliver 1,000 widgets to a retailer for 10,000.Beforedelivery,thesupplierasksfor10,000. Before delivery, the supplier asks for 500 more due to increased costs. The retailer agrees. Is the modification enforceable under the UCC?

Answer: Yes, if the modification was made in good faith. Under the UCC, no new consideration is required for a modification of a contract for the sale of goods.

Exam Warning

Modifications made under duress or bad faith are not enforceable, even under the UCC. The MBE may test whether a party's threat to breach unless paid more is legitimate or constitutes bad faith.

Revision Tip

Always identify whether the contract is governed by common law or the UCC before analyzing modification issues. The rules are different and often tested in contrast.

Key Point Checklist

This article has covered the following key knowledge points:

  • Under common law, contract modifications require new consideration (pre-existing duty rule).
  • Exceptions to the pre-existing duty rule include unforeseen circumstances, third party promises, and honest disputes.
  • The UCC allows good faith modifications without new consideration for contracts for the sale of goods.
  • No-modification clauses are enforceable under the UCC if in writing.
  • Modifications must satisfy the Statute of Frauds if the contract as modified falls within its scope.
  • Modifications made in bad faith or under duress are not enforceable.

Key Terms and Concepts

  • Pre-Existing Duty Rule
  • Good Faith Modification (UCC)
  • No-Modification Clause
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