Consideration Required for Contract Modification

Just as consideration is required for a valid contract, consideration is generally required for a modification of a contract to be legally binding. When parties want to modify an existing contract, the modification itself is treated as a new agreement. This means that the same principles that apply to the formation of a new contract, including the requirement of consideration, also apply to contract modifications.

In simple terms, if one party is seeking a modification to the contract, they typically need to offer something of value to the other party in exchange for the modification. Without consideration, the modification may not be enforceable, and the parties might not be legally obligated to follow through with the changes.

For example, a contract with a catering company to provide food and services for a corporate event states that the company will provide a buffet dinner for 100 people at a cost of $5,000. A week before the event the number of guests attending rise to 150 people. Since this is a much larger number, a contract modification is necessary.

The modification would involve an increase in the number of guests and additional costs for food, drinks, and staffing. The catering company agrees to the modification but requests an increase in the contract price to $7,000 to cover the extra expenses.

The breakdown of modifications in consideration in this example is:

• The corporation holding the event offers new consideration of the higher payment ($7,000) to the catering company in exchange for their agreement to provide services for 150 people instead of the original 100.
• The catering company is providing the consideration of providing services for 150 people instead of the original 100, as well as adjusting their preparations and staffing to accommodate the larger event.

This exchange of consideration makes the modified contract legally binding and enforceable.

Common Issues in Consideration

Now that you are aware of the requirements of consideration it is possible to use this knowledge to identify situations were there is a lack of consideration. This section discusses some common situations that may appear to have consideration but when critically analyzed are lacking an important requirement of consideration.

The problem of preexisting duty in consideration arises when a party to a contract promises to do something that they are already legally obligated to do. This means that the promise does not represent new consideration, as the party was already obligated to do it anyway. Offering a preexisting duty as consideration lacks legal detriment.

For example, a construction company agrees to build a house for a client for $100,000. Midway through the project, the client requests changes to the design that were not part of the original contract. The construction company agrees to make the changes, but afterward demands an additional $20,000 for the work. In this case, the construction company has a preexisting duty to fulfill their original contract and cannot use the additional work as new consideration. Therefore, the promise of the additional work in exchange for the extra payment will not be enforced since there is no new consideration to support it.

The problem of preexisting duty in consideration can also arise in situations where a party to a contract promises to do something they are already legally obligated to do, but under different terms. For example, if an employee is already obligated to perform certain duties as part of their job, a client cannot offer them additional compensation in exchange for doing those same duties. This is because the employee already had a preexisting duty to do the work as part of their original employment contract. Similarly, a police officer in your community cannot charge you a weekly fee to patrol your neighborhood if your neighborhood is already part of the same beat.

Where a person is promised a benefit not to do that which he is already disallowed from doing, there is no consideration due to preexisting duty. David is sixteen years old; his uncle promises him $50 if he will refrain from smoking. The promise is not enforceable: legally, David already must refrain from smoking, so he has promised to give up nothing to which he had a legal right. This promise therefore lacked legal sufficiency.

Past consideration is not sufficient to support a promise as it lacks legal sufficiency. The problem of past consideration arises when one party promises to pay or provide something in exchange for something that the other party has already done in the past. In other words, the promise is based on an act that has already been performed outside of any contractual agreement and cannot be exchanged for anything in the future.

For example, imagine that John mows his neighbor’s lawn every week for a month without any agreement of payment. At the end of the month, the neighbor promises to pay John $100 for his work. However, the neighbor cannot enforce the promise because John’s work was already performed before the promise was made. This means that John’s legal detriment was in the past – it cannot serve as consideration in a contract entered today. The lawn mowing was an act of past consideration and cannot be exchanged for something in the future.

An illusory promise is a statement that appears to be a promise, but in reality, it does not actually impose any obligation on the person making the statement and, therefore, lacks legal sufficiency. In the context of contract law, an illusory promise is not considered to be valid consideration. Not every promise is a pledge to do something.

For example, if Lydia says “I promise to sell you my car if I feel like it,” that statement is an illusory promise because it does not create a binding commitment to sell the car. By doing nothing Lydia still falls within the literal wording of her promise. Since the promise has no certain legal detriment, it cannot be considered valid consideration for a contract because it is not a true commitment.

The doctrine that such bargains are void is sometimes referred to as the rule of mutuality of obligation: if one party to a contract has not made a binding obligation, neither is the other party bound. Thus, if A contracts to hire B for a year at $6,000 a month, reserving the right to dismiss B at any time (an “option to cancel” clause), and B agrees to work for a year, A has not really promised anything; A is not bound to the agreement, and neither is B.

A promise to refrain from suing someone in return for the settlement of a legal dispute is called a covenant not to sue. The legal value in such a covenant is forbearance – giving up the legal right to sue for redress in the Courts, in exchange for the agreed upon settlement of a dispute. Ordinarily, these agreements will have legal sufficiency and adequacy of consideration. It is possible, however, for a situation to arise in which this would not represent a fair bargain, such as where there is coercion to sign such an agreement. In that case, there would still be legal sufficiency, but the agreement would lack of adequacy of consideration as it was not the product of a fair bargain.

Accord and Satisfaction Generally

Sometimes, the parties to an ongoing contract may dispute the meaning of its terms and conditions, especially the amount of money actually due. When the dispute is genuine (and not the unjustified attempt of one party to avoid paying a sum clearly due), it can be settled by the parties’ agreement on a fixed sum as the amount due. This second agreement, which substitutes for the disputed original agreement, is called an accord, and when the payment or other term is discharged, the accord is said to be satisfied. Therefore, this process is known as accord and satisfaction.

Lilac owes $1,000 to Juniper for services provided. Lilac is unable to pay the full amount owed. If Juniper agrees to accept $750 as full payment in return for Lilac paying that amount today, this is an accord. When Lilac pays the $750 today, the accord is satisfied, and the original contract is discharged. Juniper’s agreement to accept less than the original contract required for payment is a detriment of forbearance. Lilac’s promise to make payment earlier than would have been required under the original contract is also a legal detriment. Both promises, therefore, have legal sufficiency.

It’s important to note that an accord and satisfaction must be made in good faith, meaning that both parties must enter into the agreement voluntarily and with a genuine intent to settle the debt or dispute. If either party feels pressured or coerced into the agreement, it may not be considered valid.

The dispute that gives rise to the parties’ agreement to settle by an accord and satisfaction may come up in several typical ways: where there is an unliquidated debt; a disputed debt; an “in-full-payment check” for less than what the creditor claims is due; unforeseen difficulties that give rise to a contract modification, or a novation; or a composition among creditors. But no obligation ever arises—and no real legal dispute can arise—where a person promises a benefit if someone will do that which he has a preexisting obligation to, or where a person promises a benefit to someone not to do that which the promisee is already disallowed from doing, or where one makes an illusory promise.

Settling an Unliquidated Debt

An unliquidated debt is one that is uncertain in amount. Such debts frequently occur when people consult professionals in whose offices precise fees are rarely discussed, or where one party agrees, expressly or by implication, to pay the customary or reasonable fees of the other without fixing the exact amount. It is certain that a debt is owed, but it is not certain how much.

Assume a patient goes to the hospital for a gallbladder operation. The cost of the operation has not been discussed beforehand in detail, although the cost in the metropolitan area is normally around $8,000. After the operation, the patient and the surgeon agree on a bill of $6,000. The patient pays the bill; a month later the surgeon sues for another $2,000. The patient will not have to pay the additional $2,000 as the original unliquidated debt was settled with the bill of $6,000. The agreement liquidating the debt (i.e. converting the uncertain debt to a fixed amount) is an accord and is enforceable. If instead the patient and the surgeon had agreed on an $8,000 fee before the operation, and if the patient arbitrarily refused to pay this liquidated debt unless the surgeon agreed to cut her fee in half, then the surgeon would be entitled to recover the other half in a lawsuit, because the patient would have given no consideration—given up nothing, “suffered no detriment”—for the surgeon’s subsequent agreement to cut the fee.

Settling a Disputed Debt

A disputed debt arises where the parties did agree on (liquidated) the price or fee but subsequently get into a dispute about its fairness, and then settle. When this dispute is settled, the parties have given consideration to an agreement to accept a fixed sum as payment for the amount due. Assume that in the gallbladder case the patient agrees in advance to pay $8,000. Eight months after the operation and as a result of nausea and vomiting spells, the patient must undergo a second operation; the surgeons discover a surgical sponge embedded in the patient’s intestine. The patient refuses to pay the full sum of the original surgeon’s bill; they settle on $6,000, which the patient pays. This is a binding agreement because subsequent facts arose to make legitimate the patient’s quarrel over his obligation to pay the full bill. As long as the dispute is based in fact and is not trumped up, as long as the promisee is acting in good faith, then consideration is present when a disputed debt is settled.

The “In-Full-Payment” Check Situation

To discharge his liquidated debt for $8,000 to the surgeon, the patient sends a check for $6,000 marked “payment in full.” The surgeon cashes it and there is no dispute about the amount owed. In this case, the surgeon is still entitled to the remaining $2,000. At first glance, it may appear that the surgeon is agreeing to take the reduced amount by cashing the check. However, there is no legal sufficiency here. Because the surgeon is owed more than the face amount of the check, the surgeon causes the patient no legal detriment by accepting the check.

The key to the enforceability of a “payment in full” legend on the check is the character of the debt. If unliquidated, or if there is a dispute, then “payment in full” can serve as accord and satisfaction when written on a check that is accepted for payment by a creditor. But if the debt is liquidated and undisputed, there is no consideration when the check is for a lesser amount.

Unforeseen Difficulties

An unforeseen difficulty arising after a contract is made may be resolved by an accord and satisfaction, too. Difficulties that no one could foresee can sometimes serve as catalyst for a further promise that may appear to be without consideration but that the courts will enforce nevertheless. Suppose Peter contracts to build Jerry a house for $390,000. While excavating, Peter unexpectedly discovers quicksand, the removal of which will cost an additional $10,000. To ensure that Peter does not delay, Jerry promises to pay Peter $10,000 more than originally agreed. But when the house is completed, Jerry reneges on his promise. In such a situation, most courts would allow Peter to recover on the theory that the original contract was terminated, or modified, either by mutual agreement or by an implied condition that the original contract would be discharged if unforeseen difficulties developed. In short, the courts will enforce the parties’ own mutual recognition that the unforeseen conditions had made the old contract unfair. The parties either have modified their original contract (which requires consideration at common law) or have given up their original contract and made a new one (a novation).

It is a question of fact whether the new circumstance is new and difficult enough to make a preexisting obligation into an unforeseen difficulty. Obviously, if Peter encounters only a small pocket of quicksand—say two gallons’ worth—he would have to deal with it as part of his already-agreed-to job. If he encounters as much quicksand as would fill an Olympic-sized swimming pool, that’s clearly new and unforeseen, and he should get extra to deal with it. Someplace between the two quantities of quicksand there is enough difficulty that Peter’s duty to remove it is outside the original agreement and new consideration would be needed in exchange for its removal.

Creditors’ Composition

A creditors’ composition may give rise to debt settlement by an accord and satisfaction. This is an agreement whereby two or more creditors of a debtor consent to the debtor paying them pro rata shares of the debt due in full satisfaction of their claims. A composition agreement can be critically important to a business in trouble; through it, the business might manage to stave off bankruptcy. Even though the share accepted is less than the full amount due and is payable after the due date so that consideration appears to be lacking, courts routinely enforce these agreements. The promise of each creditor to accept a lesser share than that owed in return for getting something is taken as consideration to support the promises of the others. A debtor has $3,000 on hand. He owes $3,000 each to A, B, and C. A, B, and C agree to accept $1,000 each and discharge the debtor. Each creditor has given up $2,000 but in return has at least received something, the $1,000. Without the composition, one might have received the entire amount owed her, but the others would have received nothing.

Exclusive Dealing Agreement

In an exclusive dealing agreement, one party (the franchisor) promises to deal solely with the other party (the franchisee)—for example, a franchisor-designer agrees to sell all of her specially designed clothes to a particular department store (the franchisee). In return, the store promises to pay a certain percentage of the sales to the designer. On closer inspection, it may appear that the store’s promise is illusory: it pays the designer only if it manages to sell dresses, but it may sell none. The franchisor-designer may therefore attempt to back out of the deal by arguing that because the franchisee is not obligated to do anything, there was no consideration for her promise to deal exclusively with the store.

Courts, however, have upheld exclusive dealing contracts on the theory that the franchisee has an obligation to use reasonable efforts to promote and sell the product or services.

The UCC follows the same rule. In the absence of language specifically delineating the seller’s or buyer’s duties, an exclusive dealing contract under Section 2-306(2) imposes “an obligation by the seller to use best efforts to supply the goods and by the buyer to use best efforts to promote their sale.”

Outputs Contracts and Needs Contracts

An output contract and a needs contract are two types of contracts that are commonly used in business transactions. When analyzing these types of contracts, it is important to read into them a requirement of reasonableness so that they have legal sufficiency.

An output contract is a contract in which one party agrees to sell all of the goods or services that they produce to the other party. The quantity of goods or services is not predetermined or fixed, but rather depends on the seller’s output. The buyer agrees to purchase all of the seller’s output, and the seller agrees to sell all of their output to the buyer. Output contracts are commonly used in industries where the output of one party is critical to the operations of the other party, such as in manufacturing or agriculture.

For example, a farmer may enter into an output contract with a food processing company, in which the farmer agrees to sell all of their wheat crop to the processing company, and the processing company agrees to buy all of the wheat that the farmer produces.

A needs contract is a contract in which one party agrees to purchase all of their goods or services from the other party. The quantity of goods or services is not predetermined or fixed, but rather depends on the buyer’s needs. The seller agrees to provide all of the goods or services that the buyer requires, and the buyer agrees to purchase all of their goods or services from the seller. Needs contracts are commonly used in industries where the buyer has a continuous need for a particular product or service, such as in healthcare or utilities.

For example, a hospital may enter into a needs contract with a medical supply company, in which the hospital agrees to purchase all of their medical supplies from the supply company, and the supply company agrees to provide all of the medical supplies that the hospital requires.

4.3 Promises Enforceable without Consideration

For a variety of policy reasons, courts will enforce certain types of promises even though consideration may be absent. Some of these are governed by the UCC; others are part of the established common law and promote public policy.

Promise Revived after Statute of Limitations Has Passed

A statute of limitations is a law which sets the maximum period of time which one can wait before filing a lawsuit. In many states a contract claim must be brought within six years; if the plaintiff waits longer than that, the claim will be dismissed regardless of its merits. When the time period set forth in the statute of limitations has lapsed, the statute is said to have “run.” If a person renews a promise to pay or acknowledges a debt after the running of a statute of limitations, then under the common law the new promise to pay is binding, although there is no consideration in the usual sense. In many states, this new promise or acknowledgment must be in writing and signed by the person with the debt. Some courts have determined that if a person makes a partial payment after the statute has run, a promise to pay or acknowledgment of a debt has been implied.

Voidable Duties

Some promises that might otherwise serve as consideration are voidable by the promisor for a variety of reasons, including infancy, fraud, duress, or mistake. But a voidable contract does not automatically become void, and if the promisor has not avoided the contract but instead thereafter renews his promise, it is binding. For example, Mr. Melvin sells his bicycle to Seth, who is age thirteen and legally an infant. Seth promises to pay Mr. Melvin one hundred dollars. Seth may disaffirm the contract until he reaches the age of majority, but he does not. When Seth turns eighteen, he renews his promise to pay the one hundred dollars to Mr. Melvin. This promise is binding.

Charitable Contributions

A charitable contribution is a promise to donate money to a charity. Recognizing the necessity to charitable institutions of such pledges, the courts have also been mindful that a mere pledge of money to the general funds of a hospital, university, or similar institution does not usually induce substantial action but rather a promise without consideration. Generally, these promises are enforceable even if they lack consideration. As a matter of public policy, enforcing these contracts without consideration promotes the charitable purpose of the promise, and assures that a charity that has relied on the promise of a donation can receive that benefit without exchanging a detriment in return. In about one-quarter of the states, another doctrine is available for cases involving simple pledges: the “mutual promises” theory, whereby the pledges of many individuals are taken as consideration for each other and are binding against each promisor.

Promissory Estoppel

Promissory estoppel is a legal principle that allows a party to enforce a promise, even if the promise was made without consideration, provided that certain conditions are met. In essence, promissory estoppel prevents one party from going back on their promise, even if no actual contract was created.

The doctrine of promissory estoppel is invoked in the interests of justice when three conditions are met:

1. the promise is one that the promisor should reasonably expect to induce the promisee to take action or forbear from taking action of a definite and substantial character
2. the action or forbearance is taken in reliance on the promise to a detriment
3. the only way to avoid injustice is to enforce the promise

For example, let’s say that John promises to give Sally a car as a gift, but then changes his mind and refuses to give her the car. If Sally can show that she relied on John’s promise to her detriment, such as by selling her old car in anticipation of receiving the new one, she may be able to enforce the promise through the doctrine of promissory estoppel, even though there was no actual contract created.

For another example, Timko served on the board of trustees of a school. He recommended that the school purchase a building for a substantial sum of money, and to induce the trustees to vote for the purchase, he promised to help with the purchase and to pay at the end of five years the purchase price less the down payment. At the end of four years, Timko died. The school sued his estate, which defended on the ground that there was no consideration for the promise. Timko was promised or given nothing in return, and the purchase of the building was of no direct benefit to him (which would have made the promise enforceable as a unilateral contract). The court ruled that under the three-pronged promissory estoppel test, Timko’s estate was liable. 

Promises Enforceable without Consideration by Statute

We have touched on several common-law exceptions to the consideration requirement. Some also are provided by statute.

Under the UCC

Under the UCC, a contract must generally have consideration to be enforceable, but there are some exceptions that allow promises to be enforceable without consideration.

The UCC permits one party to discharge, without consideration, a claim or right arising out of an alleged breach of contract by the other party. This is accomplished by delivering to the other party a signed written waiver or renunciation. This provision applies to any contract governed by the UCC and is not limited to the sales provisions of Article 2.

The UCC also permits a party to discharge the other side without consideration when there is no breach, and it permits parties to modify their Article 2 contract without consideration so long as the modification is made in good faith. For example, Seller agrees to deliver a ton of coal within seven days. Buyer needs the coal sooner and asks Seller to deliver within four days. Seller agrees. This promise is binding even though Seller received no additional consideration beyond the purchase price for the additional duty agreed to (the duty to get the coal to Buyer sooner than originally agreed).

The UCC allows a merchant’s firm offer, signed, in writing, to bind the merchant to keep the offer to buy or sell open without consideration.  This is the UCC’s equivalent of a common-law option, which, as you recall, does require consideration.

Section 1-207 of the UCC allows a party a reservation of rights while performing a contract. This section raises a difficult question when a debtor issues an in-full-payment check in payment of a disputed debt. As noted earlier in this chapter, because under the common law the creditor’s acceptance of an in-full-payment check in payment of a disputed debt constitutes an accord and satisfaction, the creditor cannot collect an amount beyond the check. But what if the creditor, in cashing the check, reserves the right (under Section 1-207) to sue for an amount beyond what the debtor is offering? The courts are split on this issue: regarding the sale of goods governed by the UCC, some courts allow the creditor to sue for the unpaid debt notwithstanding the check being marked “paid in full,” while others do not.

Bankruptcy

Bankruptcy is federal statutory law. Like the situation described above where it was possible to revive an obligation after the statute of limitations had run, traditionally a promise to repay debts after a bankruptcy court has discharged them makes the debtor liable once again. The federal Bankruptcy Act includes certain procedural protections to ensure that the debtor knowingly enters into a reaffirmation of his debt. Among its provisions, the law requires the debtor to have reaffirmed the debt before the debtor is discharged in bankruptcy; he then has sixty days to rescind his reaffirmation. If the bankrupt party is an individual, the law also requires that a court hearing be held at which the consequences of his reaffirmation must be explained, and reaffirmation of certain consumer debts is subject to court approval if the debtor is not represented by an attorney.

International Contracts

Contracts governed by the Convention on Contracts for the International Sale of Goods do not require consideration to be binding.

References

Estate of Timko v. Oral Roberts Evangelistic Assn., 215 N.W.2d 750 (Mich. App. 1974).

Lon L. Fuller, “Consideration and Form,” Columbia Law Review 41 (1941): 799.

Richard A. Posner, Economic Analysis of Law (New York: Aspen, 1973), 46.

Restatement (Second) of Contracts, Section 87(b).

Uniform Commercial Code, Section 1-107.

Uniform Commercial Code, Sections 2-209(4) and 2-209(1).

Uniform Commercial Code, Section 2-205.