#10997 - Filling Gaps In Incomplete Contracts - Contracts

Filling Gaps in Incomplete Contracts: Substantive Interpretation by Implication

A. Modification: Substantive Approaches

1. Generally

a) Usually becomes an issue where the seller’s costs increase due to unexpected or unforeseen events

b) Difference between legitimate requests and those opportunistic attempts to use the contract relationship and the inertia it creates to hold up the other party by threatening to breach unless the contract is modified

c) Three general doctrinal approaches to the problem:

(1) The common law’s pre-existing duty rule, which attempts to use consideration to set up a bright line test to distinguish legitimate modifications from extortionate holdups

(2) The more contemporary approach taken by UCC 2-209 and Restatement § 89, which says that modifications will be enforced if they are in good faith and meet certain objective criteria

(3) The duress doctrine approach, which says that modifications will not be enforced if they were achieved only via circumstances and pressures that constitute economic duress under the duress doctrine

2. Pre-Existing Duty Rule (Common Law)

a. An agreement modifying a contract is not supported by consideration if the party demanding the modification simply does or promises to do something that which he is already contractually obligated to do. A contract modification is not enforceable without new consideration.

b. Two ways of avoiding this rule:

1. Promise to do something in addition to existing obligation

2. Rescind previous contract before entering into the revised contract

c. Alaska Packers’ Ass’n v. Domenico (1902) - Fishermen signed contracts to be shipped from San Francisco to Alaska where they would work throughout the fishing season, but then stopped work as a group and demanded twice the salary from the plant superintendent in Alaska lest they all go home and leave him with no workers. The court refused to enforce the second contracts for lack of consideration because the fishermen were already required by the first contracts to do the work required of them in the second contracts.

3. Modern Approach

a) Restatement (Second) of Contracts § 89:

(1) A promise modifying a duty under a contract not fully performed on either side is binding

(a) If the modification is fair and equitable in view of circumstances not anticipated by the parties when the contract was made; or

(b) To the extent provided by statute; or

(c) To the extent that justice requires enforcement in view of material change of position in reliance on the promise

b) UCC 2-209

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

(2) A signed agreement which excludes modification or rescission except by a signed writing cannot be otherwise modified or rescinded, but except as between merchants such a requirement on a form supplied by the merchant must be separately signed by the other party

(3) The requirements of the statute of frauds section of this Article (Section 2-201) must be satisfied if the contract as modified is within its provision

(4) Although an attempt at modification or rescission does not satisfy the requirements of subsection (2) or (3) it can operate as a waiver

(5) A party who has made a waiver affecting an executory portion of the contract may retract the waiver by reasonable notification received by the other party that strict performance will be required of any term waived, unless the retraction would be unjust in view of a material change of position in reliance on the waiver

c) Modification request must be due to changed economic circumstances. These circumstances can’t serve as a pretext.

d) Roth Steel v. Sharon Steel Corp. (1983) – P contracted to buy 200 tons of steel a month from D. Demand for steel significantly increased, which induced D to notify P that it was discontinuing price concessions made in the original contract. D told P that unless P agreed to higher prices, it would not sell it any steel. P agreed to a modified price because it felt it had no other choice. Court held that modification request wasn’t enforceable because the defendant had acted in bad faith when it threatened to breach.

e) Angel v. Murray (1974) – D and P entered into a five year contract for D’s refuse-collection services. D requested an additional $10,000 per year from P because there had been a substantial increase in the cost of collection due to an unexpected and unanticipated increase of 400 new dwelling units. P agreed to this, but later sued D for any amount paid in excess of the original agreement. Court ruled in D’s favor, holding that though the preexisting duty rule was once strictly applied, there was a growing willingness to enforce modifications when unexpected or unanticipated difficulties arise during the course of the performance of a contract, even though there is no consideration for the modification, as long as the parties agree voluntarily.

B. The Traditional Approach to Impossibility and Frustration

1. Impossibility

a) Subjective impossibility vs. objective impossibility

1. Subjective – “I cannot do it” – Not an excuse, unless the contract requires performance particularized to specific persons or goods

2. Objective – “The thing cannot be done” – This grounds excuse. It cannot merely be too difficult or unexpectedly costly. There literally must be no way that it can be accomplished.

b) Elements:

1. Death or destruction of person or thing explicitly referenced in the contract – Think artist painting a specific painting

2. Essential to performance of the contract

3. Contingency not the fault of either party

4. Risk not allocated - No specific understanding that D would be held liable

5. Risk not foreseeable

c) The impossibility of performance only eliminates the possibility of imposing the remedy of specific performance. If one is absolved of their obligations due to impossibility or frustration, he is still responsible for paying back any benefits he has received.

d) The fundamental question in excuse law is not whether performance is actually impossible, but whether the parties (explicitly or implicitly) allocated the risk of the contingency that has materialized.

c) Performance Excused: Taylor v. Caldwell – Concert Hall burns down -- Where the defendant contracted with the plaintiff to use a concert hall which burned down and there was no fault of either party the court held that there was an implied provision of the contract such that performance depended on the existence of that hall and that when the impossibility of performance arises from the destruction or death of a thing or person performance of the contract will be excused.

Counterargument (1): D should be held responsible because he was in a better position to prevent fire from occurring.

Counterargument (2): This assumes that P was aware of this implied term. Maybe he wasn’t, and would have demanded a higher price if he was.

d) Performance Not Excused: Seitz v. Mark-o-Lite Sign Contractors Inc. (841) – Sign worker gets foot amputated – Where a company contracted to renovate a sign and the contract included a force majeure provision excusing performance in case of an act of God, and where the company’s sole expert sheet metal worker was then hospitalized for diabetic complications (an event that did not resemble the circumstances enumerated in the force majeure clause), the company was still required to perform because the contract did not specify the worker to perform the work and thus the work is delegable and not impossible. The company had even looked into the possibility of hiring someone else to do the job.

2. Frustration

a) Restatement § 265 -- Where, after a contract is made, a party's principal purpose is substantially frustrated without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his...