Pre-existing duty rule

In contract law in the United States, the pre-existing duty rule is a legal concept relating to when the performance of a legal duty is classified as consideration.

Definition

Generally, performing a legal duty which is already owed under a contract does not constitute consideration, unless that duty is unclear or honestly disputed. That is, once a party agrees to do something under a contract, that party cannot change the terms without consideration and expect the new terms to be enforceable. This is expressed as the legal duty rule, and usually occurs in one of three different ways:

Pay less

One party has performed their part of the contract but the other party refuses to pay unless the amount owed is reduced. For example, a contractor performs work on a home for $10,000 only to have the homeowner refuse to pay anything unless the contractor agrees to accept $8,000 (assuming no breaches of warranty, etc.). The rule will apply, so the contractor could accept the $8,000 and sue for the remaining $2,000 because there was an 'honest dispute' as to the duty.

Pay more

One party refuses to perform her side of the contract unless a larger sum of money is paid. For example, Christine agrees to sell Julian a set of text books for $300.00. Julian wires $300.00 to his friend Jake who is charged with picking up the text books and delivering the $300.00. After the money has been wired and delivery arrangements have been made, Christine calls Julian and states that she has changed the price to $350.00 and will not deliver the books to Jake unless Julian promises to pay an additional $50.00. The rule will apply, so Julian could agree to pay the extra money, but then not do so when the books are delivered. (If Julian actually paid the extra money, then he could sue later under "duress" to recover the $50.00)

Public duty

The party seeking payment already has a public duty to perform the act. For example, a government employee polygraph expert might ask a criminal about an unrelated crime during the administration of a polygraph. If the criminal admits to the crime and the employee then seeks a reward for identifying the perpetrator, he would not be entitled to it under the legal duty rule because he already has a public duty to find out about crimes.

Exceptions

The legal duty rule does not apply if the parties mutually agree to change the terms of the contract. For example, the homeowner and contractor could agree to modify their contract to include a new window for the bathroom at an additional cost of $1,000. Alternatively, the parties could agree not to perform part of the contract for a $500 reduction in the price. Both these modifications to the original contract would be enforceable because there was consideration for each.[1] The legal duty rule protects one party when the other is trying to unilaterally change the terms of the agreement.

There are ways around the legal duty rule, such as mutual rescission of the existing contract with a clear indication of such rescission (literally tearing up the old contract). Also, in some states, parties may renegotiate contracts to include additional benefits if, for example, the party performs unexpected or additional duties, the parties assent in good faith or a new contract is agreed.

Where contractual parties owe each other existing contractual obligations, but a third party offers a promise contingent upon performance of the contract, that promise has sufficient consideration.

Consideration will be found where a party promises to perform where there are unforeseen and/or unforeseeable circumstances sufficient to discharge the party from the obligation, where any new or different consideration is promised (e.g. earlier payment or payment in stock), where the promise is to ratify a voidable obligation (e.g. go through despite fraud), where the preexisting duty is owed to another person and where there is an honest dispute as to the duty.

Also, under the Uniform Commercial Code, modifications may be made free of the Common Law legal duty rule even without consideration provided that the modification is made in good faith. However, the Statute of Frauds must be complied with, so a written contract is necessary if the contract as modified comes within the scope of that statute. For purposes of the UCC, a contract must be in writing if it is for the sale of goods where the price exceeds $500. [2]

The pre-existing duty rule has been abrogated under the Restatement, Second of Contracts § 89, which does not require independent consideration if the parties mutually and voluntarily agree to the modification (see Angel v. Murray for an early application of the Restatement).[3] The restatement, however, will not always be followed, as evidenced by the decision in Labriola v. Pollard Group, Inc..[4]

References

  1. ↑ Contracts: Cases and Commentaries: Boyle and Percy
  2. ↑ http://www.law.cornell.edu/ucc/2/2-201
  3. ↑ Ayres, I. & Speidel, R.E. Studies in Contract Law, Seventh Edition. Foundation Press, New York: 2008, p. 88
  4. ↑ Ayres, p. 81