Assignment on Common Law Jurisdictions- Contract Modifications

Extract 1 : What is the case for the rule of pre-existing duty?
Extract 2 : Can you explain the pressure for enforcing contract modifications, in financial relationships and in contracts for services?
Extract 3 : What is the case for relaxing the rule of pre-existing duty?
Extract 4 : How does a contract modification affect the allocation of insurance in a commercial contract?
Extract 5 : Should increased liability be applied retrospectively to cases, as happens, or would it be better to have a statutory change applying prospectively according to the logic of pre-existing duty in contract?

1.What is the case for the rule of pre-existing duty?

The doctrine of pre-existing duty, the preserve of Common Law jurisdictions 1, has long established that where a duty exists, the promise to execute that duty in exchange for a promise will not be valid consideration. An early illustrative example is that of the public duty to attend court under subpoena: a financial or other consideration for such mandatory service proffered by a party will not result in the creation of a valid contract, insofar as the promise made by the duty-bound party cannot qualify as consideration.2

The reasons for the general principle are transparent enough. To consider the alternative scenario provokes a series of questions testing the third fundamental component of a contract .3 If you have to do an act anyway, how can it be to your detriment to reaffirm your obligation? If the act will be done anyway, how does it benefit X to pay Y to do it? 4

The situation alters if fresh consideration forms part of the bargain. Consideration may be deemed 'fresh', thus valid, where an undertaking is made to do more than that to which the promisee is legally bound, even if the act at issue is the identical - even a direct extension of - the act which is the subject of the obligation . 5

It is a question of degree. A variation on this is so-called 'practical' benefit (see discussion of Williams v Roffey below), which has also been deemed fresh consideration 6 . This latter notion affords wider scope to categorise pre-existing duties as consideration, but with it comes an attendant danger. It raises an eroding challenge to the principle of pre-existing duty, but where such duties are public, it is relevant to consider whether it is against the public interest to give recognition to a practical benefit. It has been said that such recognition should only be afforded where 'there is nothing in the transaction which is contrary to the public interest'7 . An example of what would be contrary would be payment for the giving of evidence 8 , where impartiality in the administration of justice would risk being brought into question.

The above issues may be seen as giving an ethical dimension to the debate. But the commercial realities of business are just as significant. Where there is an existing contractual obligation rather than one deriving from public duty, and where a promisee simply undertakes to comply with the conditions of a pre-existing contract s/he has with the promisor, it follows as a natural conclusion that it will not be detrimental to do what one is already obliged to do, nor beneficial to receive what one is entitled to receive. The upshot is that no consideration exists in such a case. Thus it was that in the case of Stilk v Myrick 9, crewmembers of a ship on a return voyage to the Baltic were denied the additional wages of deserting crewmembers which they had been promised by the ship's master at the point of desertion. It was held that, while their workload might have doubled, that was no more or less than what was expected of them as part of the original contract. The situation is stated in sum:

(Stilk v Myrick seems) to lay down a simple rule that performing an existing contractual duty owed to a promisor could not amount to consideration…

Although the promisor might see a practical advantage in persuading the promisee actually to perform, and even if the promisee would actually have to perform in order to get the promised extra payment, the law appeared to refuse to recognise that there was any 'legal' benefit to the promisor or 'legal' detriment to the promisee .10

The above-mentioned ethical facet or moral tenor to the argument for pre-existing duty is well illustrated by the case of Stilk v Myrick. It is one of a genre of cases branded 'hold-ups' 11 , so-called because the claimant 12 would-be promisees held a figurative pistol to the head of the defendants by taking advantage of situations to renege on a contractual agreement and demand extra remuneration.

English courts have ever been loath to enforce such modifications: apart from the technical necessity of consideration, protection from immoral opportunistic renegotiation is clearly a prime issue. A clear example of how this could occur in a modern business context is provided by Anthony Dnes in 'The Economics of Law': an unscrupulous supplier of components for toys, who lures an unsuspecting manufacturer into a contract at a certain price, only to later raise the price (after detrimental reliance has occurred) to seriously mitigate or eliminate the manufacturer's profit. 13

One problem which Dnes accurately assesses with the status quo is that the existing duty rule only protects against opportunism to the extent that opportunists are ignorant of the law. It follows that provided such practitioners took care to provide fresh consideration of any form, such as prolonged service in the Stilk v Myrick case 14 , their ill-conceived designs could be pursued with the full force of English Law. 15

The existing-duty rule would appear therefore to have a firm foundation for reasons of equity and morality in contractual practice, but it should be borne in mind that the rule is not without the possibility of circumvention by the determined contractor.

A further case illustrative of the rule is that of Foalkes v Beer .16 A debtor under contract struck a deal with their creditor that instalment repayments over a defined period would constitute satisfaction of the total monies borrowed. The complication arose when the instalments had been repaid. The creditor then sued for interest on the whole amount. The debtor sought a judgement that 'accord and satisfaction'17 had been made, but the House of Lords refused due to lack of fresh consideration. 18

A further example is Re Selectmove 19. A company owed money to the Inland Revenue (IR). On threat of a winding up petition the company claimed that in an earlier meeting, an agreement had been reached that no action would be taken provided future tax payments were made, and the backlog debt paid off in monthly arrears. The company had kept to the terms of the agreement, but the action ensued. It was held that the agreement was void for want of consideration, although the company argued this had been catered for in terms of an implicit promise to stay in business thus generating further IR income .20

The rule of pre-existing duty clearly has force outside the situation of the private rogue contractor, and its benefits are clear here in a commercial context: the creditors in both situations were able to use it as an instrument to protect their business interests and enforce payment of monies due, despite attempted claims of renegotiation.

To consider a comparative Common Law jurisdiction, Posner, who writes of the United States legal system in 'Gratuitous promises in economics and law' unwittingly comments on the relationship between pre-existing duty and consideration with a simple question:

Why would 'economic man' ever make a promise without receiving in exchange something of value from the promisee, whether it be money, a promise of future performance beneficial to the promisor, or something else of value to him? 21

The comment is unwitting because the question is posed rhetorically: he, presumably, would not. And yet a curious anomaly exists in that no fresh consideration of the type required in English law is required to modify a contract in the United States 22, although the economic consequence of such a contractual manoeuvre bears repercussions. Dnes analyses this through the eyes of a shrewd economist:

The difficulty with allowing modifications is that the efficient allocation of risk may be distorted in a way that creates a moral hazard problem for promisees… (a) promisor should not be permitted to seek revised terms just because some… risks materialise and the contract is less profitable 23

He proceeds to explain how, at worst, the ability to modify would encourage 'underbidding', or in layman's terms a low price calculated to tempt at the start of contractual relations, only to be raised later - with the full support of the law - on the pretext of the original price level being impossible to meet. In any transaction, such a possibility would surely lead to total loss of certainty in the selection of contractual partners. Hunting for the best price would be a fruitless mission.

This, then, is a further vein of argument in support of the pre-existing duty rule. To relax the rule is to invite uncertainty in the commercial world.

Lastly, to leave the issues of commercial certainty and morality aside, Aivazian, Trebilcock and Penny raise alternative convincing argument against the loss of the doctrine of pre-existing duty. It is pointed out that to enforce even modifications that result from the mutually agreed correction of genuine mistake would require court equipage which is simply unavailable. Uniform criteria would need to be devised to identify 'opportunistic' behaviour:

(if) the promisor is now exposed to the risk of strategic behaviour by the promisee designed to exploit or manipulate… the adjudication costs attendant on courts attempting to apply rules that do not supply knife-edged sharpness in the characterization of situations (would be prohibitive) 24

Rules, which in the first instance, do not exist, and which in the second, would be expensive to hone.

2. Can you explain the pressure for enforcing contract modifications, (a) in financial relationships and (b) in contracts for services?

In both cases (a) and (b), the overwhelming reason is fairness. Traditionally, the
aforementioned doctrine has ruled out the enforcement of contract modifications. It is an intrinsic part of the doctrine that no contractual changes shall be enforceable in the courts in the absence of fresh consideration, and hence the so-called marine 'hold-up' cases such as Stilk v Myrick 25 failed.

Yet motive for such enforcement in some cases is explicable. Stilk v Myrick concerned financial relationships, between the waged crew of the ship and their employer, the ship's master. The contention of the employee plaintiffs was prima facie reasonable enough assuming a bona fide expectation of extra pay for extra labour, as promised. It is not too remote a possibility to view the defendant ship's master as the wrongful and immoral party, a cunning false promise of extra pay 26laid as bait to ensure safe passage to home port. Seen in this light, the pressure for enforcing the modification to the original contract is entirely comprehensible, as to omit to do so would be unjust.

The same is true in relation to contracts for services. In Williams v Roffey 27 there was no question of the modification of contract having been wrought for any dubious opportunism. Rather, contractual revision gave mutual commercial advantage, a 'practical benefit' proposed by those instructing an independent sub-contractor. It was never in dispute that the original price agreed for the work had been erroneously set too low, and the pressure for enforcement was felt by the court which took a flexible approach construing 'actual' consideration (as both parties had averted a disbenefit) and averting unfairness. Thus it supports the case for relaxing the rule of pre-existing duty (see below). As Dnes pointed out:

Commentaries on the case generally conclude that the decision reflects a change in approach and that courts are likely to bring in issues concerning the fairness and reasonableness of the agreement and commercial realities rather than rely on a technical view of consideration.

It follows that pressures for enforcing contract modifications can obviously exist in certain situations: the issue is whether or not the cumulative pressure is enough to
bring about a relaxing of the rule of pre-existing duty.

3. What is the case for relaxing the rule of pre-existing duty?

The doctrine of pre-existing duty is not set in stone. Courts have been seen to depart from it, in relation to, inter alia, sales contracts 28, property leases 29 and construction contracts. 30One of the more notable English 'test' cases is that of Central London Property Trust Ltd v High Trees House Ltd 31 where the plaintiff had granted the defendant a block of flats for an agreed rent, which was later reduced (as from the beginning of the lease) in the event of WWII, which had negatively affected the rental market and restricted a full let. By 1945 the flats were fully let and the receiver of the landlord company instituted legal action claiming the difference between the rent paid and the original full rent as from the third quarter of 1945 32. The judgement of the then Denning J places considerable emphasis on 'recent developments in the law':

There is no doubt that (previously the plaintiffs)… would have been entitled to recover (the full rent)… from the beginning of the term, since the lease… according to the old common law, could not be varied by an agreement by parol… only by deed 33

He continues with a discussion of estoppel theory, and cites a selection of cases 34which, in his view, afford a sufficient basis for saying that a party would not be allowed in equity to go back on such a promise:

The logical consequence, no doubt is that a promise to accept a smaller sum in discharge of a larger sum, if acted upon is binding notwithstanding the absence of consideration: and if the fusion of law and equity leads to this result, so much the better .35

It would thus appear that if equity is a convincing case for the retention of the rule of pre-existing duty on the grounds that immoral and unconscionable activity may be encouraged without the rule, the counterpoints to that debate are cases in which equity itself demands a relaxation of the rule.

Christine Jolls, in her article 'Contracts as Bilateral Commitments: A New Perspective on Contract Modification' has argued that commitment to stick with an original contract, even if both parties later want to modify that contract, may improve contractors welfare. Traditionally, the problem with this line of argument, which invariably culminates in a conclusion to preserve the rule of pre-existing duty, is that some cases merit escaping it, such as Williams v Roffey as we have seen.

The primary suggestion from Jolls sheds a new and refreshing light on the old arguments. It is that parties - at least sophisticated ones - be permitted to enter into non-modifiable contracts which they cannot do under existing law. Permitting non-modifiable contracts would, argues Jolls, 'enhance contractors' welfare' in certain situations.36 Her wisdom is in acknowledging that situations arrive across a spectrum, on one side of which are Stilk-style 'hold-up' cases, on the other are those of the Williams kind. Offering contracting parties the option to elect to a non-modifiable contract could provide a welcome security for certain complex commercial transactions.

Against the backdrop of such a legal option, the rule of pre-existing duty could be relaxed, providing protection in cases where renegotiation becomes necessary in the name of equity, and where extra consideration is undesirable or simply not contemplated. Parties requiring scope for change would elect to an ordinary contract. Those who wish to eliminate that scope, would opt for a non-modifiable version.

4. How does a contract modification affect the allocation of insurance in a commercial contract?

The difficulty with allowing modifications is that the efficient allocation of risk may be distorted in a way that creates a moral hazard problem for promisees.37 If we take as a starting point the principle that the promisor is free to revise the terms of a contract after it is drawn up, merely because risks have arisen which compromise the profitability of that contract, the effect is surely to encourage promisors to increase their risk exposure, as renegotiation of terms will be omnipresent as a fallback option.

In commercial contracts there are often agreements of independent third party or of mutual bilateral insurance to cover various contingencies. In any contract of or incorporating insurance 38, certain rules apply. 'Anson's Law of Contract' provides a précis:

The intending assured is under an obligation to disclose to the insurer all material information affecting the risk. This duty to disclose is mutual… While the foundation of this obligation was in the past regarded as an implied term in the contract itself, the weight of modern authority is that the obligation, like the duty not to misrepresent, arises before the contract is made and is therefore non-contractual and probably based on equity's jurisdiction to prevent imposition. 39

Whatever the origin of the obligation, it applies in the two fundamental types of insurance a contract may benefit from. In commercial contracts, either party may have separate policies with independent insurers to cover eventualities of risk. In order to disclose material risk information, it follows that each party must accurately assess their position: this is so-called 'risk analysis'. If contracts were to be modifiable, the logistical task of a fresh risk analysis with every shifting of the contractual goalposts would be considerable, not to mention extremely, if not prohibitively, expensive. It would nonetheless remain each party's duty to disclose, to facilitate revised terms of insurance allocation with each change.

The alternative form of insurance in a commercial contract is where each party insures the other against certain contingencies in which it is best placed to control the risk factor. Again, revised risk analysis would be required with each modification, adding to expense in procedural cost and time. Dnes in 'The Economics of Law' extols one of the virtues of 'predictable contract law': that it facilitates confident pursuit of all transactions that yield gains from trade even when performance occurs over time. He continues:

The time dimension of contracts is also important from the point of view of providing insurance. Agreements often contain express terms specifying who is to benefit or lose from increases or decreases in the price or costs related to the transaction. But even if there are gaps in agreements, when courts are regular about the manner in which they fill these in people can rely on precedent to specify implicitly the insurance aspect of a contract.

With the option of renegotiation at every minute-marker along the run-time of a contract, all certainty of precedent is lost. If the law permits contract modifications, the arguably inevitable by-product will be a slew of spaghetti-junction contracts, inadequate in terms of cost, time and efficiency.

5. Consider increasing liability for professional negligence, or for that matter other liabilities such as psychological injury, in tort. Should increased liability be applied retrospectively to cases, as happens, or would it be better to have a statutory change applying prospectively according to the logic of pre-existing duty in contract?

The authority for suggesting that increasing liability in tort should not be applied retrospectively to cases, as happens, is considerable. Critics of the law, including many academics 40 , find fault with the status quo and have long since cried out for a reform of the current elastic cobweb of ill-defined principles. This is particularly true in the domain of psychological injury.

Lunney and Oliphant in 'Tort Law: Text and materials', speak of 'severe criticism' of the present position:
Almost everyone is agreed that the current state of the law is unsatisfactory… even the judiciary has conceded - as Lord Hoffmann put it in White v Dulieu - 'the search for principle' in this area of the law has been 'called off'… criticisms are directed at the practicality and consistency of the legal principles in question… there is also significant debate as to whether the law should continue to attempt a balance between a limited right to recover damages in respect of psychiatric illness and the fear of opening the floodgates of liability 41

The problem with suggesting that the law should not continue attempting to strike the aforementioned balance is only too manifest when one examines the problems with statutory reform which would apply liability prospectively.

In the contractual rule of pre-existing duty, it makes sense that if concrete and definable reasons for the imposition of liability exist, they should be established and agreed in advance. The traditional argument to oppose a pre-existing duty schedule of liabilities for the area of psychological injury tend to be founded on the radically different nature of assessing the effects of such injury. This latter, argue those opposing the idea, tends to suggest that such a system would lead to 'floodgates' consisting of a high concentration of system abuse. As the controversial writer Stapleton cynically puts it:

Once a general duty to avoid nervous shock was recognised, many more individuals would be recognised as presenting the relevant symptoms to their GP's 42
This view is highly sceptical, and the validity of the concern has not stopped legislative reforms in other Commonwealth jurisdictions, such as the statutory regime of liability introduced at an early stage of New South Wales' tort negligence history 43. In England, although some progress has been made in the shape of the Law Commission's recommendations to do away with the criterion of proximity in determining claims for psychological injury, they remain shy of the statutory imposition of a 'foreseeability test' which may be read as the contractual equivalent of a term in the contemplation of both parties.

Nonetheless, while the Law Commission do concede the dubious nature of the concern over the floodgates argument, as 'it is difficult to be sure that a move to a pure reasonable foreseeability test would open the floodgates of litigation', they remain reticent of change due to what they claim is 'significant risk of that consequence' .44

Thus the Law Commission continue to guard against the obvious benefits of clarity to be afforded by statutory transformation, panicked as they are by being fervently enslaved to policy considerations. It can only be recommended that a profitable ingredient to throw in to the pot of ideas to escape the tangled status quo and strike that long sought balance, is the contract law principle of pre-existing duty, which would assist this complex area of tort law if its policy unfriendly by-products can be aptly circumvented.45

The doctrine does not apply in civil-law jurisdictions[^ Return]
Collins v Godefroy (1831) 1 B & Ad 950[^ Return]
Consideration, which may be expressed as some detriment to the promisor or benefit to the promisee[^ Return]
Issues raised in: Anson's Law of Contract (27th Ed), p.101[^ Return]
Glasbrook Brothers Ltd. v Glamorgan County Council [1925] A.C. 270; Ward v Byham [1956] 1 W.L.R. 496[^ Return]
Ward v Byham [1956] 1 W.L.R. 496 was considered thus in William v Roffey Bros. & Nicholls (Contractors) Ltd [1990] 1 Q.B. 1, per Glidewell L.J. at p.13[^ Return]
Williams v Williams [1957] 1 W.L.R. 148, per Denning L.J. at p.150[^ Return]
Collins v Godefroy (1831) 1 B & Ad 950[^ Return]
Stilk v Myrick (1809) 2 Camp. 317[^ Return]
Contract: Cases and Materials, p.115[^ Return]
Also consider: Alaska Packers v Domenico (USA case); Harris v Watson 170 E.R. 94 etc.[^ Return]
Referred to as 'plaintiffs' in earlier case law[^ Return]
The Law and Economics of Contract Modifications, p.5-7[^ Return]
Dnes suggests 1 extra day: The Law and Economics of Contract Modifications, p.3[^ Return]
Dnes suggests the rule be coupled with one which 'gives courts discretion to set aside opportunistic modifications that meet the technical requirements for consideration': The Law and Economics of Contract Modifications, p.3[^ Return]
Foalkes v Beer (1884) All ER Rep 106[^ Return]
An agreement to accept a lesser sum and pursuant payment of that sum[^ Return]
Detail abstracted from: Contract: Cases and Materials, p.845[^ Return]
Re Selectmove Ltd [1995] 2 All E.R. 531[^ Return]
Detail abstracted from: A Casebook on Contract (11th Ed), p.240-241[^ Return]
'Gratuitous promises in economics and law', Posner, (1977) 6 JLS 411[^ Return]
Erosion of the pre-existing duty rule was confirmed with the Uniform Commercial Code, s.2-209[^ Return]
The Law and Economics of Contract Modifications, p.12-13[^ Return]
'The Law of Contract Modifications: The Uncertain Quest for a Benchmark of Enforceability'p.205[^ Return]
Stilk v Myrick (1809) 2 Camp. 317[^ Return]
According to Epinasse's report: Contract: Cases and Materials, p.114[^ Return]
William v Roffey Bros. & Nicholls (Contractors) Ltd [1990] 1 Q.B. 1[^ Return]
In the United States of America, the Uniform Commercial Code provides for this[^ Return]
Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130[^ Return]
William v Roffey Bros. & Nicholls (Contractors) Ltd [1990] 1 Q.B. 1[^ Return]
Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130[^ Return]
Detail abstracted from: Contract: Cases and Materials, p.157[^ Return]
A deed is deemed valid consideration[^ Return]
Inter alia: Hughes v Metropolitan Rly. Co. (1877) 25 W.R.680; Salisbury (Marquess) v Gilmore [1942] 2 K.B. 38[^ Return]
Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130[^ Return]
Contract as bilateral commitments: a new perspective on contract modifications, JLS, Vol 26[^ Return]
The Law and Economics of Contract Modifications, p.12[^ Return]
Whether private or commercial[^ Return]
Anson's Law of Contract (27th Ed), p.259[^ Return]
The law is 'in a dreadful mess' as per Todd (1999, 115 LQR 345 at 349); 'a long list of anomalies' as per Jones (1997, 13 PN 111 at 113); all within: Tort Law: Text and materials, p.299-300[^ Return]
Tort Law: Text and materials, p.300[^ Return]
'In Restraint of Tort', The Frontiers of liability, vol.2[^ Return]
Tort Law: Text and materials, p.302-3[^ Return]
ibid., p.303[^ Return]
Excluding footnotes, titles and quotations[^ Return]

BIBLIOGRAPHY

CASES :

Alaska Packers v Domenico (USA case)
Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130
Collins v Godefroy (1831) 1 B & Ad 950
Foalkes v Beer (1884) All ER Rep 106
Glasbrook Brothers Ltd. v Glamorgan County Council [1925] A.C. 270
Harris v Watson 170 E.R. 94
Hughes v Metropolitan Rly. Co. (1877) 25 W.R.680
Nicholls (Contractors) Ltd [1990] 1 Q.B. 1
Re Selectmove Ltd [1995] 2 All E.R. 531
Salisbury (Marquess) v Gilmore [1942] 2 K.B. 38
Stilk v Myrick (1809) 2 Camp. 317
Ward v Byham [1956] 1 W.L.R. 496
William v Roffey Bros. & Nicholls (Contractors) Ltd [1990] 1 Q.B. 1
Williams v Williams [1957] 1 W.L.R. 148

BOOKS:

Dnes, Anthony, The Economics of Law, 1996, International Thomson Business Press
Beale, H.G., Bishop, W.D., Furmston, M.P., Contract: Cases and Materials, 2001
Lunney, M. and Oliphant, K, Tort Law: Text and materials, 2000
Jones, Michael A., Textbook on Torts (7th Ed), 2000, Blackstone Press Ltd
Beatson, J, Anson's Law of Contract (27th Ed), 1998, Oxford University Press
Smith, J.C., A Casebook on Contract (11th Ed), 2000, Sweet & Maxwell
Weir, Tony, A Casebook on Tort (9th Ed), 2000, Sweet & Maxwell

JOURNAL ARTICLES:

Aivazian, Trebilcock and Penny, 'The Law of Contract Modifications: The Uncertain
Quest for a Benchmark of Enforceability' (22 Osgoode Hall LJ 173, 1984)

Dnes, Antony, 'The Law and Economics of contract modifications'
(International review of law and economics, 1995)

Jolls, Christine, 'Contract as bilateral commitments: a new perspective on contract
modifications' (Journal of Legal Studies, Vol. 26, Number 1, 1997)

Law Commission, Liability for Psychiatric Illness
(Report No. 249, 1998)

Posner, 'Gratuitous promises in economics and law'
(6 JLS 411, 1977)

Stapleton, 'In Restraint of Tort' in P.Birks (ed.), The Frontiers of Liability, vol.2
(Oxford: OUP, 1994)

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