Pre Existing Duty Rule

Extract 1 : Pre- existing duty rule
Extract 2 : Contract modification and the allocation of insurance
Extract 3 : Renegotiations in financial relationships
Extract 4 : Contracts for services
Extract 5 : Case for relaxing the rule further

What is the case for the pre- existing duty rule?

Performance of an existing contractual duty does not amount to fresh consideration to make a renegotiated contract binding. The modern authority for this rule is the maritime hold up case of Stilk v Myrick 1 where two members of a ship's crew deserted before it had completed its voyage, the rest of the crew then threatened to leave unless the captain of the ship divided up the deserters pay amongst them. On returning to port the Captain reneged on his promise and was sued by the crew as a result. The court held that the agreement was 'void for want of fresh consideration' 2, that is to say that the ships crew had only done what they were already bound to do.

Posner sites three arguments supporting the doctrine of consideration in general, it reduces the potential for inadvertent contracts caused by careless language, the courts almost invariably won't enforce trivial promises, and finally opportunistic behaviour can be prevented. Opportunistic behaviour is particularly relevant to post contractual renegotiations, where the promisee attempts to vary the terms under which he will perform a duty. Opportunism is, in Dnes eyes, analogous with economic duress the concept that the courts propose to use in limiting the number of enforceable renegotiations (see below). Mere commercial pressure does not amount to economic duress; instead the pressure has to be such that it amounts to ' a coercion of will that vitiates consent 3 ' . In reality this means the courts will have to assess what amounts to unreasonable behaviour in a commercial situation. Dnes defines opportunism as any situation where one party tries to exploit the fact that the sunk costs 4. of the contract are asymmetrically distributed . 5
More specifically situations where the promisee tries to extract the value of contract specific assets that reflect the sunk investment knowing that the promisor cannot move that investment, and that an award of damages will not be as beneficial to the promisor as the proposed renegotiation. For example a manufacturer enters into a contract for the supply of component parts at a cost of £50,000. He then invests a further £50,000 in equipment that could only be used for the assembly of those component parts. He expects on sale to gross £105,000 leaving him with a net profit of £5000, which would be a 5% on his investment. The supplier knowing that the manufacturer has already invested in the assembly equipment increases the price of the component parts to £100,0000 and will not supply the goods for less due to supposedly higher than anticipated costs. If the manufacturer accepts the renegotiation he will lose £45,000, as his new costs will be £50,000 + £100,000 while the gross will remain at £105,000. In contrast should the manufacturer not accept the renegotiation it will cost him £50,000, as he will have no return on his sunk costs 6 .Thus the only option open to the manufacturer would be to sue for breach of contract, which is a costly and time consuming process.

One of several arguments Aivazian, Prebilcock, and Penny (ATP) put forward for maintaining the pre existing duty rule is that relaxing it will create a moral hazard for the parties to a contract encouraging opportunistic behaviour and underbidding for contracts. Similarly they argue that if the rule of pre existing duty were relaxed the courts would have to rely heavily on the concepts of economic duress and opportunism to decide where contract renegotiations are enforceable. As the concepts are relatively undefined the relaxation of the rule could lead to confusion and therefore litigation that would cost all parties money and slow commercial processes down considerably.

(1809) 2 Camp 317[^ Return]
1809) 2 Camp 317 or see H.G. Beale, W.D. Bishop and M.P. Furmston, 'Contract: Cases and Materials', 4th edition, 2001, p115[^ Return]
Pao On v Liu Yiu (1979) 3 ALL ER, 65 or see A.W. Dnes, The Law and Economics of contract modifications, International review of law and economics, Vol. 15, p229[^ Return]
Irrevocable costs which a party must pay in order for the contract to be viable.[^ Return]
A.W. Dnes, The Law and Economics of contract modifications, International review of law and economics, Vol. 15, p227[^ Return]
A.W. Dnes, The Law and Economics of contract modifications, International review of law and economics, Vol. 15, p228[^ Return]

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