Contract Consideration and Subsequent Modifications

December 28, 2009 | Erin Herbold

When negotiating a contract, the parties must ensure that “adequate consideration” has been furnished by the parties for the contract to be validly executed.  “Consideration” is “value” from a legal standpoint – anything of value that one contracting party promises to give another contracting party in return for that party’s consideration.  Consideration can be money, tangible personal property, real estate, services or even the refraining from doing something.  In general, consideration is one of the essential requirements that both parties must provide before a contract can be binding (some types of contracts are excepted, however).  Also, if one party wants to make modifications to the original contract, they must also furnish adequate consideration.  That was the issue involved in this case.

Here, the parties entered into a contract to sell a weight-loss franchise and executed an “Asset Purchase Agreement” in 2004, encompassing their entire agreement. The purchase price was set at $125,000, payable at time of closing.  One week later, the parties executed a “Sales Agreement Addendum,” indicating an increase in the purchase price to $155,000, with $135,000 payable at closing. At the closing, a few weeks later, the buyer gave the seller $135,000. 
Then the disputes started. The buyer stopped payment on part of the payment made at closing and stopped making the monthly payments due for the balance remaining. The sellers sued and the buyer claimed that the addendum to the contract was unenforceable, because it was not supported by consideration.

The trial court found that the addendum was supported by consideration and dismissed the case. The Iowa Court of Appeals affirmed the trial court’s ruling.  On further review, the Iowa Supreme Court pointed out that the concept of consideration can be confusing, but that the law “exists to enforce mutual bargains, not gratuitous promises.” The court opined that consideration exists if two conditions are met, (1) if the promisee, in exchange for a promise by the promisor, does or promised to do something the promisee has no legal obligation to do; and (2) if the promisee refrains, or promises to refrain, from doing something the promisee has a legal right to do.   The court also pointed out that there must be “new consideration” independent of the original consideration to modify a contract in Iowa. The requirement is only that “some new consideration exists.” The court reasoned that the modification lacked consideration - the promisee did not agree to give up anything. Even though the addendum contained additional financing terms, those terms only applied to the additional payment owed, not the contract in its entirety. Thus, this was nothing more than a “unilateral price hike” by the sellers.  Margeson v. Artis, 776 N.W.2d 652 (Iowa 2009).

Note:  The Iowa Supreme Court appears to have confused and misconstrued the “pre-existing legal duty rule” in deciding this case.  While the general proposition of the court is correct that modification of a contract requires new consideration, that   rule applies when one party to the contract is making the modification.  Here, both parties mutually agreed to modify the existing contract to change the original purchase price.  The pre-existing legal duty rule is concerns the protection of one party when the other is trying to get more for what that party already has a "legal duty" to do.  That wasn’t the situation in this case.