Question

A music conservatory has two concert halls. One concert hall had a pipe organ that was in poor repair, and the other had no organ. The conservatory decided to buy a new organ for its concert hall with no organ. After some negotiation, the conservatory entered into a contract with a business that both repairs and sells organs. Under the contract, the business agreed to sell a new organ to the conservatory for its concert hall for $225,000 and would add repairing the existing pipe organ for the conservatory. The business would usually charge a higher price for a project of this magnitude, but the business agreed to this price because the conservatory agreed to prepay the entire amount. The contract was signed on January 3, and the conservatory paid.

Two weeks later, before the business had commenced repair of the existing organ, the business suffered serious and unanticipated financial reversals. The chief financial officer for the business contacted the conservatory and said, Bad news. We had an unexpected liability and as a result are in a real cash crunch. In fact, even though we haven’t acquired the new organ from our supplier or started repair of your existing organ, we’ve already spent the cash you gave us, and we have no free cash on hand. We’re really sorry, but we’re in a fix. I think that we can find a way to perform both contracts, but not at the original prices. If you agree to pay $60,000 more for the repair and $40,000 more for the new organ, we can probably find financing to finish everything. If you don’t agree to pay us the extra money, I doubt that we will ever be able to perform either contract, and you’ll be out the money you already paid us.

After receiving this unwelcome news, the conservatory agreed to pay the extra amounts, provided that the extra amount on each contract would be paid only upon completion of the business’s obligations under that contract. The business agreed to this arrangement, and the parties quickly signed documents reflecting these changes to each contract. The business then repaired the existing organ, delivered the new organ, and demanded payment of the additional $100,000. The conservatory now has refused to pay the business the additional amounts for the repair and the new organ.

1. Must the conservatory pay the additional $60,000 for the organ repair? Explain.

2. Does the common law, Uniform Commercial Code, or both laws apply here and why?

Answer 1

I have answered Q2 first and then Q1:

Q2: Both laws apply here:

Common law of contracts applies to repairing of organ and Uniform Commercial Code (UCC) applies to the new organ sale by the business.

Q1: The conservatory might not be required to pay additional $60,000 for the organ repair as a result of 'pre-existing duty rule' under common law of contracts.

As per the rule the additional payment ($60,000) is enforceable only in case of additional consideration. A promise to perform any existing legal duty which is neither doubtful, nor the subject of dispute is excluded to be considered as consideration. Consideration would include, for example, repairing the organ with better parts for additional payment.

However, there is an exception to the rule that under unavoidable circumstances, the additional payment might not require additional consideration to be enforceable. The business may argue that the financial distress was an unavoidable circumstance, not under their control. However, the burden to prove that the unanticipated circumstances were not existing at the time the original contract was entered, was unknown to the business. Also, the business will have to prove that the modification in the payment was fair and equitable in light of the unanticipated circumstances. But that might not be upheld as the modification might not be justified in absence of difficulties in performing the duty which were way beyond what was anticipated in the original contract, as there were no such difference in repairs performed before and after the unanticipated circumstance.

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