Brief Fact Summary. Roth Steel Products (Plaintiff) sued Sharon Steel Corp. (Defendant) for breach of contract, with emphasis on a modification contract. Defendant appeals from the judgment of the District Court for the Plaintiff.
Synopsis of Rule of Law. A party may modify a contract without consideration as long as it is modified in good faith.
Issue. Whether the modification of the contract is enforceable?
Held. No. Judgment affirmed in part and reversed in part.
• Defendant was not entitled to relief under UCC 2-615(a). The contract modification is invalidated because of Defendant’s bad faith rather than because of economic duress. Defendant asserted that it properly increased the price because the parties had modified the original contact to reflect changed market conditions. However, the District Court found that Defendant did not seek a modification to avoid a loss on the contract. Defendant also used its position as the Plaintiff’s chief supplier of steel to extract the price modification.
• A party may modify a contact under the Uniform Commercial Code without consideration and it will still be binding, it is only limited by Article Two’s obligation of good faith. In order to determine whether a modification was obtained in good faith, the court must look at whether the party’s conduct is consistent with reasonable commercial standards of fair dealing in the trade and whether the parties were in fact motivated to seek modification by an honest desire to compensate for commercial exigencies.
• Here, the findings of the District Court are not sufficient to support a finding that Defendant did not observe reasonable commercial standards by seeking a modification. The findings do not support a conclusion that a reasonable merchant would not have sought a modification in order to avoid a loss. The findings regarding Defendant’s profits also are insufficient to warrant a conclusion that Defendant was not justified in seeking the contract modification. A party who has not actually suffered a loss on the contact may still seek a modification if a future loss on the agreement was reasonably foreseeable.
• The most important inquiry to determine whether the decision to seek a modification is justified is whether because of changes in the market performance of the contract has come to involve a loss. Unforeseen economic exigencies existed which would prompt an ordinary merchant to seek a modification to avoid a loss on the contract.
• Honesty in fact also has to be determined. Here, Defendant acted in bad faith by using coercive conduct to extract the price modification. Therefore, Defendant attempted to modify the contract in order to compensate for increased costs which made performance come to involve a loss, is ineffective because Defendant did not act in a manner consist with Article Two’s honesty in fact when it refused to perform its remaining obligations under the contract.
Discussion. In this case, the Court of Appeals affirmed the decision on impracticability and modification but remanded the case for factual findings on whether Plaintiff gave Defendant timely notice of breach. On the impracticability defense, the court held that Defendant’s inability to perform was a result of its policy accepting far more orders than it was capable of filling.