John and Jennifer Margeson entered into a contract to sell a weight-loss franchise business called Inches-A-Weigh to


John and Jennifer Margeson entered into a contract to sell a weight-loss franchise business called “Inches-A-Weigh” to Theresa Artis. The parties memorialized their agreement in an “Asset Purchase Agreement” executed on October 1, 2004. The purchase price was \($125,000,\) payable at the time of closing. The parties subsequently executed a second document entitled “Sales Agreement Addendum” (addendum). This addendum was signed on October 7, 2004. It set the price of the sale of the business at \($155,000,\) with \($135,000\) payable at the time of the closing. Of the amount to be paid at closing, \($125,000\) was identified as the proceeds of a loan secured by Artis from First Bank, and \($10,000\) was to be paid in cash. The remaining portion of the purchase price was to be paid to the Margesons in monthly installments in amounts based on sales. The closing was set for October 18, 2004. On that date, Artis tendered the \($125,000\) proceeds of the loan from First Bank, together with an additional \($10,000\) from two personal checks drawn on her bank. The parties ran into some disputes following the closing. Artis stopped payment on one of the personal checks delivered at the time of closing and stopped making the monthly payments in March 2005. The Margesons responded by filing a lawsuit for breach of the addendum.
The Margesons eventually filed a motion for summary judgment. They claimed there was no genuine issue of material fact as to any of the elements of their claim for breach of contract. Artis asserted the addendum was unenforceable because it was not supported by consideration. The district court found the addendum was supported by consideration. It granted summary judgment to the Margesons. Artis appealed, and we transferred the case to the court of appeals.
The court of appeals affirmed the ruling of the district court. We granted further review.
JUSTICE CADY It is fundamental that a valid contract must consist of an offer, acceptance, and consideration. Generally, the element of consideration ensures the promise sought to be enforced was bargained for and given in exchange for a reciprocal promise or an act.
The Margesons seek to recover under the terms of the addendum. In doing so, they seek to enforce the promise by Artis to purchase the business for \($155,000.
Artis\) argues the terms of the addendum are not a legally binding part of the contract. More precisely, Artis argues the addendum, which was a modification of the original agreement, requires independent consideration to be binding. Artis argues there was no consideration in this case because the Margesons had a preexisting duty under the first agreement to sell the business to her for \($125,000.\) The Margesons argue additional consideration was present to support the modification.
Generally, a promise to perform a preexisting duty does not constitute consideration. No consideration exists when the promisee has a preexisting duty to perform because a promisor is already entitled to receive the promise made by the promisee and the promisee has only made what amounts to a gratuitous promise. We have specifically applied this rule to preexisting contractual obligations when parties to an original contract agree to modify that contract. Artis argues the addendum was unenforceable because it arose only from a desire by the Margesons to obtain more money for their business than agreed in the original purchase agreement. Although Artis agrees she promised in the addendum to pay \($30,000\) more for the business, she claims the Margesons did not provide a return promise or performance in exchange for her promise to pay more money. The Margesons argue the addendum is supported by three instances of additional consideration: (1) a financing plan, (2) flexibility in payments, and (3) the ability to renegotiate the payment terms. The district court found these provisions to amount to independent consideration, as did the court of appeals.
New financing terms can constitute sufficient consideration to support the modification of a preexisting obligation. Yet, the new financing terms would need to apply to the preexisting obligations under the original agreement to satisfy the consideration requirement needed for the modification that the promisee promise to do something the promisee has no prior legal obligation to do or refrain from doing something that the promisee has a legal right to do. In this case, all three new financing terms pertained only to the promise made by Artis to pay the additional \($30,000.\) Thus, the new financing terms under the modification were merely part of the new promise by Artis to pay an additional sum of money for the business. The terms did not establish that the Margesons promised to do something they were not otherwise already obligated to do (sell business for \($125,000\) due at closing) or promised to refrain from doing something they had a legal right to do. Of course, the Margesons would have furnished new consideration for the modification if the financing terms under the modification applied to part or all of the \($125,000\) due at the time of closing of the original agreement. Under such a case, the Margesons would have furnished consideration because they would have promised to refrain from doing something (giving up the right to receive the original purchase price in a lump sum at the time of closing) that they had a legal right to do.
Consequently, the modification was nothing more than a unilateral price hike. Here, Artis promised additional compensation for the same performance by the Margesons. Thus, the Margesons cannot enforce the promise by Artis to pay more money for the business because they failed to produce any evidence to show they promised to do something more than they had promised to do under the first agreement. The addendum does not reflect independent consideration. The Margesons were not entitled to summary judgment on their breach of contract claim.

Do you believe the court made the correct decision? How do you think most business owners would feel about the outcome?

 Is it ethical to use a legal argument to escape from a contract modification that you agreed to? Why or why not? How would you feel about the outcome if you were the sellers of this small business?

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Dynamic Business Law

ISBN: 9781260733976

6th Edition

Authors: Nancy Kubasek, M. Neil Browne, Daniel Herron, Lucien Dhooge, Linda Barkacs

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