1-2 pages for Business Law class!!

Consideration – Something of Value

Joseph got into some trouble with the police when he was a teenager. Now, at age 22, Joseph has dropped out of college and does not have a steady job. Joseph’s grandfather is very concerned, so he promised to pay Joseph $20,000 if, by the time Joseph turned 23, Joseph got and kept a steady job, Joseph did not break the law again, and Joseph went back to college to pursue a degree.

If Joseph promises to do the three things his grandfather asked, which of those promises (if any) would constitute valid consideration (within the contract law meaning of “consideration”) for the payment of the $20,000? Give reasons for your answers.

Needs to be 1-2 pages, double spaced in APA format, and include correct spelling, punctuation, and grammar usage.

CHAPTER 4:
Offer, Acceptance, and Consideration

CHAPTER 5:
Contracts: Capacity, Genuine Assent, the Statute of Frauds, and Illegality

CHAPTER 6:
Third Parties, Performance and Discharge of Contracts, and Remedies

Unit II
Contracts

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C
ontract law is of great importance in business and in everyday life. Common trans-
actions such as buying a pack of gum at the corner grocery store, purchasing a ticket
at a movie theater, or ordering a meal at a restaurant involve making contracts, but

so does a complex patent licensing agreement between two multinational corporations. In
this unit, we will explore the nature of contracts, the requirements for their valid formation,
and the consequences for their breach.

A contract is a legally enforceable agreement between two or more people. Although all
contracts contain enforceable promises, not all promises result in contracts. Consider the
following situation:

Henry invites Ericka to dinner, and Ericka accepts. Henry looks forward to the date and can
think of little else all day long. A half hour before they were to meet, Ericka calls Henry and
tells him that she will not be able to keep their date because Ron has invited her to go danc-
ing and she has accepted. Henry is upset, hurt, and angry and would like to sue Ericka for
breach of contract, since she has clearly broken a promise made to him earlier that day and
caused him distress. Will he succeed?

Ericka may not be a very nice person, and she may have had a moral obligation to attend
the dinner date. Nevertheless, she had no legal obligation to do so. The agreement that she
breached was not a contract, but merely a social obligation that the courts will not enforce.

In order for there to be a valid contract, five basic elements must be present. Before we get
into the detailed requirements for a valid contract in this unit, it may be useful to have at
least a working definition for each of the required elements:

1. Offer: An invitation for another to enter into a contract.

2. Acceptance: Acquiescence to enter into a contract under the terms of the offer.

3. Consideration: Anything of legal value that is asked for and received as the price for
entering into a contract.

4. Legality: The extent to which the contract is legal and not against public policy.

5. Capacity: The mental competency to enter into a contract. Additionally, there are
special rules for people who are under legal age.

In some cases, there is a further requirement that the contract be in a particular form, for
example in writing, in order for it to be enforceable. In other situations, a contract may
prove not to be binding because the parties did not truly assent, such as in the case of fraud
or mistake.

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We enter into contracts every day. On the way to work, you pick up a newspaper
at a newsstand. You also stop for a cup of coffee at a cafe. While there, you use
your phone to browse the Web and purchase tickets to a concert online. Finally,
you arrive at the bus stop and pay your fare as you enter the bus that will take you
to work or to class. In each of these examples, a contract was made. In each case,
there was a valid offer and acceptance (your ordering the drink and the cafe’s pro-
viding it), consideration (the cup of coffee and the money you pay for it), capac-
ity and legality (you are (hopefully) of sound mind when purchasing the coffee,
and coffee is a legal good that can be purchased and sold in the United States).
There were no issues concerning mutual assent. No documents were signed, and
no negotiations took place; nevertheless, valid contracts were formed giving each
party certain rights and imposing on each party some responsibilities as well.

The vast majority of contracts are routinely completed without a problem, and with-
out the interested parties giving the matter much thought. Problems arise when par-
ties to a contract fail to live up to their agreements, or misunderstand what it is that
they agreed to do. In such cases, the courts may be called upon to settle the dispute
in accordance with established rules of law that determine each party’s rights and
obligations under a valid contract. Many misunderstandings and disagreements
between contracting parties, as well as costly, time-consuming litigation, can easily
be avoided if each party has a basic understanding of the law of contracts. The fol-
lowing chapters will explore the requirements for the formation of valid contracts
and the remedies available when they are breached.

Under the Uniform Commercial Code, the rules for sales of goods contracts are
sometimes different. Where the UCC rules are an exception to a basic common law
rule, they will be briefly discussed in this section, and other issues concerning the
UCC and sales of goods will be explored in later chapters. But the common law of
contracts is very much in effect today and is crucial to the running of every busi-
ness, regardless of its size.

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Chapter Overview

© Getty Images/Jupiterimages/Thinkstock

Learning Objectives

After studying this chapter, you will
be able to:

1. Describe the difference between express,
implied, bilateral, unilateral, simple,
formal, and quasi contracts.

2. Explain the requirements for a valid offer
and acceptance.

3. Explain the ways an offer may terminate.

4. Define consideration.

5. Recognize situations where consideration
is not present.

4.1 Types of Contracts
• Express Contracts v. Implied Contracts
• Bilateral Contracts v. Unilateral Contracts
• Simple Contracts v. Formal Contracts
• Quasi Contracts (Contract Implied in Law)

4.2 The Offer

• Clear Intent: An Unequivocal Promise
• Reasonably Certain Terms
• Offers and Termination

4.3 Acceptance

• Communicating the Acceptance

4.4 Consideration

• What Isn’t Consideration?
• Past Consideration
• Preexisting Duty
• Illusory Promises
• Distinguishing Illusory Promises and Requirement

Contracts
• Exceptions to the Consideration Requirement

4.5 Chapter Summary

•

Focus on Ethics

•

Case Study: Hamer v. Sidway

• Case Study: South Shore Amusements, Inc v.

Supersport Auto Racing Association
•

Critical Thinking Questions

•

Hypothetical Case Problems

•

Key Terms

4Contracts: Offer, Acceptance, and Consideration

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CHAPTER 4Section

4.1 Types of Contracts

A contract is a legally enforceable agreement. As this definition implies, a contract comes into existence from the voluntary assent of two or more individuals to enter into a legally binding agreement. Mutual accord is crucial to the formation of a
contract. One party, referred to as the offeror, makes an offer—a business proposition—to
another; the other, known as the offeree, accepts. Provided that the other three require-
ments are present (consideration, capacity, and legality), a valid contract is formed. If
Manuela offers to sell Linda her laptop for $450 and Linda accepts the offer, a valid con-
tract is formed since there is a valid offer and acceptance, consideration (something of
value is given and received by each party—the laptop and the $450), capacity (both parties
are of sound mind and are freely entering into the agreement), and the contract is for a
legal purpose.

So that seems relatively straightforward. But beware: contracts are not always so simple.
In fact, there are many subtle and difficult issues that can arise when attempting to deter-
mine if there is an offer and acceptance.

4.1 Types of Contracts

Contracts can be classified as express or implied in fact, bilateral or unilateral, and simple or formal. In addition, sometimes when a contract does not exist, there may be something known as a quasi contract (contract implied in law). Each type of
contract will be briefly examined below.

Express Contracts v. Implied Contracts
Express contracts are formed by the express language of the parties—the actual words
they use in their agreement—and can be either written or oral.

Example 4.1. Sam says to Ben, “I’ll sell you my Business Law book for $50.”

Ben replies, “I’ll take it.”

It is a popular misconception that con-
tracts are not binding unless they are
in writing. It’s always a good idea to
reduce business agreements to writing
to avoid future misunderstandings—
and to keep the parties honest as to what
it is that they have obligated themselves
to do—but most contracts are legally
valid whether they are oral or written.
Some contracts, such as those creating
an interest in real property, are required
to be in writing, witnessed, notarized,
and sealed in most jurisdictions. But the
vast majority of contracts do not need to
follow any of those formalities in order
to be binding.

Every time you buy something, you make a contract.

© Getty Images/Jupiterimages/Thinkstock

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CHAPTER 4Section 4.1 Types of Contracts

Implied contracts are formed not by the express words of the parties, but rather by their
actions. Think about the last time you bought groceries. Did you tell the checkout clerk, “I
offer to buy this gallon of milk at its advertised price?” Probably not, but the clerk under-
stood that you wanted to enter into a contract, and accepted (by ringing up your order)
on behalf of the store. As long as the parties’ actions plainly indicate an intention to enter
into a contract, and as long as the terms of that contract can clearly be implied from those
actions, a binding contract can be created even without a single word being spoken. Con-
sider the following examples:

Example 4.2. Dana walks into a newsstand and places three quarters on the
counter and takes a copy of her hometown newspaper.

Example 4.3. Steve enters Nilda’s hardware store. He picks up a screw-
driver from a rack and, looking over at Nilda, who is taking care of a line of
customers at the moment, waves the screwdriver in the air. She recognizes
Steve, a long-time customer, and understands that he would like to take
the screwdriver now and pay for the purchase later. She signals her consent
by nodding in his direction. He leaves, taking the screwdriver with him.

In each of the above situations, an implied contract has been entered into. Dana has paid
seventy-five cents for a copy of a newspaper and Steve has agreed to pay the selling price
of the screwdriver to Dana at a later time.

Bilateral Contracts v. Unilateral Contracts
If the offeror (the person who makes an offer to enter into a contract) and offeree (the person
to whom a contract offer is made) exchange promises to perform some act in the future, a
bilateral contract is formed. For example:

Example 4.4. Bruce offers to sell his old car to Irving if Irving will pay him
$2,000. Irving accepts the offer.

Example 4.5. Lina offers to babysit for Inga every Saturday for the next
three months if Inga will pay her $8.00 per hour. Inga accepts.

Example 4.6. Tina offers to sing at Charles’s club next Friday, Saturday, and
Sunday if he will pay her $5,000 per night. He agrees.

In each of the above examples, both parties are obligating themselves to take some action
in the future. As soon as the offer is accepted, a valid contract comes into existence. When
a bilateral contract is involved, the contracting parties exchange mutual promises to per-
form some future act. As soon as a bilateral contract offer is accepted, a contract comes
into existence and both parties are bound. If either party fails to live up to the agreement,
a suit for breach of contract can result.

In a unilateral contract, one party makes a promise to the other that can only be accepted
by the other’s performance. For example, if Lana offers to pay $100 to anyone who finds
and safely returns Fluffy, her lost cat, Fred can accept and form a contract only by actually
returning Fluffy safely to Lana. If Fred tells Lana, “I’ll find Fluffy later, I promise,” there is
no acceptance, and no contract.

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CHAPTER 4Section 4.1 Types of Contracts

Simple Contracts v. Formal Contracts
A simple contract is any oral or written contract that is not required to follow a specific
form, or be signed, witnessed, or sealed. The vast majority of contracts entered into by
businesses and private individuals are simple contracts, even though some may seem
rather complex and go on for many pages.

A formal contract at common law was one that needed to be in writing, signed, witnessed,
and sealed by the parties. A person’s seal on a contract (usually a unique mark made by a
signet ring pressed into hot sealing wax, though a seal could be any symbol adopted by an
individual or a company) gave that contract special significance. The distinction between
simple and formal contracts is much less important today, and in many states is only used
for contracts involving transfer of real estate.

Quasi Contracts (Contract Implied in Law)
The first thing to know about a quasi contract is that it is not a real contract at all, but
rather a situation where one person has given a benefit to the other and it seems as though
it would be unfair for him to be not be paid. So a quasi contract is a situation where to
prevent unjust enrichment, a court may award a remedy because a benefit was accepted,
even though there is no contract. This is also called a contract implied in law. There are
three distinct requirements to have a quasi contract:

1. One party has conferred a benefit on the other;
2. The party receiving the benefit chose to accept it; and
3. The benefit is the sort of thing a reasonable person would believe had to be paid

for, under the circumstances.

If the plaintiff proves the requirements for a quasi contract, the plaintiff is entitled to
recover the fair market value of the benefit that was conferred on the receiving party.

Example 4.7. Peter had spoken with you about possibly painting your
house, but no agreement was made. However, one day you look out your
window and see Peter pull up in his work van, and begin to set up his lad-
der. You don’t say a word to Peter, but simply let him paint the house. Even
if there is no contract here, you have accepted the benefit (you could have
told Peter to stop, but chose not to), and a reasonable person knows that
they have to pay for painting services. Peter is entitled to the fair market
value of the paint job.

But what if Peter comes over when you’re not home and paints your house? Because you
did not accept (you had no chance to decline), there is no quasi contract and Peter is out
of luck. (Peter should have taken a business law course!)

The law does slightly modify the rule in the case of emergency circumstances. If an
ambulance takes your unconscious, injured body to the hospital and doctors treat you
there, you are probably liable to pay for their services. Even though you could not
accept or decline, for obvious public policy reasons the law wants to encourage provid-
ers to give care in these situations. If they could not get paid, doctors might stop giving
emergency care!

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CHAPTER 4Section 4.2 The Offer

4.2 The Offer

An offer must contain an unequivocal (clear, unambiguous) promise to enter into a contract, must have reasonably certain terms, and must be communicated by the promisor (the person making the promise) to the promisee (the person to whom the
promise is made). For example, Sam tells Ben, “I’ll sell you my car for $5,000.”

But suppose Sam instead says, “Would
you give me $5,000 for my car?” That is
not an offer, but merely an inquiry, which
might open up negotiations or lead to an
offer at some point. If Sam says, “I’d sure
like to sell my car for $5,000,” there is no
offer, because Sam is not committing to
selling it to Ben at the present time.

What if Sam owns five cars? Then the
subject matter is not certain enough to
be an offer, unless Ben knows which one
Sam intended to sell.

But if Sam only owns one car, and if Sam
says, “If you give me $5,000, I’ll sell you
my car,” Sam’s statement is unequivocal
and constitutes an offer. They will have
a contract if Ben accepts.

Clear Intent: An Unequivocal Promise
An offer does not need to contain specific language such as “I promise to sell you” or “I offer
to sell you” in order to be effective. What matters is that a reasonable person under the same
circumstances would clearly understand that an offer was intended by the offeror. The lan-
guage used is always important in helping to determine the intent of the parties, but a valid
offer can be made even when no words are spoken, simply by the actions of the parties. If,
for example, Muhammad holds out a twenty-dollar bill and tells Carol, “I’ll give you this for
that fountain pen on your desk,” and Carol takes the money and puts it in her pocket with-
out saying a word, she will have clearly accepted his offer by her actions. What is important
in determining whether a valid offer or acceptance existed is the objective intent of the par-
ties as communicated through their words or actions. In other words, would a reasonable
person viewing the situation believe the parties intended to contract?

For example, on Tyrone’s drive to work one day, his car dies. Tyrone is very upset because
this is the fourth time in two weeks that he’s had car trouble, and now he’s going to be late
to work again. Tyrone gets out of the car, kicks the door, and yells, “I’d pay someone $10 to
drive this piece of junk off a cliff!” Sofia happens to be walking by, and she could use $10
and she knows where there is a convenient cliff. Can she accept? No, because a reasonable
person would realize that Tyrone is simply expressing his anger, and does not seriously
intend to pay for his car to go over a cliff.

She’s not making an offer, but merely inviting others to make
an offer to buy her car.

Dimitri Vervitsiotis/Getty Images

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CHAPTER 4Section 4.2 The Offer

The subjective intent of the offeror and offeree are irrelevant and will not be examined by
a court in determining intent to contract. What is important is not whether an offeror sub-
jectively made an offer in jest, but rather whether the person to whom the offer was made,
the offeree, should have realized that the offeror was only joking when he made the offer.
It must be clear to an average person that the offer was not seriously intended; otherwise,
the offeree can accept it and form a valid contract. Examine the following examples:

Example 4.8. Laverne tells Ernest: “I’d give you a million dollars for a kiss.”
Ernest, knowing a good deal when he hears it, runs to her and gives her a
quick smooch before she can change her mind.

Example 4.9. Deborah, exasperated at Gabe’s incessant chatter, tells him:
“If you can keep your mouth shut for five minutes, I’ll give you an all-
expense-paid cruise around the world.” He smiles and remains silent for
the required time period.

In each of the above examples, if the offerees seek to enforce the offerors’ promises they
will have a difficult time. Laverne and Deborah will almost certainly prevail if they claim
that the offers were not seriously intended. Under the circumstances, a reasonable person
should have realized that the offers were intended in jest and were not serious proposals.
But consider the following example:

Example 4.10. Glen, a radio talk show host, is discussing a recent incident
where the governor of the state was rumored to have had a sexual relation-
ship with an intern. The governor’s opponents are demanding that he be
prosecuted for perjury, since the governor said under oath at a hearing that
he had never had sex with “that woman,” and there now is plenty of evi-
dence that he did. Glen declares that a perjury case in these circumstances
would be ridiculous, and states, “No one gets prosecuted for lying about
their sex life. I’ll pay $10,000 to anyone who can show me a case where
that’s happened.” Joanna, a law student who has just read a case where a
woman who falsely accused a man of raping her was prosecuted for per-
jury, promptly sends Glen a copy of the court decision.

Did Glen make an offer? In all likelihood, a court would say yes, because objectively it
sounds as though he is serious, and he has been reasonably specific with the terms. He
may have been joking, but what Glen was really thinking doesn’t matter! Since there is an
offer, Joanna has accepted by doing the requested act, and they have a contract. Glen must
pay the $10,000.

Reasonably Certain Terms
Because the offer establishes the subject matter of what may become a binding agreement,
the offer must be reasonably specific and certain. For example, if Brianna says to Matias,
“I’ll sell you ten grade-A blue widgets at the price of a dollar per widget,” that is an offer.

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CHAPTER 4Section 4.2 The Offer

But if Brianna instead says, “I’ll sell you some grade-A blue widgets at a price of a dollar
per widget,” that is not specific enough, because there is no way of narrowing down what
she meant by “some” widgets. Five? Fifty? Five hundred? Since not even a reasonable per-
son can determine this, there is no offer. If Matias answers, “Great! I’ll take ten widgets,”
he is actually the one making the offer.

Offers and Termination
Assume we have established that an offer has been made. Emily offers to sell Terrell her
only bicycle for $100. We have intent and reasonably certain terms. But before we turn our
focus to the offeree, Terrell, to see if he has accepted, we must first establish that the offer
is still open to him.

There are a number of ways in which offers can terminate, including revocation by the
offeror, rejection or counteroffer by the offeree, lapse of time, death of either party, or
destruction or illegality of the subject matter. If any of these occurs, it is too late for Terrell
to accept and form a contract with Emily.

Revocation
As a general rule, an offeror has the right to make a revocation of (cancel) the offer at any
time prior to acceptance.

Example 4.11. Emily makes the following offer to Terrell: “I will sell you
my Raleigh bike for $100. You can have until Friday noon to let me know.”
Terrell is thinking it over. On Thursday, Emily calls Terrell and says, “Sorry,
I changed my mind. I’m keeping the bike.”

Can Emily revoke, even when she said Terrell had until Friday? Yes, because Terrell had not
yet accepted. It may not be very nice of Emily, but it is legal, and the offer has terminated.

But there are some exceptions to this general rule—in other words, some situations where
the offeror cannot terminate, even though the offer has not yet been accepted. Two com-
mon exceptions are the option and the UCC’s firm offer.

Options exist when the offeree has given the offeror consideration to keep that offer open
for a period. Suppose in the example above, Terrell wants to make sure he has until Fri-
day noon to accept. He can pay Emily $10 for an option. This means in exchange for the
money, Emily is giving up her right to revoke. If she now changes her mind on Thursday,
Terrell can just ignore the phone call. If he accepts by calling Emily on Friday morning and
saying “I’ll take that bike!” they will have a contract.

Note that Emily is not getting a down payment with that $10. Terrell still has to pay the
full $100 for the bike if he accepts, and if he declines he will not get the $10 back. In a down
payment situation, a contract has already been made.

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CHAPTER 4Section 4.2 The Offer

The UCC has a special rule when merchants are offering to sell goods. Under Section
2-205, if a merchant makes an offer in a signed writing, giving assurance that the offer
will stay open, it is a firm offer that she cannot revoke. However, the time period cannot
exceed three months (if the offer states it is open for six months, the UCC automatically
shrinks it down to three months). Some examples:

Example 4.12. ABC Inc. sends the following letter to Courtney: “We will
sell you the Futura laptop with premium software loaded for $450. This
offer is good until January 15.” The letter is signed by Andy Andrews, Vice-
President. This is a firm offer.

Example 4.13. ABC Inc. calls Courtney with the same offer. This is not a
firm offer, because it was oral.

Example 4.14. ABC Inc. offers in a signed letter to service Courtney’s
company’s computers on a monthly basis for a set fee, giving her until
January 15 to accept. This is not a firm offer, because it is not a contract
for sales of goods.

So only in the first situation will Courtney have a contract if she calls Andy at ABC on
January 6 and tells him that she accepts.

Lapse of Time
If nothing is stated as to how long the
offer will remain open, the law says that
the offer will remain open for a reason-
able amount of time. For example:

Example 4.15. Tawana makes
the following offer to Jerome: “I
will sell you my Dell laptop for
$400.” Jerome tells Tawana that
he’ll think about her offer. Two
days later, he calls her and agrees
to buy the computer under her
terms. They have a contract. But
if Jerome called her after a year,
his acceptance is too late.

A reasonable time will vary with the
subject matter. An offer to sell fresh rasp-

berries will terminate before the offer for the laptop. If Tawana’s offer involved pork belly
futures, Jerome’s acceptance would likely be too late, since that type of commodities mar-
ket fluctuates widely in very short time periods.

Confusion may be avoided if Tawana simply states a time period in her offer. If she says
“You have until 5 p.m. this Friday to call me and accept,” the offer will automatically
expire if Jerome does not respond by then.

The UCC has special rules for sales of goods contracts; some of
them only apply to merchants.

iStockphoto/Thinkstock

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CHAPTER 4Section 4.2 The Offer

Rejection or Counteroffer by the Offeree
If an offeree responds to the offer with either a rejection or a counteroffer, the offer termi-
nates. For example, assume Emily offers to sell Ben her bike for $100. Consider the follow-
ing possible responses by Ben.

“No, that’s too much.”

“I’ll give you $75.”

In the first example, Ben is rejecting Emily’s offer. In the second, he is making a counterof-
fer. In both of these situations, Emily’s offer promptly terminates. If Ben changes his mind
later and calls up Emily, saying, “I accept! I’ll give you $100 for that bike,” Ben is actually
making an offer to Emily. There is no contract unless Emily chooses to accept.

But what if the conversation goes like this:

Emily: “I’ll sell you my bike for $100.”

Ben: “Hmm. That seems a little high. Would you take $75?”

Emily: “No.”

Ben: “Okay, I accept. The bike for $100.”

This time, they have a contract. Ben’s
remark was not an outright rejection,
and he is not making a counteroffer
since he does not say he will buy the
bike for $75. He is merely engaging in a
little negotiation, which has not affected
Emily’s offer. The offer was still open
when Ben accepted.

Death, Incompetence, Destruction,
and Illegality
If either offeror or offeree dies or loses
his mental competency before the offer
has been accepted, the offer terminates.
Emily offers to sell her bike to Ben for
$100. If either Emily or Ben now dies,
the offer dies with them. But if Emily
makes her offer, and then Ben accepts,
and now Emily dies, note that they
already had made a contract and it does
not terminate.

Negotiating a contract must be undertaken with care. An
inquiry or question will not affect the offer, but a counteroffer
or rejection takes the original offer off the table.

Digital Vision/Thinkstock

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CHAPTER 4Section 4.3 Acceptance

The exception to this rule is if the offer was part of an option. So if Emily offers to sell her
house to Ben for $100,000, and Ben paid her $75 for a thirty-day option, the offer will stay
open for the thirty days even if either Emily or Ben dies. In that case, the estate of the dead
person could perform instead.

If Emily offers to sell Ben her bike, but before he can accept, Emily’s neighbor backs her
SUV over the bike, rendering it into a twisted metal and rubber abstract sculpture, the
offer terminates due to destruction of the subject matter.

If Sandra offers to sell Damian a carved ivory statue, and now the government outlaws
sale of ivory (to protect endangered elephants), the offer terminates due to illegality.

4.3 Acceptance

Acceptance of an offer is the clear manifestation of assent to the terms of the offer. For an acceptance to be valid, if must be (1) made by a person to whom the offer was made, (2) unequivocal, and (3) communicated to the offeror. The first require-
ment is simple: only a person to whom an offer was made may accept it. The following
example will illustrate:

Example 4.16. Professor Smith, an attorney, offers to draft a will for anyone
in his Business Law class for $25. Bill Jones, who is not a student in the class,
overhears the offer while passing by the lecture hall and promptly walks to
accept the offer. Bill’s acceptance is not valid since the professor’s offer was
made only to students in his class and could be accepted only by them.

It also must be clear from the offeree’s words or actions that he intends to accept the offer-
or’s offer under the offeror’s terms. Under the common law’s mirror image rule, which is
still used for situations involving subject matter other than sales of goods, an acceptance
was deemed valid only if it mirrored the offer exactly. A deviation constituted a counterof-
fer, which revoked the original offer. For example, Peter offers to paint Harry’s house for
$3,000, and Harry responds: “I accept. Use Benjamin Moore brand paint.”

Since Peter’s offer said nothing about what type of paint he was willing to use, this is a
counteroffer and they do not yet have a contract.

The mirror image rule has been modified by Article 2 of the Uniform Commercial Code
in transactions involving the sale of goods. Under UCC Section 2-207, acceptance is valid
even if it contains terms different from the original offer unless it is conditioned on the
offeree accepting the additional terms. The additional terms in the acceptance are simply
ignored and the contract is formed under the terms of the offeror’s offer.

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CHAPTER 4Section 4.3 Acceptance

Example 4.17. Peter offers to sell a painting of an Irish landscape that he
did on vacation last year for $350.

Harry responds: “I accept. Put it in one of those pretty gilt frames.”

Harry and Peter have a contract, and Harry is committed to buying the painting. But
Peter does not have to put it in the gilt frame. But if Harry had instead responded to
Peter ’s offer by saying, “I accept as long as you put it in a gilt frame,” there would be
a counteroffer by Harry and thus no contract at this point. This is because Harry has
explicitly tied his acceptance to Peter ’s agreeing to the additional term. When condi-
tional language such as “I accept as long as/but only if/contingent upon” is used in this
way, the result is a counteroffer.

However, if both parties are merchants (individuals engaged in the business of buying
and selling goods of the type involved in the contract), the additional terms in the accep-
tance become part of the contract unless:

1. they are objected to within a reasonable time of receipt of the acceptance;
2. the additional terms materially alter the contract; or
3. the offer specifically limits acceptance to the stated terms.

Note that whether the statement is an acceptance or a counteroffer has not changed for
the merchants; we are only dealing here with the terms of the contract. Consider these
examples:

Example 4.18. Peter, of Peter’s Famous Art Gallery, offers to sell a certain
painting for $350.

Harry, of Harry’s Other Famous Art Gallery, responds: “I accept, as long
as you deliver by Friday.” There is no contract because Harry made a
counteroffer.

Example 4.19. Peter makes the same offer. This time Harry says, “I accept.
Deliver to my place Friday.” They have a contract. Because they are both
merchants, Peter must deliver to Harry as noted.

Example 4.20. Same as number 2 above, except Peter, who doesn’t want to
deliver, promptly calls Harry and says, “Thanks for buying the painting,
but you have to pick it up.” Because as the offeror he has objected within a
reasonable time, the additional term about delivery is not part of the deal.

In transactions other than contracts for the sale of goods, the mirror image rule is still very
much in force for both merchants and nonmerchants alike.

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CHAPTER 4Section 4.3 Acceptance

Communicating the Acceptance
Suppose an offer has been made to you
and you want to accept. You already
know what to say (because you just
read the section above). But how should
you communicate this acceptance to the
offeror?

If the offeror stated already how you are
to accept, you must follow exactly the
offeror’s instructions. For example:

Example 4.21. Carlos offers to
sell you his acoustic guitar for
$300, and adds that you should
reply by e-mail.

Emily offers to sell you her
bike for $100 and says she must
receive your acceptance in writ-
ing by 3 p.m. Thursday.

Edmund offers to employ you as his butler for $10,000 per month, and
states that to accept you must climb the Matterhorn and plant a red flag on
the summit that says “I accept.”

In all of these situations, the offeror has directed the means of acceptance. To contract for
the guitar, you must e-mail Carlos. If you call him up, you will actually be making a coun-
teroffer. If you attempt to accept Emily’s offer by mailing an acceptance on Tuesday that
she receives on Friday, that will be another counteroffer. And as for Edmund . . . well, get
out your ice pick and make a reservation for Switzerland if you really want that job! Note
that this is all up to the offeror; there is no requirement that he be reasonable. The offeror
can make acceptance just as difficult, or silly, as he wishes.

Of course, in many situations, the offeror doesn’t give any directions on how to accept.
Jake offers to sell Calvin his business law book for $20, and that’s all he says. The rule then
is that the offeree can use any reasonable means of acceptance. In face-to-face transactions,
acceptance is usually communicated verbally. As soon as assent is given, a contract is
formed that obligates both parties to render whatever performance was promised.

Since a contract comes into existence as soon as the offeror’s offer is accepted by the offeree,
problems can arise when parties are not dealing face to face when a contract is made. In
such instances, the general rule is that an acceptance is binding at the time that it is sent.
Therefore, leaving a voice message on an answering machine constitutes acceptance at the
time that the message is recorded, not at the time that it is actually heard by the offeror.
Likewise, sending an e-mail message or a telegram containing a valid acceptance results
in a valid contract as soon as the messages are sent. Consider the following situation:

Email or phone calls can be valid methods for accepting, but
only if the offer didn’t specify other means!

Digital Vision/Thinkstock

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CHAPTER 4Section 4.4 Consideration

Example 4.22. Joan offers to sell Matilda a used television set for $100.
Matilda writes Joan a letter in which she accepts the offer. She mails the
letter at 5 p.m. The next morning, before the mail is delivered, Joan calls
Matilda and tells her that she wishes to revoke the offer. May she do so?

This illustrates the mailbox rule, which states that as long as mail is a proper way to
accept an offer, the acceptance takes effect and forms a binding contract as soon as a prop-
erly addressed and stamped envelope is mailed. Matilda’s acceptance was effective, and
they have a contract, as soon as Matilda mailed her letter to Joan, and Joan’s attempted
revocation is too late. This is true even though Joan has not yet received the acceptance.
Even if the postal service loses the letter, there is still a contract as long as the letter was
properly addressed and had the right postage.

This may seem unfair, but keep in mind that the offeror can easily protect himself by
requiring as part of the offer that acceptance be made in a particular or simply by stating
that the acceptance is not effective until it is received.

Note that because other communications, such as revocations and rejections, are not effec-
tive until they are received by the other party, it is easy for matters to get confused. For
example, Jin offers to sell Blackacre to Maurice for $100,000. Now assume the following
take place in the order listed:

Jin changes his mind and mails a revocation.

Maurice decides he wants Blackacre and mails an acceptance.

Jin receives the acceptance.

Maurice receives the rejection.

Do they have a contract? Yes, because Jin’s mailing the revocation had no effect. The offer
was still open when Maurice mailed his acceptance, which formed the contract. Perhaps
the lesson for offerors is to make revocations by the fastest means possible!

4.4 Consideration

Once an offer and acceptance are established, the third element of a contract must be examined. A contract is a bargained-for exchange between the parties, and consid-eration is whatever is being exchanged. To put it yet another way, consideration is
simply the price of the contract. Since consideration involves an exchange between par-
ties, making a visual reference of a situation can be helpful. See figure 4.1 for an example.

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CHAPTER 4Section 4.4 Consideration

Example 4.23. Norma offers to sell Leopold her stamp collection for $1,000.
Leopold accepts. A valid contract is formed, the consideration for which is
as follows: the $1,000 that Leopold must pay to Norma, and the stamp col-
lection that Norma must turn over to Leopold.

Consideration can be either of the benefit form, as in the above case where Leopold gets
the benefit of the stamp collection and Norma is entitled to the benefit of the money, or
the detriment (also called forbearance) form, as when someone gives up something he has
a legal right to do.

Example 4.24. Jenny accidentally hits Theo with her car. Jenny’s insur-
ance company offers Theo $15,000 in compensation for his injuries, but in
exchange he must sign a full release.

Here, the consideration to Theo is the promise to give him $15,000. If Theo accepts, his
consideration to the insurance company is his giving up his right to sue based on the acci-
dent. Since Theo has a right to bring a lawsuit, his release is consideration to the insurance
company, and they have a binding contract.

But if Jared, a business law student, threatens to sue Aaron on grounds that Aaron’s per-
sonality constitutes Intentional Infliction of Obnoxiousness, and only agrees to drop the
case if Aaron will promise to pay him $500, Jared’s forbearance from suing is not consid-
eration. Jared did not in good faith believe he had a right to sue. So Aaron is not bound to
pay the money.

Figure 4.1: Diagramming consideration

Diagramming contracts is a good way to keep track of consideration issues. Harry has contracted here to
pay $3,000; Peter has contracted to paint Harry’s house.

Harry Peter

$3,000

Paint house

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CHAPTER 4Section 4.4 Consideration

It is important to focus on the idea that a contract involves an exchange to understand the
concept of consideration. Suppose Maya, who is cleaning out her garage, says to Josh,
“I offer you this bike.” Josh replies, “Great! I accept.” Maya then changes her mind and
decides to sell the bike on Craigslist. Can Josh sue for breach successfully? Josh thinks
there is an offer and acceptance, after all. But alas for his case, there is no consideration.
While Maya did promise him the bike, he gave nothing in return. Thus Maya’s promise is
merely an unenforceable gift promise.

Courts generally are not concerned with whether consideration is of equal value, or
whether the parties have made a good bargain. If you truly wish to sell your Mercedes for
$10, you may do so! Sometimes nominal consideration such as this is used to turn what
might otherwise be a gift into a contract, but as long as there is no fraud, duress, or undue
influence, the contract is valid.

What Isn’t Consideration?
To have a contract, we see that there generally must be consideration flowing in both direc-
tions. However, sometimes there are things that at first look seem to be consideration, but
legally don’t qualify. This category includes past consideration, preexisting legal duties,
and illusory promises.

Also, note that some promises are simply too vague to qualify. If Darrel promises Jane a
diamond ring in three months’ time, in exchange for her love and affection, there is no
consideration. If your mother promises you $1,000 at the end of the semester if you will
be a good boy/girl this term, it might sound like a unilateral offer to you, but in fact you
will not be giving consideration. What Mom thinks is good may not be the same as what
you consider being good!

Past Consideration
If a benefit has already been given, there is no present bargained-for exchange, and thus
no consideration and no binding agreement. Consider the following:

Example 4.25. Helen, the owner of ABC Company, wishes to reward the
loyal service of Matthew, an employee. She drafts an agreement that reads
as follows: “In consideration of Matthew’s faithful service to ABC Com-
pany throughout the past thirty years, ABC Company hereby promises to
pay to Matthew a yearly pension of $20,000 per year.” Matthew accepts.

Example 4.26. Yin, grateful for Mark having saved his life, tells him: “In
consideration of your bravery in rescuing me from the path of an oncom-
ing truck, I promise to give you $50,000.” Mark accepts.

In both of the above examples, past consideration is given and there is no contract. In
reality, Helen and Yin want to make a gift to reward past service and gift promises are
not enforceable. Matthew’s 30 years of faithful service are certainly valuable, as is Mark’s
good deed. But there is no exchange involved in these situations, since the benefits from
Matthew and Mark have already been given without any bargaining.

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CHAPTER 4Section 4.4 Consideration

In the Media: Allen Iverson: “The Answer” to the Question About
When a Contract Is Made

Allen Iverson is one of the NBA’s all-time greats. Playing most of his career
with the Philadelphia 76ers, at barely six feet tall Iverson was an 11-time
all-star, and a league MVP. Although Iverson is currently in bankruptcy,
he earned $154 million playing basketball—not counting commercial
endorsements. The money from those endorsements, however, was
the source of a lawsuit filed against Iverson by his long-time mentor and
father figure, Jamil Blackmon. According to the complaint, in July 1994
(while Iverson was still playing at Georgetown University, but in an NBA-
styled summer basketball league), Blackmon suggested to Iverson that
he use the nickname, “The Answer,” meaning that Iverson would be the
answer to all of the NBA’s woes. Iverson liked this idea and later that
day he promised to give Blackmon 25 percent of all the money Iverson
might eventually make from the nickname. Upon being drafted by the
76ers, Iverson renewed his promise to Blackmon, even before signing an
endorsement deal with the shoe company Reebok. Iverson repeated the
promise about “The Answer” for years afterwards.

While “The Answer” may have been Iverson’s nickname, the question
Blackmon found himself repeatedly asking was “Where’s my money?” In
2001, Blackmon sued Iverson for breach of contract and unjust enrich-
ment. He lost, even on appeal. When looking at the nature of the alleged
contract, however, we can see why. Iverson’s promise to Blackmon came after the nickname was offered,
which means there was no consideration for Iverson’s promise to pay Blackmon 25 percent. And of
course, past performance cannot constitute consideration for the creation of a contract. Blackmon even
lost the unjust enrichment claim, which is grounded in doctrines of equity rather than pure contract law.
Here, the appellate court ruled that since Blackmon offered the nickname without expectation of com-
pensation, Iverson wasn’t unjustly enriched by profiting from the marketing of “The Answer.”

A promise to provide something in return for what another person has already done for you is not
consideration for a contractual obligation. Contract promises are exchanges about future performance
by both sides, not thank-you promises for benefits already received.

Source: Blackmon v. Iverson, 324 F. Supp. 2d 602 (E.D. Pa. 2003) http://scholar.google.com/scholar_case?case=16577460154069
688056&hl=en&as_sdt=2&as_vis=1&oi=scholarr

A friend suggested the
nickname The Answer to
Iverson, and later wanted
to be compensated for
its use.

Matt Slocum/Associated Press

Preexisting Duty
It is not consideration to do what one is already obligated to do. For example:

Example 4.27. Mara, a police officer, gives information that leads to the
arrest of a bank robber. Mara attempts to claim the $10,000 reward the bank
has offered.

rog80328_04_c04_062-088.indd 80 10/26/12 5:42 PM

http://scholar.google.com/scholar_case?case=16577460154069688056&hl=en&as_sdt=2&as_vis=1&oi=scholarr

http://scholar.google.com/scholar_case?case=16577460154069688056&hl=en&as_sdt=2&as_vis=1&oi=scholarr

CHAPTER 4Section 4.4 Consideration

Example 4.28. Al, a company’s accountant, agrees to recheck the compa-
ny’s tax returns in exchange for a percentage of the tax savings he can real-
ize for the company.

Neither Mara nor Al has given consideration to make a contract. They are already obli-
gated to perform the duties for which they seek additional compensation: the police offi-
cer has a duty to the public to catch criminals, and the accountant has a preexisting duty to
find the largest legal refund he can for his employer. Mara and Al are not giving anything
new or different than they are already required to give.

Suppose Cathy contracts to build a house for Rita for $100,000. Halfway through the proj-
ect, Cathy decides she isn’t going to make enough profit and she refuses to finish unless
Rita promises to pay her an additional $15,000. Rita, facing a half-done house, reluctantly
agrees. Cathy finishes the house. Must Rita pay her? Generally the answer is no, because
Cathy gave no new consideration. But if in exchange for Rita’s promise, Cathy in turn
promises to install a beautiful door knocker (worth an entire $25) that was not in the con-
tract, that is consideration and Rita is bound to make the extra payment. It doesn’t matter
that this is nominal consideration; the law doesn’t generally concern itself with whether
the parties have made a good deal or whether consideration is of equal value.

However, if the contract involves goods,
we get a different result under UCC Sec-
tion 2-209. Keisha promises to sell ten
office computers preloaded with certain
software to Max for $4,500. Keisha now
discovers that installing the software is
taking more time than she thought, and
she demands that Max promise in writ-
ing to pay her an extra $1,000. If Max
acquiesces, he is bound. The UCC says
that a good faith modification of an exist-
ing sales of goods contract needs no new
consideration to be binding. Of course,
Max could always refuse and threaten
to sue Keisha on their original, binding
contract if she fails to go through with
the deal.

A common example where the preexist-
ing duty rule comes into play is in the
area of agreements modifying a preex-
isting debt. In general, a person who owes a debt to another cannot enter into an agree-
ment to pay a lesser amount, since there is no consideration for the new agreement.

Example 4.29. Daniel owed Carla $50,000 that was due last June. Now, in
November, he still hasn’t paid anything and Carla is starting to think he
never will. Daniel now proposes that in exchange for his paying $40,000
next week, Carla promise to take that sum as payment in full. Carla, feeling
she may never see the money otherwise, agrees.

A firefighter’s job requires trying to put out fires, so if a
homeowner offered “I’ll give you a thousand dollars if you save
my house,” the promise would not be binding. The firefighter has
a preexisting duty to fight fires, and so gave no consideration.

maXx images/SuperStock

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CHAPTER 4Section 4.4 Consideration

Can Carla collect the $40,000, then turn around and sue Daniel for the remaining $10,000
on the original debt? In most states, the answer is yes. She is not bound to her promise to
accept the lesser sum as full payment, because she received no new consideration. Dan-
iel’s payment of the $40,000 was just part of what he already owed: he had a preexisting
legal duty to pay that money. The result could be different if there was a good faith dis-
pute as to the amount actually owed, which is known as an unliquidated debt. If Daniel
owed the money because he had bought 50,000 widgets from Carla and he claims that
20,000 of them were defective, and they agree to settle for $40,000, both parties are bound.
Also, if the money is paid before it is due, or if it is accompanied by some new item of con-
sideration, or if the settlement occurs in a bankruptcy proceeding, the creditor’s promise
to accept a lesser amount as payment in full is generally binding.

Illusory Promises
In order for consideration to be valid, each party to an agreement must be obligated under
the contract. There are situations in which both parties to a contract appear to be giving
consideration, but, in fact someone is making an illusory promise and really not commit-
ting to do anything. For example:

Example 4.30. Wendy offers to sell Oscar “1,000 widgets at $1 per widget,
delivery to be on or before June 1. Seller reserves the right to cancel at any
time without penalty.” Oscar accepts.

At first look, this appears to be a binding agreement because we seem to have an offer
and acceptance and Oscar has promised to pay $1,000, which is consideration on his part.
However, because Wendy included the right to cancel that is completely unrestricted, she
has not committed to selling a single widget to Oscar. Basically Wendy has said she will
sell Oscar the widgets if she feels like it.

As a result, if Oscar doesn’t receive the widgets by June 1, he will be unable to sue Wendy
for breach of contract. Wendy’s promise was illusory, or an illusion of a promise. Thus
there was no consideration from Wendy to Oscar to support a contract.

Suppose XYZ Company promises to buy from ABC Oil Inc. “All the heating oil we want
for the next year at a price of $2.75 per gallon.” XYZ is making an illusory promise; only
ABC is obligating itself to do anything—to provide XYZ with all the oil it wants at a set
price of $2.75 per gallon. If prices drop and XYZ prefers to buy its oil from someone else, it
is free to do so. If, on the other hand, oil prices increase, XYZ will be able to take advantage
of its agreement with ABC and buy as much oil as it wants for the $2.75-per-gallon price.

But if the agreement were to read “In consideration of a $1,000 cash payment by XYZ
to ABC, ABC promises to sell to XYZ all the oil it may want in the coming year to heat
its business premises for $2.75 per gallon,” there could be a valid contract. XYZ is now
paying ABC a cash amount (valid consideration) for what amounts to an option contract
where XYZ can buy any oil it needs during the coming year for a set price. The consid-
eration given to ABC now is the $1,000 payment, and the consideration received by XYZ
is the security of knowing that it will have a secure source of oil at a set price during the
coming year despite fluctuations in the oil market.

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CHAPTER 4Section 4.4 Consideration

Distinguishing Illusory Promises and Requirement Contracts
While promises to buy anything one wishes, chooses, desires, or wants are illusory, a promise
to buy as much of a given item as one will need or require is valid consideration. Consider
the following examples:

Example 4.31. ABC Company promises to buy from the XYZ Company “all
the heating oil it needs next winter for $3.00 per gallon.”

Example 4.32. Carl, a carpenter, promises to buy from Jan’s Hardware “all
the hardware supplies he needs for his business during the next year at a
discount of 25% off regular retail prices.”

Each of the above examples represents a valid requirement contract with valid consider-
ation, even though they may look suspiciously similar to illusory promises. In enforcing
these contracts, the courts impose an implied duty of good faith on the parties. As long
as the goods, materials, or services contracted for are likely to be needed by the promisor
during the period of time in question, the courts hold that there is valid consideration for
the promise and will enforce it. In the above examples, ABC is likely to need some heating
oil next winter, and Carl will need hardware supplies to practice his trade.

The promises are specific enough to be the basis of a contract because needs can be objec-
tively determined at the time of breach. If ABC buys its oil from another supplier, XYZ
can sue for breach. XYZ’s damages will be determined from the sales they lost when ABC
used another supplier.

If Jan’s Hardware refuses to sell Carl his supplies at the 25 percent discount, Carl’s dam-
ages will be the amount he had to pay to buy the goods (either from Jan or from another
supplier). Note that if the goods or services contracted for are not likely to be needed by
the promisor, the promise would be illusory and unenforceable. If, for example, the ABC
Company in the above example uses gas heat and obligates itself to purchase all the heat-
ing oil it needs, the promise is illusory and the agreement unenforceable, since ABC will
not need any oil.

Exceptions to the Consideration Requirement
Promises to give money to charities are binding without return consideration in most
states, since charities serve an important role in society. If you pledge $100 to the Cancer
Fund Drive, you will probably be held to it!

Another exception is promissory estoppel. ABC Inc. promises Karen the job of vice presi-
dent of the California office for the next five years at a salary of $100,000 per year. The
company requires a formal acceptance by appearing at the next Board of Directors meet-
ing. Karen says she will be there, quits her present job and moves to Los Angeles. Can
ABC renege on their job offer? Because they made a promise, and Karen has reasonably
relied on it to her detriment, ABC may be bound.

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CHAPTER 4Section 4.5 Chapter Summary

4.5 Chapter Summary

Contracts are the basic building blocks of business relationships. A business makes contracts with its suppliers, its customers, and its employees. Understanding when a contract comes into being is invaluable for business persons. A contract is made
up of specific component parts: the offer, the acceptance, and the consideration. Each one
has particular requirements and issues. In analyzing a situation, it’s always wise to take it
from the top, and begin with identifying an offer. If one can be found, proceed to the next
step: was that offer accepted by the offeree? Remember, sometimes the original offeror
and offeree can change places, such as when a counteroffer is made. If an acceptance is
present, be sure that both parties are giving consideration, or that an exception to the con-
sideration requirement is present. A contract is defined as a bargained-for exchange, and
by breaking down an agreement into its component parts, it should become more appar-
ent whether or not there is a contract.

Focus on Ethics

In the first part of the 21st century, a real estate “bubble” formed in the U.S. economy. In other
words, prices rose and rose to unrealistic levels. Many people took out mortgages that in all likeli-
hood they were not going to be able to pay off by retirement age, if ever. In some cases the mort-
gage terms were difficult to understand and buyers may not have realized what they were getting
into. In others they were just overpaying in relation to their income.

A mortgage is basically a loan contract, which is secured by the lending institution. The bank retains
title to the real estate until the loan is paid in full, and if payments are delinquent, the property can be
repossessed by the bank in a foreclosure proceeding. Furthermore, the owner would forfeit all pay-
ments previously made.

When the recession of 2008 hit, many home buyers discovered they could not afford their homes.
Many had what is termed negative equity, meaning that they owed more on their mortgages than their
homes were worth. In some cases banks foreclosed on them; in others the buyers simply walked away,
breaching their contracts. Whole neighborhoods were negatively impacted as empty properties grew
derelict, and values fell even more.

Questions for Discussion

1. The banks may have been acting legally in granting mortgages to people who could not afford
them, but do you think they were acting ethically? Were the borrowers acting ethically in buy-
ing houses out of their realistic price range? Who should have the responsibility of determin-
ing whether the loans should be made in such a situation?

2. The mortgage crisis had a draining effect on the entire U.S. economy. As a result, some people
called for more regulation of the industry. Some said the government should let the market
correct itself. Which side do you agree with?

3. Suppose you have been appointed a special judge in County X, with the power to resolve
delinquent mortgage situations. Is there anyone whose interest you need to take into account,
other than the bank and the home buyer? Should you be concerned with the interest of the
community as a whole? The banking industry? The American economy?

4. Assume you are still a judge. How would you choose among different options for a specific
situation? For example, you could order foreclosure or that the bank adjust the payment rate.
What factors will you consider in making your decision?

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CHAPTER 4Section 4.5 Chapter Summary
Case Study: Hamer v. Sidway

124 N.Y. 538, 27 N.E. 256, LEXIS 1396 (N.Y. Court of Appeals 1891)

Facts: Mr. Story was concerned about his 15-year-old nephew’s lifestyle. The uncle promises the
nephew that if he will refrain from drinking liquor, using tobacco, swearing, and playing cards or bil-
liards for money until his twenty-first birthday, the uncle will pay him $5,000. (At that time, all these
activities were actually legal for boys of this age. New York must have been a wild and crazy place!) The
nephew agrees, and adopts the wholesome lifestyle he has promised his uncle.

There is no dispute that the nephew fulfilled his promise. When he turns twenty-one, the uncle agrees
that the nephew has performed, but says he is going to wait a few years before paying him. Uncle
wants the nephew to be a little more mature before handing such a big wad of cash. (Note: This was a
lot of money in those days! The modern equivalent would be over $30,000.)

Unfortunately, the uncle dies before paying the nephew. (Note: If you’re wondering why the case is
called Hamer v. Sidway and not Story v. Story, it is because the nephew had assigned his claim to
Mr. Hamer, and the legal representative of the uncle’s estate is named Sidway.) The uncle’s executor
refuses to pay the money, saying there was no contract.

Issue: Was there a contract? Did the nephew give consideration?

Discussion: The estate contended that because the nephew was only doing what was good for him,
he did not give consideration. The nephew was not harmed and the uncle received no benefit. But
because the nephew had a legal right to drink, smoke, swear, and play cards and billiards for money,
and he gave up those rights in exchange for his uncle’s promise to pay $5,000, the nephew had under-
taken a detriment at the uncle’s behest. As the judge noted in his opinion, “Courts will not ask whether
the thing which forms the consideration does in fact benefit the promise . . . or is of any substantial
value to anyone. It is enough that something is promised, done, forborne, or suffered by the party to
whom the promise is made as consideration for the promise made to him.”

Holding: The court ruled that there was consideration, and thus a binding contract.

Questions for Discussion

1. Analyze whether the uncle made an offer.
A. Was there intent to contract? Do you think the uncle was serious?
B. Were the terms reasonably definite?
C. Would this be express or implied? Unilateral or bilateral?
D. If the uncle had instead promised, “If you mend your ways and behave yourself until you

are twenty-one, I’ll pay you $5,000,” would that be an offer?
E. Suppose the uncle promised, “If you refrain from drinking liquor and smoking tobacco,

I’ll pay you $5,000 when I’m convinced you’re going to stick with it.”Would that be a valid
offer?

2. Did the nephew accept the offer? Could he have accepted by promising to adopt a healthy
lifestyle?

3. What was the uncle’s consideration?
4. What was the nephew’s consideration?

rog80328_04_c04_062-088.indd 85 10/26/12 5:42 PM

http://www.holmescollege.org/Students/2011_Contracts/Hamer%20v%20Sidway

CHAPTER 4Section 4.5 Chapter Summary

Case Study: South Shore Amusements, Inc. v. Supersport Auto Racing Association

483 N.E.2d 337 (Ill. App. Ct. 1st Dist. 1985)

Facts: Under a written contract between South Shore Amusements and Supersport Auto Racing, South
Shore would lease the Raceway Park Motordrome (Raceway) from Supersport on September 24, 1974,
to show a closed circuit telecast of a boxing match between Muhammad Ali and George Foreman. The
match was postponed because of the injury of one of the contestants. When Brotman, the president of
South Shore, learned about the delay of the match, he telephoned Jenin, the president of Supersport.
According to Brotman, during this telephone conversation, Jenin orally agreed to make Raceway avail-
able to South Shore to show the telecast of the match on the rescheduled date. Supersport denied that
such an agreement was made. In fact, on the rescheduled date the boxing match occurred, Raceway
was closed for the season.

In reliance on the alleged oral agreement, South Shore spent money in preparation to show the match
and also lost approximately $60,000 in anticipated earnings from ticket sales. Additionally, Supersport
failed to return South Shore’s $1,500 deposit and money received from ticket sales. South Shore sued
Supersport for breach of contract, and the trial court ruled in favor of South Shore in the amount of
$8,695, based solely on the uncorroborated testimony of Brotman, who was not only South Shore’s
president but also its attorney. Supersport appealed the judgment.

Issue: Was there a valid oral modification of the written contract?

Discussion: The appellate court acknowledged that a written contract can be modified by a later oral
agreement, but ruled that the trial court’s conclusion was completely against the weight of the evidence
presented at trial. The only evidence of the oral agreement was the testimony of Brotman. There was no
other evidence, such as written correspondence confirming the alleged oral modification, or evidence
of rescheduling equipment that would be needed to show the boxing match. Moreover, there was no
evidence of the rescheduled date of the match. The court ruled that the written agreement was control-
ling, and that South Shore failed to establish that the contract was breached by a later oral modification.

Holding: The judgment of the trial court was reversed.

Questions for Discussion

1. What were the terms of the original contract between South Shore and Supersport?
2. Did Supersport perform according to the terms of the contract?
3. Since the match was delayed, why didn’t the appellate court order Supersport to return South

Shore’s deposit of $1,500 and money received from ticket sales?
4. Supposing that the original contract was modified by an oral agreement, did South Shore give

Supersport any consideration?
5. What kind of evidence should Brotman present to support his claim that the original contract

was modified by an oral agreement?

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CHAPTER 4Section 4.5 Chapter Summary
Critical Thinking Questions

1. The law sometimes defines a contract as a bargained-for exchange. Explain what
this means.

2. What does it mean when we say that the law judges intent to contract by an
objective standard?

Hypothetical Case Problems

Case 1. ABC Company writes in a letter to Sam, “How much would you take for the
forty-acre tract of land known as the old Hanscom site?” Sam writes back, “I
couldn’t take less than $150,000.” ABC responds by FedEx special delivery,
“Accept your offer for $150,000.” Do they have a contract?

Case 2. Bertha calls Anita by telephone and offers to sell Anita her oriental rug for
$400. Anita says she’ll think about it. Later on that day, she writes Bertha
telling her that she accepts the offer. On her way back from mailing the letter,
Anita receives a phone call from Bertha in which she tries to revoke the offer,
since she’s found someone who is willing to pay $800 for the rug.

A. Was mail a proper way for Anita to accept?
B. Did Bertha revoke her offer in a timely manner?
C. Do they have a contract?
D. Suppose Anita forgot to put a stamp on the letter. Has Bertha successfully

revoked with her phone call later that same day?
E. Assume Anita properly stamped and addressed her letter. What if she

had written, “I accept and will buy the rug for $350.” Now do they have a
contract?

Case 3. Rebecca is planning to retire from her job at BCA Corp. Todd, the president
of BCA Corp., tells Rebecca: “In consideration of your thirty years of faithful
service to this company, BCA Corp. promises to pay you $1,500 per month for
the rest of your life when you retire next week.” Rebecca gratefully accepts.

A. If BCA doesn’t pay Rebecca the pension, can she successfully sue for
breach of contract?

B. What if Rebecca had not yet decided if she could afford to retire, and then
Todd makes the promise?

C. Suppose Rebecca had definitely already decided to retire, but Todd is con-
cerned about replacing her. Now Todd offers, “In consideration of Rebec-
ca’s thirty years of faithful service, BCA Corp. promises to pay her $1,500
per month for the rest of her life, provided that she continues to work for
BCA for at least three more months.” Does this change the situation?

Case 4. Carla contracts to drive Martin’s race car in an upcoming race in exchange
for $1,000. Now Martin learns that the prize money has been increased, and
he tells Carla, “If you win, I’ll pay you $1,500.” Carla wins the race.

A. Does Martin owe her $1,000 or $1,500?
B. Suppose instead Carla had contracted to sell Martin three race cars for

$75,000 each. Now she tells Martin that because some components have
gone up in price, she will only sell him the three cars if he pays an extra
$10,000 per car. Martin isn’t happy, but he really wants the cars so he
agrees. Is Martin bound to pay the extra money?

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CHAPTER 4Section 4.5 Chapter Summary

acceptance The offeree’s manifestation of
assent to the terms of the offer.

bilateral contract One in which a promise
is exchanged for another promise.

contract An agreement that may be
enforced. A bargained-for exchange.

express contract One in which the offer
and acceptance are clearly stated in
express language.

firm offer An offer that states it will be held
open. Under the UCC, it must be made by a
merchant, in a signed writing, in order to be
enforceable without consideration.

formal contract One required to have a
certain format, such as being in writing
and signed with a seal.

illusory promise A statement that sounds
like a promise but is worded so as to not
commit the promisor; an illusion of a
promise.

implied contract One in which either
offer, acceptance, or both are implied by
the conduct of the parties rather than
explicit language.

mailbox rule A rule that states that as
long as mail is a proper way to accept an
offer and the offer has not stated limits on
acceptance, an acceptance is effective as
soon as it is mailed.

merchant A person who customarily deals
in goods of the type involved in the trans-
action; one for whom the contract is in the
course of business.

mirror image rule A common law rule
that states the acceptance must be on
the same terms as the offer, or it will be
deemed a counteroffer instead.

offer A promise to do business; the first
element of a contract.

offeree The person to whom an offer is
made, who has the power to accept and
form a contract.

offeror The person who makes an offer.

option An offer for which consideration
has been paid expressly to keep the offer
open for a set period of time.

promissory estoppel A legal doctrine that
allows reasonable reliance on a promise to
substitute for another legal requirement,
such as consideration.

quasi contract A situation where to pre-
vent unjust enrichment, a court may award
a remedy because a benefit was accepted,
even though there is no contract. Also
called a contract implied in law.

rejection An offeree’s declining the offer,
which results in termination of the offer.

requirement contract One in which a
buyer has agreed to buy all the specified
goods that the buyer needs or requires
for a certain period of time. (A similar
contract which involves a seller agreeing
to sell all the goods the seller produces is
known as an output contract.)

revocation An offeror’s cancellation of the
offer.

simple contract A contract which is not
required to be in a specific form.

unilateral contract A promise (offer)
exchanged for actual performance (the
acceptance).

unliquidated debt A legal obligation to pay
money, but the amount owed is in genuine
good faith dispute between the parties.

Key Terms

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