Consideration Discussion

The general rule is that each contract must meet the requirement of having consideration. This means that each party must give something of value and there must be a bargained for exchange. Before responding to this week’s discussion board, please read Chapter 12 and the chapter overview. Please reply to two students, demonstrating that you have read their posts.

In a new thread, please answer the following questions:1. Please explain the purpose of consideration and why this element is necessary for contracts. Please reference a case in Chapter 12 to support your explanation.

2. Do you think that the items exchanged should be of equivalent value? Please discuss.

PART
BUSINESS LAW:
3
THE ETHICAL, GLOBAL, AND E-COMMERCE ENVIRONMENT,
LANGVARDT, BARNES, PRENKERT, MCCRORY, AND PERRY 1
Contracts
• Chapter 9 Introduction to Contracts
• Chapter 10 The Agreement: Offer
• Chapter 11 The Agreement: Acceptance
• Chapter 12 Consideration →
• Chapter 13 Reality of Consent
© 2019 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted
without the prior written consent of McGraw-Hill Education.
1
PART
BUSINESS LAW:
3
THE ETHICAL, GLOBAL, AND E-COMMERCE ENVIRONMENT,
LANGVARDT, BARNES, PRENKERT, MCCRORY, AND PERRY 2
Contracts
• Chapter 14 Capacity to Contract
• Chapter 15 Illegality
• Chapter 16 Writing
• Chapter 17 Rights of Third Parties
• Chapter 18 Performance and Remedies
© 2019 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted
without the prior written consent of McGraw-Hill Education.
2
Contracts: Consideration
CHAPTER
12
“Make yourself necessary to someone.”
Ralph Waldo Emerson
The Conduct of Life (1860)
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Learning Objectives
12-1 Define the concept of consideration and describe
its significance in the formation of a valid contract.
12-2 Explain the elements of consideration.
12-3 Explain why illusory promises, past consideration,
and promises to perform preexisting obligations are
not consideration.
12-4 Determine what is required to create a valid
modification of a contract under both the UCC and
common law of contracts.
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Elements of Consideration
Consideration is legal value bargained for and
given in exchange for an act or a promise.
Purely gratuitous promises are not enforceable
because not supported by consideration.
Thorne v. Deas
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Legal Value of Consideration
1
Consideration in the form of an act or promise
may have legal value if the person acting of
promising satisfies the legal value test.
• Hamer v. Sidway: uncle promised to pay nephew if
he refrained from tobacco and playing cards.
Refraining from doing something the nephew had
the legal right to do was legal consideration.
Generally, courts will not examine adequacy of
consideration.
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Legal Value of Consideration
2
Adequacy of Consideration.
• Laissez-faire: as long as the parties’ acts or promises
have legal value, courts generally do not inquire
about whether it was ‘fair.’
• Courts are generally not concerned about the actual
value of consideration.
• Unless there was a ‘disguised gift’ or nominal
consideration.
• Or Grossly Inadequate (unconscionability, duress, etc).
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Consideration: Franchise Holding v
Huntington Restaurants
Plaintiff and Defendants entered into a ‘Stay
Agreement’ that established a schedule under
which Defendants would make payments
totaling $13,000,000 which gave them additional
rights and duties.
The Stay Agreement provided alternative
performance for the duty established by the
judgment, and plaintiff can sue for breach of the
Stay Agreement.
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Bargained-For-Exchange
A promisee’s act or promise must have been
bargained for and given in exchange for the
promisor’s promise.
“It is the essence of a consideration that, by the terms
of the agreement, it is given and accepted as the
motive or inducement of the promise.”
Oliver Wendell Holms
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Consideration: Steinberg v U.S.
To constitute consideration, a performance or a
return promise must be bargained for.
Steinberg falsely claimed that consideration was
the ‘mandatory’ requirement of picking up a
ticket in person.
Held: against Steinberg. There was no
bargained-for benefit that could serve as
consideration.
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Exchanges that Fail to Meet
Consideration Requirements
Illusory Promises.
Preexisting Duties.
Past Consideration.
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Illusory Promises
1
If a promisee’s promise really does not bind her
to do or refrain from doing a thing, her promise
is illusory and cannot serve as consideration.
• Note: as long as the promisee has given legal value,
the agreement will most likely be enforceable.
A cancellation or termination clause does not
mean a promise is illusory.
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Illusory Promises: Day v Fortune
Hi-Tech Marketing
An arbitration clause does not require
independent consideration; so long as the
contract as a whole is adequately supported by
consideration.
In this case, defendant retained the ability to
modify any term of the contract, at any time,
and so its promises were illusory.
Held: against Fortune. Arbitration clause was
not binding because there was no obligation.
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Illusory Promises
2
Effect of Output and Requirements Contracts.
• Output: party agrees to buy all of the other party’s
production of a particular commodity.
• Requirements: party agrees to supply all of the
other party’s needs for a particular commodity.
Exclusive Dealing Contracts.
• Imposes rights and duties on both the distributor
and the manufacturer to use their “best efforts” to
sell and supply the goods.
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Preexisting Duties
1
As a general rule, performing or agreeing to
perform a preexisting duty is not consideration.
• Promisor in such a case has effectively made a
gratuitous promise.
Includes public duties (obey the law) and
preexisting contractual duties.
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Preexisting Duties
2
Preexisting Duties and Common Law
Modifications of Contracts.
• Generally, the common law requires some new
(independent) consideration for a contract
modification to be binding.
• However, courts may enforce a modification if it
was based on unforeseen circumstances that made
a party’s performance far more difficult than
originally anticipated.
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Preexisting Duties:
Welsh v Lithia Vaudm Inc
Depending on when the contract was formed January 14, 2015 or March 16, 2015 – the
arbitration clause is enforceable or not.
• A promise to perform a preexisting duty generally
does not constitute additional consideration.
• Welshes argue binding contract was formed during
telephone conversation January 2015 but were not
told about the arbitration clause.
• Held: for Welsh. No arbitration clause.
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Preexisting Duties
3
Preexisting Duties and Modifications of
Contracts under the UCC.
• UCC does not require consideration for firm orders.
(Chapter 10) (2-205)
• Also, UCC does not require new consideration to
modify a contract for the sale of goods. (2-209)
• Unless there is coercion or fraud.
• No writing required unless the original agreement or
Statute of Frauds requires one.
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Preexisting Duties
4
Agreements to Settle Debts.
• Liquidated debts are debts in which parties have no
dispute about the existence or amount of the debt.
• Settlement agreements are enforceable.
• A creditor’s promise to discharge a liquidated debt for
part payment of the debt at or after its due date is
unenforceable for lack of consideration.
• Unliquidated debts involve a good faith dispute
about the existence or amount of a debt.
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Preexisting Duties
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Agreements to Settle Debts.
• An accord and satisfaction is the settlement of an
unliquidated debt so the creditor cannot maintain a
separate action to recover the debt.
• Composition agreements are agreements between a
debtor and two or more creditors who agree to accept
as full payment a stated percentage of their liquidated
claims against the debtor.
• Forbearance to Sue. Assuming good faith belief, it can
be valid consideration.
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Past Consideration
Past consideration: an act or benefit given in the
past that was not given in exchange for the
promise in question, is not enforceable
consideration.
• Moral Obligations: generally, promises made to
satisfy a preexisting moral obligation are
unenforceable for lack of consideration.
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Moral Consideration: Doe v Roman
Catholic Archdiocese
Doe was assaulted by a Roman Catholic priest.
• The archdiocese sent letters offering treatment.
• After several years of treatment the archdiocese
reduced its commitment to pay for two sessions per
week to one session per month.
• Doe sued for breach of contract.
Held: the letters from the archdiocese express
good intentions, but are not a contract for
unlimited care and treatment.
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Promissory Estoppel
Widely used as a consideration substitute in
cases involving commercial promises
contemplating a bargained-for exchange.
Requirements:
• a promise that the promisor should reasonably
expect to induce reliance,
• reliance on the promise by the promisee,
• and injustice to the promisee as a result of that
reliance.
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Promissory Estoppel:
McLellan v Charly
McLellan’s efforts were embodied in the 180
day option provisions of the written agreement.
Charly’s promise of the option did not induce
McLellan to take any action or forbearance of a
definite and substantial character.
Held: For Charly. McLellan is not entitled to
enforcement of the option under the doctrine of
promissory estoppel.
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Other Doctrines
1
Promises to Pay Debts Barred by Statutes of
Limitations.
• Statutes of limitations set an express statutory time
limit on a person’s ability to pursue any legal claim.
Promises to Pay Debts Barred by Bankruptcy
Discharge.
• Once a bankrupt debtor is granted a discharge, 12
creditors no longer have the legal right to collect
discharged debts.
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Other Doctrines
2
Charitable Subscriptions.
• Promises to make gifts for charitable or educational
purposes are often enforced based on promissory
estoppel, IF the institution or organization to which
the promise was made has acted in reliance on the
promised gift.
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Concept Review
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Test Your Knowledge
1
True = A, False = B
• Consideration is legal value bargained for and given
in exchange for an act or a promise.
• A person who agrees not to file suit has not
provided valid consideration.
• Courts always examine the adequacy of
consideration.
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Test Your Knowledge
2
Multiple Choice
• A person who agrees to obey the law has provided
__________ consideration.
a) No consideration (a preexisting duty).
b) Adequate consideration that is binding and enforceable.
• To be valid under the UCC, an agreement to modify
a contract for the sale of goods:
a) Does not need new consideration.
b) Requires new consideration.
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Thought Question
Your aunt agrees to buy you a new car when
you graduate if you earn straight “A” grades
during your senior year.
You earn those grades! Have you provided
legally sufficient consideration?
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Chapter 12 Learning Objectives:
1. State the elements of consideration and its purpose for contracts.
2. Identify contracts which lack consideration such as those involving illusory
promises, preexisting duties and past performance.
3. Explain promissory estoppel and when it is applied.
Chapter 12: Consideration
Keep in mind that contracts must have certain elements present to be
valid. We have already learned about the first element of agreement which
consists of an offer and an acceptance. Consideration is another element
that must be present for a contract to be valid. This means that both parties
must give something of value and there must be a bargained for exchange.
An example of this would be where John agrees to buy Sally’s textbook for
$100.00. They are both exchanging something of value. John is giving
money whereas Sally is giving a textbook.
What if John agrees to give Sally $100.00, but she does not agree to give
anything of value in return. He is just being nice since Sally has a rent to
pay. They write up a contract and both parties sign it. If John does not give
Sally the money, can she legally sue to recover the money? The answer is
no, because there is no consideration. If the court allows Sally to recover,
then the court would be enforcing a gift.
Adequacy of Consideration
As a general rule, courts do not weigh the value of the “something”
exchanged. It is not about whether each party received a fair deal. Instead,
generally as long as each party received something, consideration will exist.
Note that if there is a great disparity, this may indicate an issue such as
misrepresentation or undue influence. We will learn about these issues in
Chapter 13.
Legal Value
In most cases, people exchange a good or service for money. For example,
Bob buys a car (good) from Ed for $5,000.00. Alternatively, Jan pays Robert
to paint (service) her house for $2,000.00. Sometimes what is exchanged is
intangible. For instance, suppose that Aunt Sue is concerned that her niece,
Molly, is drinking too much. Aunt Sue offers Molly 10,000.00 if she can quit
for one year. Assume that Molly is 22. If Molly does give up drinking for one
year, does Aunt Sue have to pay Molly the $10,000.00? To answer this
question, let’s look at the consideration given by each party. Aunt Sue is
giving money or 10,000.00. Molly, on the other hand, is giving up her legal
right to drink. Therefore, both parties are giving consideration.
Promissory Estoppel
An exception to where consideration is needed is the concept of promissory
estoppel which was discussed in previous chapters. As you will recall,
promissory estoppel is an equitable doctrine and will be applied when the
plaintiff justifiably relied on a promise that the defendant made; the defendant
knew the plaintiff would rely on the promise and injustice can only be avoided
by making the defendant follow through with his or her promise.
Exchanges that lack Consideration
In this chapter, pay special attention to examples where it will appear that
consideration is given, when it is really lacking. The chart below identifies the
contracts where consideration is lacking.
Illusory Promise
Promisor is not bound
Preexisting
Duty
Promisor is performing a duty he or she must
already perform
Past
Consideration
An act or benefit given in the past, not for the
current promise
Illusory Promise
For example, suppose Anne states she will pay Martin $300.00 to
paint her fence if she is in a good mood. Is consideration valid? Here,
the consideration is illusory, since Anne has not incurred any
obligation. The consideration she has given is more of an illusion
since she is not bound by the promise.
Preexisting Duty Rule
In evaluating whether consideration is valid, look at whether the
parties are giving something new. Imagine that Nellie took her
nephew, Justin, to an amusement park. Although she tried to watch
him very closely, he managed to get lost. When Nellie told a police
officer that she could not find Justin, she offered him a reward of
$1,000.00 if he could find Justin that same day. Is the reward
valid? No. The police officer is already under a preexisting duty to
find missing persons and property.
The concept of a preexisting duty also applies in the case of a
liquidated debt. This is a debt that is not in dispute. In other words,
both parties agree that the debt is owed to the other party. If the party
who owes money (debtor) pays less that what is owed, this cannot be
fair consideration for the creditor’s agreement to accept less than
what is owed. This is the case since the debtor has not given
anything new of value, he or she already had a preexisting duty to
pay that amount.
This rule also comes into play when a party tries to modify its
contractual duties under a construction contract.
Past Consideration
Let’s examine another example involving questionable
consideration. Suppose that Diego worked as an engineer at ABC
Co. for 30 years. After he retired, the CEO of that company told
Diego that he would give him $2,000.00 since he was such a
wonderful employee. Did the CEO have to give Diego the
$2,000.00? No, because this is an example of past
consideration. The promises were not given in response to each
other. In other words, there was no bargained for exchange.