Chapter 8

1. Chapter 8 Consideration

2. #3 Consideration (in depth) • Consideration what a person demands and generally must receive in order to make his or her promise legally binding • Each party must: Promise, Act or Forbearance • Must be in exchangefor a return PrAcFo • Exchanges must have legal value (worth something in the eyes of the law)

3. Each party must: Promise, Act or Forbearance What’s Your Verdict: • Promise: Pay $100 • Acts: House Sitting, Dog Walking • Forbearance: refrain / not to do something

4. Must be in exchangefor a return Promise, Act or Forbearance • Promisor: Person who offers promise • Promisee: Person to whom the promise is made • Consideration must be mutual. • If either party does not receive the required consideration, that party has no duty to perform.

5. Exchanges must have Legal Value • Legal Value: there has been a change in a party’s legal position as a result of contract. • Exchange of twp benefits

6. Forms of Consideration • Money $ • Goods • Acts • Forbearance • Promise • Marriage Consideration – “This for That” in contracts

7. Not Consideration • Gift transfer of ownership w/o receiving anything in return. • Lacks an exchange of value from both. • Generally not legally enforceable.

8. Illusory Promises To be consideration, a promise must be binding • Must create a duty or impose an obligation Illusory Promise – contract contains a clause that allows you to escape the legal obligation Termination Clauses Output & Requirement Clauses

9. Illusory Promises • Termination Clauses • Business often want the power to withdrawal if circumstances change. • Not illusory if: termination is allowed only after a defined circumstance (such as defined time) • That is a clear CHANGE in legal obligations

10. Illusory Promises • Output Clauses • Buyers sometimes agree to purchase all of a particular producers production. • Requirement Clauses • Seller may agree to supply all of the needs of a particular buyer. • Courts recognize these contracts as supported by consideration because they imply a duty of fair dealing.

11. Illusory Promises • Output and Requirements Contracts • Output contract - steel company may buy all of the output of a nearby coal mining company. • Requirements contract -carburetor manufacturer may agree to supply all the carburetors needed for the production of a certain make of vehicle. • Termination Clauses • the power to withdraw from a contract if business circumstances change

12. Existing Duty • A person sometimes promises to do something that he or she is obligated to do by law or by prior contract. • Such a promise, or act, cannot serve as consideration to bind the other party to a later contract. • Examples on Slides to Follow….

13. Existing Duty • Existing Public Duty • On your 16th Birthday, Aunt Ellen promised to pay you $10,000 if you promise not to buy alcohol for 4 years. You agree. • NOT a contract: Illegal for you to buy alcohol until you are 21.

14. Existing Duty • Existing Private Duty • If a contract creates a duty, this duty cannot be the basis of consideration in a different contract. • Same rule holds true for someone demanding further compensation for carrying out a contractual promise already made.

15. Existing Duty • Existing Private Duty • When a duty already exists, a person cannot come back demanding more • Existing Public Duty If you make an agreement not to drink alcohol when you are not of age to drink, there is no binding agreement

16. Settlement of Liquidated Debts • Individuals must pay the amount agreed upon.

17. Existing Duty • Settlement of Liquidated Debts • Liquidated Debt: one where parties agree that the debt exists and on the amount of the debt. • Creditor agrees to accept less than total amount due from debtor

18. Existing Duty • Settlement of UNLiquidated Debts • Unliquidated Debts: Genuine dispute between parties on how much is owed. • A payment offered in full settlement by the debtor and accepted by the creditor settles the claim. (Accord & Satisfaction)

19. Release • When a tort occurs - the liability is un-liquidated because the extent of damages is uncertain • Due to financial pressure - injured party in the tort will agree to discharge another person from liability for the tort in return for a monetary payment or other consideration (release) • Discharge agreement = release

20. Existing Duty • Composition with Creditors • Group of creditors agree to accept less than what they are entitled to, in full satisfaction of their claims against a debtor. • Debtor agrees not to file bankruptcy. • Best case scenario for all creditors involved. • If bankruptcy filed, they could receive much less.

21. Why is consideration not binding in illusory contracts? • The promise is not binding because, as stated, it is in essence a sham best paraphrased by, “I will if I want to.”

22. False Consideration • Mutual Gifts - when something of value is given by one party to another without demanding anything in return, the something of value is not consideration for anything later promised or provided. • Past Performance - an act that has already been performed cannot serve as consideration

23. What distinguishes a gift from a valid contract? • Gift transfer of ownership w/o receiving anything in return.Lacks an exchange of value from both. • Valid Contract: consideration supports the contractual promises made.

24. 4 Exceptions to Requirement of Consideration • Promises to Charitable Organizations • Business Pledges/Contributes • one way = usually means gift = not a contract • Courts will enforce promises provided the charity states a specific use for the money and actually acts in reliance on the pledge. • NonProfits: churches, schools, hospitals, etc. may rely on such donations.

25. 4 Exceptions to Requirement of Consideration • Promises covered by the UCC • UCC – Uniform Commercial Code • Firm Offers: leave the offer open is bound for a period of time stipulated or up to 3 months.

26. 4 Exceptions to Requirement of Consideration • Promises covered by the UCC (continued) • Under UCC: a good-faith agreement that modifies an existing contract for the sale of goods needs no new consideration. • Ex: sale is made, seller then agrees to give buyer a valid warranty without further charge. *** Modification Enforceable ***

27. 4 Exceptions to Requirement of Consideration • Promises barred from Collection by Statute • Statute of Limitations: specifies a time limit for bringing a lawsuit. (Lose the right to litigate) • Breach of Contract = 3 years in most states

28. 4 Exceptions to Requirement of Consideration • Promissory Estoppel • Enforcement of a promise to avoid injustice by denying to the promisor the defense of lack of consideration. • Courts counteract injustice by taking action in the name of fairness or equity. • Brought into use = “Invoked”

29. Promissory Estoppel • For the courts to invoke Promissory Estoppel the following conditions must be met: • The promisor should reasonably foresee that the promise will rely on the promise. • The promisee does, in fact, act in reliance on the promise • The promisee would suffer a substantial economic loss if the promise is not enforced. • Injustice can be avoided only by enforcement of promise.