Business Law Chapter 15

Illusory Promise

A situation in which a party appears to commit to something but really has not committed to anything. It is not a promise and thus not consideration. Example, Shawn offers to sell Molly his skis for $300. Molly responds, "I'll look at them in the morn, and if I like them, I'll pay you." Molly hasn't committed to doing anything. The law considers this an illusory promise- it is not a promise at all.

Legal Principle

An illusory promise is not consideration.

Type of Contract

Bilateral - Promisor (a promise), Promisee (a promise). Unilateral- Promisor (a promise), Promisee (an act).

Legal Principle

For a promise to be enforced by the courts, there must be consideration.

Consideration

It is what a person will receive in return for performing a contract obligation. Consideration can be anything, as long as it is the product of a bargained- for exchange. In bus, often money. Example, Dan agrees to purchase Marty's car for $1,000. Dan's payment of $1,000 is the consideration Marty will receive for the car. Title to and possession of the car are the consideration Dan will receive in exchange.

Adequacy of Consideration

The court will not set aside a sale because someone made a bad deal. Conversely, if the court believes fraud or undue influence occurred, the court may look at adequacy of consideration. (For example, suppose a person divests himself of all his assets for pennies on the dollar then declares bankruptcy--the court will likely review the consideration paid to determine where there was fraud by the debtor against the creditors). Legal Principle- The court seldom considers adequacy of consideration.

contract under seal

is second exception to the rule requiring consideration. In the past, contracts were sealed with a piece of soft wax into which an impression was made. typically identified with the word seal or the letters L.S. (locus sigilli which means the place for the seal). The parties using them are presumed, without evidence to the contrary, to be adopting the seal for the contract. 10 states still allow a contract without consideration to be enforced if it is under seal.

Partial Payment of a Debt

partial payment of a debt may or may not be valid consideration, depending on whether the debt is liquidated or unliquidated.

Promissory Estoppel

the legal enforcement of an otherwise unenforceable contract due to a party's detrimental reliance on the contract. This is one exception to the rule requiring consideration. Occurs when three conditions are met- -One party makes a promise and either knows or should know that the other party will reasonably rely on it. -The other party does reasonably rely on the promise. -The only way to avoid injustice is to rely on the promise.

Liquidated Debt

Debt for which there is no dispute between the parties about the fact that money is owed and the amount of money owed. Example, if Natalie calls her credit card comp and explains she is a poor student and cannot pay the entire $3k, the credit card comp agrees to accept $2,000 as payment in full. The following month she gets a new credit card statement showing she owes the remaining $1k. May the credit card comp collect the additional $1k? Yes, a creditor's promise to accept less than owed, when the debtor is already obligated to pay the full amount, is not binding.

Accord and Satisfaction (chart)

*Debt Disputed?* Yes-amount of debt in dispute. *Status of Debt*- Unliquidated. *Payment?* Debtors offers to pay less money than creditor believes is owed as full payment, and creditor agrees. *Create an accord?* Yes. *Create a satisfaction?* Yes. Once debtor pays the money agreed to, the debt is satisfied and the creditor may not collect any additional money. *Debt Disputed?* Yes-existence of debt in dispute *Status of Debt* Unliquidated *Payment?* Debtor offers to pay a sum of money as full payment when debtor does not believes *Create an accord?* Yes *Create a satisfaction?* Yes. Once the debtor pays the money agreed to, the debt is satisfied and the creditor may not collect any additional money. *Debt Disputed?* No dispute over amount of debt or existence of debt. *Status of Debt* Liquidated *Payment?* Debtor offers to pay less money than is owed as full payment, and creditor agrees. *Create an accord?* No *Create a satisfaction?* No. Even if the debtor pays the money agreed to, the creditor may still sue for the balance it believes is owed. *Debt Disputed?* No dispute over amount of debt or existence of debt. *Status of Debt*Liquidated. *Payment?* Debtor offers a different payment (e.g., her car) as full payment. *Create an accord?* Yes *Create a satisfaction?* Yes. Once the debtor makes a different payment, the debt is satisfied and the creditor may not collect anything else.

Type of consideration

A benefit to the promisee - A promise to stay in a job until a particular project is complete (this is a benefit to the employer). A detriment to the promisor - A promise to your football coach to refrain from riding your motorcycle during football season even though you love riding it. A promise to do something - A promise to cook dinner for your roommate for the next six months. A promise to refrain from doing something - A promise to stop staying out late at night during exam week.

Preexisting Duty

A promise to do something that one is already obligated to do. It is not considered valid consideration. There are two parts to this rule. (1) *Performance of a duty you are obligated to do under the law is not good consideration.* And (2) *performance of an existing contractual duty is not good consideration.* Example- (1) If someone offers a reward for the capture of a suspect, a police officer may not collect it, as he or she was already obligated to apprehend the suspect. (2) And If Jen decides to have a pool built in her backyard. Under the existing contract, the pool is to be completed by June 1. The contractor explain that due to a shortage of workers, the completion date cannot be met, however, if Jen were to pay an extra $5,000, additional workers could be hired and the pool completed on time. Jen tells the contractor she will pay the 5k. On June 1, the pool is completed and the contractor asks for the additional payment. Is Jen legally obligated to pay? No, because the contractor had a preexisting contractual duty to complete the pool by June 1.

Exceptions to the Preexisting Duty Rule

Exceptions are *unforeseen circumstances, additional work, and UCC Article 2 (sale of goods). If *unforeseen circumstances cause a party to make a promise regarding an unfinished project, that promise is valid consideration.* Example, suppose the pool contractor has been building pools in Jen's neighborhood for the last 20 yrs and has never had any probs with rocks. While bulldozing the hole for the pool in Jen's backyard, the contractor hits solid rock. It will cost an additional $5,000 to clear the rock with jackhammers, possibly even dynamite. The contractor says unless Jen agrees to pay the additional money, he will not be able to finish the pool. Jen agrees to it. The court will enforce Jen's promise to pay. The contractor has given additional consideration (removal of the rock) and Jen will be held to her promise to pay the additional mercy.

Reliance Damages

How promissory estoppel works? Suppose Amanda receives a job offer across the country, she gives up her apartment, cancels all her other job interviews, and moves all her possessions, she arrives at her new location and there is no job, she sues her employer. She may recover her *reliance damages* (money she spent in "reliance" on the job offer). In the right case, can provide a remedy where no other remedy exists.

Past Consideration

Legal Principle: Past consideration is no consideration at all. Imagine that after 5 yrs of working well, your boss says that he's going to give you 5% of the company stock but 6 months later you still haven't received the stock. You may not sue your boss to enforce the promise because for a promise to be enforceable, there must be bargaining and an exchange. Because your work has already been performed, you have given nothing in exchange. A promise can't be based on consideration provided before the promise was made. Exception to this rule. Under the Restatement (Second) of Contracts (a persuasive, though not binding, authority), promises based on past consideration may be enforceable "to the extent necessary to avoid injustice." In some cases, if past consideration was given with expectation of future payment, the court may enforce the promise.

Legal Principle

Promissory estoppel and contracts under seal are two exceptions to the common law rule requiring consideration.

Two exceptions to "paid in full" checks creating an accord and satisfaction.

Under common law, in many states, debtors sometimes attempts to create an accord and satisfaction by sending the creditor a check with "paid in full" written on it. In many states this did create an accord and satisfaction, and if the creditor cashed the check, he or she was bound to accept the lesser amount as payment in full. The UCC has reduced the scope of this rule. Under UCC Section 3-311, effective in 30 states, the rule has two major exceptions. 1st, A safeguard that protects businesses from inadvertently creating accord-and-satisfaction agreement, comps may notify their debtors that any offer to settle a claim for less than the amount owed must be sent to a particular address and/or person. May look something like *Conditional Payments* any payment, blah, blah, blah... 2nd, if a business does inadvertently cash a "paid in full" check, it has 90 days to offer the debtor repayment in the same amount. For example, if John owed his credit card comp $3,000 and sent a $2,000 check marked "paid in full" to the correct address and person, the credit card comp has 90 days to offer to repay John the $2,000. Once the business has made that offer, no accord and satisfaction exists.

Lack of Consideration

A court will enforce one party's promise only if the party promised some consideration in exchange. A mutual exchange of something of value.

Unliquidated Debt AND Accord and Satisfaction

A debt for which the parties *either dispute the fact that any money is owed or agree that some money is owed but dispute the amount.* in other words, the parties either disagree about whether money is owed or dispute the amount. They can settle for less than the full amount if they enter into an *accord and satisfaction,* which must meet 3 requirements to be enforceable. (1) The debt is unliquidated (the amount of existence of the debt is in dispute). (2) The creditor agrees to accept as pull payment less than it claims is owed. (3) The debtor pays the amount they have agreed on. Under these circumstances, the debt is fully discharged. The *accord* is the new agreement to pay less than the creditor claims is owed. The *satisfaction* is the debtor's payment of the reduced amount. But if the debtor fails to pay the new amount, the creditor may sue for the full amount of the original debt. Legal Principle- When a debt is unliquidated, the parties may enter into an accord and satisfaction.