Business Law Consideration Chapter 6

Legal Detriment

(1) The doing the which the promisee was under no prior legal obligation to do (2) the refraining from doing of that which he was previously under o legal obligation to refrain from doing.

Conditional Promises

A conditional promise is a promise the performance of which depends upon the happening or non-happening of an event not certain to occur. A conditional promise is sufficient consideration unless the promisor knows at the time of making the promise that the condition cannot occur.

Settlement of a Disputed Debt

A disputed debt is an obligation whose existence or amount is contested. A promise to settle a validly disputed claim in exchange for an agreed payment or other performance is supported by consideration. A promise to settle a validly disputed claim in exchange for an agreed payment or other performance is supported by consideration. Where the dispute is based on contentions without merit or not made in good faith, the debtor's surrender of such contentions is not a legal detriment to the claimant. The Restatement adopts a different position by providing that the settlement of a claim that proves invalid is consideration if at the time of the settlement (1) the claimant honestly believed that the claim was valid or (2) the claim was in fact doubtful because uncertainty as to the facts of the law. -Were no price is set, the client most pay the reasonable amount due.

Pre Existing Contractual Duty

A duty the terms of which are neither doubtful nor the subject of honest dispute is also legally insufficient consideration because the doing of what one is legally bound to do is neither a detriment to a promisee nor a benefit to the promisor.

Modification of a preexisting contract

A modification of a contract occurs when the parties to the contract mutually agree to change one or more of its terms. Under the common law, a modification of an existing contract must be supported by mutual consideration to be enforceable. In other words, the modification must be supported by some new consideration beyond that which is already owed under the original contract. Thus, there must be a separate and distinct modification contract.

Moral Obligation

A promise made in order to satisfy a pre existing moral obligation is made for past consideration and therefore is unenforceable for lack of consideration. The Restatement and minority of states recognize moral obligations as consideration.

Promise to Pay Debt Discharged in Bankruptcy

A promise to pay a debt that has been discharged in bankruptcy is also enforceable without consideration. The bankruptcy code, imposes a number of requirements that must be met before such a promise be enforced.

Requirements Contract

A purchaser's agreement to purchase from a particular seller all the materials of a particular kind that the purchaser needs is called a requirements contract. It ensures the buyer of a ready source of inventory or supplies. These contracts are not illusory. The buyer under a requirements contract does not promise to buy as much as she desires to buy, but as much as she needs.

Substituted Contracts

A substituted contract results when parties to a contract mutually agree to rescind their original contract and enter into a new one. This situation usually involves three separate contracts: the original contract, the contract of rescission, and the substitute contract. Substituted contracts are perfectly valid, allowing the parties to effectively discharge the original contract and to impose obligations under the new one. The rescission is binding in that, as long as each party still had rights under the original contract, each has, by giving up those rights, provided consideration to the other.

Exclusive Dealing Contracts

An exclusive dealing agreement is a contract in which a manufacturer of goods grants to a distributor an exclusive right to sell its products in a designated market. Unless otherwise agreed, an implied obligation is imposed on the manufacturer to use its best efforts to supply the goods and on the distributor to use her best efforts to promote their sale. These implied obligations are sufficient consideration to bind both parties to the exclusive dealing contract.

Voidable Promises

Another promise that is enforceable without new consideration is a new promise to perform a voidable obligation that has not previously been avoided. The power of avoidance may be based on lack of capacity, fraud, misrepresentation, duress, undue influence, or mistake. For instance, a promise to perform an antecedent obligation made by a minor upon reaching the age of majority is enforceable without new consideration.

Contracts without Consideration

Certain transactions are enforceable even though they are not supported by consideration.

Third Parties

Consideration to support a promise may be given to a person other than the promisor if the promisor bargains for that exchange.

Bargained for Exchange

Consideration, or that which is exchanged for a promise, is present only when the parties intend an exchange. The consideration exchanged for the promise may be an act, a forbearance to act, or a promise to do either of these. Thus, there are two basic elements to consideration: (1) Legal Sufficiency (something of value in the eye of the law) and (2) bargained for exchange. Both must be present to satisfy the requirement of consideration.

Promise to Pay Debt by the Statute of Limitations

Every state has a statute of limitations stating that legal actions to enforce a debt must be brought within a prescribed period of time after the rights to bring the action arose. Actions not begun within the specified period-will be dismissed. An exception to the past consideration rule extended to promises to pay all or part of a contractual debt barred by the statute of limitations. The new promise in binding without consideration. Any recovery under the new promise is limited to the terms contained in the new promise. Most states require that new promises falling under this rule, must be in writing form.

Good faith

Furthermore, the Code imposes a good faith limitation upon the quantity to be sold or purchased under an output or requirements contract. Thus, this type of contract involves such actual output or requirements as may occur in good faith, except that no quantity unreasonably disproportionate to any stated estimate or, in the absence of an estimate, to any normal prior output or requirements.

Bargained-For Exchange

Have each given to the other something in a mutually agreed-upon exchange for his promise or performance.

Bilateral Contracts

In a bilateral contract there is an exchange of promises. Thus, each party is both a promisor and a promisee. The promise is binding if that promise is supported by legal consideration, which may consist of either a legal detriment or a legal benefit. This, in a bilateral contract, each promise is the consideration for the other, a relationship that has been referred to as mutuality of obligation. Both of them must be bound or neither is bound.

Unilateral Contracts

In a unilateral contract, a promise is exchanged for a completed act or a forbearance to act. Because only one promise exists, only one party, the offeror, makes a promise & is therefore the promisor while the offeree is that promisee. A unilateral contract may also consist of a promise exchanged for a forbearance.

Promises to Perform Prior Unenforceable Obligations

In certain circumstances the courts will enforce new promises to perform an obligation that originally was not enforceable or that has become unenforceable by operation of law. These situations include promises to pay debts barred by the statute of limitations, debts discharged in bankruptcy, and voidable obligations.

Settlement of an Undisputed Debt

Is an obligation that is not contested as to its existence or its amount. Under the common law, the payment of a lesser sum of money that is owed in consideration of a promise to discharge a fully matured, undisputed debt is legally insufficient to support the promise of discharge. But if the method of payment is other than what originally discussed the consideration will then be legally sufficient, also if the payment is done beforehand. The restatement, however, requires that the new consideration differs from what was required by the duty in which reflects more than the pretense of bargain.

Consideration

Is the primary-but not the only- basis for the enforcement of promises in our legal system. Consideration is the inducement to make a promise enforceable. The doctrine of consideration ensures that promises are enforced only where the parties have exchanged something of value in the eye of the law.

Promises Made Enforceable by Statute

Some gratuitous promise that otherwise would be unenforceable have been made binding by statute. Such as...

Sale of Goods

The Code has modified the common law rule for contract modification by providing that the parties can effectively modify a contract for the sale of goods without new consideration, provided they both intent to modify the contract and act in good faith. Moreover, the Restatement has moved toward this position by providing that a modification of an executory contract is binding if it is fair and equitable in the light of surrounding facts that the parties had not anticipated when the contract was made.

Contract Modifications

The Code provides that a contract for the sale of goods can be effectively modified without new consideration, provided the modification is made in good faith.

Output and Requirements Contracts

The agreement of a seller to sell her entire production to a particular purchaser is called an output contract. It gives the seller an ensured market for her product.

Promissory Estoppel

The courts enforce non contractual promises under the doctrine of promissory estoppel in order to avoid injustice. The most common application of the doctrine of promissory estoppel is to charitable subscriptions. The courts have generally enforced charitable subscriptions promises.

Past Consideration

The element of exchange is absent where a promise is given for an act already done. A promise made on account of something that the promisee has already done is not enforceable.

Adequacy

The items or actions that the parties agree to exchange no not need to be of the same value. Rather, the law will regard the consideration as adequate if the parties have freely agreed to exchange. The requirement of legally sufficient consideration is not at all concerned with whether the bargain was good or bad. If the purported consideration is clearly without value, such that the transaction is a sham, many courts would hold that consideration is lacking.

Preexisting Obligations

The law does not regard the performance of, or the promise to perform, a pre existing legal duty, public or private, as either a legal detriment or a legal benefit. A public duty does not arise out of a contract; rather, it is imposed on members of society by force of the common law or by statute. Thus, public officials, are under a preexisting obligation to perform their duties by virtue of their public office.

Legal Benefit

The obtaining by the promisor of that which he had no prior legal right to obtain. In most, if not all, cases where there is legal detriment to the promisee there is also legal benefit to the promisor. The presence of either is sufficient.

Gratuitous Promises

Those made without consideration- are not legally enforceable, except under certain circumstances.

Legal Sufficiency

To be legally sufficient, the consideration for the promise must be either a legal detriment to the promise of a legal benefit to the promisor. In other words, in return for the promise the promisee must give up something of legal value or the promisor must receive something of legal value.

Firm Offers

Under the code, a firm offer, a written offer signed by a merchant offeror to buy or sell goods, is not revocable for lack of consideration during the time within which it is stated to be opened, not to exceed three months.

Renunciations

Under the code, any claim or right arising out of an alleged breach of contract can be discharged in whole or in part without consideration, by a renunciation signed and delivered to the other party.

Contracts Under Seal

Under the common law, when a person desired to bind himself by bond, deed or solemn promise, he executed his promise under seal. No consideration for this promise was necessary. Some states have abolished this, specifically eliminating the use of seals in contracts for the sale of goods.

Illusory Promises

Words of promise that make the performance of the purported promisor entirely optional do not constitute a promise at all. Consequently, they cannot serve as consideration. An illusory promise is a statement that is in the form a promise but imposes no obligation upon the maker of the statement. "as many barrels of oil as Gasco shall choose at $40 per barrel," lacks consideration.