C.13 Consideration (MGMT 212)

Bilateral contract

+ A promise for a promise + "I will sell you this car if you promise to pay me $20,000"

Unilateral Contract

+ A promise for an act +" I promise to pay you if you trim my trees"

Requirements and Output Contracts

+ are used in dealing with uncertainty as to future market conditions, are not treated as illusory

Adequacy of Consideration

+Adequacy of consideration relates to how much consideration is given and whether a fair bargain was reached +Courts will inquire into the adequacy of consideration (if the consideration is legally sufficient) only when fraud, undue influence , duress, or lack of bargained-for exchange may be involved.

Preexisting Duty ( busn. ex)

+If a party is already bound by a contract to perform a certain duty, that duty cannot serve as consideration for a second contract. +Ajax Contractors begins construction on a seven-story office building and after three months demands an extra $75000 on its contract. If the extra $75000 is not paid, the contractor will stop working. The owner of the land, finding no one else to complete the construction, agrees to pay the extra $75000. The agreement is unenforceable because it is not supported by legally sufficient consideration. Ajax contractors had a preexisting contract duty to complete the building.

Past Considerations

+Promises made in return for actions or events that have already taken place are unenforceable. +These promises lack consideration in that the element of bargained-for exchange is missing. +You can bargain for something to take place now or in the future but not for something that has already taken place.

Consideration

-Elements of Consideration -Adequacy of Consideration

Exceptions to the rule of adequacy of consideration will not be examined by a court:

1) Fraud, duress, undue influence, or lack of bargained-for exchange. 2)Incompetency of one party 3)Unconscionable transaction

The following types of promises may be enforced despite the lack of consideration:

1) Promises that induce detrimental reliance, under the doctrine of promissory estoppel 2)Promises to pay debts that are bared by a statute of limitations 3)Promises to make Charitable Contributions

Requirements to Establish Promissory Estoppel

1) There must be a clear and definite promise 2)The promisor should have expected that the promissee would rely on the promise 3)The promise reasonably relied on the promise by acting of refraining from some act 4)The promisees reliance was definite and resulted in substanital detriment 5)Enforcement of the promise is necessary to avoid injustice +If these requirements are met, a promise may be enforced even though it is not supported by consideration. In essence, the promisor will be estopped (prevented) from asserting the lack of consideration

When The Preexisting Duty Rule does NOT apply:

1) Unforeseen Difficulties 2)Rescission and new contract

Legally sufficient consideration consist of:

1) a promise to do something that one has no prior legal duty to do; 2 )The performance of an action that one is otherwise not obligated to undertake 3)The refraining from an action that one has a legal right to undertake

Problems Areas Concerning Consideration:

1)Uncertain Performance 2)Requirements and Output Contracts

Settlements of Claims:

A promise to pay or actual payments of part of a mature, liquidated, undisputed debt is not consideration to pay the remaining balance. 1)Accord and Satisfaction 2)Release 3)Convenant Not to Sue

Past Considerations (ex 2)

A real estate agent sold a friends house without charging commission , and in return , the friend promises to give the agent $1000. The friends promise is simply an intention to give a gift.

Preexisting Duty (ex)

A sheriff, for instance has a duty to investigate crime and to arrest criminals. Hence, a sheriff cannot collect a reward for providing information leading to the capture of a criminal

Illusory Promise (ex 2)

A storeowner promises as $500 bonus to each employee who works christmas day, as long as the owner feels that they did their jobs well. The owners promise is just a statement of something she may or may not do in the future.

option-to-cancel (ex)

Abe contracts to hire Chris for one year at $5000 per month, reserving the right to cancel at anytime. On close examination of these words, you can see that Abe has not actually agreed to hire Chris, as Abe could cancel without liability before Chris started performance. This contract is therefore illusory But if Abe instead reserves the right to cancel to contract at any time after Chris began performance by giving Chris a 30 day notice, the promise if not illusory. Abe by saying that he will give Chris 30 days notice, is relinquishing the opportunity (legal right) to hire someone else instead of Chris for a 30 day period. If Chris works for one month and Abe then gives him the 30 day notice, Chris has an enforceable claim for two months salary (10,000)

Liquidation debt (ex)

Barbara Kwan signs an installment loan contract with her bank. In the contract, Kwan agrees to pay a set rate of interest on a specified amount of borrowed funds at monthly intervals for two years. Because both parties know the precise amount of the total obligation, it is a liquidated debt.

Elements of Consideration

Consideration is the valuer given in exchange for a promise that is necessary to form a contract. Consideration is often broken down into two elements: a) Legal Value: something of legally sufficient value must be given in exchange for a promise. This may consist of a promise, a performance, or forbearance. b) Bargained-for-exchange: there must be a bargained-for-exchange

Past Considerations (ex)

Jamil Blackmon became friends with Allen Iverson when Iverson was a high school student who showed tremendous promise as an athlete. On evening, Blackmon suggested that Iverson use "The Answer" as a nickname in the summer league basketball tournaments. Blackmon said that Iverson would be "the answer" to all the National Basketball Assocations woes. Later that night, Iverson said that he would give Blackmon 25% of any proceeds from the mercandising of products that used "The Answer" as a logo or slogan. Because Iversons promise was made in return for past considerations, it was unenforceable. In effect, Iverson stated his intention to give Blackmon a gift

Application of the Promissory Estoppel Doctrine (ex)

Jeffrey and Kathryn Dow owned 125 acres of land in Corinth , Maine. The Dows regarded the land as their childrens heritage, and the subject of the childrens living on the land was often discussed within the family. With the Dows permission their daughter installed a mobile home and built a garage on the land. After the daughter gets married to Jarrod, the Dows agreed to finance the construction of a house on the land for the couple. When Jarod died , however, Teresa financed the house with Jarrod life insurance proceeds. Her father performed a substantial amount of carpentry and other work in the house. Teresa then asked her parents for a deed to the property so that she can obtain a mortgage. They refused. Teresa sued her parents for promissory estoppel. Maines highest court ruled in her favor. The court reasoned that the Dows support and encouragement of their daughters construction of a house on the land "conclusively demonstrated" their intent to transfer.

Release (ex)

Lupes car is damaged in an automobile accident caused by Dexter negligence. Dexter offer to give her $3000 if she will release him from further liability resulting from the accident. Lupe agrees and signs release. If lupe laters discovers that it will cost $4200 to repair her car, she normally cannot recover the additional amount from Dexter.Lupe is limited to the $3000 specified in her release.

Bargained Exchange (example)

Sheng-Li says to his son, "In consideration of the fact you are not as wealthy as your brothers, I will pay you $5000." The fact that the word consdieration is used doe snot, by itself, mean consideration has been given. Indeed, Sheng-Li promise is not enforceable, because the son does not have to do anything in order to receive the $5000 promised. Becasue the son does not need to give Sheng-Li something of legal value in return for his promise, there is no bargained for exchange.

When voluntary consent may be lacking (ex)

Spencer pays $500 for an iphone 7 that he later discovers is a fake (counterfeit). Because the device is not authentic, he could claim that there was no valid contract because of inadequate consideration and fraud

Hamer V. Sidway (courts decision)

The courts of Appeals of New York disagreed with Sidway. The court rules that the nephew had legally sufficient consideration by giving up smoking, drinking, etc. for money until 21. He was therfore entitled to the money. Sidway argued that the nephew had suffered no determent, because what he had done was in his own best interest. The court pointed out that "in general a waiver of any legal right at the request of another party is a sufficent consideration for a promise" "the promisee had the right to drink, smoke, etc, and he had the right to do so".... That right was abandoned for a period of years upon the strength of the promise of his uncle that for such forbearance he would give him $5000

Illusory Promise (ex)

The president of Tuscan Corporation says to her employees, "If profits continue to be high, everyone will get a 10 percent bonus at the end of the yea- if management agrees." + This is a illusory promise, or no promise at all, because performance depends solely on the discretion of management. +No bargained-for consideration

Preexisting Duty

Under most circumstances, a promise to do what one already has a legal duty to do does not constitute legally sufficient consideration. The preexisting legal duty may be imposed by law or may arise out of a previous contract.

Hamer V. Sidway (Landmark case)

William E. Story, was the uncle of William E. Story II,. The uncle promised to pay his nephew 5,000 (76,000 in todays dollars) if he would refrain from drinking, using tabacco, swearing, and playing cards or billiards for money until the age of 21 (note when the contract was formed , it was legal in New York to drink and play cards for money before the age of 21) The nephew agreed and fully performed his part of the bargain. The nephew reached 21 and fullfilled his part of the deal. The uncle wrote a letter back indicating that he was pleases with his nephew performance and saying "you shall have $5000, as i promised you". The nephew left the money in care of the uncle, where it would earn interest under the terms and conditions of the letter. The uncle died about twelve years later without having paid his nephew any part of the $5000(plus interest). The executor of the uncles estate Mr.Sidway refused to pay $5000 plus interest to hamer, a third party to whom the nephew had transfered his rights in the note. The court reviewed the case to determine whether the nephew had given valid consideration under the law.

Promissory estoppel (detrimental reliance)

a person who has reasonably and substantially relied on the promise of another may be able to obtain some measure of recovery

Accord and Satisfaction

a) An accord provides that the debtor promises to give something, other than that which was originally agreed upon, in exchange for the creditors acceptance of the debtors performance in full satisfaction of the original debt. b)satisfaction occurs when the accord is executed c)A debtor and creditor may settle an outstanding obligation by entering into an accord and satisfaction if the original debt is unliquidated and the obligation to pay or the amount of the debt is disputed +Liquidation debt: the amount of the debt is ascertained, fixed, agreed-on, and settled and is an exact sum of money or a sum that is capable of being made definite by compution +Unliquidated debt: the amount of the debt is not ascertained, fixed , agreed-on, settles or reasonable persons may differ over the amount owed.

Rescission and new contract

a) If a contract is completely executory because neither party has performed, the parties may mutually agree to rescind the contract. b)Thereafter, the parties are free to enter into a new contract, which may have the same or different terms.

Uncertain Performance

a) Illusory Promise:A promise that solely depends upon the discretion, whim, or wish of the promisor b)an unconditional "option-to-cancel" caluse + When the promisor has the option to cancel the contract before performance begun, the promise is illusory +If the right to cancel is conditioned upon the happening of some event, the contract is enforceable

Adequacy of Consideration:

a) In general, because of the doctrine of freedom to contract, the relative value of the consideration given by contracting parties is not examined by the courts. b) Under the doctrine of freedom to contract, courts leave it up to the parties to decide what something is worth, and parties are usually free to bargain as they wish.

Unforeseen Difficulties

a) Sometimes, a promise to pay additional consideration or compensation is enforceable if unknown, unanticipated, unforeseen difficulties arise causing the burden of performance to increase greatly b) In states in which the unforeseen difficulties exception is recognized, the exception is usually applied in limited situations, such as construction contracts

Promises to pay debts that are bared by a statute of limitations

a) Statutes provide that a person who has a cause of action must commence that action or sue, within as specified period of time. b)After the statutory period of time has expired , the aggrieved party is barred from suing because the contract is unenforceable c)A new promise by a debtor to pay a debt, even though technically not supported by new consideration, will extend the period of time provided for in the statute of limitations so that the new promise is enforceable d)If a debtor makes a partial payment of a debt after the statutory period has run, it is implied that the debtor acknowledges the existence of the debt, and the creditor can thereafter sue for the balance of the debt.

Release

a) a release is a relinquishment of the right or discharge of an obligation or claim that one person has against another person b) A release will generally be binding if it meets the following requirements: 1)The release was obtained and given in good faith 2)The release is in signed writing 3)Consideration is given for the release

Covenant to sue

a) an agreement to substitute a contractual obligation for some other type of legal action b)Must be supported by consideration c)Does not always bar further recovery. Ex)Lupe agrees with Dexter not to sue damages in a tort action if he will pay for the damages in her car. If Dexter fails to pay for the repairs, Lupe can bring an action against him for breach of contract.

Promises that induce detrimental reliance, under the doctrine of promissory estoppel

a) clear and definite promise b) the promise must justify rely upon the promise c) the promisee must reasonably rely upon the promise d) Justice would be better served by enforcement of the promise

Promises to make Charitable Contributions

a)Based upon traditional contract law, promises to make gifts to religious, educational, charitable, or other nonprofit organization are not supported by legally sufficient consideration b)Today, such charitable subscriptions are enforced based upon different theories: +Promissory estoppel +Public Policy

Bargained Exchange

the promise given by the promisor must induce the promise to offer a return promise, a performance, or a forbearance, and the promisee's promise, performance, or forbearance must induce the promisor to make the promise.