Business Law - Chapter 12 consideration

Exclusive Dealing Contract -

grant to a franchisee or licensee by a manufacturer of the sole right to sell goods in a defined market. -manufacturer is under implied obligation to use best efforts to supply goods and distributor uses best efforts to promote their sale -this agreement binds both parties

article 9 of UCC

involves bulk sales

article 2 of UCC

involves sales

explain difference between economic sufficiency vs legal sufficiency

legal sufficiency = something of value

statue of limitations

normal _____________ on a contract is 3 years (varies from state to state) no consideration needed parties are waiving the right to defense of expiration same rules apply in bankruptcy

UCC rules

they make contracts easier to occur, especially between merchants

consideration in unilateral contracts

a promise is exchanged for completed act or forbearance to act -only one party (offeror) makes promise and is therefore promisor while other party (offeree) is person receiving the promise and is thus promisee offer: promise by A acceptance: performance of requested act or forbearance by B consideration: promise by A, performance of requested act or forbearance by B -for A's promise to be binding, it must be supported by consideration consisting of either legal detriment to B or legal benefit to A

-Modification of a Preexisting Contract -

under the common law a modification of a preexisting contract must be supported by mutual consideration; under the Code a contract can be modified without new consideration. -must be in good faith

Promises Under Seal -

where still recognized, the seal acts as a substitute for consideration. -under common law, when person desired to bind himself by bond, deed, or solemn promise, he executed his promise under seal

1. In consideration of $1800 paid to him by Joyce, Hill gave Joyce a written option to purchase his house for $180,000 on or before April 1. Prior to April 1, Hill verbally agreed to extend the option until July 1. On May 18, Hill, known to Joyce, sold the house to Gray, who was ignorant of the unrecorded option. Is there a contract between Joyce & Hill? Explain.

common law (real property - need to be in writing to be enforceable) answer: bargained for exchange. no, consideration was paid to Hill for holding the property for the specified time subject to the right of Joyce to exercise option whether to buy or not -When time limit expired, contract was at end and right under the option was extinguished -having house up for 180k to public is option at the money

(b) Ralph, knowing that his son, Ed, desires to purchase a tract of land, promises to give him the $25,000 he needs for the purchase. Ed, relying on this promise, buys an option on the tract of land. Can Ralph rescind his promise?

(b) Yes, judgment for Ralph. The doctrine of promissory estoppel does not make every gift promise binding just because the promisee has changed positions. There must be a justifiable reliance on the promise to the extent that the promisee takes definite and substantial action. Since Ed purchased only an option to buy the property, this probably would not be construed as a substantial action on his part.

-Requirements Contract

- agreement to buy all of one's needs from a single producer. -ensures the buyer of a ready source of inventory or supplies -isn't illusory

Settlement of a Disputed (unliquidated) Debt

- payment of a lesser sum of money to discharge a disputed debt (one whose existence or amount is contested) is legally sufficient consideration.

3 types of non- illusory promises

-Output Contract - agreement to sell all of one's production to a single buyer. -Requirements Contract - agreement to buy all of one's needs from a single producer. -Exclusive Dealing Contract - grant to a franchisee or licensee by a manufacturer of the sole right to sell goods in a defined market.

output contract

-Output Contract - agreement to sell all of one's production to a single buyer. -it affords the seller an ensured market for her product -isn't illusory -Code (UCC) imposes good faith limit on quantity to be sold or purchased under output or requirements contract --> contracts like this involve 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 stated estimate, to any normal prior output or requirements may be tendered or demanded

Promissory Estoppel -

-promissory estoppel makes promises enforceable to extent necessary to avoid injustice -most common application of promissory estoppel is to charitable subscriptions doctrine that prohibits a party from denying her promise when the promisee takes action or forbearance to his detriment reasonably based upon the promise. -if you rely on someone's promise in significant way (change your position), we may make it enforceable even if there was no consideration

consideration

1) payment or money. 2) a vital element in the law of contracts, consideration is a benefit which must be bargained for between the parties, and is the essential reason for a party entering into a contract.

some transactions are enforceable even though they aren't supported by consideration --> they include

1. promises to perform prior unenforceable obligations, 2. promises that induce detrimental reliance (promissory estoppal) 3. promises made under seal 4. promises made enforceable by statute

the requirement of legally sufficient consideration is simply

1. that the parties have agreed to an exchange and 2. that the subject matter exchanged either imposed a legal detriment upon promisee or conferred legal benefit upon promisor

The Snyder Mfg. Co., being a large user of coal, entered into separate contracts with several coal companies. In each contract it was agreed that the coal company would supply coal during the entire year in such amounts as the manufacturing company might desire to order, at a price of $35 per ton. In February, the Snyder Company ordered 1,000 tons of coal from Union Coal Company, one of the contracting parties. Union Coal Company delivered 500 tons of the order and then notified Snyder Company that no more deliveries would be made and that it denied any obligation under the contract. In an action by Union Coal to collect $35 per ton for the 500 tons of coal delivered, Snyder files a counterclaim, claiming damages of $1,500 for failure to deliver the additional 500 tons of the order and damages of $4,000 for breach of agreement to deliver coal during the balance of the year. What contract, if any, exists between Snyder and Union?

Answer: Illusory Promises. Snyder Mfg. Co. owes Union the rate of $35 per ton for 500 tons of coal already delivered. Moreover, the alleged contracts, to the extent executory, are probably not binding on either party. These agreements to supply Snyder with such amounts of coal as "it might desire to order" contain illusory promises. Snyder did not agree to order or to buy any coal. It was therefore not contractually bound to do so. Where one party to an agreement is not bound, neither party is bound. Even though the contracts come within the UCC, its good faith provisions could, but probably would not validate these illusory promises. Furthermore, these alleged contracts would not constitute requirements contracts.

3. (a) Judy orally promises her daughter, Liza, that she will give her a tract of land for her home. Liza, as intended by Judy, gives up her homestead and takes possession of the land. Liza lives there for six months and starts construction of a home. Is Judy bound to convey the real estate?

Answer: Promissory Estoppel. (a) Yes, decision for Liza. Usually, gift promises are ruled as lacking consideration and are not binding agreements. In this case, Liza justifiably relied on the promise and acted to her detriment by selling her home, moving onto the property, and starting construction of a new house. The doctrine of promissory estoppel applies to such promises that induce action by the promisee that would be reasonably expected by the promisor. Judy becomes liable for having induced the change in position by Liza.

Nancy owed Sharon $1,500, but Sharon did not initiate a lawsuit to collect the debt within the time prescribed by the statue of limitations. Nevertheless, Nancy promises Sharon that she will pay the barred debt. Thereafter, Nancy refuses to pay and Sharon sues. Is Nancy's new promise binding?

common law - Sharon wins. Binding if the indebteness is still enforceable or would be except for the effect of the statute of limitations. The statue of limitations exists in each state saying that actions to enforce a debt must be brought with a prescribed period of time. However, a new promise to pay the debt is binding according to its terms without consideration for 2nd statutory period. Most states require that this has to be in writing to be enforceable.

Preexisting Contractual Obligation -

performance of a preexisting contractual duty is not consideration. -preexisting contractual duty = duty the terms of which are neither doubtful nor the subject of honest dispute -is legally insufficient consideration bc the doing of what one is legally bound to do is neither a detriment nor benefit -Modification of a Preexisting Contract -Substituted Contracts -Settlement of an Undisputed Debt -Settlement of a Disputed Debt

legal sufficiency

Legal Sufficiency - consists of either a benefit to the promisor or a detriment to the promisee. -Legal Benefit - obtaining something to which one had no prior legal right. -Legal Detriment - doing an act one is not legally obligated to do or not doing an act that one has a legal right to do.

Promises to Perform Prior Unenforceable Obligations -

Promises to Perform Prior Unenforceable Obligations - 1. Promise to Pay Debt Barred by the Statute of Limitations - a new promise by the debtor to pay the debt renews the running of the statute for a second statutory period. 2. Promise to Pay Debt Discharged in Bankruptcy - may be enforceable without consideration. 3. Voidable Promises - a new promise to perform a voidable obligation that has not been previously avoided is enforceable. 4. Moral Obligation - a promise made to satisfy a preexistng moral obligation is generally unenforceable for lack of consideration. -required to honor promise when soomone does something nice for you? no

Discuss and explain whether there is valid consideration for each of the following promises: a. A and B entered into a contract for the purchase and sale of goods. A subsequently promised to pay a higher price for the goods when B refused to deliver at the contract price. b. A promised in writing to pay a debt, which was due from B to C, on C's agreement to extend the time of payment for one year. c. A orally promised to pay $150 to her son, B, solely in consideration of past services rendered to A by B, for which there had been no agreement or request to pay.

a. Maybe--if the failure to pay was for a good faith reason under the Uniform Commercial Code UCC allows parties to modify a contract with consideration as long as both parties intend to modify and act in good faith b. Yes--extending time is a legal detriment for C and paying is detriment to A (common law - not sale of goods) c. No--past consideration is no consideration at all - not valid consideration

Past Consideration -

an act done before the contract is made is not consideration. -unbargained for past events are not consideration

unliquidated debt

an obligation disputed as to either its existence or its amount

liquidated debt

an obligation the existence and amount of which is undisputed

(2) renunciations,

any claim or right arising out of alleged breach of contract can be discharged without consideration by written waiver or renunciation

substituted contracts

are permissible -must have mutual agreement of all parties -cant be unilateral (ex: marriage)

encumbrance

cloud right to, interest in, or legal liability on real property that does not prohibit passing title to the property but that diminishes its value. Encumbrances can be classified in several ways. They may be financial (ex: liens) or non-financial (ex: easements, private restrictions).

Preexisting Public Obligations -

public duties such as those imposed by tort or criminal law are neither a legal detriment nor a legal benefit. -law doesn't regard performance of preexisting legal duty as either legal detriment or benefit -public duty doesn't arise out of a contract but rather it is imposed upon members of society by force of common law -public duty includes duty not to commit assault, battery, false imprisonment, defamation -public officials are also under preexisting obligation to perform their duties

illusory contract

say something in such a way that there is no contract -not sufficiently defined to create a contract

output contract

says i agree to buy all that you produce -yes, an enforceable contract -requires good faith

Promises Made Enforceable by Statute -

some gratuitous promises have been made enforceable by statute; the Code makes enforceable (1) contract modifications, (2) renunciations, and (3) firm offers. -ex: merchants -ex: contacts and good faith

Substituted Contracts

the parties agree to rescind their original contract and to enter into a new one; rescission and new contract are supported by consideration.

conditional Promise -

a contract in which the obligations are contingent upon the occurrence of a stated event. -a promise the performance of which depends n happening or non happening of an event not certain to occur -sufficient consideration unless promisor knows at the time of making the promise that the condition cannot occur

5. The Snyder Mfg. Co. entered into separate contracts with several coal companies. In each contract it was agreed that the coal company would supply coal during the entire year in such amounts as the manufacturing company might desire -In February the Snyder Company ordered one thousand tons of coal from Union Coal Company - Union Coal Company delivered five hundred tons of the order and then notified Snyder Company that no more deliveries would be made and that it denied any obligation under the contract. In an action by Union Coal to collect $55 per ton for the five hundred tons of coal delivered, Snyder files a counterclaim, claiming damages of $1,500 for failure to deliver the additional five hundred tons of the order and damages of $4,000 for breach of agreement to deliver coal during the balance of the year. What contract, if any, exists between Snyder and Union?

UCC - sale of goods Answer: Illusory Promises. Snyder Mfg. Co. owes Union the rate of $55 per ton for 500 tons of coal already delivered. Moreover, the alleged contracts, to the extent executory, are probably not binding on either party. These agreements to supply Snyder with such amounts of coal as "it might desire to order" contain illusory promises. Snyder did not agree to order or to buy any coal. It was therefore not contractually bound to do so. Where one party to an agreement is not bound, neither party is bound. Even though the contracts come within the UCC, its good faith provisions could, but probably would not validate these illusory promises. These alleged contracts would not constitute requirements contracts because Snyder has contracted with several companies and has not promised any of them that it would buy all its requirements of coal from them.

Ch. 12 - Alan purchased shoes from Barbara on open account. Barbara sent Alan a bill for $10,000. Alan wrote back that 200 pairs of the shoes were defective and offered to pay $6,000 and give Barbara his promissory note for $1,000. Barbara accepted the offer, and Alan sent his check for $6,000 and his note, in accordance with the agreement. Barbara cashed the check, collected on the note, and one month later sued Alan for $3,000. Is Barbara bound by her acceptance of the offer?

UCC - sale of goods (if common law would need to subst. perform) Settlement of a Disputed Debt. Yes, decision in favor of Alan and against Barbara. The problem indicates that a genuine dispute occurred between Alan and Barbara. Where a check is tendered by the debtor to the creditor in full payment or settlement, the cashing of the check constitutes an accord and satisfaction. Revised 3-311. The fact that Alan gave Barbara his promissory note for $1,000 and that Barbara collected on the note strengthens the conclusion stated. Moreover, under UCC Section 2-209(1), consideration is not needed.

(1) contract modifications,

UCC has abandoned the common law rule requiring that a modification of existing contract be supported by consideration to be valid -code provides that a contract for sale of goods can be modified without new consideration (as long as modification is in good faith)

Bargained-For Exchange -

a mutually agreed-upon exchange.for promise or performance

On February 5, Devon entered into a written agreement with Gordon whereby Gordon agreed to drill a well on Devon's property for the sum of $5,000 and to complete the well on or before April 15. Before entering into the contract, Gordon made test borings and had satisfied himself as to the character of the subsurface. After two days of drilling, Gordon struck hard rock. On February 17, Gordon removed his equipment and advised Devon that the project had proved unprofitable and that he would not continue. On March 17, Devon went to Gordon and told Gordon that he would assume the risk of the enterprise and would pay Gordon $100 for each day required to drill the well, as compensation for labor, the use of Gordon's equipment, and Gordon's services in supervising the work, provided Gordon would furnish certain special equipment designed to cut through hard rock. Gordon said that the proposal was satisfactory. The work was continued by Gordon and completed in an additional fifty-eight days. Upon completion of the work, Devon failed to pay, and Gordon brought an action to recover $5,800. Devon answered that he had never become obligated to pay $100 a day and filed a counterclaim for damages in the amount of $500 for the month's delay based on an alleged breach of contract by Gordon. Decision? Answer: Pre-existing Contractual Obligation. Decision in favor of Gordon. As a general rule, a promise to do what one is already bound to do by a valid contract will not be sufficient consideration for a new agreement. However, Section 89 of the Restatement, Second, Contracts provides that a "promise modifying a duty under a contract not fully performed on either side is binding (a) if the modification is fair and equitable in view of the circumstances not anticipated by the parties when the contract was made . . ." Alternatively, although of dubious validity in this problem, the same result may be reached on the ground of a substituted contract: that the original contract was rescinded by mutual agreement and that new promises were then made which furnished consideration for each other.

common law - intent and consideration needed Answer: Pre-existing Contractual Obligation. Decision in favor of Gordon. As a general rule, a promise to do what one is already bound to do by a valid contract will not be sufficient consideration for a new agreement. However, Section 89 of the Restatement, Second, Contracts provides that a "promise modifying a duty under a contract not fully performed on either side is binding (a) if the modification is fair and equitable in view of the circumstances not anticipated by the parties when the contract was made . . ." Alternatively, although of dubious validity in this problem, the same result may be reached on the ground of a substituted contract: that the original contract was rescinded by mutual agreement and that new promises were then made which furnished consideration for each other.

Ch. 12 - George owed Keith $800 on a personal loan. Neither the amount of the debt nor George's liability to pay the $800 was disputed. Keith had also rendered services as a carpenter to George without any agreement as to the price to be paid. When the work was completed, an honest and reasonable difference of opinion developed between George and Keith with respect to the value of Keith's services. Upon receiving from Keith a bill of $600 for the carpentry services, George mailed in a properly stamped and addressed envelope his check for $800 to Keith. In an accompanying letter, George stated that the enclosed check was in full settlement of both claims. Keith indorsed and cashed the check. Thereafter, Keith unsuccessfully sought to collect from George an alleged unpaid balance of $600. May Keith recover the $600 from George

common law - services Settlement of Disputed/Undisputed Debts. Decision, in part, in favor of Keith. This common law problem presents questions attending the payment or settlement of (1) a past due, undisputed or liquidated debt and (2) a disputed debt. In Pinnel's Case, 5 Coke 117, and Cumber v. Wayne, 1 Strange, 426, the question presented and decided was "that payment of a lesser sum on the day in satisfaction of a greater, cannot be in satisfaction for the whole," although the parties agreed that such payment should satisfy the whole. An accord and satisfaction is a contract and like any other contract must be supported by a valid consideration. Consideration consists of a benefit to the promisor or a detriment to the promisee. Because of the past due undisputed debt, George was under legal obligation to pay $800. By paying $800 in full settlement of both obligations, George did not suffer a legal detriment as to the second (carpentry) contract. George merely did something which he was already legally bound to do. The payment of the $800 discharged the undisputed obligation but, since it did not constitute consideration for the disputed debt, that debt remains. In short, Keith still had a claim for $600 which George could, of course, contest, as to the amount. Had George paid an amount greater than $800, he would have a better argument as to settlement of both debts.

Ch.12 - (a) Ann owed $2500 to Barry for services Barry rendered to Ann. The debt was due June 30, 2015. In March 2016, the debt was still unpaid. Barry was in urgent need of ready cash and told Ann that if she would pay $1500 of the debt at once, Barry would release her from the balance. Ann paid $1500 and stated to Barry that all claims had been paid in full. In August 2016, Barry demanded the unpaid balance and subsequently sued Ann for $1000. Result? (b) Modify the facts in (a) by assuming that Barry gave Ann a written receipt stating that all claims had been paid in full. Result? (c) Modify the facts in (a) by assuming that Ann owed Barry the $2500 on Ann's purchase of a motorcycle from Barry. Result?

common law - services Settlement of an Undisputed Debt. (a) Decision for Barry. As this debt arose out of a contract for services, the common law of contracts would apply. At common law the payment of a lesser sum of money in full satisfaction of a liquidated, undisputed debt in a greater amount is legally insufficient consideration for a promise of the creditor to discharge the entire debt. There is no legal detriment to the promisee or legal benefit to the promisor. -all he did was make a promise b. UCC: Renunciation. (b) Decision for Barry unless UCC Section 1-107 applies. It is unclear whether Section 1-107 applies to transactions outside of the Code. If it does not, then the written receipt would not change the result in question 2a. If Section 1-107 applies, then the written receipt would constitute a written waiver or renunciation signed and delivered by the aggrieved party and would discharge the debt and Ann wins. (Article 1 = any commercial transaction, not just sale of goods) c. Modification of a Pre-existing Contract. (c) This transaction would be subject to the Uniform Commercial Code b/c sale of goods. Under Section 2-209 (1) a contract for the sale of goods can be validly modified by the parties without new consideration provided they so intend and act in good faith. This problem presents a question of intent and good faith. Since payment was already due and Barry was acting under economic urgency, the modification is probably not binding. However, if Barry gave Ann a written release as was done in (2) (b), the result would most likely differ. UCC Section 1-107 expressly provides that any claim or right arising out of any breach can be discharged in whole or in part "without consideration" by a written waiver or renunciation signed and delivered by the aggrieved party. Consequently, under the Code, consideration is no longer required to discharge a debt. The only requirement is that the creditor sign and deliver a sufficient writing, which Barry did. Barry's only defense would be that of economic duress, which should be found to exist under the **Note any liquidated/disputed debt must have additional consideration, such as paying early

third parties

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

consideration definition and elements

defn- the inducement to enter into a contract. -the primary basis for enforcement of promises in our legal system -=___________only present when parties intend an exchange - detriment, detriment, benefit, benefit (makes valid) Elements - legal sufficiency and bargained-for exchange.

option on real estate

if you pay 1800 to pay for house in a week and seller sells to someone else before you say you'll buy it, you can sue -damages can equal next available house in same neighborhood that costs way more -unique with real estate

mutuality of obligation

in bilateral contract each promise is consideration for the other, this relationship is called mutuality of obligation -consequence is that each promisor in bilateral contract must be bound or neither is bound

Adequacy -

not required where the parties have freely agreed to the exchange. -the subject matter that the parties agree to exchange doesn't need to have same or equal value; law regards consideration as adequate if parties have freely agreed to exchange -Adequacy (cont'd) - Conditional Promise - a contract in which the obligations are contingent upon the occurrence of a stated event.

(3) firm offers

not revocable for lack of consideration during time stated, not to exceed 3 months, or if no time is stated, for a reasonable time

consideration in bilateral contracts

parties exchange promises -each party is both a promisor and promisee -A's promise is binding and enforceable by B is that promise is supported by legal consideration from B (can be either legal detriment to B or benefit to A) (same for B's promise to be binding) -offer: promise by A -acceptance: return promise by B to perform requested act or forbearance -consideration: promise by A, return promise by B to perform requested act or forbearance

Settlement of an Undisputed (liquidated) Debt -

payment of a lesser sum of money to discharge an undisputed debt (one whose existence or amount is not contested) does not constitute legally sufficient consideration.

legal sufficiency

to be legally sufficient, consideration exchanged for the promise must be either legal detriment to promisee or legal benefit to promisor (aka promisee must give something up of legal value or promisor must receive something of legal value)