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BUSINESS LAW [BUS 206]

LECTURE 8

LAW OF CONTRACTS [2A]

CONSIDERATION
Definition

Is the primary but not the only basis for the enforcement of promises

One of the elements needed to make an agreement binding

Is the inducement to make a promise enforceable

Is what each party to a contract gives up to the other in making their agreement

Promise or performance that the promisor demands as the price of the promise

Elements

Consideration comprises two (2) basic elements:

[1] Legal sufficiency (something of value); and
[2] Bargained-for exchange

Both must be present to satisfy the requirement of consideration

LEGAL SUFFICIENY
Definition

To be legally sufficient, the consideration exchanged for the promise must be either a legal
detriment to the promisee or 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
Legal Benefit

Obtaining by the promisor of that which he had no prior legal right to obtain

Legal Detriment

[1] Doing (undertaking to do) that which the promisee was under no prior legal obligation to do; or

[2] refraining from doing (or the undertaking to refrain from doing) that which he was previously
under no legal obligation to refrain from doing
Adequacy

Legal sufficiency has nothing to do with adequacy of consideration

The law will regard consideration as adequate if the parties have freely agreed to the exchange

LEGAL SUFFICIENY (contd)

ILLUSORY PROMISES

Promise that in fact does not impose any obligation on the promisor

Example: Bilateral contract - to be enforceable, there must be mutuality of obligation i.e. both
parties must have created obligations to the other in their respective promises

On the other hand, it is illusory promise if one partys promise contains either no obligation or only
an apparent obligation to the other

Party making an illusory promise is not bound because he or she has made no real promise

Effect the other party who has made a real promise is also not bound because he or she has
received no consideration

The contract fails for lack of mutuality

The following promises are not illusory:

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
Conditional Promise the obligations are contingent upon the occurrence of a stated event

LEGAL SUFFICIENY (contd)

Preexisting Public Obligations

Public duties such as those imposed by tort or criminal law are neither a legal
detriment nor a legal benefit
Preexisting Contractual Obligation

Doing or promising to do what one is already under obligation to do is not

consideration Gardiner, Kamya & Associates V. Jackson (2004)

A promise to refrain from doing what one has no legal right to do is not consideration

The preexisting duty or legal obligation can be based on statute, on general principles
of law, on responsibilities of an office held, or on a preexisting contract

LEGAL SUFFICIENY (contd)

Modification of a Preexisting Contract

Under the common law a modification must be supported by mutual consideration

Under the UCC a contract can be modified without new consideration

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

Settlement of an Undisputed 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

Settlement of a Disputed Debt

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

BARGAINED-FOR EXCHANGE

The central idea behind consideration is that the parties have intentionally entered
into a bargained exchange with one another and have given to each other something
in exchange for a promise or performance

Consideration is the bargained-for exchange between the parties to a contract

Something of value must be given or promised in return for the performance or

promise of performance of the other Brooksbank V. Anderson (1998)

A performance or return promise is bargained for if it is sought by the promisor in

exchange for his promise and is given by the promisee in exchange for that promise

The value given or promised can be money, services, property, or the forbearance of
a legal right

Thus, a promise to give someone a birthday present is without consideration, as the

promisor received nothing in exchange for his promise of a present

BARGAINED-FOR EXCHANGE (contd)

PAST CONSIDERATION

Consideration is the inducement for a promise or performance

The element of bargained-for exchange is absent where a promise is given for a past transaction

Therefore, unbargained-for past events are not consideration despite their designation as past
consideration

A promise made on account of something that the promisee has already done is not enforceable

A promise based on a partys past performance lacks consideration Smith V. Locklear (2005)

Past consideration is no consideration

Promise made in exchange for a past benefit bargained-for-exchange is not present

THIRD PARTIES

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

Example: Apple promises to pay Bull $15.00 if Bull delivers a specified book to Cinderella

Apples promise is binding because Bull incurred a legal detriment by delivering the book to Cinderella,
as Bull was under no prior legal obligation to do so, and Apple had no prior legal right to have the book
given to Cinderella

CONTRACTS WITHOUT CONSIDERATION

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

Such transactions include:

[1] promises to perform prior unenforceable obligations;
[2] promises that induce detrimental reliance (promissory estoppel);
[3] promises made under seal; and
[4] promises made enforceable by statute

Promise to perform prior unenforceable obligations

In certain circumstances the courts will enforce new promises to perform obligation that
originally was not enforceable or 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

In addition, some courts will enforce promises to pay moral obligations

CONTRACTS WITHOUT CONSIDERATION (contd)

Promissory Estoppel

Doctrine that a promise will be enforced although it is not supported by consideration when the
promisor should have reasonably expected that the promise would induce action or forbearance of
a definite and substantial character on the part of the promised and injustice can be avoided only
by enforcement of the promise

Also sometimes called the doctrine of detrimental reliance and applicable when:
[i] the promisor makes a promise that lacks consideration;
[ii] the promisor intends or should reasonably expect that the promisee will rely on the promise;
[iii] the promisee in fact relies on the promise in some definite and substantial manner ; and
[iv] enforcement of the promise is the only way to avoid injustice Neuhoff V. Marvin Lumber and
Cedar Co (2004)

Promises made 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

He did not have to sign the document, his delivery of a document to which he had affixed his seal
being sufficient

CONTRACTS WITHOUT CONSIDERATION (contd)

Promises made enforceable by statute

Some gratuitous promises that would otherwise be unenforceable have been made
binding by statute

Most significant among these are:

[1] Contract modifications the Uniform Commercial Code (UCC) provides that a
contract for the sale of goods can be effectively modified without new consideration
provided the modification is made in good faith
[2] Renunciation Under the UCC, any claim or right arising out of an alleged breach
of contract can be discharged in whole or in part without consideration by a written
waiver or renunciation signed and delivered by the aggrieved party
[3] Irrevocable offers Under the UCC, a firm offer, a written offer signed by a
merchant offeror promising to keep open an offer to buy or sell goods, is not revocable
for lack of consideration during the time stated, not to exceed three (3) months, or if no
time is stated, for a reasonable time

CASE STUDY
QUESTION 1
[a] Kevin offers to pay Jimmy $500 for his used trumpet, and Jimmy accepts. Define and discuss
the consideration.
[b] What if Jimmy offered to give Kevin the used trumpet and Kevin accepted. Is there an
agreement? Is there an enforceable contract? Was there consideration? Was there bargained-for
exchange?
QUESTION 2
John Boy states to Joshua I will pay you $5000 if you paint my home. Joshua in fact paints the
house. Was there consideration? Is the agreement enforceable?
QUESTION 3
Jack is prepared to relinguish his right to sue Jane for damages as long as Jane promises to pay
$10,000 in return for the promise to relinguish the right. Discuss in relation to consideration.

CASE STUDY
QUESTION 4
A creditor promises to forgo collection of a debt from the debtor if the debtor agrees to modify
the terms of the transaction. Discuss in relation to consideration.
QUESTION 5
Officer Mary Rodgers is an undercover police officer in the city of Pasadena, California. Officer
Rodgers promised Fanny Brooks that she would diligently patrol the area of Fanny Brooks
estate on weekends to keep down the noise and drinking of rowdy young persons who gathered
in this area and Fanny Brooks promised to provide a $500 per month gratuity for this extra
service. Is the promise enforceable?
QUESTION 6
A bonus of $5000 is promised in return for the promise of a contractor to complete the building
at a date earlier than that specified in the original agreement. Is the promise to pay the bonus
binding?

CASE STUDY
QUESTION 7
Abraham owes Lincoln $50,000.00, which was due on February 5, 2012. On March 1, 2012,
Abraham offers to pay back $40,000.00 if Lincoln will agree to accept this amount as the
discharge of the full amount owed. Lincoln agrees to this proposal, and it is set forth in
writing signed by the parties. However, Lincoln later sues for the $10,000.00 balance. Will
Lincoln succeed in a lawsuit against Abraham?
QUESTION 8
Fred ONeal came up with the idea for the formation of the new community bank of Villa
Rica and was active in its formation. Just prior to the execution of the documents creating
the bank, the organisers discussed that once the bank was formed, it would hire ONeal,
giving him a three-year contract at $65,000.00 the first year, $67,000.00 the second year,
and $70,000.00 the third.
In a lawsuit against the bank for breach of contract, ONeal testified that the consideration
he gave in exchange for the three-year contract was his past effort to organise the bank
[ONeal V. Home Town Bank of Villa Rica (1999)]. Discuss.