CHAPTER 8 Consideration

CHAPTER 8Consideration 8-1 Types of Consideration 8-2 Questionable Consideration 8-3 When Consideration Is Not Required

8-1 Types of Consideration GOALS • Identify the three requirements of consideration • Recognize the various forms of consideration Chapter 8

FOCUS • John, a writer, gets a call from his editor and, consequently, has to leave immediately on a research trip to Hudson ay and Newfoundland in Canada. As the trip should take a couple of weeks, he leaves a note offering to pay his neighbor, Jordan, $100 to watch his house and feed and walk his dog during the absence. John then leaves without ever speaking to Jordan. Jordan gets the note a complies. Is there a enforceable contract? What is the consideration for each party. Yes and John promised to pay $100 and Jordan walked the Dog. Both consideration. Prior to Jordan’s performance no one is bound by the contract. Chapter 8

CONSIDERATION • Is what a person demands and generally must receive in order to make the promise legally binding. Chapter 8

Three requirements of Consideration • Each party must give an act, forbearance, or promise to the other party. (Consideration) • Each party must trade what they contribute to the transaction for the other party’s contribution. (Must actually change hands) • What each party trades must have legal value, that is, it must be worth something in the eyes of the law. (Has Value) Chapter 8

Types of Consideration • A promise • Includes promisor and promisee. • You can promise to incur a detriment –referring to the act of doing that which the promisee was under no prior legal obligation to do or the refraining from doing that which he was previously under no legal obligation to refrain from doing. • An Act other than a promise • Forbearance (not to do something) • A Change in legal relation of the parties • Money • Other Property Chapter 8

A Gift is not Consideration • Gift – transfer of ownership without getting anything in return. • Donor – Gift giver • Donee – Gift receiver. • Whole transaction not legally binding until donee actually receives the gift. Chapter 8

Legal Value • Usually found in the exchange of two benefits. • Change in your legal position. • Can exchange a benefit for a detriment. • If you don’t drive until your 22, I’ll pay you the money I save on insurance. $10,000 (You have the legal right to drive) • Can exchange 2 detriments. Chapter 8

Consideration Does not have to be equal as long as the agreement is genuine. Unconscionable Contract – if the court finds that the difference in consideration is grossly unfair (evidence of duress, fraud) courts can find it unconscionable and void the contract. Chapter 8

Consideration Nominal consideration – a token amount of consideration. (Mostly on public documents) Chapter 8

List the three requirements of consideration. Chapter 8

8-2 Questionable Consideration GOALS • Describe situations in which consideration is present only under limited circumstances • Recognize when what appears to be binding consideration is not Chapter 8

Scenario • Ms. Miller tells her students: “You have worked hard, and if you continue to perform at this high level, I'll pay for a pizza party at the end of the year—if I think it is warranted.” The students continue to work hard, and class grades are high, but no party is given. Question • Can the students enforce the promise? No. This is a illusory promise. No consideration . Who would be the one to decide if they continued to perform? Chapter 8

CIRCUMSTANTIAL CONSIDERATION • Illusory promises • Promises are illusory (or unenforceable) if they can terminate for any reason. • Reason there is no contract is they are hard to enforce because the terms are uncertain. • For a promise to be considered consideration it must create an obligation or create a duty. Chapter 8

Enforceable Termination Clause • Defined circumstances. • After the passage of certain length of time. • After a set period after a notice of termination is given. In each instance there is a change in the party’s legal obligations. Chapter 8

Enforceable Contracts with some uncertainty. • Output Contracts – Contract where the buyer agrees to purchase all of a particular producer’s production. • Requirement Contract - Contract where a seller may agree to supply all the needs of a particular buyer. • If any party does not live up to these contracts then you have a breech of contract. It is in breech of “fair dealings” Chapter 8

What is not Consideration in a contract • Existing duty • Existing public duty - laws • Existing private duty – already made contract • Settlement of liquidated debts – agreed upon amount of debt by both parties, where the debtor pays less to creditor (without creditors ok). Even if creditor takes the payment the remaining debt is still owed. • Paying less is okay if both agree and the debtor gives additional consideration. (Ex. Payment early) Chapter 8

What is not Consideration in a contract • Existing duty • Settlement of unliquidated debts – amount of debt in dispute. Considered unliquidated. Debtor makes offer and Creditor accepts pmt. in full. • Accord and Satisfaction • Accord – The new consideration agreement • Satisfaction – Payment or act of the new consideration. Chapter 8

What is not Consideration in a contract • Existing duty • Release – Settlement of an unliquidated debt. • Composition of creditors – a group of creditors cooperatively agree to accept less then full payment. They debtor receives consideration of them not to sue. Chapter 8

FALSE CONSIDERATION • Mutual gifts – giving something to one party without getting anything in return. • Past performance – consideration is for immediate and future performance only. Chapter 8

Question If a contract contains a clause stating that all the buyer’s obligations could be extinguished by giving 30 days’ notice, would this make the buyer’s obligations under the contract illusory? No. This termination clause does not make the buyer’s obligations illusory because termination is allowed following a defined period of notice. It does not allow termination for any reason at any time. Chapter 8

Question Georgia’s neighbors approached her right after she received her driver’s license and said they felt that she drove too fast on the roads where their kids often played. They struck a deal with her that if she stayed within the speed limit for the next three months they would pay her $200. Georgia agreed. Is there a benefit to the neighbors? Is there a benefit to Georgia? Is there an enforceable contract? Although this arrangement seems to benefit both Georgia and her neighbors, no contract exists. Georgia has an existing public duty to obey the speed limit. This, Georgia is not providing a consideration by agreeing to perform an already existing duty. Chapter 8

Question Kamiar owed Rubio $5,000, which was in one year. There was no dispute as the amount. However, Rubio needed money immediately, so Kamiar offered to pay $4,000 early in full settlement of the debt. If Kamiar pays the $4,000 early, will Rubio be able to successfully sue and collect the $1,000 later. No. Rubio cannot sue Kamiar for the remaining $1,000. Kamiar has offered valuable additional consideration by changing his legal position and paying the $4,000 early in exchange for settlement of the debt. Chapter 8

8-3 When Consideration Is Not Required GOALS • Distinguish situations in which consideration is not needed • Recognize when the doctrine of promissory estoppel can be applied Chapter 8

FOCUS • Why are exceptions to the doctrine of consideration needed? Chapter 8

EXCEPTIONS TO THE REQUIREMENT OF CONSIDERATION Consideration is necessary to bind someone to their promise Except: • Promises to charitable organizations (Next) • Promises covered by the UCC • Firm offers • Modifications to sale made in “good faith” needs no additional Consideration. • Promises barred from collection by statute (Next) • Statute of limitations most states 3 years for Breach of contract from when claim arises. • Debts discharged in bankruptcy • Promissory estoppel (Next) =

Promises to Charitable Organizations • Contributions that are pledged (payment in the future) and the party who makes the pledge receives nothing in return. • If the pledge is for a specific purpose and the organization receiving it has or is spending money for that purpose. • They are legally obligated to make those payments. (BACK) Chapter 8

Promises Barred from Collection by Statute • Debts discharge in Bankruptcy can be reaffirmed (reinstated) by the debtor. • This would not need additional consideration.BACK) Chapter 8

Promissory Estoppel • Promissory estoppel is an important doctrine in contract law in which a non contractual promise lacking consideration rendered enforceable to avoid an injustice. Promissory estoppel arises when injustice can be avoided only by means of the enforcement of a promise that would otherwise be unenforceable for lack of consideration. • The Following conditions must be present for the courts to invoke Promissory Estoppel: • The promisor should reasonably see that the promissee will rely on the promise. • The promisee does rely on the promise • The promisee would suffer substantial economic loss if not enforced • Injustice can be avoided only with invoking the promise. • BACK) Chapter 8

Name four exceptions to the requirement of consideration. Chapter 8

CHAPTER 8 Consideration