Consideration in Contracts: Understanding Its Importance and Legal Requirements

1. Consideration Chapter 8

2. The Opening Scene, pg. 163 • Jake • Alena • Arkadi • Viktor • Jessica

3. Bell Ringer • What did you think the word consideration meant before learning about it in this class?

4. The Opening Scene, pg. 163 When is a contract sealed with consideration? A contract is sealed with consideration when each party gains something and gives up something of value Does the law permit past actions to serve as consideration in a new contract? The law does not permit past actions to serve as consideration in a new contract Is there any recourse in the law when people disagree on the amount owed in a contractual situation? Accord and satisfaction may solve the problem when people disagree on the amount owed in a contractual situation Are promises to fulfill social engagements supported by consideration? Promises to fulfill social engagements are NOT supported by consideration

5. Requirements of Consideration • The LAW will always refused to enforce most gratuitous, of free agreements. • WHY? • All agreements must be bargained for if they are to be binding on the parties…

6. Consideration Requirements • To be binding on the parties: Terms must be bargained! • An agreement is bargained when: something of value is given up for something else of value • This is what binds parties in a contractual relationship • This is commonly referred to as: consideration

7. Consideration • Consideration: • The exchange of benefits and detriments by parties to an agreement • Benefit: Something that a party was not previously entitled to receive • Detriment: Any loss suffered • The law has always refused to enforce most “gratuitous” or free agreements.

8. Types of Consideration Type 1 -Involves giving up or promising to give up something you have the legal right to keep. Type 2- Involves doing something or promising to do something that you have a legal right to do Type 3- Known as “Forebearance”, is not doing something that you have the legal right to do

9. 3 Key Characteristics of Consideration Promise involving the concept of a “bargained-for exchange” • Defined: When a promise is made in return for another promise, an act, or a promise not to act • Example: You made arrangement to borrow your friend’s bike, there is no understanding that you would pay for the use, your friend decides not to let you use it… • Hence, no bargained-for exchange, means NO Contract!

10. 3 Key Characteristics of Consideration Something of value • There is no specific value requirements to consideration. • A promise to help you clean your friend’s room can be considered “something of value” • Goods and services do not have to be the same as market value • Courts can rule consideration is “Unconscionable”, meaning contract is completely out of line • All that matters is that the parties agreed freely on the value and the price

11. 3 Key Characteristics of Consideration Legality of consideration • Court requires all consideration in an agreement be legal • If the consideration is illegal, then the contract is invalid • Parties cannot agree to do something they have no legal right to do • Also can’t give up something they do not legally own or have a right too

12. Types of Consideration Commonly Used to Secure a Contract • Money • Some limits: administrative regulations • Rent, fuel, oil, and natural gas • Property • Exchange one comic book for another • Services • Do one thing for another

13. Class Project • List some examples of commonly used consideration in today’s legal environment?

14. Types of Consideration Commonly Used to Secure a Contract • Promises not to sue (Ex. 2, pg. 168) • Women was eating lunch at Martini’s • She had tuna and immediately got ill • She went to hospital and was diagnosed with food poisoning from improperly refrigerated seafood • She sued the restaurant for failure to refrigerate the tuna properly • Martini’s offered her $5,000 if she would drop lawsuit

15. Types of Consideration Commonly Used to Secure a Contract • Charitable pledges (Ex. 3, pg. 169) • Saint Carmela’s Church announced to the parish they were beginning a campaign to re-roof the church • Parishioners pledged more than $12,000 • Relying on these pledges, the church began work on the roof • At this point each pledge becomes an enforceable agreement, no matter how small

16. Problems with Consideration • Parties involved in contracts sometimes disagree over the amount of consideration of the contract • Disputed amounts can be settled by accord and satisfaction • Accord: Acceptance of less than amount owed by creditor • Agreed-to-settlement contained in the accord is…. Satisfaction:

17. Problems with Consideration • Undisputed amounts can not be disputed if the parted have mutually agreed to a set amount of money • ALL disputes must be: • Real • Occur in good faith • Not be trivial

18. Class Work • Vocabulary – Chapter 8, Section 1

19. Concept Review • Law Class Blog Chapter 8 • POP QUIZ ---- 3 Questions • Be thorough and complete!

20. Agreements Without Consideration Chapter 8, Section 2

21. Introducing the Section • Did you ever do something based on a promise someone made to you? • Did you ever quit a job because someone promised a better one?

22. Enforceable Agreements Without Consideration • Promises under seal • Promises after discharge in bankruptcy • Debts barred by the statute of limitations • Promises enforced by promissory estoppel • Options

23. Enforceable Agreements Without Consideration • These are Enforceable Agreements without Consideration because: • They are allowed by state statute, or because courts, in the interest of justice and fairness, find it inappropriate to require consideration

24. Enforceable Agreements Without Consideration • Promises under seal • Mark or impression indicating that the instrument was formally accepted • Common in contracts, also know as “Notary Seals” • Promises after discharge in bankruptcy • Court hearings must be held • Debtors must be informed of legal consequences of assuming debt • Debts barred by the statute of limitations • Statute of limitations for lawsuits • Two years

25. Promissory Estoppel When someone intends a gift but consideration in not present, a promise may be enforced under the doctrine of Promissory Estoppel • These conditions must be met: • The promisor should reasonably foresee that the promisee will rely on the promise. • The promisee does, in fact, act in reliance on the promise. • The promisee would suffer a substantial economic loss if the promise in not enforced • Injustice can be avoided only by enforcement of the promise • Promissory Estoppel – “the court will ‘estop’ or barred the person who made the promise from claiming that there was no consideration

26. Promissory Estoppel • Promissory – “containing or consisting of a promise” • Estoppel – “restraint on a person to prevent him or her from contradicting a previous act” • Promissory Estoppel – “the court will ‘estop’ the person who made the promise from claiming that there was no consideration

27. Unenforceable Agreements Without Consideration • Why are they unenforceable? • The courts find these lack even the most basic qualities of valid consideration.

28. Unenforceable Agreements Without Consideration • Illusory Promises • Example 7, pg. 177 • Future Gifts • Past Consideration • Example 8, pg. 177 • Preexisting Duties • Example 9, pg. 178 • Discussion Starter

29. Unenforceable Agreements Without Consideration • Illusory Promises • Meaning they appear at first glance to be contracts but on further scrutiny are revealed to be hollow • John and Paul reach an agreement that John will sell Paul any apples that he might need over a three month period. • They develop a price for this time frame • However, because Paul might not order any apples within the next three month, he is not bound to do anything

30. Unenforceable Agreements Without Consideration • Future Gifts • Person promises to bestow a gift at some future time or in a will, that promise is not enforceable • Past Consideration • The act of giving or exchanging benefits or detriments must occur when a contract is made. • Past consideration, taken in the past is not regarded as legal by the courts

31. Unenforceable Agreements Without Consideration • Preexisting Duties • If a person is already under legal obligation to do something, a promise to do that same thing is not consideration • Promise to Attend a Social Engagement • All contracts are agreements, but not all agreements are contracts • An agreement to meet for lunch would not be binding if the friend gave nothing in exchange for the promise

32. Classwork • Finish Packet • Exam on Wednesday