CHAPTER 8 CONSIDERATION 8 1 TYPES OF CONSIDERATION

CHAPTER 8 CONSIDERATION

8 -1 TYPES OF CONSIDERATION Consideration - Is what a person demands and generally must receive in order to make her or his promise legally binding.

8 -1 TYPES OF CONSIDERATION Three requirements of consideration • Each party must: – Make a promise – Perform an act – Forbear (refrain from doing something) • Each party’s promise, act or forbearance must be in exchange for a return promise, act, or forbearance by the other party. • What each party exchanges must have legal value. – Worth something in the eyes of the law

8 -1 TYPES OF CONSIDERATION Consideration for a gift • A gift is a transfer of ownership without receiving anything in return. • A promise to make a gift is generally not legally enforceable. • After the donor intentionally transfers the gift to the donee and the donee accepts it – the transaction becomes legally binding.

8 -1 TYPES OF CONSIDERATION Promise, Act, or Forbearance – the promise to not do something • Giving of further time for repayment of an obligation or agreement; not to enforce claim (at) its due date. A delay in enforcing a legal right. Act by which creditor waits for payment of debt due by a d ebtor after it becomes due. • Within Usury law, the contractual obligation of a lende r or creditor to refrain, during a given period of time, fr om requiring the borrower or debtor to repay the loan or debt then due and payable.

8 -1 TYPES OF CONSIDERATION Contractual Exchange • A person promising an action or forbearance is the promisor. • The person to whom the promise is made is the promisee.

8 -1 TYPES OF CONSIDERATION Legal Value • A change in the party’s legal position as a result of a contract. • Most commonly found in the exchange of two benefits. • Legal value can also be found in the exchange of benefit for a detriment (promise to refrain from doing something you have the legal right to do)

8 -1 TYPES OF CONSIDERATION Adequacy of Consideration • What parties give and get as consideration need not be of equal economic value.

8 -1 TYPES OF CONSIDERATION Adequacy of Consideration • What parties give and get as consideration need not be of equal economic value. • Economic value is unimportant as long as there is genuine agreement • If the considerations received by one of the parties is so grossly inadequate so as to shock the conscience of the court, the contract or a term thereof will be declared unconscionable (grossly unfair or oppressive) and void.

8 -1 TYPES OF CONSIDERATION Nominal Consideration • Token amount identified in a written contract when parties either cannot or do not wish to state the amount precisely.

HOMEWORK 8 -1 Assessment Answer questions 1 -6. Write the question and the answer on a loose-leaf sheet of paper. Answer question 7 (be specific and give a detailed answer) DUE: THURSDAY 11 -5 -15

8 -2 QUESTIONABLE CONSIDERATION Circumstantial Consideration Illusory Promises An illusory promise, like nominal consideration, looks like a contract and sounds like a contract but it is not a contract because one of the parties is not bound.

8 -2 QUESTIONABLE CONSIDERATION • • • Circumstantial Consideration Illusory Promises Termination Clauses The power to withdraw from a contract if business circumstances change The promise is NOT illusory if termination is allowed only after a change is defined circumstances, after the passage of a certain length of time, or after a set period of notice is given. Output and Requirements Contracts When buyers agree to purchase all of a particular producer’s production – output contract. When a seller agrees to supply all of the needs of a particular buyer – requirements contract.

8 -2 QUESTIONABLE CONSIDERATION Circumstantial Consideration Existing Duty • Existing Public Duty – Public servants who take an oath of office or by the very nature of their positions, make explicit and/or implied promises to perform various duties. • Existing Private Duty – If a contract creates a duty, this duty cannot be the basis of consideration in a different contract. – A person cannot demand further compensation for carrying out a contractual promise already made.

8 -2 QUESTIONABLE CONSIDERATION Circumstantial Consideration Existing Duty • Settlement of Unliquidated Debts • Liquidated debt – the parties agree that the debt exists and on the amount of the debt. • When a creditor accepts less than that the total amount due in full settlement for a debtor there is NO consideration if the debt is liquidated.

8 -2 QUESTIONABLE CONSIDERATION Circumstantial Consideration Existing Duty Settlement of Unliquidated Debts • Accord & Satisfaction – A method of discharging a claim whereby the parties agree to give and accept something in settlement of the claim and perform the agreement, the accord being the agreement and the satisfaction its execution or performance, and it is a new contract substituted for an old contract which is thereby discharged, or for an obligation or Cause of Action which is settled, and must have all of the elements of a valid contract.

8 -2 QUESTIONABLE CONSIDERATION Release • Release Circumstantial Consideration Existing Duty – Due to financial pressure, an injured party in the tort will agree to discharge another from liability for the tort in return for a monetary payment or other consideration. Composition with Creditors – A group of creditors will accept less than what they are entitled to. – The debtor agrees not to file for bankruptcy. – The creditor promises to refrain from suing for the full amount.

8 -2 QUESTIONABLE CONSIDERATION False Consideration Mutual Gifts When something of value is given by one party to another without demanding anything in return, the something of value is not consideration for anything promised or provided.

8 -2 QUESTIONABLE CONSIDERATION False Consideration Past Consideration • Contractual bargaining takes place in the present, for immediate or future performance. • An act that has already been performed cannot serve as consideration.

8 -3 When Consideration is not Required Exceptions to the Requirement of Consideration Promises to Charitable Organizations • Contractual bargaining takes place in the present, for immediate or future performance. • An act that has already been performed cannot serve as consideration.

8 -3 When Consideration is not Required Exceptions to the Requirement of Consideration Promises Covered by the UCC • FIRM OFFERS – A merchant who makes an offer in a signed writing to buy or sell goods and promises to leave the offer open is bound for the period of time stipulated or up to thee months • MODIFICATION – Under the UCC a good-faith agreement that modifies an existing contract for the sale of goods needs no new consideration.

8 -3 When Consideration is not Required Exceptions to the Requirement of Consideration Promises Barred from Collection by Statute • Statutes of Repose and Limitations – Statute of Limitation: specifies a time limit for bringing a lawsuit once you become aware of a legal claim. – The statute of limitations for breach of contract or torts is three years. • Debts Discharged in Bankruptcy – Even after a debt has been discharged as a result of the debtor declaring bankruptcy, the obligation may be reaffirmed or (reinstated) by a promise of the debtor.

8 -3 When Consideration is not Required Exceptions to the Requirement of Consideration Promissory Estoppel In the law of contracts, the doctrine that provides that if a party changes his or her position substantially either by acting or forbearing from acting in reliance upon a gratuitous promise, then that party can enforce the promise although the essential elements of a contract are not present.

8 -3 When Consideration is not Required Exceptions to the Requirement of Consideration Promissory Estoppel Certain elements must be established to invoke promissory estoppel. • A promisor—one who makes a promise—makes a gratuitous promise that he should reasonably have expected to induce action or forbearance of a definite and substantial character on the part of the promisee—one to whom a promise has been made. • The promisee justifiably relies on the promise. • A substantial detriment—an economic loss—ensues to the promisee from action or forbearance. • Injustice can be avoided only by enforcing the promise.