Types of Consideration 2 Aim Define consideration and

Types of Consideration 2

Aim: Define consideration and determine when there is no consideration. Do Now: • Take out your HW, the answers to the questions and the cases from Tuesday.

Consideration …what a person demands and generally must receive in order to make her or his promise legally binding. 4

Three Requirements of Consideration 1. Each party must perform an act, forbearance, or promise to the other party. 2. Each party’s promise, act or forbearance must be in exchange for a return promise, act or forbearance by the other party. 3. What each party trades must have legal value that is, must be worth something in the eyes of the law. *Warm, fuzzy feeling doing something good – NOT CONSIDERATION*

Legal Value - There has been a change in a party’s legal position as a result of the contract • Bargain Test 1. Benefit for a Benefit • Sunoco will fix your car for $250 2. Benefit for a Detriment • Forbearing of a legal right (promise to refrain from doing what you have a right to do) • Mom asks you not to drive until your 23 and she will give you $5, 000 3. Detriment for a Detriment • John forbears from buying dog if Larry will not build a fence

Contractual Exchanges • Promisor - person promising an action or forbearance • Promisee - the person to whom the promise is made • Consideration must be mutual 7

Adequacy of Consideration • What the parties give and get as consideration need not be of equal value. • Values that different people place on the same property may vary widely. • Economic value is unimportant as long as there is genuine agreement. • However, if the consideration received by one party is grossly inadequate this could be a sign of misrepresentation, mistake, duress or undue influence. • If so, the contract could be declared unconscionable. 8

Consideration vs. Gift • Gift - transfer of ownership without receiving anything in return • Promise to make a gift – generally not legally enforceable • Donor - person giving the gift • Donee - person receiving the gift • When Donor intentionally transfers the gift to the donee, transaction becomes binding 9

Nominal Consideration • In some written contracts such as Deeds -- one party may state $1 as the consideration. • Party cannot state specific value • Parties do not wish to publicize – Ex. $1 and other valuable consideration in exchange for a car

• John, a writer, gets a call from his editor and, consequently, has to leave immediately on a research trip to Hudson Bay 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 gets the note and complies. Jordan • Is this an enforceable contract? What is the consideration for each party?

Homework For a high school graduation present, your aunt promised to give you two round-trip tickets for a cruise for her and a friend. The promised trip was to be along the “Mexican Riviera” from Long Beach, California, to Acapulco, Mexico. At the graduation exercises, however your aunt gave you a kiss instead and said, “The stock market is down, Sorry, darling!” 1. State two reasons why you think you should be able to recover the value of the trip from your aunt. 2. State two reasons why you think your aunt should not have to pay.

Two reasons aunt is legally obligated to provide tickets • You should be able to recover the value of the trip b/c of basic fairness. • You may have passed up other opportunities b/c the trip was already on her schedule, such reliance, if reasonably anticipatable, may legally bind your Aunt to her promise.

Two reasons why you think the aunt should not have to pay • Your aunt simply made a promise to make a gift; this was not a binding contract • The trip would have been a luxury for you. Your Aunt would not be harming you by declining to give you a luxury item.

Assignments Independent Practice Assignments Examine the following three case studies and determine the outcome of each case as to the legality of each case: 1. 2. 3. Traveling the 48 After Graduation Case Band Aid Case Finder’s Keeper Case 15

Hamer v. Sidway • Yes. Judgment reversed. Valuable consideration may consist either in some right, interest, profit, or benefit accruing to one of the parties or some forbearance, detriment, loss, or responsibility given, suffered, or undertaken by the other party. Here, the court found that it is sufficient that P restricted his lawful freedom of action within certain prescribed limits upon the faith of D’s agreement. Furthermore, the court found nothing in the record that would permit a determination that D was not benefited in the legal sense. • Discussion. Under the bargain test for consideration, P’s forbearance was arguably both a benefit to D and a detriment to P. D benefited by having his nephew refrain from certain conduct and P suffered a detriment by denying himself the enjoyment of that conduct. 16

Kirksey v. Kirksey • No. Defendant’s promise was gratuitous, and as such cannot be enforced due to lack of consideration. Although the Justice writing the opinion would consider Plaintiff’s inconvenience valid consideration to enforce Defendant’s promise, the Court finds that the promise is merely gratuitous and lacks consideration. The Court finds Defendant’s promise to be gratuitous and will not enforce it due to lack of consideration. It may be that the court was reluctant to interfere in a family dispute. 17

Homework • In your textbook, read pages 149 – 152 • Complete the Legal Vocabulary on page 149. 18

Aim: Describe situations in which consideration is present only under limited circumstances. Do Now: • Take out your HW & place it on my desk • Copy the Aim • Under the Aim answer: • Write TWO examples of agreements you will enter within the next five years. – Describe the agreement and note the consideration involved in both agreements.

Hamer v. Sidway • Yes. • Here, the court found that it is sufficient that P restricted his lawful freedom of action within certain prescribed limits upon the faith of D’s agreement. • Under the bargain test for consideration, P’s forbearance was arguably both a benefit to D and a detriment to P. • D benefited by having his nephew refrain from certain conduct and P suffered a detriment by denying himself the enjoyment of that conduct. 20

Kirksey v. Kirksey • No. Defendant’s promise was gratuitous, and as such cannot be enforced due to lack of consideration. 21

Illusory Promises • To be consideration, a promise must be binding. It must create a duty or impose an obligation. • If a contract contains a clause that allows you to escape the legal obligation, your promise is illusory. • “I promise to paint the house, if I have time. ” – You may never have time – This does not change your legal position • An illusory promise is unenforceable because the terms express such uncertainty of performance that it is actually no promise at all. 22

Example • Bob and Sam enter into a contract that requires Sam to appear at Bob’s ice cream stand each day and pay $1. 00, for which Bob will give Sam as much ice cream as he wants to. • While this agreement binds Sam to paying $1. 00 every day, Bob does not appear to be bound to do anything, as he has committed only to providing ice cream if he feels like it. 23

Illusory Promises • This type of agreement is not enforceable in court, as it does not specifically detail performance required by one party, appearing to bind only the other party to perform or pay. 24

Termination Clauses (aka convenience clause) • The power to withdraw from a contract if business circumstances change • If the clause gives one party the power to terminate the contract for any reason, the promise to perform is illusory (not enforceable). • The promise is NOT illusory if the termination clause states: – Termination is allowed only after a change in defined circumstances of the contract – The passage of a certain length of time – After a set period after a notice of termination is given (30 25 days)

There are two types of business contracts that are generally enforceable even though there is some uncertainty as to the amount of performance legally required. 26

Illusory Promises • Output contract - contracts in which the seller agrees to sell to the buyer, and the buyer agrees to purchase from the seller, all of something the seller produces. Ex. steel company may buy all of the output of a nearby coal mining company. • Requirements contract – contracts in which the buyer agrees to purchase from the seller and the seller agrees to sell to the buyer, all of some good the buyer needs or requires. Ex. carburetor manufacturer may agree to supply all the carburetors needed for the production of a certain make of vehicle. 27

Duty of Fair Dealing • Courts recognize these contracts as supported by consideration because they impose a duty of fair dealing on the parties. • No business should be required to go bankrupt by staying in an output or requirements contract that has become unprofitable through no fault of the termination party. 28

Assignment • Create a scenario for each of the following: 1. Promise with consideration (enforceable) 2. Promise that is illusory (unenforceable) 3. Contract with a termination clause that will make it enforceable 4. An output OR requirement contract agreement 29

Aim: Describe situations in which consideration is present only under limited circumstances. Recognize when what appears to be binding consideration is not. Do Now: • Take out your HW (4 scenarios) • Take out your notebook and copy down the Aim.

Forms of Consideration that are Legally Binding in Certain Circumstances – Agreement contains a Termination Clause • Cannot allow party to withdraw at anytime for any reason • MUST STATE: 1. 2. 3. Only after a change in the circumstances After passage of a certain length of time After a set period of termination notice 31

Forms of Consideration that are Legally Binding in Certain Circumstances – Output Contract: Buyer agrees to purchase all of a producer’s production – Requirements Contract: Seller agrees to supply all of the needs to a particular buy – *No specific amount stated – Still enforceable 32

Duty of Fair Dealing • Courts recognize these contracts as supported by consideration because they impose a duty of fair dealing on the parties. • No business should be required to go bankrupt by staying in an output or requirements contract that has become unprofitable through no fault of the termination party. 33

Existing Duty • A person sometimes promises to do something that he or she is already obligated to do by law or in a prior contract. – These promises are Not Enforceable 34

Existing Duty Existing Private Duty • When a duty already exists, a person cannot come back demanding more compensation. ⁻ Ex. You have worked at a law firm for 5 years for $40, 000. Your boss’s competitor offers you a job for $50, 000. You cannot demand this money, you are still bound to the prior contract your signed with your boss. Existing Public Duty • If the law creates a duty to do (or not do) a certain thing, this duty cannot be the basis of consideration in a contract. – Ex. A police officer apprehends an escaped convict. Cannot collect the reward. – Ex. If you make an agreement not to drink alcohol when you are not of age to drink, there is no binding agreement. 35

Settlement of Liquidated Debts • Liquidated debts: The parties agree that the debt exists and on the amount of the debt. – A debtor can settle by paying less than the full amount owed if there is additional consideration. – Must be mutual • Ex. I’ll pay you $500 instead of $600 one month earlier than stated. • Unliquidated debts: Dispute between the parties as to how much is owed. 36

Settlement of Unliquidated Debts n Accord and satisfaction - a payment offered in full settlement by the debtor (accord) and accepted by a creditor settles the claim (satisfaction). • Ex. You say you owe $50 to the creditor, they say you owe $100. You both agree to $75 to settle the debt. - -Binding contract - -Consideration is found because there is mutual forbearance from suing for the amount owed. 37

Case Study: • Alex owed Keith $5, 000 which was due in one year. There was no dispute about the amount. Keith needed the money after two months, so Alex offered to pay $4, 000 early in full settlement of the debt. • If Alex pays the $4, 000 early, will Keith be able to successfully sue and collect the $1, 000 later? 38

Release • When a tort occurs the liability is unliquidated – Why? – because the extent of damages is uncertain. • It is called release if a party settles a claim. • Paying money is sufficient consideration for the promise not to sue. 39

Assignments When Credit Gets Out of Personal Control Assignment Credit card debt has gotten out of control in America. • Research “Credit Card Debt” on the Internet • Describe the current credit situation in the U. S, binding contracts related to credit card, advantages and disadvantages of credit, bankruptcy, and composition with creditors (exists in bankruptcy cases where creditors are happy to accept a percentage of debt owed by the debtor). • This can be hand written or typed. • Due Friday in class. 40

Aim: Recognize when what appears to be binding consideration is not. Do Now: • Take out your HW and place it on my desk • Take the “Liquidated Debts” article from my desk and read

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 later promised or provided. – “I gave you those flowers last month, now pay for my lunch. ” – NOT ENFORCEABLE • Past Performance - an act that has already been performed cannot serve as consideration – “I washed your car last week, you have to clean my house. ” – NOT ENFORCEABLE 42

Exceptions to the Requirements of Consideration • Promises to Charitable Organizations ü Pledges (promises to pay future amounts) ü Party who makes the Pledge/Gift receives nothing in return. ü Courts enforce promises (pledges) when the charity states a specific use for the money and acts in reliance on the pledge. ü Ex. You make a financial pledge to your church, the court can hold you accountable to the amount if the church has specifically indicated the project the money was going to be used for. 43

Exceptions to the Requirements of Consideration Common law -modification of a contract needs consideration Modifications UCC (Uniform Commercial Code) good-faith agreement that modifies an existing contract for the sale of goods needs no new consideration Ex. After a sale has been made, a seller could agree to give the buyers a valid warranty for no extra charge. Firm Offers – A merchant that agrees to keep an offer open 44

Promises Barred from Collection by Statute • Statute of Limitations - states a time limit for bringing a lawsuit (for breach of contract - three years) – If a person is planning to sue for damages, they must be aware of the statute of limitations to make sure their case is not thrown out due to time elapsed. • Debts Discharged in Bankruptcy – Creditors can no longer contact you after filing for bankruptcy. – If a person files bankruptcy with the intention of paying some of the listed creditors in the future, they must list the debts they plan to pay in the future with the bankruptcy court. 45

Assignments ØCase Studies: ØComplete the case study worksheet ØBeing working on your Chapter 8 Exam Review Sheet 46

Promissory Estoppel When someone intends a gift but consideration is 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 is not enforced – Injustice can be avoided only by enforcement of the promise. • This doctrine protects the innocent person who depends on the promise. Ex. If a high school agrees to shovel snow from a 90 year old person’s sidewalk, when there is doubt, promissory estoppel will enforce the promise. 47