Download LESSON 9-1 What is Consideration?

CHAPTER 9
Chapter 9 Slide 1
Mutual Consideration
Lessons
9-1 What Is Consideration?
9-2 Legal Value and Bargained-For
Exchange
9-3 When Is Consideration Not Required?
LAW FOR BUSINESS AND PERSONAL USE
© SOUTH-WESTERN PUBLISHING
LESSON 9-1
Chapter 9 Slide 2
What Is
Consideration?
GOALS
 Define consideration
 Determine when there is no consideration
LAW FOR BUSINESS AND PERSONAL USE
© SOUTH-WESTERN PUBLISHING
Chapter 9 Slide 3
CONSIDERATION
 The main purpose of consideration is to
distinguish between social promises
(gift) and more serious transactions
where one thing is being exchanged for
something else.
o Ex. A birthday gift for a friend vs.
services from a utility company.
LAW FOR BUSINESS AND PERSONAL USE
© SOUTH-WESTERN PUBLISHING
Chapter 9 Slide 4
CONSIDERATION (cont.)
 Gift – the transfer of ownership without
receiving anything in return.
 Shifting ownership – ownership of a gift
remains with the owner (donor) until the
owner gives the gift to the other party
(donee).
o
o
Donor – the person giving the gift
Donee – the person receiving the gift
LAW FOR BUSINESS AND PERSONAL USE
© SOUTH-WESTERN PUBLISHING
Chapter 9 Slide 5
CONSIDERATION (cont.)
 Consideration – that which is given or received in a
contract
 Three requirements of consideration:
o
o
o
Each party must give an act, forbearance, or promise
to the other party.
Each party must trade what they contribute to the
transaction (act, forbearance, or promise) for the other
party’s contribution.
What each party trades must have legal value, that is,
it must be worth something in the eyes of the law.
LAW FOR BUSINESS AND PERSONAL USE
© SOUTH-WESTERN PUBLISHING
Chapter 9 Slide 6
WHAT’S YOUR VERDICT?
Your neighbors are going skiing in the Canadian
Rockies near Calgary, Alberta. Their vacation
will last 10 days. They unilaterally offer to pay
you $30 on their return if you pick up their mail
each day they are gone. You accept by picking
up their mail every day.
LAW FOR BUSINESS AND PERSONAL USE
© SOUTH-WESTERN PUBLISHING
Chapter 9 Slide 7
WHAT’S YOUR VERDICT? (cont.)
 Is there consideration for both parties? Is
the contract enforceable?
Yes, you contributed to picking up their mail,
and they offered to pay you $30. There was an
act and a promise.
LAW FOR BUSINESS AND PERSONAL USE
© SOUTH-WESTERN PUBLISHING
Chapter 9 Slide 8
ACT, FORBEARANCE, OR
PROMISE
 In the last example, you (the person
staying at home) contributed by picking
up the mail each day.
o This is considered an act.
 The act was traded for the neighbors
promise to pay the $30.
 Forbearance – to not do something
LAW FOR BUSINESS AND PERSONAL USE
© SOUTH-WESTERN PUBLISHING
Chapter 9 Slide 9
TRADING
 Promisor – person promising an action or
forbearance
 Promisee – person to whom the promise is
made
 In most contracts, trading arises as one party
exchanges a promise for the promise of the
party on the other side.
LAW FOR BUSINESS AND PERSONAL USE
© SOUTH-WESTERN PUBLISHING
Chapter 9 Slide 10
TRADING (cont.)
 Consideration must be mutual.
o Each party must give consideration, and each
party must receive consideration.
o Can be given by conferring (discussing) a
benefit or by incurring a detriment (loss or
damage).
o If either party does not give consideration, the
other has no duty to perform as promised.
LAW FOR BUSINESS AND PERSONAL USE
© SOUTH-WESTERN PUBLISHING
Chapter 9 Slide 11
LEGAL VALUE
 Legal Value – there has been a change in a party’s
legal position as a result of a contract.
 From What’s Your Verdict?:
o
o
The act benefited the neighbor so there is legal value.
It also benefited you because you received $30, which
is also a legal value.
The act and promise had legal value and were traded,
therefore consideration is present and there is a
contract.
 Legal value is most commonly found in this form –
the exchange of two benefits.
LAW FOR BUSINESS AND PERSONAL USE
© SOUTH-WESTERN PUBLISHING
Chapter 9 Slide 12
LEGAL VALUE (cont.)
 Can also be found in the exchange of benefit for a detriment.
o
o
Arises when you promise forbearance – refraining from doing
something you have a right to do.
This is a change in your legal position and is therefore valid
consideration.
 Can also be found in the exchange of two detriments.
o
Ex: If you tell your neighbor that you will not buy a dog if they
don’t put up a fence.
 Both parties changed their legal position, therefore there
is consideration.
LAW FOR BUSINESS AND PERSONAL USE
© SOUTH-WESTERN PUBLISHING
Chapter 9 Slide 13
ADEQUACY OF
CONSIDERATION
 What each party gives and gets as
consideration does not need to be of equal
economic value.
 Economic value is unimportant as long as
there is genuine agreement.
o If there is a big difference in economic value,
there may be an issue in the agreement,
which may lead the court to deem the
contract unenforceable.
LAW FOR BUSINESS AND PERSONAL USE
© SOUTH-WESTERN PUBLISHING
Chapter 9 Slide 14
IN THIS CASE….
While cleaning out his garage, Shreve found an old glass
lampshade. He showed it to Laval, who thought it was an
authentic Tiffany antique. Laval offered to buy it for $150,
and Shreve accepted. When Shreve later learned that it
was worth at least $450, he tried to cancel the contract
and reclaim the lampshade. “Your miserable $150 was
not a fair price!” he said. “That shade is worth at least
three times as much!” Shreve sued, but lost because
$150 is sufficient consideration for a $450 lamp.
LAW FOR BUSINESS AND PERSONAL USE
© SOUTH-WESTERN PUBLISHING
Chapter 9 Slide 15
IN THIS CASE….
 Why was the $150 offer “sufficient” for a $450
lampshade?
The determination may be based on personal needs and
desires, market supply/demand, and a party’s ability to
evaluate.
If the difference in value is extreme, it may indicate there
is no genuine agreement.
LAW FOR BUSINESS AND PERSONAL USE
© SOUTH-WESTERN PUBLISHING
Chapter 9 Slide 16
NOMINAL CONSIDERATION
 Nominal consideration – token amount identified in a
written contract when parties either cannot or do not
wish to state the amount precisely.
o
o
Consideration from one party to another may be
identified as “one dollar ($1) and other good and valuable
consideration.”
The actual consideration may be more.
 Courts will enforce contracts supported by nominal
consideration if in fact consideration was given.
LAW FOR BUSINESS AND PERSONAL USE
© SOUTH-WESTERN PUBLISHING
Chapter 9 Slide 17
LESSON 9-2
Legal Value and
Bargained-For Exchange
GOALS
 Identify when there is legal value
 Determine when there is a bargained-for
exchange
LAW FOR BUSINESS AND PERSONAL USE
© SOUTH-WESTERN PUBLISHING
Chapter 9 Slide 18
LEGAL VALUE
 Legal Value - change in the legal position of
a party as a result of a contract.
 When a benefit is promised, the promise has
his or her legal rights increased, so this has
legal value.
o Ex: If you promise to paint your neighbor’s
house for $3,000, you’ve increased your
neighbor’s legal benefit to include painting the
house.
LAW FOR BUSINESS AND PERSONAL USE
© SOUTH-WESTERN PUBLISHING
Chapter 9 Slide 19
ILLUSORY PROMISES
 To be consideration, promises must be
binding.
o Must create a duty or impose an obligation.
 If a contract contains a clause that allows you to
escape the legal obligation, the promise is said to be
illusory (misleading).
o Ex: If you have a clause that states “paint the
house – if you have time.”

You may never have time to paint the house.
LAW FOR BUSINESS AND PERSONAL USE
© SOUTH-WESTERN PUBLISHING
Chapter 9 Slide 20
ILLUSORY PROMISES (cont.)
 Major topics discussed:
1. Termination Clauses
2. Output and Requirements Contracts
3. Implied Duty of Fair Dealings
LAW FOR BUSINESS AND PERSONAL USE
© SOUTH-WESTERN PUBLISHING
Chapter 9 Slide 21
ILLUSORY PROMISES (cont.)
Ms. Miller, a high school government teacher, says to
her students: “All of you have worked hard, and if you
continue to perform at this high level, I’ll pay for a pizza
party for the class 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.
Can the students enforce the promise?
No, it’s an illusory promise because performance is solely
determined by the teacher.
LAW FOR BUSINESS AND PERSONAL USE
© SOUTH-WESTERN PUBLISHING
Chapter 9 Slide 22
TERMINATION CLAUSES
 Businesses typically include termination clauses in
contracts in case their circumstances change.
 A termination clause gives one party the power to
terminate a contract for any reason; the promise to
perform would be illusory.
 On the other hand, if termination is allowed only
after a change in defined circumstances or a specific
length of time, the promise would not be illusory.
LAW FOR BUSINESS AND PERSONAL USE
© SOUTH-WESTERN PUBLISHING
Chapter 9 Slide 23
OUTPUT AND REQUIREMENTS
CONTRACTS
 In some situations, buyers sometimes agree
to purchase all of a particular producer’s
production.
o Ex: A steel company may buy all of the
output of a nearby coal mining company.
 Output contract - agreement to purchase all
of a particular producer's production
LAW FOR BUSINESS AND PERSONAL USE
© SOUTH-WESTERN PUBLISHING
Chapter 9 Slide 24
OUTPUT AND REQUIREMENTS
CONTRACTS (cont.)
 On the other hand, a seller may agree to
supply all of the needs of a particular buyer.
o Ex: A carburetor manufacturer may agree to
supply all the carburetors needed for a certain
make of vehicle.
 Requirements contract - seller agrees to
supply all of the needs of a particular buyer
LAW FOR BUSINESS AND PERSONAL USE
© SOUTH-WESTERN PUBLISHING
Chapter 9 Slide 25
IMPLIED DUTY OF FAIR
DEALINGS
 When the different types of clauses create
what seem to be illusory promises, some
states will find an implied duty of fair
dealings.
o
Means the clause(s) cannot be exercised arbitrarily,
but must be exercised in a way that constitutes fair
dealings.
LAW FOR BUSINESS AND PERSONAL USE
© SOUTH-WESTERN PUBLISHING
Chapter 9 Slide 26
EXISTING DUTY
 A person sometimes promises to do something that he or
she is already obligated to do by law or by prior contract.
o
A promise or act of such cannot serve as consideration.
 Six major topics discussed:
1.
2.
3.
4.
5.
6.
Existing Public Duty
Existing Private Duty
Settlement of Liquidated Debts
Settlement of Unliquidated Debts
Release
Composition of Creditors
LAW FOR BUSINESS AND PERSONAL USE
© SOUTH-WESTERN PUBLISHING
Chapter 9 Slide 27
WHAT’S YOUR VERDICT?
Lemsky employed Vork under a three-year contract. The
contract called for Vork to manage a motel for Lemsky at
$25,000 a year, as well as receive a free apartment. After six
months, Flemming offered Vork $30,000 a year to manage a
larger motel. Upon learning of the offer, Lemsky said to Vork,
“You’re competent. You’re honest. I need you. I’ll meet any
offer you get from anyone else.” Vork remains on the job.
Must Lemsky pay her the higher salary?
LAW FOR BUSINESS AND PERSONAL USE
© SOUTH-WESTERN PUBLISHING
Chapter 9 Slide 28
EXISTING PUBLIC DUTY
 If on your 16th birthday your aunt promised
to pay you $10,000 if you promised to not
purchase alcohol for two years and you
said, “Okay,” this would not be a contract.
o It is illegal for you to purchase alcohol at 16
years of age.
 The agreement benefits you, but you don’t receive
a detriment (loss) because you are not giving up a
legal right.
LAW FOR BUSINESS AND PERSONAL USE
© SOUTH-WESTERN PUBLISHING
Chapter 9 Slide 29
EXISTING PRIVATE DUTY
 If a contract creates a duty, this duty cannot
be the basis of consideration in a different
contract.
 “What’s Your Verdict?” Answer
o Must Lemsky pay her the higher salary?
No, because there was no new consideration
provided to hold Lemsky legally accountable.
LAW FOR BUSINESS AND PERSONAL USE
© SOUTH-WESTERN PUBLISHING
Chapter 9 Slide 30
SETTLEMENT OF LIQUIDATED
DEBTS
 Liquidated debt - debt for which the
parties agree that the debt exists and on
the amount of debt
 Creditor – a person to whom a debt is
owed
 Debtor – a person who owes money to a
creditor
LAW FOR BUSINESS AND PERSONAL USE
© SOUTH-WESTERN PUBLISHING
Chapter 9 Slide 31
SETTLEMENT OF LIQUIDATED
DEBTS (cont.)
 When a creditor agrees to accept less than
the total amount due in full settlement from
a debtor, there is no consideration if the
debt is liquidable.
 A debtor can settle a claim by paying less
than the full amount if additional
consideration is given.
 There must be mutual agreement between
both parties to do so.
LAW FOR BUSINESS AND PERSONAL USE
© SOUTH-WESTERN PUBLISHING
Chapter 9 Slide 32
SETTLEMENT OF LIQUIDATED
DEBTS (cont.)
Shawver borrows $1,000 from Reno. The loan is to be
paid in one year with interest at 10% per year, or a total
amount of $1,100. On the due date, Shawver sends Reno
a check for only $1,000, saying “Sorry, I’m strapped for
cash. You will have to accept this in full payment.” Reno
endorses and cashes the check. Reno may later sue and
recover the unpaid balance of $100.
LAW FOR BUSINESS AND PERSONAL USE
© SOUTH-WESTERN PUBLISHING
Chapter 9 Slide 33
SETTLEMENT OF LIQUIDATED
DEBTS (cont.)
 Does Reno have the legal right to sue for the
remaining $100?
Yes, there was no consideration for the suggested
agreement to reduce the amount due.
LAW FOR BUSINESS AND PERSONAL USE
© SOUTH-WESTERN PUBLISHING
Chapter 9 Slide 34
SETTLEMENT OF
UNLIQUIDATED DEBTS
 In some cases, there is a genuine dispute between
parties about how much is owed.
 Partial payment offered in full settlement by the
debtor and accepted by a creditor settles the claim.
 Accord and satisfaction - parties' agreement to
change the obligation required by their original
contract and the performance of the new obligation
LAW FOR BUSINESS AND PERSONAL USE
© SOUTH-WESTERN PUBLISHING
Chapter 9 Slide 35
SETTLEMENT OF
UNLIQUIDATED DEBTS
 Ex: A debtor may in good faith claim that a certain
debt is $500. The creditor in good faith contends
that it is worth $1,000. If the parties compromise
on $750, their agreement is binding.
o Consideration is found in their mutual forbearance.
 The disputed claim would be settled if the creditor cashed
the check and noted “In full settlement of all claims
outstanding.”
LAW FOR BUSINESS AND PERSONAL USE
© SOUTH-WESTERN PUBLISHING
Chapter 9 Slide 36
RELEASE
 At the time most torts occur, the liability is
unliquidated because the extent of damages is
uncertain.
 Release – a party settles a claim at the time a tort
occurs.
 The payment of money is sufficient consideration
for the promise not to sue.
 Many people are hurt financially by signing a
release too soon.
LAW FOR BUSINESS AND PERSONAL USE
© SOUTH-WESTERN PUBLISHING
Chapter 9 Slide 37
COMPOSITION OF CREDITORS
 Composition of Creditors - agreement by all
creditors to accept something less than the total
amount of their claims as full payment
o This agreement protects themselves from losing
more if the debtor files for bankruptcy.
 Releases a debtor from full payment
LAW FOR BUSINESS AND PERSONAL USE
© SOUTH-WESTERN PUBLISHING
Chapter 9 Slide 38
A QUESTION OF ETHICS
A motorist and her two young children are
stranded in the parking lot of a shopping mall with
a dead car battery. Having just completed your
driver’s education course, you connect the two
batteries with jumper cables. With your engine
running, she turns her key and her engine starts
smoothly. Grateful, she asks for your address and
promises to send you $25.
LAW FOR BUSINESS AND PERSONAL USE
© SOUTH-WESTERN PUBLISHING
Chapter 9 Slide 39
A QUESTION OF ETHICS (cont.)
 Is she legally bound to keep her promise?
No, she promised to do it after you jump-started her battery.
For there to be consideration, the bargaining must take
place in the present, for a present or future act.
 Is she ethically bound to do so?
Yes, because she promised to send him the money so she
should keep her word.
LAW FOR BUSINESS AND PERSONAL USE
© SOUTH-WESTERN PUBLISHING
Chapter 9 Slide 40
BARGAINED-FOR EXCHANGE
 Two main topics discussed:
1. Mutual Gifts
2. Past Performance
LAW FOR BUSINESS AND PERSONAL USE
© SOUTH-WESTERN PUBLISHING
Chapter 9 Slide 41
MUTUAL GIFTS
 The consideration on both sides must be
traded one for the other.
 If they are not traded, there are two gifts
being made.
 See “What’s Your Verdict?”
LAW FOR BUSINESS AND PERSONAL USE
© SOUTH-WESTERN PUBLISHING
Chapter 9 Slide 42
WHAT’S YOUR VERDICT?
Francis, a pedestrian, saw a car pulled over by the side
of the road with a flat tire. He came to the driver’s aid,
replacing the flat with the spare tire. Then he
accompanied the driver to the nearest gas station
where her flat was repaired. She thanked Francis and
said she would give him $20 on her next payday. Later
she changed her mind, and Francis sued.
LAW FOR BUSINESS AND PERSONAL USE
© SOUTH-WESTERN PUBLISHING
Chapter 9 Slide 43
WHAT’S YOUR VERDICT? (cont.)
 Can Francis win the $20?
No, the promise came after the deed was done. Even
where the gifts have legal value, they are not
consideration unless they arise from a bargained-for
exchange.
 Is there an ethical duty?
Absolutely
LAW FOR BUSINESS AND PERSONAL USE
© SOUTH-WESTERN PUBLISHING
Chapter 9 Slide 44
PAST PERFORMANCE
 If bargaining takes place in the present for
immediate or future performance,
consideration is present.
 If an act has already been performed, there
is no consideration and is called past
consideration.
LAW FOR BUSINESS AND PERSONAL USE
© SOUTH-WESTERN PUBLISHING
LESSON 9-3
Chapter 9 Slide 45
When Is Consideration
Not Required?
GOALS
 Identify when promissory estoppel applies
 Discuss situations in which consideration is not
needed
LAW FOR BUSINESS AND PERSONAL USE
© SOUTH-WESTERN PUBLISHING
Chapter 9 Slide 46
PROMISSORY ESTOPPEL
 There are exceptions to the general
rule that mutual consideration is
necessary for a valid contract or
binding promise.
 Promissory Estoppel - promise is
enforced even though no consideration
is given for it
LAW FOR BUSINESS AND PERSONAL USE
© SOUTH-WESTERN PUBLISHING
Chapter 9 Slide 47
PROMISSORY ESTOPPEL (cont.)
The following conditions must be met for promissory
estoppel to apply:
 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.
LAW FOR BUSINESS AND PERSONAL USE
© SOUTH-WESTERN PUBLISHING
Chapter 9 Slide 48
WHAT’S YOUR VERDICT?
Silvertone, a wealthy financier, strongly believes that
world travel is essential for a balanced education.
Accordingly, he told his twin niece and nephew that if
they would “cap their college degrees with a trip around
the world,” he would pay all of their expenses upon their
return, up to $9,500 for each. Using savings and some
borrowed money, the twins took off on a 90-day journey.
Total reasonable expenses for each exceeded $9,500
by the time they returned home.
LAW FOR BUSINESS AND PERSONAL USE
© SOUTH-WESTERN PUBLISHING
Chapter 9 Slide 49
WHAT’S YOUR VERDICT?
 Is Silvertone liable to the twins?
Yes, he is legally bound to reimburse them up to
$9,500. Although he did not receive any consideration
from the twins for his promise, he is estopped from
denying he offered them a gift.
LAW FOR BUSINESS AND PERSONAL USE
© SOUTH-WESTERN PUBLISHING
Chapter 9 Slide 50
EXCEPTIONS TO THE
CONSIDERATION REQUIREMENT
 Major topics discussed:
1. Promises to charitable organizations
2. Statute of limitations
3. Uniform Commerical Code
LAW FOR BUSINESS AND PERSONAL USE
© SOUTH-WESTERN PUBLISHING
Chapter 9 Slide 51
PROMISES TO CHARITABLE
ORGANIZATIONS
 Individuals and businesses often contribute money
to nonprofit or charitable organizations such as
churches, schools, and hospitals.
 The contributions may be outright gifts or promises
(pledges) to pay in the future.
o Pledges are enforceable provided the charity states a
specific use for the money and actually acts in
reliance on the pledge.
LAW FOR BUSINESS AND PERSONAL USE
© SOUTH-WESTERN PUBLISHING
Chapter 9 Slide 52
WHAT’S YOUR VERDICT?
Branyan pledged $25,000 to the building fund of the
community hospital. Relying on this and other pledges, the
hospital’s board of directors entered into a contract for
construction of a new section.
LAW FOR BUSINESS AND PERSONAL USE
© SOUTH-WESTERN PUBLISHING
Chapter 9 Slide 53
WHAT’S YOUR VERDICT? (cont.)
 Can the Branyans be held to their pledge?
Yes, because the hospital entered into a construction
contract which depended on that pledge.
LAW FOR BUSINESS AND PERSONAL USE
© SOUTH-WESTERN PUBLISHING
Chapter 9 Slide 54
STATUTE OF LIMITATIONS
 Statute of limitations - state laws setting time
limits for bringing a lawsuit
 Knowing the law, you must sue before the
statute of limitations passes or you cannot sue.
 SOL for breach of contract or torts = 3 years
LAW FOR BUSINESS AND PERSONAL USE
© SOUTH-WESTERN PUBLISHING
Chapter 9 Slide 55
UNIFORM COMMERCIAL CODE
(UCC)
 In common law, a promise to leave an offer
open is not enforceable.
o Only when the offeree has provided
consideration is this promise enforceable.
 Option contract - underlying contract to keep
an option open
LAW FOR BUSINESS AND PERSONAL USE
© SOUTH-WESTERN PUBLISHING
Chapter 9 Slide 56
FIRM OFFER
 Under the UCC, 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
up to three months even when no payment or
other consideration has been given for the
promise.
 Firm offer - binding offer stating in writing how
long it is to be held open
LAW FOR BUSINESS AND PERSONAL USE
© SOUTH-WESTERN PUBLISHING
Chapter 9 Slide 57
MODIFICATIONS
 At common law modification of a contract needs
consideration.
o
Unless it’s a good-faith agreement that modifies an existing
contract.
 Ex: After a sale has been made, a seller could agree to give
the buyers a valid warranty without further charge.
o
Modification is enforceable though not supported by
consideration.
LAW FOR BUSINESS AND PERSONAL USE
© SOUTH-WESTERN PUBLISHING