Capacity to ContractIllegality

WritingRights of Third Parties

Performance and Remedies

© 2010 The McGraw-Hill Companies, Inc. All rights reserved.

Consideration

Make yourself necessary to someone.

Ralph Waldo Emerson

The Conduct of Life (1860)

© 2010 The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives

Elements of consideration Legal value Bargained-for exchange

Exchanges that fail to meet consideration

Exceptions to consideration requirement

12 - 3

Consideration is legal value bargained for and given in exchange for an act or a promise

Elements of Consideration

12 - 4

Purely gratuitous promises are not enforceable because not supported by consideration Thorne v. Deas

Consideration in the form of an act or promise may have legal value if the person Refrains from doing something the

person has the legal right to do Example: Hamer v. Sidway

Does something the person had no prior legal duty to do

Generally, courts will not examine adequacy of consideration

Legal Value of Consideration

12 - 5

A promisee’s act or promise must have been bargained for and given in exchange for the promisor’s promise Example: Gottlieb v. Tropicana Hotel

and Casino in which participating in a promotion that benefited the company was adequate consideration to form a contract

Bargained-for Exchange

12 - 6

Illusory promises Preexisting duties Past consideration

Exchanges That Are Not Consideration

12 - 7

If promisee’s promise really does not bind promisee to do or refrain from doing a thing, promise is illusory and cannot serve as consideration Example: Heye v. American Golf Corporation,

Inc. in which an employee successfully claimed lack of consideration for an arbitration clause in a contract because mutual obligation did not exist

AGC’s promise to arbitrate was illusory since they could amend the contract at any time

Illusory Promises

12 - 8

As a general rule, performing or agreeing to perform a preexisting duty is not consideration Promisor in such a case has effectively

made a gratuitous promise Includes public duties (obey the law)

and preexisting contractual duties

Preexisting Duties

12 - 9

General rule is an agreement to modify an existing contract requires mutual assent and new consideration Example: Ross v. May Company

Exceptions to general rule: Modification due to unforeseen

circumstances that a party could not reasonably foresee

CISG and UCC 2–209(1): agreement to modify a contract for the sale of goods

Preexisting Duties & Contract Modification

12 - 10

Liquidated debts are debts in which parties have no dispute about the existence or amount of the debt A creditor’s promise to discharge a liquidated

debt for part payment of the debt at or after its due date is unenforceable for lack of consideration

If there is a dispute about the existence or amount of the debt, the debt is unliquidated Settlement agreements are enforceable

Preexisting Duties & Settlement Agreements

12 - 11

Past consideration is an act or benefit given in the past that was not given in exchange for the promise in question, thus it cannot be consideration

Past Consideration

12 - 12

Promissory estoppel, because a donative promise is not a bargained-for exchange Example: Skebba v. Kasch

State statutes that extend promises to pay debts that have been barred by statute of limitations or bankruptcy discharge

Charitable subscriptions (like promissory estoppel)

Exceptions to Consideration Requirement

12 - 13