LAW FOR BUSINESS AND PERSONAL USE © SOUTH-WESTERN PUBLISHING Chapter 9Slide 1 Mutual Consideration 9-1 9-1What Is Consideration? 9-2 9-2Legal Value and

LAW FOR BUSINESS AND PERSONAL USE LAW FOR BUSINESS AND PERSONAL USE © SOUTH-WESTERN PUBLISHING© SOUTH-WESTERN PUBLISHING

Chapter 9Chapter 9 Slide Slide 11

Mutual Consideration

9-19-1 What Is Consideration?

9-29-2 Legal Value and Bargained-For Exchange

9-39-3 When Is Consideration Not Required?

CHAPTER 9

Lessons



What Is Consideration?

Define considerationDetermine when there is no consideration

LESSON 9-1

GOALS



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.



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 Donor – the person giving the gifto Donee – the person receiving the gift



CONSIDERATION (cont.)

Consideration – that which is given or received in a contract

Three requirements of consideration:

o Each party must give an act, forbearance, or promise to the other party.

o Each party must trade what they contribute to the transaction (act, forbearance, or promise) for the other party’s contribution.

o What each party trades must have legal value, that is, it must be worth something in the eyes of the law.



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.



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.



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



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.



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.



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 The act benefited the neighbor so there is legal value.

It also benefited you because you received $30, which is also a legal value.

o 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.



LEGAL VALUE (cont.)

Can also be found in the exchange of benefit for a detriment.o Arises when you promise forbearance – refraining from doing

something you have a right to do.o 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.



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.



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.



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.



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 Consideration from one party to another may be identified as “one dollar ($1) and other good and valuable consideration.”

o The actual consideration may be more.

Courts will enforce contracts supported by nominal consideration if in fact consideration was given.



Legal Value and Bargained-For Exchange

Identify when there is legal valueDetermine when there is a bargained-for

exchange

LESSON 9-2

GOALS



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.



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.



ILLUSORY PROMISES (cont.)

Major topics discussed:1. Termination Clauses

2. Output and Requirements Contracts

3. Implied Duty of Fair Dealings



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.



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.



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



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



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.



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. Existing Public Duty

2. Existing Private Duty

3. Settlement of Liquidated Debts

4. Settlement of Unliquidated Debts

5. Release

6. Composition of Creditors




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?



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.



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?” Answero Must Lemsky pay her the higher salary?

No, because there was no new consideration provided to hold Lemsky legally

accountable.



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



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.




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.




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.



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



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.”



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.



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



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.



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.



BARGAINED-FOR EXCHANGE

Two main topics discussed:1. Mutual Gifts

2. Past Performance



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?”




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.




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



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.



When Is Consideration Not Required?

Identify when promissory estoppel appliesDiscuss situations in which consideration is not

needed

LESSON 9-3

GOALS



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



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.




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.




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.



EXCEPTIONS TO THE CONSIDERATION REQUIREMENT

Major topics discussed:1. Promises to charitable organizations

2. Statute of limitations

3. Uniform Commerical Code



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.




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.




Can the Branyans be held to their pledge?

Yes, because the hospital entered into a construction contract which depended on that pledge.



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



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



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



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.

Documents

LAW FOR BUSINESS AND PERSONAL USE © SOUTH-WESTERN PUBLISHING Chapter 9Slide 1 Mutual Consideration 9-1 9-1What Is Consideration? 9-2 9-2Legal Value and