2 ConsiderationConsideration – What a person demands and generally must receive in order to make promise legally binding.
3 Consideration Three Requirement of Consideration Each party must make a promise, perform an act, or forbear (refrain from doing something)Each parties promise, act, or forbearance must be in exchange for a return promise, act, or forbearance by the other partyWhat each party exchanges must have legal value (must be worth something in the eyes of the law)
4 ConsiderationConsideration distinguishes a contractual promise from a promise to make a gift.Gift – Transfer of ownership without receiving anything in return.Gifts are not generally not legally enforceableGift only becomes legally binding once the gift is exchanged.Donor – person giving the giftDonee – Person receiving the gift
5 Promise, Act, or Forbearance Forbearance – to not do something
6 Contractual ExchangePromisor – Person promising an action or forbearancePromisee – Person to whom promise is made to.Consideration must be mutual
7 Legal ValueLegal Value – Means there has been a change in a party’s legal position as a result of the contractMost commonly found in the exchange of two benefits.Can also be found in the exchange of benefit for a detriment (forbearing of a legal right)Example – If you refrain from driving until you are 25, I will give you $25,000.Not a benefit but a detriment to you (giving up your legal right)
8 Adequacy of Consideration Economic value is unimportant as long as there is genuine assentHowever, if the economic value is evidence of mutual mistake, duress, undue influence, or fraud, the contract could be declared unconscionable (grossly unfair or oppressive) and may not be enforceable
10 8-1 AssessmentTurn to page 144 and complete 8-1 Assessment
11 8-1 AnswersFalseGiftAdequacy or economic valueA (nominal)
12 8-1 Answers The parties are bound. Given up the right The neighbors did receive considerationYes. The adequacy of consideration will not be questioned.
13 Circumstantial Consideration Illusory Promises – Clause in contract that allows you to escape the legal obligationTermination Clauses – Power to withdraw from a contract if business circumstances change.Output Contract – Buyers agree to purchase all of a particular producer’s productionRequirements Contract – Seller agrees to supply all of the needs of a particular buyer.
14 Circumstantial Consideration Existing Duty – A person sometimes promises to do something that he or she already is obligated to do by law or contractSuch a promise or act, cannot serve as consideration
15 Existing DutiesExisting Public Duty – Agreement creates a benefit for you, but you don’t incur a detriment because you are not giving up a legal rightExample: Aunt promises to pay you $10,000 if you promise to not purchase alcohol for two years and you say “OK”. No contract
16 Existing DutiesExisting Private Duty – A person cannot demand further compensation for carrying out a contractual promise already madeSettlement of Liquidated Debts (is where the parties agree that the debt exists and on the amount of the debt)When a creditor (person to whom the debt is owed) agrees to accept less than the total amount due in full settlement from the debtor (person who owes money) there is no consideration if the debt is liquidated
17 Existing Duties Settlement of Liquidated Debts Assume Frank borrows $1000 from Carrie. The loan is to be paid back in one year with interest at 10% per year, or a total payment of $1,100. Frank sends a check to Carrie on the due date for $1,000 and a note saying “Sorry, I’m strapped for cash. You will have to accept this in full payment.” Carrie endorses and cashes the check.
18 Existing Duties Settlement of Liquidated Debts A debtor can settle a claim by paying less than the full amount if additional consideration is given.Must be mutual agreement
19 Existing Duties Settlement of Unliquidated Debts When there is a genuine dispute between the parties about how much is owed is referred to as unliquidated.Accord and Satisfaction - Payment offered in full settlement by the debtor and accepted by the creditor settles the claimAccord – New agreement on the sum
20 Existing DutiesRelease – An agreement, due to financial pressures, an injured party in a tort will agree to discharge another from liability for the tort in return for a monetary payment or other considerationComposition with Creditors – Group a creditors will cooperatively agree to accept less than what they are entitled to, in full satisfaction of their claims against a debtor.Debtor agrees not to file for bankruptcyCreditors agree not to sue for the entire amount
21 False ConsiderationMutual Gift – Something of value given by one party to another without demanding anything in returnPast Performance – Act already performed cannot serve as consideration
22 8-2 AssessmentTurn to page 148 and complete the 9 questions
23 Exceptions to the Requirement of Consideration Promises to Charitable OrganizationsGift is enforceable providing the charity states a specific use for the money and actually acts in reliance on the pledgePromises Covered by the UCCModifications made in good-faith needs no new consideration
24 Exceptions to the Requirement of Consideration Promises Barred from Collection by StatuteStatute of Limitations – Time limit to bring a lawsuitOnce you become aware of a legal claim, you must sue before statute of limitations passes or you lose the right to litigateDebts Discharged in BankruptcyEven after a debt has been discharged as a result of bankruptcy, the obligation may be reinstated by a promise of the debtor. This is done by cosignor
25 Exceptions to the Requirement of Consideration Promissory EstoppelPrevents promisors from stating in court that they did not receive consideration for their promises4 conditions to invoke Promissory EstoppelThe promisor should reasonably foresee that the promisee will rely on the promiseThe promisee does, in fact, act in reliance on the promiseThe promisee would suffer a substantial economic loss if the promise is not enforcedInjustice can be avoided only by enforcement of the promise