Consideration Chapter 8

8-1 Types of Consideration Identify the 3 requirements of consideration Discuss the adequacy of consideration

Consideration What a person demands and generally must receive in order to make her or his promise legally binding 3 requirements: –Each party must make a promise, perform an act, or forbear –Party’s promise must be in exchange for a return promise by other party –What each party exchanges must have legal value Must be Mutual – Parties that do not receive the required consideration has no duty to perform their part

Consideration Distinguishes between a contractual promise from a promise to make a gift Binding only after… Donor intentionally transfers a gift Donee accepts

Consideration TERMS: Gift –Transfer of ownership w/o receiving anything in return Donor –Person giving the gift Donee –Person receiving the gift Forbearance –To not do something Promisor -promising an action or forbearance Promisee – person to whom promise was made

Legal Value There has been a change in a party’s legal position as a result of the contract Exchange of benefit for detriment may occur –Abstain from driving until 21 yrs old Forbearance = Detriment Exchange of 2 detriments has legal value –Don’t buy dog, neighbor won’t build fence

Legal Value Adequacy of Consideration –Doesn’t have to be equal to economic value –“courts do not inquire into adequacy of consideration” –Big difference could mean mutual mistake, duress, undue influence, or fraud –Grossly inadequate = unconscionable May not be enforceable Nominal Consideration –Token amount stated instead (ie. $1) –May not want to publicize in public records

Assignment P , 8 Practice Activity 8-1 (worksheet)

8-2 Questionable Consideration Describe situations in which consideration is present only under limited circumstances Recognize when what appears to be binding consideration is not

Circumstantial Consideration Certain forms of consideration are only legally binding in proper circumstances…properly worded provisions or patterns of behavior. A.Illusory Promises Promise must create a duty or impose an obligation –Allows you to escape the legal obligation –One party granted the right to terminate for any reason Termination clauses – allowed if change in circumstances ie. After period of time Output and Requirement contracts

B.Existing Duty  Can not serve as consideration  Existing Public Duty, Existing Private Duty IE. No alcohol for 2 years after turning 16  Liquidated debt Parties agree that the debt exists and amount Debtor can settle for less if additional consideration is provided Circumstantial Consideration

B.Existing Duty  Unliquidated debt Genuine dispute between how much is owed Accord and Satisfaction –Payment offered for full settlement and accepted by creditor  Release Discharge another from liability in tort cases in exchange for monetary payment  Composition with creditors Creditors agree to accept less than entitled; debtor agrees to Not file bankruptcy

False Consideration Mutual Gifts Past Performance –Contractual bargaining takes place in the present –Immediate or future performance by both parties –Act already been done can NOT serve as consideration

Assignments P , 8 Practice Activity 8-2 (worksheet)

8-3 Consideration is not Required Distinguish situations in which consideration is not needed Recognize when the doctrine of promissory estoppel can be applied

Exceptions to Requirements 1.Promises to Charitable Organizations –No exchange of consideration among parties –Courts enforce such promises if charity proves specific use of the funds and acted in reliance to the pledge What’s Your Verdict p Promises covered by the UCC –Firm offers –Modifications Ie. Warranty added after the agreement at no charge

3. Promises Barred from Collection by Statue A.Statute of limitations o specifies a time limit for bringing a lawsuit o 3 years for contracts B.Debts discharged in bankruptcy o Obligation may be reaffirmed by debtor Exceptions to Requirements

4. Promissory Estoppel –Allow courts to take action for equity and fairness –Prevents promisors from stating in court that they didn’t receive consideration…promises than can be enforced –Conditions : Promisor should reasonably forsee that the promisee will rely on the promise The promisee does 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 Exceptions to Requirements

Assignment 8-3 P , 8 Practice Activity 8-3 (worksheet)