3 Contracts Introduction to Contracts The Agreement: Offer The Agreement: Acceptance Consideration Reality of Consent McGraw-Hill/Irwin Business Law, 13/e © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

3 Contracts Capacity to Contract Illegality Writing Rights of Third Parties Performance & Remedies McGraw-Hill/Irwin Business Law, 13/e © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

12 Consideration “Make yourself necessary to someone.” H A P T E R Consideration “Make yourself necessary to someone.” Ralph Waldo Emerson, The Conduct of Life (1860)

Learning Objectives Elements of consideration Legal value Bargained-for exchange Exchanges that fail to meet consideration Exceptions to consideration requirement 12 - 5

Elements of Consideration Consideration is legal value bargained for and given in exchange for an act or a promise 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 Does something the person had no prior legal duty to do Purely gratuitous promises are not enforceable because not supported by consideration Example: early case of Thorne v. Deas, in which part owner of sailing ship promised co-owners he would insure the ship for upcoming voyage. He failed to do so, and when the ship was lost at sea, court found he was not liable to co-owners for breaching his promise because his promise was purely gratuitous; he had neither asked for nor received anything in exchange for making it. Example of legal value: Hamer v. Sidway In famous 19th-century case, Hamer v. Sidway, an uncle’s promise to pay his nephew $5,000 if he refrained from using tobacco, drinking, swearing, and playing cards or billiards for money until his 21st birthday was held to be supported by consideration. Indeed, the nephew had refrained from doing any of these acts, even though he may have benefited from so refraining. He had a legal right to indulge in such activities, yet he had refrained from doing so at his uncle’s request and in exchange for his uncle’s promise. This was all that was required for consideration. Generally, courts will not examine adequacy of consideration 12 - 6

Bargained-for Exchange 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 Rena and Sheldon Gottlieb were vacationing in Atlantic City, New Jersey, and visited the Tropicana casino. Tropicana offers people membership in its “Diamond Club.” To become a Diamond Club member, an individual must visit a promotional booth in the casino, obtain and fill out an application form, and show identification. There is no charge. The application form lists the person’s name, address, telephone number, and e-mail address, and this information is entered into the casino’s computer database. Each member receives a Diamond Club card that has a unique identification number. The member then presents or “swipes” the card in a machine each time he or she plays a game at the casino, and the casino obtains information about the member’s gambling habits. The casino’s marketing department then uses that information to tailor its promotions. Rena Gottlieb was, and had been for a number of years, a member of the Diamond Club. When she entered the casino on July 24, she immediately went to the Fun House Million Dollar Wheel Promotion, which offers participants the chance to win a grand prize of $1 million. Diamond Club members were entitled to one free spin of the Million Dollar Wheel each day. She presented her Diamond Club card, a casino operator swiped it through the card reader, she pressed a button to activate the wheel, and the wheel began spinning. Gottlieb claims that the wheel landed on the $1 million grand prize, but when it did so, the casino attendant immediately swiped another card through the machine, reactivated the wheel, and the wheel landed on a prize of two show tickets. Tropicana denies that its attendant intervened and reactivated the wheel, and contends that the wheel simply landed on the lesser prize. Ms. Gottlieb sued Tropicana for breach of contract, among other theories, and Tropicana moved for summary judgment. Court: According to Tropicana, participation in a promotion such as the Million Dollar Wheel cannot constitute consideration that would support the formation of an enforceable contract. [We disagree] Ms. Gottlieb had to go to the casino to participate in the promotion. She had to wait in line to spin the wheel. By presenting her Diamond Club card to the casino attendant and allowing it to be swiped into the casino’s machine, she was permitting the casino to gather information about her gambling habits. Additionally, by participating in the game, she was a part of the entertainment that casinos, by their very nature, are designed to offer to all of those present. All of these detriments to Ms. Gottlieb were the requested detriments to the promisee induced by the promise of Tropicana to offer her a chance to win $1 million. Tropicana’s motives in offering the promotion were “in nowise altruistic.” It offered the promotion in order to generate patronage of and excitement within the casino. In short, Ms. Gottlieb provided adequate consideration to form a contract with Tropicana. Tropicana further challenges Ms. Gottlieb’s breach of contract claim on the grounds that it is clear as a matter of law that she did not win the $1 million prize. Tropicana points to computer records in support of its position that Ms. Gottlieb did not win the grand prize. Ms. Gottlieb relies in part on her own testimony and the testimony of her husband, who witnessed her spin of the promotional wheel. It is for the jury, and not for the court, to resolve this factual dispute. Motion for summary judgment on the contract claim denied in favor of Ms. Gottlieb. 12 - 7

Illusory Promises 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 See Heye v. American Golf Corporation, Inc. 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. American Golf Corporation (AGC) hired Melissa Heye for a job in the pro shop. After Heye was hired but before she began working, AGC gave Heye a number of documents, including the Co-Worker Alliance Handbook. On page 20 of the handbook was a reference to arbitration that essentially stated that binding arbitration would be the exclusive means of resolving all disputes. Page 23 of the handbook contained an acknowledgment. Heye worked for AGC and later sued AGC on a variety of grounds. AGC moved to compel arbitration. The trial court initially granted this motion, but after Heye filed a motion for reconsideration, the trial court denied AGC’s motion. AGC appealed. Court: We interpret an arbitration agreement under the rules of state contract law. For a contract to be legally valid and enforceable, it must be factually supported by an offer, an acceptance, consideration, and mutual assent. AGC asserts that the arbitration agreement is supported by consideration in the form of AGC’s agreement to arbitrate. …A valid contract must possess mutuality of obligation. … When a promise puts no constraints on what a party may do in the future—in other words, when a promise, in reality, promises nothing—it is illusory, and it is not consideration. …Heye contends AGC is “free to amend, supplement, rescind or revise the policy regarding arbitration at its whim.” We disagree with AGC … The agreement, in essence, gives AGC unfettered discretion to terminate arbitration at any time, while binding Heye to arbitration. AGC remains free to selectively abide by its promise to arbitrate; the promise, therefore, is illusory. Denial of motion to compel arbitration affirmed in favor of Heye. 12 - 8

No Consideration Generally, performing or agreeing to perform a preexisting duty is not consideration Promisor effectively made gratuitous promise Includes public duties (obey the law) and preexisting contractual duties 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 Preexisting duties and contract modification: General rule is an agreement to modify an existing contract requires new consideration 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 and settlement agreements: 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 12 - 9

Test Your Knowledge True=A, False = B Consideration is legal value bargained for and given in exchange for an act or a promise A person who agrees not to file suit has not provided valid consideration Courts always examine the adequacy of consideration True False – refraining from something a person is not legally obligated to do is valid consideration. False – courts do not examine the adequacy of consideration unless fraud is alleged 12 - 10

Test Your Knowledge Multiple Choice A person who agrees to obey the law has provided __________ consideration. (a) No consideration (a preexisting duty) (b) Adequate consideration that is binding and enforceable To be valid under the UCC, an agreement to modify a contract for the sale of goods: (a) Does not need new consideration (b) Requires new consideration The correct answer is (a) The correct answer is (a). The CISG and UCC 2–209(1) provide an exception to the general rule and state that an agreement to modify a contract for the sale of goods does not need new consideration. 12 - 11

Thought Question Your Aunt agrees to buy you a new car when you graduate if you earn straight “A” grades during your senior year. You earn those grades. Have you provided legally sufficient consideration? 12 - 12