Chapter 12: Consideration

Topics Covered Chapter 12: Consideration A. Legal Sufficiency. B. Bargained-For-Exchange. C. Contracts Without Consideration.

Legal Sufficiency Definition – the inducement to enter into a contract. Elements – legal sufficiency and bargained-for exchange. 

Legal Sufficiency Legal Sufficiency— consists of either a benefit to the promisor or a detriment to the promisee. Legal Benefit – obtaining something to which one had no prior legal right. Legal Detriment —doing or not doing an act when one has a legal right to do so. Pearsall v. Alexander (1990). 

Legal Sufficiency Legal Sufficiency. Adequacy – not required where the parties have freely agreed to the exchange. Unilateral Contract: promise is exchanged for an act, or a completed act. 

Legal Sufficiency Legal Sufficiency. Bilateral Contracts: promise exchanged for a promise. Both promises must be supported by consideration.

Legal Sufficiency Illusory Promises— promise that imposes no obligation on the promisor. The following promises are not illusory: Output Contract – agreement to sell all of one's production to a single buyer. 

Legal Sufficiency Illusory Promises. The following promises are not illusory: Requirements Contract – agreement to buy all of one's needs from a single producer. Exclusive Dealing Contract – grant by a manufacturer to sell goods in a defined market. 

Legal Sufficiency Illusory Promises. The following promises are not illusory: Conditional Promise –the obligations are contingent upon the occurrence of a stated event.

Legal Sufficiency Preexisting Public Obligations – public duties such as those imposed by tort or criminal law are neither a legal detriment nor a legal benefit.

Legal Sufficiency Preexisting Contractual Duty– performance of a preexisting contractual duty is not consideration. Denney v. Reppert (1968).

Legal Sufficiency Modification of a Preexisting Contract. Under the common law a modification must be supported by mutual consideration; under the Code a contract can be modified without new consideration. New England Rock Services, Inc. v. Empire Paving, Inc. (1999).

Modification of a Preexisting Contract + = Original Contract Modifying Contract Modified Contract Common Law Consideration is required Replaces original contract Restatement Consideration is required Consideration is required unless modification is fair and equitable in light of facts not anticipated when contract was made Replaces original contract UCC Consideration is required No consideration is required if modification is made in good faith Replaces original contract

Legal Sufficiency Substituted Contracts – the parties agree to rescind their original contract and to enter into a new one; rescission and new contract are supported by consideration. Settlement of an Undisputed Debt – payment of a lesser sum of money to discharge an undisputed debt does not constitute legally sufficient consideration.

Legal Sufficiency Settlement of a Disputed Debt – payment of a lesser sum of money to discharge a disputed debt is legally sufficient consideration.

Bargained-For Exchange Definition – a mutually agreed-upon exchange. Past Consideration – an act done before the contract is made is not consideration. Third Parties —consideration may be given to another person.

Contracts without Consideration Promises to Perform Unenforceable Obligations. Promise to Pay Debt Barred by the Statute of Limitations – a new promise by the debtor to pay the debt renews the running of the statute for a second statutory period. 

Contracts without Consideration Promises to Perform Unenforceable Obligations. Promise to Pay Debt Discharged in Bankruptcy – may be enforceable without consideration. Voidable Promises – new promise to perform a voidable obligation that has not been previously voided is enforceable.

Contracts without Consideration Promises to Perform Unenforceable Obligations. Moral Obligation – a promise made to satisfy a preexisting moral obligation is generally unenforceable for lack of consideration.

Contracts without Consideration Promissory Estoppel – doctrine that prohibits a party from denying her promise when the promisee takes action or forbearance to his detriment reasonably based upon the promise. Dilorenzo v. Valve & Primer Corporation (2004).

Contracts without Consideration Contracts Under Seal-- where still recognized, the seal acts as a substitute for consideration. Promises Made Enforceable by Statute. Some gratuitous promises have been made enforceable by statute. 

Contracts without Consideration Promises Made Enforceable by Statute. The Code makes enforceable (1) contract modifications, (2) renunciations, and (3) firm offers.

Consideration A promises B Yes No Yes Next Slide In exchange for A’s promise B incurs a legally sufficient consideration by --doing an act --forbearing from acting --promising to do an act --promising to forebear A’s promise is binding: it is supported by consideration Yes A’s promise is to pay obligation --barred by the statue of limitations --discharged in bankruptcy --that is voidable No A’s promise is binding without consideration Yes Next Slide

A’s promise is not binding Consideration B detrimentally and justifiably relies on A’s promise, and A should reasonably have expected reliance No A’s promise is binding to the extent necessary to avoid injustice under the doctrine of promissory estoppel Yes A’s promise is made under seal and delivered to B No A’s promise is binding in those states that recognize the seal as a substitute for consideration Yes A’s promise is subject to the UCC and is a --modification of a sales contract --renunciation of a claim --firm offer by a merchant No A’s promise is binding under the UCC Yes A’s promise is not binding No