Contracts 4 Consideration

Consideration Promise or set of promises which the law will enforce or in some way regard as a source of obligation. 3 parties to every K: Offeror Offeree Willing court Valuable consideration.

Bargain Theory of Consideration Restatement (Second) §71 (1) To constitute consideration, a performance or a return promise must be bargained for. (2) A performance or return promise is bargained for if it sought by the promisor in exchange for her promise and is given by the promisee in exchange for that promise.

Bargained-for Consideration Promise X A promise for a Promise: “I promise to do X if you Promise to do Y.” Promisor Promisee A B Promisee Promisor Promise Y Contract formed when promises exchanged

Bargained-for Consideration Bilateral Promise Promise X Key Requirements ☞ Mutuality of obligation ☞ legal detriment ☞ Reciprocal inducement Promisor Promisee A B Promisee Promisor Promise Y

Bargained-for Consideration Promisor – Promisee Set Up Promise X A promise for an action “I promise to do X if you do Y.” A B Promisee Promisor Promise Y Contract not formed until promisee undertakes action

Example if Bilateral Contract A says to B : “If you promise to paint my building, I promise to pay you $100,000.” B says “I agree”. [Contract is formed when B agrees]. Legal detriment : yes, doing something one would otherwise not have to do. Mutuality of Obligation : yes, both are committing themselves to undertake a detriment

3-step approach: Ask: Do I find a bargain? Look to the terms of the bargain. Does each of the exchanged promises or acts involve bargained-for legal detriment, to the promisor or the actor? If the answer to question #2 is no (one of the parties did not incur legal detriment), is there any substitute for valuable consideration present in this fact pattern (is this a promissory estoppel fact pattern)? If you’ve found a bargain and you have qualified it as a contract because there is bargained-for legal detriment on both parties of the exchange, ask yourself: do they reveal any defenses, which if established, would preclude formation? Real defenses, if in the fact pattern, would preclude formation of the contract.

Definition May be formed either in the bargained-for promise to perform any act, or the performance of any act, which but for this bargain, I am not legally obligated to perform. May be found in the bargained-for-promise to forebear – that but for this bargain, I am legally privileged to pursue. Bargained-for exchange in legal position and not any legal element of economic benefit that imparts value for valuable consideration.

Definition (cont’) There must be: bargained-for + legal detriment. Elements of agreement; offeror and offeree consciously exchanged promises with view to altering their legal rights and liabilities. Gifts, past consideration and moral consideration are not valuable consideration b/c there is not element of bargain. Bargain is a synonym for exchange.

Value element Ex: Bargain found in bilateral mode. A and B formed their bargain through an exchange of promises. You look to each of the promises and with respect to promise A gave to B, ask: did A’s promise involve promise to do any act which but for obligation to B, A was not legally obligated to perform? If so, A’s promise is valuable consideration. Q: Did B bring valuable consideration to this bargain? But for the bargain with A, was B not legally obligated to perform? If so, B’s promise is valuable consideration.

Found legal detriment on both sides of the exchange, we have found an executory bilateral contract. If the attempted formation was in the unilateral mode, the analysis is the same. Offeror would have made the promise. I promise neighbor $25 to pull weeds from yard. If neighbor does the requested act and therefore bring about acceptance of the offer, is there a contract? Did B do an act which but for attempted K with A, B was not legally obligated to perform? B had no legal obligation to weed my yard. His act had quality of legal detriment. But for the promise to give $25, I wouldn’t be legally bound to do so. Result: K in the bargained-for mode.

Bargain, detriment on both sides of the exchange, if so,  we have a K.

Want of consideration 1. Defense to formation of a K. 2. If it can be established, no K. 3. At formation stage of K, other party incurred no element of legal detriment. 4. Party who gave a promise cites want of consideration, there is no K, defense to formation. 5. Trump card in all K litigation.

Ex(1): The parties have exchanged promises Ex(1): The parties have exchanged promises. (90% of exams on multistate involve bargains in the bilateral mode.) If, at the day they exchange promises, promise that B has given no quality of legal detriment, A has the defense to formation for want of consideration. His promise was legally valuable, B’s was not. (want of mutuality of obligation – common law terminology – unless both parties to a K are legally bound, neither is legally bound)

Ex(2): A and B are both merchants, both in the petroleum business Ex(2): A and B are both merchants, both in the petroleum business. A is a seller of petroleum products at the wholesale level. B owns a chain of gas stations. Party who commenced the negotiation, wrote a formal written proposal and sent it to the seller, B. B says: if I decide to order 10,000 cases of 30-weight oil, you promise first to accept the order, ship within one week, and grant me a 20%-discount off of your then-list prices. You (A) accept the order B requests, ship within 1 week and grant B a 20% discount off of your then-list prices. B wrote back: I accept.

Discuss. There is no deal b/c the buyer said “if”. A has the defense of want of consideration. A promised by saying “ I accept that deal “ he promised to accept order of 10,000 cans of oil and grant 20% discount off of list prices, promises of seller is legally valuable. But, the buyer did not promise anything – he gave an illusory promise. Buyer had the full measure of freedom before sending the letter and after the letter was receiving by the seller b/c he said “if I.

Modern courts favor reconstruction of events so as to conclude that K has been formed. Looking at the subsequent history between the parties. Full performance of the terms of an illusory promise cures the want of consideration and produces contractual liability. I.e., if this proposal was made on November 20th and if on 20th of December, A sells B the oil cases, then this would create contractual liability. On November 20th, there was no K – it was an illusory undertaking. On December 20th, there was full performance.

What about part performance under an illusory promise What about part performance under an illusory promise? Say the seller sells 50% of what’s requested, this doesn’t cure the want of consideration. Buyer is not obligated to perform unless he got the full benefit of his bargain. Rule: Part performance never cures the want of consideration. If you have a want of consideration fact pattern, look to see if there’s any facts which would cure the illusory promise and produce contract formation. (first proformation tactic of the law)

Failure of consideration Admits that K was formed. Admitting that the other party incurred bargained-for legal detriment. Contending that the other party is in present, material breach of the K. Consequence – the consideration has failed. Failure of consideration is a defense to the enforcement of my K duties, therefore it is a personal defense.

Inadequacy of consideration Involves allegation that I have made a stupid deed. I have come out hopelessly on the short end of the transaction. Allegation that I made a stupid bargain. This is no defense at all. ** Exception: Permitted to a party in a fiduciary or confidential relationship.

Wood v. Lucy Exclusive agent for 1-year to market Lady Duff’s fashion goods. Otis promised to split profits 50-50 and account to her quarterly for any profits and promised to protect the integrity of seal of fashion approval when, as necessary, copyright and trademark protection. This was marketed in NY. Lady Duff marketed her goods in LA. Otis demanded an accounting.

Wood v. Lucy Court said: Otis Wood had not promised her anything, had given her an illusory undertaking, had promised to split profits 50-50, but never promised there would be offer any profits; he promised to account, but if there was nothing to account…; he promised to copyright and trademark her clothing, but if there was none, he had no obligation.

Wood v. Lucy Court looked at the agreement and thought there was a business deal b/c they had a mutual business objective. Court said: we just have to determine that both parties said that they’d use best efforts to accomplish business objective and alleged want of consideration vanished. Same result with UCC. Every UCC sale, dealing of good faith and fair dealing, seeking to bring about the commercial objective of our relationship.

Want of consideration Pre-existing duties Promissory Esstopel

Pre-existing duties Ex: Suppose that individuals enrolled in PMBR bar review course were to approach the lecturer and say: Dan, I offer you $100 if you promise to show up tomorrow and give a second set of PMBR lectures. Your promise is not binding. Lecturer did not give a firm promise. Did I promise to do an act that but for the bargain with you, I was not legally obligated to perform?

Pre-existing duties Under an agreement between instructor & PMBR for giving 3 3-hour sessions of contract law, the student is the intended 3rd party beneficiary. Promise has no legal detriment, b/c just spoke of pre-existing obligation.

Getting around pre-existing duties If I were to exchange tenor or pre-existing duty, by promising that I’d show up 30-second early than the time called for under the K called for by PMBR or stay 15-seconds longer, any alteration in the tenor…is to overcome defense of want of consideration. Did I promise to do an act that but for the bargain with you, I was not legally obligated to perform? Under an agreement between instructor & PMBR for giving 3 3-hour sessions of contract law, the student is the intended 3rd party beneficiary. Promise has no legal detriment, b/c just spoke of pre-existing obligation.