Legal Value and bargain for exchange Lesson 9-2 Legal Value and bargain for exchange

What you will learn……. How to Identify “When” there is legal value How a promise can contain enough proof that an actual agreement exists Determining if its possible for an agreement to have something in it that was “Already” agreed to What is a bargain for exchange

What is LEGAL VALUE? Legal Value is defined as “A change in the legal position of the parties as a result of the contract” It is an exchange of legal rights Ex) Before the contract, I had a right to my money and the store had a right to the item I want to purchase. After the contract, I have a right to the product and the store has a right to the money

How are legal rights exchanged? They are based on legal benefits and legal detriments Benefits are something you gain Detriments are things you give up Exchanges can be benefit for benefit, detriment for detriment or benefit for detriment Most common: Benefit for benefit

What was exchanged? Jimmy goes to work for Frontier Inc, a local supplier of farming equipment, for a salary of $90,000. He is hired under a 1 year contract to complete an inventory, create a plan on how to save money for the business and to determine why Frontier Inc’s sales have dropped over the last 2 years. What benefits and/or detriments were exchanged in this agreement?

What was exchanged in this one? Carol, a partner in Frontier Legal Inc, a local law firm, is under contract for 3 years. 1 year into her contract, she finds reason to believe her firm has taken a case against her moral beliefs. She decides to ask her boss, to break her contract based on this. Her boss says, I will allow you to break your deal, as long as Carol agrees to sell her shares in the business back at 24% less than their value. What benefits/Detriments were exchanged in this agreement?

Must all promises be binding if consideration is present? Yes, promises that contain consideration can be binding All promises must include create a duty or impose an obligation Duties and obligations means both parties “MUST” do something Ex) If I promise to paint a house for $10,000, but can’t give a definite date, if the painting gets done, I must be paid as I completed my obligation. You have the duty now to pay me

What happens if a promise is made where you can change your mind? “Open Ended” promises are called Illusory promises Illusory promises means the contract contains a clause allowing “EITHER” party to escape a legal obligation Ex) If I tell my neighbor I am a retired plumber and can complete work they need done in their home, then say “If I get a chance”, its illusory as I am not committing to the work and it may NEVER get done. I cannot be sued or forced to complete the work

What types of Illusory Promises are there? Termination Clauses: Used by businesses Output Contract: Buying the entire output of a company Requirements Contract: “Supplying” your products for one manufacturer only

Why offer a termination Clause? It allows a business the power to “Withdraw” from a contract if circumstances change Only the party the clause is offered to may withdraw, NOT both parties Ex) If I offer a new product to a business that they are unaware of, I may say to them “I will sell you a full palate of my new soda for .20 less than what you pay for Pepsi or Coke. Give me 25% of the shelf space and if my product does not sell, cancel the contract and I’ll refund all your money.

Why are output contracts created? Output contracts are created so only “1” company may purchase all of the product from another company and use it in their business Ex) McDonalds bought the rights to 1 type of potato and created French fries that could only be bought at a McDonalds, giving them exclusive rights to the product

Why are Requirements contracts created? Requirements Contracts are created when a company agrees to sell their product only to certain companies of their choice Exclusive rights to product created Ex) Microsoft sold only to PC based computer companies, not MAC. Nike sold only to particular retailers allowing them to be the only people selling Nike products

What is required when illusory promises are enforced? There is an Implied Duty of Fair Dealings when a person uses a termination clause, an output contract or a requirements contract Clauses cannot be used arbitrarily, but rather for some “fair” reason. Used by courts so parties are not taken advantage of and shows consideration is present..

Can consideration be promised more than once? Once someone promises consideration, it cannot be used as the basis of another agreement Called Existing Duty Existing Duty is something a person is obligated to do either by law or based on the contract agreed to

Compare these….. Existing Public Duty Existing Private Duty Promising something you are already obligated to do by law Ex) Telling your parents “I promise not to drink alcohol if you promise to pay for my college” Promising something you are already obligated to do based on a contract Ex) Agreeing to a 3 year work contract, then trying to re- negotiate after learning you can make more money from a competitor. You are stuck in the agreement for 3 years.

Why can’t Existing Duty be used as negotiations? There is “NO NEW” consideration being given If you want to re-negotiate something, “each” party must give additional consideration Ex) If you sign a 3 year contract with a company for $120,000 a year then learn you can make $150,000 a year with a competitor, you would need to offer something to your boss to be able to break the contract legally..

How do debt contracts work? When you agree to take on a debt (Credit card, mortgage, car loan, etc..) you agree to pay the company you took the loan from using the terms agreed to Ex) $300 per month for 48 months If you “Stop” paying the debt, you are in default Default means you are not following the terms of the loan and can be sued

What happens when a loan goes into default? Default means you are breaking the terms of the loan Bank can now take legal steps to make you pay If you cannot pay, they can make arrangements, change the terms, take less per month or take you to court…

Is there anything else banks do to get money owed to them? Yes, they can settle for less than what is owed.. Why? They know the person may never pay so they get what they can (Risk/Reward) Accord and Satisfaction means the bank accepts less than the full amount owed in exchange for an agreement NOT to sue for the balance owed…

How does Accord and satisfaction work? A bank would try to get a person to pay the entire amount owed. After learning a person either can’t pay or wont pay, they need to make decisions. If the person is going bankrupt, they may accept less than the full amount to get “Something”. Something is better than nothing at all. If they believe they can get the entire amount owed in court by suing, they will take that route. It’s a “choice” made by the bank and bank alone. The person owing the money had no choice in offering this…

What are debt terms? When a debt is “Liquidated”, it means the parties agree that the debt exists and the amount is correct (I get a bill from Verizon for $65 and pay it because I agree its correct) When a debt is “Unliquidated”, it means one party disputes either the debt itself or the amount (If I get a bill from Verizon for $65 and agree I owe something, but not $65, I can make Verizon show proof why the amount I am being billed is correct. My right!

What happens if the debt is paid? If a party completes their responsibility (Pays their debt), the contract terminates (Ends, as both parties completed their duties and obligations) Release means one party agrees “NOT” to sue another party for not fulfilling their duty or obligations Ex) If a bank gets a customer to pay $400 of a $2000 debt, they may offer to sign a “release” to get them to pay as a form of consideration. The customer gets out of the contract and the bank recovers something..

Lets review the 3 parts of all consideration? Give- A promise must be made to give something to the other party Trade- Means what was promised, was actually traded Legal Value- What each party gains must have value that is “Fair” not necessarily equal

What happens if the trade does not occur? The trade of the consideration means what was negotiated to and agreed to actually happened If the trade does not take place by both sides, a “Mutual Gift” occurred Ex) If one party offers to help another party change a flat tire on the side of a highway, then “After” the tire is changed, the person needing the help offers $20 to the person for their time, the $20 represents a “Gift” as it was not negotiated before….

Can something that has happened in the past be negotiated as consideration? Absolutely NOT! “ALL” bargaining takes place in the present Past Performance means something that has already been negotiated and completed and cannot be used as future consideration Ex) If a car salesman gives you a great price on a new car in 2010, then when you go back to buy another new car this year says to you “I cannot give you a great price again because I already gave you one 6 years ago”. That is past performance and has nothing to do with the current negotiations. They have a right to say that, but not use it as consideration in the current deal..

Legal Review….. What is a contract that provides a way for “one” party to escape an obligation called? Do termination clauses contain consideration? What type of illusory promise means a company only supplies its goods to particular businesses? What benefit is there to supply all of your output to only certain businesses? What is an agreement where a debt is agreed to and to its amount called? Why would a bank allow a person to pay less than the full amount of a debt owed in exchange for an agreement not to sue them in court for the remaining debt? What is this called?