CHAPTERCHAPTER McGraw-Hill/Irwin©2008 The McGraw-Hill Companies, All Rights Reserved Consideration TWOTWO

2-2 Objectives Chapter Objectives: –Use vocabulary regarding consideration properly –Discuss the requirements of valid consideration –Identify invalid, not legally recognizable consideration –Differentiate between sufficiency and adequacy of consideration –Determine if the obligation falls within one of the four “special agreements” that do not require consideration

2-3 Legal Value Consideration is the “why” of the contract. It must be valid in order for a binding contract to exist

2-4 Legal Value, continued Both parties must gain (benefit) or give (detriment) This exchange is the consideration for the agreement

2-5 Legal Value, continued Benefit conferred Detriment incurred

2-6 Legal Value: Exceptions Five Rules indicating when the exchange is NOT Legal Consideration: 1. Gifts 2. Moral Obligations 3. Illusory Promises 4. Past Consideration 5. Preexisting Duties

2-7 1.Gifts: Bestowing a benefit without any expectations on the part of the giver to receive something in return and the absence of any obligation on the part of the receiver to do anything in return Five Rules

2-8 2.Moral Obligations: A social goal or personal aspiration that induces a party to act without any expectation of a return performance from the recipient Five Rules, continued

2-9 Both gifts and moral obligations fail as valid consideration due to lack of mutual obligation. Five Rules, continued

Illusory Promises: A statement that appears to be a promise but actually enforces no obligation upon the promisor because he retains the subjective option whether or not to perform on it Five Rules, continued

Past Consideration: A benefit conferred in a previous transaction between the parties before the present promise was made Five Rules, continued

Pre-existing Duties: An obligation to perform an act that existed before the current promise was made that requires the same performance presently sought Five Rules, continued

2-13 The Preexisting Duty Rule has several exceptions: –New or different consideration –Voidable obligation –Duty is owed to a third person –Unforeseen circumstances Preexisting Duty Rule

2-14 Legal Value: Exceptions Gifts, moral obligations, illusory promises, past consideration, and preexisting duties lack legal value and are therefore invalid consideration

2-15 Sufficiency of Consideration There is a distinction between sufficient consideration and adequate consideration.

2-16 Sufficiency of Consideration –Sufficient consideration: the exchanges have recognizable legal value and are capable of supporting an enforceable contract. The actual values are irrelevant –Adequate consideration: exchanges that are fair and reasonable as a result of equal bargaining for the things of relatively equal value.

2-17 Sufficiency of Consideration Insufficient types of Consideration: −Nominal Consideration −Good Consideration −Sham Consideration

2-18 Nominal Consideration The value of the things exchanged are grossly disproportionate to each other so that very little is given in exchange for something of great value Nominal Consideration

2-19 Good Consideration Similar to nominal consideration. An exchange made based on love and affection, which have no legal value. (example: parents selling their home to their child for a dollar) Good Consideration

2-20 Sham Consideration An unspecified and indeterminable recitation of consideration that cannot support an exchange Sham Consideration

2-21 Sufficiency of Consideration Conditions attached to the consideration are generally regarded as valid as long as there is an objective standard to determine whether that condition has been met: - Condition An event that may or may not happen upon which the rest of the performance of the contract rests

2-22 Sufficiency of Consideration Conditions to contracts: –allow parties to be released from their obligations if certain events do or do not occur –must be determined by a measurable standard

2-23 Special Agreements Special Agreements: −Pledges to charity −Repayment of debts −Guarantees −Formal Contracts Special Agreements are enforced as contracts, even though no consideration exists.

2-24 Pledges to charity: −A legally enforceable gift to a qualifying institution. (example: when people call in to a public broadcasting telethon and pledge a donation) Special Agreements

2-25 Guarantees −An agreement in which a third party assures the repayment of a debt owed by another party Special Agreements GUARANTEE

2-26 Repayment of debts −A voluntary repayment of a debt: an agreement to pay back a debt that cannot be collected upon using legal means because the obligation to make payments has been discharged Special Agreements

2-27 Formal Contracts −An agreement made that follows a certain prescribed form like negotiable instruments. (example: when you write a check to pay for groceries you have executed a formal contract) Special Agreements

2-28 Summary Consideration is the substance of the offer, it is that for which the parties have bargained Consideration requires mutuality of obligation and must have legal value recognizable by the courts