© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Chapter 11 Consideration and Equity Chapter 11 Consideration and Equity

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Consideration Consideration – something of legal value given in exchange for a promise. Consideration is a necessary element for the existence of a contract. Common types of consideration are: –A tangible payment (money or property); or –Performance of an act (e.g., providing legal services).

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Consideration (continued) Consideration consists of two elements: 1. Something of legal value must be given; and 2. There must be a bargained- for exchange.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Legal Value Something of legal value must be given. Under the modern law of contracts, a contract is considered supported by legal value if: 1. The promisee suffers a legal detriment; or 2. The promisor receives a legal benefit.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Bargained-for Exchange To be enforceable, a contract must arise from a bargained-for exchange. –Exchange that parties engage in that leads to an enforceable contract. Gift or gratuitous promise – an unenforceable promise because it lacks consideration.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman The Use of Output and Requirements Contracts in Business There are two special types of business contracts that specifically allow a greater degree of uncertainty concerning consideration: – Output Contracts – Requirements Contracts

Prentice Hall, 2001© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman7 Contemporary Business Environment Nominal Consideration Best Efforts Contracts

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Contracts Lacking Consideration Illegal Consideration Illusory Promise Moral Obligation Preexisting Duty Past Consideration

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Illegal Consideration Illegal consideration – a promise to refrain from doing an illegal act. Such a promise will not support a contract.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Illusory Promise Illusory promise – a contract into which both parties enter, but one or both of the parties can choose not to perform their contractual obligations. Thus, the contract lacks consideration. Such promises are unenforceable.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Moral Obligation Promises made out of a sense of moral obligation or honor lack consideration. Moral consideration is not treated as legal consideration. Such promises are unenforceable in most states.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Preexisting Duty Preexisting duty – a promise lacks consideration if a person promises to perform an act or do something he or she is already under an obligation to do. The promise is unenforceable because no new consideration has been given.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Preexisting Duty (continued) The preexisting duty rule arises when one of the parties to an existing contract seeks to change the terms of the contract during the course of its performance. Such midstream changes are unenforceable. The parties have a preexisting duty to perform according to the original terms of the contract.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Preexisting Duty (continued) Sometimes a party to a contract runs into substantial unforeseen difficulties while performing his or her contractual duties. The contract can be modified and enforced without new consideration being given.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Past Consideration Problems of past consideration often arise when a party to a contract promises to pay additional compensation for work done in the past. Past consideration (e.g., prior acts) will not support a new contract. New consideration must be given.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Concept Summary: Promises Lacking Consideration Type of Consideration Description of Promise Illegal consideration Promise to refrain from doing an illegal act. Illusory promisePromise where one or both parties can choose not to perform their obligation. Moral obligationPromise made out of a sense of moral obligation or honor or love or affection. Some states enforce these types of contracts. Preexisting dutyPromise based on the preexisting duty of the promisee to perform. The promise is enforceable if (1) the parties rescind the contract and enter into a new contract, or (2) there are unforeseen difficulties. Past consideration Promise based on the past performance of the promise.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Settlement of Claims The law promotes the voluntary settlement of disputed claims. Settlement: –Saves judicial resources, and –Serves the interests of the parties entering into the settlement

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Settlement of Claims (continued) Accord – an agreement whereby the parties agree to accept something different in satisfaction of the original contract. Satisfaction – the performance of the accord. If the accord is not satisfied, the other party can sue to enforce either the accord or the original contract.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Promissory Estoppel Promissory estoppel (detrimental reliance) A doctrine that prevents the withdrawal of a promise by a promisor if it will adversely affect a promisee who has adjusted his or her position in justifiable reliance on the promise.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Promissory Estoppel (continued) For the doctrine of promissory estoppel to be applied, the following elements must be shown: 1. The promisor made a promise. 2. The promisor should have reasonably expected to induce the promisee to rely on the promise.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Promissory Estoppel (continued) 3. The promisee actually relied on the promise and engaged in an action or forbearance of a right of a definite and substantial nature. 4. Injustice would be caused if the promise were not enforced.