© 2010 Pearson Education, Inc., publishing as Prentice-Hall 1 CONSIDERATION AND PROMISSORY ESTOPPEL © 2010 Pearson Education, Inc., publishing as Prentice-Hall CHAPTER 5

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 2 Consideration Consideration – something of legal value given in exchange for a promise. Consideration is a necessary element for the existence of a contract. Contracts unsupported by consideration are generally not enforceable.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 3 Consideration (continued) Consideration consists of two elements: Something of legal value must be given; and There must be a bargained-for exchange.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 4 Legal Value A contract is considered supported by legal value if: The promisee suffers a legal detriment; or The promisor receives a legal benefit. Most commonly involves tangible payment (e.g., money, property) or performance of an act (providing services)

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 5 Bargained-for Exchange Process of bargaining or inducement that leads to an enforceable contract. Naturally present in most commercial transactions.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 6 Gift Promises Gratuitous promises unenforceable due to lack of consideration. –Promise freely given and not induced by promise of some benefit. Completed gift promise not revocable.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 7 Contracts Lacking Consideration Illegal Consideration Illusory Promise Moral Obligation Preexisting Duty Past Consideration

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 8 Illegal Consideration A promise to refrain from doing an illegal act. –E.g., “I will not drink alcohol until I am 21 if you pay me $1,000.” Such a promise is not enforceable.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 9 Illusory Promise A contract that both parties enter, but one or both of the parties can choose not to perform their contractual obligations. –E.g., “I will pay you a bonus at the end of the year if I feel like it at that time.” Such a promise is unenforceable.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 10 Moral Obligation Promises made out of a sense of moral obligation or honor lack consideration. –E.g., “I will pay you $1,000 because I am your uncle and families take care of each other.” Such promises are unenforceable in most states.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 11 Preexisting Duty A promise to do something the party is already under an obligation to do. –E.g., a police officer has a preexisting duty to use best efforts to recover stolen property. Such a promise is unenforceable because no new consideration has been given.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 12 Preexisting Duty (continued) Preexisting duty rule arises when one party to an existing contract seeks to change the terms of the contract during the course of its performance. Such midstream changes are unenforceable without additional consideration. The parties have a preexisting duty to perform according to the original terms of the contract.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 13 Preexisting Duty (continued) Sometimes a party to a contract runs into substantial unforeseen difficulties while performing his or her contractual duties. –Outside normal risks of business. E.g., contractor finds substantial environmental contamination that must be remediated at great expense. The contract can be modified and enforced without new consideration being given.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 14 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. –E.g., “I will pay you a $1,000 bonus because you’ve been a great employee.” Past consideration (e.g., prior acts) will not support a new contract. New consideration must be given.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 15 Summary: Promises Lacking Consideration ProblemDescription of Promise Illegal considerationPromise 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 party to perform. The promise is enforceable if there are unforeseen difficulties. Past considerationPromise based on the past performance of the promise.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 16 Special Business Contracts Business contracts that specifically allow a greater degree of uncertainty concerning consideration: –Output Contracts –Requirements Contracts –Best-Efforts Contracts Not regarded as illusory.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 17 Settlement of Claims Law promotes voluntary settlement of disputed claims. –Saves judicial resources, and –Serves the interests of the parties entering into the settlement.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 18 Settlement of Claims (continued) Accord – parties agree to accept something different in satisfaction of the original contract. Satisfaction – performance of the accord. If the accord is not satisfied, the other party can sue to enforce either the accord or the original contract.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 19 Promissory Estoppel Promise legally unenforceable due to lack of consideration or other problem. This doctrine provides a remedy if withdrawal of a promise by a promisor will adversely affect a promisee who detrimentally relied on the promise.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 20 Promissory Estoppel (continued) The following elements must be shown: Promisor made a promise. Promisor should have reasonably expected that promisee would rely on the promise. Promisee did rely on promise. Injustice would result if promise not enforced.