1. LAW FOR BUSINESS AND PERSONAL USE © SOUTH-WESTERN PUBLISHING Chapter 9Slide 1 Legal Value and Bargained-For Exchange Identify when there is legal value Determine when there is a bargained-for exchange LESSON 9-2 GOALS

2. LAW FOR BUSINESS AND PERSONAL USE © SOUTH-WESTERN PUBLISHING Chapter 9Slide 2 LEGAL VALUE (#9)When there is a change in the legal position of the party as a result of the contract. (#9)When a benefit is promised, legal rights are increased. (#9)When goods or money are promised, legal rights are also increased.

3. LAW FOR BUSINESS AND PERSONAL USE © SOUTH-WESTERN PUBLISHING Chapter 9Slide 3 Illusory Promises The promise must create a duty or impose an obligation. (#9)Illusory promises do not constitute legal value. If a contract contains a clause that allows you to escape the legal obligation, the promise is said to be illusory. Example: You might have a clause stating that you will “paint the house- if you have time.” This does not increase your legal obligation because you may never have time to paint the house.

4. LAW FOR BUSINESS AND PERSONAL USE © SOUTH-WESTERN PUBLISHING Chapter 9Slide 4 Termination Clauses Businesses often want the power to withdraw from a contract if business circumstances change. If the clause gives one party the power to terminate the contract for any reason, the promise to perform would be illusory.

5. LAW FOR BUSINESS AND PERSONAL USE © SOUTH-WESTERN PUBLISHING Chapter 9Slide 5 Termination Clauses If termination is allowed only after a change in defined circumstances, or after the passage of a certain length of time or 30-days’ notice, the promise is not illusory.

6. LAW FOR BUSINESS AND PERSONAL USE © SOUTH-WESTERN PUBLISHING Chapter 9Slide 6 OUTPUT & REQUIREMENTS CONTRACTS Output Contract is when buyers agree to purchase all of a particular producer’s production. Ex: A steel company may buy all of the output of a nearby coal mining company.

7. LAW FOR BUSINESS AND PERSONAL USE © SOUTH-WESTERN PUBLISHING Chapter 9Slide 7 OUTPUT & REQUIREMENTS CONTRACTS CONT…….. Requirements Contract is when a seller agrees to supply all of the needs of a particular buyer. Ex: A carburetor manufacturer may agree to supply all the carburetors needed for a certain make of vehicle. If one party elected to stop production and thereby eliminates the obligation, courts recognizes these contracts as supported by consideration.

8. LAW FOR BUSINESS AND PERSONAL USE © SOUTH-WESTERN PUBLISHING Chapter 9Slide 8 OUTPUT & REQUIREMENTS CONTRACTS CONT…….. Implied Duty of Fair Dealings (#9)Some termination clauses, output and requirements clauses, and other clauses create what would seem to be illusory promises, many states will find an implied duty of fair dealings. This means the clause cannot be exercised arbitrarily, but must be exercised in a way that constitutes fair dealings.

9. LAW FOR BUSINESS AND PERSONAL USE © SOUTH-WESTERN PUBLISHING Chapter 9Slide 9 EXISTING DUTY A person sometimes promises to do something that he or she is already obligated to do by law or by prior contract. Such a promise, or act, cannot serve as consideration. (#9) Existing duty does not constitute legal value.

10. LAW FOR BUSINESS AND PERSONAL USE © SOUTH-WESTERN PUBLISHING Chapter 9Slide 10 EXISTING PUBLIC DUTY Not giving up your legal right

11. LAW FOR BUSINESS AND PERSONAL USE © SOUTH-WESTERN PUBLISHING Chapter 9Slide 11 EXISTING PRIVATE DUTY If a contract creates a duty, this duty cannot be the basis of consideration in a different contract. The same rule hold true when a person demands further compensation for carrying out a contract already made.

12. LAW FOR BUSINESS AND PERSONAL USE © SOUTH-WESTERN PUBLISHING Chapter 9Slide 12 SETTLEMENT OF LIQUIDATED DEBTS A liquidated debt is one where the parties agree that the debt exists and on the amount of the debt. Creditor-A person to whom a debt is owed. Debtor-A person who owes money to a creditor’ (#9)Settlement of debts may also constitute legal value because the creditor receives money either earlier than expected or in lieu of not receiving any money at all.

13. LAW FOR BUSINESS AND PERSONAL USE © SOUTH-WESTERN PUBLISHING Chapter 9Slide 13 SETTLEMENT OF UNLIQUIDATED DEBTS When there is a genuine dispute between the parties about how much is owed. Consideration is found in mutual forbearance from litigating the amount owed. Accord and satisfaction - parties’ agreement to change the obligation required by their original contract and the performance of the new obligation.

14. LAW FOR BUSINESS AND PERSONAL USE © SOUTH-WESTERN PUBLISHING Chapter 9Slide 14 RELEASE Release – is when a party settles a claim at the time the tort occurs, and the liability is unliquidated because the extent of damages is uncertain. The payment of money is sufficient consideration for the promise not to sue.

15. LAW FOR BUSINESS AND PERSONAL USE © SOUTH-WESTERN PUBLISHING Chapter 9Slide 15 COMPOSITION OF CREDITORS Composition of Creditors is an agreement by all creditors to accept something less than the total amount of their claims as full payment. In return, the debtor agrees not to file for bankruptcy.

16. LAW FOR BUSINESS AND PERSONAL USE © SOUTH-WESTERN PUBLISHING Chapter 9Slide 16 #7 Describe four ways of settling debts and the consideration involved. #1 - A liquidated debt may be settled by the debtor paying less than the acknowledged amount of the debt if the creditor agrees to the settlement; the consideration would probable be that the payment be received earlier than it would have been otherwise.

17. LAW FOR BUSINESS AND PERSONAL USE © SOUTH-WESTERN PUBLISHING Chapter 9Slide 17 #7 #2 - An unliquidated debt may be settled by a compromise on the different amount each party believes is due; the consideration due to the agreement is in the mutual forbearance from litigating the amount owed.

18. LAW FOR BUSINESS AND PERSONAL USE © SOUTH-WESTERN PUBLISHING Chapter 9Slide 18 #7 #3 - A party may also settle a claim by signing a release. The payment received is consideration for the promise not to sue, so both parties receive a consideration.

19. LAW FOR BUSINESS AND PERSONAL USE © SOUTH-WESTERN PUBLISHING Chapter 9Slide 19 #7 #4 - In a potential bankruptcy a composition of creditors could agree to settle debts for less than they are entitled to if the debtor agrees not to file for bankruptcy. Each creditor’s consideration is the reciprocal promises of the other creditors to refrain from suing and the receipt of greater amounts than if bankruptcy is filed.

20. LAW FOR BUSINESS AND PERSONAL USE © SOUTH-WESTERN PUBLISHING Chapter 9Slide 20 WHAT’S YOUR VERDICT? Must Lemsky pay her the higher salary?

21. LAW FOR BUSINESS AND PERSONAL USE © SOUTH-WESTERN PUBLISHING Chapter 9Slide 21 BARGAINED-FOR EXCHANGE Mutual gifts (#8)The consideration on both sides must be traded one for the other. Past performance (#8)Bargaining takes place in the present, for immediate or future performance by both parties. (#8)Therefore, an act that has already been performed cannot serve as consideration.

22. LAW FOR BUSINESS AND PERSONAL USE © SOUTH-WESTERN PUBLISHING Chapter 9Slide 22 #8 When a gift of an act or a tangible item such as goods or money is made, it is not bargained in exchange for something else and therefore is not a consideration.

23. LAW FOR BUSINESS AND PERSONAL USE © SOUTH-WESTERN PUBLISHING Chapter 9Slide 23 #10 Explain when there is a bargained-for exchange. A bargained-for exchange occurs when one party asks a consideration of another party in return for a consideration. The bargaining or negotiation takes place in the present for immediate or future performance by both parties. Therefore an act that has already been performed cannot be a consideration after it has occurred.

24. LAW FOR BUSINESS AND PERSONAL USE © SOUTH-WESTERN PUBLISHING Chapter 9Slide 24 WHAT’S YOUR VERDICT? Can Francis win the $20?