1. Chapter 10 Consideration McGraw-Hill ©2010 The McGraw-Hill Companies, Inc. All rights reserved.

2. © 2013 The McGraw-Hill Companies, Inc. All rights reserved. The Nature of Consideration Consideration was defined as promises exchanged by the parties to a contract. Forbearance is then the promise to refrain from doing something that a party has a legal right to do, or the promise of inaction. Consideration in a contract may be more than just the promises exchanged by the parties, but the actual benefit gained and the detriment suffered by them. A party who makes a promise, the promisor, may make a promise to pay a sum of money to another party, the promisee, for the performance of a certain act. 10-2

3. © 2013 The McGraw-Hill Companies, Inc. All rights reserved. Characteristics of Valid Consideration Legality A valid contract does not exist if the consideration is a promise to perform an illegal act (or to avoid performing a legal act). Adequacy Judging whether or not the exchange of promises in a contract was fair. In an attempt to level the playing field, many consumer protection statutes have been passed. The notions of unconscionable contracts and contracts of adhesion are now widely applied. Possibility of Performance A legally enforceable contract cannot be based on a promise that is impossible to fulfill. 10-3

4. © 2013 The McGraw-Hill Companies, Inc. All rights reserved. Kinds of Valid Consideration Consideration required in an enforceable contract can be: An exchange of promises Forbearance Pledges or subscriptions 10-4

5. © 2013 The McGraw-Hill Companies, Inc. All rights reserved. A Promise for a Promise Promise: A promise of an act by one party in exchange for the promise of an act by another is a valid consideration. The exchange of money is not a requirement. Example: Joanne promised to paint Elaine’s office room if Elaine helps with her landscape project. 10-5

6. © 2013 The McGraw-Hill Companies, Inc. All rights reserved. Example: Valid Consideration Facts: Jamaal promised to repair Jane’s bike if Jane agreed to paint Jamaal’s room. Although the most common form of valid consideration is the promise of money by one party for an act or service, the exchange of money is not a requirement. Therefore, the exchange of promises would be deemed a valid consideration even though there was no money exchange involved between Jamaal and Jane. 10-6

7. © 2013 The McGraw-Hill Companies, Inc. All rights reserved. Promise of Forbearance One party to a contract may wish to exchange his or her promise to pay money for a promise of inaction from the other party. Example: Jonah agreed to purchase a printing business from Mark for a certain price, only if Mark promised to refrain from opening another printing business within 10 miles for three years. 10-7

8. © 2013 The McGraw-Hill Companies, Inc. All rights reserved. Example: Forbearance Facts: Amy agreed to purchase a grocery store from Ben for $500,000 if Ben promised to refrain from opening another grocery store within a 50-mile radius for the next two years. Many contracts in which part of the consideration is forbearance involve agreements not to compete. This situation falls under a promise of forbearance because Amy’s consideration was her promise to pay the agreed selling price for Ben’s business, and the promise of inaction, or forbearance. Ben’s consideration was his promise to transfer the business to Amy, and to avoid opening a similar business within the set radius for two years. 10-8

9. © 2013 The McGraw-Hill Companies, Inc. All rights reserved. Pledge or Subscription A pledge is a promise to donate money to such organizations as churches, temples, mosques, hospitals, colleges, cultural institutions, charitable organizations, and other groups. Because pledges are for a worthy cause, courts have deemed them to be enforceable. Example: John Peterson makes a pledge of $20.00 to the local firefighters association. 10-9

10. © 2013 The McGraw-Hill Companies, Inc. All rights reserved. Consideration and the UCC In some cases that involve contracts to sell goods, the Uniform Commercial Code (UCC) dispenses with the requirement of consideration in certain contracts that involve any of the following: A merchant’s written firm offer that provides that the contract is irrevocable. A written discharge of a claim for an alleged breach of contract. Modifications of existing contracts. 10-10

11. © 2013 The McGraw-Hill Companies, Inc. All rights reserved. General Release General Release: Statutes that permit a person who has a claim against another to give up, or release, his or her claim without an exchange of consideration by making a written statement to that effect. A general release may be regarded as valid consideration if the parties so intend. In such cases, the general release would be viewed as forbearance. In some states, a general release is supported by consideration only where the original claim that is being released is not regarded by the courts as frivolous. 10-11

12. © 2013 The McGraw-Hill Companies, Inc. All rights reserved. Agreements That Lack Consideration Certain agreements are not enforceable because they lack consideration. Barren promises Gratuitous promises Illusory promises Agreements supported by: Moral consideration Past consideration 10-12

13. © 2013 The McGraw-Hill Companies, Inc. All rights reserved. Barren Promises A promise to do something that is already required to do either by law or by contract represents no additional sacrifice and is not valid consideration. A promise to pay an existing debt or to obey the law, or a similar promise, is called a barren promise. The obligation to perform acts already required is known as a preexisting duty. 10-13

14. © 2013 The McGraw-Hill Companies, Inc. All rights reserved. Gratuitous Promises A person who makes a promise without requiring some benefit in return has made a gratuitous promise. Agreements based on such one-sided promises are generally not enforceable. Example: A golf pro promises to give her golf clubs to her friend after a tournament is over. She realizes that they are worth more than she orignally thought and changes her mind. The pro is not obliged to give her friend the clubs as it was a gratuitous promise. 10-14

15. © 2013 The McGraw-Hill Companies, Inc. All rights reserved. Illusory Promises An illusory promise consists of an indefinite, open-ended statement purporting to be an agreement. A person who makes an illusory promise never commits to a specific or absolute act. Example: The manager of a fleet of delivery trucks tells the owner of an auto repair shop “If your tires are high quality, I will purchase all the tires I need from you.” 10-15

16. © 2013 The McGraw-Hill Companies, Inc. All rights reserved. Agreements Supported by Moral Consideration A person is not legally bound to do what he or she may feel obligated to do because of love, friendship, honor, sympathy, conscience, or some other moral consideration. Some courts, however, will justify the enforcement of some contracts, even though there is no consideration, by stating that there was “moral consideration.” 10-16

17. © 2013 The McGraw-Hill Companies, Inc. All rights reserved. Agreements Supported by Past Consideration Past consideration is a promise to repay someone for a benefit after it has been received. This type of promise is generally not a valid consideration and is considered a gratuitous promise. Example: Mike promised his brother Joe that he would give him two Superbowl tickets when Joe graduated from college. As planned, Joe graduated and Mike gave him the tickets. When Joe realized how expensive the tickets were, he promised to pay Mike one-half of the ticket price. Joe later changed his mind and decided not to keep his promise. Joe will not be legally held to his promise since it was based on past consideration. 10-17