2. P A R T P A R T Contracts Introduction to Contracts The Agreement: Offer The Agreement: Acceptance Consideration Reality of Consent 3 McGraw-Hill/Irwin Business Law, 13/e © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

3. P A R T P A R T Contracts Capacity to Contract Illegality Writing Rights of Third Parties Performance & Remedies 3 McGraw-Hill/Irwin Business Law, 13/e © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

4. Consideration PA E TR HC 12 “Make yourself necessary to someone.” Ralph Waldo Emerson, The Conduct of Life (1860)

5. Learning Objectives  Elements of consideration  Legal value  Bargained-for exchange  Exchanges that fail to meet consideration  Exceptions to consideration requirement 12 - 5

6.  Consideration is legal value bargained for and given in exchange for an act or a promise Elements of Consideration 12 - 6 Purely gratuitous promises are not enforceable because not supported by consideration

7.  Consideration in the form of an act or promise may have legal value if the person  Refrains from doing something the person has the legal right to do  Example: Hamer v. Sidway  Does something the person had no prior legal duty to do  Generally, courts will not examine the adequacy of consideration Legal Value of Consideration 12 - 7

8.  A promisee’s act or promise must have been bargained for and given in exchange for the promisor’s promise  Example: Gottlieb v. Tropicana Hotel and Casino in which participating in a promotion that benefited the company was adequate consideration to form a contract Bargained-for Exchange 12 - 8

9.  Illusory promises  Preexisting duties  Past consideration Exchanges That Are Not Consideration 12 - 9

10.  If the promisee’s promise really does not bind the promisee to do or refrain from doing anything, the promise is illusory and cannot serve as consideration  Example: Heye v. American Golf Corporation, Inc. in which an employee successfully claimed lack of consideration for an arbitration clause in a contract because mutual obligation did not exist  AGC’s promise to arbitrate was illusory since they could amend the contract at any time Illusory Promises 12 - 10

11.  As a general rule, performing or agreeing to perform a preexisting duty is not consideration  Promisor in such a case has effectively made a gratuitous promise  Includes public duties (obey the law) and preexisting contractual duties Preexisting Duties 12 - 11

12.  General rule is an agreement to modify an existing contract requires new consideration  Exceptions to general rule:  Modification due to unforeseen circumstances that a party could not reasonably foresee  CISG and UCC 2–209(1): agreement to modify a contract for the sale of goods Preexisting Duties & Contract Modification 12 - 12

13.  Liquidated debts are debts in which parties have no dispute about the existence or amount of the debt  A creditor’s promise to discharge a liquidated debt for part payment of the debt at or after its due date is unenforceable for lack of consideration  If there is a dispute about the existence or amount of the debt, the debt is unliquidated  Settlement agreements are enforceable Preexisting Duties & Settlement Agreements 12 - 13

14.  Past consideration is an act or benefit given in the past that was not given in exchange for the promise in question, thus it cannot be consideration Past Consideration 12 - 14

15. Review 12 - 15

16. Test Your Knowledge  True=A, False = B  Consideration is legal value bargained for and given in exchange for an act or a promise  A person who agrees not to file suit has not provided valid consideration  Courts always examine the adequacy of consideration 12 - 16

17. Test Your Knowledge  Multiple Choice  A person who agrees to obey the law has provided __________ consideration.  (a) No consideration (a preexisting duty)  (b) Adequate consideration that is binding and enforceable  To be valid under the UCC, an agreement to modify a contract for the sale of goods:  (a) Does not need new consideration  (b) Requires new consideration 12 - 17

18. Thought Question  Your Aunt agrees to buy you a new car when you graduate if you earn straight “A” grades during your senior year. You earn those grades. Have you provided legally sufficient consideration? 12 - 18