1. Consideration “Make yourself necessary to someone.”
Ralph Waldo Emerson, The Conduct of Life (1860)

2. Learning Objectives Elements of consideration
Legal value
Bargained-for exchange
Exchanges that fail to meet consideration
Exceptions to consideration requirement
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3. Elements of Consideration
Consideration is legal value bargained for and given in exchange for an act or a promise
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
Does something the person had no prior legal duty to do
Purely gratuitous promises are not enforceable because not supported by consideration
Example: early case of Thorne v. Deas, in which part owner of sailing ship promised co-owners he would insure the ship for upcoming voyage. He failed to do so, and when the ship was lost at sea, court found he was not liable to co-owners for breaching his promise because his promise was purely gratuitous; he had neither asked for nor received anything in exchange for making it.
Example of legal value: Hamer v. Sidway
In famous 19th-century case, Hamer v. Sidway, an uncle’s promise to pay his nephew $5,000 if he refrained from using tobacco, drinking, swearing, and playing cards or billiards for money until his 21st birthday was held to be supported by consideration. Indeed, the nephew had refrained from doing any of these acts, even though he may have benefited from so refraining. He had a legal right to indulge in such activities, yet he had refrained from doing so at his uncle’s request and in exchange for his uncle’s promise. This was all that was required for consideration.
Generally, courts will not examine adequacy of consideration
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4. Bargained-for Exchange
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
Rena and Sheldon Gottlieb were vacationing in Atlantic City, New Jersey, and visited the Tropicana casino. Tropicana offers people membership in its “Diamond Club.” To become a Diamond Club member, an individual must visit a promotional booth in the casino, obtain and fill out an application form, and show identification. There is no charge. The application form lists the person’s name, address, telephone number, and address, and this information is entered into the casino’s computer database. Each member receives a Diamond Club card that has a unique identification number. The member then presents or “swipes” the card in a machine each time he or she plays a game at the casino, and the casino obtains information about the member’s gambling habits. The casino’s marketing department then uses that information to tailor its promotions.
Rena Gottlieb was, and had been for a number of years, a member of the Diamond Club. When she entered the casino on July 24, she immediately went to the Fun House Million Dollar Wheel Promotion, which offers participants the chance to win a grand prize of $1 million. Diamond Club members were entitled to one free spin of the Million Dollar Wheel each day. She presented her Diamond Club card, a casino operator swiped it through the card reader, she pressed a button to activate the wheel, and the wheel began spinning. Gottlieb claims that the wheel landed on the $1 million grand prize, but when it did so, the casino attendant immediately swiped another card through the machine, reactivated the wheel, and the wheel landed on a prize of two show tickets. Tropicana denies that its attendant intervened and reactivated the wheel, and contends that the wheel simply landed on the lesser prize. Ms. Gottlieb sued Tropicana for breach of contract, among other theories, and Tropicana moved for summary judgment.
Court: According to Tropicana, participation in a promotion such as the Million Dollar Wheel cannot constitute consideration that would support the formation of an enforceable contract. [We disagree] Ms. Gottlieb had to go to the casino to participate in the promotion. She had to wait in line to spin the wheel. By presenting her Diamond Club card to the casino attendant and allowing it to be swiped into the casino’s machine, she was permitting the casino to gather information about her gambling habits. Additionally, by participating in the game, she was a part of the entertainment that casinos, by their very nature, are designed to offer to all of those present. All of these detriments to Ms. Gottlieb were the requested detriments to the promisee induced by the promise of Tropicana to offer her a chance to win $1 million. Tropicana’s motives in offering the promotion were “in nowise altruistic.” It offered the promotion in order to generate patronage of and excitement within the casino. In short, Ms. Gottlieb provided adequate consideration to form a contract with Tropicana. Tropicana further challenges Ms. Gottlieb’s breach of contract claim on the grounds that it is clear as a matter of law that she did not win the $1 million prize. Tropicana points to computer records in support of its position that Ms. Gottlieb did not win the grand prize. Ms. Gottlieb relies in part on her own testimony and the testimony of her husband, who witnessed her spin of the promotional wheel. It is for the jury, and not for the court, to resolve this factual dispute. Motion for summary judgment on the contract claim denied in favor of Ms. Gottlieb.
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5. Illusory Promises
If promisee’s promise really does not bind promisee to do or refrain from doing a thing, promise is illusory and cannot serve as consideration
See Heye v. American Golf Corporation, Inc.
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.
American Golf Corporation (AGC) hired Melissa Heye for a job in the pro shop. After Heye was hired but before she began working, AGC gave Heye a number of documents, including the Co-Worker Alliance Handbook. On page 20 of the handbook was a reference to arbitration that essentially stated that binding arbitration would be the exclusive means of resolving all disputes. Page 23 of the handbook contained an acknowledgment. Heye worked for AGC and later sued AGC on a variety of grounds. AGC moved to compel arbitration. The trial court initially granted this motion, but after Heye filed a motion for reconsideration, the trial court denied AGC’s motion. AGC appealed.
Court: We interpret an arbitration agreement under the rules of state contract law. For a contract to be legally valid and enforceable, it must be factually supported by an offer, an acceptance, consideration, and mutual assent. AGC asserts that the arbitration agreement is supported by consideration in the form of AGC’s agreement to arbitrate. …A valid contract must possess mutuality of obligation. … When a promise puts no constraints on what a party may do in the future—in other words, when a promise, in reality, promises nothing—it is illusory, and it is not consideration. …Heye contends AGC is “free to amend, supplement, rescind or revise the policy regarding arbitration at its whim.” We disagree with AGC … The agreement, in essence, gives AGC unfettered discretion to terminate arbitration at any time, while binding Heye to arbitration. AGC remains free to selectively abide by its promise to arbitrate; the promise, therefore, is illusory. Denial of motion to compel arbitration affirmed in favor of Heye.
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6. No Consideration
Generally, performing or agreeing to perform a preexisting duty is not consideration
Promisor effectively made gratuitous promise
Includes public duties (obey the law) and preexisting contractual duties
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
Preexisting duties and contract modification:
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 and settlement agreements:
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
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7. “Necessity never made a good bargain.”
Reality of Consent
“Necessity never made a good bargain.”
Benjamin Franklin, 1735

8. Learning Objectives
Five doctrines that permit people to avoid their contracts because of the absence of real consent:
Misrepresentation
Fraud
Mistake
Duress, and
Undue influence
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9. Effect of Doctrines
Contracts induced by mistake, fraud, misrepresentation, duress, or undue influence are generally considered to be voidable
Person claiming non-consent has power to rescind (cancel) the contract
Person claiming non-consent must not act in a manner to ratify (affirm) the contract
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10. Misrepresentation or Fraud?
A misrepresentation is a false statement and may be negligent (innocent) or fraudulent (knowledge of falsity and intent to deceive)
Elements:
Defendant made an untrue assertion of fact
Fact asserted was material or was fraudulent
Complaining party relied on the assertion
Reliance of complainant was reasonable
Fifth element for fraud: injury
Elements of innocent or fraudulent misrepresentation:
Defendant made an untrue assertion of fact
Includes active concealment or non-disclosure
Concealment example: if Summers offers his house for sale and paints the ceilings to conceal the fact that the roof leaks, his active concealment constitutes an assertion of fact
Nondisclosure differs from concealment in that concealment involves the active hiding of a fact, while nondisclosure is the failure to volunteer information
Fact asserted was material or was fraudulent
Fact is material if likely to play significant role in inducing reasonable person to enter the contract
Complaining party entered the contract because of reliance on the assertion
Reliance of complainant was reasonable
Reliance means that person entered the contract because of belief in the assertion
Problem with justifiable reliance element is identifying the extent to which the relying party is responsible for investigating the accuracy of the statement on which he relies. Section 172 of the Restatement, which provides that a relying party’s failure to discover facts before entering the contract does not make his reliance unjustifiable unless his fault was too extreme. Most courts place a greater degree of accountability on the person who makes the assertion rather than the person who relies on the assertion.
Fifth element for fraud:
Injury
Rodi v. Southern New England School of Law:
Facts:
Rodi went to Southern New England School of Law (SNESL) which claimed that the ABA accreditation committee had recommended SNESL for “provisional accreditation.” The recruitment letter claimed provisional accreditation, but the SNESL carried a disclaimer about accreditation.
Disclaimer about accreditation in catalogue
Rodi intended to take New Jersey bar exam and the law requires bar applicants to hold law degrees from ABA accredited law schools
Accreditation critically important to Rodi
ABA denied accreditation during Rodi’s first year; Dean urged Rodi to remain
Rodi graduated, SNESL remained unaccredited, and Rodi was ineligible to sit for the New Jersey bar examination
Rodi filed suit against SNESL and others alleging fraudulent misrepresentation
Court granted SNESL motion to dismiss
Issue and Legal Reasoning:
Had Rodi failed to state a claim?
Despite catalogue disclaimer, if SNESL representatives knew of non-accreditation probability, then positive statements about the likelihood of SNESL’s accreditation were actionably misleading
Reversed and remanded in favor of Rodi

11. Mistake & Duress
A mistake is a belief about a fact that is not in accord with the truth
A unilateral mistake will not render a contract unenforceable unless unequal bargaining position existed
Duress is wrongful threat or act that coerces a person to enter or modify contract
Physical, emotional, or economic harm
Mistake:
Mistake must relate to facts as they exist at the time the contract is created
Mistake not due to other party’s statements
Mutual mistakes may be remedied by reformation
A unilateral mistake will not render a contract unenforceable unless unequal bargaining position existed
Example: Estate of Nelson v. Rice in which the sellers sued buyers after buyers recognized a profit on the sale of estate sale paintings
Duress:
Duress is wrongful threat or act that coerces a person to enter or modify contract
Physical, emotional, or economic harm
Given duress, victim must have no reasonable choice but to enter the contract
Alternatives Example: Barry, a traveling salesman, takes his car to Cheatum Motors for repair. Barry pays Cheatum the full amount previously agreed upon for the repair, but Cheatum refuses to return Barry’s car to him unless Barry agrees to pay substantially more than the contract price for the repairs. Because of his urgent need for the return of his car, Barry agrees to do this. In this case, Barry technically had the alternative of filing a legal action to recover his car. However, this would not be a reasonable alternative for someone who needs the car urgently because of the time, expense, and uncertainty involved in pursuing a lawsuit. Thus, Barry could avoid his agreement to pay more money under a theory of duress.
Example of Radford v. Keith:
Donald Keith and Donald W. Keith & Associates and Marlene Radford entered into a written contract for the construction of a house for Radford. The total amount of the contract was $165, Contract provided that price could be adjusted for changes to the building plan made by either party. When residence completed, closing was scheduled. Approximately one week before the closing, Keith telephoned Radford and demanded that she meet with him in his office. During this meeting, Keith informed Radford that there were “big problems” that could prevent her from closing, accused Radford of fraud and told her that he would sign a document that could prevent the closing from going forward. Keith tave Radford several choices, such as going to court to settle the matter or signing a Note and Deed of Trust promising to pay Keith an additional $25,715. Keith instructed one of his associates to stand outside the door to his office for two hours to be sure that they were not interrupted.
Before meeting with Keith, Radford had made arrangements for her personal belongings to be delivered to the new residence and she had executed a notice to vacate her rental unit. As a result, she was concerned that she would be displaced if Keith’s actions prevented her from closing on the loan. According to Radford, Keith threatened to sue her and she thought that her only option was to sign the note in order to close in a timely manner. She signed the Note and Deed of Trust.
Radford later filed suit against Keith and his company, claiming duress and seeking to rescind the note and cancel the deed of trust. The jury found sufficient evidence of duress and returned a verdict in favor of Radford. Keith and his company moved for a directed verdict and a judgment notwithstanding the verdict at the close of trial. The trial court denied both motions, and Keith and his company appealed.
Court: “While we recognize that Keith’s threat to initiate legal proceedings may have been lawful and justifiable, his methods were such that a jury could determine that his actions were grossly unfair to Radford so as to rise to the level of a wrongful act.”

12. Undue Influence
Undue influence involves wrongful pressure exerted on a person during the bargaining process
Pressure exerted through persuasion rather than coercion
Undue influence is common in familial relationships with regard to wills and trusts.

13. Capacity to Contract
“No brilliance is needed in the law. Nothing but common sense, and relatively clean fingernails.”
John Mortimer

14. Learning Objectives The meaning of capacity
The classes of persons without capacity
The rights to disaffirm or ratify
The duties of disaffirmance

15. Definition
Person must have ability to give consent before being legally bound to agreement, thus capacity is the ability to incur legal obligations and acquire legal rights
A person who contracts without necessary capacity may avoid the contract at his/her option

16. The Lack of Capacity
Status incapacity refers to minors, factual incapacity includes those suffering from a mental disability and intoxicated persons
Contract in which one party lacks capacity is voidable at the option of person lacking capacity
Right to avoid a contract is disaffirmance
Example: Stroupes v. The Finish Line, Inc.
Stroupes v. The Finish Line, Inc.: Court ruled that a minor’s employment contracts, including arbitration agreements, were voidable by the minor
Stroupes was 16 and worked at The Finish Line, Inc. until she quit alleging sexual harassment. The company tried to compel arbitration under an arbitration clause in the written employment contract. The court stated: “…under Tennessee law, a minor’s employment contracts, including arbitration agreements, are voidable by the minor. The court finds that Lindsey’s employment contract with Finish Line was voidable by Lindsey, and was voided by filing this action.”
Details about disaffirmance:
Minors may not avoid contracts if a statutory exception exists (marriage, insurance, educational loans)
Fact that a minor is emancipated (independent from parents) does not give minor capacity to contract
An exculpatory clause (e.g., liability waiver) signed by a parent does not necessarily waive the minor’s rights (Creech v. Melnik)
Minor’s power to avoid contracts does not end on day he/she reaches the age of majority, but continues for a reasonable period of time afterwards

17. Capacity & Mental Impairment
Those who suffer from a mental illness may be disadvantaged in their ability to protect their interests in the bargaining process
Thus, their contracts are void or voidable
Test: Did the person have sufficient mental capacity to understand the nature and effect of the contract?

18. Contracts of Intoxicated Persons
Intoxication is a ground for lack of capacity only when it is so extreme that the person is unable to understand the nature of the bargaining process
Note: courts are not sympathetic!

19. Duties Upon Disaffirmance
Each party has duty to return to the other any consideration the other has given
The incapacitated may be liable for damages
See Dodson v. Schrader
Incapacitated person generally required to pay reasonable value for necessities (required for survival) furnished to them
Example: Young v. Weaver
Was the apartment a necessity?
Dodson v. Schrader:
Joseph Dodson, age 16, bought a 1984 Chevrolet truck from Burns and Mary Shrader, owners of Shrader’s Auto Sales, for $4,900 cash. At the time, Burns Shrader, believing Dodson to be 18 or 19, did not ask Dodson’s age and Dodson did not volunteer it. Dodson drove the truck for about eight months, when he learned from an auto mechanic that there was a burned valve in the engine. Dodson did not have the money for the repairs, so he continued to drive the truck without repair for another month until the engine “blew up” and stopped operating. He parked the car in the front yard of his parents’ house. He then contacted the Shraders, rescinding the purchase of the truck and requesting a full refund. The Shraders refused to accept the truck or to give Dodson a refund. Dodson then filed an action seeking to rescind the contract and recover the amount paid for the truck. Before the court could hear the case, a hit-and-run driver struck Dodson’s parked truck, damaging its left front fender. At the time of the circuit court trial, the truck was worth only $500. The Shraders argued that Dodson should be responsible for paying the difference between the present value of the truck and the $4,900 purchase price. The trial court found in Dodson’s favor, ordering the Shraders to refund the $4,900 purchase price upon delivery of the truck. The Tennessee Court of Appeals affirmed this judgment, and the Shraders appealed.
Court: “The first of these minority rules is called the “Benefit Rule.” This rule holds that, upon rescission, recovery of the full purchase price is subject to a deduction for the minor’s use of the merchandise. This rule recognizes that the traditional rule in regard to necessaries has been extended so far as to hold an infant bound by his contracts, where he failed to restore what he has received under them to the extent of the benefit actually derived by him from what he has received from the other party to the transaction. The other minority rule holds that the minor’s recovery of the full purchase price is subject to a deduction for the minor’s “use” of the consideration he or she received under the contract, or for the “depreciation” or “deterioration” of the consideration in his or her possession.”
Young v. Weaver:
Kim Young contracted as a minor with a friend to lease an apartment from Weaver. The two stayed in the apartment and paid rent for three months. Young moved out near the end of November and returned to live with her parents. Young had a dog that caused damage to the apartment in the amount of $270. Y oung did not pay for this damage before vacating the apartment. Weaver managed to rent the apartment to someone else several months later. Weaver filed a claim against Young in Small Claims, seeking damages for the unpaid rent and the damage done by Young’s dog. The court ruled in favor of Weaver and awarded $1,370 in damages. Young appealed the decision to the Tuscaloosa Circuit Court, which tried the case and also entered a judgment in favor Weaver and awarded him $1,095. Young appealed.
Court: “Alabama law, like the law of most other states, provides that persons providing “necessaries” of life to minors may recover the reasonable value of such necessaries irrespective of the existence, or nonexistence, of a voidable contract respecting those necessaries. …Determining whether the subject of a contract is a necessity to a minor entails a two-step analysis…[generally considered a necessity and a necessity to that minor]. …Young’s parents were willing and able to provide lodging for their daughter at the time she rented the apartment from Weaver. Given the authorities cited above and the particular facts of this case, we conclude that the trial court erred in its determination that the apartment in question was a necessity for Young. Therefore, as a minor, Young is not legally bound under the lease agreement. Reversed and remanded in favor of Young.”

20. Ratification
Ratification occurs when a person who reaches majority or is no longer suffering a mental disability or intoxication indicates either expressly or impliedly, that he intends to be bound by a contract made while incapacitated