BLTC 11e IM-Ch12 - NACM - National Association of …nacm.org/docs/cap_acap_materials/BLTC_11e_IM-Ch12-F.docx · Web viewvalue (if any) of the thing promised. The thing of legal value

Chapter 12

ConsiderationINTRODUCTION

Your students should now understand that not every promise is binding. Continuing the discussion of when a promise is binding, this chapter focuses on consideration.

The first concept students should understand about consideration is that it means something of legal value. They may find it difficult to understand that a promise has legal value as consideration, distinct from the economic value (if any) of the thing promised. The thing of legal value may be goods, money, performance, or a return promise. If it is performance, that performance may be an act (other than a promise), a forbearance (refraining from doing something that one has a legal right to do), or the creation, modification, or destruction of a legal relation.

The second concept that should be explained is that consideration must be bargained for. Performance or a promise is bargained for if the promisor seeks it in exchange for his or her promise and the promisee gives it in exchange for that promise. It is not enough that the promise induces the conduct of the promisee or that the conduct of the promisee induces the making of the promise. They must induce each other, or the bargained-for exchange element does not exist.

CHAPTER OUTLINE

I. Elements of ConsiderationConsideration is the value given in return for a promise. As noted above, there are two elements—

ADDITIONAL CASES ADDRESSING THIS ISSUE —

Sufficiency of Consideration

Cases considering the sufficiency of consideration include the following.

• Blair v. Scott Specialty Gases, 283 F.3d 595 (3d Cir. 2002) (a mandatory arbitration provision in an employee handbook was supported by “adequate” consideration: “[w]hen both parties have agreed to be bound by arbitration, adequate consideration exists and the arbitration agreement should be enforced”).

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2 UNIT TWO: CONTRACTS AND E-CONTRACTS

• Mona Electric Group, Inc. v. Truland Service Corp., 193 F.Supp.2d 874 (E.D.Va. 2002) (“the mere continuation of employment does not furnish consideration for a non-competition agreement” not to so licit an employer’s customers).

• Martindale v. Sandvik, Inc., 173 N.J. 76, 800 A.2d 872 (2002) (the creation of an employment relationship, which occurs when an employer agrees to consider hiring or agrees to hire an applicant for employment, was sufficient consideration to uphold an arbitration agreement contained in the employment application).

• Oscar v. Simeonidis, 352 N.J.Super. 476, 800 A.2d 271 (A.D. 2002) (a modification to a commercial lease, which changed the method for determining rent during the lease renewal period, was supported by consideration: “the parties adopted a formula that would permit them and any other interested person to determine the rental upon renewal of the lease by reference to objective, readily ascertainable criteria. This is itself valuable consideration sufficient to sustain the modification because the mutual agreement to abide by such a formula has the capacity to remove an element of uncertainty from the parties’ future legal relationship”).

• England v. O’Flynn, __ Ohio App.3d __, __ N.E.2d __ (2 Dist. 2002) (a physician’s breach of an obligation in an agreement with another physician caused a failure of consideration, which excused the non-breaching physician from reimbursing the breaching physician for the amount of a promissory note).

A. LEGALLY SUFFICIENT VALUEThis may be—

• A promise to do something that one has no prior legal duty to do.• The performance of an action that one is otherwise not obligated to undertake.• The refraining from an action that one has a legal right to undertake.

B. BARGAINED-FOR EXCHANGEThe consideration given by the promisor must induce the promisee to offer a return promise, per-formance, or forbearance, which must induce the promisor to make the promise. This element of bargained-for exchange distinguishes contracts from gifts.

ADDITIONAL BACKGROUND—

Bargained-for Exchange

Consideration is something exchanged for something else. Often, the concept of consideration is broken into the two elements that are discussed above and in the text. The element of exchange is also discussed in the Restatement (Second) of Contracts, Section 71. The following is the text of that section with selected Comments and Illustrations.

§ 71. Requirement of Exchange; Types of Exchange

(1) To constitute consideration, a performance or a return promise must be bargained for.

(2) A performance or return promise is bargained for if it is sought by the promisor in exchange for his


CHAPTER 12: CONSIDERATION 3

promise and is given by the promisee in exchange for that promise.

(3) The performance may consist of

(a) an act other than a promise, or

(b) a forbearance, or

(c) the creation, modification, or destruction of a legal relation.

(4) The performance or return promise may be given to the promisor or to some other person. It may be given by the promisee or by some other person.

Comment:

* * * *

b. “Bargained for.” In the typical bargain, the consideration and the promise bear a reciprocal rela tion of motive or inducement: the consideration induces the making of the promise and the promise induces the furnishing of the consideration. Here, as in the matter of mutual assent, the law is concerned with the external manifestation rather than the undisclosed mental state: it is enough that one party manifests an intention to induce the other’s response and to be induced by it and that the other responds in accordance with the inducement. * * * But it is not enough that the promise induces the conduct of the promisee or that the conduct of the promisee induces the making of the promise; both elements must be present or there is no bargain. Moreover, a mere pretense of bargain does not suffice, as where there is a false recital of consideration or where the purported consideration is merely nominal. In such cases there is no consideration and the promise is enforced, if at all, as a promise binding without consideration * * * .

Illustrations:

l. A offers to buy a book owned by B and to pay B $10 in exchange therefore. B accepts the offer and de liv-ers the book to A. The transfer and delivery of the book constitute a performance and are con sideration for A’s promise. See Uniform Commercial Code §§ 2-106, 2-301. This is so even though A at the time he makes the offer secretly intends to pay B $10 whether or not he gets the book, or even though B at the time he accepts secretly intends not to collect the $10.

2. A receives a gift from B of a book worth $10. Subsequently A promises to pay B the value of the book. There is no consideration for A’s promise. This is so even though B at the time he makes the gift secretly hopes that A will pay him for it. As to the enforcement of such promises, see § 86.

3. A promises to make a gift of $10 to B. In reliance on the promise B buys a book from C and prom ises to pay C $10 for it. There is no consideration for A’s promise. As to the enforcement of such promises, see § 90.

4. A desires to make a binding promise to give $1000 to his son B. Being advised that a gratuitous promise is not binding, A writes out and signs a false recital that B has sold him a car for $1000 and a promise to pay that amount. There is no consideration for A’s promise.



5. A desires to make a binding promise to give $1000 to his son B. Being advised that a gratuitous promise is not binding, A offers to buy from B for $1000 a book worth less than $1. B accepts the offer knowing that the purchase of the book is a mere pretense. There is no consideration for A’s promise to pay $1000.

c. Mixture of bargain and gift. In most commercial bargains there is a rough equivalence between the value promised and the value received as consideration. But the social functions of bargains include the provision of opportunity for free individual action and exercise of judgment and the fixing of values by private action, either generally or for purposes of the particular transaction. Those functions would be impaired by judicial review of the values so fixed. Ordinarily, therefore, courts do not inquire into the adequacy of consideration, particularly where one or both of the values exchanged are difficult to measure. * * * Even where both parties know that a transaction is in part a bargain and in part a gift, the element of bargain may nevertheless furnish consideration for the entire transaction.

On the other hand, a gift is not ordinarily treated as a bargain, and a promise to make a gift is not made a bargain by the promise of the prospective donee to accept the gift, or by his acceptance of part of it. This may be true even though the terms of gift impose a burden on the donee as well as the donor. * * * In such cases the distinction between bargain and gift may be a fine one, depending on the motives manifested by the parties. In some cases there may be no bargain so long as the agreement is entirely executory, but performance may furnish consideration or the agreement may become fully or partly enforceable by virtue of the reliance of one party or the unjust enrichment of the other. * * *

Illustrations:

6. A offers to buy a book owned by B and to pay B $10 in exchange therefore. B’s transfer and delivery of the book are consideration for A’s promise even though both parties know that such books regularly sell for $5 and that part of A’s motive in making the offer is to make a gift to B. * * *

7. A owns land worth $10,000 which is subject to a mortgage to secure a debt of $6,000. A promises to make a gift of the land to his son B and to pay off the mortgage, and later gives B a deed subject to the mortgage. B’s acceptance of the deed is not consideration for A’s promise to pay the mortgage debt.

8. A and B agree that A will advance $1000 to B as a gratuitous loan. B’s promise to accept the loan is not consideration for A’s promise to make it. But the loan when made is consideration for B’s promise to repay.

d. Types of consideration. Consideration may consist of a performance or of a return promise. Consideration by way of performance may be a specified act of forbearance, or any one of several specified acts or forbearances of which the offeree is given the choice, or such conduct as will produce a speci fied result. Or either the offeror or the offeree may request as consideration the creation, modification or destruction of a purely intangible legal relation. Not infrequently the consideration bargained for is an act with the added requirement that a certain legal result shall be produced. Consideration by way of return promise requires a promise as defined in § 2 [of the Restatement]. Consideration may consist partly of promise and partly of other acts or forbearances, and the consideration invited may be a performance or a return promise in the alternative. Though a promise is itself an act, it is treated separately from other acts. * * *

Illustrations:

* * * *

10. A says to B, the owner of a garage, “I will pay you $100 if you will make my car run properly.” The production of this result is consideration for A’s promise.



11. A has B’s horse in his possession. B writes to A, “If you will promise me $100 for the horse, he is yours.” A promptly replies making the requested promise. The property in the horse at once passes to A. The change in ownership is consideration for A’s promise.

12. A promises to pay B $1,000 if B will make an offer to C to sell C certain land for $25,000 and will leave the offer open for 24 hours. B makes the requested offer and forbears to revoke it for 24 hours, but C does not accept. The creation of a power of acceptance in C is consideration for A’s promise.

13. A mails a written order to B, offering to buy specified machinery on specified terms. The order pro vides “Ship at once.” B’s prompt shipment or promise to ship is consideration for A’s promise to pay the price. See * * * Uniform Commercial Code § 2-206(1) (b).

II. Adequacy of Consideration

A. THE GENERAL RULEAdequacy of consideration refers to the fairness of the bargain. Ordinarily, courts will not evaluate the adequacy of consideration, regardless of the comparative economic value of the things exchange. Parties are generally free to bargain as they will.

B. WHEN VOLUNTARY CONSENT MAY BE LACKINGA court will evaluate the adequacy of consideration if it is so grossly inadequate as to “shock the conscience” of the court—if, in terms of its amount or worth, it indicates fraud, duress, or undue influence. The contract may be declared unconscionable.

III. Agreements That Lack Consideration

A. PREEXISTING DUTYUnder most circumstances, a promise to do what one already has a legal duty to do is not legally suffi -cient consideration. There are exceptions—

1. Unforeseen DifficultiesWhen a party to a contract runs into unforeseen and substantial difficulties that could not have been anticipated at the time the contract was entered into, the parties may agree to extra compensation for overcoming the difficulties, and a court may enforce the agreement. These unforeseen difficulties do not include risks ordinarily assumed in business.

2. Rescission and New ContractTwo parties can agree to rescind their contract, at least to the extent that it is executory. When rescission and the making of the new contract take place at the same time, some courts may find a the preexisting duty and refuse to enforce the new promise.

B. PAST CONSIDERATIONPromises made with respect to events that have already taken place are unenforceable. They lack the element of bargained-for exchange.



CASE SYNOPSIS—

Case 12.1: Baugh v. Columbia Heart Clinic, P.A.

Columbia Heart Clinic, P.A., in South Carolina is a corporate medical practice that provides comprehensive cardiology services. Its physician-shareholders, including Kevin Baugh, are all cardiologists. Several years after joining the practice, Baugh signed a non-compete agreement. Later, Baugh filed a suit in a South Carolina state court against the clinic, asking the court to declare that the agreement was unenforceable.. The court ruled in the plaintiff’s favor. The clinic appealed.

A state intermediate appellate court reversed. The non-compete agreement “was supported by new consideration * * * where [it] provided that the cardiology practice would pay shareholders $5,000 per month for twelve months following separation from employment, so long as the shareholders did not compete with the cardiology practice.”

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Notes and Questions

Unless employees have access to trade secrets or other proprietary information, is it ethical to require them to sign non-compete agreements as a condition of employment? In some states, courts view continued employment as consideration, but other states take the opposite view, requiring a payment, such as $100, for there to be consideration. To give $1, which some contracts state, is generally, alone not seen by the courts as real consideration, so it would be better to offer a larger amount.

Some employers require all employees to sign a standard form, even when there is no purpose in so doing because some employees pose no competitive threat. The non-compete clause can, however, serve as a barrier to other employers who are afraid of hiring a person and then possibly facing litigation. Even if the suit by the former employer is not successful, other employers may not want to risk such expense so they simply do not hire such persons. Thus widespread usage not related to trade secrets, customer lists, or other valuable information that deserves protection, is a business tactic hard to justify, particularly from an ethical standpoint.

Would an economic recession and global financial crisis excuse a former employee from having to comply with a noncompete clause that he or she had signed? Why or why not? Yes, because any agreement that bars a person from accepting employment during a recession only makes it harder to find work. No, because the purpose of a noncompete clause is to protect a business from unfair competition—excusing a party from complying with the clause for reasons that are outside the control of the business would be unfair.

When a non-compete agreement is entered into before employment, would additional compensation constitute sufficient consideration for the agreement? Yes. In a bilateral contract, consideration is something of legally sufficient value given in return for a promise. The “something of legally sufficient value” can be a promise to do something that one has no prior legal duty to do. In the facts of this question, consideration for the non-compete agreement exists in the form of the additional compensation. The employer receives the signed non-compete agreement, and the employee receives the added pay.



In this case, did the court hold that the non-compete agreement at the heart of the dispute was supported by consideration? Yes. In this case, the court held that the non-compete agreement at the heart of the parties’ dispute was supported by consideration. The agreement provided that Columbia Heart would pay its former employee-shareholders $5,000 per month for twelve months following their separation from the clinic’s employment, so long as they did not compete with the clinic’s cardiology practice. “Consequently, the Agreements are supported by new consideration.”

C. ILLUSORY PROMISES

• If a contract expresses such uncertainty of performance that the promisor has not actually promised to do anything, the promise is illusory—without consideration and unenforceable.

• An option-to-cancel clause that allows the promisor to cancel the deal before performance has begun creates uncertainty of performance and is illusory.

IV. Settlement of Claims

A. ACCORD AND SATISFACTIONFor an accord and satisfaction, the amount of the debt must be in dispute.

1. Liquidated DebtsA liquidated debt cannot serve as the basis for an accord and satisfaction because the debtor has a preexisting obligation to pay it and gives no consideration to reduce the amount due.

2. Unliquidated DebtsAn unliquidated debt can serve as the basis for an accord and satisfaction because, as consideration, the parties give up the right to contest the amount

B. RELEASEA release bars further recovery. A release, is binding if—

• It is secured and given in good faith.• It is in a signed writing (not required in all states).• Consideration is given (not required under the UCC).

C. COVENANT NOT TO SUEUnlike a release, a covenant not to sue does not bar further recovery. This covenant is binding if—

• It is secured and given in good faith.• It is in a signed writing (not required in all states).• Consideration is given (not required under the UCC).

CASE SYNOPSIS—

Case 12.2: Already, LLC v. Nike, Inc.

Nike, Inc., designs, makes, and sells a line of athletic shoes known as Air Force 1s. Already, LLC, designs and markets athletic shoe lines known as “Sugars” and “Soulja Boys.” Nike filed a suit in a federal district court against Already, alleging that Soulja Boys and Sugars infringed the Air Force 1 trademark.



Already filed a counterclaim, contending that the Air Force 1 trademark is invalid. While the suit was pending, Nike issued a “Covenant Not to Sue,” promising not to raise any trademark claims against Already or any affiliated entity based on Already's existing footwear designs, or any future Already designs that constituted a “colorable imitation” of Already's current products. Nike then filed a motion to dismiss its claims and Already's counterclaim. The court granted the motion. The U.S. Court of Appeals for the Second Circuit affirmed. Already appealed.

The United States Supreme Court affirmed. The Court held that “this case is moot.” Under the covenant not to sue, Nike could not file a claim for trademark infringement against Already, and Already could not assert that Nike’s trademark was invalid.

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Notes and Questions

What is the likely next step in this case? The parties might attempt to arrive at a mutually agreeable financial settlement of each other’s moot claims. The amount, if any, would likely be less than either party sought in this litigation. But both parties will save the cost of a trial and further legal action against the payment and settlement of the claim and both can continue to do business without changing their product lines.

Which types of contracts are similar to a covenant not to sue? Types of contracts that are similar to a covenant not to sue include an accord and satisfaction, and a release. In a covenant not to sue, the parties substitute a contractual obligation for some other type of legal action based on a valid claim. In an accord and satisfaction, a debtor offers to pay, and a creditor accepts, a lesser amount than the creditor originally claimed was owed. When the amount of a debt is not certain, and reasonable persons differ over the amount owed, acceptance of payment of a lesser sum operates as satisfaction of the debt because there is valid consideration—the parties give up a legal right to contest the amount in dispute. A release is a contract in which one party forfeits the right to pursue a legal claim against the other party. The consideration for a release is the legal right that the party forfeits in exchange for the other’s promise to pay a stipulated amount.

V. Promissory Estoppel

A. REQUIREMENTS TO ESTABLISH PROMISSORY ESTOPPELReasonable reliance on a promise may form a basis for enforceable contract rights and duties under the doctrine of promissory estoppel (or detrimental reliance) if there is—

• A clear and definite promise.• The promisor’s expectation that the promisee will rely on the promise.• The promisee’s act or refraining from acting in reasonable reliance on the promise.• The promisee’s definite reliance results in substantial detriment.• Justice better served by enforcement of the promise.

B. APPLICATION OF THE DOCTRINEOriginally applied to gifts and charitable donations, this doctrine is now applied in other situations, including business transactions, to prevent unfairness when a promise might otherwise be unenforceable.



CASE SYNOPSIS—

Case 12.3: Harvey v. Dow

Jeffrey and Kathryn Dow own land in Corinth, Maine. The Dows often referred to the land as their children’s heritage to be left to them or given to them when they were older. With the Dows’ permission, their daughter Teresa installed a mobile home and built a garage on the land. Teresa married Jarrod Harvey, and the Dows agreed to finance the construction of a house on the land. But Jarrod died in a motorcycle accident, and Teresa financed the house with life insurance proceeds. Jeffrey did much of the work. Teresa then asked her parents for a deed to the property so that she could obtain a mortgage. They refused. Teresa filed a suit in a Maine state court against her parents. The court rejected the claim that she was entitled to a judgment on a theory of promissory estoppel. Teresa appealed.

The Supreme Judicial Court of Maine vacated the judgment, and remanded for the entry of a judgment in Teresa’s favor. The Dows showed a promissory commitment to transfer land to their daughter. The Dows’ support and encouragement of their daughter’s construction of a house on the land “conclusively demonstrated” their intent. After years of promises to convey the land to their children, Jeffrey approved the site, obtained the building permit, and built much of the house.

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Notes and Questions

Did it make a significant difference to the outcome of this case that the parties were so closely related? It may have made a difference to both courts, but any effect is speculative and must be inferred. The trial court appears to have been swayed by the parents’ ultimate intent to transfer the property to their children when they felt the timing was right. The appellate court may have made its suggestion with respect to the appropriate remedy—and indeed may have remanded the case to the lower court to determine a remedy—because of the relationship of the parties.

Teresa testified that she and Jeffery had discussed a transfer of the land by deed before the house was built. Jeffery testified that there was no discussion of a deed until Teresa moved into the house and asked for one. Which court—trial or appellate—is in the best position to assess the credibility of a witness? Why? A trial court is in a better position than an appellate court to determine the credibility of a witness because the witness may actually testify in the trial court. An appellate court has before it only the record on appeal. This record contains a transcript of the witness’s testimony, but the witness’s demeanor and behavior cannot be shown in a transcript.

ADDITIONAL BACKGROUND—

Application of the Doctrine of Promissory EstoppelThe rule is that only promises supported by consideration are enforceable. There are exceptions,

however. Among those exceptions are promises reasonably inducing another to act or to refrain from acting. These promises are enforced under the doctrine of promissory estoppel. This doctrine is expressed in the



Restatement (Second) of Contracts, Section 90. The following are excerpts from the illustrations accompanying the Comments to that section. These illustrations indicate the range of circumstances in which the doctrine of promissory estoppel applies.

1. A, knowing that B is going to college, promises B that A will give him $5,000 on completion of his course. B goes to college, and borrows and spends more than $5,000 for college expenses. When he has nearly completed his course, A notifies him of an intention to revoke the promise. A’s promise is binding and B is entitled to payment on completion of the course without regard to whether his per formance was “bargained for” * * *.

* * * *

2. A promises B not to foreclose, for a specified time, a mortgage which A holds on B’s land. B thereafter makes improvements on the land. A’s promise is binding and may be enforced by denial of foreclosure before the time has elapsed.

3. A sues B in a municipal court for damages for personal injuries caused by B’s negligence. After the one year statute of limitations has run, B requests A to discontinue the action and start again in the superior court where the action can be consolidated with other actions against B arising out of the same accident. A does so. B’s implied promise that no harm to A will result bars B from asserting the statute of limitations as a defense.

4. A has been employed by B for 40 years. B promises to pay A a pension of $200 per month when A re tires. A retires and forbears to work elsewhere for several years while B pays the pension. B’s promise is binding.

* * * *

5. A holds a mortgage on B’s land. To enable B to obtain a loan, A promises B in writing to release part of the land from the mortgage upon payment of a stated sum. As A contemplated, C lends money to B on a second mortgage, relying on A’s promise. The promise is binding and may be enforced by C.

6. A executes and delivers a promissory note to B, a bank, to give B a false appearance of assets, deceive the banking authorities, and enable the bank to continue to operate. After several years B fails and is taken over by C, a representative of B’s creditors. A’s note is enforceable by C.

7. A and B, husband and wife, are tenants by the entirety of a tract of land. They make an oral promise to B’s niece C to give her the tract. B, C and C’s husband expend money in building a house on the tract and C and her husband take possession and live there for several years until B dies. The expenditures by B and by C’s husband are treated like those by C in determining whether justice requires enforcement of the promise against A.

* * * *

8. A applies to B, a distributor of radios manufactured by C, for a “dealer franchise” to sell C’s products. Such franchises are revocable at will. B erroneously informs A that C has accepted the application and will soon award the franchise, that A can proceed to employ salesmen and solicit orders, and that A will receive an initial delivery of at least 30 radios. A expends $1,150 in preparing to do business, but does not receive the franchise or any radios. B is liable to A for the $1,150 but not for the lost profit on 30 radios. * * *

9. The facts being otherwise as stated in Illustration 8, B gives A the erroneous information deliber ately and



with C’s approval and requires A to buy the assets of a deceased former dealer and thus discharge C’s “moral obligation” to the widow. C is liable to A not only for A’s expenses but also for the lost profit on 30 radios.

* * * *

11. A is about to buy a house on a hill. Before buying he obtains a promise from B, who owns adjoin ing land, that B will not build on a particular portion of his lot, where a building would obstruct the view from the house. A then buys the house in reliance on the promise. B’s promise is binding, but will be specifically enforced only so long as A and his successors do not permanently terminate the use of the view.

12. A promises to make a gift of a tract of land to B, his son-in-law. B takes possession and lives on the land for 17 years, making valuable improvements. A then dispossesses B, and specific performance is denied because the proof of the terms of the promise is not sufficiently clear and definite. B is entitled to a lien on the land for the value of the improvements, not exceeding their cost.

* * * *

13. A, a bank, lends money to B on the security of a mortgage on B’s new home. The mortgage requires B to insure the property. At the closing of the transaction A promises to arrange for the required insurance, and in reliance on the promise B fails to insure. Six months later the property, still uninsured, is destroyed by fire. The promise is binding.

14. A sells an airplane to B, retaining title to secure payment of the price. After the closing A prom ises to keep the airplane covered by insurance until B can obtain insurance. B could obtain insurance in three days but makes no effort to do so, and the airplane is destroyed after six days. A is not subject to liability by virtue of the promise.

TEACHING SUGGESTIONS

1. When explaining that a promise may itself be of legal value as consideration, it might be helpful to draw a continuum with “economic value” at one end and “moral obligation” at the other. Include at appropriate points on the line other examples of what is and is not consideration.

2. Students should be encouraged to note situations in which the common law alone applies and situa tions in which the UCC applies. Also noteworthy are those principles on which the common law and the UCC diverge. To call attention to the divergences, students might be asked whether they think the courts should use the UCC as a guide even in non–UCC cases.

Of importance to the subject discussed in this chapter is UCC 2–209 (“An agreement modifying a contract within this Article needs no consideration to be binding.”) If no consideration is necessary, what is to stop an individual from setting a low price to get a contract and later insisting on an increase? What of a situation in which a party bargains in good faith, but a cost later rises and the party insists on an increase in the contract price? Sometimes it might seem cheaper to breach and wait to be sued than to perform. According to UCC 1–203, “Every contract or duty within this act imposes an obligation of good faith in its performance or its enforcement.” The section on unconscionability (UCC 2–302) might also apply. Under the common law, some promises to pay additional amounts for the same consideration are binding



when certain conditions occur—unforeseen difficulties, for example—but an increase in price due to a decrease in supply or an increase in demand is not enough.

Students might also be asked to read UCC 1–207 (“A party who with explicit reservation of rights per-forms . . . in a manner demanded or offered by the other party does not thereby prejudice the rights re -served.”). Under that section, if there is a disputed debt, and a check is sent for a lesser amount than the payee wants to accept, but the check is marked “Paid in Full,” what should the payee do? If he or she crosses out “Paid in Full” and writes “all rights reserved,” the check can be cashed without discharging the checkwriter’s obligation under the contract.

3. Students may find it helpful, when confronted with difficult points of law, to reduce the points into short statements. Here is an example of an abbreviated statement of the requirements for consideration:

• The promise must be made to induce current performance by the promisee (this is the bargained-for exchange element).

• The promisor must suffer legal detriment, and

• The promise must be binding, not illusory.

Cyberlaw Link

Does the requirement of consideration apply to contracts agreed to over the Internet? Are there any reasons why it should not? Are there any reasons why consideration should be eliminated as a requirement for entering into a contract (over the Internet or in any other situation)?

DISCUSSION QUESTIONS

1. What is consideration? Consideration is the inducement exchanged to enter a contract. It must be (1) legally sufficient and (2) part of a bargained-for exchange.

2. In most circumstances, parties are free to make whatever promises they wish, but only those promises made with consideration may be enforced as contracts. What is the purpose of this requirement? Legal rules exist not for their own sake but to further justice and convenience in the business of life. Economic and commercial activities are encouraged by giving legal protection to such transactions—i.e., exchanges—and not to gratuitous promises, which may be made without deliberation and may not be relied on. Also, a gratuitous promise may be made improvidently or its promisee may even show ingratitude. There would not seem to be either a legal or an ethical basis for enforcing such promises.

3. The courts generally do not weigh the sufficiency of consideration according to the comparative economic value of what is exchanged. Should they? Why or why not? The legal sufficiency of a consideration for a promise does not depend on the comparative economic value of the consideration and of what is promised in return, because the parties are deemed to be the best judges of their bargains. A party is presumed to contract for the performance of an act that will afford him or her pleasure, gratify an ambition, please a fancy, or express appreciation of a service another has rendered.



4. Can a preexisting duty satisfy the requirements of consideration? Under most circumstances, a promise to do what one already has a legal duty to do is not legally sufficient consideration. Because the application of this rule can be harsh, courts are alert to finding any legal detriment or benefit that may exist, no matter how small or insignificant it may be, so that the promise will be enforceable.

5. What are some of the exceptions to the preexisting duty rule? Rescission and new contract. Rescission is the unmaking of a contract, in which the parties are returned to the positions they held before the con tract was made. Preexisting duties are discharged by rescission. Parties can agree to rescind a contract, at least to the extent that it is executory, and they can agree to make a new contract. In that situation, there are three separate agreements—the initial one, the rescission, and the later contract. When rescission and the making of the new contract occur simultaneously, some courts refuse to enforce the new promise under the preexisting duty rule. Some courts hold that the new agreement is unenforceable on the ground of insufficient consideration. Other courts consider the timing unimportant, as long as the rescission is express, and hold that the new promises furnish consideration for each other. Still other courts hold that the original consideration carries over into the new agreement. Unforeseen difficulties. Sometimes there are unforeseen and substantial difficulties that could not have been anticipated when the contract was agreed to. If the parties agree to pay extra compensation for overcoming these difficulties, a court may enforce the agreement. Unforeseen difficulties do not include ordinary business risks.

6. What is an illusory promise? If a contract calls for such uncertain performance that the promisor has not really promised to do anything, the promise is illusory. There is no bargained-for consideration. For example, promising that “I’ll buy from you, unless I buy from someone else” is an illusory promise, because performance is entirely at your discretion. Usually, whether a promise is illusory depends on all the facts, not only on the terms of the agreement.

7. Discuss agreements to settle claims or discharge debts. Accord and satisfaction. An accord occurs when a debtor offers to pay and a creditor agrees to accept a lesser sum than the creditor claims was originally owed; satisfaction occurs when the accord is executed. The amount of the debt must be unliquidated (unsettled). If so, accepting a check on which is written “payment in full” may discharge it. Consideration exists in the parties’ giving up the right to contest the amount in dispute. In most states, if the debt is liquidated, acceptance of a lesser sum than is owed will not discharge the balance of the debt (because the debtor has a preexisting legal duty to pay the entire debt and gives no consideration to satisfy the obligation of paying the balance to the creditor). Release. A release bars recovery beyond the terms stated in the release. Generally, a release is binding if: (1) it is secured and given in good faith; (2) it is in a signed writing (not required in all states); and (3) consideration is given (not required under the UCC). Covenant not to sue. In a covenant not to sue, the parties substitute a contractual obligation for some other type of action (for example, agreeing not to sue a tortfeasor if he or she will pay for all damages substitutes a contract for the tort action; if the victim sues in tort, he or she breaches the contract). Generally, a covenant not to sue is binding if: (1) it is secured and given in good faith; (2) it is in a signed writing (not required in all states); and (3) consideration is given (not required under the UCC).

8. Discuss the doctrine of promissory estoppel. The doctrine of promissory estoppel, (not available in some jurisdictions) involves a promise given by one party that induces another party to rely on it to his or her detriment. When the promisor can reasonably have expected the reliance, the promise will be enforced if injustice cannot otherwise be avoided. The promisee’s reliance must have been justified, and generally the act must have been of a substantial nature. The promisor is estopped from asserting the lack of consideration as a defense—that’s how the promise is enforced.

9. When is consideration legally sufficient? Consideration is the inducement exchanged to enter a contract. Consideration must be (1) legally sufficient and (2) part of a bargained-for exchange. Legal sufficiency exists when



one does or promises to do something that one had no prior legal duty to do. It also includes forbearance (refraining or promising to refrain from doing something that one has a legal right to do). Legal sufficiency exists when one obtains something that one had no prior legal right to obtain. Legal sufficiency is not necessarily the same as economic sufficiency, or adequacy.

10. What are the circumstances in which a court will question whether consideration is adequate? Ade-quacy of consideration refers to the fairness of the bargain. Ordinarily, courts will not evaluate the adequacy of consideration, unless it is so grossly inadequate as to “shock the conscience” of the court, because under the doctrine of freedom of contract parties are normally free to bargain as they wish. In general, a court of law will not question the adequacy of consideration if it is legally sufficient. In an extreme case, a court of law may consider the adequacy of consideration in terms of its amount or worth, because inadequate consideration may indicate fraud, duress, undue influence, a lack of bargained-for exchange, or a party’s incompetency. A court of equity is more likely to question the adequacy of consideration. In an equity suit, it must be shown that the transaction was not unconscionable—that is, generally speaking, so one-sided under the circumstances as to be unfair—and that consideration was exchanged.

ACTIVITY AND RESEARCH ASSIGNMENT

In discussing the use of accord and satisfaction as a means of settling a disputed debt, ask students who work with accounts receivable whether they were instructed as to how to handle checks marked “Account Paid in Full.” Have students ask businesspersons generally what their policy is concerning these sort of checks, whether they have had experiences with them, and, if so, what resulted. (See also the first TEACHING SUGGESTION above.)

EXPLANATION OF A SELECTED FOOTNOTE IN THE TEXT

Footnote 3: Jamil Blackmon became friends with Allen Iverson in 1987 when Iverson was a promising high school athlete. Blackmon provided financial and other support to Iverson and his family. One evening in 1994, Blackmon suggested that Iverson use “The Answer” as a nickname. Later that night, Iverson said that he would give Blackmon 25 percent of any proceeds from the merchandising of products that used “The Answer” as a logo or slogan. In 1996, just before Iverson was drafted by the Philadelphia 76ers, Iverson told Blackmon that Iverson intended to use “The Answer” under a contract with Reebok. In 1997, Reebok began to sell, and continues to sell, products bearing “The Answer” slogan. Iverson did not share any of his profits with Blackmon. In 1998, Iverson persuaded Blackmon to move to Philadelphia. Blackmon filed a suit in a federal district court against Iverson, alleging breach of contract, among other things. In Blackmon v. Iverson, the court dismissed Blackmon’s complaint. The alleged contract between the parties was not supported by sufficient consideration. The disclosure of the idea for the use of “The Answer” as a marketing tool occurred before the formation of a promise to pay for the use of the idea. “[T]he suggestion that the defendant use ‘The Answer’ as a nickname and for product merchandising [occurred] one evening in 1994. This was before the defendant first promised to pay; . . . the promise to pay was made later that evening. The disclosure of the idea also occurred before the defendant told the plaintiff that he was going to use the idea in connection with the Reebok contract in 1996, and before the sales of goods bearing ‘The Answer’ actually began in 1997. Regardless of whether the contract was formed in 1994, 1996, or 1997, the disclosure of ‘The Answer’ idea had already occurred and was, therefore, past consideration insufficient to create a binding contract.”

Could the facts of the Blackmon case support an action based on unjust enrichment? No. The court explained that there is no “allegation that the plaintiff expected payment if the defendant used the nickname ‘The Answer.’ The plaintiff’s facts show that he wanted and intended the defendant to use the nickname in summer league



basketball tournaments, starting in 1994, without expecting any payment for that use. The plaintiff cannot make out a claim that the defendant was unjustly enriched by the use of a nickname that the plaintiff freely offered.” Besides, “the use of the nickname on products came years after the defendant began using the nickname. . . . Any benefit to the defendant from the marketing of products with ‘The Answer’ on them comes from his fame as a basketball player and the investment in marketing the products by Reebok.”

Suppose that only five minutes had elapsed between Blackmon’s suggestion that Iverson use “The Answer” as a marketing slogan and Iverson’s promise to give Blackmon a percentage of the proceeds. Would the court’s ruling in this case have been any different? Why or why not? The court might have been more willing to rule in Blackmon’s favor under this set of facts. In this situation, too, whatever occurred between the times of the suggestion and the promise might have influenced the court’s decision. For example, did the parties separate and meet later or did they remain together, talking about the nickname and its potential?

What might Blackmon have done to secure payment for Iverson’s use of “The Answer” as a nickname before that use became valuable? The court pointed out that “[t]he plaintiff's facts show that he wanted and intended the defendant to use the nickname in summer league basketball tournaments, starting in 1994, without expecting any payment for that use. The plaintiff cannot make out a claim [for payment for] the use of a nickname that the plaintiff freely offered. . . . Any benefit to the defendant from the marketing of products with ‘The Answer’ on them comes from his fame as a basketball player and the investment in marketing the products by Reebok.” The outcome in this case might have been different if Blackmon had insisted on payment from his first suggestion of the nickname—perhaps by signing a contract with Iverson. Blackmon might also have secured a right to payment by producing and marketing products with the slogan himself before others were involved or possibly by signing a contract with Reebok before that company became otherwise involved.


Documents

BLTC 11e IM-Ch12 - NACM - National Association of …nacm.org/docs/cap_acap_materials/BLTC_11e_IM-Ch12-F.docx · Web viewvalue (if any) of the thing promised. The thing of legal value