Business Law: Ch 8

Consideration

Consideration

• Consideration – What a person demands and generally must receive in order to make promise legally binding.

Consideration

• Three Requirement of Consideration1. Each party must make a promise, perform an

act, or forbear (refrain from doing something)2. Each parties promise, act, or forbearance must

be in exchange for a return promise, act, or forbearance by the other party

3. What each party exchanges must have legal value (must be worth something in the eyes of the law)

Consideration

• Consideration distinguishes a contractual promise from a promise to make a gift.

• Gift – Transfer of ownership without receiving anything in return.– Gifts are not generally not legally enforceable– Gift only becomes legally binding once the gift is

exchanged.– Donor – person giving the gift– Donee – Person receiving the gift

Promise, Act, or Forbearance

• Forbearance – to not do something

Contractual Exchange

• Promisor – Person promising an action or forbearance

• Promisee – Person to whom promise is made to.

• Consideration must be mutual

Legal Value• Legal Value – Means there has been a change

in a party’s legal position as a result of the contract– Most commonly found in the exchange of two

benefits.– Can also be found in the exchange of benefit for a

detriment (forbearing of a legal right)– Example – If you refrain from driving until you are

25, I will give you $25,000. • Not a benefit but a detriment to you (giving up your

legal right)

Adequacy of Consideration

• Economic value is unimportant as long as there is genuine assent

• However, if the economic value is evidence of mutual mistake, duress, undue influence, or fraud, the contract could be declared unconscionable (grossly unfair or oppressive) and may not be enforceable

Nominal Consideration

• Nominal Consideration – token amount stated

8-1 Assessment

• Turn to page 144 and complete 8-1 Assessment

8-1 Answers

1. False2. Gift3. False4. False5. Adequacy or economic value6. A (nominal)

8-1 Answers

7. The parties are bound. Given up the right8. The neighbors did receive consideration9. Yes. The adequacy of consideration will not

be questioned.

Circumstantial Consideration

• Illusory Promises – Clause in contract that allows you to escape the legal obligation – Termination Clauses – Power to withdraw from a

contract if business circumstances change.– Output Contract – Buyers agree to purchase all of

a particular producer’s production – Requirements Contract – Seller agrees to supply

all of the needs of a particular buyer.

Circumstantial Consideration

• Existing Duty – A person sometimes promises to do something that he or she already is obligated to do by law or contract– Such a promise or act, cannot serve as

consideration

Existing Duties

1. Existing Public Duty – Agreement creates a benefit for you, but you don’t incur a detriment because you are not giving up a legal right – Example: Aunt promises to pay you $10,000 if

you promise to not purchase alcohol for two years and you say “OK”. No contract

Existing Duties2. Existing Private Duty – A person cannot

demand further compensation for carrying out a contractual promise already made

3. Settlement of Liquidated Debts (is where the parties agree that the debt exists and on the amount of the debt)– When a creditor (person to whom the debt is

owed) agrees to accept less than the total amount due in full settlement from the debtor (person who owes money) there is no consideration if the debt is liquidated

Existing Duties

3. Settlement of Liquidated Debts– Assume Frank borrows $1000 from Carrie. The

loan is to be paid back in one year with interest at 10% per year, or a total payment of $1,100. Frank sends a check to Carrie on the due date for $1,000 and a note saying “Sorry, I’m strapped for cash. You will have to accept this in full payment.” Carrie endorses and cashes the check.

Existing Duties

3. Settlement of Liquidated Debts– A debtor can settle a claim by paying less than

the full amount if additional consideration is given.

– Must be mutual agreement

Existing Duties

4. Settlement of Unliquidated Debts– When there is a genuine dispute between the

parties about how much is owed is referred to as unliquidated.

– Accord and Satisfaction - Payment offered in full settlement by the debtor and accepted by the creditor settles the claim• Accord – New agreement on the sum

Existing Duties

5. Release – An agreement, due to financial pressures, an injured party in a tort will agree to discharge another from liability for the tort in return for a monetary payment or other consideration

6. Composition with Creditors – Group a creditors will cooperatively agree to accept less than what they are entitled to, in full satisfaction of their claims against a debtor.• Debtor agrees not to file for bankruptcy• Creditors agree not to sue for the entire amount

False Consideration

• Mutual Gift – Something of value given by one party to another without demanding anything in return

• Past Performance – Act already performed cannot serve as consideration

8-2 Assessment

• Turn to page 148 and complete the 9 questions

Exceptions to the Requirement of Consideration

• Promises to Charitable Organizations– Gift is enforceable providing the charity states a

specific use for the money and actually acts in reliance on the pledge

• Promises Covered by the UCC– Modifications made in good-faith needs no new

consideration

Exceptions to the Requirement of Consideration

• Promises Barred from Collection by Statute– Statute of Limitations – Time limit to bring a

lawsuit• Once you become aware of a legal claim, you must sue

before statute of limitations passes or you lose the right to litigate

• Debts Discharged in Bankruptcy• Even after a debt has been discharged as a result of

bankruptcy, the obligation may be reinstated by a promise of the debtor. This is done by cosignor

Exceptions to the Requirement of Consideration

• Promissory Estoppel– Prevents promisors from stating in court that they

did not receive consideration for their promises– 4 conditions to invoke Promissory Estoppel

1. The promisor should reasonably foresee that the promisee will rely on the promise

2. The promisee does, in fact, act in reliance on the promise

3. The promisee would suffer a substantial economic loss if the promise is not enforced

4. Injustice can be avoided only by enforcement of the promise