A. Legal Sufficiency 1. Adequacy 2. Unilateral Contracts 3. Bilateral Contracts 4. Illusory Promises a. Output and Requirement Contracts b. Exclusive Dealing Contracts c. Conditional Promises 5. Pre-existing Obligation a. Modification of a Pre-existing Contract b. Substituted Contracts c. Settlement of a Undisputed Debt d. Settlement of an Disputed Debt B. Bargained-For-Exchange 1. Past Consideration 2. Third Parties C. Contracts without Consideration 1. Promises to Perform Prior Unenforceable Obligations a. Promise to Pay Debt Barred by the Statute of Limitations b. Promise to Pay Debt Discharged in Bankruptcy c.
Voidable Promises d. Moral Obligation 2. Promissory Estoppel 3. Contracts under Seal 4. Promises Made Enforceable by Statute a. Contract Modifications b. Renunciations c. Firm Offers Cases in This Chapter Pearsall v. Alexander Denney v. Reppert New England Rock Services, Inc. v. Empire Paving, Co. DiLorenzo v. Valve and Primer Corporation *** Chapter Objective *** Define consideration and explain what is meant by legal sufficiency. A. LEGAL SUFFICIENCY Consideration is the legal value which supports a promise in a contract relationship; it is the inducement to make a contract enforceable.
To be legally sufficient, the consideration for the promise must be either a legal detriment to the promisee or a legal benefit to the promisor. In other words, the promisor must receive something of legal value or the promisee must give up something of legal value in return for the promise. Legal detriment does not mean harm, but rather something which the promisee was previously under no legal obligation to do or refrain from doing. Legal benefit means the obtaining by the promisor of that which he had no prior legal right to obtain. CASE Pearsall v. Alexander Case Questions 1.
Would the results be the same if the Lottery ticket was worth $20. 00? $2,000,000? 2. How can the “course of conduct” test be applied to this situation? Ethical Question: Did the parties act in an ethical manner? Explain. 154 CONSIDERATION CHAPTER 12 Critical Thinking Question: Would it have been preferable to have this continuing agreement put in writing? Explain. Adequacy Legal sufficiency has nothing to do with adequacy of consideration. The requirement of legally sufficient consideration is not at all concerned with whether the bargain was “fair” or either good or bad for either party.
The requirement is simply: (1) that the parties have freely agreed to an exchange and (2) that the subject matter exchanged, or promised in exchange, either imposed a legal detriment on the promisee or conferred a legal benefit on the promisor. Unilateral Contracts In a unilateral contract, one party (the promisor) exchanges a promise for an action (or restraint from acting) from another party (the promisee). The promisee does not make a promise in return, but simply fulfills the action or the restraint to complete the contract. Bilateral Contracts In a bilateral contract there is an exchange of promises.
Thus, each party is both a promisor and a promisee. Describe illusory promises, output contracts, requirements contracts, exclusive dealing contracts, and conditional contracts. *** Chapter Objective *** Illusory Promises A statement that appears to be a promise but that, upon close examination of the words, promises nothing real or legally binding; it may contain words such as “desire” or “want” or “wish to buy,” making performance entirely optional. The following types of contracts are NOT illusory because the promisor has actually become obligated to do something.
Output and Requirements Contracts — The agreement of a seller to sell her entire production to a particular purchaser is called an output contract. An agreement to purchase all the materials of a particular kind that the purchaser needs from a seller is called a requirements contract. These are not illusory contracts because they are for a provable quantity, not for a desired amount. Exclusive Dealing Contracts — an exclusive arrangement made by one party to sell the goods of another in a designated market.
A “best efforts” rule is used to evaluate the obligation of the manufacturer to supply goods and of the distributor to promote their sale. Conditional Promises — The obligation to perform depends upon the happening or nonhappening of a stated event. If the promisor knows that the conditional event cannot occur, the conditional promise will not be sufficient. *** Chapter Objective *** Explain whether preexisting public and contractual obligations satisfy the legal requirement of consideration. Pre-Existing Obligations.
The law does not regard the performance of (or the promise to perform) a preexisting obligation, whether public or private, as either a legal detriment or a legal benefit. CASE Denney v. Reppert CHAPTER 12 CONSIDERATION 155 Case Questions 1. If the apprehension of the suspects had taken place in the county in which Reppert worked as a deputy, would he have been eligible for the reward? 2. What public policy reasons support denying public officials and employees rewards for carrying out their required responsibilities? 3.
If Reppert had not participated in the apprehension of the suspects, could the bank have successfully argued that he violated a pre-existing moral obligation owed to the public since he was a law enforcement officer? Ethical Question: Did the court treat all the parties fairly? Explain. Critical Thinking Question: Do you agree with the preexisting duty rule? Explain. Modification of a Pre-Existing Contract — The Pre-Existing Duty rule under common law requires that a contract modification or amendment be supported by additional and new consideration.
This rule is different from the UCC, which provides that contract modifications are binding despite no new consideration provided they intend to do so and act in good faith. Also, if a valid controversy develops regarding a party’s obligations, a subsequent modification that clarifies the dispute and that is unsupported by consideration, will be valid. NOTE: See Figure 12-1 in the textbook. Substituted Contracts — A substituted contract results when the parties to a contract mutually agree to rescind their original contract and enter into a new one.
This situation actually involves three separate contracts: the original contract, the agreement of rescission, and the substituted contract. CASE New England Rock Services, Inc. v. Empire Paving, Co. Case Questions 1. What was the alleged consideration in this case? 2. If the contract in this case had come under the purview of the U. C. C. , would the result have been different? Ethical Question: Was this contract modification fair? Explain. Critical Thinking Question: Which rule for contract modification do you believe is the best: the common law, the Code’s or the Restatement’s?
Why? Settlement of an Undisputed Debt — An undisputed (liquidated) debt is an obligation whose existence and amount are not contested. Under the common law, the payment of a lesser sum in return for the discharge of a fully matured, undisputed debt is not sufficient to support the promise of discharge. Settlement of a Disputed Debt — A disputed (unliquidated) debt is an obligation whose existence or amount is contested. The giving up or compromise of a disputed claim constitutes legally sufficient consideration if the dispute is honest and not frivolous.
Explain the concept of bargained-for exchange and whether this element is present with past consideration and third-party beneficiaries. *** Chapter Objective *** 156 CONSIDERATION CHAPTER 12 B. BARGAINED-FOR EXCHANGE A bargained-for exchange requires a mutually agreed upon exchange of consideration. Past Consideration Past consideration is an act done before the contract is made. The element of exchange is missing where a promise is given for an act already done. Past consideration is no consideration.
Third Parties Consideration to support a promise may be given to a person other than the promisor if the promisor bargains for that exchange. Conversely, consideration may be given by some person other than the promisee. *** Chapter Objective *** Identify and discuss contracts that are enforceable even though they are not supported by consideration. C. CONTRACTS WITHOUT CONSIDERATION Certain promises are enforceable even though they are not supported by consideration. Promises to Perform Prior Unenforceable Obligations The courts may enforce a new promise that originally was not enforceable or has become unenforceable.
Promise To Pay Debts Barred By The Statute Of Limitations — The statute of limitations provides a time limit on bringing a legal action, but the debtor can become liable again for an expired debt by freely admitting that the debt is owed, by making partial payment, or by making a new promise to pay without pleading the statute. Promise To Pay Debts Discharged In Bankruptcy — The Bankruptcy Act limits the enforceability of such promises, but in some cases, they may be enforceable. Voidable Promises — A new promise to fulfill a previous voidable (but not avoided) promise may be enforced, as long as the new promise is not voidable.
Moral Obligations — Under common law, promises to pay these are not enforceable. The Restatement imposes an obligation on promisors “to the extent necessary to prevent injustice” and provides for enforcement of a promise to pay for a benefit already received by mistake. Promissory Estoppel Sometimes noncontractual promises are enforced under the doctrine of promissory estoppel where one party has relied, to her detriment, on the promise made by another party. NOTE: See Figure 12-2 in the textbook for a summary of when a promise is binding. CASE DiLorenzo v. Valve and Primer Corporation Case Questions 1.
Is the act of turning down job offers from other companies considered valid consideration? 2. What was the consideration that DiLorenzo claims to have given? Ethical Question: Did the parties act ethically? Explain. Critical Thinking Question: What would have satisfied the consideration requirement in this case? CHAPTER 12 CONSIDERATION 157 Contracts Under Seal Under the common law, a promise under seal was binding without consideration. In some states a promise under seal is still binding. Most states, however, have created laws which remove the distinction between contracts under seal and written, unsealed contracts.
Promises Made Enforceable by Statute Some gratuitous promises that otherwise would be unenforceable have been made binding by statute. Most significant among these are certain promises that are made enforceable by the Uniform Commercial Code, including: Contract Modifications — contract for sale of goods can be modified in good faith, even without consideration. Renunciation — any claim or right arising from a breach can be discharged with a written, signed renunciation. Firm (Irrevocable) Offer — if by a merchant, is not revocable for lack of consideration during the stated time of the offer, or for a reasonable time.