Chapter 15: Consideration

Business Law, Sixth Edition
© 2019 BVT Publishing. All rights reserved.
S-1
Chapter 15:
Consideration

S-2
Learning Objectives
• Describe the elements of a bargain.
• Understand the adequacy of consideration.
• Explain the mutuality of obligation.
• Distinguish between a liquidated debt and
an unliquidated debt.
• Discern the concept of forbearance.
• Discuss contracts that are valid without
consideration.

S-3
15.0 In the News (Slide 1 of 2)
Notre Dame files motion to dismiss four
claims in lawsuit
http://bvtlab.com/7qBq7
Notre Dame responded to a lawsuit filed by an unnamed
student alleging he was unjustly dismissed from the
university less than a month before his graduation. The
University seeks to dismiss the count of estoppel and
reliance because, under Indiana law, “promissory
estoppel cannot be established without reasonable
reliance on a promise.”

S-4
15.0 In the News (Slide 2 of 2)
• Discuss the concept of promissory
estoppel.
• Do you agree with the University’s
argument that a promissory estoppel
does not exist? Explain.

S-5
15.1a Benefits and Detriments
Consideration requires that both parties
receive a legal benefit and incur a legal
detriment.
• Legal benefit
- Party receives something that it had no prior
legal right to receive.
• Legal detriment
- Promise to perform (or act of performance) that
one had no prior legal obligation to perform

S-6
15.1b Elements of a Bargain
• The promisee must suffer legal detriment.
• The promise in question must induce the
legal detriment.
• The legal detriment must induce the
making of the promise.
Contracts: What Is Consideration? (2:46)
http://bvtlab.com/GhDMg

S-7
15.1c Adequacy of Consideration
Generally, courts will not inquire into the
adequacy (or value) of consideration.
• The law is only concerned with the existence
of consideration.
• If there is evidence of fraud or other
abnormalities, courts will determine whether
inadequate consideration was present.
• The Code provides that unconscionable
contracts may be unenforceable.

S-8
15.1c Critical Thinking (Slide 1 of 2)
Case: Grellner
Plaintiff and defendants made a written agreement in
which defendant agreed to become plaintiff’s partner
in exchange for stock shares. Plaintiff alleged
defendant breached their contract by stealing
plaintiff’s intellectual property relating to a new
product/technology. Defendant moved to dismiss
claiming invalid consideration and, therefore, no
contract. District court denied defendants’ motion and
found that a contract existed, stating that courts are
concerned with evaluating the “legal sufficiency” of
consideration and not with its “adequacy” or value.

S-9
15.1c Critical Thinking (Slide 2 of 2)
• What did the court determine was
consideration in this case?
• As stated in the case, courts generally, are
not concerned with the adequacy of
consideration offered by both parties. Is this
a good rule? Why?
• Under what circumstances should the court
inquire as to the adequacy of
consideration? When? Why?

S-10
15.2a Introduction Doctrine of
Mutuality (Slide 1 of 2)
Doctrine of mutuality of consideration
applies only to bilateral contracts.
• Each party must be bound, or neither party
is bound.
• Promise is not supported by consideration,
one party is not legally bound.

S-11
15.2a Introduction Doctrine of
Mutuality (Slide 2 of 2)
A promise will be held invalid if:
• The promise is illusory.
• The promisor is already bound
(preexisting duty) to do what he/she
now promises to do.
• The promise is to forbear from suing, but
the promisor has an invalid claim—that is,
no legal right to sue.

S-12
15.2b Categories of Invalid Promises
Type Definition Example
Illusory Promise No promise exists because
the promisor actually does
not need to perform.
“If I decide to purchase an iPod, I will buy
yours.”
Pre-existing
Duty
Promisor promises
something they are already
under an agreement to
perform.
“I agree to paint your house for $5,000
even though last week I agreed to paint it
for $4,000.
Forbearance Promise not to sue when a
supposed claim is invalid.
“Although I know the accident was entirely
my fault, I agree not to sue you.”
Past
Considerations
Promise made for actions
that already took place.
Attorney Mike agrees to provide free legal
services for friend Jerry. 3 months after
performance of services, Jerry and Mike
agree Mike will receive $1,000. Jerry fails
to pay; Mike sues, but will lose because
the payment promise is for past
consideration.

S-13
15.2b Illusory Promises
Purports to be a promise but is not one
because the promisor need not perform it
• Courts require that there be a possibility
that the promisor will incur legal detriment.
• Typical illusory promise, the promisor’s
promise is conditional

S-14
15.2d Preexisting Duty
Promises to do what one is already
legally obligated to—no legal detriment
• Performance of an existing duty is not
consideration.
• Types of preexisting duty situations:
– Modifications of non-Code contracts
– Modification of Code contracts
– Discharge of debts and forbearance

S-15
15.2e Modification of Non-Code
Contracts
Subsequent agreement modifying an
existing contract must be supported by
new consideration.
• Exceptions to the preexisting duty rule:
– New or different duties
– Unforeseeable difficulties
– Rescission

S-16
15.2e Critical Thinking
Case: Plante & Moran Cresa
In examining an agreement dealing with project
management services, the court found that the
“flood” was not an unforeseen difficulty.
• Why doesn’t the additional hardship associated
with the flooding fit within the preexisting duty
exception?
• What facts would have to change in order for the
additional work to be considered “unforeseen”?

S-17
15.2f Modification of Code Contracts
No Consideration
• Rule: Parties to a contract for the sale of
goods may change the terms without
consideration.
Good Faith
• The exercise of bad faith to escape the duty
to perform under the original terms is not
permitted.
• Observance of reasonable commercial
standards of fair dealing in the trade

S-18
15.2g Discharge of Liquidated Debts
and Claims
• There is no consideration for the
agreement to accept less than the full
amount owed.
• Payment of a lesser sum is only
performance of an existing duty.
• Exceptions:
– Creditor gifts the balance to the debtor.
– Creditor is given something in addition to
money.

S-19
15.2h Exception for Composition
Agreements
State law allows composition agreements.
• Creditors agree to discharge the entire
amount owed on receipt of payment of a
smaller sum than is owed.
• Must involve two or more creditors
• Informal reorganization of debtor

S-20
15.2i Discharge of Unliquidated
Debts and Claims (Slide 1 of 2)
• Disputed debt
• May be subject to a compromise
settlement
• Compromise figure agreed to by both
parties operates to create consideration
for a contract resulting in the discharge
the claim.

S-21
15.2i Discharge of Unliquidated
Debts and Claims (Slide 2 of 2)
Accord and satisfaction
• A fully executed contract between creditor
and debtor
Accord: an agreement whereby creditor
agrees to accept, as full discharge of the
debt owned by the debtor, a sum less than
the creditor believes is owed.
Satisfaction: The debtor actually pays the
amount they have agreed under the accord.

S-22
15.2i Critical Thinking (Slide 1 of 2)
Case: Addison Express
This case presents an interaction of facts,
contract theory, and statutory law worthy of the
final exam of the most diabolical of contract
professors. Each party to the contract at issue
experienced financial loss and business
interruption. In the main, each party conducted
itself in the legitimate pursuit of its own
business interests.

S-23
15.2i Critical Thinking (Slide 2 of 2)
• Did the court find that the parties had
entered into an accord and
satisfaction? Why?
• What specific language included in
Medway’s two letters was pivotal in
resolving this legal dispute?

S-24
15.3a Promissory Estoppel
Required elements
• A definite promise
• Promisor should have expected that the
promisee would rely on the promise.
• A reasonable person would have relied on the
promise.
• Promisee relied on the promise, and it resulted
in substantial detriment to the promisee.
• Basic justice and fairness requires that the
promise be honored and enforced.

S-25
15.3c Firm Offers and Renunciations
• Irrevocable without consideration.
• Under the Code, a written offer by a
merchant to buy or sell goods is not
revocable.
• Renunciation or waiver is valid without
consideration.
– Waive any right or claim arising out of a
breach of contract
– Must be in writing

Chapter 15: Consideration

More Related Content

What's hot (20)

Similar to Chapter 15: Consideration (20)

More from Tara Kissel, M.Ed (20)

Recently uploaded (20)

Chapter 15: Consideration