Common Law Contract: Consideration


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Common Law Contract: Consideration

  1. 1. U.S. Contract Law Consideration
  2. 2. Overview Consideration Extremes CommercialGift ExchangeNo K Contract
  3. 3. General Considerations . . .about consideration: Why have this doctrine?  To allow court differentiate between contracts that should be enforced and those that should not.  Consideration is really concerned with the validity of outstanding promises. What is it?  An element of an exchange that makes a contract enforceable.
  4. 4. Two Main Theories Benefit/Detriment Approach  “An act or forbearance of one party, or the promise thereof, is the price for which the promise of the other is bought, and the promise thus given for value is enforceable.”  See Hamer v. Sidway Bargain Approach  See Restatement 2nd §71  Promises must be bargained for  NOTE: Both approaches call for some kind of detriment and benefit. The difference is whether there must be inducement on both sides.
  5. 5. Elements of Consideration Detriment – the promisee must be giving up something Benefit – the promisor must be gaining something. Bargained For – the parties must have agreed to the exchange
  6. 6. What is Detriment Detriment is giving something of value or any relinquishment of a legal right.  Could take the form of immediate act, or  Forbearance, or  Partial or complete abandonment of a right. It could also be a PROMISE to act, forbear or abandon a right.
  7. 7. Detriment Example Condis flat Condis detriment Condi Hillary Payment of €2000 Hillarys detriment or promise to payStandard bilateral K, in which the promise by each party is exchanged forand induces the promise by the other.
  8. 8. Legal Right Example:Hamer Uncles detriment Promise to give $5,000Uncle Nephew Promise to quit smoking, etc. detriment?
  9. 9. How Does Benefit Fit In? Usually, promisees detriment translates easily into promisors benefit. But what about the Hamer case? How did the uncle benefit?  Benefit here is defined broadly to mean “to get what one bargained for”.
  10. 10. Bargained For Exchange Under Bargain Approach:  Promise or performance must be sought by the promissory and given to the promisee in exchange for a promise or performance.  These promises must induce each other!  It means nothing if a party suffers a legal detriment unless the parties agree that it is the price for the promise. Bargain simply means agreement.
  11. 11. Firm Offer/OptionsA promise to keep an offer open for a stated period of time. Consideration must be given in exchange for this promise to keep open.  We will discuss consideration later. Anofferor is considered to be in breach if he revokes “firm offer.”
  12. 12. Option w/ Consideration ExampleOption (Prelim K) promise to keep offer open Offeror Offeree $100 if exercised, will lead toUnderlying Exchange(proposed K) Farm Offeror Offeror $2 million
  13. 13. Option w/out Consideration There are two instances where an option K can be formed without consideration being given: Court applies doctrine of Estoppel UCC §2-205  Merchant selling or buying goods  offer placed in writing  writing contains assurance the offer will be held open  signed by the parties
  14. 14. Estoppel Example Seller writes to buyer offering to sell farm, stating that offer will be held open until Friday. No consideration is given, thus not binding. Buyer, intending to accept offer by Friday, quits his job in the city on Tuesday to devote his full attention to his new farm. Wednesday, seller revokes Thursday, buyer disregards revocation and tenders acceptance.
  15. 15. Estoppel Example Buyer claims reliance on promise not to revoke offer until Friday caused him to quit his job. If offer is not enforced, buyer claims he will suffer unfair detriment A court may apply the doctrine of promissory estoppel (to be discussed in more detail later).  Seller did promise to keep open the offer  Its reasonable to expect that buyer would rely on this.  Buyer did in fact rely, to his detriment.  Whether buyers reliance was justified is Q for court.
  16. 16. Consideration Problem AreasGenerally, consideration is not an issue.However, it does arise in a few instances that wecall here “problem areas:” Gifts Promissory Estoppel Pre-Existing Duty Accord and Satisfaction Modification Past/Moral Consideration
  17. 17. Gifts GeneralRule - promise to make a gift is NOT enforceable  If only it were so simple. Common law generally does not enforce the promise of a gift because  motivated by affection, gratitude or altruism  nothing was given in exchange  the gift maker should therefore be able to recant without facing legal liability.
  18. 18. Promissory Estoppel A promise coupled with detrimental reliance. Sometimes called a substitute for consideration. Grew from the equitable remedy of estoppel.
  19. 19. Promissory Estoppel A promiseThe promisors conduct +and intent (objective) A reasonable expectation by the promisor that it will induce relianceThe promisees reaction Promise does induce action or forbearance Reliance is justifiedThe consequence: Detriment Injustice can be avoided only by enforcementLimits on relief Remedy may be limited as justice requires
  20. 20. Consideration? Alaska Packers Assn v. Domenico
  21. 21. Pre-Existing Duty Rule One does not suffer detriment by doing something or promising to do something that one is already obliged to do or by forbearing to do something that is already forbidden.  Pre-existing duty could be legal or contractual.§ 73. Performance Of Legal Duty  Performance of a legal duty owed to a promisor which is neither doubtful nor the subject of honest dispute is not consideration; but a similar performance is consideration if it differs from what was required by the duty in a way which reflects more than a pretense of bargain.
  22. 22. Pre-Existing Duty Example Agreement 2Agreement 1 Flat Condi Hillary $1500 $2000
  23. 23. Accord & Satisfaction Process of completely discharging party from prior obligation: Have the parties gone through a process of offer and acceptance (accord)? Has the accord been carried out (satisfaction)? Was the offer and acceptance supported by consideration?
  24. 24. Accord & Satisfaction ExampleNOTE - An accord and satisfaction differs from a modification in that amodification immediately discharges a preexisting duty, whereas an accord andsatisfaction does not discharge a preexisting duty until the agreed upon, alternateperformance occurs. Flat for 1 year bargained for new consideration Don Robert discharge of $24.000 Don owes Robert $24,000 for past work. (outstanding promise).
  25. 25. Modification of On-Going Transaction§89. Modification Of Executory Contract  A promise modifying a duty under a contract not fully performed on either side is binding  (a) if the modification is fair and equitable in view of circumstances not anticipated by the parties when the contract was made; or  (b) to the extent provided by statute; or  (c) to the extent that justice requires enforcement in view of material change of position in reliance on the promise.
  26. 26. A Different Result?Manufacturer (M) contracts for sale of100,000 of these @ $10/pc to lawn Price of metal increasemower maker (LM). after M has already delivered ¼ of the pieces to LM. OBI agrees to buy 100,000 mowers at fixed price from LM M refuses to sell LM remaining pieces unless LM agrees to pay $13/pc
  27. 27. Past/Moral Consideration§ 86. Promise For Benefit Received  (1) A promise made in recognition of a benefit previously received by the promisor from the promisee is binding to the extent necessary to prevent injustice.  (2) A promise is not binding under Subsection (1)  (a) if the promisee conferred the benefit as a gift or for other reasons the promisor has not been unjustly enriched; or  (b) to the extent that its value is disproportionate to the benefit.
  28. 28. Consideration? Mills v. Wyman