1. Chapter 11
Consideration and Equity
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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2. Consideration
• Consideration – something of
legal value given in
exchange for a promise.
• Consideration is a necessary
element for the existence of
a contract.
• Common types of
consideration are:
– A tangible payment (money or
property); or
– Performance of an act (e.g.,
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3. Consideration (continued)
• Consideration consists of
two elements:
1. Something of legal value
must be given; and
2. There must be a bargained-
for exchange.
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4. Legal Value
• Something of legal value
must be given.
• Under the modern law of
contracts, a contract is
considered supported by
legal value if:
1. The promisee suffers a legal
detriment; or
2. The promisor receives a legal
benefit.
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5. Bargained-for Exchange
• To be enforceable, a
contract must arise from a
bargained-for exchange.
– Exchange that parties engage
in that leads to an enforceable
contract.
• Gift or gratuitous promise –
an unenforceable promise
because it lacks
consideration.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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6. The Use of Output and Requirements
Contracts in Business
• There are two special types
of business contracts that
specifically allow a greater
degree of uncertainty
concerning consideration:
– Output Contracts
– Requirements Contracts
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7. Contemporary Business
Environment
Nominal Best Efforts
Consideration Contracts
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8. Contracts Lacking Consideration
Illegal
Consideration Illusory
Promise
Moral
Obligation
Preexisting
Duty
Past
Consideration
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9. Illegal Consideration
• Illegal consideration – a
promise to refrain from doing
an illegal act.
• Such a promise will not
support a contract.
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10. Illusory Promise
• Illusory promise – a contract
into which both parties enter,
but one or both of the parties
can choose not to perform
their contractual obligations.
• Thus, the contract lacks
consideration.
• Such promises are
unenforceable.
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11. Moral Obligation
• Promises made out of a sense
of moral obligation or honor
lack consideration.
• Moral consideration is not
treated as legal
consideration.
• Such promises are
unenforceable in most states.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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12. Preexisting Duty
• Preexisting duty – a promise
lacks consideration if a
person promises to perform
an act or do something he or
she is already under an
obligation to do.
• The promise is unenforceable
because no new
consideration has been
given.
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13. Preexisting Duty (continued)
• The preexisting duty rule
arises when one of the
parties to an existing
contract seeks to change the
terms of the contract during
the course of its
performance.
• Such midstream changes are
unenforceable.
• The parties have a
preexisting duty to perform
according to the original
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14. Preexisting Duty (continued)
• Sometimes a party to a
contract runs into substantial
unforeseen difficulties while
performing his or her
contractual duties.
• The contract can be
modified and enforced
without new consideration
being given.
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15. Past Consideration
• Problems of past
consideration often arise
when a party to a contract
promises to pay additional
compensation for work done
in the past.
• Past consideration (e.g., prior
acts) will not support a new
contract.
• New consideration must be
given.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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16. Concept Summary: Promises Lacking
Consideration
Type of Description of Promise
Consideration
Illegal Promise to refrain from doing an illegal act.
consideration
Illusory promise Promise where one or both parties can
choose not to perform their obligation.
Moral obligation Promise made out of a sense of moral
obligation or honor or love or affection.
Some states enforce these types of
contracts.
Preexisting duty Promise based on the preexisting duty of
the promisee to perform. The promise is
enforceable if (1) the parties rescind the
contract and enter into a new contract, or
(2) there are unforeseen difficulties.
Past Promise based on the past performance
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17. Settlement of Claims
• The law promotes the
voluntary settlement of
disputed claims.
• Settlement:
– Saves judicial resources, and
– Serves the interests of the
parties entering into the
settlement
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18. Settlement of Claims (continued)
• Accord – an agreement
whereby the parties agree to
accept something different
in satisfaction of the original
contract.
• Satisfaction – the
performance of the accord.
• If the accord is not satisfied,
the other party can sue to
enforce either the accord or
the original contract.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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19. Promissory Estoppel
Promissory estoppel
(detrimental reliance)
• A doctrine that prevents the
withdrawal of a promise by a
promisor if it will adversely
affect a promisee who has
adjusted his or her position in
justifiable reliance on the
promise.
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20. Promissory Estoppel (continued)
• For the doctrine of
promissory estoppel to be
applied, the following
elements must be shown:
1. The promisor made a
promise.
2. The promisor should have
reasonably expected to
induce the promisee to rely
on the promise.
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21. Promissory Estoppel (continued)
3. The promisee actually relied
on the promise and
engaged in an action or
forbearance of a right of a
definite and substantial
nature.
4. Injustice would be caused if
the promise were not
enforced.
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