McGraw-Hill/Irwin
12-1
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
P
A
R
T
Contracts
3
•Introduction to Contracts
•The Agreement: Offer
•The Agreement: Acceptance
•Consideration
•Reality of Consent
12-2
P
A
R
T
Contracts
3
•Capacity to Contract
•Illegality
•Writing
•Rights of Third Parties
•Performance and Remedies
12-3
C H A P T E R
12
Consideration
Make yourself necessary to
someone.
Ralph Waldo Emerson
The Conduct of Life (1860)
12-4
Learning Objectives
• Define concept of consideration, list
elements, and explain significance
• Explain why illusory promises, past
consideration, and promises to
perform preexisting obligations are
not consideration
• Determine what is a valid contract
modification
12-5
Elements of Consideration
• Consideration is legal value bargained
for and given in exchange for an act or
a promise
•
Purely gratuitous
promises are not
enforceable because
not supported by
consideration
• Thorne v. Deas
12-6
Legal Value of Consideration
• Consideration in the form of an act or
promise may have legal value if the person
acting of promising
– Refrains from doing something the person has
the legal right to do
• Example: Hamer v. Sidway
– Does something the person had no prior legal
duty to do
• Generally, courts will not examine adequacy
of consideration
12-7
Bargained-for Exchange
• A promisee’s act or promise must have
been bargained for and given in
exchange for the promisor’s promise
– Example: Gottlieb v. Tropicana Hotel
and Casino in which participating in a
promotion that benefited the company
was adequate consideration to form a
contract
12-8
Exchanges That Are Not
Consideration
• Illusory promises
• Preexisting duties
• Past consideration
12-9
Illusory Promises
• If promisee’s promise really does not bind
promisee to do or refrain from doing a thing,
promise is illusory and cannot serve as
consideration
– Example: Heye v. American Golf Corporation,
Inc. in which an employee successfully claimed
lack of consideration for an arbitration clause in a
contract because mutual obligation did not exist
– AGC’s promise to arbitrate was illusory since they
could amend the contract at any time
12-10
Preexisting Duties
• As a general rule, performing or agreeing
to perform a preexisting duty is not
consideration
– Promisor in such a case has effectively
made a gratuitous promise
• Includes public duties (obey the law) and
preexisting contractual duties
12-11
Preexisting Duties &
Contract Modification
• General rule is an agreement to modify
an existing contract requires mutual
assent and new consideration
• In Margeson v. Artis, Iowa Supreme Court
held that attempt to modify contract
failed since Margesons had a preexisting
duty to sell business under terms of
original contract and new consideration
not provided
12-12
Preexisting Duties &
Settlement Agreements
• Liquidated debts are debts in which parties
have no dispute about the existence or
amount of the debt
– A creditor’s promise to discharge a liquidated
debt for part payment of the debt at or after
its due date is unenforceable for lack of
consideration
• If there is a dispute about the existence or
amount of the debt, the debt is unliquidated
– Settlement agreements are enforceable
12-13
Past Consideration
• Past consideration is an act or benefit
given in the past that was not given in
exchange for the promise in question,
thus it cannot be consideration
12-14
Exceptions to
Consideration Requirement
• Promissory estoppel, because a donative
promise is not a bargained-for exchange
– Example: Skebba v. Kasch
• State statutes that extend promises to pay
debts that have been barred by statute
of limitations or bankruptcy discharge
• Charitable subscriptions (like promissory
estoppel)
12-15
12-16
Thought Question
• Your Aunt agrees to
buy you a new car
when you graduate if
you earn straight “A”
grades during your
senior year. You
earn those grades.
Have you provided
legally sufficient
consideration?
12-17