Section 8.1
Consideration
Section
8.1
Chapter 8Consideration
Consideration
Section 8.1
Consideration
Section 8.2
Agreements without Consideration
Understanding Business and Personal Law
Consideration
Section 8.1 Consideration
Why It’s Important
By understanding the concept of consideration,
you will be able to avoid problems that frequently
result when agreements lack this important
contractual element.
Understanding the difference between contracts
that require consideration and those that do not,
will enable you to avoid common problems
associated with consideration or the lack thereof.
Understanding Business and Personal Law
Consideration
Section 8.1 Consideration
Requirements of Consideration
The law has always refused to
enforce most gratuitous, or free,
agreements.
Parties to an agreement must
surrender something of value in
exchange for something else of
value.
Understanding Business and Personal Law
Consideration
Section 8.1 Consideration
Requirements of Consideration
This exchange, or the promise to
exchange things of value, is what
binds the parties to each other in a
contractual relationship.
This binding element is known as
consideration.
Understanding Business and Personal Law
Consideration
Section 8.1 Consideration
Requirements of Consideration
Consideration distinguishes a legally
binding agreement from other types of
agreements, such as social
agreements that contain an offer and
an acceptance. (Agreeing to go to the
homecoming dance is not a contract)
Understanding Business and Personal Law
Consideration
Section 8.1 Consideration
The Nature of Consideration
Consideration is the exchange of
benefits and detriments by parties to
an agreement.
Understanding Business and Personal Law
Consideration
Section 8.1 Consideration
The Nature of Consideration
A benefit is something that a party
was not previously entitled to
receive.
A detriment is any loss suffered.
Understanding Business and Personal Law
Consideration
8.1
Section
8.1 Consideration
Consideration
Understanding Business and Personal Law
Consideration
Section 8.1 Consideration
The Nature of Consideration
There are three types of
consideration.
1. Giving up or promising to give up
something that you have the legal
right to keep.
Understanding Business and Personal Law
Consideration
Section 8.1 Consideration
The Nature of Consideration
2. Doing something or promising to do
something that you have the legal
right not to do.
3. Not doing something that you have
the legal right to do, which is known
as forbearance.
Understanding Business and Personal Law
Consideration
Section 8.1 Consideration
The Characteristics of
Consideration
Consideration must involve these key
characteristics.
1. bargained-for exchange
2. something of value
3. legal benefits and detriments
Understanding Business and Personal Law
Consideration
Section 8.1 Consideration
Bargained-for Exchange
An agreement involves a Bargained
for Exchange when a promise is
made in return for another promise, an
act, or a promise not to act.
Understanding Business and Personal Law
Consideration
Section 8.1 Consideration
Something of Value
The law has no specific value
requirements on consideration.
All that matters is that the parties
agreed freely on the value and the
price.
Understanding Business and Personal Law
Consideration
Section 8.1 Consideration
Something of Value
Usually the courts will not even
consider whether the value of the
consideration is adequate.
However, a contract may be
deemed unconscionable, when
the courts believe the consideration
is completely out of line.
Understanding Business and Personal Law
Consideration
Section 8.1 Consideration
Legality of Consideration
The courts require that the
consideration involved in an
agreement be legal. If the
consideration is illegal, the contract is
invalid.
Understanding Business and Personal Law
Consideration
Section 8.1 Consideration
Types of Consideration
These include:
money
property
services
promises not to sue
charitable pledges
Understanding Business and Personal Law
Consideration
Section 8.1 Consideration
Money as Consideration
Unless price limits have been placed
on certain transactions by
administrative regulations, legislative
fiat, or executive ruling, parties to a
contract are free to exchange any
amount of money that they negotiate.
Understanding Business and Personal Law
Consideration
Section 8.1 Consideration
Property and Services as
Consideration
Before money was accepted as a
medium of exchange, it was common
to use property and services as
consideration.
Understanding Business and Personal Law
Consideration
Section 8.1 Consideration
Property and Services as
Consideration
Some parties still prefer to engage in
barter agreements that involve goods
and services.
Understanding Business and Personal Law
Consideration
Section 8.1 Consideration
A Promise Not to Sue
If one party has the right to sue
another party but gives up that right in
exchange for something of value, the
court will generally uphold the
exchange as valid consideration.
Understanding Business and Personal Law
Consideration
Section 8.1 Consideration
A Promise Not to Sue
Pending lawsuits are frequently
settled in this manner.
When a person accepts an offer and
agrees not to sue, he or she is asked
to sign an agreement, which is called
a release.
Understanding Business and Personal Law
Consideration
Section 8.1 Consideration
Charitable Pledges
Charitable organizations and nonprofit
institutions often depend upon
contributions.
This dependency has led the court to
enforce charitable pledges just as if
they were contracts.
Understanding Business and Personal Law
Consideration
Section 8.1 Consideration
Problems with Consideration
When parties disagree about the
amount of money that the debtor owes
the creditor, a problem has arisen over
the consideration involved.
Understanding Business and Personal Law
Consideration
Section 8.1 Consideration
Disputed Amounts
If the parties to a contract cannot
agree as to the actual amount owed,
the amount is said to be in dispute.
Understanding Business and Personal Law
Consideration
Section 8.1 Consideration
Disputed Amounts
A dispute can be settled by
accord and satisfaction (separate
definitions on next slide) if the creditor
accepts a payment that is less than
the amount due as full payment.
Understanding Business and Personal Law
Consideration
Section 8.1 Consideration
Disputed Amounts
The acceptance by the creditor of
less than what has been billed to
the debtor is accord.
The agreed-to settlement as
contained in the accord is the
satisfaction.
Understanding Business and Personal Law
Consideration
Section 8.1 Consideration
Disputed Amounts
The dispute must be real, must occur
in good faith, and must not be trivial.
Understanding Business and Personal Law
Consideration
Section 8.1 Consideration
Undisputed Amounts
If the parties have mutually agreed to
a set amount of money in the contract,
then the amount cannot be disputed.
End of Section 8.1
Understanding Business and Personal Law
Consideration
Section 8.2
Agreements
without Consideration
Consideration
Section 8.1 Consideration
Enforceable Agreements
without Consideration
Some courts have eliminated the
requirement of consideration in certain
agreements.
Understanding Business and Personal Law
Consideration
Section 8.1 Consideration
Enforceable Agreements
without Consideration
These exceptions are allowed by state
statute or because the courts, in the
interest in fairness or justice, find it
inappropriate to require consideration.
Understanding Business and Personal Law
Consideration
Section 8.1 Consideration
Enforceable Agreements
without Consideration
Some common agreements in this
category include:
promises under seal
promises after discharge in
bankruptcy
Understanding Business and Personal Law
Consideration
Section 8.1 Consideration
Enforceable Agreements
without Consideration
debts barred by the statute of
limitations
promises enforced by promissory
estoppel
options
Understanding Business and Personal Law
Consideration
Section 8.1 Consideration
Promises under Seal
A seal is a mark or impression placed
on a written contract indicating that
the instrument was executed and
accepted in a formal manner.
Understanding Business and Personal Law
Consideration
Section 8.1 Consideration
Promises under Seal
Today most states that require a seal
will permit the seal to be indicated by
the addition of seal or L.S. (locus
sigilli, which translates to “place of the
seal”).
Understanding Business and Personal Law
Consideration
Section 8.1 Consideration
Promises after Discharge
in Bankruptcy
A person who has had his or her debts
discharged in bankruptcy can reaffirm
the debt, which means he or she has
decided to pay the debt voluntarily.
Understanding Business and Personal Law
Consideration
Section 8.1 Consideration
Promises after Discharge
in Bankruptcy
Under most state laws, no new
consideration needs to be provided in
support of this reaffirmation. Instead,
the reaffirmation must be supported by
contractual intent.
Understanding Business and Personal Law
Consideration
Section 8.1 Consideration
Debts Barred by Statutes
of Limitations
A statute of limitations establishes the
time frame within which a party is
allowed to bring suit. Different states
set different time limits for the
collection of a debt.
Understanding Business and Personal Law
Consideration
Section 8.1 Consideration
Debts Barred by Statutes
of Limitations
No new consideration is needed for a
debtor to reaffirm a debt barred by the
statute of limitations.
Understanding Business and Personal Law
Consideration
Section 8.1 Consideration
Promises Enforced
by Promissory Estoppel
Under promissory estoppel, a
promise may be enforceable without
consideration.
Understanding Business and Personal Law
Consideration
Section 8.1 Consideration
Promises Enforced
by Promissory Estoppel
promissory—containing or
consisting of a promise
estoppel—restraint on a person to
prevent him or her from
contradicting a previous act.
Understanding Business and Personal Law
Consideration
Section 8.1 Consideration
Promises Enforced
by Promissory Estoppel
The doctrine is used to prevent
injustice when a person changes his
or her position significantly in reliance
on another person’s promise and the
promise is not fulfilled.
Understanding Business and Personal Law
Consideration
Section 8.1 Consideration
The Elements
of Promissory Estoppel
Three conditions must be met before
the courts will apply this principle.
1. The promise must be made to
bring about action or forbearance
by another person who gave no
consideration.
Understanding Business and Personal Law
Consideration
Section 8.1 Consideration
The Elements
of Promissory Estoppel
2. The one who gave no
consideration must have relied on
the promise and changed his or
her position in a significant way.
3. Injustice can be avoided only by
enforcing the agreement.
Understanding Business and Personal Law
Consideration
Section 8.1 Consideration
Option
When an offeree gives consideration
to an offeror in exchange for a
promise from the offeror to keep an
offer open for a specified period of
time, this is known as an option.
Understanding Business and Personal Law
Consideration
Section 8.1 Consideration
Option
When a merchant makes a written
offer stating a period of time during
which an offer will remain open,
consideration is not needed.
The offer is called a firm offer, or an
irrevocable offer.
Understanding Business and Personal Law
Consideration
Section 8.1 Consideration
Unenforceable Agreements
without Consideration
There are certain promises that the
courts will not enforce because they
lack even the most basic qualities of
valid consideration.
Understanding Business and Personal Law
Consideration
Section 8.1 Consideration
Unenforceable Agreements
without Consideration
Included in this category are:
illusory promises
promises of future gifts
promises of legacies
Understanding Business and Personal Law
Consideration
Section 8.1 Consideration
Unenforceable Agreements
without Consideration
promises based on past
consideration
promises based on preexisting
duties
agreements to attend social
engagements
Understanding Business and Personal Law
Consideration
Section 8.1 Consideration
Illusory Promises
For a binding contract to be formed,
both parties must be under an
obligation to do something.
If this is not the case, then neither
party is bound to do anything.
Understanding Business and Personal Law
Consideration
Section 8.1 Consideration
Illusory Promises
Some contracts appear to be
contracts but on further scrutiny are
revealed to be hollow.
Such an agreement is said to involve
illusory promises.
Understanding Business and Personal Law
Consideration
Section 8.1 Consideration
Future Gifts
If a person promises to bestow a gift
at some future time or in a will, that
promise is not enforceable if no
consideration is given for the promise.
Understanding Business and Personal Law
Consideration
Section 8.1 Consideration
Past Consideration
The act of giving or exchanging
benefits and detriments must occur
when a contract is made.
Understanding Business and Personal Law
Consideration
Section 8.1 Consideration
Past Consideration
Past consideration, or consideration
that took place in the past or that is
given for something that has already
been done, is not regarded as legal by
the courts.
Understanding Business and Personal Law
Consideration
Section 8.1 Consideration
Preexisting Duties
If a person is already under a legal
obligation to do something, a promise
to do that same thing is not
consideration.
These obligations are called
preexisting duties.
Understanding Business and Personal Law
Consideration
Section 8.1 Consideration
Promise to Attend
a Social Engagement
An agreement to meet a friend for
lunch or another social engagement
would not be a legally binding
agreement because the friend has
given nothing in exchange for the
promise.
End of Chapter 8
Understanding Business and Personal Law
Consideration