CHAPTER 12 - CONSIDERATION
TRUE/FALSE
1. Courts enforce all promises in the interests of simple morality.
ANS: F
PTS: 1
MSC: AACSB Analytic | AACSB Ethics
2. Consideration can be a promise or an act.
ANS: T
PTS: 1
MSC: AACSB Analytic
3. Agreeing not to open a competing business could be consideration.
ANS: T
PTS: 1
MSC: AACSB Analytic
4. The UCC requires consideration for agreements modifying contracts for the sale of goods.
ANS: F
PTS: 1
MSC: AACSB Analytic
5. Billy owes a liquidated debt of $3000 to Rayna, his personal weight trainer. Billy sends Rayna a check for
$300 on which he has marked, "Payment in Full." If Rayna cashes the check she will not be able to
successfully sue Billy for the remainder of the debt.
ANS: F
PTS: 1
MSC: AACSB Reflective Thinking
6. Boris sky dives out of a plane and gets hung up in a tree, hopelessly suspended and swinging precariously in
his parachute from the branches of the tree. Natasha sees that he is in trouble and comes to his rescue. Once
Boris is safely on the ground, he gratefully promises to give Natasha half of his life savings. When he
changes his mind, Natasha will probably be unsuccessful in enforcing his promise.
ANS: T
PTS: 1
MSC: AACSB Reflective Thinking
7. Raul agrees to paint Mike's house for $1,000. Before finishing, Raul states it is too hot to finish, and Mike
offers to pay $1,200 if Raul finishes. Mike's statement that he will pay $1,200 is unenforceable.
ANS: T
PTS: 1
MSC: AACSB Reflective Thinking
8. Contracts in which one party agrees to buy all his requirements of certain goods from the other party are
generally unenforceable because there is no definite amount.
ANS: F
PTS: 1
MSC: AACSB Analytic
9. An illusory promise is valid consideration.
ANS: F
PTS: 1
MSC: AACSB Analytic
10. Contracts generally do not require bargaining that leads to an exchange between the parties.
ANS: F
PTS: 1
MSC: AACSB Analytic
11. Courts normally require consideration to be approximately equal on both sides of the bargain.
ANS: F
PTS: 1
MSC: AACSB Analytic
12. Section 2-306 of the UCC expressly disallows output contracts in the sale of goods.
ANS: F
PTS: 1
MSC: AACSB Analytic
13. Denton agreed to build a cedar deck for the Thrashers for $7,000. After he began the work, the Thrashers
asked him to add cedar flower boxes at one side. Denton replied he would, but it would cost an additional
$600. The Thrashers would not be obligated to pay the additional sum because the original agreement already
obligated Denton to complete the deck for $7,000.
ANS: F
PTS: 1
MSC: AACSB Reflective Thinking
14. Pastor Tom was employed by the First Church for 40 years. On Pastor Tom's retirement there was no
adequate pension plan. Two months after the retirement, a wealthy parishioner, in consideration for Pastor
Tom's 40 years of faithful service and for being such a "sweet" man, promised to pay him $500 per month for
the rest of his life. This promise probably is not enforceable.
ANS: T
PTS: 1
MSC: AACSB Reflective Thinking
15. Hilda owes Lex $3,000, which is an undisputed amount. If she offers him her car in full settlement of the debt
and he accepts, the agreement is binding and he can no longer claim she owes him anything on the original
debt.
ANS: T
PTS: 1
MSC: AACSB Reflective Thinking
MULTIPLE CHOICE
1. An agreement to pay a lesser amount to settle an unliquidated debt is:
a.
enforceable, as there is consideration.
b.
unenforceable, as there is no consideration.
c.
enforceable in only some states.
d.
unenforceable as a violation of public policy.
ANS: A
PTS: 1
MSC: AACSB Analytic
2. In the historic case of Hamer v. Sidway, the nephew:
a.
lost, as there was no consideration.
b.
lost, as the uncle was dead.
c.
won, as there was consideration.
d.
won, as there was a completed gift.
ANS: C
PTS: 1
MSC: AACSB Analytic
3. What phrase explains how a requirements contract can be valid?
a.
“will buy 100 percent of output”
b.
“willing to accept the entire quantity”
c.
“no consideration needed”
d.
“in good faith”
ANS: D
PTS: 1
MSC: AACSB Analytic
4. The Utah Court of Appeals in the Dementas v. Estate of Tallas case found:
a.
the trial court correctly determined that there
was no consideration to support Tallas’s
promise.
b.
Utah applies the “moral obligation” exception
to the requirement of consideration, and
therefore Tallas’s promise was supported by
consideration.
c.
because Utah does not recognize the “moral
obligation” exception to the requirement of
consideration, Dementas prevails.
d.
the trial court’s finding that the services
rendered by Dementas to Tallas were
performed gratuitously was erroneous.
ANS: A
PTS: 1
MSC: AACSB Analytic
5. "I'll sell you my car if I decide to sell it" is an example of:
a.
a conditional offer.
b.
an unliquidated offer.
c.
a unilateral contract.
d.
an illusory promise.
ANS: D
PTS: 1
MSC: AACSB Analytic
6. In January, Alex promised to pay Y-K Inc. $5,000 if it would refrain from filing suit against him on a breach
of contract action. Y-K agreed and accepted a $5,000 check from Alex. Which of the following statements is
correct?
a.
Y-K's promise to refrain from suing Alex was
not supported by legal consideration.
b.
Y-K's promise to refrain from suing Alex was
supported by legal consideration and is
enforceable.
c.
This is an accord and satisfaction, and Y-K
cannot sue.
d.
The courts would apply promissory estoppel
in this situation.
ANS: B
PTS: 1
MSC: AACSB Reflective Thinking
7. Zero, Inc. agreed to build Millie a storage building for $8,000. After beginning the project, Zero realized that
it could not complete the job and make a profit. Zero demanded $9,500 to complete the building. Millie
agreed to pay the $9,500. When the project was complete, Millie tendered $8,000 to Zero for the job. If Zero
sues Millie for the remaining $1,500:
a.
Zero will win because there was consideration
for the additional $1,500.
b.
Zero will win because Millie had a
pre-existing duty to pay any additional
amounts.
c.
Zero will lose because there was no legal
consideration to support the additional $1,500.
d.
Zero will lose because the UCC does not
require consideration to modify an existing
contract.
ANS: C
PTS: 1
MSC: AACSB Reflective Thinking
8. Walter worked nights as a clerk in a fast-food store. On his last work shift, Walter's boss told him, "I'm really
grateful for the year that you have worked here. I am going to give you a bonus of $1,000 in your last
paycheck." When Walter got his last paycheck, there was no bonus. If Walter sues, the likely result will be:
a.
Walter will win, as the promise is enforceable.
b.
Walter will lose, as he gave no consideration.
c.
Walter will lose unless the promise was in
writing.
d.
Walter will win, as no consideration is
required to modify an employment contract.
ANS: B
PTS: 1
9. An unliquidated debt can be described as:
a.
b.
c.
d.
ANS: B
PTS: 1
MSC: AACSB Reflective Thinking
a debt in which both its existence and amount
is in dispute.
a debt in which the existence or amount is in
dispute.
a debt disputed by the creditor but not the
debtor.
a debt undisputed by either party.
MSC: AACSB Analytic
10. A promise by Derkin Restaurants to buy all of the produce it needs this next year at an established price from
Elfredo's Produce would be an:
a.
enforceable requirements contract.
b.
enforceable output contract.
c.
unenforceable, illusory contract.
d.
unenforceable promise based on past
consideration.
ANS: A
PTS: 1
MSC: AACSB Reflective Thinking
11. Bernie owes an undisputed amount to Wilde’s Heating & Air Conditioning. Which of the following is true?
a.
If Wilde’s agrees to accept less than the full
amount as full payment, the agreement is not
binding.
b.
The undisputed amount is also known as an
unliquidated amount.
c.
If the parties agree to settle for less than the
full amount, their agreement is governed by
the ruling in Henches v. Taylor.
d.
If Wilde’s agrees to accept less than the full
amount, the agreement is only binding if it is
in writing and signed by Bernie.
ANS: A
PTS: 1
MSC: AACSB Reflective Thinking
12. Police Officer Paul apprehends a wanted criminal and then demands the $10,000 reward offered by Crime
Stoppers. Which of the following statements is true?
a.
Police Officer Paul is not entitled to the
reward because past consideration is never
valid consideration.
b.
Police Officer Paul is entitled to the reward
because he puts his life on the line every day.
c.
Police Officer Paul is not entitled to the
reward because he was under a pre-existing
duty to make the arrest.
d.
Police Officer Paul is not entitled to the
reward but may have an argument under
promissory estoppel.
ANS: C
PTS: 1
MSC: AACSB Reflective Thinking
13. If Rudy offers Oscar $200 for his laptop valued at $600 and Oscar agrees, a court will probably:
a.
set aside the agreement as being unfair.
b.
set aside the agreement because the
consideration is inadequate.
c.
not set aside the agreement based on the
adequacy of the consideration.
d.
not set aside the agreement because of the
UCC.
ANS: C
PTS: 1
MSC: AACSB Reflective Thinking
14. Jamie is building a house on her lot. She invites Earnie of Earnie's Excavation to bid on the excavation job.
Earnie observes that the lot next to Jamie's is also under excavation and the soil in that lot is normal and not
excessively rocky. Based on the assumption that the soil in Jamie's lot will be similar, he and Jamie agree that
the excavation will cost $3,000. When Earnie starts digging, he learns there is solid rock under Jamie's lot.
Earnie says it will cost an extra $2,500 for the excavation work. Jamie agrees just to get the job done but later
refuses to pay a dime more than $3,000. If Earnie sues, the most likely result would be:
a.
Jamie wins, as Earnie was under a preexisting
duty to dig the basement.
b.
Earnie wins as this modification is governed
by the UCC and consideration is not required
to enforce a modification of the agreement.
c.
Jamie wins as Earnie was not acting in good
faith and just wanted to put Jamie in a
situation where she didn't have a choice but to
agree to more money.
d.
Earnie wins, as the modification was due to
unforeseen difficulties.
ANS: D
PTS: 1
MSC: AACSB Reflective Thinking
15. If Becky promises not to drink alcohol until she becomes a legal adult in exchange for Ben's promise of
$1,000, the agreement is:
a.
enforceable because Becky is giving up the
right to do something she would otherwise be
entitled to do.
b.
enforceable because the agreement
accomplishes Ben's goal of keeping Becky
from drinking.
not enforceable because Becky does not have
a legal right to drink alcohol.
not enforceable because Becky is a minor and
could disaffirm the contract.
c.
d.
ANS: C
PTS: 1
MSC: AACSB Reflective Thinking
16. Upon graduating from college, Kathy announced her plans to enter law school the following fall and to marry
Rick in December. Kathy's father was afraid that marriage during her first year in law school might cause her
to fall behind in her studies or cause her to drop out of school. He called Kathy and promised her $10,000 if
she postponed her wedding until after completion of her first year of law school. Kathy agreed and postponed
the wedding for a year. Kathy successfully completed her first year of law school, but soon thereafter, Kathy's
father died. The administrator of her father's estate claimed she was not entitled to the $10,000 because there
was no consideration for her father's promise. If Kathy sues the estate, she will probably be:
a.
unsuccessful because her father's death
terminated the contract.
b.
successful, as there was consideration.
c.
unsuccessful because her father received no
benefit.
d.
unsuccessful because it was merely fatherly
advice not to get married during the first year
of law school.
ANS: B
PTS: 1
MSC: AACSB Reflective Thinking
17. Under the Uniform Commercial Code, an agreement modifying a contract:
a.
always requires consideration.
b.
requires consideration only when the sale of
goods is involved.
c.
may not require consideration.
d.
requires consideration only when one of the
parties is incompetent.
ANS: C
PTS: 1
MSC: AACSB Analytic
18. Mary owes $3,800 on her credit card. She sends the credit card company a check for $800 with the notation
“payment in full” on the check. If the credit card issuer cashes the check:
a.
Mary’s balance will automatically be paid in
full if the $3,800 amount was a liquidated
debt.
b.
Mary’s balance will automatically be paid in
full regardless of whether the amount of
$3,800 was liquidated or unliquidated.
c.
the check may be subject to a UCC exception
to the general rules for accord and satisfaction
cases involving checks.
d.
Mary’s balance will automatically be paid in
full if the $3,800 amount was an unliquidated
debt.
ANS: C
PTS: 1
MSC: AACSB Reflective Thinking
19. If Crosby and Dash are in disagreement as to the exact amount of money that Crosby owes Dash, then they
may choose to form a new agreement at a set amount. If they both perform the new agreement, their conduct
would be an example of:
a.
a rescission.
b.
a contract modification.
c.
a preexisting duty.
d.
an accord and satisfaction.
ANS: D
PTS: 1
MSC: AACSB Reflective Thinking
20. An agreement in which a buyer agrees to buy all the goods produced by a manufacturer is known as:
a.
a requirements contract.
b.
an output contract.
c.
an exclusive dealing contract.
d.
an option contract.
ANS: B
PTS: 1
MSC: AACSB Analytic
21. The Plaza Hotel contracts with EZ Lawn to have EZ mow the grass on the Plaza grounds for the next 10
years. However, there is a clause in the contract that states if the hotel chooses, the contract may be
terminated provided Plaza pays EZ $2,000 on termination. Which of the following is correct?
a.
The contract is unenforceable because the
option to cancel clause makes the contract an
illusory promise.
b.
The contract is unenforceable because the
$2,000 is past consideration.
c.
The contract is unenforceable because only
one party has the option to cancel.
d.
The contract is enforceable because the option
to cancel clause is supported by consideration.
ANS: D
PTS: 1
MSC: AACSB Reflective Thinking
22. Mid-American Oil had a contract with NSB Company to supply 1,000 gallons of oil by September 1. The
contract contained a provision which required all modifications to be written and signed by the company
presidents. In early August, an executive of Mid-American talked with the purchasing agent of NSB who
orally agreed to two shipments of oil; one in September and the second one in December. By September 30,
when only 500 gallons had been delivered, NSB sued. The likely outcome of this lawsuit is:
a.
NSB wins because the modification was not
supported by new consideration.
b.
NSB wins because the modification has to be
in writing.
c.
Mid-American Oil wins because the UCC
governs this case and no new consideration is
required.
d.
Mid-American Oil wins because new
consideration was present.
ANS: B
PTS: 1
MSC: AACSB Reflective Thinking
23. Bailey Co. and Spryt Bros. enter into a contract for the manufacture and sale of 400 lawn chairs. If both
parties agree that a modification is necessary:
a.
the surest way to modify the contract is to
liquidate it.
they may not do so without court supervision.
an agreement to rescind the contract will
terminate the contractual rights of Bailey Co.
and Spryt Bros. if neither of them had
completed their obligations.
courts will generally not enforce a
cancellation and modification of a contract
unless one party received inadequate
consideration under the original contract.
b.
c.
d.
ANS: C
PTS: 1
MSC: AACSB Reflective Thinking
24. Marco agrees to sell Clowns R Us some balloons. The contract states that Clowns may buy as many balloons
as it wishes. This agreement is:
a.
a requirements contract.
b.
an output contract.
c.
an illusory contract.
d.
an enforceable contract.
ANS: C
PTS: 1
MSC: AACSB Reflective Thinking
25. The Kelsoe v. International Wood Products, Inc. case was an example of:
a.
promissory estoppel.
b.
partial performance.
c.
illusory promises.
d.
lack of consideration.
ANS: D
PTS: 1
MSC: AACSB Analytic
ESSAY
1. Discuss the concept of consideration.
ANS:
Consideration is anything that someone might want to bargain for. It is a required element of a contract and
distinguishes contracts from gifts. Normally consideration is either doing or promising to do something you
are not legally required to do (sell my car) or refraining from doing something you are legally entitled to do
(drink if over 21).
PTS: 1
MSC: AACSB Communication
2. Frank's Furniture Company promised in a written agreement to purchase as much walnut wood "as it desires"
from Forestry Products, Inc. If Frank's purchased walnut wood from another source and Forestry Products
sued, what is the likely result?
ANS:
Frank's is not obligated to purchase anything from Forest Products under this contract. Therefore, the contract
is illusory and fails for lack of consideration. Forestry Products could not win a suit to enforce an agreement.
PTS: 1
MSC: AACSB Communication | AACSB Reflective Thinking
3. What two exceptions did the UCC create for accord and satisfaction check cases?
ANS:
The first Code exception involves “organizations” which receive potentially thousands of checks every day
and cannot inspect all notations. Under the exception, if an organization notifies a debtor that any offers to
settle for less than the debt claimed must be made to a particular official, and the check is sent to anyone else
in the organization, depositing a “full settlement” check generally does not create an accord and satisfaction.
Second, if within 90 days of cashing a “full payment” check, the creditor offers repayment of the same
amount to the debtor, there is no accord and satisfaction.
PTS: 1
MSC: AACSB Communication
4. Shirley Rhone suffered injuries when a truck struck the vehicle in which she was riding. State Auto Mutual
Insurance Co. was the insurer involved and provided personal injury coverage. Shirley went to see Dr. Allen,
a chiropractor who provided treatments 32 times over a 3-month period. Dr. Allen billed State Auto in three
separate billings. After paying the first two billings in full, State Auto expressed concern about whether Dr.
Allen's charges were excessive. State Auto hired Chiropractic Consultants, Inc. to evaluate Dr. Allen's
billings. The consultants advised that Dr. Allen's billings were indeed excessive. State Auto then telephoned
Dr. Allen and offered a partial payment to settle the account. After this conversation, State Auto issued and
sent a check for $864 payable to Dr. Allen. On the face of the check, State Auto noted the total amount
allocated to each claim and typed "settlement in full." On the reverse side it said, "The endorsement of this
draft by the payee constitutes a clear release and full settlement of the claim or account shown on the other
side." Upon receipt of the check, Dr. Allen cashed the check. He then sought payment of an additional $895.
State Auto claims there was an accord and satisfaction with respect to the amount due for services rendered
by Dr. Allen. What are the requirements of an accord and satisfaction? Were those requirements met in this
case?
ANS:
An accord is the agreement to settle for less than the creditor claims. The satisfaction is the actual payment of
that compromised amount. There must be: 1) an unliquidated debt, 2) an agreement between the parties that
the creditor will accept as full payment a sum less than originally claimed, and 3) payment by the debtor of
the agreed amount. An accord and satisfaction is valid consideration to support a creditor’s agreement to drop
all claims. It appears that all the elements of an accord and satisfaction were satisfied in this case.
PTS: 1
MSC: AACSB Communication | AACSB Reflective Thinking
5. Douros Realty & Construction Co. had a lead on a "prime" piece of real estate. Although Douros did not have
a listing agreement with the seller of the property, he contacted Kelley Properties. Douros knew that Kelley
was looking for a location for a commercial development. Douros contacted Kelley stating only that he had
the "finest, most outstanding, viable location in the county and it just came on the market." Douros said he
would reveal the location of the property and the owner's name if Kelley would sign an agreement which
would require Kelley to pay a 10% commission if a sale of the property resulted. The agreement was signed.
Four months later, Kelley bought the property after negotiating the deal himself. Kelley claims he does not
owe a commission to Douros because there was insufficient consideration to support the payment of
commission so large. Kelley claims that all Douros did in the entire transaction was to reveal the location of
the property and the owner's name. Was there sufficient consideration to make this promise enforceable?
ANS:
Consideration sufficient to support a contract may be either a detriment to the promisee or a benefit to the
promisor. The detriment to the promisee may consist of his doing anything legally he is not bound to do.
Douros did what he was not legally required to do: reveal the location of the property and the owner's name.
This constitutes legal consideration; the courts will rarely look at the adequacy of the consideration.
PTS: 1
MSC: AACSB Communication | AACSB Reflective Thinking
6. Shelby hired Evan to drill a well on her property for $3,000. They both thought the soil and subsoil were
normal for the area, but after he started drilling, Evan found a layer of rock that required him to purchase a
special drill and required an extra ten hours of work. Evan demanded an extra $1,000 to complete the job.
Discuss whether Shelby is liable for the additional $1,000.
ANS:
The general rule is that a promise to do something the promisor is already obligaed to do is not consideration.
Therefore, under the general rule Shelby would not be liable for the extra $1,000, since Evan was already
obligated to drill the well for $3,000. However, under an exception to the general rule, when unforeseen
circumstances cause a party to make a promise regarding an unfinished project, that promise is generally
valid consideration. Even though Evan was only promising to finish what he was already obligated to do, his
promise to finish the well was valid consideration because neither he nor Shelby knew of the rock and he
faced a situation quite different from what the parties anticipated when they entered into the contract.
PTS: 1
MSC: AACSB Communication | AACSB Reflective Thinking