Business Law: Ch 8
Consideration
Consideration
• Consideration – What a person demands and
generally must receive in order to make
promise legally binding.
Consideration
• Three Requirement of Consideration
1. Each party must make a promise, perform an
act, or forbear (refrain from doing something)
2. Each parties promise, act, or forbearance must
be in exchange for a return promise, act, or
forbearance by the other party
3. What each party exchanges must have legal
value (must be worth something in the eyes of
the law)
Consideration
• Consideration distinguishes a contractual
promise from a promise to make a gift.
• Gift – Transfer of ownership without receiving
anything in return.
– Gifts are not generally not legally enforceable
– Gift only becomes legally binding once the gift is
exchanged.
– Donor – person giving the gift
– Donee – Person receiving the gift
Promise, Act, or Forbearance
• Forbearance – to not do something
Contractual Exchange
• Promisor – Person promising an action or
forbearance
• Promisee – Person to whom promise is made
to.
• Consideration must be mutual
Legal Value
• Legal Value – Means there has been a change
in a party’s legal position as a result of the
contract
– Most commonly found in the exchange of two
benefits.
– Can also be found in the exchange of benefit for a
detriment (forbearing of a legal right)
– Example – If you refrain from driving until you are
25, I will give you $25,000.
• Not a benefit but a detriment to you (giving up your
legal right)
Adequacy of Consideration
• Economic value is unimportant as long as
there is genuine assent
• However, if the economic value is evidence of
mutual mistake, duress, undue influence, or
fraud, the contract could be declared
unconscionable (grossly unfair or oppressive)
and may not be enforceable
Nominal Consideration
• Nominal Consideration – token amount stated
8-1 Assessment
• Turn to page 144 and complete 8-1
Assessment
8-1 Answers
1.
2.
3.
4.
5.
6.
False
Gift
False
False
Adequacy or economic value
A (nominal)
8-1 Answers
7. The parties are bound. Given up the right
8. The neighbors did receive consideration
9. Yes. The adequacy of consideration will not
be questioned.
Circumstantial Consideration
• Illusory Promises – Clause in contract that
allows you to escape the legal obligation
– Termination Clauses – Power to withdraw from a
contract if business circumstances change.
– Output Contract – Buyers agree to purchase all of
a particular producer’s production
– Requirements Contract – Seller agrees to supply
all of the needs of a particular buyer.
Circumstantial Consideration
• Existing Duty – A person sometimes promises
to do something that he or she already is
obligated to do by law or contract
– Such a promise or act, cannot serve as
consideration
Existing Duties
1. Existing Public Duty – Agreement creates a
benefit for you, but you don’t incur a
detriment because you are not giving up a
legal right
– Example: Aunt promises to pay you $10,000 if
you promise to not purchase alcohol for two
years and you say “OK”. No contract
Existing Duties
2. Existing Private Duty – A person cannot
demand further compensation for carrying
out a contractual promise already made
3. Settlement of Liquidated Debts (is where the
parties agree that the debt exists and on the
amount of the debt)
– When a creditor (person to whom the debt is
owed) agrees to accept less than the total
amount due in full settlement from the debtor
(person who owes money) there is no
consideration if the debt is liquidated
Existing Duties
3. Settlement of Liquidated Debts
– Assume Frank borrows $1000 from Carrie. The
loan is to be paid back in one year with interest
at 10% per year, or a total payment of $1,100.
Frank sends a check to Carrie on the due date for
$1,000 and a note saying “Sorry, I’m strapped for
cash. You will have to accept this in full
payment.” Carrie endorses and cashes the
check.
Existing Duties
3. Settlement of Liquidated Debts
– A debtor can settle a claim by paying less than
the full amount if additional consideration is
given.
– Must be mutual agreement
Existing Duties
4. Settlement of Unliquidated Debts
– When there is a genuine dispute between the
parties about how much is owed is referred to as
unliquidated.
– Accord and Satisfaction - Payment offered in full
settlement by the debtor and accepted by the
creditor settles the claim
•
Accord – New agreement on the sum
Existing Duties
5. Release – An agreement, due to financial
pressures, an injured party in a tort will agree to
discharge another from liability for the tort in
return for a monetary payment or other
consideration
6. Composition with Creditors – Group a creditors
will cooperatively agree to accept less than what
they are entitled to, in full satisfaction of their
claims against a debtor.
•
•
Debtor agrees not to file for bankruptcy
Creditors agree not to sue for the entire amount
False Consideration
• Mutual Gift – Something of value given by
one party to another without demanding
anything in return
• Past Performance – Act already performed
cannot serve as consideration
8-2 Assessment
• Turn to page 148 and complete the 9
questions
Exceptions to the Requirement of
Consideration
• Promises to Charitable Organizations
– Gift is enforceable providing the charity states a
specific use for the money and actually acts in
reliance on the pledge
• Promises Covered by the UCC
– Modifications made in good-faith needs no new
consideration
Exceptions to the Requirement of
Consideration
• Promises Barred from Collection by Statute
– Statute of Limitations – Time limit to bring a
lawsuit
• Once you become aware of a legal claim, you must sue
before statute of limitations passes or you lose the right
to litigate
• Debts Discharged in Bankruptcy
• Even after a debt has been discharged as a result of
bankruptcy, the obligation may be reinstated by a
promise of the debtor. This is done by cosignor
Exceptions to the Requirement of
Consideration
• Promissory Estoppel
– Prevents promisors from stating in court that they
did not receive consideration for their promises
– 4 conditions to invoke Promissory Estoppel
1. The promisor should reasonably foresee that the
promisee will rely on the promise
2. The promisee does, in fact, act in reliance on the
promise
3. The promisee would suffer a substantial economic
loss if the promise is not enforced
4. Injustice can be avoided only by enforcement of the
promise