P A R T
3
Contracts
Introduction to Contracts
The Agreement: Offer
The Agreement: Acceptance
Consideration
Reality of Consent
McGraw-Hill/Irwin Business Law, 13/e
© 2007 The McGraw-Hill Companies, Inc. All rights reserved.
P A R T
3
Contracts
Capacity to Contract
Illegality
Writing
Rights of Third Parties
Performance & Remedies
McGraw-Hill/Irwin Business Law, 13/e
© 2007 The McGraw-Hill Companies, Inc. All rights reserved.
C H A P T E R
12
Consideration
“Make yourself necessary to someone.”
Ralph Waldo Emerson, The Conduct of Life (1860)
Learning Objectives
 Elements
of consideration
 Legal value
 Bargained-for exchange
 Exchanges that fail to meet
consideration
 Exceptions to consideration
requirement
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
12 - 6
Legal Value of Consideration

Consideration in the form of an act or
promise may have legal value if the person

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 the
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

12 - 8
Example: Gottlieb v. Tropicana Hotel and
Casino in which participating in a
promotion that benefited the company
was adequate consideration to form a
contract
Exchanges That Are Not
Consideration
 Illusory
promises
 Preexisting duties
 Past consideration
12 - 9
Illusory Promises
If the promisee’s promise really does not
bind the promisee to do or refrain from
doing anything, the 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

12 - 10
AGC’s promise to arbitrate was illusory since they
could amend the contract at any time
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 new
consideration

Exceptions to general rule:


12 - 12
Modification due to unforeseen circumstances that a
party could not reasonably foresee
CISG and UCC 2–209(1): agreement to modify a
contract for the sale of goods
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

12 - 13
Settlement agreements are enforceable
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
Review
12 - 15
Test Your Knowledge

True=A, False = B
Consideration is legal value bargained
for and given in exchange for an act or
a promise
 A person who agrees not to file suit
has not provided valid consideration
 Courts always examine the adequacy
of consideration

12 - 16
Test Your Knowledge

Multiple Choice
 A person who agrees to obey the law has
provided __________ consideration.
(a) No consideration (a preexisting duty)
 (b) Adequate consideration that is binding
and enforceable


To be valid under the UCC, an agreement
to modify a contract for the sale of goods:
(a) Does not need new consideration
 (b) Requires new consideration

12 - 17
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 - 18