Chapter 8: Consideration and Privity

Question 1

Gratuitous Promise

Answer 1

A promise for which nothing of legal value is given in exchange.

Question 2

Consideration

Answer 2

Exists when a party either gives (or promises to give) a benefit to someone else or suffers (or promises to suffer) a detriment to themselves.

Question 3

Sufficient Consideration

Answer 3

May be almost anything of value.

Question 4

Can consideration be applied to people outside the contract?

Answer 4

No.

Question 5

Adequate Consideration

Answer 5

Has essentially the same value as the consideration for which it is exchanged.

Question 6

Peppercorn Theory

Answer 6

Says that even if you exchange a horse for peppercorn, the peppercorn has some value and therefore the consideration is sufficient, even if it is not adequate.

Question 7

Forbearance to Sue

Answer 7

A promise to not pursue a lawsuit.

Question 8

Mutuality of Consideration

Answer 8

Requires that each party provide consideration in return for the other part’s consideration.

Question 9

Past Consideration

Answer 9

Consists of something that a party did prior to the contemplation of a contract.

Question 10

Is past consideration considered consideration?

Answer 10

No.

Question 11

Pre-Existing Obligation

Answer 11

An obligation that existed, but was not actually performed, before the contract was contemplated.

Question 12

Can pre-existing public duty provide consideration for a new contract?

Answer 12

No.

Question 13

Can pre-existing contractual obligation owed to a third party provide consideration for a new contract?

Answer 13

Yes, the consideration can be used twice if it is with two different parties.

Question 14

Can pre-existing contractual obligation owed to the same party provide consideration for a new contract?

Answer 14

No, you cannot force someone to pay more if you are only doing the same job you already promised to do.

Question 15

What is the risk of providing consideration to multiple parties under new contracts?

Answer 15

You are liable to all of them if you do not perform.

Question 16

Novation

Answer 16

A process in which the initial contract is discharged, and the parties enter into a new agreement that includes a higher price.

Question 17

What are ways that a corporation can avoid the lack of consideration when there is a pre-existing contractual obligation owed to the same party?

Answer 17

By using the process of novation, by introducing a new consideration, or by using a seal.

Question 18

Why would someone be willing to ignore the rule in Gilbert Steel?

Answer 18

Because business owners recognize that financial success in the long run sometimes requires short-term flexibility.

Question 19

Your friend owes you $100k. You accept that your friend cannot pay, and say that you will accept $70k. After your friend pays you $70k though, you demand another $30k. Are you allowed to do this?

Answer 19

Legally, yes.

Question 20

Your friend owes you $100k. You accept that your friend cannot pay, and say that you will accept $70k. After your friend pays you $70k though, you demand another $30k. You are allowed to do this, with the exception of which cases?

Answer 20

• If the smaller sum was placed under seal.
• If there was new consideration introduced for the lower amount.
• If there was legislation.

Question 21

Legislation such as the Mercantile Law Amendament Act that allows debt to be extinguished upon payment of lesser amount is subject to what conditions?

Answer 21

• There must be part performance (the payment must be received, not just a promise).
• The statute may not be used in an unconscionable manner.

Question 22

What are the two major exceptions to the rule that a promise is enforceable only if it is contained in a contract that is supported by consideration?

Answer 22

• Seals.

- Promissory Estoppel.

Question 23

Seal

Answer 23

Mark that is put on a written contract to indicate a party’s intention to be bound by the terms of that document, even though the other party may not have given consideration.

Question 24

When must a seal be applied?

Answer 24

When the party signs the document.

Question 25

When would a seal be used?

Answer 25

When you are co-signing for a loan for a friend at the bank.

Question 26

In what form must a seal be?

Answer 26

Can be as simple as writing “seal” on a document.

Question 27

Estoppel

Answer 27

A rule that precludes a person from disputing or retracting a statement that they made earlier.

Question 28

Promissory Estoppel

Answer 28

A doctrine that prevents a party from retracting a promise that the other party has relied upon.

Question 29

What 4 requirements are required in order to apply promissory estoppel?

Answer 29

1. The representor (party making the promise) must clearly indicate that they will not enforce their legal rights against the representee (party receiving the promise).
2. The representee must rely upon the statement in a way that would make it unfair for the representor to retract their promise.
3. The representee must not be guilty of inequitable behaviour.
4. The representor’s statement must be made in the context of an existing legal relationship.

Question 30

Promissory Estoppel can be used as a ___, but not as a ___.

Answer 30

Shield, sword.

Question 31

If the four requirements of promissory estoppel are not met, can you assert original rights with respect to the future?

Answer 31

Yes, as long as they give reasonable notice. They just cannot assert their original rights with respect to the past.

Question 32

Stranger

Answer 32

Someone who did not participate in the creation of the contract.

Question 33

Privity of Contract

Answer 33

Refers to the relationship that exists between the individuals who create a contract.

Question 34

Assignment

Answer 34

A process in which a contractual party transfers their rights to a third party. Basically transferring the balance someone owes you.

Question 35

Assignor

Answer 35

The contractual party who assigns their contractual rights.

Question 36

Assignee

Answer 36

The stranger to whom the contractual rights are assigned.

Question 37

Debtor

Answer 37

The original contracting party against whom the assigned right cab be enforced.

Question 38

Equitable Assignment

Answer 38

An assignment that was traditionally enforced by the court of equity.

Question 39

What are the two ways assignment can happen?

Answer 39

Equitable assignment or statutory assignment.

Question 40

Why is it advantageous to provide notice of assignment to the debtor, even though the assignment does not depend on their consent?

Answer 40

Because the debtor only needs to pay once, and it may be to the wrong person.

Question 41

Subject to the Equities

Answer 41

Means that the debtor can generally use the same defences and counterclaims against the assignee that they could have used against the assignor.

Question 42

Statutory Assignment

Answer 42

An assignment that conforms to the requirements of a statute.

Question 43

What are the three special requirements for statutory assignment?

Answer 43

1. Must be written.
2. Written notice to the debtor is required.
3. Must be absolute (not conditional or incomplete).

Question 44

What are the best examples of cases that use statutory assignment?

Answer 44

Bankruptcy and death.

Question 45

If you are under a statutory assignment to be a personal representative for someone, what do you have a responsibility to do?

Answer 45

To collect and pay the person’s debts. However, you are not required to satisfy obligations of a personal nature.

Question 46

Can contractual obligations be assigned?

Answer 46

No, only contractual rights can be assigned.

Question 47

Vicarious Performance

Answer 47

Occurs when a contractual party arranges to have a stranger perform their obligations.

Question 48

Is vicarious performance a form of assignment?

Answer 48

No, you are still liable if the job is not done properly, even though the contractor did the work.

Question 49

Trust

Answer 49

Occurs when one person holds property on behalf of another.

Question 50

Trustee

Answer 50

The person who holds the property on behalf of the other.

Question 51

Beneficiary

Answer 51

The person on whose behalf the property is held.

Question 52

Privity of Contracts and Trusts.

Answer 52

Debtor makes a contractual promise to the trustee. The Trustee owes trust to the beneficiary. The beneficiary is allowed to enforce the promise that the debtor made.

Question 53

What do statutes allow for to bypass the rule that you must be a party in order to enforce the contract?

Answer 53

• Daughter whose father bought car accident insurance in order to protect them.
• Life insurance.

Question 54

How are exclusion clauses used in employment to bypass the privity of contracts and trusts?

Answer 54

If client signs an exclusion clause that says they cannot sue the company or its employees, then the employees may be entitled to rely upon an exclusion clause that was created for their benefit, despite the lack of privity of interest.

Question 55

Himalaya Clause

Answer 55

A special term of contract that protects a third party beneficiary from liability.

Question 56

Is the Himalaya clause an exception to the privity rule?

Answer 56

No, it is a process that leads to a new contract being created for the benefit of employees.