Chapter 8: Consideration and Privity Flashcards
Gratuitous Promise
A promise for which nothing of legal value is given in exchange.
Consideration
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.
Sufficient Consideration
May be almost anything of value.
Can consideration be applied to people outside the contract?
No.
Adequate Consideration
Has essentially the same value as the consideration for which it is exchanged.
Peppercorn Theory
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.
Forbearance to Sue
A promise to not pursue a lawsuit.
Mutuality of Consideration
Requires that each party provide consideration in return for the other part’s consideration.
Past Consideration
Consists of something that a party did prior to the contemplation of a contract.
Is past consideration considered consideration?
No.
Pre-Existing Obligation
An obligation that existed, but was not actually performed, before the contract was contemplated.
Can pre-existing public duty provide consideration for a new contract?
No.
Can pre-existing contractual obligation owed to a third party provide consideration for a new contract?
Yes, the consideration can be used twice if it is with two different parties.
Can pre-existing contractual obligation owed to the same party provide consideration for a new contract?
No, you cannot force someone to pay more if you are only doing the same job you already promised to do.
What is the risk of providing consideration to multiple parties under new contracts?
You are liable to all of them if you do not perform.
Novation
A process in which the initial contract is discharged, and the parties enter into a new agreement that includes a higher price.
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?
By using the process of novation, by introducing a new consideration, or by using a seal.
Why would someone be willing to ignore the rule in Gilbert Steel?
Because business owners recognize that financial success in the long run sometimes requires short-term flexibility.
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?
Legally, yes.
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?
- If the smaller sum was placed under seal.
- If there was new consideration introduced for the lower amount.
- If there was legislation.
Legislation such as the Mercantile Law Amendament Act that allows debt to be extinguished upon payment of lesser amount is subject to what conditions?
- There must be part performance (the payment must be received, not just a promise).
- The statute may not be used in an unconscionable manner.
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?
- Seals.
- Promissory Estoppel.
Seal
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.
When must a seal be applied?
When the party signs the document.
When would a seal be used?
When you are co-signing for a loan for a friend at the bank.
In what form must a seal be?
Can be as simple as writing “seal” on a document.
Estoppel
A rule that precludes a person from disputing or retracting a statement that they made earlier.
Promissory Estoppel
A doctrine that prevents a party from retracting a promise that the other party has relied upon.
What 4 requirements are required in order to apply promissory estoppel?
- The representor (party making the promise) must clearly indicate that they will not enforce their legal rights against the representee (party receiving the promise).
- The representee must rely upon the statement in a way that would make it unfair for the representor to retract their promise.
- The representee must not be guilty of inequitable behaviour.
- The representor’s statement must be made in the context of an existing legal relationship.
Promissory Estoppel can be used as a ___, but not as a ___.
Shield, sword.
If the four requirements of promissory estoppel are not met, can you assert original rights with respect to the future?
Yes, as long as they give reasonable notice. They just cannot assert their original rights with respect to the past.
Stranger
Someone who did not participate in the creation of the contract.
Privity of Contract
Refers to the relationship that exists between the individuals who create a contract.
Assignment
A process in which a contractual party transfers their rights to a third party. Basically transferring the balance someone owes you.
Assignor
The contractual party who assigns their contractual rights.
Assignee
The stranger to whom the contractual rights are assigned.
Debtor
The original contracting party against whom the assigned right cab be enforced.
Equitable Assignment
An assignment that was traditionally enforced by the court of equity.
What are the two ways assignment can happen?
Equitable assignment or statutory assignment.
Why is it advantageous to provide notice of assignment to the debtor, even though the assignment does not depend on their consent?
Because the debtor only needs to pay once, and it may be to the wrong person.
Subject to the Equities
Means that the debtor can generally use the same defences and counterclaims against the assignee that they could have used against the assignor.
Statutory Assignment
An assignment that conforms to the requirements of a statute.
What are the three special requirements for statutory assignment?
- Must be written.
- Written notice to the debtor is required.
- Must be absolute (not conditional or incomplete).
What are the best examples of cases that use statutory assignment?
Bankruptcy and death.
If you are under a statutory assignment to be a personal representative for someone, what do you have a responsibility to do?
To collect and pay the person’s debts. However, you are not required to satisfy obligations of a personal nature.
Can contractual obligations be assigned?
No, only contractual rights can be assigned.
Vicarious Performance
Occurs when a contractual party arranges to have a stranger perform their obligations.
Is vicarious performance a form of assignment?
No, you are still liable if the job is not done properly, even though the contractor did the work.
Trust
Occurs when one person holds property on behalf of another.
Trustee
The person who holds the property on behalf of the other.
Beneficiary
The person on whose behalf the property is held.
Privity of Contracts and Trusts.
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.
What do statutes allow for to bypass the rule that you must be a party in order to enforce the contract?
- Daughter whose father bought car accident insurance in order to protect them.
- Life insurance.
How are exclusion clauses used in employment to bypass the privity of contracts and trusts?
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.
Himalaya Clause
A special term of contract that protects a third party beneficiary from liability.
Is the Himalaya clause an exception to the privity rule?
No, it is a process that leads to a new contract being created for the benefit of employees.
