Contract Formation Part 4 Flashcards
What is Consideration?
Something valuable!
2 Elements of Consideration:
1) Bargained for exchange
2) that which is bargained for must be of LEGAL VALUE. It must be a BENEFIT to promisor or DETRIMENT to promisee.
Bargained-For Exchange = the act or forbearance by the promisee must be of some benefit to the promisor. IF the motive of the promisor is no more than to state a condition of a promise to make a gift, that would mean there is no consideration. Economic benefit is not required. Peace of mind or gratification of mind works. Past or moral consideration generally does not suffice.
Legal Value = courts normally don’t inquire into the adequacy of consideration. If a party wants to contract to sell an item of high market value for a relatively low price, that’s fine. But courts of equity may inquire into relative values and deny an equitable remedy if the K is unconscionable. EXCEPTIONS:
1) Token/Nominal/Sham Consideration is generally not sufficient. Basically means the K is really a gift.
Legal Benefit and Detriment:
1) Legal detriment to promisee will result if he does something he is under no legal obligation to do or refrains from doing something that he has a legal right to do (uncle promises nephew 5k if he doesn’t drink until age 30)
2) Legal benefit to promisor is the forbearance or performance of an act by the promisee which the promisor could not legally expect or demand but which confers benefit on promisor
Preexisting Legal Duty Rule
A preexisting legal duty is generally NOT consideration.
EXCEPTIONS:
1) New or different consideration promised. A variance on the preexisting duty, like accelerating performance, counts as new consideration. Doesn’t matter how slight the change is.
2) A promise to perform a voidable obligation is enforceable despite the absence of new consideration. EXAMPLE: a minor’s ratification of a K upon reaching 18 is enforceable without new consideration.
3) Traditionally, when a preexisting duty was owed to a 3rd party, courts held that the new promise did not constitute consideration. However, modern courts and the majority hold that the new promise constitutes consideration. EXAMPLE: Saul Pimon contracts with Pam Promotor to sing at a concert in New York for $25,000. Later, when Pimon threatens to cancel, Dud Dooright, a Pimon fan, offers to pay Pimon an additional $5,000 if he sings at the concert. Pimon
appears and sings as agreed. Under the traditional view, Pimon cannot enforce Dooright’s promise to pay the additional $5,000, but under the majority view Pimon can enforce the promise because Pimon did not owe a duty to
Dooright under the original contract.
4) If the scope of the legal duty owed is subject to honest dispute, a modifying agreement about it will normally work.
5) A promise modifying a K that has not been fully performed on either side is binding without consideration if the modification is fair and equitable in view of circumstances not anticipated when the K was made. Under majority view, unforeseen difficulty in performing is NOT a substitute for consideration. But, if the difficulty rises to impractical levels, such that the duty of performance would be discharged, most states will hold that the unforeseen difficulty is an exception to the preexisting legal duty rule.
6) Art 2 UCC = contract modifications in good faith are binding without consideration. Good faith modifications are based on legitimate commercial reason outside the control of the party seeking the modification. Modifications extorted from the other party are in bad faith and are unenforceable.
7) Existing Debts = when the amount is undisputed, payment of a smaller sum than due will NOT be sufficient consideration for a promise by the creditor to discharge the debt. Neither a legal detriment nor benefit would be present. But remember that if the consideration is in any way new or different, sufficient consideration may be found.
Forbearance to Sue = promising not to sue may be consideration. If the claim is valid, it’s sufficient consideration, but if the claim is invalid and the claimant knows it, that’s not consideration.
Mutual and Illusory Promises
Consideration must exist on both sides. Agreements where 1 party is bound but the other isn’t lack mutuality because at least one of the promises is “illusory”. But sometimes, mutuality will be found even though the promisor has some choice or discretion:
1) Requirement and Output Contracts = These are enforceable as the promisor is suffering a legal detriment because he has parted with the legal right to buy or sell the goods he may need from or to another source.
2) Conditional Promises = these are enforceable no matter how remote the contingency UNLESS the “condition” is within the promisor’s control. EX: Alice promises to deliver goods to Charles “only if her son comes into the business.” Valid consideration exists. If the promise were “only if I decide to take my son into
the business,” a court might find no consideration.
3) Right to Cancel or Withdraw = although reservation of an unqualified right to cancel or withdraw at any time may be an illusory promise, the consideration is valid if this right is in any way restricted, so EX: the right to cancel upon 60 days’ notice. Art 2 implies requirement of reasonable notice even if not specified in the K
4) Exclusivity Agreements - Best Efforts Implied = a court may find an implied promise furnishing mutuality in appropriate circumstances (such as exclusive marketing agreements). The courts generally will find an implied promise to use best efforts and sustain agreements that might otherwise appear illusory. EX: Y Corp. was granted exclusive rights to sell Dominick’s dresses in return for one-half
the profit. The agreement was silent as to any obligation on the part of Y Corp. Held:
Y Corp. impliedly promised to use its best efforts to sell Dominick’s dresses. [See
UCC §2-306(2)]
5) Voidable Promises = not objectionable on “mutuality” grounds. A contract with a minor can be disaffirmed but won’t prevent the promise from serving as consideration.
6) Unilateral / Option K = not objectionable on mutuality grounds
7) Suretyship/Guarantor Promises
8) Right to Choose among Alternative Courses = a promise to choose one of several alternative means of performance is illusory unless every alternative involves some legal detriment to the promisor. However, if the power to choose rests with the promisee or some 3rd party not under the control of the promisor, the promise is enforceable as long as at least one alternative involves some legal detriment.
