Contract Law AMP - Consideration

Question 1

A pedestrian shoved a child out of the path of a speeding car and in doing so sustained significant injuries. The child’s grateful parents promised to pay the pedestrian’s medical bills but then later refused to pay.
Which one of the following offers the pedestrian’s best hope of recovery against the child’s parents for the cost of the medical bills?

A The material benefit rule

B The preexisting legal duty rule

C The moral consideration rule

Answer 1

A

Out of these choices, the pedestrian’s best hope of recovery is found in the material benefit rule. Under a modern trend, some courts will enforce a promise if: (i) it is based on a material benefit that was previously conferred by the promisee on the promisor, and (ii) the promisee did not intend to confer the benefit as a gift. This includes situations, such as this one, in which the promisee performed an unrequested act during an emergency. The pedestrian will not be able to recover based on moral consideration. The general rule is that if an act was performed before the promise was made, it will not satisfy the bargain requirement. The preexisting legal duty rule is not applicable to these facts. That rule states that a promise to perform, or the performance of, an existing legal duty is not consideration. There was no preexisting duty here. QUESTION ID: K0016C Additional Learning

Question 2

A conditional promise is unenforceable if:

A The condition is entirely within the promisor’s control

B The condition is the promisor’s satisfaction with the performance

C The condition is entirely within the promisee’s control

D The condition is extremely remote

Answer 2

A

Conditional promises are enforceable unless the condition is entirely within the promisor’s control. Such a promise will be deemed illusory. An illusory promise is one in which the promisor is not actually bound to perform. The promisor could simply choose to assert his control over the condition so that he suffers no legal detriment. Consideration fails in such an instance because the agreement lacks mutuality. Mutuality requires that consideration exists on both sides of the contract. Conditional promises are enforceable no matter how remote the contingency. Promises conditioned on the promisor’s satisfaction are enforceable because the party has a duty to act in good faith. If the condition is entirely within the promisee’s (or some third party’s) control, the promise is enforceable as long as it involves a possibility of legal detriment, no matter how remote. The promisee or the third party could assert control over the condition such that the promisor is obligated to perform; thus the promisor’s promise is not illusory. QUESTION ID: K0019A Additional Learning

Question 3

__________ can serve as a substitute for consideration.

A A suretyship promise

B A bargained-for exchange

C An option

D Promissory estoppel

Answer 3

D

Promissory estoppel is considered a substitute for consideration. Under the doctrine of promissory estoppel, a promise is enforceable even without consideration if necessary to prevent injustice if the promisor should reasonably expect to induce action or forbearance, and such action or forbearance is in fact induced. A bargained-for exchange is a necessary element of consideration, not a substitute for consideration. A suretyship promise is a promise to pay the debt of another. Suretyship contracts require proper consideration to be enforceable. An option is a distinct contract in which the offeree gives consideration for a promise by the offeror not to revoke an offer. An option is not a substitute for consideration. QUESTION ID: K0008B Additional Learning

Question 4

A promise not to sue on a claim can be considered valuable consideration only if:

A The claim is valid or would appear to be valid under the reasonable person standard

B The claim is valid, in law or in fact

C The claim is valid or the claimant reasonably and in good faith believes the claim is valid

Answer 4

C

A promise not to sue on a claim can be considered valuable consideration only if the claim is valid or the claimant reasonably and in good faith believes the claim is valid. The reasonable person standard does not apply; the claimant herself must actually believe the claim is valid. QUESTION ID: K0015A Additional Learning

Question 5

Which of the following statements about suretyships is false?

A Suretyship contracts involve a promise to pay the debt of another

B Sureties can be compensated or gratuitous

C Suretyship contracts are enforceable without consideration

Answer 5

C

A suretyship contract is not enforceable unless it is supported by consideration. A suretyship contract involves a promise to pay the debt of another. A suretyship contract can be compensated or gratuitous. If a surety is compensated, the requirement of consideration is not much of an issue, because the compensation will serve as consideration for the surety’s promise. If the surety is gratuitous, the timing of the promise becomes important in determining whether adequate consideration is present. If the surety makes his promise to pay before or at the same time as the creditor performs or promises to perform, there is consideration. QUESTION ID: K0018B Additional Learning

Question 6

A promise to choose one of several alternative means of performance is illusory (lacks consideration) if __________.

A the power to choose the means of performance rests with the promisee

B the promisor retains the power to select an alternative without legal detriment

C every alternative involves some legal detriment to the promisor

D some of the alternatives involve no legal detriment, regardless of who has the power to choose

Answer 6

B

A promise to choose one of several alternative means of performance is illusory if the promisor retains the power to select an alternative without legal detriment. Ordinarily, 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 third party not under the control of the promisor, the promise is enforceable even though some alternatives involve no legal detriment, as long as at least one alternative involves some legal detriment. QUESTION ID: K0020 Additional Learning

Question 7

A suretyship contract is supported by proper consideration:

A Only if the surety is compensated

B If the surety is compensated or makes the suretyship promise before (or at the same time as) the creditor performs or promises to perform

C If the surety is compensated or makes the suretyship promise after the creditor performs or promises to perform

Answer 7

B

A suretyship contract must be supported by consideration. Compensation will serve as proper consideration for a surety’s promise. In addition, if a gratuitous surety makes his promise to pay before (or at the same time as) the creditor performs or promises to perform, the creditor’s performance or promise will serve as proper consideration for the surety’s promise, because the creditor has incurred a detriment in exchange for the surety’s promise. In contrast, if a gratuitous surety does not make his promise until after the creditor has performed or made an absolute promise to perform, there is no consideration to support the surety’s promise because of the preexisting legal duty rule. QUESTION ID: K0006A Additional Learning

Question 8

In judging the validity of consideration, courts of law __________ inquire into the adequacy of the consideration.

A Will not

B Will

C May or may not

Answer 8

A

Courts of law normally will not inquire into the adequacy of consideration, such as when one party wishes to contract to sell an item of high market value for a relatively low price. In contrast, courts of equity may consider the relative values of the consideration and deny an equitable remedy if they find a contract to be unconscionable. QUESTION ID: K0010A Additional Learning

Question 9

When the amount due on a debt is undisputed, which of the following will not be considered sufficient consideration for a promise by the creditor to discharge the debt?

A Payment before maturity.

B Payment in a different medium.

C Payment to one other than the creditor.

D Payment of a smaller sum than due.

Answer 9

D

When the amount due 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 a benefit would be present. In contrast, if the consideration is in any way new or different, such as payment before maturity or to one other than the creditor; or payment in a different medium (e.g., stock instead of cash), then sufficient consideration may be found. QUESTION ID: K0005 Additional Learning

Question 10

Which of the following is sufficient to establish bargained-for consideration?

A A benefit that is not intended to induce a detriment

B A benefit that provides peace of mind

C A detriment involving a prior legal obligation

Answer 10

B

For valid consideration, the benefit need not be economic. A benefit of peace of mind or the gratification of influencing the mind of another is sufficient to establish bargained-for consideration, provided that the promisee is not already legally obligated to perform the requested act. Prior legal obligations, sometimes called “past consideration,” generally are not sufficient consideration. If something was already given or performed before the promise was made, it was not given in “exchange” for the promise when made. To constitute bargained-for consideration, the detriment must be the price of the exchange. If the promisor’s motive was to induce the detriment, it is consideration. However, if the motive was a condition of a promise for a gift (e.g., “come to my house, and I will give you my old stereo”), there is no consideration. QUESTION ID: K0011A Additional Learning

Question 11

What does it mean when an agreement lacks mutuality?

A The consideration for the agreement is not equal

B The agreement is so unfair to one party that it will be deemed unconscionable

C One party has become bound but the other has not

Answer 11

C

An agreement that lacks mutuality is one in which one party has become bound but the other has not. Consideration must exist on both sides of the contract. Without mutuality, there is consideration on only one side. Courts of law normally will not inquire into the adequacy of consideration to judge whether the agreement is unfair to one of the parties. If a party wishes to enter into a contract that others might judge unfair, so be it. (Note that courts of equity may inquire into the adequacy of consideration and deny an equitable remedy if the court deems the deal unconscionable.) While consideration must exist on both sides of the contract, there is no requirement that consideration be equal. QUESTION ID: K0017A Additional Learning

Question 12

Which of the following promises is commonly considered to be illusory?

A A promise with an unqualified right to cancel or withdraw at any time

B A promise conditioned on the promisor’s satisfaction

C A promise to purchase all that one requires

D A promise to sell all that one decides to make

Answer 12

A

Reservation of an unqualified right to cancel or withdraw at any time would be considered an illusory promise. “Requirements” contracts (i.e., promises to purchase all that one requires) and “output” contracts (i.e., promises to sell all that one decides to make) are enforceable, as the promisor has parted with the legal right to buy (or sell) the goods he may need (or make) from (or to) another source. A promise conditioned on the promisor’s satisfaction is not illusory because the promisor is constrained by good faith (for contracts involving personal taste) and a reasonable person standard (for contracts involving mechanical fitness, utility, or marketability). QUESTION ID: K0007 Additional Learning

Question 13

Under U.C.C. Article 2, a contract for the sale of goods may be modified without consideration only if:

A The modification is sought in good faith.

B It is a requirements or output contract.

C There is an honest dispute as to the legal duty owed by a party.

D Unforeseen circumstances make performance impracticable.

Answer 13

A

Under Article 2, all contract modifications sought in good faith are binding without consideration. Both an honest dispute as to the legal duty owed and unforeseen circumstances that make performance impracticable are exceptions to the preexisting legal duty rule. They are examples of adequate consideration for all contracts, not examples of the facts necessary to modify a sales contract without consideration. Requirements and output contracts are treated the same as other sales contracts in terms of modification. As with other sales contracts, no consideration is required for modification if the modification is sought in good faith. QUESTION ID: K0004 Additional Learning

Question 14

Which of these might be considered valuable consideration?

A A promise to do something that one is legally obligated to do

B A promise to make a gift

C A promise with no economic value

Answer 14

C

A promise with no economic value might be considered valuable consideration. Peace of mind or the gratification of influencing the mind of another may be sufficient, provided that the promisee is not already legally obligated to do the requested act. A promise to make a gift is not considered valuable consideration as no bargained-for exchange is present. QUESTION ID: K0001A Additional Learning

Question 15

A bargained-for change in legal position between the parties is commonly known as __________.

A valuable consideration

B an executory bilateral contract

C promissory estoppel

D detrimental reliance

Answer 15

A

Valuable consideration can be defined as a bargained-for change in legal position between the parties. Valuable consideration is only one element of a properly formed executory bilateral contract. The substitute doctrines of detrimental reliance and promissory estoppel might come into play when valulable consideration is not present, but when the facts indicate that to prevent injustice the promisor should be estopped from not performing. QUESTION ID: K0009 Additional Learning

Question 16

The promise to refrain from suing on a claim may constitute consideration provided that __________.

A the claimant reasonably and in good faith believes his claim to be valid

B the claimant has a substantial likelihood of success on his claim

C the claim is timely

D the claim is for $500 or more

Answer 16

A

If the claimant reasonably and in good faith believes his claim to be valid, forbearance of the legal right to have his claim adjudicated constitutes detriment and consideration. There is no dollar threshold on the amount of the claim; thus, it need not be for $500 or more. Whether the claim is actually invalid or timely, and whether the claimant has a substantial likelihood of success on his claim are not factors in determining whether the forebearance is sufficient consideration. QUESTION ID: K0015 Additional Learning

Question 17

What is an “illusory” promise?

A A promise where the promisor is not bound to perform

B A promise where the promisor’s performance is conditioned on the promisor’s satisfaction

C A promise where the promisor has some choice or discretion in the means of performance

Answer 17

A

An illusory promise is one in which the promisor is not bound to perform. Consideration fails in such instances because the agreement lacks mutuality. Mutuality requires that consideration exists on both sides of the contract. A promise is not illusory just because the promisor has some choice or discretion in the means of performance, or because performance is conditioned on the promisor’s satisfaction. The promisor still has a duty to perform in good faith in such situations. Since both the promisor and the promisee are bound to perform, mutuality exists. QUESTION ID: K0017B Additional Learning

Question 18

Valuable consideration must have:

A Legal value

B Economic value

C Substantial value

Answer 18

A

One of the basic elements of consideration is that which is bargained for must be considered of legal value or, as it is traditionally stated, it must constitute a benefit to the promisor or a detriment to the promisee. The benefit to the promisor need not have economic value. Peace of mind or the gratification of influencing the mind of another may be sufficient to establish bargained-for consideration, provided that the promisee is not already legally obligated to perform the requested act. There is no requirement of substantial value. QUESTION ID: K0011B Additional Learning

Question 19

Under the doctrine of promissory estoppel, a promise is enforceable __________ when the promisor should reasonably expect to induce action or forbearance, and such action or forbearance is in fact induced.

A Provided there is proper consideration

B In all cases

C If necessary to prevent injustice

Answer 19

C

A promise is enforceable if necessary to prevent injustice when the promisor should reasonably expect to induce action or forbearance, and such action or forbearance is in fact induced. Such a promise is not enforceable in all cases because the doctrine of promissory estoppel only applies when necessary to prevent injustice. Promissory estoppel is considered a substitute for consideration. Thus proper consideration is not necessary if the facts indicate that the promisor should be estopped from not performing. QUESTION ID: K0008C Additional Learning

Question 20

A legal detriment can best be defined as __________.

A negotiating a bargained-for exchange

B making a promise to perform, or the actual performance of, an existing legal duty

C suffering an actual loss in exchange for some perceived benefit

D doing something you are under no legal obligation to do, or refraining from doing something that you have a legal right to do

Answer 20

D

A legal detriment will result if the promisee does something he is under no legal obligation to do or refrains from doing something that he has a legal right to do. Legal detriment need not involve any actual loss to the promisee or benefit to the promisor. For example, a party suffers legal detriment if he agrees to refrain from doing something that he had no intention of ever doing. As long as he had a right to do the act he promised to refrain from, he suffers legal detriment. A legal detriment is not a negotiation. It is also not the same thing as a bargained-for exchange, although it may be an element of such an exchange. A legal detriment is not a promise to perform, or the actual performance of, an existing legal duty. Legal detriment does not require performance; it can consist of refraining from doing something. Also, if a party has an existing legal duty to do something, he does not suffer a detriment by agreeing to do it. QUESTION ID: K0013 Additional Learning

Question 21

Under U.C.C. Article 2, what standard is applied to allow the modification of a sales contract without additional consideration?

A Detrimental reliance

B Good faith

C Honest dispute

Answer 21

B

Under Article 2, all contract modifications sought in good faith are binding without consideration. (In contrast, at common law, a contract modification generally is unenforceable unless it is supported by new consideration.) A compromise based on an honest dispute as to the legal duty owed is adequate new consideration for a contract, not the standard for modification of a sales contract without consideration. Detrimental reliance is a means of enforcing a promise without any consideration under certain circumstances when no actual contract has been formed. It is not the standard for allowing the modification of a sales contract without additional consideration under Article 2. QUESTION ID: K0004C Additional Learning

Question 22

Conditional promises are enforceable even if __________, but not if __________.

A The condition is entirely within the promisor’s control; the contingency is extremely remote

B The contingency is extremely remote; the condition is entirely within the promisor’s control

C The condition is entirely within the promisee’s control; the contingency is extremely remote

D The contingency is extremely remote; the condition is entirely within the promisee’s control

Answer 22

B

Conditional promises are enforceable, no matter how remote the contingency, unless the “condition” is entirely within the promisor’s control. Such a promise will be deemed illusory. An illusory promise is one in which the promisor is not actually bound to perform. The promisor could simply choose to assert his control over the condition so that he suffers no legal detriment. Consideration fails in such an instance because the agreement lacks mutuality. Mutuality requires that consideration exists on both sides of the contract. If the condition is entirely within the promisee’s (or some third party’s) control, the promise is enforceable as long as it involves a possibility of legal detriment, no matter how remote. The promisee or the third party could assert control over the condition such that the promisor is obligated to perform, thus the promisor’s promise is not illusory. QUESTION ID: K0019B Additional Learning

Question 23

An otherwise valid debt that is now barred by the statute of limitations can still be enforced if______.

A The debtor makes a new promise to pay the debt, either orally or in writing

B The debtor makes a new promise to pay the debt in writing

C The debtor admits owing the debt, either orally or in writing

D The debtor admits owing the debt in writing

Answer 23

B

If an otherwise valid debt would be enforceable except for the fact that a technical defense to enforcement stands in the way (e.g., statute of limitations), the courts will enforce a new promise to pay if it is in writing or has been partially performed. An oral promise is not enough. The fact that debtor admits owing the debt, orally or in writing, is not sufficient, as that obligation is now barred. QUESTION ID: K0002A Additional Learning

Question 24

Which of the following would not be considered valuable consideration that supports a contract?

A Peace of mind for the promisor.

B Fulfillment of a condition to receive a gift.

C A benefit with no economic value.

D The gratification of influencing the mind of another.

Answer 24

B

The mere fulfillment of a condition to receive a gift is not adequate consideration. The fulfillment of the condition must be of some benefit to the promisor to constitute proper consideration. The benefit to the promisor need not have economic value. Peace of mind or the gratification of influencing the mind of another may be sufficient to establish bargained-for consideration. QUESTION ID: K0001 Additional Learning

Question 25

A gratuitous surety contract will be considered unenforceable for lack of consideration if the surety makes his promise to pay __________.

A before the creditor has performed or made an absolute promise to perform

B after the creditor has performed or made an absolute promise to perform

C as a response to a condition precedent to the creditor’s performance

D in exchange for payment from the creditor

Answer 25

B

If a gratuitous surety (i.e., one who is not paid for his services) does not make his promise until after the creditor has performed or made an absolute promise to perform, there is no consideration to support the surety’s promise because of the preexisting legal duty rule—the creditor has not incurred any new detriment in exchange for the surety’s promise. Thus, the surety’s promise is unenforceable. If the gratuitous surety makes his promise to pay before the creditor performs or promises to perform, the creditor’s performance or promise will serve as consideration for the surety’s promise. If the contract between the debtor and the creditor makes obtaining a surety a condition precedent to the creditor’s performance, so that the creditor would be justified in refusing to perform the contract until a surety is obtained, the surety’s promise is binding if the creditor performs in reliance on the surety’s promise. As with other contracts, if the creditor gives additional consideration such as payment in exchange for the surety’s promise, the surety will be bound. QUESTION ID: K0006 Additional Learning

Question 26

The __________ is a possible exception to the general rule against the use of “past” consideration as the basis for a contract.

A Material benefit rule

B Preexisting legal duty rule

C Parol evidence rule

Answer 26

A

The material benefit rule is a possible exception to the general rule against the use of past consideration as the basis for a contract. Under the rule, some courts will enforce a promise if: (i) it is based on a material benefit that was previously conferred by the promisee on the promisor, and (ii) the promisee did not intend to confer the benefit as a gift. This includes situations in which the promisee performed an act at the promisor’s request or performed an unrequested act during an emergency. The preexisting legal duty rule provides that a promise to perform, or the performance of, an existing legal duty is not consideration. The parol evidence rule is not an exception to the rule regarding past consideration. It states that where the parties to a contract express their agreement in a writing with the intent that it embody the final expression of their bargain, any other expressions—written or oral—made prior to the writing, as well as any oral expressions contemporaneous with the writing, are inadmissible to vary the terms of the writing. QUESTION ID: K0016A Additional Learning

Question 27

Which of the following normally would not be an exception to the preexisting legal duty rule?

A A compromise based on an honest dispute as to duty.

B A minor’s ratification of a contract upon reaching the age of majority.

C An acceleration of the performance of the duty.

D Payment of a smaller sum to settle an existing debt.

Answer 27

D

In the case of an existing debt, payment by the debtor of a smaller sum than due will not be sufficient consideration for a promise by the creditor to discharge the debt. However, because courts are anxious to avoid the preexisting duty rule, payment of a smaller debt may be sufficient consideration if the payment is in any way different (e.g., stock instead of cash) or if the debt was honestly disputed. Almost any variation, such as accelerating performance, is considered adequate consideration. A promise to perform a voidable obligation (e.g., a minor’s ratification of a contract upon reaching the age of majority) is also enforceable despite the absence of new consideration. If the scope of the legal duty owed is the subject of honest dispute, then a modifying agreement relating to it will ordinarily be given effect. QUESTION ID: K0014 Additional Learning

Question 28

Which of these is the best example of a ratification?

A A new valid promise to perform on a disputed debt

B A new valid promise to perform a preexisting legal duty

C A new valid promise to perform a voidable obligation

Answer 28

C

The best example of ratification is a new valid promise to perform a voidable obligation, such as when an infant ratifies an already formed, yet voidable, contract upon reaching the age of majority, or when a defrauded person promises to go through with a tainted contract after learning of the fraud. A promise to perform a preexisting legal duty is not ratification because there is already a duty to perform an enforceable agreement. A promise to perform on a disputed debt will be enforced, as the compromise itself is considered consideration for the new promise. This is not an example of ratification because it does not involve a voidable obligation. QUESTION ID: K0003A Additional Learning

Question 29

Conditional promises are generally enforceable, unless the __________.

A condition is entirely within the promisor’s control

B contingency is too remote

C promise is conditioned on one party’s satisfaction

D condition is based on a subjective standard

Answer 29

A

Conditional promises are enforceable, no matter how remote the contingency, unless the “condition” is entirely within the promisor’s control. Furthermore, a condition may be based on a subjective standard, such as one party’s satisfaction with the goods. QUESTION ID: K0019 Additional Learning

Question 30

How can one avoid the preexisting legal duty rule?

A By full performance of the duty

B By making a brand-new identical promise

C By modifying the original consideration slightly

D By beginning performance

Answer 30

C

Courts are anxious to avoid the preexisting duty rule, which states that the promise to perform, or the performance of, an existing legal duty is not consideration. Thus modifying the original consideration, even slightly, is generally enough to avoid the rule. Making a brand-new identical promise is not sufficient because there is no consideration for the new promise. There must be new consideration or the consideration that is different in some way, such as by accelerating performance, to avoid the preexisting duty rule. Beginning performance does not avoid the preexisting legal duty rule.Even full performance of a preexisting legal duty is not sufficient consideration. There must be some new or different obligation. QUESTION ID: K0014B Additional Learning

Question 31

Which of the following would serve as sufficient consideration for a promise by a creditor to discharge an existing debt?

A An alternative method of payment

B Unforeseen difficulty in performance by the debtor

C Partial payment of the debt

D Acknowledgement of the existence of the debt

Answer 31

A

When the proposed consideration is in any way new or different (e.g., an alternative method of payment), there is usually sufficient consideration to change a preexisting duty, such as discharging an existing debt. Mere acknowledgement of a preexisting duty is not sufficient consideration to change the preexisting duty.Partial payment of the amount due on an existing debt is not sufficient consideration for a promise by the creditor to discharge the debt. Neither a legal detriment nor benefit is present. Under the majority view, mere unforeseen difficulty in performance is not a substitute for consideration. Although the modern view permits modification without consideration if the modification is fair and equitable in view of circumstances not anticipated when the contract was made, it would not apply to payment of an existing debt. That exception to the consideration requirement applies only if the contract has not been fully performed on either side, and an existing debt suggests that the creditor has already performed. Also, as with impracticability, difficulty in paying money would be unlikely to be considered the type of unforeseen circumstance this view is intended to address. QUESTION ID: K0005B Additional Learning

Question 32

A promise to choose among one of several alternative means of performance, only one of which involves an actual legal detriment, will be deemed __________.

A Valuable consideration if the choice of performance rests with the promisee

B Valuable consideration if the choice of performance rests with the promisor

C Illusory, no matter where the choice of performance rests

Answer 32

A

A promise to choose among one of several alternative means of performance, only one of which involves an actual legal detriment, will be deemed valuable consideration so long as the power to choose rests with the promisee or some third party not under the control of the promisor. If the promisee (or the third party) chooses the one alternative that involves a legal detriment, the promisor is bound to perform; thus, his promise is not illusory. If the power to choose rests with the promisor, such a promise will be deemed illusory. An illusory promise is one in which the promisor is not actually bound to perform. The promisor could simply choose the alternative with no legal detriment. Consideration fails in such instances because the agreement lacks mutuality. Mutuality requires that consideration exists on both sides of the contract. QUESTION ID: K0020A Additional Learning