Formation of Contracts - Consideration & Enforcement

Question 1

When is a promise enforceable?

Answer 1

When it is supported by valid consideration

• bargained-for change in legal position between the parties

Question 2

Legal Detriment and Bargained-for Exchange

Answer 2

For the legal detriment to constitute sufficient consideration, it must be bargained for in exchange for the promise

• Promise must induce the detriment & detriment must induce the promise (mutuality of consideration)

Question 3

In what forms can consideration take?

Answer 3

1. A return promise to do somthing
2. A return promise to refrain from doing somthing legally permitted
3. The actual performance of some act, or
4. Refraining from doing some act

Question 4

What is a gratuitous Promise?

Answer 4

A promise to make a gift

• Unenforceable - No bargained-for consideration

Question 5

How to distinguish a gift from valid consideration

Answer 5

Test - Whether offeree could reasonably believe intent of offeror was to induct the action

• Language of the parties - words suggesting benevolence not self interest
• Context - gift more common in fam. context
• Benefit - if creates no ben. to promisor, likely a gift

If Yes, then there is consideration and the promise is enforceable

Question 6

When can a gratuitous promise be enforceable?

Answer 6

Under the Doctrine of Promissory Estoppel - Promise is enforceable if:

• If promisor/donor knows that promise to make a gift will induce subst. reliance by the promisee AND
• Failure to enforce it would cause subst. injustice

Question 7

Adequacy of Consideration

Answer 7

Party can’t challenge a K on the grounds that the consideration is inadequate

• Subjective Value - the benefit to the promisor doesn’t need to have an econ. value
  
  • So long as the promisor wants it, the giving of it will constitute adequate consideration

Question 8

Preexisting-Duty Rule

Answer 8

Common Law - A promise to perform a preexisting legal duty is not consideration b/c the promisor is already bound to perform (so there is no legal detriment)

• Promisor must give something in addition to what is owed, or vary the preexisting duty in some way

Question 9

Preexisting Duty - Exception for third party

Answer 9

When a 3d party offers a promise contingent on perf. of a contractual obligation by a party

• The 3d party’s promise is sufficient consideration

Question 10

Past Consideration

Answer 10

Common Law - something given in the past is not adequate consideration b/c it could not have been bargained for or done in reliance upon a promise

Modern Trend - Enforce promises when nec. to prevent injustice, unless promisee intended act to be a gift or didn’t expect compensation

Question 11

Modification - Common Law

Answer 11

Modification must be supported by consideration, agreements to modify the K are enforceable if:

• Rescission of existing K& entering into of new K
• Unforeseen difficulties arise and one party agrees to compensate other party for them, OR
• New obligations arise on both sides

Question 12

Modification - UCC

Answer 12

Under Article 2, No consideration is necessary to modify a K

• BUT good faith is required

Question 13

What does good faith require?

Answer 13

Requires honesty in fact and fair dealing in accordance with reasonable commercial stds.

• Applies to all parties (merchants and nonmerchants)

Question 14

What is an accord agreement?

Answer 14

One party to K agrees to accept different perf. from the other party than what was promised in the existing K

• Consideration is required for an accor to be valid

Question 15

Accord & Satisfaction - Creditor agrees to accept lesser amount in full satisfaction of the debt

Answer 15

Original Debt is discharged only when:

• there is some dispute as to:
  
  • the validity of the debt or
  • the amount of the debt
  • Or when payment is of a different type thean called for under the orig. K

Question 16

What is a Satisfaction?

Answer 16

The perf. of the accord agreement

• Will discharge both the orig. K and the accord K

Question 17

What is the effect if an accord is breached by the debtor ?

Answer 17

The creditor can sue on the orig. contract or under the accord agreement

Question 18

What is an illusory Promise ?

Answer 18

Not legally binding

• It’s a promise that essentially pledges nothing because:
  
  • it is so vague or
  • b/c the promisor can choose whether to honor it

Question 19

Voidable and Unenforceable Promises

Answer 19

Can still be consideration

Question 20

Requirements Contract & Output Contracts

Answer 20

Requirements Contract - buyer agrees to buy all that he will require of a product from the other party

Output Contract - Seller agrees to sell all that she manuf. of a product to the buyer

• There is consideration b/c promisor suffers legal detriment
• b/c cov. of GF & Fair dealing is implied in all Ks, any quantities under a K can’t be unreas. disproportionate to any estimates (or if no estimates, to any normal or comparable prior req. or output)

Question 21

Settlement of a Legal Claim

Answer 21

The promise not to bring a legal action or to assert a particular claim or defense in an action

• is consideration for a settlement agreement b/c party making prom. is foregoing a legal right

Question 22

What promises are binding without consideration?

Answer 22

Promise to:

1. Pay a debt barred by the SOL or Bankruptcy
2. Promise to perf. a voidable duty
3. Promise to pay enefits received - Material Benefit Rule
4. Promissory Estoppel

Question 23

Promise to Pay debt barred by SOL or Bankruptcy

Answer 23

New promise to pay a devt after the SOL has run is enforceable without consideration

Question 24

Promise to Perform a Voidable Duty

Answer 24

A new prom. to perf. a duty that is voidable is enforceable without consideration

• So long as the new promise doesn’t suffer from an infirmity that would make it voidable

Question 25

Promise to Pay Benefits Received - Material Benefit Rule

Answer 25

When a party perf. an unrequested service for another party

• Modern Trend - permits the perf. party to enforce the promise of payment for material benefits received to extent nec. to prevent injustice
  
  • Only to the extent nec. to prevent injustice
• Exception - the perf. party rendered the services w/out expectation of compensation (gift)

Question 26

Promissory Estoppel

Answer 26

Consideration Substitute - A promise is binding if:

1. Promisor should reas. expect it to induce action on the part of the promisee or a 3d pers.
2. Promise does induce such action, AND
3. Injustice only avoided by enforcement of the promise

Always look for a valid K b/f considering prom. est. as the correct answer choice

Question 27

Construction Contracts & Promissory Estoppel

Answer 27

When a general contractor uses a particular subcontractor’s bid to formulate his own

• An agreement not to revoke a sub-bid is enforceable under the theory of Prom. Est.
• It would be unjust to allow the subcontractor to revoke a bid after inducing reliance in the gen. contractor

Question 28

Enforceability of Contracts

Answer 28

K may be unenforceable based on:

• defense to formation or
• defense to enforcement

Question 29

Void Contracts

Answer 29

Entire transaction is null (as if no K existed)

Question 30

Voidable Contracts

Answer 30

Operates as a valid K until/unless one of the parties takes steps to avoid it

Question 31

Unenforceable Contracts

Answer 31

A valid Contract that can’t be enforced if one of the parties refuses to carry out its terms