Formation of Contracts - Consideration & Enforcement Flashcards
When is a promise enforceable?
When it is supported by valid consideration
- bargained-for change in legal position between the parties
Legal Detriment and Bargained-for Exchange
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)
In what forms can consideration take?
- A return promise to do somthing
- A return promise to refrain from doing somthing legally permitted
- The actual performance of some act, or
- Refraining from doing some act
What is a gratuitous Promise?
A promise to make a gift
- Unenforceable - No bargained-for consideration
How to distinguish a gift from valid consideration
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
When can a gratuitous promise be enforceable?
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
Adequacy of Consideration
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
Preexisting-Duty Rule
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
Preexisting Duty - Exception for third party
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
Past Consideration
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
Modification - Common Law
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
Modification - UCC
Under Article 2, No consideration is necessary to modify a K
- BUT good faith is required
What does good faith require?
Requires honesty in fact and fair dealing in accordance with reasonable commercial stds.
- Applies to all parties (merchants and nonmerchants)
What is an accord agreement?
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
Accord & Satisfaction - Creditor agrees to accept lesser amount in full satisfaction of the debt
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
What is a Satisfaction?
The perf. of the accord agreement
- Will discharge both the orig. K and the accord K
What is the effect if an accord is breached by the debtor ?
The creditor can sue on the orig. contract or under the accord agreement
What is an illusory Promise ?
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
Voidable and Unenforceable Promises
Can still be consideration
Requirements Contract & Output Contracts
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)
Settlement of a Legal Claim
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
What promises are binding without consideration?
Promise to:
- Pay a debt barred by the SOL or Bankruptcy
- Promise to perf. a voidable duty
- Promise to pay enefits received - Material Benefit Rule
- Promissory Estoppel
Promise to Pay debt barred by SOL or Bankruptcy
New promise to pay a devt after the SOL has run is enforceable without consideration
Promise to Perform a Voidable Duty
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
Promise to Pay Benefits Received - Material Benefit Rule
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)
Promissory Estoppel
Consideration Substitute - A promise is binding if:
- Promisor should reas. expect it to induce action on the part of the promisee or a 3d pers.
- Promise does induce such action, AND
- Injustice only avoided by enforcement of the promise
Always look for a valid K b/f considering prom. est. as the correct answer choice
Construction Contracts & Promissory Estoppel
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
Enforceability of Contracts
K may be unenforceable based on:
- defense to formation or
- defense to enforcement
Void Contracts
Entire transaction is null (as if no K existed)
Voidable Contracts
Operates as a valid K until/unless one of the parties takes steps to avoid it
Unenforceable Contracts
A valid Contract that can’t be enforced if one of the parties refuses to carry out its terms
