Section 8.1

Agreements without Consideration Chapter 8 Consideration Section 8.1 Consideration Section 8.2 Agreements without Consideration

Why It’s Important By understanding the concept of consideration, you will be able to avoid problems that frequently result when agreements lack this important contractual element. Understanding the difference between contracts that require consideration and those that do not, will enable you to avoid common problems associated with consideration or the lack thereof.

Requirements of Consideration The law has always refused to enforce most gratuitous, or free, agreements. Parties to an agreement must surrender something of value in exchange for something else of value.

Requirements of Consideration This exchange, or the promise to exchange things of value, is what binds the parties to each other in a contractual relationship. This binding element is known as consideration.

Requirements of Consideration Consideration distinguishes a legally binding agreement from other types of agreements, such as social agreements that contain an offer and an acceptance. (Agreeing to go to the homecoming dance is not a contract)

The Nature of Consideration Consideration is the exchange of benefits and detriments by parties to an agreement.

The Nature of Consideration A benefit is something that a party was not previously entitled to receive. A detriment is any loss suffered.

8.1 Consideration

The Nature of Consideration There are three types of consideration. Giving up or promising to give up something that you have the legal right to keep.

The Nature of Consideration Doing something or promising to do something that you have the legal right not to do. Not doing something that you have the legal right to do, which is known as forbearance.

The Characteristics of Consideration Consideration must involve these key characteristics. bargained-for exchange something of value legal benefits and detriments

Bargained-for Exchange An agreement involves a when a promise is made in return for another promise, an act, or a promise not to act. Bargained for Exchange

Something of Value The law has no specific value requirements on consideration. All that matters is that the parties agreed freely on the value and the price.

Something of Value Usually the courts will not even consider whether the value of the consideration is adequate. However, a contract may be deemed unconscionable, when the courts believe the consideration is completely out of line.

Legality of Consideration The courts require that the consideration involved in an agreement be legal. If the consideration is illegal, the contract is invalid.

Types of Consideration These include: money property services promises not to sue charitable pledges

Money as Consideration Unless price limits have been placed on certain transactions by administrative regulations, legislative fiat, or executive ruling, parties to a contract are free to exchange any amount of money that they negotiate.

Property and Services as Consideration Before money was accepted as a medium of exchange, it was common to use property and services as consideration.

Property and Services as Consideration Some parties still prefer to engage in barter agreements that involve goods and services.

A Promise Not to Sue If one party has the right to sue another party but gives up that right in exchange for something of value, the court will generally uphold the exchange as valid consideration.

A Promise Not to Sue Pending lawsuits are frequently settled in this manner. When a person accepts an offer and agrees not to sue, he or she is asked to sign an agreement, which is called a release.

Charitable Pledges Charitable organizations and nonprofit institutions often depend upon contributions. This dependency has led the court to enforce charitable pledges just as if they were contracts.

Problems with Consideration When parties disagree about the amount of money that the debtor owes the creditor, a problem has arisen over the consideration involved.

Disputed Amounts If the parties to a contract cannot agree as to the actual amount owed, the amount is said to be in dispute.

Disputed Amounts A dispute can be settled by accord and satisfaction (separate definitions on next slide) if the creditor accepts a payment that is less than the amount due as full payment.

Disputed Amounts The acceptance by the creditor of less than what has been billed to the debtor is accord. The agreed-to settlement as contained in the accord is the satisfaction.

Disputed Amounts The dispute must be real, must occur in good faith, and must not be trivial.

Undisputed Amounts If the parties have mutually agreed to a set amount of money in the contract, then the amount cannot be disputed. End of Section 8.1

Agreements without Consideration Section 8.2 Agreements without Consideration

Enforceable Agreements without Consideration Some courts have eliminated the requirement of consideration in certain agreements.

Enforceable Agreements without Consideration These exceptions are allowed by state statute or because the courts, in the interest in fairness or justice, find it inappropriate to require consideration.

Enforceable Agreements without Consideration Some common agreements in this category include: promises under seal promises after discharge in bankruptcy

Enforceable Agreements without Consideration debts barred by the statute of limitations promises enforced by promissory estoppel options

Promises under Seal A seal is a mark or impression placed on a written contract indicating that the instrument was executed and accepted in a formal manner.

Promises under Seal Today most states that require a seal will permit the seal to be indicated by the addition of seal or L.S. (locus sigilli, which translates to “place of the seal”).

Promises after Discharge in Bankruptcy A person who has had his or her debts discharged in bankruptcy can reaffirm the debt, which means he or she has decided to pay the debt voluntarily.

Promises after Discharge in Bankruptcy Under most state laws, no new consideration needs to be provided in support of this reaffirmation. Instead, the reaffirmation must be supported by contractual intent.

Debts Barred by Statutes of Limitations A statute of limitations establishes the time frame within which a party is allowed to bring suit. Different states set different time limits for the collection of a debt.

Debts Barred by Statutes of Limitations No new consideration is needed for a debtor to reaffirm a debt barred by the statute of limitations.

by Promissory Estoppel Promises Enforced by Promissory Estoppel Under promissory estoppel, a promise may be enforceable without consideration.

by Promissory Estoppel Promises Enforced by Promissory Estoppel promissory—containing or consisting of a promise estoppel—restraint on a person to prevent him or her from contradicting a previous act.

by Promissory Estoppel Promises Enforced by Promissory Estoppel The doctrine is used to prevent injustice when a person changes his or her position significantly in reliance on another person’s promise and the promise is not fulfilled.

of Promissory Estoppel The Elements of Promissory Estoppel Three conditions must be met before the courts will apply this principle. The promise must be made to bring about action or forbearance by another person who gave no consideration.

of Promissory Estoppel The Elements of Promissory Estoppel The one who gave no consideration must have relied on the promise and changed his or her position in a significant way. Injustice can be avoided only by enforcing the agreement.

Option When an offeree gives consideration to an offeror in exchange for a promise from the offeror to keep an offer open for a specified period of time, this is known as an option.

Option When a merchant makes a written offer stating a period of time during which an offer will remain open, consideration is not needed. The offer is called a firm offer, or an irrevocable offer.

Unenforceable Agreements without Consideration There are certain promises that the courts will not enforce because they lack even the most basic qualities of valid consideration.

Unenforceable Agreements without Consideration Included in this category are: illusory promises promises of future gifts promises of legacies

Unenforceable Agreements without Consideration promises based on past consideration promises based on preexisting duties agreements to attend social engagements

Illusory Promises For a binding contract to be formed, both parties must be under an obligation to do something. If this is not the case, then neither party is bound to do anything.

Illusory Promises Some contracts appear to be contracts but on further scrutiny are revealed to be hollow. Such an agreement is said to involve illusory promises.

Future Gifts If a person promises to bestow a gift at some future time or in a will, that promise is not enforceable if no consideration is given for the promise.

Past Consideration The act of giving or exchanging benefits and detriments must occur when a contract is made.

Past Consideration Past consideration, or consideration that took place in the past or that is given for something that has already been done, is not regarded as legal by the courts.

Preexisting Duties If a person is already under a legal obligation to do something, a promise to do that same thing is not consideration. These obligations are called preexisting duties.

Promise to Attend a Social Engagement An agreement to meet a friend for lunch or another social engagement would not be a legally binding agreement because the friend has given nothing in exchange for the promise. End of Chapter 8