P A R T P A R T Contracts Introduction to Contracts The Agreement: Offer The Agreement: Acceptance Consideration Reality of Consent 3 McGraw-Hill/Irwin Business Law, 13/e © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

P A R T P A R T Contracts Capacity to Contract Illegality Writing Rights of Third Parties Performance & Remedies 3 McGraw-Hill/Irwin Business Law, 13/e © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

Consideration PA E TR HC 12 “Make yourself necessary to someone.” Ralph Waldo Emerson, The Conduct of Life (1860)

Learning Objectives  Elements of consideration  Legal value  Bargained-for exchange  Exchanges that fail to meet consideration  Exceptions to consideration requirement

 Consideration is legal value bargained for and given in exchange for an act or a promise Elements of Consideration Purely gratuitous promises are not enforceable because not supported by consideration

 Consideration in the form of an act or promise may have legal value if the person  Refrains from doing something the person has the legal right to do  Example: Hamer v. Sidway  Does something the person had no prior legal duty to do  Generally, courts will not examine the adequacy of consideration Legal Value of Consideration

 A promisee’s act or promise must have been bargained for and given in exchange for the promisor’s promise  Example: Gottlieb v. Tropicana Hotel and Casino in which participating in a promotion that benefited the company was adequate consideration to form a contract Bargained-for Exchange

 Illusory promises  Preexisting duties  Past consideration Exchanges That Are Not Consideration

 If the promisee’s promise really does not bind the promisee to do or refrain from doing anything, the promise is illusory and cannot serve as consideration  Example: Heye v. American Golf Corporation, Inc. in which an employee successfully claimed lack of consideration for an arbitration clause in a contract because mutual obligation did not exist  AGC’s promise to arbitrate was illusory since they could amend the contract at any time Illusory Promises

 As a general rule, performing or agreeing to perform a preexisting duty is not consideration  Promisor in such a case has effectively made a gratuitous promise  Includes public duties (obey the law) and preexisting contractual duties Preexisting Duties

 General rule is an agreement to modify an existing contract requires new consideration  Exceptions to general rule:  Modification due to unforeseen circumstances that a party could not reasonably foresee  CISG and UCC 2–209(1): agreement to modify a contract for the sale of goods Preexisting Duties & Contract Modification

 Liquidated debts are debts in which parties have no dispute about the existence or amount of the debt  A creditor’s promise to discharge a liquidated debt for part payment of the debt at or after its due date is unenforceable for lack of consideration  If there is a dispute about the existence or amount of the debt, the debt is unliquidated  Settlement agreements are enforceable Preexisting Duties & Settlement Agreements

 Past consideration is an act or benefit given in the past that was not given in exchange for the promise in question, thus it cannot be consideration Past Consideration

Review

Test Your Knowledge  True=A, False = B  Consideration is legal value bargained for and given in exchange for an act or a promise  A person who agrees not to file suit has not provided valid consideration  Courts always examine the adequacy of consideration

Test Your Knowledge  Multiple Choice  A person who agrees to obey the law has provided __________ consideration.  (a) No consideration (a preexisting duty)  (b) Adequate consideration that is binding and enforceable  To be valid under the UCC, an agreement to modify a contract for the sale of goods:  (a) Does not need new consideration  (b) Requires new consideration

Thought Question  Your Aunt agrees to buy you a new car when you graduate if you earn straight “A” grades during your senior year. You earn those grades. Have you provided legally sufficient consideration?