CHAPTER 11 CONSIDERATION: THE BASIS OF THE BARGAIN DAVIDSON, KNOWLES & FORSYTHE Business Law: Cases and Principles in the Legal Environment (8 th Ed.)

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 2 CONSIDERATION Parties have made an exchange of value. Parties have made an exchange of value. Exchange of value, the quid pro quo of contract formation is consideration. Exchange of value, the quid pro quo of contract formation is consideration. Parties have made an exchange of value. Parties have made an exchange of value. Exchange of value, the quid pro quo of contract formation is consideration. Exchange of value, the quid pro quo of contract formation is consideration.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 3 THE BARGAIN AS A CONTRACT THEORY Presence of consideration indicates the parties’ exchange of value results in an agreement between the parties. Presence of consideration indicates the parties’ exchange of value results in an agreement between the parties. Consideration shows some obligation or duty worthy of a court’s protection. Consideration shows some obligation or duty worthy of a court’s protection. Establishes that parties are acting deliberately and intend to bind to terms of the agreement. Establishes that parties are acting deliberately and intend to bind to terms of the agreement. Theories permit an agreement to be binding in some cases despite a lack of consideration. Theories permit an agreement to be binding in some cases despite a lack of consideration. Presence of consideration indicates the parties’ exchange of value results in an agreement between the parties. Presence of consideration indicates the parties’ exchange of value results in an agreement between the parties. Consideration shows some obligation or duty worthy of a court’s protection. Consideration shows some obligation or duty worthy of a court’s protection. Establishes that parties are acting deliberately and intend to bind to terms of the agreement. Establishes that parties are acting deliberately and intend to bind to terms of the agreement. Theories permit an agreement to be binding in some cases despite a lack of consideration. Theories permit an agreement to be binding in some cases despite a lack of consideration.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 4 DEFINITION OF CONSIDERATION Most common definition states consideration is: Most common definition states consideration is: – Waiver, or promised waiver. Voluntary surrender of a legal right; intentional surrender of a right. Voluntary surrender of a legal right; intentional surrender of a right. – Of rights bargained for: Benefit to the promissor or a detriment to the promisee. Benefit to the promissor or a detriment to the promisee. – Given in exchange for a promise. Most common definition states consideration is: Most common definition states consideration is: – Waiver, or promised waiver. Voluntary surrender of a legal right; intentional surrender of a right. Voluntary surrender of a legal right; intentional surrender of a right. – Of rights bargained for: Benefit to the promissor or a detriment to the promisee. Benefit to the promissor or a detriment to the promisee. – Given in exchange for a promise.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 5 DEFINITION OF CONSIDERATION Detriment refers to the fact that the promise is based on the promisee giving up something. Detriment refers to the fact that the promise is based on the promisee giving up something. Consideration can take many forms, primarily money, but can include, but is not limited to time, conversion, or forbearance. Consideration can take many forms, primarily money, but can include, but is not limited to time, conversion, or forbearance. Consideration is whatever the offeror wants enough to bargain (legally) for. Consideration is whatever the offeror wants enough to bargain (legally) for. Detriment refers to the fact that the promise is based on the promisee giving up something. Detriment refers to the fact that the promise is based on the promisee giving up something. Consideration can take many forms, primarily money, but can include, but is not limited to time, conversion, or forbearance. Consideration can take many forms, primarily money, but can include, but is not limited to time, conversion, or forbearance. Consideration is whatever the offeror wants enough to bargain (legally) for. Consideration is whatever the offeror wants enough to bargain (legally) for.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 6 DEFINITION OF CONSIDERATION Consideration as an Act or a Forbearance to Act: Consideration as an Act or a Forbearance to Act: – Necessity of parties’ bargaining over event or object and exchanging something of value to bind themselves to do something. – Unilateral contract, consideration is revealed in an act or a forbearance to act. – Some benefit to the promissor (one making the promise). – Some detriment to the promisee (one to whom the promise is made). – In exchange for whatever the promissor promises to do. Consideration as an Act or a Forbearance to Act: Consideration as an Act or a Forbearance to Act: – Necessity of parties’ bargaining over event or object and exchanging something of value to bind themselves to do something. – Unilateral contract, consideration is revealed in an act or a forbearance to act. – Some benefit to the promissor (one making the promise). – Some detriment to the promisee (one to whom the promise is made). – In exchange for whatever the promissor promises to do.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 7 DEFINITION OF CONSIDERATION Consideration as a Promise to Act or to Forbear: Consideration as a Promise to Act or to Forbear: – Bilateral contract, consideration consists of not actions themselves, but rather promises to act or to forebear from taking some action. – Promises must be real, not illusory. Adequacy of Consideration: Adequacy of Consideration: – Is of no interest to the court, assuming fraud, mistake, duress or undue influence is not involved. Consideration as a Promise to Act or to Forbear: Consideration as a Promise to Act or to Forbear: – Bilateral contract, consideration consists of not actions themselves, but rather promises to act or to forebear from taking some action. – Promises must be real, not illusory. Adequacy of Consideration: Adequacy of Consideration: – Is of no interest to the court, assuming fraud, mistake, duress or undue influence is not involved.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 8 CONSIDERATION IN SPECIAL CONTEXTS Contracts for the Sale of Goods: Contracts for the Sale of Goods: – “Firm offer” provisions of UCC makes offer irrevocable for up to three months. – Intended to encourage commercial activity. Suretyship Contracts: Suretyship Contracts: – Consideration is an absolute requirement. – Involves three parties: Principal debtor. Principal debtor. Creditor. Creditor. Surety. Surety. Contracts for the Sale of Goods: Contracts for the Sale of Goods: – “Firm offer” provisions of UCC makes offer irrevocable for up to three months. – Intended to encourage commercial activity. Suretyship Contracts: Suretyship Contracts: – Consideration is an absolute requirement. – Involves three parties: Principal debtor. Principal debtor. Creditor. Creditor. Surety. Surety.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 9 CONSIDERATION IN SPECIAL CONTEXTS Liquidated Debts: Liquidated Debts: – Partial payment of that debt is not consideration for full discharge of the debt, the amount owed is not disputed. – Absence of consideration. Unliquidated Debts: Unliquidated Debts: – Amount of debt is in dispute, partial payment of that debt is consideration for payment in full. Liquidated Debts: Liquidated Debts: – Partial payment of that debt is not consideration for full discharge of the debt, the amount owed is not disputed. – Absence of consideration. Unliquidated Debts: Unliquidated Debts: – Amount of debt is in dispute, partial payment of that debt is consideration for payment in full.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 10 CONSIDERATION IN SPECIAL CONTEXTS Composition Agreements: Composition Agreements: – Reached between debtor and creditors when accepting smaller percentage of debt owed in full satisfaction. – Consideration for full discharge of the debt. Composition Agreements: Composition Agreements: – Reached between debtor and creditors when accepting smaller percentage of debt owed in full satisfaction. – Consideration for full discharge of the debt.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 11 ABSENCE OF CONSIDERATION Illusory Promises: Illusory Promises: – Promises that do not bind the promissor to a commitment. – Promises without benefit to promissor or without detriment to promisee. Preexisting Duty: Preexisting Duty: – When a person is already obligated to perform a certain duty. Illusory Promises: Illusory Promises: – Promises that do not bind the promissor to a commitment. – Promises without benefit to promissor or without detriment to promisee. Preexisting Duty: Preexisting Duty: – When a person is already obligated to perform a certain duty.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 12 ABSENCE OF CONSIDERATION Moral Consideration: Moral Consideration: – When you feel guilty and offer a large gift and later renege. – No consideration and no bargaining. Past Consideration: Past Consideration: – No bargaining and exchange of value has occurred. – No consideration and promises will not be enforceable.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 13 EXCEPTIONS TO BARGAIN THEORY OF CONSIDERATION Promissory Estoppel: Promissory Estoppel: – When promissor makes clear, definite, communicated promise which induced the promisee to act, courts will enforce the agreement. Charitable Subscriptions: Charitable Subscriptions: – Promise to pay a certain sum to a nonprofit charity. Promissory Estoppel: Promissory Estoppel: – When promissor makes clear, definite, communicated promise which induced the promisee to act, courts will enforce the agreement. Charitable Subscriptions: Charitable Subscriptions: – Promise to pay a certain sum to a nonprofit charity.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 14 EXCEPTIONS TO BARGAIN THEORY OF CONSIDERATION Promises Made After the Expiration of the Statute of Limitations: Promises Made After the Expiration of the Statute of Limitations: – Set time limits on when creditors can bring suit against debtors for the sum owed to the creditors. – Enforced by the courts. – No consideration. Promises Made After the Expiration of the Statute of Limitations: Promises Made After the Expiration of the Statute of Limitations: – Set time limits on when creditors can bring suit against debtors for the sum owed to the creditors. – Enforced by the courts. – No consideration.

© 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 15 EXCEPTIONS TO BARGAIN THEORY OF CONSIDERATION Promises to Pay Debts Covered by Bankruptcy Discharges: Promises to Pay Debts Covered by Bankruptcy Discharges: – Debtor promises to pay a debt covered by a discharge in bankruptcy. – After bankruptcy discharge will be enforced by the courts. – No consideration.