12-1 Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Introduction to Contracts The Agreement: Offer The Agreement: Acceptance Consideration Reality of Consent Contracts P A R T

Capacity to Contract Illegality Writing Rights of Third Parties Performance and Remedies Contracts P A R T

12-4 Consideration PA E TR HC 12 Make yourself necessary to someone. Ralph Waldo Emerson The Conduct of Life (1860)

12-5 Learning Objectives Define concept of consideration, list elements, and explain significance Explain why illusory promises, past consideration, and promises to perform preexisting obligations are not consideration Determine what is a valid contract modification

12-6 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 Thorne v. Deas

12-7 Consideration in the form of an act or promise may have legal value if the person acting of promising –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 adequacy of consideration Legal Value of Consideration

12-8 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

12-9 Illusory promises Preexisting duties Past consideration Exchanges That Are Not Consideration

12-10 If promisee’s promise really does not bind promisee to do or refrain from doing a thing, 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

12-11 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

12-12 General rule is an agreement to modify an existing contract requires mutual assent and new consideration In Margeson v. Artis, Iowa Supreme Court held that attempt to modify contract failed since Margesons had a preexisting duty to sell business under terms of original contract and new consideration not providedMargeson v. Artis Preexisting Duties & Contract Modification

12-13 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

12-14 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

12-15 Promissory estoppel, because a donative promise is not a bargained-for exchange –Example: Skebba v. KaschSkebba v. Kasch State statutes that extend promises to pay debts that have been barred by statute of limitations or bankruptcy discharge Charitable subscriptions (like promissory estoppel) Exceptions to Consideration Requirement

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12-17 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?