© 2013 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 10 Consideration 1 Copyright © 2016 McGraw-Hill Education. All rights reserved.

© 2013 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 10 Case Hypothetical and Ethical Dilemma John Harrington, Jr. (“Junior”) is a 24-year-old, 3-pack-per-day smoker. John Harrington, Sr. (“Senior”) is a very concerned parent. On January 1, father announces to son, “Junior, if you will stop smoking for the entire year, I will pay you $5,000.” Senior believes that if Junior will stop smoking for one year, he will “kick the habit.” Junior reluctantly accepts his father’s terms, and extinguishes his half-smoked cigarette with the heel of his boot. On January 1 of the following year, Junior approaches Senior and says “Dad, time to pay up.” Senior has no reason to doubt that Junior has refrained from smoking for an entire year, but states “Son, this was for your benefit. The gift I have given you is the gift of life, and you are now likely to enjoy that gift longer, because you are now much less likely to contract cancer. Health statistics show that non-smokers live ten years longer than smokers. Enjoy your newfound life, but I will not pay you the $5,000.” Does Senior owe Junior the $5,000? Is there an enforceable contract between father and son? If there is not an enforceable contract, does Junior have any other legal or equitable theory of recovery? Is Senior ethically obligated to pay Junior the $5,000? 2

© 2013 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 10 Case Hypothetical Seattle Shoestring Sales, Inc. arranged to sell shoestrings to Victory, Inc., a tennis shoe manufacturer. According to the terms of the deal, Seattle Shoestring Sales committed to sell Victory whatever number of shoestrings it will produce next year, at seventy-five cents per pair. Since entering into their agreement, the price of cotton has skyrocketed five hundred percent. To produce shoestrings, Seattle Shoestring Sales’ cost alone will be approximately $1.50 per pair. Seattle Shoestring Sales has informed Victory that it cannot and will not honor the deal. Is there an enforceable contract between Seattle Shoestring Sales, Inc. and Victory, Inc.? Is the failure to include a quantity term in the agreement fatal to its enforceability? What about the fact that the price of cotton dramatically increased after the companies reached their agreement? Should a court or other arbiter increase the per-pair contract price to account for the increase in the price of cotton, and then enforce the agreement? 3

© 2013 The McGraw-Hill Companies, Inc. All rights reserved. Consideration Definition: What a person will receive in return for performing a contract obligation 4

© 2013 The McGraw-Hill Companies, Inc. All rights reserved. Examples of Consideration Benefit to promisor Detriment to promisee Promise to do something Promise to refrain from doing something 5

© 2013 The McGraw-Hill Companies, Inc. All rights reserved. Type of Consideration Based on Type of Contract Bilateral Contract: Exchange of promises Unilateral Contract: Promise in exchange for an act 6

© 2013 The McGraw-Hill Companies, Inc. All rights reserved. Rules of Consideration For a promise to be enforced legally, there must be consideration -Exception—Promissory Estoppel: One party makes promise knowing other party will rely on it Other party relies on promise (“actual reliance”) Justice dictates enforcement of promise, even though it is not supported by consideration Court rarely considers adequacy of consideration 7

© 2013 The McGraw-Hill Companies, Inc. All rights reserved. Rules of Consideration (Continued) Illusory promise does not constitute consideration Past consideration does not constitute consideration for purposes of present contract Promise to do something you are already legally obligated to do is not valid consideration (“Pre-existing duty rule”) 8

© 2013 The McGraw-Hill Companies, Inc. All rights reserved. Partial Payment of Debt Liquidated Debt: No dispute as to amount of money owed Unliquidated Debt: Parties either (in good faith) dispute fact money owed, or dispute amount of money owed 9

© 2013 The McGraw-Hill Companies, Inc. All rights reserved. Partial Payment of Debt (Continued) “Accord and Satisfaction” Requirements (“Accord” represents agreement, “satisfaction” represents payment; accord and satisfaction means partial payment of disputed debt discharges remaining balance allegedly owed): -Unliquidated debt -Creditor agrees to accept, as full payment, less than creditor claims owed -Debtor pays agreed-upon amount 10