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Buisness Law Today Chapter 10
Buisness Law Today Chapter 10
CHAPTER
TE A RNING OB I E CT I V E S
56Nocauseof
C H APTER OUTTINE
.ELEMENTS AFTER
OFCONSIDERATION READING THISCHAPTER, YOUSHOULD BEABLE TO arises
action
ANSWER THE FOLLOWING QUESTIONS:
-LEGAL AND
SUFFICIENCY fromabare
OFCONSIDERATION .
ADEQUACY I What rs conslcleratloni al
/
pr0mlse,/
.CONTRACTSTHATLACK 2 What is required for considerationto be legally
CONSIDERATION sufficient?
Legal Maxini
.SETTLEMENTOFCLAIMS
What are some exampiesof contractsthat lack
-PROMISSORYESTOPPEL consideration?
V alue
Legal
The "somethingof legally sufficientvalue" may consistof ( I ) a promiseto do something
(2) 27tffiu
that one has .ro"prio,i.gri a"ty to do (to pay on receipi of certain goods'for example),
(such as CONSIDERATION
the performanceof an-action that one is otherwisenot obligatedto undertake
272llNili!il
CONTRACTS
providing accounting sewices),or (3) the refraining from an action that one has a legal
FORBEARANCE right to undertake(called a forbearance).
The act of refrainingfrom an action Considerationin bilateralcontractsnormally consistsof a promisein return for a prom-
that one has a legalright to
undertake.
ise,as explainedin Chapter 8. FExIMFLEtor I In a conhactfor the saleof goods,the seller
promisesto ship specific goodsto the buyer, and the buyer promisesto pay for those goods
when they are received.Eich of thesepromisesconstifutesconsiderationfor the contract. E
In contrast, unilateral contracts involve a promise in return for a performance.
IEExAMpt-E 10.21Anitasaysto her neighbor,"If you paint my garuge,Iwill pay you $800."
Anita's neighbor paints the gange. The act of painting the garageis the considerationthat
createsAnita's contrachralobligation to pay her neighbor $800. tr
What if, in return for a promiseto pay,a personrefrainsfrom pursuing harmful habits,
such as the use of tobacco and alcohol? Does such forbearancecreateconsiderationfor
the contract?This wasthe issuein Hamer v. Sidway,a classiccaseconcerningconsidera-
tion that we presentas this chapter'sLandmark in the Law featureon page275.
Exchange
Bargained-for
The second element of considerationis that it must provide the basisfor the bargain
struck behveenthe contractingparties.The promise given by the promisor must induce
the promiseeto incur a legal detriment either now or in the future, and the detriment
incurred must induce the promisor to make the promise.This element of bargained-for
exchangedistinguishescontractsfrom gifts.
Robertosaysto his son,"ln consideration
lri]Exnrvtpt.rtorl of the Factthat you are not as
wealthy asyour brothers,I will pay you $5,000."This promise is not enforceablebecause
Roberto'sson has not given any return considerationfor the $5,000 promised.l The son
(the promisee)incurs no legal detriment; he doesnot have to promiseanything or under-
take (or refrain from undertaking) any action to receivethe $5,000. Here, Roberto has
simply statedhis motive for giving his son a gift. The fact that the word considerationis
used doesnot, by itself, mean that considerationhas been given. S
Does askinga bank for changefor a $50 or $100 bill initiate a bargained-forexchange?
The bank in the following casearguedthat obtaining changeis not a contractualtransac-
tion becausethere is no consideration.
€ A S El0.l- Co ntin ue d
0F THECOURT
lN THEWORDS circuitJudge.
. . . MccoNNErf
***x
The lssue Of COnSideratiOn The nephewleft the moneyin the careof his uncle,
who held it for the nexttwelveyears.Whenthe uncledied in I88Z however,the execu-
tor of the uncle'sestaterefusedto pay the $5,OOO claim brought by Hamer,a third party
to whom the promisehad been ossigned.(The law allows partiesto assign,or transfer,
rightsin contractsto third parties;see Chapter16.)The executor,Sidway,contendedthat
the contractwas invalidbecausetherewas insufficient consideration to suPPortit. The
unclehad receivednothing,and the nephewhad actuallybenefitedby fulfillingthe
uncle'swishes.Therefore,no contractexisted.
N. E . 25(61 8 9 1 ).
a. 1 2 4N . Y . 538, 27
276rwIIroU
CONTRACTS
Sometimes,one or both of the partiesto a contract may think that they have exchanged
considerationwhen in fact they have not. Here, we look at some situationsin which the
parties'promisesor actionsdo not qualifi, as contractualconsideration.
Preexisting
Duty
Under most circumstances,a promiseto do what one alreadyhas a legal duty to do does
not constitutelegallysufficientconsiderationbecauseno legal detriment is incurred. The
preexistinglegal duty may be imposed by law or may ariseout of a previouscontract.A
sheriff, for example,cannot collect a reward for information leading to the capture of a
criminal if the sheriff alreadyhas a legal duty to capturethe criminal. Likewise,if a party
To learnmore about how is alreadybound by contract to perform a certain duty, that duty cannot serveas consid-
the courtsdecidesuch issuesas eration for a secondcontract.
whether consideration was lacking
IbExAMPLE t0.51Bauman-Bache.Inc., beginsconstructionon a seven-story office build-
for a particularcontract,look at
relevantcaselaw which can be ing and after three months demandsan extra$75,000on its contract.If the extra$75,000
accessedthrough the Web site of is not paid, the firm will stopworking. The owner of the land, having no one elseto com-
CornellUniversiVsSchoolof Law at plete construction, agreesto pay the extra $75,000.The agreementis not enforceable
becauseit is not supportedby legally sufficient consideration;Bauman-Bachehad a pre-
contracts. existingcontractualduty to complete the building. E
Normally, contracting parties are supposed to anticipate the risk that costs may
fluctuate during the duration of the contract. Thus, a party who has a preexisting
duty to build a house cannot ask for a modification due to an increase in the the
price of lumber. Not all risks can be anticipated, however, and sometimes a court
will allow the parties to modify a contract because of unforeseen difficulties that
will make performance much more expensive or complicated. Nevertheless,
because it is hard for the parties to determine whether a court will enforce the
agreed-on modification or apply the preexisting duty rule, modifying a preexisting
contract without consideration is risky. Parties should retain counsel and be clear
about all other options before negotiating chanSesto a preexisting duty.
E
Rescissionand New Contract The law recognizesthat h.vopartiescan mutually agree
to rescindtheir contract,at leastto the extent that it is executory(still to be carried out).
3. Note that under the Uniform CommercialCode (UCC), any agreementmodifyinga salescontractneedsno con
siderationto be binding.SeeUCC 2-209(l).
277@
CONSIDERATION
4. Pronounced reh-sih-zhen
P.5d8ee (2008).
SupremeCourtof Montana,34l Mont' 73, l7s
Hernandezarguesthatthenon-competeagreementisinvalidandunenforceable,
good considJration. Accessorganics contendsthat
becauseit is not ,"pi"uJ-uf
suppliedsufficientconsideration'
H.'r.*"a.rt ,"lrty ,'tt?'-tti'-tt'ed Zmployment at thetime
if theemployee entersinto ihe non-compete agreement nextpase
consideration exrsts l0'2-Continues
CASE
tht";;i;y;; engage in
of hiring.t)uring pre-employment negotiatio"r,'il;;;pily."
",'td
279@EU t,
CONSIDERATION
cent bonus at the end of the year will be giver-r-if managementihinks it is warranted."
This is an illusory promise,or no promiseat all, becauseperformancedependssolely on
the discretionof the president (the management).There is no bargained-forconsidera-
tion. The statementdeclaresmerelythat managementmay or may not do somethingin
the future. El
Option-to-cancelclausesin contractsfor specifiedtime periodssometimespresent
probi.-s in regardto consideration.lEExnrvrpr-r ro.slAbe contractsto hire Chris for one
year at $5,000 per month, reservingthe right to cancel the contract at any time. On
closee"amirrati,on of thesewords,you can seethat Abe has not actualiyagreedto hire
Chris, asAbe could cancelwithout liability beforeChris startedperformance'Abe has
not given up the opportunityof hiring someoneelse.This contractis ihereforeillusory.
No,i ,uppore thai Abe contractsto hire Chris for a one-yearperiod at $5,000 per
month, i.r.ruit-rg the right to cancel the contract at any time after Chris has begun_per-
formance by giving Chiis thirty days'notice. Abe, by sayingthat he will give Chris thirty
days'notice,is relinquishingthe opportunity(legalright) to hire someoneelseinstead
'chri,
of for a thirty-d"y p.ti,rd. If chris works for one month, at the end of which Abe
giveshim thirty days'notice, Chris has a valid and enforceablecontractualclaim for
$1 0 ,0 0 0in s alar ylel
.
n|llfiIilrillET[ Businesspersons
Businesspersons or otherscan settlelegal claims in severalways.It is important to under- shouldconsidersettlingpotential
stand the nature of the considerationgiven in thesesettlementagreements, or contracts. legaldisputesto saveboth their
commonly settledthrough an accordand in
satisfaction, which a debtor offers own time and resources and those
Claims are
Two other methods that are also of the courts.
amouni
to pay a lesser than the creditorpurportsis owed.
often used to settleclaims are the releaseand the coyenantnot to sue.
andS at isf a c t i o n
Accord
ANDSATISFACTION
I1 an accord and satisfaction,a debtoroffersto pay,and a crediioraccepts,a lesseramount ACCORD
the A commonmeansof settlinga
than the creditor originally claimed was owed. Thus, in an accord and satisfaction,
disputedclaim,wherebYa debtor
debtor attemptsto teiminate an existingobligation. The accordis the settlementagree- offersto paya lesseramountthan
the creditorpurPortsis owed.The
ment. In an accord,the debtor offersto give or perform somethinglessthan tl-reparties of the offer
claim' creditor'sacceDtance
originally agreed on, and ihe crediior acceptsthat offer in satisfaction of the
createsan accord(agreement), and
Saiisfact'ion"isthe performance(usuallypayment),which takesplace after the accord is when the accordis executed,
satisfactionoccurs.
execr-rted.A basicrule is that there can be no satisfactionunlessthere is first an accord.
For accord and satisfactionto occur, the amount of the debt must be in dispute' lf iI
DEBT
is a liquidated debt, then accord and satisfactioncannot take place.A debt is liquidated LIQUIDATED the amounthas
An A debtfor which
if its ;ount has been ascertained,fixed, agreedon, settled,or exactlydetermined' beenascertained, fixed,agreedon,
example of a liquidated debt is a loan contract in which the borrower agreesto pay a settled,or exactlydetermined. lf the
amountof the debt is in disPute,the
stioulatedamount every month until the amount of the loan is paid. In the majority of unliquidated'
debt is considered
states,acceptanceof (an accord for) a lessersun'ithan the entire amount of a liquidated
debt is not satisfaction,and the balance of the debt is still legally owed. The rationale
for this rule is that the debtor has given no considerationto satisfiithe obligation of pay-
ins the balanceto the creditor-because the debtor has a preexistinglegal obligation to
oav the entire debt.
Antmliquidated debtis the oppositeof a liquiclateddebt. Here, teasonablepersonsmay
differ overihe amount owed.It is not settled,fixed, agreedon, ascertained,or determined'
In thesecircumstances,acceptanceof paymentof the lessersum operatesasa satisfaction,
or discharge,of the debt. One argumer-itto supportthis rule is that tl'repartiesgive up a
iegal righito contestthe amount in dispute,and thus considerationis given.
290lr$Irlrir,r
CONTRACTS
Release
REIEA5E A releaseis a conhactin which one par[uforfeitsthe right to pursuea legalclaim againstthe
A contractin which one partryforfeits
other party.Releases will generallybe binding if they are ( 1) given in goodfaith, (2) statedin
the rightto pursuea legalclaim
againstthe otherparty. a signedwriting (requiredby many states),and (3) accompaniedby consideration.5 Clearly,
partiesare better off if they know the extent of their injuries or damagesbefore signing
releases.
to5l Supposethat you are involved in an automobile accident causedby
@
Y ou can find an exampleof
IEEXAMPLE
Raoul'snegligence.Raoul offersto give you $2,000 if you will releasehin-rfrom further
liability resultingfrom the accident.You believe that this amount will cover the damage
a releaseform and the
informationthat shouldbe included to your car, so you agreeto and sign the release.Later you discoverthat the car repairs
in a releaseby goingto will cost$4,200.Can you collectthe balancefrom Raoul?The answeris normallyno; you
are limited to the $2,000in the release.Why? The reasonis that a valid contractexisted.
xwaiverp.htm. You and Raoul both assentedto the bargain (hence, agreementexisted),and sufficient
considerationwaspresent.Your considerationfor the contractwasthe legal detrimentyou
suffered(by releasingRaoul from liability, you forfeitedyour right to sue to recoverdam-
ages,should they be more than $2,000). This legal detriment was induced by Raoul's
promiseto give you the $2,000.Raoul'spromisewas,in turn, induced by your promise
not to pursueyour legai right to sue him for damages.p
Beforeagreeingto a release,a party should be certain of its terms.The following case
emphasizes this point.
f N THEWORDS
0F THEC0URT. . . FAWSETTr
chiefJudge.
ll'***nornrmmad
Qureshihad givenAttorneySchillingerclearand unequivocal
settlethe caseon behalfof Defendants
Oakridgeand Mr. Qureshi.
"trl?tlrt_"
On July28, 2006,Mr. Schillinger telephoned
Mr. Blumstein,
counselfor BP,and
offereda settlement
proposalwherebyoakridgewould pay to BP $263,616.95, the
amountallegedly due to BP for the unamortized
advanceof fundsunderthe Dealer
SupplyAgreement.
@
CONSIDERATION
Notto S u e
Co v enant COVENANT
An
NOTTOSUE
aRreement to substitutea
not to sue cloesnot alwavs bar further lecovery The parties contiactualobligationfor.someother
Unlike a release,a covenant lega1action based on a aciion based on a valid
obligation for some oti'rertype of type of tegal
simply substitute, ."";;;;i with Raoul not to sr-re claim.
that
the eariierexan"rpie) agree 1,61
valiclclaim. Suppose(r;li;;
2S2
IIEIIM
CONTRACTS
to pay,
for damagesin a tort action if he will pay for the damageto your car. If Raoul fails
vou can bring an action for breach of contract.
contract
Sometimes,individualsrely on promises,and such reliance n'rayform a basisfor
,ight, ,.rd duties. Under ihe doctrine of promissory estoppel (also called detrimental
PROMISSORY ESTOPPEL
A doctrinethat aPPlies when a ,fiiorrn1,a personwho has reasonablyrelied on the promise-ofanother can often obtdin
oromisormakesa clearand definite the
promiseon whichthe Promisee some measure of recovery.When the doctrine of promissoryestoppel is applied,
(barredor impeded) from revoking the promise. For the
justifiablyrelies.Sucha promiseis promisor(the offeror)is esiopped
bindingif lusticewill be better doctrine of promissoryestoppel to be applied, the following elements are required:
servedby the enforcement of the
promise. I There must be a clear and definite promise.
ESTOPPED
Barred,impeded,or Precluded. 2 The promiseemust justifiablyrely on the promise'
5 The reliance normally must be of a substantialand definite character.
4 iustice will be better servedby the enforcementof the promise'
l"ExTMFLE l0.lo1Your uncle tells you, "l'11pay you $1,500a week so that you won't
job, but your
haueto work anymore."In reliance on youl uncle's promise,you quii your
uncle refusesto pay you. Under the dochine of promissory estoppef you may be able to
enforcehi, pro-ir".6 Now your uncle makesa promise to give you $20,000 buy a car.
to
if you buy th" .", with youi own funds and he does not pay you, you may once again be
abie to enforcethe promiseunder this doctrine. E
num-
shoutd the doctrine of promissory estoppelbe opplied to promises of employmenf?A
come before the courts in which the story is strikinglysimilar:in reliance on
ber of caseshave
an offerof employment, a person has left a job, sold her or his home, and moved to another
gov-
location-onlyto learn that the offer has been revoked.In those jurisdictionsthat are
little
erned by the common law doctrineof employmentat wilt,7these personsoften have
in thesejurisdictions often hold that even though an employer has made an
recourse.Courts
offer of employment to a particular job candidate, under the at-will doctrine the employer
neednot hirethat Person.
Occasionally,however,a court will applythe doctrineof promissoryestoppelin such cir-
cumstances. Forexample,in one case,ThomasFreyhad beenworkingfor a firm at which he
of
had substantialbenefitsand would havebeen entitledto stockoptions.ThenAndrewTaitz
chassis,LLC, offered Frey a position, promising him a large bonus if the
workhorsecustom
promise,
company'searningsexceeded$39.1 million by the end of 2OO2.In relianceon that
Freyleft his job and took the position at Workhorse.
By the end ol 2OO2,projectionsindicatedthat Workhorse'searningswould exceedthe
the
requiredlevel.Freythereforebelievedthat he was entitledto the bonus when he left
companyin January2005. In the spring ol 2OO3, Frey asked for his bonus, but Taitz responded
Frey
that tecause Freyno longerworked for the comPany,he was not entitledto the bonus'
filed a lawsuitagainst Workhorse, claiming, among other things, that he was entitled to dam-
agesunder the doctrineof promissoryestoppelbecausehe had left a lucrativeand secure
positionto take the job at Workhorse'
AlthoughWorkhorseclaimedat the trial that its 2002 earningswere only around$37'6mil-
lion, the auditedfinancialstatementsit presentedhad been completedten monthslate and
Answers for the even-numberedquestionsin this tor Review sectioncon be found on this text's accomponyingWeb site ot
wrivwcengage.com/blaw/blt. Select"Chopter t0" and click on "For Review."
I What is consideration?
2 What is requiredfor considerationto be legallysr-rfficient?
5 \\4rat are someexamplesof contractsthat lack consideration?
4 What is an accordand satisfaction?
5 In wl-ratcircumstancesmight a promisebe enforceddespitea lack of consideration?
ffi
HypoTHETrcA[ ANDcAsEpR0Br.EMs
scENARros
t#-i ContractModification.Tabor is a buyer of file cabinetsrnanu- nets),Martin informs Thbor that becauseof inflation, Martin
facturedby Martin. Martint contractrvith Tabor calls for is losing money and will promiseto deliver the remaining
deliverl of fifty file cabinetsat $40 per cabinet in five equal thirty cabinetsonly if Tabor will pay $50 per cabinet.Tabor
installments.After deliveryof two installments(twenty cabi- agreesin writing to do so. Discusswl.retherMariin can legally