Contract Law: Consideration

Transcription

1 Contract Law: Consideration Overview Not all promises are enforceable Example: Gratuitous Promises To be enforceable, the contract must be supported by consideration Consideration Legal value, bargained for and given in exchange for an act or a promise Promisee must give something of value in exchange for the promise Promise to do or refrain from doing something Thorne v. Deas (NY 1809) Part owner of Sea Nymph promised to insure ship When ship was lost, not liable to co-owners no consideration Copyright Thomas P. Langdon. All Rights Reserved. 1

2 Important aspects of Consideration Limits scope of promisor s liability for his promises Mechanical application often produces unfair results Elements of Consideration Legal Value An act (unilateral K) or promise (bilateral K) Adequacy of consideration does not matter Laissez-faire philosophy Have right to make bad contracts Exceptions Disguised gifts not enforceable K Inference of fraud, duress, lack of capacity or unconscionability Elements of Consideration Bargained-for Exchange Act or promise must have been bargained for and given in exchange for the promise It is the essence of a consideration that, by the terms of the agreement, it is given and accepted as the motive or inducement of the promise. - Oliver Wendell Holmes The Common Law (1881), p. 239 Copyright Thomas P. Langdon. All Rights Reserved. 2

3 Exchanges failing to Meet Illusory Promises Promise that does not bind the promisee Potential Issues Cancellation/Termination Clauses Output & Requirement Contracts Exclusive Dealing Contracts Exchanges failing to Meet Pre-existing Duties Performing or agreeing to perform a preexisting duty is not consideration Issues Preexisting Public Duties Example: Promise not to commit a crime. Preexisting Contractual Duties Applies when contracts are modified Mechanical application could be unfair when parties have actually agreed to fair modification of the contract Enforcing Modifications of pre-existing contractual duties Provide additional consideration Unforeseen circumstance defense Court may enforce if a party could not reasonably be expected to have foreseen the circumstance causing modification Constructive Termination Parties mutually agree to terminate old contract and enter into new contract Each party agrees to release the other from prior contractual obligations in exchange for the other party s promise to do the same. Must be Fair and free from coercion Copyright Thomas P. Langdon. All Rights Reserved. 3

4 Pre-existing Duty Rule & the UCC No consideration required for firm offers [2-205] Agreement to modify contract needs no consideration to be binding [2-209(1)] Requirements of good faith & unconscionability still apply Unfair & coerced changes unlikely to be enforced Planning Issues- If contract requires written modifications, this clause is enforced [2-209(2)] If price of goods is $500 or more, Code s statute of frauds section must be satisfied [2-201, 2-209(3)]. Pre-Existing Duty & The CISG CISG allows contracts to be modified by mere agreement of the parties A contractual provision requiring modifications to be in writing is enforceable Pre-Existing Duty to Settle Debts Debtor offers creditor less than creditor is demanding as full payment Liquidated Debt due & certain Creditor s promise to discharge for part payment is unenforceable for lack of consideration Unliquidated Debt good faith dispute about existence or amount Settlement called accord & satisfaction Creditor cannot maintain action to recover the remainder of the debt that he alleges is due Copyright Thomas P. Langdon. All Rights Reserved. 4

5 Additional Debt Issues Composition Agreements Agreement to accept stated percentage as full payment Generally enforced even though no additional consideration Forbearance to Sue Valid consideration Exchanges failing to Meet Past Consideration Not consideration at all Issues Moral Obligation Generally, promises made to satisfy preexisting moral obligation are unenforceble Exceptions to the Consideration Requirement Promissory Estoppel Consider Thorne v. Deas (Sea Nymph case) Promises to Pay Debts Barred by SOL Promises to pay debts barred by bankruptcy discharge Charitable subscriptions Copyright Thomas P. Langdon. All Rights Reserved. 5