3. CONTRACTS: Consideration

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rubidoux
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3. CONTRACTS: Consideration
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2012-05-18 14:10:47
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Consideration
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  1. ELEMENTS OF CONSIDERATION
    There must be a bargained for exchange between the parties and that which is bargained for must be considered of legal value or, as it is traditionally stated, it must constitute a benefit to the promisor or a detriment to the promisee.

    The benefit need not have economic value. Peace of mind or the gratification of influencing the mind of another may be sufficient to establish bargained-for consideration.

    • If something was already given or performed in the past, will not normally be considered consideration because it was not given in exchange for the promise when made. There are exceptions to this rule:
    • --> debt barred by a technical defense -- courts will enforce a new promise if it is in writing or has been partially performed, but only to the extent of the new promise.
    • --> some courts will enforce a promise if it is based on a material benefit that was previously conferred by the promisee on the promisor and if the promisee did not intend to confer the benefit as a gift -- includes situations where promisee performed an act at promisor's request or promisee performed an unrequested act during an emergency.

    • Courts of law normally will not inquire into the adequacy of consideration. However, courts of equity may inquire into the relative values and deny an equitable remedy if they find a contract to be unconscionable.
    • --> if the consideration is only token, entirely devoid of value, it will usually not be legally sufficient, this indicates a gift rather than a bargained-for exchange
    • --> where there is a possibility of value in the bargained-for act, adequacy of consideration will be found even though the value never comes into existence
  2. LEGAL BENEFIT AND DETRIMENT THEORIES
    MAJORITY RULE: detriment to the promisor in performing an act or making a promise is the exclusive test of consideration. the fact that this act or promise may confer a legal benefit on the other party, taken alone, is not sufficient consideration.

    MINORITY: either detriment or benefit may suffice

    2nd RESTATEMENT: only Q is whether something was bargained for and given in exchange
  3. PREEXISTING LEGAL DUTY
    The promise to perform or the performance of a preexisting legal duty will not be sufficient consideration.

    EXCEPTIONS:

    -- if promisor has agreed to add to or vary preexisting duty, such as by accelerating perfomance, there is consideration

    -- a promise to perform a voidable obligation is enforceable despite the absence of new consideration

    -- a new promise constitutes consideration even if same promise was owed to a 3rd party previously

    -- if the scope of the legal duty owed is the subject of honest dispute, then a modifying agreement relating to it will ordinarily be given effect as the compromise by each party is a detriment

    -- if an unforeseen difficulty rises to the level of impracticability, such that the duty of performance would be discharged, most states will make it an exception to the preexisting duty rule

    -- at common law a contract modification is unenforceable unless it is supported by new consideration, under art2 such a modificatin sought in good faith is binding without consideration
  4. FORBEARANCE TO SUE AS CONSIDERATION
    The promise to refrain from suing on a claim may constitute consideration. Even if the claim is invalid, in law or in fact, if the claimant reasonably and in good faith believes his claim to be valid, forbearance of the legal right to have his claim adjudicated constitutes detriment and consideration.
  5. MUTUALITY
    Consideration must exist on both sides of the transaction, but mutuality will be found to exist in certain situations even though the promisor has some choice or discretion:

    -- requirements and outputs contracts -- consideration exists, as the promisor is suffering a legal detriment in that he has parted with the legal right to buy or sell the goods he may need or manufacture from or to another source.

    -- conditional promises -- enforceable no matter how remote the contingency unless the condition is entirely within the promisor's control, where condition is buyer's satisfaction, consideration exists because the buyer has the duty to act in good faith and only reject goods if he is truly dissatisfied.

    -- reserving a right to cancel or withdraw does not invalidate consideration if this right is in any way restricted, ie, must include reasonable notice.

    -- voidable promises are not held objectionable on mutuality grounds
  6. SURETY
    A suretyship contract involves the promise to pay the debt of another. It's not enforceable unless it is supported by consideration. If a surety is compensated, the compensation will serve as consideration. If it is gratuitous, the consideration requirement depends on timing:

    --> if the gratuitous surety makes his promise to pay before or at the same time as the creditor performs or promises to perform, the creditor's performance or promise will serve as consideration for the surety's promise because the creditor has incurred a detriment in exchange for the surety's promise.

    --> if a gratuitous surety does not make his promise until after the creditor has performed or made an absolute promise to perform, there is no consideration to support the surety's promise because of the preexisting legal duty rule -- the creditor has not incurred any new detriment in exchange for the surety's promise. Thus, the surety's promise is unenforceable.
  7. RIGHT TO CHOOSE AMONG ALTERNATIVE COURSES
    A promise to choose one of several alternative means of performance is illusory unless every alternative involves soe legal detriment to the promisor. However, if the power to choose rests with the promisee or some third party, the promise is enforceable as long as at least one alternative involves some legal detriment. An actual selection of an alternative that involves legal detriment would cure the illusory promise even if promisor made the choice.
  8. PROMISSORY ESTOPPEL OR DETRIMENTAL RELIANCE
    Consideration is not necessary if the facts indicate that the promisor should be estopped from not performing. A promise is enforceable if necessary to prevent injustice if:

    (1) the promisor should reasonably expect to induce action or forbearance;

    (2) of a definite and substantial character;

    (3) and such action or forbearance is in fact induced.

    The above is from 1st restatement, 2nd restatement omits the definite or substantial character element. Under 1st restatement, a court will award expectation damages (what was promised under the contract), whereas a court following the 2nd restatement would award reliance damages which is usually less than expectation, but in theory could exceed them.

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