Chapter 12: Consideration 1
Chapter 12
Consideration
Answers to Learning Objectives/
Learning Objectives Check Questions
at the Beginning and the End of the Chapter
Note that your students can find the answers to the even-numbered Learning Objectives Check questions in Appendix E at the end of the text. We repeat these answers here as a convenience to you.
1A.What is consideration? Consideration is the value exchanged for a promise. To be legally sufficient, consideration must be “something of legal value.” This may include (1) a promise to do something that one has no prior legal duty to do, (2) the performance of an act that one is otherwise not obligated to do, or (3) the refraining from an act that one has a legal right to do.
2A.What are some examples of contracts that lack consideration? Under most circumstances, a promise to do what one already has a legal duty lacks consideration. Promises made with respect to events that have already taken place lack the element of bargained-for exchange. Also, if a contract expresses such uncertainty of performance that the promisor has not actually promised to do anything, the promise is without consideration and unenforceable.
3A.What is an accord and satisfaction? In an accord and satisfaction, a debtor offers to pay in satisfaction of an obligation, and a creditor accepts, a lesser amount than the creditor originally claimed to be owed. The accord is the agreement to pay and to accept less, and the satisfaction is the execution of the accord.
4A.In what circumstances might a promise be enforced despite a lack of consideration? Under the doctrine of promissory estoppel (or detrimental reliance), a promisor (the offeror) is estopped from revoking a promise even in the absence of consideration. There are three required elements:
1.A clear and definite promise.
2.The promisee’s justifiable reliance on the promise.
3.Reliance of a substantial and definite character.
Answers to Critical Thinking Questions
in the Cases
Case 12.1—Critical Thinking—Social Consideration
When a non-compete agreement is entered into after employment has begun, would continued employment constitute sufficient consideration for the agreement? Explain. No, continued employment does not constitute consideration for a non-compete agreement entered into after employment has begun. The employee who is asked to sign such an agreement is already employed. The agreement requires new consideration for its support. This might consist of, for example, a change to the employment relationship such as a term of duration imposed on previously at-will employment, or additional compensation or another benefit.
In the words of the court in the Baugh case, “When a covenant not to compete is entered into after the inception of employment, separate consideration, in addition to continued at-will employment, is necessary in order for the covenant to be enforceable. There is no consideration when the contract containing the covenant is exacted after several years' employment and the employee's duties and position are left unchanged.”
Case 12.2—Critical Thinking—Economic Consideration
Why would any party agree to a covenant not to sue? The simple answer is money. When a party believes it to be an advantage to agree to a covenant not to sue, that party is most likely to agree. In the example in the text, the party whose car was damaged in the accident agrees not to sue if the other party will pay for the damage. This agreement saves the time and money that a suit for damages might require for both parties.
In the Already case, the covenant not to sue has similar advantages for the parties—both can continue to do business without changing their product lines and without the costs of trademark infringement or invalid trademark litigation.
Case 12.3—Critical Thinking—Legal Consideration
On remand, the lower court was ordered to determine the appropriate remedy. Should Teresa be awarded specific performance to compel a transfer of the land? Or should she obtain damages? Discuss. In a case of promissory estoppel, the factors that bear on whether any relief should be granted also bear on the character and the extent of the remedy. If relief is measured by the terms of the Dows’ promise, specific performance would be the most appropriate remedy.
If relief is measured by the extent of Teresa’s reliance rather than by the terms of the Dows’ promise, however, damages based on the value of the house or the land might be more appropriate. Because the Dows have not been unjustly enriched by the construction of the house—Teresa lives in it—damages should not put their daughter in a better position than specific performance would. Thus, it would not be proper to award consequential damages, which could be more costly to the Dows than specific performance. The most appropriate measure of damages might be to award Teresa the value of the land. The construction costs saved due to the efforts contributed by Jeffrey might be figured into the mix.
Answers to Questions in the Reviewing Feature
at the End of the Chapter
1A.Elements
Yes, there was an offer that was accepted with consideration. The parties agreed to the terms of the deal, which included cash for the building and the labor to take the building down and put it back together.
2A.Principle
Under the rule of unforeseen difficulties, a change in the terms may be allowed because of unforeseen difficulties, although that rule is not easy to have applied.
3A.Promise
No, John cannot enforce the promise because it is a gift being offered. At this point in their dealings, the neighbor is making a promise with no consideration from John, so it is a gift, not a bargained-for exchange.
4A.Doctrine
Assuming the neighbor knew about the income John was losing by counting on the deal as discussed, John might recover under the doctrine of promissory estoppel, which is when one has reasonably relied on the promise of another.
Answer to Debate This Question in the Reviewing Feature
at the End of the Chapter
Courts should not be able to rule on the adequacy of consideration. A deal is a deal. Courts should not accept to rule on the adequacy of consideration because in so doing, they create a moral hazard situation for anyone who, after the fact, doesn’t think she or he “got a good deal.” In other words, if those who enter into agreements know that they can later avoid their contractual obligations by claiming that the consideration was inadequate, they will take less time and resources to determine if the agreement is correct, appropriate, and fair.
Sometimes people are tricked into entering into agreements for which they receive grossly unfair consideration. Fraud might be involved. Undue influence (duress) could be another reason. In such situations, these individuals should have access to the court system to redress their grievances. To deny them this access would be unfair.
Answers to Issue Spotters
at the End of the Chapter
1A.In September, Sharyn agrees to work for Totem Productions, Inc., at $500 a week for a year beginning January 1. In October, Sharyn is offered the same work at $600 a week by Umber Shows, Ltd. When Sharyn tells Totem about the other offer, they tear up their contract and agree that Sharyn will be paid $575. Is the new contract binding? Explain. Yes. The original contract was executory. The parties rescinded it and agreed to a new contract. If Sharyn had broken the contract to accept a contract with another employer, she might have been held liable for damages for the breach.
2A.Before Maria starts her first year of college, Fred promises to pay her $5,000 when she graduates. She goes to college, borrowing and spending far more than $5,000. At the beginning of the spring semester of her senior year, she reminds Fred of the promise. Fred sends her a note that says, “I revoke the promise.” Is Fred’s promise binding? Explain. Yes. Under the doctrine of detrimental reliance, or promissory estoppel, the promisee is entitled to payment of $5,000 from the promisor on graduation. There was a promise, on which the promisee relied, the reliance was substantial and definite (the promisee went to college for the full term, incurring considerable expenses, and will likely graduate), and it would only be fair to enforce the promise.
Answers to Questions and Case Problems
at the End of the Chapter
Business Scenarios and Case Problems
12–1A. Preexisting duty
Tuan’s claim that no contract existed because Lewis had given no consideration for Tuan’s promise is supported by the preexisting duty rule. Lewis was already obligated to Ben to do his best to win the race, and the same consideration (attempting to win the race) could not be used in a second contract with Tuan. Because Lewis had a preexisting duty to try to win the race, a majority of courts would likely hold that Tuan was correct in arguing that no contract existed because Lewis gave no consideration.
12–2A.Past consideration
Past consideration is no consideration; therefore, a promise to pay for an event that has already taken place is not enforceable. There is nothing to bargain for in this situation. Also, there is no consideration if the promise is based on a moral duty (obligation) to pay. Because Daniel is presumed to be an adult responsible for his own care, Fred has no legal duty of care to Daniel. Thus, Fred’s promise cannot be enforced by the elderly couple, because Fred had at best only a moral obligation to reimburse them for the care rendered, and the promise to pay was for an event already performed.
Because of the harshness of this rule, a few states have passed statutes enforcing such agreements (usually only up to the value of care received), or a court will enforce such a promise if the promisor received a substantial valuable benefit (such as being saved from physical harm or financial disaster). In this situation, though, it is unlikely that the court would hold for the elderly couple, as the recipient of the benefit was Daniel, and not the promisor, Fred.
12-3A. Accord and satisfaction
The accord and satisfaction created by Merrick’s cashing the check would bar any recovery. An accord and satisfaction is created by cashing a check that is accompanied by a letter with restrictive language. In this case, the language in the letter is unambiguous. The check was the “final settlement.” There is no doubt as to what Maine Wild intended or what should reasonably have been understood by Merrick. Merrick had the choice of accepting the check on these terms or of returning it—he chose to accept it.
12–4A.Past consideration
The non-compete agreement fails for lack of consideration. Promises made in return for actions that have already taken place are unenforceable. They lack consideration because the element of bargained-for exchange is missing.
If the non-compete agreement had been a part of the original employment bargain, then there may have been a bargained-for exchange. But Hernandez signed the agreement when he was already working for Access so the employment is not consideration. This “afterthought” agreement could have been valid if it had been supported by a pay increase or some other new benefit. But Hernandez did not receive any new benefit for the agreement. Because the agreement was not supported by consideration, it was not an enforceable contract.
In the actual case on which this problem is based, the court ruled in Hernandez’s favor on the reasoning stated above.
12–5A.Rescission
Yes, the Sharabianlous have a good argument for the return of their deposit and rescission of the contract. Rescission is the unmaking of a contract so as to return the parties to the positions that they were in before the contract was made. When ordered by a court, rescission is intended to bring about substantial justice by adjusting the equities between the parties.
Here, rescission is appropriate because the contracting parties were mutually mistaken as to the condition of the property. The environmental contamination substantially reduced the property’s value. When an agreement to buy property is rescinded, the seller must refund all payments received in connection with the sale. Hence, the Sharabianlous should be refunded their deposit.
In the actual case on which this problem is based, the court ordered a refund of the Sharabianlous’ deposit.
12–6A.Spotlight on Kansas City Chiefs—Bargained-for exchange
No, there was no consideration for the arbitration provision. Consideration is required to create a bilateral contract. Consideration is something of legally sufficient value given in return for a promise. The “something of legally sufficient value” may consist of either a promise to do or refrain from doing something or a transfer of something of value.
In this problem, the arbitration “agreement” contains promises made only by Sniezek. Only Sniezek agrees to comply at all times with and be bound by the constitution and bylaws of the National Football League (NFL). Only Sniezek agrees to refer all disputes to the NFL Commissioner for a binding decision. Only Sniezek agrees to release the Chiefs from any related claims on the Commissioner's decision. Nowhere in the document do the Chiefs agree to do anything. Thus, the document does not contain any promises by the Chiefs to constitute sufficient consideration for Sniezek's promise to forgo her right of access to the courts and arbitrate her claims against them.
The Chiefs might argue that the “agreement” was a condition of Sniezek's keeping her employment, which the Chiefs had already offered her and she had already accepted. But the document did not alter the nature of her employment relationship—no employment contract was created, no additional compensation or other benefit was offered. Consequently, allowing Sniezek to stay on the job was not sufficient consideration to support a promise to arbitrate.
In the actual case on which this problem is based, Sniezek filed a charge of age discrimination against the Chiefs in a Missouri state court, and the Chiefs filed a motion to compel arbitration. The court denied the motion, and a state intermediate appellate court affirmed the denial for the reasons stated above.
12–7A.Business Case Problem with Sample Answer—Consideration
Citynet’s employee incentive plan was an offer for a unilateral contract. A Citynet employee who stayed on the job when he or she was under no obligation to do so could be considered to have accepted Citynet's offer and to have provided sufficient consideration to make the offer a binding and enforceable promise. Consideration has two elements—it must consist of something of legal value and must provide the basis for the bargain between the parties. A unilateral contract involves a promise in return for performance. The promisor becomes bound to the contract when the promisee performs, or in many cases begins to perform, the act. Both the promise and the performance have legal value.
Here, Citynet set up an employee incentive plan “to attract and retain experienced individuals.” The plan provided that a participant who left Citynet’s employ could “cash out” his or her entire vested balance. When Ray Toney terminated his employment and asked to redeem his vested balance, however, Citynet refused. But Toney had long stayed on the job when he did not have to. This was sufficient consideration to make Citynet’s offer under the incentive plan a binding and enforceable contract with Toney.
In the actual case on which this problem is based, a West Virginia state court issued a judgment in Toney’s favor. The West Virginia Supreme Court of Appeals affirmed, on the reasoning and principles stated above.
12–8A.A Question of Ethics—Promissory estoppel
1.The elements of promissory estoppel are (1) a promise, (2) the promisee’s justifiable reliance on the promise, (3) reliance of a substantial and definite character, and (4) justice better served by the enforcement of the promise. In the facts of this problem, under a theory of promissory estoppel, Aceves’s best strategy is to argue that the bank’s promise to work with her in modifying the loan was enforceable, that she relied on the promise by forgoing bankruptcy protection, that the bank breached its promise by foreclosing on her home, and that justice would be better served by allowing her to stay in her home and work out a modified schedule of payments with the bank.
In the actual case on which this problem is based, the court concluded that the bank promised to work on a loan modification if Aceves did not seek relief in bankruptcy, Aceves reasonably relied on this promise when she withdrew her filing, and this decision allowed the bank to foreclose on the property.
2.As for unethical behavior, U.S. Bank clearly misrepresented it was willing to forgo foreclosure while expediting foreclosure proceedings. The bank apparently never intended to work with Aceves to modify her loan. It promised to do this only to convince her to forgo bankruptcy proceedings so that the bank could foreclose on the property. The elements of fraud are similar to the elements of promissory estoppel, with the additional requirements that a false promise be made and that the promisor know of the falsity when making the promise. It is easy to view this conduct as unethical. Acts that support claims for promissory estoppel and fraud, as occurred in these facts, are patently unethical.