Business Law 2004-2005 Ms. Donna Lee Sirkis
NC OBJ 5.01 Explain when there is sufficient consideration to cause an agreement to be a legally enforceable contract.
I. Requirements of Consideration
A. Consideration is the exchange of benefits and detriments by the parties to an agreement.
B. Benefit - something that a party was not previously entitled to receive.
C. Determent - any loss suffered.
Three Types:
1. Giving up something, or promising to give up something, that you have a legal right to keep.
2. Doing something, or promising something that you have no legal right not to do.
3. Forbearance - not doing something that you have the legal right to do.
D. Characteristics of Consideration: There are 3 key characteristics for consideration:
1. Promises must involve the concept of a bargained-for-exchanged.
2. Something of Value must be involved.
3. The benefits and detriments promised must be legal and not unconscionable.
E. Legality of Consideration: the courts require that the consideration involved in an agreement be legal.
II. Adequacy of Consideration - The courts do not look into the adequacy of the consideration. That is, they do not look to see whether the value of the consideration was fair to both parties.
A. The court finds the contract unconscionable, that is, the contract is so one-sided that it unfairly oppresses on party and unreasonably favors the other party.
1. If a contract is claimed to be or appears unconscionable, the court may give the parties a reasonable opportunity to present evidence concerning the commercial setting of the contract.
III. Types of Consideration:
A. Money as Consideration: this is probably the easiest form to understand. One party will offer money in exchange for another’s party’s promise or performance.
B. Property and Services as Consideration: Before money was used as a medium for exchange, it was common to use property and services as consideration. This is often referred to as the barter system, in which goods and services are exchanged rather than money.
C. Disputed Amounts: If the parties to a contract cannot agree as to the actual amount owed, that amount is said to be in dispute. A dispute can be settled in:
1. Accord and Satisfaction: if the creditor accepts a payment that is less than the amount due as full payment. The acceptance by the creditor of less than what has been billed to the debtor is accord. The agree-to settlement as contained in the accord is the satisfaction. The dispute must be real, must occur in good faith, and must not be trivial.
D. Undisputed Amounts: If the parties have mutually agreed to a set amount of money in the contract, then the amount cannot be disputed.
IV. Special Applications of Consideration - Each promise made as a consideration for another promise must create a new obligation. If you promise to do something you are already legally bound to do, your promise does not create a new obligation and is not regarded as valid consideration.
A. Partial Payment Debt
B. Settlement of Disputed Claims - Suppose that there is an honest difference of opinion as to how much is owed. Parties often compromise on the amount owed, particularly in contracts for services.
C. Extension of Time for Payment
V. Consideration in Your Everyday Life
A. The following principles pertain to consideration in everyday situations.
1. To amount to consideration, the act done or promised must be legal and not involve any violation of the law.
2. If a person pays a debt in advance, it is something he or she is not legally bound to do. This would amount to consideration for settling the debt for a lesser amount.
3. Is a person has made a gift in the past, has performed services in the past as a gift, or has been paid for past services, he or she may not use these past performances as consideration for a new promise.
4. To constitute consideration, an act or a promise must be bargained for.
5. Consideration is the contractual element that distinguishes a legally binding agreement from all other types of agreements.
6. Because many charities depend upon contributions, the courts enforce charitable pledges as if they were contracts.
7. Usually, a party will offer money in exchange for another party’s promise or performance.
8. Some people prefer barter agreements that involve goods and services rather than money.
9. Generally, the courts do not get involved in determining how much consideration is enough.
10. Forbearance is a type of consideration that involves promising not to do something that you are legally entitled to do.
VI. Enforceable Agreements Without Consideration - Some agreements are enforceable without consideration. In certain circumstances the courts find that a promise influences the behavior of other people.
A. Promises Under Seal: A seal is a mark or an impression placed on a written contract indicating that the instrument was executed and accepted in a formal manner.
B. Promises After Discharge in Bankruptcy: It is possible for a person who has had his or her debts discharged in bankruptcy to decide to pay such debts voluntarily.
C. Debts Barred by Statutes of Limitations: This simply establishes a time frame within which a party is allowed to bring suit. Different states set different time limits for the collection of debt.
D. Promissory Estoppel - Under the doctrine of promissory estoppel a promise may be enforceable without consideration.
1. Promissory - containing or consisting of a promise.
2. Estoppel - restraint on a person to prevent him or her from contradicting a previous act.
E. Option: Sometimes an offeree will give consideration to an offeror in exchange for a promise from the offer open for specified period of time. This is known as an option. The offer, which is called a firm offer, or an irrevocable offer, must be signed by the offeror. The time permitted for acceptance cannot exceed three months.
F. Pledges and Subscriptions
1.Citizens and business firms are offer asked to sign pledges to support community projects.
2. Not all courts look at consideration for pledges or subscriptions in the same way. Some courts hold that the promises of other persons who have subscribed to the same fund amount to consideration.
VII. Unenforceable Agreements Without Consideration - Certain acts promises do not provide consideration. These include promises to make a gift, to obey the law, or to fulfill another preexisting duty.
A. Promise to Make a Gift - something given freely, for no consideration. Once given, a gift has the status of and executed contract, and the giver cannot force its return.
B. Promise to Obey the Law - everyone is obligated to obey the law, a promise to do so is no detriment.
C. Preexisting Duty - If a person is already under a legal duty to do something, a promise to do that some thing does not furnish consideration.
D. Past Consideration - Giving or exchanging benefits and detriments by the parties must take place when the contract is made. If consideration took pale in the past or is given for something that has already been done, the courts will not regard the consideration as legal.
E. Illusory Promise - For a binding contract to be formed, both parties must be under obligation to do something; otherwise, neither is bound to do anything. Some contracts are illusory; they have a false appearance. At first glance, they appear to bind both parties, upon further examination, however, it is clear that they do not obey.
F. Promise to Attend a Social Engagement - All contracts consist of agreements, but not all agreements consist of contracts.
NC OBJ 5.01 Consideration Word Search
B O Y T E H P G I F T A R T I E S M U C
F S R T C G I V E A N D R E C E I V E O
O C O O N E N S I D E R A T I O N I F N
R T S H A B E N E F I T E I R C O N T S
E P S R M A C S T I S T E O B E E N F I
B R I E R O R C I E A B L E E Y C I K D
E O M G O E F M M M I R U X N I H G A E
A M O D F E L B A N O I C S N O C N U R
R I R E R Y R M B T A R T T K Y D P R A
A S P L E K W G N T P A P S C Y X K C T
N O W P P S P X P E K C I J X R W M U I
C R J P T T T K Y Q S C Q I K B U I N O
E M M P S U O T I U T A R G Q S N P P N
D O V H A Y R O S U L L I R O N O D F A
L L U F P J V T I G O S H D U G E E Q C
P J H W O Y I S I T L E P P O T S E M O
C B M I U G E O Q K W F N K D U T W O R
E X W O G O K N T C U W N R S P J K B Y
I P L F J A T W Z T D E T R I M E N T A
U G D Q Y C X Q E V R M G Y S V G Z S T
1. Something that a party was not previously entitled to receive. ______
2. Exchange of benefits and detriments by the parties involved in a contract. ______
3. A type of loss suffered by a party to a contract. ______
4. Person receiving the gift. ______
5. Person giving the gift. ______
6. Not doing something that one has a legal right to do. ______
7. Something given freely. There is no consideration. ______
8. Some contracts are ______. At first glance, they appear to bind both parties.
9. This cannot be used for consideration. ______
10. This is a type of promise that is enforceable without consideration. ______
11. The person to whom the promise is made. ______
12. The person making the promise. ______
13. Type of estoppel that makes some promises enforceable without consideration. ______
14. When consideration is so inadequate that it shocks the conscience of the court. ______
NC OBJ 5.02 Identify traits of those parties lacking contractual capacity.
The Requirement of Capacity: To make a legally binding contract you have to have two elements, offer and acceptance, combine to make the third element, the genuine acceptance. Now we get into the next three elements to have a legal binding agreement. These final elements are capacity, consideration, and legality. Capacity relates directly to the involvement of minors in contracts.
II. Minor’s Rights and Obligations:
A. Capacity is the legal ability to enter a contract. Rebuttable presumption, can be challenged in a court of law, if the minor falsely allowed the other party to assume they had capacity to enter the contract.
B. Definition of Minority: A person who has not yet reached the age of legal adulthood, usually referred to as the age of majority, is considered a minor. A person who has not reached the age of majority is still in his or her minority.
C. Legal Age: In 1972, when the voting age was lowered from 21 to 18, most states also lowered the age of majority from 21 to 18. The exception to this is the ability to buy alcohol, in which most states have raised the legal drinking age to 21.
D. Emancipation and Abandonment: When a minor is no longer under the control of a parent they are considered emancipated. This means they are responsible for their contracts. When a minor marries or leaves home, giving up all rights to parental support, is considered emancipated. These individuals are said to have abandoned the protection afforded them as minors.
E. Misrepresentation of Age
If a minor claims to be over the age of majority, then he or she has committed fraud. (Fraud is a wrongful act, and minors are responsible for their wrongful acts.)
III. Contracts of Minors:
A. Voidable Contracts
Contracts by minors are voidable by the minor.
B. Returning the Merchandise
If a minor still has the merchandise he or she received upon entering a contract that merchandise must be returned when the contract is disaffirmed.
C. Disaffirming the Whole Contract
A minor may not affirm parts of a contract that are favorable and disaffirm the unfavorable parts.
D. Disaffirming Contracts Made With Other Minors
When two minors enter into a contract with each other, both of them have the right to disaffirm the contract. This means that both enter the contract with the risk that the other may attempt to get out of the contract.
E. Ratification of Minors’ Contracts
After reaching the age of majority, a person can ratify, or approve, contracts made during minority. Ratification ends the privileges that a person had while still a legal “child.”
F. Contracts for Necessaries
A minor is held responsible for the fair value of necessaries. Necessaries, sometimes called necessities, include food, clothing, shelter, and medical care.
G. Special Statutory Rules
Many states have made changes in their statutes that control the capacity of minors to enter into contracts. The law warns adults against contracting with minors, except for necessaries.
IV. Other Contractual Capacity Rules
As you have seen, parties to a contract must have the capacity to enter into that contract. A minor may disaffirm a contract into which he or she has entered.
A. Mentally Impaired People
The right given to minors to disaffirm contracts is also given to the mentally impaired for the same reason. They are considered unable to make sound judgments. A guardian may be appointed to oversee the mentally impaired person’s contracts.
B. Intoxicated Persons
Persons who are intoxicated at the time that they enter a contract are sometimes able to disaffirm those contracts. The contracts are treated in much the same way as contracts of minors and the mentally impaired.