12-1 Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

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3•Introduction to Contracts•The Agreement: Offer

•The Agreement: Acceptance•Consideration

•Reality of Consent

Contracts

PA

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3•Capacity to Contract

•Illegality•Writing

•Rights of Third Parties•Performance and Remedies

Contracts

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Consideration

PA ET RHC 12

Make yourself necessary to someone.

Ralph Waldo EmersonThe Conduct of Life (1860)

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Learning Objectives

• Define concept of consideration, list elements, and explain significance

• Explain why illusory promises, past consideration, and promises to perform preexisting obligations are not consideration

• Determine what is a valid contract modification

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• Consideration is legal value bargained for and given in exchange for an act or a promise

Elements of Consideration

• Purely gratuitous promises are not enforceable because not supported by consideration• Thorne v. Deas

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• Consideration in the form of an act or promise may have legal value if the person acting of promising– Refrains from doing something the person

has the legal right to do • Example: Hamer v. Sidway

– Does something the person had no prior legal duty to do

• Generally, courts will not examine adequacy of consideration

Legal Value of Consideration

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• A promisee’s act or promise must have been bargained for and given in exchange for the promisor’s promise– Example: Gottlieb v. Tropicana Hotel

and Casino in which participating in a promotion that benefited the company was adequate consideration to form a contract

Bargained-for Exchange

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• Illusory promises• Preexisting duties• Past consideration

Exchanges That Are Not Consideration

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• If promisee’s promise really does not bind promisee to do or refrain from doing a thing, promise is illusory and cannot serve as consideration– Example: Heye v. American Golf Corporation,

Inc. in which an employee successfully claimed lack of consideration for an arbitration clause in a contract because mutual obligation did not exist

– AGC’s promise to arbitrate was illusory since they could amend the contract at any time

Illusory Promises

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• As a general rule, performing or agreeing to perform a preexisting duty is not consideration– Promisor in such a case has effectively

made a gratuitous promise

• Includes public duties (obey the law) and preexisting contractual duties

Preexisting Duties

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• General rule is an agreement to modify an existing contract requires mutual assent and new consideration

• In Margeson v. Artis, Iowa Supreme Court held that attempt to modify contract failed since Margesons had a preexisting duty to sell business under terms of original contract and new consideration not provided

Preexisting Duties & Contract Modification

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• Liquidated debts are debts in which parties have no dispute about the existence or amount of the debt– A creditor’s promise to discharge a

liquidated debt for part payment of the debt at or after its due date is unenforceable for lack of consideration

• If there is a dispute about the existence or amount of the debt, the debt is unliquidated – Settlement agreements are enforceable

Preexisting Duties & Settlement Agreements

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• Past consideration is an act or benefit given in the past that was not given in exchange for the promise in question, thus it cannot be consideration

Past Consideration

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• Promissory estoppel, because a donative promise is not a bargained-for exchange– Example: Skebba v. Kasch

• State statutes that extend promises to pay debts that have been barred by statute of limitations or bankruptcy discharge

• Charitable subscriptions (like promissory estoppel)

Exceptions to Consideration Requirement

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Thought Question

• Your Aunt agrees to buy you a new car when you graduate if you earn straight “A” grades during your senior year. You earn those grades. Have you provided legally sufficient consideration?