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Consideration is one of the four essential elements of a contract. We were first introduced to it in chapter 9. In everyday usage, the word consideration means kindness or care. In the law, it means something very different.

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(Read slide.)So consideration is a thing of value that is given by one party to another. It must

have LEGAL VALUE and it must be BARGAINED FOR. We will learn what these two expressions mean on the slides that follow; but first, let’s take a brief look at the doctrine of consideration.

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A doctrine is like a policy. The doctrine of consideration says that…(read slide.) Notice that the word “exchanged” is present, and that the expression “something of value in the eyes of the law” is present. Let’s take a closer look at the two key components of this definition.

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The first key component we want to look at is this question of what constitutes “legal value.” (Read second bullet point.)

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Here’s our answer. (Read bullets.)Let’s do two examples.

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He won’t win, not because she’s his mother, but because he gave her no consideration to make her promise to him enforceable in court. It is a noncontractual promise because it lacks consideration. This one’s easy, because Mike gave nothing to his mother. What if the thing the promisee gives has no value to the promisor? Let’s look at an example and see.

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This case is called Hamer versus Sidway, even though both the uncle and the nephew in the case were named William Story.Here’s what happened: (Read slide.)This 1891 case is described on page 274. Who won?Mr. Hamer won, right? Why?

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The answer is contained on this slide.The younger Mr. William Story refrained from doing several things which; at that time in American history, he had a legal right to do, even though he was a minor. Notice the word “or” in the middle of this slide. All the promisee has to do is ONE of these two things. If that’s what was bargained for – meaning if that’s what the promisor appears to have wanted from the promisee in the negotiations – then forbearance – refraining from doing something you had a legal right to do –functions perfectly well as consideration to make the promise a contractual one –meaning one that is enforceable in court.

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The estate argued that the forbearance was of no value to the uncle; and in fact that the beneficiary of the forbearance was the nephew himself. But consideration need not be of benefit to the promisor. It is sufficient that the consideration is a DETRIMENT to the promisee.Again, notice the word “or” in the middle of this slide.The younger Mr. William Story refrained from engaging in activities he had a legal right to engage in. That will be presumed by the court to be a detriment to him. Any foreclosure of your options – any shortening of the list of the things you have a legal right to do – will be presumed to be a detriment.

Note that in the vast majority of contracts, the same act by the promisee will be both a detriment to him and a benefit to the promisor.

So for example, if Phil promises to pay me $150 for my used surfboard, his promise is both a detriment to him and a benefit to me. But it only needs to be ONE OR THE OTHER to function as CONSIDERATION. That’s what we learn from the Hamer v. Sidway case. It doesn’t have to be both. My promise to Phil – to give him my used surfboard when he gives me the $150 – is both a detriment to me and a benefit to Phil. But it only needs to be ONE OR THE OTHER to function as CONSIDERATION.

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Phil’s promise to pay me $150 functions as the CONSIDERATION – the thing of legal value - that makes MY PROMISE legally enforceable. My promise to give my used surfboard in exchange for the $150 is the CONSIDERATION – the thing of legal value - that makes PHIL’S PROMISE legally enforceable. The doctrine of consideration says that EACH PROMISE MUST BE SUPPORTED BY CONSIDERATION.Phil is both a promisor and a promisee. He makes one promise and I make one promise. For each promise made, the PROMISEE must have given something of legal value in exchange to make the promise legally enforceable.

Court says “Is this promise legally enforceable? Yes, because the promisee gave something of legal value in exchange. The SELLER is the promisee with regard to this promise. Now let’s look at the other promise. Is this promise legally enforceable? Yes, because the promisee gave something of legal value in exchange. The BUYER is the promisee with regard to this promise. Analysis complete. Both promises are supported by consideration.”

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So far, we have had one example where the son gave nothing, and that made the mother’s promise a noncontractual promise; and we have had one example where there was an exchange, and it met the test of consideration.In the next 13 slides, we will explore three specific situations in which there is a two-way exchange, yet the courts say there is no consideration and no contract. Those three exceptions are called (read bullets.)Along the way, we will also explore two exceptions to the second situation listed here: illusory promises. Those two exceptions are called “output contracts” and “requirements contracts.”Let’s get started.

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Despite it’s name, past consideration is not consideration at all.Because it was not bargained for in an exchange, past consideration is not valid consideration.This is the third oxymoron we have encountered in this class. The first two were “quasi-contract” and void contract. Each of those sounds like a kind of contract, but they are not.Let’s do two examples. First:Suppose that Erin fixes Dave’s car stereo just to be nice; and that when she’s finished, it sounds so good that Dave says (read quote.)The fixing of the car stereo has legal value, but it was NOT BARGAINED FOR. It did NOT INDUCE THE PROMISE to pay $100. It could not have, since it was in the past when the $100 was offered. It therefore cannot and does not function as consideration. There is no contract here. Under the law, Dave need never pay Erin the $100. Note that many of us might say that Dave has a moral obligation to pay Erin the money, but he does not have a legal one. Now let’s do our second example.

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This case is in your book on page 267. If you have not already done so, pause this presentation and read this case, then re-start the presentation.

(Pause)(Read first bullet.)He promised her 5 percent of the company’s stock, right? Why?Well, we’re not told why, but we can surmise that it was probably in appreciation of

her years of past service. This should start sounding a lot like the car stereo example we just did.

What did the trial court do?They granted a motion for a directed verdict filed by International Wood Products.

This means International Wood Products won the case at the trial court level.We learned about directed verdicts in chapter 3.To refresh your memory, a motion for a directed verdict is generally filed after all

the testimony in the trial has been heard. International Wood then filed a motion that there are no remaining material (meaning important) issues of fact for the jury to determine; and that based on the established facts, they must win the case under the law, so there is no need to let the jury deliberate. The judge granted that motion, giving victory to International Wood and ending the case before the jury had adjourned for deliberation.

What did Ms. Kelsoe do?

She appealed the case, right?I’m not sure why we’re seeing the case at the state Supreme Court without being told what

happened at the state appeals court level. That can happen under various circumstances, but I’m not sure which one caused it to happen in this case. At any rate, we’re looking at a state Supreme Court decision here.

(Read third bullet.)They affirmed the trial court decision to grant the motion for a directed verdict. They

confirmed victory for International Wood. International Wood may have had a moral obligation to give Ms. Kelsoe the 5% of the company’s shares, but they had no legal obligation to do so. Why not?

Because she didn’t offer anything of value going forward to make their promise binding as a contractual promise.

Question: At trial, International Wood’s lawyer got Ms. Kelsoe to admit she had never promised to “stay on forever,” or to “stay on for five years” in return for the promise of stock. Why did he ask these questions?

Answer: If Ms. Kelsoe had made such a promise, there would have been valid consideration on both sides, and Ms. Kelsoe could have enforced the company’s promise. The lawyer was trying to demonstrate that Ms. Kelsoe gave no consideration, and thus could not enforce International Wood’s promise.

Question: Didn’t the company’s lawyer take a great risk in asking about what Ms. Kelsoe had promised? If she had said, “I promised to stay for five years, and in return they promised me the stock,” wouldn’t that have been fatal to the defendant’s case?

Answer: There was no real risk because the lawyer presumably asked the same question during a deposition. To ask the question for the first time during trial would be terrible legal work, but this lawyer knew exactly the answer he was going to get.

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…because there is a zero percent chance the promisor will be inconvenienced by the alleged promise.

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This case is on page 276 of your textbook. This is a You Be The Judge case. (Pause)(Read first bullet.)That is the legal issue before the Texas Court of appeals in this case.Who do you think won? Are you persuaded by the argument for Culbertson, or are you

persuaded by the argument for Brodsky?The argument for Brodsky is a clever one. It tries to shift the question a little bit. It says

“the purpose of the earnest money deposit was to get Mr. Brodsky to perform the necessary tests on the land on a timely basis, so he could decide whether he wanted to buy it, and he did perform those tests, therefore you should enforce Mr. Culbertson’s promise to hold the offer to sell open for 60 days.” But this argument contains a false premise. The purpose of an earnest money deposit is to make the probability that Mr. Brodsky will be inconvenienced by his promise greater than zero percent. The way this deal was structured, there was no way Mr. Brodsky could be inconvenienced. His so-called “earnest money deposit” was a cleverly-disguised illusory promise.

Some students are swayed by the idea that, if a person promises to hold an offer open for a specified period of time, such as 60 days, they have a moral obligation to keep that promise, therefore they must have a legal obligation to do so also. But this is not the case. What Mr. Brodsky should have done if he wanted to bind Mr. Culbertson into holding his offer to sell open for 60 days is paid him a non-refundable fee of say $150. Or $250. Whatever Mr. Culbertson required that was reasonable. By making this fee non-refundable but small, Mr. Brodsky would have created what is called an option contract. Option contracts are frequently employed in real estate, professional sports, and in the stock market. We don’t have time to explore them in further detail here, but if you’re interested, Wikipedia has an excellent article under “option contract.”

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Let’s look now at two situations where, under common law rules, the courts would have seen no contract, on the grounds that the promise of one of the parties appears on the face of it to be illusory. As we shall see, the Uniform Commercial Code Article 2 has solved this problem by imposing duties on the party making the illusory promise. The first of these two exceptions to the illusory promise doctrine is called a requirements contract.In a requirements contracts, the seller promises to supply ALL THAT THE BUYER SHALL REQUIRE of a specified item for a specified period of time at a specified price. The REQUIREMENTS of the buyer is the “gating factor.” It is the factor that determines the QUANTITY of goods that flow from the seller to the buyer per unit of time.Suppose for example that Hewlett-Packard’s personal computer division contracts with Fujitsu Microelectronics for Fujitsu to supply all its requirements for a certain size DRAM chip for a one year period at a price of $.25 per megabyte. Fujitsu can use as many or as few of its factories to supply those requirements as it wants. The demand level of the Hewlett-Packard factory is the sole determining factor that determines the quantity of this particular type of chip traded per month or quarterbetween the two parties.

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Prior to the enactment of the UCC, many common law courts were reluctant to enforce requirements contracts on the grounds that the buyer’s promise was illusory. However, both buyer and seller may have good reasons for entering into a requirements contract, so the law has adjusted to accommodate them. One of the concerns that had to be addressed was the possibility that the buyer would take advantage of the seller by increasing their “requirements” if the market price of the thing being purchased increases (while the contractual price between the parties remains fixed.) In our example, suppose that the market price of DRAM chips in wholesale purchase quantities goes up from $.25 to $1.25 after only 4 months? What is to prevent Hewlett-Packard from saying that its “requirements” have tripled and selling the chips it doesn’t need to build its computers on the open market for $1.25 per chip?

The UCC addresses this concern by imposing a “good faith limitation” on the quantity to be purchased. Thus, only Hewlett-Packard’s requirements that “occur in good faith” can be demanded by Hewlett-Packard, and the amount Hewlett-Packard says it “requires” cannot be “unreasonably disproportionate to any estimate stated in the contract”; or, the absence of such an estimate, “to any normal prior requirements which Hewlett-Packard has had in the past.”

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The second exception to the illusory promise doctrine we want to learn is called an output contract.In an output contract, the buyer promises to buy the full output of one or more of the seller’s factories. They will usually get a really low price per unit when they make this promise, because now the seller is guaranteed to sell their entire output at a predetermined price. So they can run that factory at full capacity and produce those chips at the lowest possible per unit cost. The seller doesn’t have any risk of idle capacity, which raises per unit costs, during the contract period. In an output contract, the manufacturing capacity of the seller at his specified plants is the “gating factor.” It is this factor that determines the QUANTITY of goods that flow from the seller to the buyer per unit of time.

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(Read first 2 bullets, then say)Either of these facts would render the alleged contract void.Their concern was this. What is to prevent Fujitsu, if both the cost and market price

of making DRAM chips falls to $.10 – and if Fujitsu and Hewlett-Packard have entered into an output contract – from running its factory day and night and tripling its output of DRAM chips in order to take advantage of this special profit opportunity? But both buyer and seller gain something from an output contract, and both give something up.

The UCC imposes standards of “fair dealing” to output contracts very similar to those it imposes for requirements contracts. The seller cannot increase or decrease its output except in good faith, and no quantity unreasonably disproportionate to any estimates contained in the contract – or, in the absence of such estimates – to the amounts transacted by these parties in the past – will be enforced by the courts.

If the seller operates in good faith, then he will neither close his plant if the agreed upon price becomes uneconomical, nor triple his output if the agreed upon price represents a windfall for the seller. Thus, the seller’s promises, if he acts in good faith, become potentially binding.

(Read last bullet.).

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Start here: One of the essential requirements of consideration is that the promisee is offering something he or she is not already legally required to provide. Pre-existing duties, as they are called, come in two flavors: public duties and private duties.The doctrine of preexisting duties says that:(READ BULLETS.)Here’s an example of the duty not to commit assault and battery:So if a guy named Thor said to you “If you promise to pay me $100 a week, I will promise not to break both of your kneecaps;” then, even if you made that promise, it would not be enforceable in court, because Thor has a preexisting duty not to break your kneecaps. The same would be true if someone threatened to hurt a loved one, ruin your reputation by saying untrue things about you, or burn down your barn.

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The other type of preexisting duty is a preexisting PRIVATE duty. These arise from contracts. When you enter into a contract, all the things you promise to do are considered private duties. That’s why…(READ FIRST BULLET.)Because neither party to a contract can REPEAT a promise they are contractually bound to fulfill in exchange for a NEW OR ADDITIONAL promise from the other party. This is fair because…(READ SECOND BULLET.)You are building your dream house: a shingle and glass paragon of supernal originality, nestled on a hillside overlooking 300 acres of postcard-perfect wilderness. The builder has agreed to finish the project by September 1, and you have already sold your current house, scheduled the moving company, and committed yourself to a new job close to your new home. But in July, the builder announces that he cannot finish the job. You’re furious. He replies that transporting material has proven to be more expensive than he anticipated, and also that his carpenters and electricians have raised their rates. He can complete the work only if you agree to pay an extra $60,000, on top of the $750,000 you have already promised. You desperately need the house finished, so you reluctantly agree to the extra cost, feeling misused. On September 1 you move in, and you pay the builder the $750,000 originally agreed upon. He sues for the extra $60,000. Will he win?No. The builder gave no consideration to support your promise to pay the extra

$60,000. The builder was already obligated to finish on September 1. He cannot make that promise a second time in exchange for additional money from you. It is a pre-existing duty and cannot function as consideration for a one-sided modification of the contract favoring him.This is one of at least 8 situations in which contract law lets someone lie and get away with it in order to avoid an even bigger injustice.

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(Read bullet point)The same would be true if the builder cast about for something you wanted, such as upgrading the kitchen floor from ceramic tile to granite tile. Even if you later argue that no one in their right mind would pay $60,000 for such an upgrade, you will be bound by your promise to pay the additional $60,000.So if they’re offering something new in exchange for additional money, don’t say yes unless you think it’s a good deal for you!

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We will learn to exceptions to the general rule that one-sided modifications to contracts governed by common law are not legally enforceable.1. Under the common law, if the seller encounters “unforeseen and unforeseeable

circumstances” that are “not part of the ordinary business risks routinely borne by service providers in this industry,” AND if the seller then offers the buyer a take-it-or-leave-it deal saying I will only continue if you pay me more than we originally agreed upon, AND if the buyer agrees to the additional money, then the modification will be binding.

2. The only two examples I’ve seen in the literature are unusual subsurface soil conditions and unexpected subsurface water.

3. The book gives an example of unexpected subsurface water on page 277.4. The example I’ll give involves unusual subsurface soil conditions.5. Hal contracts to have Bill drill a water well on his property for a fixed fee.

Before agreeing, Bill takes two core samples to a depth of 50 feet. These show no unusual subsurface rock. The actual well is going to be 90-130 feet in depth. Bill agrees to the deal. After Bill begins drilling he hits unusually hard rock at a depth of 65 feet. It ruins the three drill bits he has brought with him. He informs Hal that he plans to breach his contract unless Hal agrees to pay him time and materials to drill the well. He estimates it will take approximately three times as long to drill the well than he originally anticipated. Hal agrees. Hal will be bound by this modification. Bill followed standard procedure in his

industry for determining the condition of the subsurface soil and rock. There was nothing on the surface that would indicate to a geologist the likely presence of this unusual rock formation on this land. The subsurface rock formation is an unforeseen circumstance.

6. However, increases in the cost of labor and materials due to changes in the labor supply or the materials market will always be considered an ordinary business risk borne entirely by the seller of services. Even if labor or material costs skyrocket, rising much more than they ever have before, the seller will generally be bound to provide the service at the agreed upon contract price. Unforeseen circumstances are basically limited to when mother nature throws the seller a real curve ball.

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The book calls this “Contract rescission and modification” but I call it “Contract rescission and substitution.”

Read first 3 bullets, then say:By absolving the other party of their promises, each person is incurring a detriment to them

that is a benefit to the other party. Thus, it looks like there is consideration to support the rescission, even if the value of the remaining promises between the two parties is not equal.

Each party however must have some unfulfilled promises under the contract. Otherwise, the rescission will be invalid for lack of consideration.

If the modification agreement was fair and free from coercion, a court may find that the old agreement was terminated and a new one was created.

(Read last bullet.)The rescission and substitution exception would seem to provide a perfectly legal way to

avoid the general rule that a contract modification is not binding unless there is new consideration. If for example the contractor has built part of your house and you have paid part of the money, he might sort of blackmail you by saying “you have to agree to rescind this contract with me and to make a new contract where everything is the same – the delivery date is still September 1, the kitchen floor is still ceramic tile – but the final delivery price is $60,000 higher. Otherwise, I’m going to drive away from the jobsite and you will be stuck with an unfinished house.” If you agree to that, will the court see through it? Usually yes, if you tell them exactly how it came to pass that you agreed to the rescission and substitution. In other words, if you tell the court that you were blackmailed into doing it that way, they will see it as a contract modification without consideration, even if the paperwork drawn up appears to indicate a rescission and substitution.

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(Read whole slide, then say:)However, contract modifications under the UCC that are not supported by consideration are subject to scrutiny under the principles of good faith and unconscionability.

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1. If in the case of the mother who promised her son a Porsche on his 18th birthday, the crafty son had said “You know mom, that’s great. But the problem is, I’ve taken business law and I know that gift promises aren’t enforceable. So to make your promise enforceable, how about if I give you a dollar right now, nonrefundable.” And if the mom said “OK honey” and the son paid her a dollar right then, and if the son later sued the mom because she still didn’t buy him the Porsche on his 18th birthday, he would still lose. The courts would recognize that the dollar wasn’t something the mom was looking for. It wasn’t the thing she wanted so badly that she would only promise to buy him the Porsche if he promised to give her the dollar. So the dollar wasn’t really “bargained for in exchange” for the promise to give the Porsche, therefore it fails to qualify as consideration.

2. Let’s look at bullet point #2. Suppose that Mr. Jones, a salesperson for Mr. Smith, comes to Mr. Benson’s home and sells him a complete set of so-called “gourmet cooking utensils” that are worth approximately $300. Mr. Benson, and eighty-year-old man who lives alone in a one-room apartment, signs a contract to buy the utensils for $1,450 plus $145 in interest; because, according to the contract, he has agreed to pay for the utensils in ten monthly payments of $154 each. Benson claims that he thought he was getting the utensils for one payment of $154, but the written contract clearly says otherwise. In a case like this, Mr. Benson can argue that the contract is unconscionable, and he can argue that he was misled by Mr. Jones’ oral statements. He might also argue that Mr.

Jones used high pressure sales tactics, refusing to leave the apartment while Mr. Benson went to the bathroom, thus increasing the pressure on Mr. Benson to sign the contract to get rid of the salesman. The mismatch between the value of the utensils and the amount Mr. Benson has agreed to pay for them is a problem of inadequacy. By itself, the courts will not use inadequacy as a basis upon which Mr. Benson can rescind the contract; but they will use it as one bit of evidence that there was fraud, duress, unconscionability, or one of the other factors listed here.

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Here’s a special case of pre-existing duty.An agreement by a creditor to accept less than what was originally agreed upon in settlement of a debt may (pause) or may not be enforceable.It depends upon (pause) the nature of the debt (paus) and whether the loan is past due or not.Before we can understand this, we need to learn the difference between a liquidated debt and an unliquidated debt.A liquidated debt is a debt that is both due and certain; and it is certain both as to its amount (pause) and its existence.

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The general rule on liquidated debts is that (read first bullet point.)Let’s do an example.You claim that your friend Felicity owes you $90,000, but she refuses to pay. Finally, when you are desperate, Felicity offers you a cashier’s check for $60,000, provided you accept it as full payment. You reluctantly agree and cash the check. The next day you sue Felicity for $30,000. Who will win? The answer turns out to depend upon whether Felicity’s debt to you was liquidated or unliquidated, and if it was liquidated, whether it was past due or not.

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Page 281Who won on appeal, Mr. White or the bank?2 reasons:1. Liquidated debt, and2. They only agreed to postpone. They did that.

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Read first 2 bullet points.But every contract modification must be supported by consideration. And this one is.Read 3rd bullet point.

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Pages 284-5.The check from Mr. Taylor’s lawyer was accompanied by a letter that said “I have enclosed a check for (the amount owed to you according to my calculations) as payment in full to settle Mr. Taylor’s account with you.”Who won?(Read reasoning, page 285.)

What makes the debt disputed?1. He attempted to bill for his time attempting to collect his debts. This is not

reasonable or customary industry practice.2. Washington state is one of one 3 states that still permit balance-billing for in-

network covered services. However, a court will permit a customer to dispute whether a bill is “reasonable and customary” or not in a case of implied contract where price was not communicated or discussed prior to the patient receiving treatment. The wide gap between what Mr. Henches charged and what Mr. Taylor’s insurance company paid creates a legitimately disputed debt.

My calculations: $7,000 for 24 treatments = $292 per treatment. $2,625 for 24 treatments = $109.38 per treatment.

Do additional EOC questions 1, 4, 5, 6, and 7.

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