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Chapter 12 – Consideration
1. C H A P T E R
12
Consideration
Make yourself necessary to
someone.
Ralph Waldo Emerson
The Conduct of Life (1860)
12-1
2. 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
12-2
3. Elements of Consideration
• Consideration is legal value bargained
for and given in exchange for an act or
a promise
• Purely gratuitous
promises are not
enforceable because
not supported by
consideration
• Thorne v. Deas
12-3
4. Legal Value of Consideration
• 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
12-4
5. Bob Acres, LLC v. Schumacher Farms, LLC
• Parties entered into real estate contract
• Court held that, as long as parties to a real
estate purchase agreement clearly
express intent to buy and sell real property,
the fact that buyer failed to provide
earnest money did not invalidate contract
12-5
6. Bargained-for Exchange
• 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
12-6
7. Exchanges That Are Not
Consideration
• Illusory promises
• Preexisting duties
• Past consideration
12-7
8. Illusory Promises
• 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
12-8
9. Preexisting Duties
• 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
12-9
10. Preexisting Duties &
Contract Modification
• 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
12-10
11. Exceptions to General Rule
• CISG and UCC 2–209(1):
agreement to modify
contract for sale of
goods
• Modification due to
unforeseen
circumstances that a
party could not
reasonably foresee
12-11
12. Preexisting Duties &
Settlement Agreements
• 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
12-12
13. Past Consideration
• 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
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14. Exceptions to
Consideration Requirement
• 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)
12-14
16. Test Your Knowledge
• True=A, False = B
– Consideration is legal value
bargained for and given in
exchange for an act or a promise
– A person who agrees not to file suit
has not provided valid consideration
– Courts always examine the
adequacy of consideration
12-16
17. Test Your Knowledge
• Multiple Choice
– A person who agrees to obey the law has
provided __________ consideration.
a) No consideration (a preexisting duty)
b) Adequate consideration that is binding
and enforceable
– To be valid under the UCC, an
agreement to modify a contract for the
sale of goods:
a) Does not need new consideration
b) Requires new consideration
12-17
18. 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?
12-18
Editor's Notes
Example: early case of Thorne v. Deas, in which part owner of sailing ship promised co-owners he would insure the ship for upcoming voyage. He failed to do so, and when the ship was lost at sea, court found he was not liable to co-owners for breaching his promise because his promise was purely gratuitous; he had neither asked for nor received anything in exchange for making it.
In famous 19th-century case, Hamer v. Sidway, an uncle’s promise to pay his nephew $5,000 if he refrained from using tobacco, drinking, swearing, and playing cards or billiards for money until his 21st birthday was held to be supported by consideration. Indeed, the nephew had refrained from doing any of these acts, even though he may have benefited from so refraining. He had a legal right to indulge in such activities, yet he had refrained from doing so at his uncle’s request and in exchange for his uncle’s promise. This was all that was required for consideration.
Hyperlink is to the opinion on the Justia.com website. Minnesota Court of Appeals held that, as long as the parties to a real estate purchase agreement clearly express the intent to buy and sell real property, the fact that the buyer did not provide the earnest money stated in the contract did not render the contract invalid. Earnest money was nominal amount ($500 earnest money on a $70,000 contract for the purchase of 25 acres of undeveloped land), indicating that earnest money not significant factor in seller’s decision to sell the property to the buyer. Instead, earnest money showed buyer’s good-faith intentions. Court noted that failure of a party to perform a material provision of the agreement could be a breach permitting non-breaching party to discontinue performance. However, in this case, seller did not raise any objection to buyer’s failure to tender the earnest money until it had already announced that it no longer wished to be bound by the purchase agreement. Consequently, seller waived any right to object to specific breaches of agreement by buyer.
Rena and Sheldon Gottlieb were vacationing in Atlantic City, New Jersey, and visited the Tropicana casino. Tropicana offers people membership in its “Diamond Club.” To become a Diamond Club member, an individual must visit a promotional booth in the casino, obtain and fill out an application form, and show identification. There is no charge. The application form lists the person’s name, address, telephone number, and e-mail address, and this information is entered into the casino’s computer database. Each member receives a Diamond Club card that has a unique identification number. The member then presents or “swipes” the card in a machine each time he or she plays a game at the casino, and the casino obtains information about the member’s gambling habits. The casino’s marketing department then uses that information to tailor its promotions. Rena Gottlieb was, and had been for a number of years, a member of the Diamond Club. When she entered the casino on July 24, she immediately went to the Fun House Million Dollar Wheel Promotion, which offers participants the chance to win a grand prize of $1 million. Diamond Club members were entitled to one free spin of the Million Dollar Wheel each day. She presented her Diamond Club card, a casino operator swiped it through the card reader, she pressed a button to activate the wheel, and the wheel began spinning. Gottlieb claims that the wheel landed on the $1 million grand prize, but when it did so, the casino attendant immediately swiped another card through the machine, reactivated the wheel, and the wheel landed on a prize of two show tickets. Tropicana denies that its attendant intervened and reactivated the wheel, and contends that the wheel simply landed on the lesser prize. Ms. Gottlieb sued Tropicana for breach of contract, among other theories, and Tropicana moved for summary judgment. Court: According to Tropicana, participation in a promotion such as the Million Dollar Wheel cannot constitute consideration that would support the formation of an enforceable contract. [We disagree] Ms. Gottlieb had to go to the casino to participate in the promotion. She had to wait in line to spin the wheel. By presenting her Diamond Club card to the casino attendant and allowing it to be swiped into the casino’s machine, she was permitting the casino to gather information about her gambling habits. Additionally, by participating in the game, she was a part of the entertainment that casinos, by their very nature, are designed to offer to all of those present. All of these detriments to Ms. Gottlieb were the requested detriments to the promisee induced by the promise of Tropicana to offer her a chance to win $1 million. Tropicana’s motives in offering the promotion were “in nowise altruistic.” It offered the promotion in order to generate patronage of and excitement within the casino. In short, Ms. Gottlieb provided adequate consideration to form a contract with Tropicana. Tropicana further challenges Ms. Gottlieb’s breach of contract claim on the grounds that it is clear as a matter of law that she did not win the $1 million prize. Tropicana points to computer records in support of its position that Ms. Gottlieb did not win the grand prize. Ms. Gottlieb relies in part on her own testimony and the testimony of her husband, who witnessed her spin of the promotional wheel. It is for the jury, and not for the court, to resolve this factual dispute. Motion for summary judgment on the contract claim denied in favor of Ms. Gottlieb.
American Golf Corporation (AGC) hired Melissa Heye for a job in the pro shop. After Heye was hired but before she began working, AGC gave Heye a number of documents, including the Co-Worker Alliance Handbook. On page 20 of the handbook was a reference to arbitration that essentially stated that binding arbitration would be the exclusive means of resolving all disputes. Page 23 of the handbook contained an acknowledgment. Heye worked for AGC and later sued AGC on a variety of grounds. AGC moved to compel arbitration. The trial court initially granted this motion, but after Heye filed a motion for reconsideration, the trial court denied AGC’s motion. AGC appealed. Court: We interpret an arbitration agreement under the rules of state contract law. For a contract to be legally valid and enforceable, it must be factually supported by an offer, an acceptance, consideration, and mutual assent. AGC asserts that the arbitration agreement is supported by consideration in the form of AGC’s agreement to arbitrate. …A valid contract must possess mutuality of obligation. … When a promise puts no constraints on what a party may do in the future—in other words, when a promise, in reality, promises nothing—it is illusory, and it is not consideration. …Heye contends AGC is “free to amend, supplement, rescind or revise the policy regarding arbitration at its whim.” We disagree with AGC … The agreement, in essence, gives AGC unfettered discretion to terminate arbitration at any time, while binding Heye to arbitration. AGC remains free to selectively abide by its promise to arbitrate; the promise, therefore, is illusory. Denial of motion to compel arbitration affirmed in favor of Heye.
Hyperlink is to the Iowa court’s opinion. In Margeson v. Artis , Margesons agreed to sell their weight loss franchise to Artis on October 1, 2004 for $125,000. On October 7, 2004 an addendum to the contract was signed increasing the sale price to $155,000. At closing , loan proceeds were used to pay original $125,000 and personal checks from Artis totaling $10,000 were delivered. Balance was to be paid monthly based on sales. Disputes arose and Artis stopped payment on one of her checks and stopped paying the monthly installments. Margesons sued for the balance of the contract. Artis claimed addendum was unenforceable for lack of consideration. District Court and Court of Appeals found for Margesons. Iowa Supreme Court reversed, holding that there was no consideration given for the addendum since Margesons had a preexisting duty to sell the business under the terms of the original contract. Clear that actual value of consideration was irrelevant, but simply had to exist. Court also rejected theories of estoppels and waiver argued by Margesons.
Liquidated debt example: Connor borrows $10,000 from Friendly Finance Company, payable in one year. On the day payment is due, Connor sends Friendly a check for $9,000 marked: “Payment in full for all claims Friendly Finance has against me.” Friendly cashes Connor’s check, thus impliedly promising to accept it as full payment by cashing it, and later sues Connor for $1,000. Friendly is entitled to the $1,000 because Connor has given no consideration to support Friendly’s implied promise to accept $9,000 as full payment. However, had Connor done something he had no preexisting duty to do in exchange for Friendly’s promise to settle for part payment, he could enforce Friendly’s promise and avoid paying the $1,000. For example, if Connor had paid early, before the loan contract called for payment, or in a different medium of exchange from that called for in the loan contract (such as $4,000 in cash and a car worth $5,000), he would have given consideration for Friendly’s promise to accept early or different payment as full payment. The settlement of an unliquidated debt is called an accord and satisfaction. When an accord and satisfaction has occurred, the creditor cannot maintain an action to recover the remainder of the debt that he alleges is due.
Hyperlink is to opinion on Wisconsin Bar Association website. Court of Appeals reviewed question of whether compensation promises made to a valued sales employee were enforceable even in the absence of any employment or remuneration contract. The Court of Appeals enforced a mere promise to pay that was never reduced to a specific contract agreement.
True False – refraining from something a person is not legally obligated to do is valid consideration. False – courts do not examine the adequacy of consideration unless fraud is alleged
The correct answer is (a) The correct answer is (a). UCC 2–209(1). For example, Electronics World orders 200 XYZ televisions at $150 per unit from XYZ Corp. Electronics World later seeks to cancel its order, but XYZ refuses to agree to cancellation. Instead, XYZ seeks to mollify a valued customer by offering to reduce the price to $100 per unit. Electronics World agrees, but when the televisions arrive, XYZ bills Electronics World for $150 per unit. Under classical contract principles, XYZ’s promise to reduce the price of the goods would not be enforceable because Electronics World has furnished no new consideration in exchange for XYZ’s promise. Under the Code, no new consideration is necessary and the agreement to modify the contract is enforceable.
Opportunity for class discussion about the logic (or illogic) of the consideration requirement.
