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Chapter 8

Chapter 8 Notes


Department
Law and Business
Course Code
LAW 122
Professor
Kernaghan Webb
Chapter
8

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Chapter 8: Consideration and Privity
CONSIDERATION
The main goal of contract law is to enforce bargains. And as business ppl know, a bargain
involves more than an offer and an acceptance; it also involves a mutual exchange of
value.
oGratuitous Promise: is a promise for which nothing of legal value is given in exchange. E.g. I
offer to give you a laptop and you simply agree to receive it. Consequently, while you will be
entitled to keep the laptop if I actually give it to you, you cannot force me to hand it over to you
in the first place.
B/c we did not have a bargain, we did not have a contract, and thus I am entitled to
change my mind.
The creation of a contract therefore generally depends on an exchange of value. Consideration
must be provided by both parties.
oConsideration: exists when a party either gives (or promise to give) a benefit to someone else
of suffers (or promises to suffer) a detriment of itself.
Consideration must move from each side of a contract but not necessarily to the other
side. E.g. you and I will have a contract if I promise to give $5000 to your brother,
and you promise to give a car to my sister.
In that situation it is enough that we promised to provide a benefit to someone; we do
not have to promise to provide benefit to each other.
Sufficient and Adequate Consideration
A contract must be supported by sufficient consideration.
oSufficient Consideration: may be almost anything of value. E.g. It is sufficient if a person
promises to give up smoking, drinking or swearing.
There are nevertheless exceptions: love and affection is not enough to support an
enforceable agreement.
Although a contract must be sufficient, it does not have to be adequate.
oAdequate Consideration: has essentially the same value as the consideration for which it is
exchanged.
E.g. If I promise to give you my computer worth $5000, and you promise to give up
smoking, drinking and swearing for a year, it would seem I made a very bad bargain. In
economic terms, I will be giving up far more than you will be providing in return.
The law presumes that ppl are able to look after their own interests, and it generally
allows them to decide what price they will demand under a contract.
Forbearance to Sue
For business ppl, the diff b/t sufficient consideration & adequate consideration is particularly
important in the context of forbearance to sue.
oForbearance to Sue: is a promise to not pursue a lawsuit.
In the vast majority of cases, the parties settle their dispute out of court. They often
enter into a contract for that purpose. The plaintiff promises not to bring the
matter into court, and the defendant agrees to pay less money than it allegedly owed.
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Chapter 8: Consideration and Privity
If the plaintiffs action would have succeeded in court, there obviously is
consideration on both sides of the contract. The plaintiff surrendered the right to
claim full damages, and the defendant paid money.
In some situation, the courts will not enforce forbearance agreements, especially if
the party that threatened to sue did not honestly believe that it had a valid claim in
the first place.
Past Consideration
Because the law views a contract as a bargain, consideration must be provided by both sides.
oMutuality of Consideration: requires that each party provide consideration in return for the
other parts considerations.
The requirement of mutuality is important to the idea of past consideration.
oPast Consideration: consists of something that a party did prior to the contemplation of a
contract.
Past consideration is not given in exchange for the other partys consideration, and
thus is not really consideration at all. It therefore cannot support a contract.
Pre-Existing Obligation
B/c past consideration is no consideration at all, an act that was actually performed before a
contract was proposed cannot provide consideration for that agreement,
oPre-Existing Obligation: is an obligation that existed, but was not actually performed, before
the contract was contemplated. There are 3 types of pre-existing obligations:
1.Pre-Existing Public Duty: a person who owes a pre-existing public duty cannot rely
upon that obligation as consideration for a new contract. E.g. firefighters & police officers
who are called to your office during an emergency cannot sell their services to you under
a new contract.
One reason is that when they became public servants, they already promised to help
ppl like you in times of need, thus do not have anything else to offer in a new
agreement. However, when their shift is done, they can do as they please.
2.Pre-Existing Contractual Obligation Owed to Third Party: A promise to perform a
pre-existing public duty is not good consideration for a new contract. In contrast, a
promise to perform a pre-existing obligation that previously arose under a contract with
a third party can be good consideration for a new contract.
3.Pre-Existing Contractual Obligation Owed to the Same Party: the court usually
holds that the same person cannot be required to pay twice for the same benefit.
Furthermore, the courts want to prevent a person from threatening to breach one
contract in order to get the other party to enter into a second contract at a higher price.
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Chapter 8: Consideration and Privity
Many scholars argue that a partys promise to revise the terms of a contract should
sometimes be enforceable if the revision accurately reflects an unexpected change in
circumstances.
There are other ways in which Canadian business ppl can avoid the rule of Gilbert steel.
i.They can use the process of novation to discharge their initial contract and enter into
a new agreement that includes a higher price.
ii.They can agree that something new is to be done in exchange for the extra price.
iii.The defendants promised in Gilbert Steel would have been binding if it had been
made under seal.
iv.Business ppl can simply ignore the rule in Gilbert Steel, since financial success in the
long run sometimes requires short-term flexibility.
Promise to Forgive an Existing Debt
Similar issues, like Gilbert Steel, arise when a creditor promises to forgive a debt in exchange for
something less than full payment. E.g. pg 174-175.
The courts have developed several exceptions:
i.A promise to accept a smaller sum is enforceable if it is placed under seal.
ii.A promised to accept less money is enforceable if the debtor gives something new in
exchange for it.
An important statutory exception exists in many parts of Canada. Several jurisdictions have
legislation that allows a debt to be extinguished upon payment of lesser amount. Section 16 of
the Mercantile Law Amendment Act of Ontario is typical.
Part performance of an obligation either before or after breach thereof when expressly
accepted by the creditor or rendered in pursuance of an agreement for that purpose, though
without any new consideration, shall be held to extinguish the obligation.
Thought the provision is important, it is also subject to certain restrictions:
i. It requires part performance part of the debt must have been paid. Thus you
actually have to receive $70,000 for me.
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