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Chapter 8

LAW 122- Chapter 8 -Consideration and Privity .docx

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Law and Business
LAW 122
Theresa Miedema

Law 122 – Chapter 8 – Consideration and Privity Consideration pg. 177  The main goal of contract law is to enforce bargains. And as business people know, a bargain involves more than an offer and an acceptance. It also involves a mutual exchange of value – without an exchange a contract cannot exist  A gratuitous promise is a promise for which nothing of legal value is given in exchange  Consideration exists when a party either gives (or promises to give) a benefit to someone else or suffers (or promises to suffer) a detriment to itself Sufficient and Adequate Consideration  Sufficient consideration may be almost in value  If an elderly gentleman promises to pay $10 000 to his wayward niece in exchange for her to promise to “always be kind and caring,” the parties will not have a contract  Adequate consideration has essentially the same value as consideration for which is exchanged  For example, if I promise to give you a computer worth $5000 in exchange for you to give up smoking, swearing and drinking for a year, it would seem I have made a very bad bargain  Because the law presumes that people are able look after their own interests, it generally allows them to decide what price they will demand under contract – Lawyers refer to these set of rules as the peppercorn theory Forbearance to Sue  Forbearance to sue is a promise to not pursue a lawsuit  In some situations, 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 pg.180  There must also be mutuality of consideration; requires that each party provide consideration in return for other party’s consideration  Past consideration consists of something that a party did prior to the contemplation of a contract  No mutuality  Not given in exchange for other party’s consideration  Is not really a consideration at all, therefore cannot support a contracts  Example pg. 180 **** Pre-existing Obligation  Because the past consideration is no consideration at all, an act that was actually performed before a contract was proposed cannot provide consideration for that agreement  A pre-existing obligation is an obligation that existed, but was not actually performed, before the contract was contemplated  We must distinguish 3 types of pre-existing obligations 1. Pre-existing Public Duty  Cannot rely upon that obligation as consideration for a new contract  For example, firefighters and police who are called into your office during emergency cannot sell their services to you under contract  It would be against public policy to allow public servants to take advantage of your misfortune by charging for their services  By becoming a public servant does not promise to protect citizens around the clock 2. Pre-existing Contractual Obligation Owed to Third Party  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  See Case Brief 8.2  In one sense, there is an advantage to using the same consideration for two difference contracts – you may be able to extract valuable promises form two different parties 3. Pre-existing Contractual Obligation Owed to the Same Party  The courts usually hold that the same person cannot be required to pay twice for the same benefit a promise is merely repeated, it does not provide anything new  The courts want to prevent a person form threatening to breach a contract in order to get other parties to enter into a second contract at a higher price Concept Summary 8.1 1 Law 122 – Chapter 8 – Consideration and Privity Pre-Existing Obligations and Consideration Situation Can a Pre-Existing Obligation Generally Provide Consideration for a New Contract? Pre-existing contractual public duty No Pre-existing contractual obligation owed to third Yes party Pre-existing contractual obligation owed to same No party Promise to Forgive an Existing Debt - See examples on page 184 of other cases considering pre-existing obligations Promises Enforceable Without Consideration Generally speaking, a promise is enforceable only if it is contained in a contract that is supported by consideration. That rule is subject to 2 major exceptions; seals and promissory estopped Seal  A seal is a mark that is out on a written contract to indicate a party’s intention to be bound by the terms of that document, even though the other party may not have given consideration  The essential purpose of a seal is to draw the parties attention to the importance of the occasion and to ensure that they appreciate the seriousness of making an enforceable promise outside the usual bargaining process  Most common seals occurs in connections to guarantees  A bank may be willing to lend money to me, but only if you guarantee my loan by promising to repay the bank if I fail to do so – therefore the bank will require you to put your promise under a seal  The process of placing a seal on a document is subject to a loose rule and a strict rule Promissory Estoppel  Estoppel is a rule that precludes a person from disputing or retracting a statement that they made earlier  The court may hold that a person is “estopped” form unfairly denying the truth of prior statement if the person to whom the statement was made relied on it  The concept of estoppel applied only to statements regarding past or present facts. – also promises and future facts also  Promissory estoppel is a doctrine that prevents a party from retracting a promise that the other party has relied upon  Therefore the doctrine creates an important exception to the general rule that only enforces promises that were acquired in exchange for consideration  Case Brief 8.4 page 186  The doctrine of promissory estoppel will apply only if four requirements are met 1. The representor must clearly indicate that it will not enforce its legal rights against the representee 2. The representee must rely upon the statement in a way that would make it unfair for the representor to retract its promise 3. The representee must be guilty of inequitable behaviour – the doctrine of promissory estoppel does not apply 4. The representor’s statement must be made in the context of an existing legal relationship If these four requirements are met, the representor cannot assert its original rights with respect to the past. However, that party may be allowed to enforce its original rights in the future if it gives reasonable notice of its intention to do so Concept Summary 8.2 Enforcing a Promise to Forgive a Debt 2 Law 122 – Chapter 8 –
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