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LAW 122 (625)
Chapter 8

ch. 8 -Consideration and Privity .docx

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Law and Business
LAW 122
Theresa Miedema

Chapter 8 – Consideration and Privity Ingredients to form contract include: intention to create legal relations, offer and acceptance Another ingredient: consideration – refers to the thing each party provides under contract - unless consideration exists on both sides of bargain, courts will not usually enforce parties’agreement Privity of contract – identifies parties to contract, determines who can sue or be sued Consideration vs. Gratuitous promise (free promise) Consideration: confers a benefit (receiving a good, giving a good/service), or suffers a detriment (gving up a right to do something, giving up our right to revoke) Consideration: Main goal of contract law is to enforce bargains Bargains involve more than offer and acceptance – also mutual exchange of value, otherwise no contract exists The bargain theory: Contracts have to be bargain (an exchange – mutuality or something the law says has value) = consideration? Gratuitous promise: a promise for which nothing of legal value is given in exchange; no bargain made, no contract exists (I will give you my computer and you hand it over, but I don’t give you anything of value for your computer, but I Can’t ask you to hand the computer to me forcibly and you could possibly change your mind) Creation of contract depends on exchange of value Consideration must be provided by both parties – exists when party either gives (or promises to give) benefit to someone else or suffers (or promises to suffer) detriment to itself Idea of consideration broad, seldom causes problems Benefit can be received by a 3 party – you stop smoking, ill donate $1,000 to lung cancer association Parameter two: pepper corn theory – we don’t care if you make stupid deals Sufficient andAdequate consideration: (pg. 184-185) Sufficient consideration: maybe almost anything of value. Ex. give up smoking in exchange for a $5,000 computer Exceptions – love and affection are not sufficient to support enforceable agreement Adequate Consideration: has essentially the same value as the consideration for which it is exchanged. Pepper corn theory: two people create agreement by exchanging peppercorn for horse; peppercorn has some value, thus sufficient consideration, but not worth as much as horse so not adequate consideration – contract still enforceable we don’t care if you make stupid deals Forbearance to Sue: is a promise to not pursue a lawsuit (b/c they are expensive, unpredictable, companies enter into such contracts) plaintiff promises not to bring matter to court, defendant agrees to pay less money than allegedly owed – plaintiff surrenders right to claim full damages, defendant paid money, thus consideration on both sides of contract We settle the claim – settle a car accident with $$ instead of sueing What if later discovered plaintiff would have lost case – parties still held to agreement though plaintiff merely agreed not to pursue lawsuit it would have lost Important to receive advice from lawyer before agreeing to forbear on possible legal action 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, so not really consideration at all, cannot support a contract Ex. I do something good, someone sees and says I’ll give you $100, this IS NOT consideration b/c there is no mutuality. I did it w/o thinking about actually being apart of a contract. I can’t sue for $100 May be difficult to determine whether something past consideration Ex. landscaper cuts your grass without asking you first, you promise to pay – not contract as services provided before you promised to pay money Ex. 2 if you ask for work to be done without stating price, work done, after you mention sum of money, this is different, you would be required to pay reasonable price – subsequent promise is evidence of reasonable price; company’s actions were good consideration, not past consideration, provided in return for implicit promise you would pay, part of bargaining process Pre-existing Obligations B/c past consideration is no consideration at all, an actual that was actually performed before a contract was proposed can’t provide consideration for that agreement But can a contract supported by promise to fulfill pre-existing obligation – an obligation that existed, but was not actually performed, before contract contemplated? Distinguish between 3 types of pre-existing obligations: 1. Pre-existing public duty – person who owes pre-existing public duty cannot rely on that obligation as consideration for new contract; against public policy to allow public servants to charge for their services, though not obliged to promise to protect persons around the clock Ex. These are basically police officers, fire fighters people who work as public servants, there job is to serve the public say your house is on fire they won’t be making a contract with you they will just do their duty. They can’t offer you anything more than saving your house from burning. But if a police officer is of duty he doesn’t have to protect you, but can ask to be paid to put out fire b/c they’re off duty rd 3 party – good consideration for new contract – you can use consideration twice - extract valuable promises from two different parties - singer performs at concert in exchange for money with promoter, and then singer persuades a music publisher under a separate contract to record the concert – gets paid twice – but if the singer refuses to perform, it will be held liable to both the promoter and the publisher, even though it essentially failed to do only one thing Same party – same person can’t be required to pay twice for same benefit, if promise merely repeated, it doesn’t provide anything new ** Can a Pre-existing obligation generally provide Consideration for a new contract? – ONLY Pre- existing contractual obligation owed to a third party could Promise to Forgive Existing Debt Gilbert Steel Case pg. 189 - – plaintiff contract to sell steel to defendants at set price, afterwards plaintiff’s supplier raises price, defendant promises to pay higher price for remaining shipments, then refuses to honour its promise, argues nothing provided in exchange for later promise, held – defendant correct, not required to pay extra price as it had not received anything new in exchange for promise to do so Similar issues arise when creditor promises to forgive debt in exchange for something less than full payment Promise to accept lesser amount is enforceable only if supported by fresh consideration, must prove that provided something new Number of exceptions developed by courts – promise to accept smaller sum enforceable if placed under seal; promise to accept less money enforceable if debtor gives something new in exchange for it Ex. debtor  lender. Lender gave 10k, debtor  I can pay you 7k but I want you to forgive me for the balance. You can’t sue me for 3k Common law says no this doesn’t work “if you want 10k you have to sue me to enforce, I can only pay 7k” law says that’s not an enforceable contract Case law says you can NEVER give a binding promise to settle a debt, accepting less than full debt to forgive the outstanding debt, full discharge of debt – not good consideration – can always sue for that remaining balance unless there’s new consideration To make promise binding – accept 7k, and discharge 3k (Good consideration = benefits) – pay in cash instead of cheque (vice versa = new consideration – changing format), pay a day earlier, add something tangible (peppercorn, used car), place it under seal (not new consideration, but is an exception), look to statutory law Pg. 191 provision – if debtor and lender have an agreement, where the lender explicitly says I accept 7k, fulldischarge of 3k, and receives the $$, then the promise will be binding even though there’s no new consideration – until you make the payment, lender can change mind Promises Enforceable w/o Consideration Generally, promise enforceable only if contained in contract supported by consideration; two exceptions – seals, promissory estoppel Seals - a mark that is put 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. Essential purpose of seal to draw parties’attention to importance of occasion, ensure they appreciate seriousness of making enforceable promise outside usual bargaining process, Ex. guarantee of loan to bank, enforceable even if guarantor received no consideration Alegal seal – family seal (wax on ring) – doesn’t need any particular format, can just write “Seal” or red sticker seals, or family/company seal, etc. no restrictions One strict rule: seal must be placed on the paper at the time the promise is made – not before or after! **** Promissory estoppel - is a doctrine that prevents a party from reacting a promise that the other party
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