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Chapter 6

4. Chapter 6 – Formation of a Contract, Consideration and Intention.pdf

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Department
Business
Course
BU231
Professor
Valerie Irie
Semester
Spring

Description
BU231 Lecture 3 Wednesday, May 22, 2013 Chapter 6 – Formation of a Contract, Consideration and Intention The Meaning of Consideration  Bargain: each party pays a price for promise of the other  offer must form a bargain! o In a unilateral contract – price paid for offeror’s promise = act done by offeree o Bilateral contract – price paid for each other’s’ promise is the promise of the other  Consideration: the price for which the promise of the other is bought  As long as the promisor bargains for the other part to (promise to) do something that she otherwise would not do, the promisor will have received consideration  doesn’t have to benefit himself Gratuitous Promises  Gratuitous promise: promise made without bargaining for or accepting anything in return  Consideration is essential to make a contract legally bargaining  gratuitous stuff isn’t binding  For gratuitous promises, the law states that if the promisor does not perform, the promise has no legal remedy (compensation for the benefit that was promised)  Usually, charities do not sue people who promised to donate and didn’t follow through, because this makes people reluctant to place promises in the first place  Sometimes, donor die before honouring large pledges, and charities sue their estates. This charity will be asked what price it paid for the pledge  court may find consideration if the charity began a project in response to the donor’s promise o Must be explicit, or there must be an implied request from the promisor o When a pledge is for general funds, the charity can make it legally binding if it uses a seal on its pledge cards or offers something to the donor in return (ex: membership rights) o If the charity offers something in return as act of gratitude, the exchange is not a promise and it is not binding  the donor never asked for this act of gratitude. (example on p136)  If the gratuitous promise is performed, she can’t change her mind it’s no longer her property Adequacy of Consideration  Court doesn’t inquire into whether the promisor made a good bargain  personal value judgment  Court will only examine the adequacy of consideration if there is some allegation of wrongdoing by one party  fraud, duress, or undue influence  promise may be voidable at promisor’s option o Courts are concerns with protecting the interests of weak parties (ex: consumers from unconscionable conduct) o If person A decided to sue B and then B paid A out of court and the settled, and then A found out B didn’t even have a right to sue, this is okay as long as B genuinely believed she could sue A  provided that the promise has an honest belief in her right to sue, giving it up is good consideration for the promisor’s promise. Otherwise, when would a settlement ever be binding? Motive Contrasted with Consideration: Past Consideration  Consideration = the PRICE that makes the promisor’s promise binding  Promisor’s reason for making the promise (motive) is irrelevant  cannot change a gratuitous promise into a binding contract, nor the other way around  If one person promises to reward another who has previously done an act gratuitously, the promise is not binding  motive and consideration are not the same  Past consideration: gratuitous benefit previously conferred upon a promisor  there is no element of bargain, so past consideration = no consideration  Moral cause: moral duty of promisor to perform his promise BU231 Lecture 3 Wednesday, May 22, 2013 Relation between Existing Legal Duty & Consideration  Where A has existing contract with B, a later promise by B to pay A something extra is not binding  performance by A is not good consideration for the later promise because it was already a contract  Ex: promise to increase pay if the workers don’t desert their station = unenforceable  But if it seems like party B is at liberty to abandon the job, and there is a fresh promise to proceed because party A offered, it may be good consideration for an additional sum  binding  but also unfair because it’s the threat of blackmail  but sometimes party A may offer more to get better performance from party B and both parties may benefit  Consideration already given will not support new promises when parties try to modify an existing contract,rdven if such changes may be fairer than original contract.  When a 3 party to a contract promises to pay a sum to promisor for his promise to perform already existing obligations to the promisee  problem  courts hold that this is binding, and if A fails to perform, A is liable to both B and C o Must distinguish between situation where therdater promise is made by the promise in the original contract, and where it is made by a 3 party to that contract  Court will find promise unenforceable for police officers if they’ve been asked to do something that they are already bound to do or something that will interfere with their regular duties Gratuitous Reduction of a Debt  Consideration requirement may lead to some other unsatisfactory results  Creditor may benefit from settling for reduced amount than to insist on full payment 1) Creditor may end up with less money than if she had accepted a reduced sum, because debtor may become bankrupt 2) Proposed reduction may enable debtor to borrow money from friends 3) Debtor may not have assets to enable him to pay in full, so any court judgment against him would not realize more than the reduced amount 4) Creditor may urgently need at least part of the sum owed o The rule presented above = creditor can sue debtor because the extra promise was gratuitous o Early payment before due date is sufficient new consideration to make an agreed reduction in the debt binding on the creditor  court will not inquire into adequacy of the consideration o Rule only applies to payments of money, and not to transfer of goods or provision of services  if I agree to accept $900 in full settlement of $1000 debt, I can sue successfully for the remaining balance later. If I accept $500 and a bar of chocolate in full settlement of $1000, I can’t sue. o Rule only applies to agreements between creditor and debtor; if creditor accepts promise by a rd rd 3 party to cancel the debt, creditor can no longer sue debtor since 3 party technically bought the debt from the creditor o In Ontario, when creditor agrees to accept part performance in settlement of a debt and the debtor
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