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Chapter 6

Chapter6ReadingNotes.doc

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Department
Business
Course Code
BU231
Professor
Valerie Irie

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1 READING NOTES Chapter 6: Formation of a Contract, Consideration and Intention Before an agreement is binding in law, certain essential elements must be present, primarily there must be consideration, can be replaced though. The Meaning of Consideration • In a unilateral contract, the price paid for the offeror’s promise is the act done by the offeree • In a bilateral contract, the price paid for each party’s promise is the promise of the other • This ‘price’ is called consideration, “price for which the promise is bought” o Can range from a number of dollars, to a single staple! Gratuitous Promises • Consideration is essential to make a contract binding o A person can still make a promise to another without bargaining for anything in return o Such a promise made in the absence of a bargain / price is called a gratuitous promise and does not become a contract, nor is it enforceable by law o Made void by lack of consideration (Never was a contract!) • Law simply states that if the promisor does not perform, the promise has no legal remedy; cannot seek compensation for disappointed expectations o Can donors later change their mind and demand gift back on grounds of lack of consideration?  No, it is no longer their property unless there was undue influence Adequacy of Consideration • Consideration must have some value in the eyes of the law, but the court will not inquire into whether the promisor has made a good bargain o Courts take this stance because evaluating the adequacy requires a personal value judgment, no longer impartial • Courts will only ever examine adequacy in instances where consideration is grossly inadequate pointing to fraud or undue influence exerted on promisor • Can become a slippery slope: o Eg. A promise not to sue someone who’s damaged your car in order to force them into paying you can be seen as consideration in a unilateral contract after a car crash Past Consideration • Remember, consideration is the price that makes the promisor’s promise binding • The reason for making the promise (motive) is irrelevant o For example, motive cannot change a gratuitous promise into a binding contract, nor reduce a binding promise into voluntary obligation 2 • If someone promises to reward another who has previously done an act the promise is not binding o Why?  Because that promise is gratuitous, just like the benefit that they received earlier  Moral of the story, if you want to be a good person and receive something for it… put it in paper first! After the fact doesn’t matter! • Benefit previously conferred upon the promisor is called past consideration, past consideration is no consideration Relation Between Existing Legal Duty and Consideration • If someone is already under contract duty to me, a later promise by me to pay them extra to perform that same work is not binding o Eg. If I offered to pay someone twice as much to complete construction on time, I wouldn’t be held to pay for that if they did so because they were already bound by the original contract to complete the work on time • Not every change in contractual terms amounts to unfair exploitation such as when you pay workers more in hopes of easing hardship and increasing performance • Third parties promising to pay a sum to perform already existing obligations are considered binding o Eg. If someone who is a principle leaseholder approaches a contractor in order to ensure the successful completion by a date binds the two because the contractor gives new consideration to the leaseholder Gratuitous Reduction of Debt • Foakes v. Beer o Debtor owed a large sum of money that was overdue o Creditor agreed to accept a series of installments of principal, forgoing their right to interest, so long as the debtor paid promptly o Even though the debtor paid the principal in full the creditor still sued them for interest, argued it was a gratuitous promise and did not bind. Why? No consideration was made. • This rule has been found unrealistic o Fails to recognize business reality, why? o Creditors may find it more beneficial to settle for a reduced amount than to insist on payment in full  The compromise might avoid placing debtor in bankruptcy, where creditor might never get any money back  Proposed reduction might enable debtor to get money from friends  Debtor may need the cash in a hurry • How can Foakes v. Beer be avoided? o Payment be
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