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Chapter 6

BU231 Chapter Notes - Chapter 6: Contract, Estoppel, Puffery


Department
Business
Course Code
BU231
Professor
Valerie Irie
Chapter
6

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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”
oCan range from a number of dollars, to a single staple!
Gratuitous Promises
Consideration is essential to make a contract binding
oA person can still make a promise to another without bargaining for
anything in return
oSuch 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
oMade 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
oCan 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
oCourts 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:
oEg. 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
oFor example, motive cannot change a gratuitous promise into a binding
contract, nor reduce a binding promise into voluntary obligation
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If someone promises to reward another who has previously done an act the
promise is not binding
oWhy?
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
oEg. 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
oEg. 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
oDebtor owed a large sum of money that was overdue
oCreditor agreed to accept a series of installments of principal, forgoing
their right to interest, so long as the debtor paid promptly
oEven 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
oFails to recognize business reality, why?
oCreditors 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?
oPayment before due date is sufficient consideration to make agreed
reduction in debt
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