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Chapter 12

BMGT 380 Chapter Notes - Chapter 12: Arbitration Clause, Critical Inquiry, Interlocutory Appeal

Business and Management
Course Code
BMGT 380
William Mc Clenahan

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Chapter 12 00:02
I. Elements of Consideration
A. Consideration: legal value, bargained for and given in exchange for an act or a
A.1. A promise generally cannot be enforced against the promisor unless that
promisee has given up something of legal value in exchange for the promise
A.2. A promisee must pay the price that the promisor asked to gain the right to
enforce the promisor’s promise
A.3. If the promisor did not ask for anything in exchange for making her promise or
if what the promisor asked for did not have legal value (something she was
already entitled to), her promise is not enforceable against her because it is not
supported by consideration
A.4. Two important aspects of the consideration requirement:
A.4.a. The requirement tended to limit the scope of a promisor’s
liability for his promises by insulating him from liability for gratuitous
promises and by protecting him against liability for reliance on such
A.4.b. The mechanical application of the requirement often
produced unfair results
B. Legal Value
B.1. An act or promise can have legal value in one of two ways:
B.1.a. If, in exchange for the promisor’s promise, the promisee
does, or agrees to do, something he had no prior legal duty to do
B.1.b. If, in exchange for the promisor’s promise, the promisee
refrains from doing, or agrees not to do, something she has a legal
right to do
B.1.c.This does not require that an act/promise have monetary/economic
value to amount to consideration
B.2. Adequacy of Consideration
B.2.a. Courts will generally not concern themselves with
questions regarding the adequacy of consideration that the promisee
gave; as long as the promisee’s act or promise satisfies the legal value
test, the courts do not ask whether that act/promise was worth what the
promisor gave, or promised to give, in return for it
B.2.b. Several qualifications must be made concerning the general
rule on adequacy of consideration:
B.2.b.i. If the inadequacy of consideration is apparent on the
face of the agreement, most courts conclude that the agreement
was a disguised gift rather than an enforceable bargain
B.2.b.i.a. Unenforceable: an agreement calling for an unequal
exchange of money or identical goods and containing no
other terms ($500 for $1,000 or 20 BLaw textbooks for
40 identical BLaw textbooks)
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B.2.b.ii. Inadequacy of consideration, standing alone, is
never sufficient to prove lack of true consent or contractual
capacity; the courts may refuse to grant specific performance
or other equitable remedies to persons seeking to enforce unfair
B.2.b.iii. Nominal consideration: if no other consideration is
actually exchanged; attempts to make gratuitous promises look
like true bargains by reciting a nonexistent consideration
B.2.b.iii.a. Most courts refuse to enforce such agreements unless
they find that the stated consideration was truly bargained
C. Bargained for Exchange
C.1. In addition to the fact that a promisee’s act or promise provides legal value to
find that it amounted to consideration, the promisee’s act or promise must have
been bargained for and given in exchange for the promisor’s promise
C.1.a. It must be the price that the promisor asked for in exchange
for making his promise
II. Exchanges That Fail to Meet Consideration Requirements
A. Illusory Promises
A.1. The promisee must have promised to do, or refrain from doing, something at the
promisor’s request
A.2. If the promisee’s promise is illusory, it really does not bind the promisee to do
or refrain from doing anything, such a promise could not serve as consideration
A.2.a. Lack the mutuality of obligation required for an agreement
to be enforceable; the promisee has not given the promisor anything of
legal value in exchange for the promisor’s promise
A.2.b. So long as the promisee has given legal value, the
agreement will be enforceable even though what the promisee gave is
worth substantially less than what the promisor promised in return
A.3. Effect of Cancellation of Termination Clauses:
A.3.a. The central issue in cases where the fact that an agreement
allows one or both of the parties to cancel/terminate their contractual
obligations does not necessarily mean that the party(ies) with the
power to cancel have given an illusory promise, concerns whether a
promise subject to cancellation or termination actually represents a
binding obligation
A.3.b. Limits on the circumstances under which cancellation may
occur (a dealer’s failure to live up to dealership obligations), or the
time in which a cancellation may occur (no cancellations for the first
90 days), or a requirement of advance notice of cancellation (30-day
notice requirement)
A.3.b.i. In each case, where the party making such a
promise has bound himself to do something in exchange for the
other party’s promise, this would effectively remove a promise
from the illusory category
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A.3.c.A party’s duty of good faith and fair dealing can also limit the right
to terminate and prevent its promise from being considered illusory
A.4. Effect of Output and Requirements Contracts
A.4.a. Output contract (agrees to buy all of the other party’s
production of a particular commodity)
A.4.b. Requirements contract (agreement to supply all of another
party’s needs for a particular commodity)
A.4.c.Many CL courts refused to enforce such agreements on the ground
that their failure to specify the quantity of goods to be produced or
purchased rendered them illusory
A.4.c.i. Feared that a party to such an agreement might be
tempted to exploit the other party; subsequent market
conditions could make it profitable for the seller in an output
contract or the buyer in a requirements contract to demand tat
the other party buy or provide more of the particular
commodity than the other party had actually intended to buy or
A.4.d. The Code legitimizes output and requirements contracts;
A.4.d.i. Addresses the concern about the potential for
exploitation by limiting a party’s demands to those quantity
needs that occur in good faith and are not unreasonably
disproportionate to any quantity estimate contained in the
contract, or to any normal prior output or requirements if no
estimate is states
A.5. Effect of Exclusive Dealing Contracts
A.5.a. Does the distributor have any duty to sell the
manufacturer’s products and does the manufacturer have any duty to
supply any particular number of products?
A.5.b. The Code recognizes this by providing that, unless the
parties agree to the contrary, an exclusive dealing contract imposes a
duty on the distributor to use her best efforts to sell the goods and
imposes a reciprocal duty on the manufacturer to use his best efforts to
supply the goods
B. Preexisting Duties
B.1. As a general rule, performing or agreeing to perform a preexisting duty is not
consideration; the promisor in such a case has effectively made a gratuitous
promise, since she was already entitled to the promisee’s performance
B.2. Preexisting Public Duties
B.2.a. Every member of society has a duty to obey the law and
refrain from committing crimes or torts; a promisee’s promise not to
commit such an act can never be consideration
B.2.b. Public officials, by virtue of their offices, have a
preexisting legal duty to perform their PR responsibilities
B.3. Preexisting Contractual Duties and Modifications of Contracts under the
Common Law
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