11 - 1© 2007 Prentice Hall, Business Law, sixth edition, Henry R.

Cheeseman

Chapter 11Consideration and

Equity

Chapter 11Consideration and

Equity

11 - 2© 2007 Prentice Hall, Business Law, sixth edition, Henry R.

Cheeseman

Consideration• Consideration – something

of legal value given in exchange for a promise.

• Consideration is a necessary element for the existence of a contract.

• Common types of consideration are:– A tangible payment (money or

property); or– Performance of an act (e.g.,

providing legal services).

11 - 3© 2007 Prentice Hall, Business Law, sixth edition, Henry R.

Cheeseman

Consideration (continued)

• Consideration consists of two elements:

1. Something of legal value must be given; and

2. There must be a bargained-for exchange.

11 - 4© 2007 Prentice Hall, Business Law, sixth edition, Henry R.

Cheeseman

Legal Value• Something of legal value

must be given.• Under the modern law of

contracts, a contract is considered supported by legal value if:

1. The promisee suffers a legal detriment; or

2. The promisor receives a legal benefit.

11 - 5© 2007 Prentice Hall, Business Law, sixth edition, Henry R.

Cheeseman

Bargained-for Exchange• To be enforceable, a

contract must arise from a bargained-for exchange.– Exchange that parties engage

in that leads to an enforceable contract.

• Gift or gratuitous promise – an unenforceable promise because it lacks consideration.

11 - 6© 2007 Prentice Hall, Business Law, sixth edition, Henry R.

Cheeseman

The Use of Output and Requirements Contracts in Business

• There are two special types of business contracts that specifically allow a greater degree of uncertainty concerning consideration:– Output Contracts– Requirements Contracts

11 - 7Prentice Hall, 2001© 2007 Prentice Hall, Business Law, sixth edition, Henry R.

Cheeseman7

Contemporary Business Environment

Nominal Nominal ConsiderationConsideration

Best Efforts Best Efforts ContractsContracts

11 - 8© 2007 Prentice Hall, Business Law, sixth edition, Henry R.

Cheeseman

Contracts Lacking Consideration

Illegal Illegal ConsiderationConsideration Illusory Illusory

PromisePromise

Moral Moral ObligationObligation

Preexisting Preexisting DutyDuty

Past Past ConsiderationConsideration

11 - 9© 2007 Prentice Hall, Business Law, sixth edition, Henry R.

Cheeseman

Illegal Consideration

• Illegal consideration – a promise to refrain from doing an illegal act.

• Such a promise will not support a contract.

11 - 10© 2007 Prentice Hall, Business Law, sixth edition, Henry R.

Cheeseman

Illusory Promise• Illusory promise – a

contract into which both parties enter, but one or both of the parties can choose not to perform their contractual obligations.

• Thus, the contract lacks consideration.

• Such promises are unenforceable.

11 - 11© 2007 Prentice Hall, Business Law, sixth edition, Henry R.

Cheeseman

Moral Obligation• Promises made out of a

sense of moral obligation or honor lack consideration.

• Moral consideration is not treated as legal consideration.

• Such promises are unenforceable in most states.

11 - 12© 2007 Prentice Hall, Business Law, sixth edition, Henry R.

Cheeseman

Preexisting Duty• Preexisting duty – a

promise lacks consideration if a person promises to perform an act or do something he or she is already under an obligation to do.

• The promise is unenforceable because no new consideration has been given.

11 - 13© 2007 Prentice Hall, Business Law, sixth edition, Henry R.

Cheeseman

Preexisting Duty (continued)

• The preexisting duty rule arises when one of the parties to an existing contract seeks to change the terms of the contract during the course of its performance.

• Such midstream changes are unenforceable.

• The parties have a preexisting duty to perform according to the original terms of the contract.

11 - 14© 2007 Prentice Hall, Business Law, sixth edition, Henry R.

Cheeseman

Preexisting Duty (continued)

• Sometimes a party to a contract runs into substantial unforeseen difficulties while performing his or her contractual duties.

• The contract can be modified and enforced without new consideration being given.

11 - 15© 2007 Prentice Hall, Business Law, sixth edition, Henry R.

Cheeseman

Past Consideration• Problems of past

consideration often arise when a party to a contract promises to pay additional compensation for work done in the past.

• Past consideration (e.g., prior acts) will not support a new contract.

• New consideration must be given.

11 - 16© 2007 Prentice Hall, Business Law, sixth edition, Henry R.

Cheeseman

Concept Summary: Promises Lacking Consideration

Type of Consideration

Description of Promise

Illegal consideration

Promise to refrain from doing an illegal act.

Illusory promise Promise where one or both parties can choose not to perform their obligation.

Moral obligation Promise made out of a sense of moral obligation or honor or love or affection. Some states enforce these types of contracts.

Preexisting duty Promise based on the preexisting duty of the promisee to perform. The promise is enforceable if (1) the parties rescind the contract and enter into a new contract, or (2) there are unforeseen difficulties.

Past consideration

Promise based on the past performance of the promise.

11 - 17© 2007 Prentice Hall, Business Law, sixth edition, Henry R.

Cheeseman

Settlement of Claims• The law promotes the

voluntary settlement of disputed claims.

• Settlement:– Saves judicial resources, and– Serves the interests of the

parties entering into the settlement

11 - 18© 2007 Prentice Hall, Business Law, sixth edition, Henry R.

Cheeseman

Settlement of Claims (continued)

• Accord – an agreement whereby the parties agree to accept something different in satisfaction of the original contract.

• Satisfaction – the performance of the accord.

• If the accord is not satisfied, the other party can sue to enforce either the accord or the original contract.

11 - 19© 2007 Prentice Hall, Business Law, sixth edition, Henry R.

Cheeseman

Promissory EstoppelPromissory estoppel

(detrimental reliance)

• A doctrine that prevents the withdrawal of a promise by a promisor if it will adversely affect a promisee who has adjusted his or her position in justifiable reliance on the promise.

11 - 20© 2007 Prentice Hall, Business Law, sixth edition, Henry R.

Cheeseman

Promissory Estoppel (continued)

• For the doctrine of promissory estoppel to be applied, the following elements must be shown:

1. The promisor made a promise.

2. The promisor should have reasonably expected to induce the promisee to rely on the promise.

11 - 21© 2007 Prentice Hall, Business Law, sixth edition, Henry R.

Cheeseman

Promissory Estoppel (continued)

3. The promisee actually relied on the promise and engaged in an action or forbearance of a right of a definite and substantial nature.

4. Injustice would be caused if the promise were not enforced.