Peter Maggs (Fall 2011)
Chapter 1: Bases for Enforcing Promises
Function of Consideration:
1. Cautionary – lets parties know significance of their acts (in serious business deals)
2. Evidentiary – provides trustworthy evidence (shows that deal actually happened
Definition of Consideration: A performance or return promise bargained for and given in exchange for a promise à 1) Return Promise (bilateral) or 2) Actual Performance (unilateral)
Rule = Restatement 71: Requirement of Exchange
(1) To constitute consideration, a performance or a return promise must be bargained for.
(2) It’s bargained for if it is sought by the promisor in exchange for his promise & given by the promisee in exchange for that promise.
(3) Performance may consist of:
(a) An act other than a promise, or
(b) A forbearance, or
(c) The creation, modification, or destruction of a legal relation
(4) The performance or return promise may be given to the promisor or to some other person. It may be given by the promisee or by some other person.
Rule = Restatement 79: Adequacy of Consideration
If the requirement of consideration is met, there is no additional requirement of:
(a) A gain, advantage, or benefit to the promisor or a loss, disadvantage, or detriment to the promisee; or
(b) Equivalence in the values exchanged; or à any amount is OK (including nominal consideration)
(c) Mutuality of obligation (both parties have agreed to be bound)
1. ENFORCEABLE PROMISES: AN INTRODUCTION
uHawkins v. McGee
Doctor’s promise to the patient was binding
2. CONSIDERATION AS A BASIS FOR ENFORCEMENT
Bargains That are Not Consideration
1. Nominal Consideration (only if donative promise made to look like bargain)
2. Promises to surrender or forbear a legal claim that in unreasonable (Restatement 74)
3. Bargains involving an illusory promise (Restatement 77)
4. Bargains involving what a party is already legally obliged to do (Pre-Existing Duty Rule, Restatement 73)
(A) Fundamentals of Consideration
uHamer v. Sidway(1891): Uncle promised nephew $5000 to abstain from drinking & smoking until he was 21. The nephew performed by giving up his legal right to drink & smoke. Don’t have to prove benefit to promisor(although can argue benefit=uncle’s satisfaction from seeing nephew not drink), just detriment to promisee. One or the other. The detriment is forbearance of a legal right to drink = consideration.
Note: Nephew would’ve argued under Restatement 71(3)(b) & Restatement 79 (a promise in exchange for a promise/performance is sufficient consideration regardless of detriment or benefit to the promisee) if it was a later case!!
***subj to SofF(contract don’t have to be in writing, memo sufficient).
Uncle: Writing required b/c it takes 4 years to graduate from college (not performable in 1 year).
Nephew: I could drop out w/in 1yr & complete performance so no writing necessary.***
RULE: (Abstention from Conduct) – Forbearance of a legal right (not doing something you had a legal right to do) at the request of another is sufficient consideration for a promise.
uShadwell v. Shadwell (1860): Uncle promised nephew money if he got married to Ellen. Nephew forbore his legal right to stay single by marrying her = consideration
If uncle had promised nephew $5k and nephew didn’t have to do anything, then there is no consideration = gratuitous promise (Gratuitous Promise = Not Enforceable Contract)
Gratuitous promise = promise made by one who has not received consideration for it (it was given for nothing = for free). You can’t make it enforceable just by paying a little token pmt b/c¼
1. Consideration is more than just a formality
a. The bargain must be real & not just a mere pretense
**Old view of consideration**
Peppercorn – consideration of little trifling value
i. A wants to make a binding promise to B to give him $1K, but he knows that a gratuitous promise isn’t binding, so he’s offers to buy a book from B for $1K that was only worth $1. NO CONSIDERATION!!! BUT
c. Restatement 71 says any consideration suffices (NEW VIEW)
uFiege v. Boehm(1956): The woman promised not to sue the man (who she & he both thought was the father of her child), for bastardy in exchange for his promise to pay child support money. Held Even though the belief turned out to be false & he wasn’t the father, this is sufficient consideration b/c she honestly & reasonably believed the claim was valid at the time of the contract.
Restatement 74(1)(2): Settlement of Claims à Honest/Reasonable belief he was dad
(1) Forbearance to assert or the surrender of a claim or defense which proves to be invalid isn’t consideration unless (forbearance to sue isn’t consideration)
(a) The claim or defense is in fact doubtful b/c of uncertainty as to the facts or the law, or (was not doubtful at time of contract in Fiege v. Boehm) OR
(b) The forbearing or surrendering party believes that the claim or defense may be fairly determined to be valid (forbearing party thinks it’s true)
RULE: (Contract not to sue) – Forbearance to assert a legal claim is sufficient consideration whether or not the claim turns out to be true, as long as plaintiff had honest & reasonable belief the claim was valid.
(B) The Requirement of Exchange
Action in the Past
A promise is given for moral or past consideration when the promisor is motivated by some past event b/w him & promisee which benefited the promisor placing him under moral obligation to promisee.
“Past” consideration – performance/promise can’t be bargained for b/c it has already happened
Exceptions to Traditional Rule
1) Promise to pay a debt barred by statute of limitations
2) Promise to perform a voidable obligation
3) Promise to pay a debt discharged by bankrupcy
uFeinberg v. Pfeiffer Co(1959): Plaintiff seeking to enforce employer’s promise to pay her retirement benefits for the rest of her life starting whenever she got ready to retire. Held: no consideration b/c D’s promise was just a gift as P gave nothing in exchange for the promise. Past years of service not consideration b/c performance was not bargained for. P’s continued employment after learning of the benefits was not consideration either b/c the promise said she could quit at anytime – her continued employment was not given in exchange for D’s promise as it wasn’t a condition of gaining the retirement benefits. However, P wins anyway b/c she did rely on D’s promise to her detriment when she changed positions by retiring from a profitable position and giving up any chance of other gainful employment at her age. (Promissory Estoppel wins in this case à Restatement 90)
Note: Employer didn’t do it right!! If he wanted to make it binding, he should’ve said, “If P continues to work for 6 months, then she’ll get a pension.” à Valid consideration
GENERAL RULE: Consideration is a bargained for exchange and one cannot bargain for services that already happened in the past under Restatement §71. So, promise based on past services is w/o consideration.
RULE: Gratuitous pension plan – there was no consideration for P’s past performance or her continued employment, but she still wins b/c her retirement was a change of position in reliance on D’s promise. (Reliance will be discussed later!!)
1. “Moral Obligation”
a. Traditional C/L rule: a promise made in recognition of a moral obligation arising out of a benefit previously received is not enfo
der promissory estoppel – where a promisor makes an unenforceable promise (lack of consideration), which induces substantial/detrimental reliance by the promisee, promisor may be required to reimburse promisee’s reliance expenses.
uNote Case: Jailhouse Rock: Radio station uses promotion of no commercials or $25,000 to gain listeners for its station (bargaining for listeners) à If prison guard made prisoner listen to the radio, he isn’t bargaining for an exchange; has to listen on his own volition.
uNote Case: Broadnax v. Ledbetter(1907): P sued for reward for catching prisoner even though at the time he caught him he didn’t know about the reward. Held: P couldn’t accept an offer and act in performance of it, if he didn’t know it existed. He didn’t catch the criminal in exchange for Ds promise b/c he didn’t know of that promise, so no bargain.
uNote: Now Plaintiff sees the reward on sheriff’s building as they are walking in. P gets the $ b/c if you find out about offer before you complete performance, than you can collect.
Restatement 51: Effect of Part Performance W/O Knowledge of Offer¼
An offeree who learns of an offer after he has rendered part of the performance requested by the offer may accept by completing the requested performance. (P has not completed performance yet)
uNote: P could still get $ if he turned in criminal b/c he was his friend & wanted to help him. Motive does not matter as long as you know of offer.
Restatement 81 – Consideration as Motive or Inducing Cause
(1) The fact that what is bargained for doesn’t of itself induce a performance or return promise does not prevent the performance or return promise from being consideration for the promise.
(2) The fact that a promise does not of itself induce a performance or return promise does not prevent the performance or return promise from being consideration for the promise.
uLake Land Employment Group of Akron, LLC v. Columber (2004): Employee in at-will agreement signs non-compete agreement preventing him from working in 50-mile radius Akron, Ohio for 3 years. Employee works for 10 more years and then is terminated. After, starts up a competing company. Employer sues, employee says non-compete was overly restrictive and imposed undue hardship on him. Held: Consideration b/c although the employee didn’t receive anything from the agreement; his employment status of at-will continued and that continuation was deemed enough for consideration.
Dissent: Nothing changed except non-compete, employee got nothing; no bargain
RULE: Concluded an employer's forbearance from terminating an employee at-will contract (or continued at-will employment) can constitute valid consideration
a. Note: Change in employee handbook
RULE: Employer with a written policy requiring discharge for cause may unilaterally change its policy (w/o express reservation to do so) to one of termination at will, so long as it provides affected employees reasonable notice of the change.
(D) Promises As Consideration