Friday, February 26, 2010
5 - Contracts - Formation (Consideration)
Contracts – Formation (Consideration)
PLEASE NOTE THAT THE FOLLOWING IS TAKEN FROM SOME OF MY CLASS NOTES, SOME OF WHICH IS MY OWN PERSONAL WORK AND SOME OF WHICH BELONGS TO CONCORD LAW SCHOOL. IT IS POSTED TO HELP MY IL STUDENTS IN PARTICULAR. IT CANNOT BE DISSEMINATED WITHOUT EXPRESS, WRITTEN PERMISSION.
The rule is that consideration is present if both parties engage in a bargained for exchange of acts or promises and both parties incur new legal detriment as a result of the contract. Most of the time it is fairly apparent whether or not consideration is present, however, there are some nuances to consider.
1. Promissory Estoppel – Consideration Substitute.
A promise made that causes another party to reasonably, foreseeably and detrimentally rely on that promise will be enforceable to the extent necessary to avoid injustice. Basically, this is a Detrimental Reliance argument.
2. Illusory Promise.
In this situation, the issue is whether or not there is a true legal detriment to the promisor. In other words, “I’ll pay you $100 if the sun rises tomorrow in the west.” There is no downside to the promisor.
3. Pre-existing Duty Rule.
Here, an agreement to pay for an obligation that already exists, fails for lack of consideration. There are special rules for Output/Requirements Contracts. Absent a special rule these contracts would fail for consideration because there is no specific quantity. Output/Requirement contracts are limited to good faith obligations and that the quantity cannot be unreasonably disproportionate to stated estimates or prior requirements.
3. New Consideration when a contract is modified.
At common law, when a contract is modified, there must be mutual agreement to the modification and there must be new consideration. The exception to this rule is if there are “unanticipated difficulties” that are substantial. If so, then no new consideration is needed.
The UCC rule is that only mutual consent entered into in good faith is needed. There is no need for new consideration or unanticipated difficulties.
Next we’ll look at “Defenses to Formation.”
Professor Doug Holden
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