business law chapter 4: consideration (bargained for exchange)
TRANSCRIPT
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Business Law
Chapter 4: Consideration (Bargained for Exchange)
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Introduction
• Consideration is often defined as “some right, interest, profit or benefit accruing to one party” or the loss, detriment or responsibility assumed by another party to the contract.
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• Consideration is also a requirement of a legally valid contract.
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What is consideration?
• The basic reason for a contract; a person gives up something of value in exchange for receiving something of value through the contract.
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Why is consideration required?
• Consideration is required for the formation of a valid contract for the simple reason that it shows the parties’ intent to be bound.
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• A one-sided promise does not put the other party in any different footing than he or she had prior to the promise.
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Types of Consideration
• A right
• A profit
• An interest
• A physical object
• A responsibility undertaken
• A legal detriment
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Legal Detriment
• Consideration can also be satisfied through actions.
• When a person assumes a legal detriment, this can also satisfy the requirement of a consideration.
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Detriment
• The “bargained for exchange" in a contract, where the parties take on some responsibility that they are not legally obligated to undertake
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Proving Consideration
• When the consideration for a contract is under dispute, the parties involved must devote time and energy in proving (or disproving) the existence of consideration.
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• Many times, the contract itself will recite the actual consideration.
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• In many jurisdictions, there are legal presumptions that may also help to establish the existence of consideration.
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• Written contracts, for example, are often presumed to have consideration, although the other party can rebut this presumption.
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• As a general rule, there is no requirement that consideration for a contract be recited or expressed in the writing.
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Quid Pro Quo
• The phrase “quid pro quo” is a Latin term that is usually translated as “something for something.”
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Quid pro quo and Consideration
• Quid pro quo is a general term; consideration is a specific, legal term.
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Inadequate or Insufficient Consideration
• Courts often refrain from determining the value of the consideration.
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• Parties are free to negotiate any contract terms that they choose, as long as the contract does not involve fraud, duress or undue influence over one party, or a contract that is void for public policy reasons.
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• Inadequate consideration is not considered insufficient consideration and therefore will not automatically void a contract.
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Grossly Inadequate Consideration
• Grossly inadequate consideration is often a feature of unconscionable contracts.
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• An unconscionable contract is one in which the terms or bargain is so obviously one-sided that the contract should be voided for public policy reasons.
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Contracts “Under Seal”
• Seals are rare in modern contracts.
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• Under the common law, a contract under seal was presumed to have consideration and therefore no additional evidence or testimony about the consideration was required.
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Legal doctrines that affect consideration
• Courts have created several legal doctrines that affect the analysis of consideration in a contract.
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Promissory Estoppel
• The basic idea behind estoppel is that when person A makes a statement that person B relies upon, A is prevented from denying the truth of his statement.
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What is Estoppel?
• When a person is barred by prior actions from claiming a right or a duty against another person who relied, in good faith, on those actions.
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Promissory Estoppel and Consideration
• Under the theory of promissory estoppel, when Party B suffers some legal detriment as a result of the contract, Party A cannot claim that there was no consideration for the contract.
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The Elements of Promissory Estoppel
• 1) there was a clear and definite promise; 2) the promisor intended to induce reliance, and that reliance occurred; and 3) the only way to avoid injustice is to enforce the contract.
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Waiver
• When a person gives a waiver, he or she surrenders a right, requirement or obligation.
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Accord and Satisfaction
• When parties change the terms of their contracts, or negotiate entirely new contracts based partly on a previously existing contract.
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Contracts for an Illegal Purpose
• A contract that contemplates an illegal purpose, such as a criminal act, will not become enforceable simply because it is supported by consideration.