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Business Law

Principles and Practices

Goldman, A., & Sigisrnond, W. (2014). Business Law: Principles and Practices (9th ed.). South- Western Cengage Learning.

Cengage Advantage Books

PRINCIPLES AND PRACTICES

onsideration

-iAPTER PREVIEW

e Requirement of Consideration

e Nature of Consideration

equacy of Consideration

ral Consideration

st Consideration

cial Problems Relating to nsideration

-- x isting Contractual Agreement -::ex isting Duty to Pay a Debt -::ex isting Duty to Perform a Legal

O bligation

reements Enforceable Without "'lsi deration

- mi ses to Charitable Organizations rni ssory Estoppel

- mi ses Involving the Statute of Limitations

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This chapter describes consideration, the second element required in a

contract. It opens with a discussion, supported by examples, pointing out th a·

if an agreement lacks consideration, neither party can enforce the agreemen·

unless it has already been carried out. The chapter then describes what

consideration consists of and how much consideration is necessary to make a

deal. There is a brief discussion of the terms moral consideration and past

consideration. The remainder of the chapter is devoted to special problems

relating to consideration and some exceptional situations in which agreeme nts

without consideration can be enforced.

Facts Houston worked at a local bakery in a small town but sought to obtain a super- market franchise with a large chain called "Blue Bird ." Houston was assured that upon payment of a franchise fee of $120,000, Blue Bird would bu ild him a fran - chised store at a new location . Houston was advised by Blue Bi rd to first buy a small grocery store in his hometown in order to get some management experi- ence, which he did. Three months later, Blue Bird told Houston to sell his store and get ready for the move to a franchised store. Houston re luctantly did sell the store, but at a loss, and took a temporary job at a local bakery on the night shift. Blue Bird then told Houston that "everything was ready to go except that more money was needed to start up the franchise." Houston, with much difficulty, raised the money. Blue Bird then told Houston again that even more money was needed. This time Houston, his funds depleted, sued Blue Bird.

At Trial Houston sued Blue Bird for damages (relying on a promise), lost profits, and ex- penses based upon breach of contract. Bl ue Birds attorney claimed the parties never reached a legal agreement on essential factors necessary to establish a binding contract, including the lack of consideration. The attorney cla imed that it was no more than a handshake.

Questions 1. Define consideration. 2. What legal theory could be used by Houston in court to counter Blue Birds

claim of lack of consideration in a proposed agreement between Blue Bird and Houston?

3. Is this theory a legal or an equ ity doctrine?

The Requirement of Consideration -- LEARNING OBJECTIVE ~

Explain why the presence of consideration in an

agreement is essential.

cons ideration: something of value given by each party to bind an agreement

pro misor: one who makes a promise

promisee: person to whom a promise is made

Chapter 7 discuss ed agre ement, the first element of a cont ract. Anot her require- ment of a legally enforceable contract is consideration . Even though t here ha been an offer and accept ance, an agreement m ay not ripen into a contract wit h- out the presence of consideration. Toget her, offer, acceptance, and consid eration are the three most important elements in the for m ation of a contract. O nce estab- lished, the intention to create a legal relationship would be present. If no consid- eration is present, the contract may not be enforc ea ble even if it contains a clause stating that is should be enforceable. Consideration is someth ing of legal value that each p arty gives to the contrac t to bind t he agre ement. Suppose, for exa mple. that your friend (the promisor, or person making a promise) promised to give you (the promisee, or person to whom the promisor make the promise) $200 if you repair his computer. Yo u repaired the computer, and your fr iend paid you $20 0.

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ol untary transfer of property -u consideration

The consideration your friend gave to the contract was $200. The consideration you gave to the contract was repairing the computer. Keep in mind that the parties must exchange something of value, but not necessarily of equal value, nor does consideration necessarily need to be monetary. (The next section will further ex- plain this issue.) What the exchange does require, however, is that the value exchanged by each party induced the other to enter into the agreement.

Johnson sold his son real estate valued at $500,000 for $1.00. A court most likely would not recognize this transaction as a valid contract since Johnson's relationship with his son is what induced him (Johnson) to enter into the contract, not the price.

Under the common law, the parties to a contract are not bound unless both give consideration; consequently, a promise to make a gift is unenforceable. A gift is a voluntary transfer of property without consideration. If you promise to give a friend an electronic thesaurus as a birthday gift, your promise is not legally binding even if your friend accepts. You, the offeror, have received nothing of value (consideration) in return from your friend, the offeree.

You will discover later in this chapter that there are exceptions to this rule regarding the exchange of consideration. You will also discover later in the text that there are exceptions under the UCC.

The presence or absence of consideration is unimportant once an agreement has been executed (carried out). For example, you and a friend agree to exchange graduation gifts. You give your friend a digital recorder as a graduation gift, but she does not give you anything. A court will not cancel the agreement and return the recorder to you because your friend gave no consideration.

Generally, both written and oral promises require consideration. Some states have laws providing that certain written contracts are valid without consideration.

e Nature of Consideration

...EARNING OBJECTIVE ~ uss what forms consideration

takes.

,. detriment: consideration that is : 'Jce by the offeree

_earance: refraining from doing .:; .,ing one has a legal right to do

The consideration demanded by the promissor (offeror) and given by the prom- isee (offeree) may be a benefit to the offeror, such as money, a computer, jewelry, or a cell phone. Often, however, the consideration does not have a monetary value and does not benefit the offeror. Instead, the consideration may consist of a sacrifice by the offeree. This sacrifice is called legal detriment. Legal detriment is consideration when the offeree, at the request of the offeror:

1. Does something (an act) or promises to do something he or she is not legally bound to do. Wadsworth, a multimillionaire industrialist, told a group of sixth-grade students in a speech at their commencement exercises that if they stayed in school and graduated from high school, he would pay each successful high school graduate's tuition to any four-year college in the United States. Each current sixth-grade student's completion of high school (an act that the student was not legally bound to do) was consideration for Wadsworth's promise to pay his or her college tuition.

2. Refrains (from an act) or promises to refrain from doing something she or he has a legal right to do. This refraining is called forbearance . A famous entertainer with a gross annual income of over $5 million promised his young friend full support for life, a $10,000 monthly salary, and a one-half interest in all the entertainer's real estate if the friend would refrain from pursuing his planned career in education and become the entertainer's bodyguard, chauffeur, and secretary for life. The friend had a legal right to pursue a career in education; therefore , refraining from this act was consideration for the entertainer's promise to do the things he promised for his young friend.

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Adequacy of Consideration ---· LEARNING OBJECTIVE ~

Indicate when the courts will question the adequacy of

consideration.

nominal consideration: dollar or other small sum of money used to bind a contract

As stated earlier in the chapter, the presence of consideration in an agreem essential. In the past, however, courts have not questioned whether the con· - ation received by each party was sufficient or fair in light of the consideratio- - other party gave. The -parties have been free to enter into an agreement on re. they can agree upon, even though one party may obtain a "better deal." In - - words, there are situations in which the parties exchange things that are equivalent in value. This may be due to the fact that one party is more igno:- than the other, that the parties are mistaken, or that one party wished to be r:: generous than the other party. In these situations, courts do not care, as long the promise suffers some detriment, no matter how small.

Cullen owned a racehorse worth $25,000 that had not made a good showing in the last six races. He decided to sell this horse at any cost j __ to get rid of it. Farnsworth, his friend, seriously offered him $200, and Cullen seriously accepted the offer. The horse then went on to win the next three races at the track, bringing the owner a substantial amount of money. Cullen had second thoughts and demanded a return of the horse, claiming that the consideration he received was too small. Becau. a serious offer was made by Farnsworth and was seriously accepted b) Cullen, who received the consideration he requested, Cullen was bound by the agreement even though the horse was worth $25,000.

Modern courts (based on equitable principles) have changed the histori.: view of consideration. They now protect individuals from contracts that are _ one-sided as to be unconscionable (unfair) . (Unconscionable contracts are cussed in Chapter 10.) They are willing to examine the adequacy of consid~­ ation and deny relief to a party that has subjected another party to an uni.- · bargain. For ex ample, the courts will question the adequacy of the considerati~­ (extreme lack of equivalent value) if the contract calls for the exchange of diffp,.-_ ent quantities of things that are identical in nature or have a fixed value, such money. A promise to pay a friend $200 in return for the friend's promise :- immediately pay you $20 (money promised for money) is not enforceable . Yer promise to pay $200 in return for a promise to deliver a book worth $20 is bi n.::- ing. Because the items exchanged are not identical in nature , the adequacy of L consideration is unimportant to the validity of the contract. It is difficu lt : . compare the worth of different items, so adequacy of consideration must L. judged by the parties to the contract.

The courts will also question the adequacy of the consideration if there is ?~ indication of fraud, duress, or undue influence (discussed in Chapter 14). F example, at the time Fleming purchased a used motorcycle, the salesperson delibe:-- ately misrepresented the condition of the motorcycle and charged him more mon than it was worth. Under these circumstances, the courts will permit Fleming avoid the agreement because he relied on the salesperson's statements.

Often, a written contract states that the consideration given for a promise -- $1 or some other small amount. This small sum of money is called nomi na. consideration. Courts will enforce contracts with such small consideration if t h:: amount was actually paid and if the offeror intended that amount to be the pric; for the promise. If, however, the $1 amount was stated in the contract only r make it appea r that the contract contained consideration, but the $1 was no~ actually paid, the courts will not enforce the contract. They would consider this action of stating the amount in the contract simply a cover up to make a grat u- itous promise enforceable.

In most states, se a ls placed on contracts are not substitutes for consideration. Article 2 of the UC C ha s aboli shed the effect of a seal with regard to the sale of goods.

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LEARNING OBJECTIVE ~ scover that moral consideration

is not more enforceable than any other promise

unsupported by consideration.

st Consideration

~RNJNG OBJECTIVE~ _ealize that past consideration

is legally no consideration at all.

nsideration: prom ise made a t that has already taken place

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Answer True (T) or Fa lse (F) . 1. Consideration is needed to make a prom ise lega lly

enforceable. T F 2. A promise to make a gift is enforceable in a court of law. T F 3. Consideration may be something other than money. T F 4. A promi se to refrain from doing something that the law

requires is consideration. T F 5 . Forbearance is a promise to do someth ing you are not

legally required to do. T F

Sometimes an offeror makes a promise because he or she feels it is the right thing to do. In other words, this person (the offeror) feels a moral commitment to make such a promise . In most states, courts adhere strictly to the requirements of con- sideration concerning moral obligations and would say that a moral promise is no more enforceable than any other promise unsupported by consideration. At best, a court wou ld conclude that the offeror intends to make a gift. Consider the following example:

Speedy, who had a great deal of affection for her aunt, promised to pay the rent on her apartment while the aunt was in the hospital and unable to work. Because Speedy received no consideration from her aunt for Speedy's moral promise to pay, the promise Speedy made is not legally binding.

A minority of courts wou ld take a different position and hold that a moral obligation is sufficient to enforce a promise even without return consideration, especially if the promise of the offeror involved a humanitarian gesture. In these few states, a promise such as the one Speedy made in the example might very well be enforceable.

Past consideration is a promise made for an act that has already taken place. This doctrine has the same status with the courts as moral consideration. Because consideration is something of value given by the offeree at the time of the prom- ise made by the offeror, past consideration is therefore legally no consideration at all in most states. In other words, for the consideration to be va lid, the offeror's promise must induce the offeree to act.

A friend helped you study for a final exam in your business law course. After the exam, you promised to give your friend $25 for the help. Because it was a promise to pay for help that had already been given, you are not obligated to pay the $25.

The offeree must give the consideration after the offeror makes the request. If before the exam you had promised your friend $25 to help you study for the fi- nal exam and your friend had agreed, the promise would be binding. In that case, your promise induced or motivated your friend to help you.

In some states, a written promise to pay for an act already performed (past consideration) is binding.

Sometimes a court will incorporate a past benefit into a contract and thereby deem that the contract has sufficient consideration to be enforceable. This, of course, pres umes that all the other requirements of a valid contract are present.

Marcum lived in an apartment owned by Summers. Summers asked Marcum to make certain repairs, which Marcum did, knowing that he would be paid for his work. Upon completion of the repairs, Marcum submitted a bill for his services, which Summers paid.

In this example, the agreement is enforceable. Although the repairs Marcum completed were a past benefit, he completed the work at the request of Summers. It wasn't as if Marcum did the work and then brought it to the attention of Sum- mers. This latter situation is a straightforward case of past consideration.

Special Problems Relating to Consideration

LEARNING OBJECTIVE ~ Determine the need for

consideration in special contexts.

Many problems involving consideration (or the lack of it) arise during the performance of a contract. Courts often deal with these problems on an individ- ual basis. Although many such problems occur, one common problem involves the preexisting legal obligation.

Preexisting Contractual Agreement Sometimes the offeree, after beginning performance under the terms of an already existing agreement, will not continue to perform unless the offeror makes a new promise to pay more money. A new promise by the offeror to pay more money under these circumstances is not legally binding. The offeree has fu r - nished no additional consideration for the new promise because there is a preex- isting legal duty to perform.

Castro, a building contractor, prepared a bid in writing to build a barn behind Medford's farmhouse for $50,000. After beginning work, Castro discovered that he required more materials than originally planned. Castro informed Medford that he would not continue the job until Medford agreed to pay an additional $5,000 for the extra necessary materials. Medford orally promised to pay. Castro was already legally obligated to complete the work for $50,000. Since Castro furnished no additional consideration for Medford's promise to pay him $5,000 more, Medford is therefore not legally required to pay the additional $5,000.

By doing or agreeing to do something extra-something not covered by the existing agreement-the offeree would be providing the additional consideration required in return for the offeror's promise to pay more money. If, in the exa m- ple, Castro had agreed to make the barn larger than originally agreed, he wou ld have provided consideration in return for Medford's new promise to pay an ad- ditional $5,000, and Medford would be required to pay the additional money.

In the interest of fairness and equity, the courts sometimes allow exceptions to the preexisting rule for circumstances not anticipated by the parties when the contract was made. Thus, in the preceding case, the courts might allow Castro to collect the extra compensation agreed upon ($5,000) if he had honestly run into some unforeseeable circumstance that caused him to lose money. A superior fo rce event such as a terrorist attack or an act of God such as a hurricane that destroy part of the barn during the construction period are examples of unforeseen cir- cumstances. These courts believe that as long as a person in Castro's position i not in any way negligent or dishonest, he or she should be entitled to collect.

In some states, a written agreement that changes an existing agreement and that is signed by the promisor needs no additional consideration.

Preexisting Duty to Pay a Debt Certain promises to pay a debt are not legally enforceable because one of the par- ties (the debtor:) already has a. preexisting DJ]jy to PJJY .tbe .de.ht to .t.be o.tJ~e..- p.:w:y (the creditor) . For example, a creditor may agree (promise) to accept part payment

idated cla im : debt, amount of '1 is not in dispute

·quidated claim: debt, amount of h is subject to an honest disp ute

(a smaller sum of money) from the debtor in full payment of the debt. Neverthe - less, in the majority of states, if there is no dispute about the existence of the debt or its amount, the debt is called a liquidated claim and the promise is not legally enforceable. The debtor has given no consideration for the creditor's promise to accept less money; the debtor is already legally obligated to pay the full amount. Even if the creditor accepts the smaller amount, the creditor may still collect the remainder of the debt.

Sellers owed you $500. On the due date, Sellers told you that she could not pay the full $500. You orally agreed to accept $400 in full settlement of the debt. Sellers agreed and paid you the $400. Because Sellers gave you no consideration for your promise to accept less than the full amount owed ($500), you may recover the balance due of $100.

If, however, a creditor accepts less money plus additional consideration from the debtor, the debt will be canceled. In this example, if you agreed to accept $400 plus one DVD worth $50, the entire $500 debt would be canceled because you have agreed to the additional consideration. The additional consideration may take any form; the value of the consideration is unimportant as long as it is an additional consideration.

In some states, if a creditor accepts part payment of a debt and gives the debtor a written release from the remainder of the debt, the release cancels the entire debt without additional consideration.

Part payment of a debt can cancel a debt if there is an honest dispute over the correct amount of the debt- called an unliquidated claim- and the parties agree to a compromise. Instead of going to court to settle the dispute, the debtor and creditor each give up this legal right. They agree instead to settle out of court on an amount somewhere between the amount the debtor claims is owed and the amount the creditor claims is correct. This compromise is legally binding and represents full settlement of the entire debt. One legal argument in support of this rule is that the consideration in the compromise agreement is each party's re - fraining , or promising to refrain, from contesting the amount in court.

Dodge hired Finzer to construct a human performance lab in an existing room of her home. When Finzer completed the job, he sent her a bill for $10,000. Dodge disputed the bill, claiming that a fair price was $8,500. She claimed that this figure was based on the exact same job performed for several of her friends and neighbors by other contractors. Finzer responded by saying that his work was quality work and was worth $10,000 but that in view of her report of what friends and neighbors paid, he would accept $9,000 in full settlement of the disputed bill. Dodge agreed and paid the $9,000. The $9,000 paid by Dodge cancels the $10,000 debt.

A dispute between debtor and creditor may also cancel that debt if the credi- tor accepts and cashes a check for an amount less than the creditor believes is due and the check is marked on its face "payment in full." If the creditor cashes the check, she in effect has made a promise to discharge the debtor from any additional obligation. Courts in most states reason that if any part of the debt is in dispute, the entire debt is unliquidated. Consequently, any payment that is made by the debtor and accepted by the creditor as payment in full is binding.

Crandall, who owned a landscaping service, orally gave Drake an estimate of $1,500 for cutting down two trees on Drake's property. Crandall then cut down the trees, claiming that Drake orally agreed to the work. Drake insisted, however, that she had authorized only an estimate. In an effort to settle the dispute, Drake mailed Crandall a check for $1,200 with the notation on the check "paid in full." Crandall cashed the check and then sued Drake for the additional $300.

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composition of creditors: agreement among creditors to accept a percentage of total owed by debtor in fu ll settlement of debt

In this example, Crandall could not collect the $300. Drake's check for $1,200 was an offer to settle the dispute. When Crandall cashed the check for $1,200, she accepted this offer to settle. The result would be the same even if, be- fore cashing the check, Crandall had crossed out a "paid in full" notation writ- ten on the check by Drake, or Crandall wrote in "under protest." Because of this confusion, the parties should follow the rule under UCC 3 -311, which states that if Drake wishes to protect her rights fully, she should include a note with the check that the instrument was tendered in good faith as full satisfaction of an unliquidated claim. Crandall can protect her rights by not cashing the check and returning it to Drake with a note stating that she is not agreeing to accept the ten- dered amount as full payment of the debt.

If a person owes money to several people, part payment of the debt owed to each of the creditors may cancel the entire debt if all the creditors agree. A com- position of creditors is an arrangement in which all creditors agree to accept a certain percentage of the total amount owed by the debtor in full settlement of a debt. Creditors who agree to the composition actually receive no additional con- sideration from the debtor in return for their promise to accept less money. Courts, nevertheless, will enforce such an agreement because no one creditor receives the full amount of the debt owed. Creditors generally agree to this type of arrangement only when they believe they will never be able to collect the full amount owed to them by the debtor.

Werner owed $4,000 to Vienna and $2,000 to Hobbs, for a total of $6,000. The two creditors agreed to accept 50 percent of their claims in full settlement of the debt. Under this arrangement, Vienna received $2,000 (50 percent of $4,000) and Hobbs received $1,000 (50 percent of $2,000). Because Vienna and Hobbs agreed to take less money in full payment of the total debt owed by Werner, the remainder of the debt is canceled.

A creditor's promise to extend the due date of a debt is not enforceable un- less the debtor gives additional consideration. If no additional consideration is given by the debtor for the creditor's promise to extend the time for payment, the creditor may legally demand repayment before the end of the extension.

Graves owed McHale $400. When the debt was due, Graves did not have the money and asked McHale for a three-month extension. McHale orally agreed. Before the three months were up, McHale changed his mind and sued Graves for the money. Because Graves gave no consideration for McHale's promise to extend the time of payment by three months, McHale's promise is not legally enforceable.

A debtor may legally obtain an extension of the due date if the creditor agrees to the extension and receives additional consideration. Suppose, in the ex- ample, McHale agreed to extend the due date and accepted a part payment of the debt from Graves before the original due date. The part payment by Graves would be the additional consideration needed in return for McHale's promise to extend the due date by three months.

In some states, a creditor's written promise to extend the due date of a debt is enforceable without additional consideration.

Preexisting Duty to Perform a Legal Obligation A person who performs or promises to perform his or her legal obligation gives no consideration for an offeror's promise to pay money. Into this category fall police officers, judges, legislators, and other public officials. A promise, for ex- ample, to pay a police officer a reward for the arrest of a person who burglarized your home is not legally enforceable. The arrest of criminals, and in this particu- lar case, a burglar, is part of a police officer's legal obligations. He or she cannot gain privately from this obligation.

greements Enforceable Without Consideration

LEARNING OBJECTIVE ~ Identify circumstances under

which a court will enforce an agreement despite the

absence of circumstances.

ge: promise to make a gift to a a table , religious, educational, or :'1tific institution; bailment created

-en personal property is deposited security for repayment of a debt

Up to this point, the emphasis has been on situations in which consideration was required for promises to be enforceable . There are exceptional situations , however, in which promises can be enforced without consideration. In an effort to avoid injustice, courts base their decisions to enforce such promises on prin- ciples of equity. If ordinary contract law instead of equity were the basis, these same promises would not need to be enforced because consideration is lacking.

Promises to Charitable Organizations A promise to make a gift to a charitable, religious, educational, or scientific or- ganization or to some other institution such as a library, museum, or hospital that depends on voluntary contributions is usually enforceable without consider- ation under modern court view. This promise is called a pledge or subscription. The pledge can be oral (e.g., a donation called in to a television station during a charity telethon), but it is usually in writing. Before your pledge is binding, you must acknowledge it. In states where a pledge is required in writing, the donor is often asked to sign a pledge card (see Figure 8.1) . There are different theories for enforcing such a promise.

One theory is that the organization, even before payment of the pledges, will rely on the total amount of pledged money and enter into various contracts or make other expenditures . Under the circumstances, it would be unfair to the or- ganization to permit any person to withdraw a pledge.

The Preservation of Animals in Tennessee, Inc., an educational and scientific not for-profit corporation organized for the purpose of protecting wild animals, establishes and maintains refuge areas for wild

q L_ my gift to the Highland Hospital Foundation will help provide new and expanded services for Highland's C/...'?f1 patients and will directly support the high quality of personalized patient care to which Highland is committed . My tax deductible check is enclosed for S .

Through this gift , 1/we will be considered a:

0 Gimtrt6utor-(S5-24)

•O ~(S25-99) Receives "Highland Highlitcs'' four times a year. Recognition in hospital publication.

•0 .%£w.($100-499) Receives all of the above plus free pe rsonalized Emergency Medical Card . Invitation to annualrtception .

•second Century Associa£e

PLEASE PRINT MluM~.

•0 ~($500-999) Re ceives all of the abo\'t plus invitation to annual recognition dinnr:r.

• 0 .%wza0.(S1000 or more) Rect'in:s all o f the ahm:e plus recognition in hospital lobby as le:Jding contributor. Invitation to spedal Founder's en:m . Fn:r tickets to hospiul functiun s.

Please make check payable to: Highland Hospital Foundation, Inc.

Every gift large or small is important to Highland.

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Send acknowledgement of gift to :

Name (circle) or. M.r.Mrs. Name ___ _______ _ Ple:~se specify the '"~Jy rou wish roue name 10 appear in the annual report of gifts. •

Address Addn: ss __________ _

City ________ State _____ Zip ___ _

Telephone (

Please designate my (our) gift: 0 A regular donation: t O In honor of; tO In memory of; t O In appreciAtion of:

Name _ __________ ,Occasion:-:---~..,.-- • Donors' names :are acknowledged in our tAcknowledgemcnt of gift is sent

hospital pUblication unless you immediately and no amount is instruct us otherwise. mentioned.

FIGURE 8.1 Pledge Card

_ ___ ___ _ Zip __ _

Rt'l ationship w prrson honort:d ____ _

0 This gift will be m:atcht:d by my (spouse's) employer. Enclosed is the Matching Gift Form supplied by my (spouse's) employer.

0 Please send me more information in regard to estate tax and income tax savings from a chariuble gift to Highland .

promissory estoppel: equitable doctrine applied by the courts to enforce a promise unsupported by consideration

animals within Tennessee. To build more refuge areas and maintain present ones, the corporation depends on voluntary contributions from the public. Montgomery, who had a real love of animals, responded to a request by the corporation to contribute and, like many other people, signed the following pledge on June 8, 2005: «In consideration of my interest in animals and in consideration of the pledges of others, I hereby agree to pay to the order of the treasurer of The Preservation of Animals in Tennessee, Inc., the sum of two thousand dollars ($2,000). (signed) Gloria M. Montgomery." Based on this pledge and the pledges of others, several more refuge areas for wild animals were built in certain areas of the state between August 1, 2011, and December 1, 2011, at a cost of $300,000. Montgomery refused to pay her pledge as agreed, claiming that she now desired to use the $2,000 for a trip to Europe during the winter holidays. The corporation notified her that she was legally liable for payment of the $2,000 and that it would take action through legal channels to collect the money if she did not pay. In a return letter to the corporation, she insisted she was not liable because her pledge was merely a promise to make a gift and that she had received no consideration from the corporation for this promise. Because the corporation built several new refuge areas for wild animals relying on the pledges, Montgomery is legally obligated to pay the $2,000 regardless of the lack of consideration, as she claimed.

Another theory is that the promise to pay is made in consideration of the promises of others to also give. The promise of each promisor is supported by the promises of others.

Generally, a pledge may be withdrawn at any time before the institution takes steps to begin construction. Some courts, however, hold that once made, a pledge may not be withdrawn.

Promissory Estoppel Courts in some states occasionally apply the equity doctrine of promissory estoppel to enforce a promise unsupported by consideration on the part of the offeree if it would be grossly unfair not to enforce the promise since the result could lead to a harsh result, causing an injustice to occur if relief is not allowed . In short, the offeror is prevented by law (stopped) from claiming a defense (no consideration for his or her promise) that would normally be available.

Martin was an employee of Case for twenty-five years but had not received any benefits. Nevertheless, Case promised to pay Martin a pension of $1,300 a month for life whenever Martin decided to take retirement. Case made it quite clear to Martin, however, that he was not asking her to retire, nor did he wish her to retire. Martin retired two years later, making no plans to work anywhere else. Instead, she simply relied on the monthly income Case agreed to provide; in fact, she would not have retired without it. After a few years, Case discontinued the pension. Martin was then too advanced in age to look for another job and sued Case to continue payment of the pension. Case claimed that his promise to pay the pension in the first place was never supported by consideration on Martin's part.

The court in this example would probably rule in Martin's favor based on the equity doctrine of promissory estoppel because the purpose of this doctrine is to enforce a promise even though consideration is lacking. Case made a prom- ise of a monthly income for life, and Martin relied on this promise. Case how- ever, reneged on this agreement. It would obviously be grossly unfair if she were not able to continue to collect the pension. An injustice could be avoided only by enforcing Case's promise.

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You are graduating from Spencer Community College and plan to attend a four-year college to complete a bachelor's degree in physical therapy. Your well-to-do uncle promises to reimburse you for your room, board, and tuition for the remaining two years you will be in co ll ege if you, instead, complete a program in optics . Relying on your uncle's promise, you attend co llege and complete the program in optics.

Questions 1. If you completed the program in optics, would your uncle be obligated to make

payments as he promised to do? 2. If you had started the program in optics, but then dropped out at the end of the

first year at your four-year college , can you legally demand that your uncle pay you for that year's room, board , and tu ition?

3. If you had completed the program in physical therapy as you had originally planned, but your uncle still reimbursed you for room, board, and tuition, could your uncle then change his mind a short time after giving you the money and ask for a return of the money, claiming lack of cons ideration?

Promises Involving the Statute of Limitations Each state has a statute of limitations legally preventing a creditor from collect- ing a debt after a certain period of time. The time varies from state to state. After this period passes, t he creditor can no longer initiate a lawsuit against the debtor. At times, however, a debtor with a guilty conscience wishes to repay the money that he or she owes even though the time limit for collection has passed. Because the debtor actually has no legal obligation to pay, however, the promise cannot serve as consideration. The debtor's promise amounts at best to a moral obliga- tion to pay, and a moral obligation is not consideration. In most states, however, if the debtor offers to repay the debt in writing, the courts will make an excep - tion to the past consideration rules governing consideration and enforce the debt- or's prorpise. Th is new promise is binding according to the terms contained in the new agreement for another statutory period.

Answer True (T) or False (F) . 1. Promises made to charitable organizations that depend

upon voluntary contributions are generally enforceable without consideration. T F

2 . A creditor's promise to accept less than the amount owed as full payment of a debt is legally bind ing . T F

3. Part payment of a debt may cance l the entire debt if there is an honest dispute ove r the exact amount of the debt. T F

4 . A debtor who makes a part payment of the debt before the due date is no longer liable for the balance. T F

5 . A liquidated debt is one that is not in dispute. T F

ey Points in Chapter • • • :c:ies to a contract, as a general rule, are not bound un- - consideration is given by both of them.

Consideration is a promise by the offeror in return - either money or property or a sacrifice by the offeree -::rred to as legal detriment.

Courts do not usually question whether the consider- received by each party is sufficient or even fair. The

~-rs may raise this question if there is evidence of

fraud, duress, or undue influence or if the contract is grossly unfair (unconscionable) .

A moral promise (e.g., based on love and affection) is no more enforceable than any other promise unsup - ported by consideration.

Past consideration is no consideration. The offeror, for example, is not bound by a promise to pay money fo r an act performed prior to the promise.

Performing or promising to perform an existing obli- gation is not consideration unless the offeree does some - thing in addition to what is required by the existing agreement.

Certain promises to pay a debt are not legally en- forceable because the debtor already has a preexisting duty to pay the debt to the creditor. A liquidated claim (no dispute over the correct amount) must be distin- guished from an unliquidated claim (amount of the debt is in dispute). Refer to the "Special Problems Relating to Consideration" section of the chapter.

In exceptional situations {pledges to charitable, reli- gious, educational, or scientific organizations) courts will enforce promises made without consideration. This rule also applies to promises to pay a debt that has ex- pired under a state's statute of limitations.

Applying the preexisting rule to the payment of debts, a distinction is made between liquidated and un- liquidated debts. If a creditor agrees {promises) to accept part payment from a debtor in full payment of a liqui- dated claim (no dispute exists about the existence or amount of the debt), the promise is not enforceable. The debtor is already legally obligated to pay the full amount.

Important Legal Terms

composition of creditors

consideration

forbearance

gift

legal detriment

liquidated claim

nominal consideration

Questions and Problems for Discussion

1. Jenetta agreed to work as an administrative assistant for Di Brin, owner of the BuildWell Constmct.ion Cmnpany, for $2,5DD a mont.\;!. lifter six months on the job, Jenetta claimed that because her wages were inadequate, her current contract was terminated. Is she correct?

2. Discuss the differences among adequate consideration, moral consideration, and past consideration.

3. Rohn Corporation entered into a written contract to hire Layman for five years at a salary of $200,000 per year. After three years, Layman asked Rohn for a $25,000 per year raise under the current contract. Rohn agreed. At the end of the five-year contract, Layman left, but Rohn sued to get back the extra $25,000 per year for the last two years of the five-year contract. Should Rohn be successful in the lawsuit?

4. Visca, while visiting a friend's house, was injured when some heavy ceiling tiles in the bathroom came

If, however, a debt is unliquidated (an honest dispur~ does exist over the amount of the debt), the accepta nce by the creditor of a part payment of that debt cancels the remainder. The debtor and creditor each gave up the lega. right to go to court to settle the dispute. Part payment o: a disputed claim also cancels the remainder of the deb t ii the creditor accepts and cashes a check marked "paid ~ full." Regardless of this majority view, some states stiL hold that a creditor may collect the balance of the clai m.

A person such as a public official who is already le- gally obligated to perform a duty under the law gives no consideration for his or her promise to pay money. T his public official cannot gain privately from the duty to per- form a legal obligation.

In exceptional situations, courts will enforce prom- ises made without consideration. Often, these situation involve promises {pledges) to make gifts to charitable, re- ligious, educational, or scientific organizations under t he doctrine of promissory estoppel or as the result of a promise made after a debt expires under a state's stature of limitations.

Some of the rules of consideration will change when the UCC is studied in future chapters.

past consideration

pledge

promtsee

promtsor

promissory estoppel

unliquidated claim

loose, fell, and hit her squarely on the head. She suffered a slight concussion. Her friend gave her

.... rno.tley to see a doctor a .... t}a to pay for t.~.~e prescriptions ordered by the doctor. In turn, Visca agreed orally not to sue her friend for the injury she received. Several weeks later, because Visca complained of severe headaches and had to make several more visits to a doctor and continue with medication, she decided to sue her friend for additional expenses and pain and suffering. Can Visca recover the additional money?

5. Graves was struck by a car driven by Koons. They then had a dispute as to whether or not the accident was Koons's fault and as to the extent of Graves's injuries. They finally agreed that Koons would pay Graves $1,500 (and he did) in return for Graves's promise to release Koons of all liability. In the event that Graves's actual damages later turn out to be in excess of $1,500, is Graves still bound by his promise of release?

" When Glocker received her bill from Lawnmark, a lawn-care company, she became very angry about the amount that the company claimed she owed . She immediately wrote a letter to the company's general manager, giving her version of the amount owed and including a check for that amount. She marked on the face of the check "paid in full settlement of the claim by the Lawnmark Company." The general manager cashed the check and immediately sued Glocker to recover the remaining balance. Can the general manager legally collect?

- Adler was a medical research assistant at Mills General Hospital. Before his contract with the hospital expired, he was offered a position with another hospital at a higher salary. Mills General Hospital then offered Adler an increase in salary if he would complete his employment contract. Adler agreed to stay at Mills General Hospital. Is Adler entitled to the increase in salary offered by the ho spital? The City of Newland through its financial director entered into a contract with Armae, a waste management contractor, to haul away all the city's waste products for a certain price. After the ontract was made, several new rental units were

bu ilt in the city, and Armae, based on his higher osts, asked the city for an additional $20,000

ses for Review

_-\pfel, a company that sold computer systems, sold a -omputerized system for trading securities on the :narket to Prudential- Bache Securities, an rnvestment bank. Before the purchase was made, Prudential-Bache thoroughly reviewed Apfel's ~-srem, which had been made known only to them, an d deemed that the system fit its business needs. :-his review was followed by a sales contract in

hich Prudential-Bache agreed to make periodic ayments for employing this system. Prudential-

Bache encouraged its customers to use the system - d for at least two years was the only company to Her these services. During this time, they handled

·1 lions of transactions, which of course produced orne for the company. After a few years,

rudential-Bache had a change in personnel. The .:om ract with Apfel was reviewed, and the new

an agement decided to cancel and not make · :;nher payments. The new management claimed -- r the contract with Apfel had no value to them --d that therefore there was no consideration to

d the parties. Their "no value" claim stated that omputerized system was not as secret as had

en conveyed to them and that other investment _ :npanies were also using the system. Was

dollars a year. At a public meeting, all city council members voluntarily voted to authorize the mayor to pay Armae the additional amount. Several community citizens who attended the meeting then sued the city, claiming that the additional compensation should have been denied. They based their claim on the theory that a contract was already in place and that there was no consideration for the payment of the increased compensation. Were the contract modification and additional $20,000 per year to Armae valid?

9. The board of directors of Hill Haven, a home for the elderly, was accepting donations to build an additional dormitory at the home. Hogan promised in writing to donate $3,000 for the proposed addition. Relying on this and other pledges, the directors contracted for the construction of the dormitory. Is Hogan bound by the promise to donate $3,000?

10. Davies was employed in the data-processing division of a bank . Desmond and Zwick, owners of a firm that manufactured athletic equipment, orally promised Davies a position as office manager if she would quit the bank job and work for them. Davies quit her job at the bank, but Desmond and Zwick did not keep their promise to hire her. Can Davies legally enforce the promise made by Desmond and Zwick to hire her?

Prudential-Bache in a position to claim that no consideration was present because of its claim that it had no value to the company? (Apfel v. Prudential- Bache Securities, Inc., 600 N.Y.S.2d 433)

2. After working for the company for several years, Love and Morris, employees of Airco, Inc., were asked to sign employment contracts containing a noncompete clause. Airco stated that employees were asked to sign so as to prevent future competition from former employees who decided to leave the company. Although Airco never formally made any promises, both employees believed that signing the agreement would either make their jobs more secure or give them a better chance for promotion. About a year and a half after signing the agreement, Love and Morris left Airco and went to work for a competitor. Airco then petitioned the court to enforce the noncompete provisions of the two men's employment contracts. Love and Morris contended that they received no consideration for signing the noncompete covenant in their contract. Were they correct? (Milner Airco, Inc. v. Morris, 433 S.E.2d 811)

3. Pearsall and Alexander drove to a liquor store to purchase lottery tickets. Pearsall went into the store

alone, and when he came out, and in reference to the tickets asked Alexander, "Are you in on it?" Alexander said, "Yes." When Pearsall asked Alexander for his half of the purchase price of the tickets, Alexander replied that he had no money. When they reached Alexander's home, Alexander, expressing his anxiety that Pearsall might lose the tickets, demanded that Pearsall produce them, snatched them from Pearsall's hand, and "scratched" them, only to find that both were worthless. At about 8:00 P.M. that same evening, Alexander, who apparently had come by some funds of his own, returned to the liquor store and bought two more tickets and returned home. This time Pearsall, who had been offended by Alexander's conduct earlier in taking both tickets, snatched the two tickets from Alexander and announced that he would be the one to "scratch" them. He changed his mind however and gave over one of the tickets to Alexander. Each man then "scratched" one of the tickets. Pearsall's ticket proved worthless; Alexander's was a $20,000 winner. Subsequently, Alexander cashed in the ticket and received the winnings; but when Pearsall asked for his share, Alexander refused to give Pearsall anything. Pearsall brought suit against Alexander claiming breach of an agreement to share the proceeds of the winning ticket. Alexander denied that there was any agreement to share the winnings. Pearsall, however, stated that his lawsuit was not about suing for money based on gambling,

but rather on an agreement entered into to sha re - winnings of a jointly purchased lottery ticket. E man gave as consideration for the agreement hi promise to share the proceeds of the winnings. Should Pearsall win this case? (Pearsall v. Alexander, S72 A. 2d 113-DC)

4. Ralston was injured when she fell down a church stairway. Matthew, agent for the company that insured the church, promised Ralston that the insurance company would pay her hospital and medical expenses if she did not sue the church. Ralston agreed, but the insurance company refuse- _ to pay her expenses, claiming that charitable and religious organizations in the state of Kansas were not liable for negligence. The company stated tha: Ralston had no valid claim and that her promise not to sue was not consideration. Did Ralston ha,-e- a valid claim? (Ralston v. Matthew, 173 Kan. SS C

S. Williamson was about to lose a house that she owned but was mortgaged. She agreed to sell the house to Matthews for an amount she thought would pay off the mortgage and leave enough money for her to purchase a mobile home. After making the sale, Williamson went to her attorney and said that she wished to back out of the house sale because the selling price was inadequate. She claimed that she had not charged Matthews enou~ ... to pay off her mortgage and then be able to purchase a mobile home. Could the sale of the hous to Matthews be voided for lack of consideration ? (Williamson v. Matthews, 379 So2d 124S Ala)