978-0077733735 Chapter 9 Lecture Notes

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Chapter 09 – Consideration and Cyber-Payments

Chapter 9

Consideration and Cyber-Payments

I. Key Terms

Accord (p. 225) Legal detriment (p. 219)

Accord and satisfaction (p. 225) Locus sigilli (p. 226)

Bargained-for exchange (p. 220) Option (p. 228)

Consideration (p. 219) Past consideration (p. 229)

Disputed amount (p. 225) Preexisting duties (p. 229)

Estoppel (p. 228) Promissory estoppel (p. 228)

EU Data Protection Directive (p. 232) Release (p. 224)

EU E-Privacy Directive (p. 232) Safe Harbor Principles (p. 232)

Firm offer (p. 228) Satisfaction (p. 225)

Forbearance (p. 220) Seal (p. 226)

Illusory promise (p. 229) Statutes of limitations (p. 227)

Irrevocable offer (p. 228) Unconscionable (p. 221)

II. Learning Objectives

1. Define the term consideration.

2. Identify the different types of detriment

3. Explain the characteristics necessary for valid consideration.

4. Define the term unconscionable.

5. Explain whether a promise not to sue can be consideration.

6. Explain whether a charitable pledge can be consideration.

7. Define accord and satisfaction.

8. Identify those enforceable contracts that lack consideration.

9. Explain promissory estoppel.

10. Describe the issues involved in cyber-payments

III. Major Concepts

9-1 Requirements of Consideration

The fifth element necessary to any valid contract is consideration. Consideration is the

mutual exchange or promise to exchange benefits and sacrifices between contracting

parties. Consideration has three requirements: (1) promises made during bargaining

depend on the consideration to be received, (2) the consideration must involve something

of value, and (3) the benefits and detriments promised must be legal.

9-2 Types of Consideration

Generally, consideration takes the form of money, property, or services. There are certain

special kinds of agreements and promises to which the benefits and sacrifices are unique.

Among these are promises not to sue and charitable pledges.

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Chapter 09 – Consideration and Cyber-Payments

9-3 Problems with Consideration

Problems sometimes arise when the consideration involved in a contract is money and the

parties do not agree on the amount of money owed. If there is a genuine dispute, a

creditor can accept an amount as full payment even though it is less than the amount

claimed. Once the creditor has accepted the lesser amount, the dispute is settled by an act

of accord and satisfaction. If the dispute is not genuine, accord and satisfaction do not

apply. As a general rule, contracts are not enforceable without consideration. However,

some states eliminate the need for consideration in some agreements. These agreements

include promises bearing a seal, promises after discharge in bankruptcy, debts barred by

the statute of limitations, promises enforced by promissory estoppel, and options

governed by the UCC. Other agreements that seem to involve consideration but that the

courts will not enforce involve preexisting duties, past consideration, illusory promises,

and gifts.

9-4 Cyber-Payment Tactics and Concerns

The measurement of consideration has become an issue when consumers buy and sell

online. Consumers can comparison shop online using shopping search engines,

patronizing user-friendly industries, and shopping with companies that provide price

comparisons on their websites. Cyber–shopping hidden costs include Internet access fees

and shipping and handling costs. Some illegal practices involved in online shopping

include discriminatory price-setting, credit card fraud, and bait-and-switch schemes.

Online consumers can choose from several payment methods including credit cards, debit

cards, smart cards, and alternative cyber-payment systems such as PayPal. Privacy

protection and security, however, are limited.

IV. Outline

I. Requirements of Consideration (9-1)

A. The Nature of Consideration

1. Consideration consists of a mutual exchange of gains and losses between contracting

parties.

2. The term “legal benefit” is used to designate the gain that each party experiences.

3. The term “legal detriment” is used to describe the sacrifice that each party must

experience.

4. The term “forbearance” is used to reference the type of legal detriment that involves

refraining from doing something that one has a legal right to do.

B. The Characteristic of Consideration

1. Consideration has three characteristics.

a. The agreement must involve a bargained-for-exchange.

b. The contract must involve adequate consideration.

c. The benefits and detriments promised must themselves be legal.

2. In general, the courts do not look into the adequacy of consideration.

3. A court may refuse to enforce a contract or any clause of a contract if it finds

unconscionability.

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Chapter 09 – Consideration and Cyber-Payments

4. Consideration requires that the benefits and sacrifices promised between the parties

be legal.

II. Types of Consideration (9-2)

A. Money as Consideration

1. The shift from a barter to a cash economy occurred when transporting goods to the

market became difficult and hazardous, and it was also accelerated by the need for

credit.

2. Today we are in an era of change from a cash/credit economy to one based on

electronic transfer; but even when electronic transfers are involved, people still tend

to think in terms of cash.

B. Property and Services as Consideration

1. Consideration can consist of property and services.

2. Barter agreements contain valid consideration.

C. Promises Not to Sue

1. A promise not to sue, when there is the right or apparent right to sue, is enforceable

when it is supported by consideration.

2. A promise not to sue in exchange for an amount of money is a customary way to

settle or prevent a pending lawsuit.

3. A promise not to sue is commonly called a release.

D. Charitable Pledges

1. Under traditional rules, charitable pledges are not enforceable as contractual

obligations because they are not supported by consideration.

2. Because of the dependence of charities on contributions, courts have been encouraged

to enforce charitable pledges in the following three ways:

a. Some courts see the promise to install a memorial to the promisor as

consideration.

b. A more contemporary approach is to use either promissory estoppel or public

policy to support the claim.

c. Some courts have held that a pledge made is supported by the pledges of all

others who have made similar pledges.

III. Problems with Consideration (9-3)

A. Accord and Satisfaction

1. A disputed amount is one on which the parties never reached mutual agreement.

2. If a creditor accepts as full payment an amount that is less than the amount due, then

the dispute is settled by an accord and satisfaction.

3. Accord is the implied or expressed acceptance of less than what has been billed the

debtor.

4. Satisfaction is the agreed upon settlement contained in the accord.

B. Enforceable Agreements (Without Consideration)

1. Promises under Seal

a. Years ago, contracts under seal required no consideration.

b. Most states have abolished the concept that contracts under seal require no

consideration.

c. The UCC has eliminated the use of the seal in all sale-of-goods contracts.

d. A few states still require the use of the seal in real property and certain other types

of transactions.

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Chapter 09 – Consideration and Cyber-Payments

2. Promises after Discharge in Bankruptcy

a. Persons discharged from indebtedness through bankruptcy may reaffirm their

obligations.

b. The bankruptcy court must now hold a hearing when a reaffirmation is intended,

informing the debtor that reaffirmation is optional, not required, and of the legal

consequences of reactivating a debt.

c. It is up to the bankruptcy court to approve a reaffirmations.

d. State laws, in most cases, provide that no new consideration need be provided in

support of reaffirmation.

3. Debts Barred by Statutes of Limitations

a. Statutes of limitations limit the time within which a party is allowed to bring suit.

b. Debtors may revive and reaffirm debts barred by the statutes of limitations

without the necessity of new consideration.

c. Affirmation will result from the part payment of the debt.

4. Promises Enforced by Promissory Estoppel

a. The doctrine of estoppel denies rights to complaining parties that are shown to be

the cause of their own injury.

b. Promissory estoppel is a legal doctrine that restricts a party from denying that a

promise was made under certain conditions, even though consideration has not

been exchanged to bind an agreement.

c. Promissory estoppel requires that the party making the promise know, or be

presumed to know, that the other party might otherwise make a definite and

decided change of position in contemplation of those promises.

C. Unenforceable Agreements

1. Preexisting Duties

a. A preexisting duty is a promise to do something that one is already obligated to do

by law or by some other promise or agreement.

b. A preexisting duty cannot be made consideration in a new contract.

2. Past Consideration

a. A promise to give another something of value in return for goods or services

rendered and delivered in the past, without expectation or reward, is past

consideration.

b. Only when goods or services are provided as the result of bargained-for present or

future promises is an agreement enforceable.

3. Illusory Promises

a. An illusory promise is one that seems genuine but that on close examination

actually fails to obligate the promissor to do anything.

b. Illusory promises fail to provide mutuality of promises.

4. Future Gifts and Legacies

a. The promise of a gift to be given at some future time or in a will is not

enforceable if no consideration is given for the promise.

b. Illusory promises include promises to provide gratuitous services or to lend

property without anything in return.

IV. Cyber-Payment Tactics and Concerns (9-5)

A. Cyber-Price and Competition

1. Cyber-Price Shopping

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Chapter 09 – Consideration and Cyber-Payments

a. Some consumers subscribe to search engines providing pricing comparison

information.

b. In some industries, it is becoming more common for companies to provide price

comparison rates on their own Web sites.

2. Cyber-Shopping Costs

a. A danger of cyber-shopping involves hidden costs.

b. A hidden cost may involve Internet access fees.

c. Another hidden cost involves shipping and handling fees.

3. Cyber-Shopping and the Law

a. Buyers and sellers are both at risk when they negotiate a contract online.

b. Sellers are especially vulnerable to credit card fraud and identity fraud.

c. To protect consumers, Congress passed the Identity Theft and Assumption

Deterrence Act (ITADA).

d. ITADA was amended by the Identity Theft Penalty Enhancement Act (ITPEA)

adding a new crime called aggravated identity theft to the original statute.

B. Cyber-Payments and Cyber-Contracts

1. Cyber-Payment Options

a. Popular payment methods are by credit card or debit card.

b. Online shoppers who deal with European companies may find that they have to

use a stored value or smart card.

c. Many consumers are moving to a third option, the alternative payment systems,

such as PayPal

2. Cyber-Payment Security Update

a. The United States is not as up-to-date as the European Union in providing data

and privacy protection to its consumers.

b. The EU Data Protection Directive along with the EU E-Privacy Directive

guarantee the rights of European citizens while, at the same time, ensuring the

smooth exchange of data among those nation-states that honor the privacy and

data protection standards themselves.

c. U.S. corporations that are involved with EU corporations must demonstrate that,

despite the lack of legislation in the United States, the companies themselves will

promise to honor the same degree of protection to data and to privacy as

guaranteed by the EU.

d. Guarantees that U.S. corporations will promise the same degree of protection as

EU corporations have been labeled the Safe Harbor Principles and are enforced by

the U.S. Department of Commerce.

e. In the wake of the U.S. PRISM program run by the National Security Agency that

permitted governments of the U.S. and the U.K. to run an Internet communication

collection process, the EU has threatened to make it more difficult for

non-European companies to qualify for safe harbor exceptions.

V. Background Information

A. Cross-Cultural Notes

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Chapter 09 – Consideration and Cyber-Payments

1. The Masai of East Africa have long used cattle as a medium of exchange, particularly

in dowries.

2. The CISG treats the issue of consideration differently from what is traditionally

thought needed. There is no specific mention of consideration anywhere in the CISG.

See Christopher C. Kokoruda, The UN Convention on Contracts for the International

Sale of Goods – It’s not Your Father’s Uniform Commercial Code, 85 – Jun F.L B.J.

B. Historical Notes

1. Medieval English lawyers invented the verbs agreare (to agree) and barganizare (to

bargain) to describe the action of a contract, which previously had been described by

the words covenant and contract. Later, the action of assumpsit was used, a promise

by which someone undertakes or assumes an obligation to someone else.

2. In early America, contract law was less enforced and more flexible than land law or

civil procedure. Consideration was regarded as an element that was not to be

measured by the court. For purposes of the law of contract, the price determined by

the parties was proof of the market value. In actual practice, however, judges were

often sympathetic to the underdog in contract cases in which the uneducated or naive

were manipulated by those who were shrewder. As a result, rules of consideration

were often bent.

C. State Variations

1. Traditionally, the seal took the place of consideration in Massachusetts. The case of

Knott v. Racicot, 442 Mass. 314, 812 N.E.2d 1207 (2004), however, abolishes the

presumption of consideration for option contracts executed under seal. This may

bring into question the use of the seal in relation to other purchase and sale

agreements.

2. The statute of limitations for breach of a sales contract varies from state to state. For

a starting point on research on different statute of limitations see the NOLO website

http://www.nolo.com/legal-encyclopedia/statute-of-limitations-state-laws-chart-29941

.html.

VI. Terms

1. Another legal term for consideration is quid pro quo, which is Latin for “something

in return for something.”

2. Estoppel is a legal way to stop someone from making a claim or denial when previous

actions or words to the contrary have been made. The term estoppel comes from the

French word estoupail, which literally means “a stopper.”

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Chapter 09 – Consideration and Cyber-Payments

VII. Related Cases

1. In the case of Frey v. Sovine, 58 N.C. App. 731, 294 S.E.2d 748 (1982), Michael

Sovine wrote two bad checks to Robert Barrett. Barrett then had warrants issued for

Sovine’s arrest. Barrett also went to Sovine’s mother, threatening to have her son put

in jail if he did not pay his debts. Frightened by his threats, Mrs. Sovine signed a

promissory note and a deed of trust giving security interest on her home to Barrett in

exchange for his promise not to pursue criminal charges against her son. The court

held that the note and deed of trust were void and unenforceable because they were

executed as a result of coercion and duress. The court also ruled that dismissal of the

criminal warrants against her son was not valid consideration because it was against

public policy.

2. Danby guaranteed that the Osteopathic Association would receive credit for bank

loans totaling $55,000. The Association, a charity, was using the funds to build a

hospital. After the hospital had used $31,000 of the credit available, Danby became

dissatisfied with the construction of the hospital and attempted to withdraw his

guarantee for the rest of the promised funds. In Danby v. Osteopathic Hospital

Association of Delaware, 34 Del. Ch. 427, 104 A.2d 903(Del.1954), the court ruled

that, based on the doctrine of promissory estoppel, the guarantee could not be

withdrawn. The hospital relied on the promise—it might never have agreed to a loan

contract knowing funding might be withdrawn at any point in the project.

3. A Porsche owner was experiencing problems with the automobile’s clutch system, so

he took the car in to be repaired. The new maintenance included a six-month

warranty. When the Porsche owner soon after experienced the same problems, he

took the car back to the shop, where his chauffer was allegedly promised the repair

would be covered by the warranty. However, the repair shop later refused to pay for

the repairs, asserting that the repair was due to driver abuse. The court ruled that the

oral promise to repair allegedly made to the chauffer was not supported by any new

consideration and therefore did not constitute an enforceable contract. Schupak v.

Porsche Audi Manhattan, 541 N.Y.S.2d 412 (N.Y. 1989).

VIII. Teaching Tips and Additional Resources

1. Information from the Internal Revenue Service regarding bartering is available at

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Bartering-Tax-Ce

nter.

2. Additional information regarding Roman Emperor Justinian, referenced in the text,

can be found on the website of the Metropolitan Museum of Art at

http://www.metmuseum.org/toah/hd/just/hd_just.htm.

3. A timeline for philanthropy in the U.S. is available from the website of the National

Philanthropic Trust at http://www.nptrust.org/history-of-giving/timeline/2000s/.

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Chapter 09 – Consideration and Cyber-Payments

4. OnGuardOnline.gov provides online shopping tips at

http://www.onguardonline.gov/articles/0020-shopping-online.

5. Additional information regarding charitable giving may be found at the web site of

the American Bar Association at

http://www.americanbar.org/groups/taxation/resources/taxtips4u/charity_b4.html.

6. Additional information regarding U.S. EU Safe Harbor provisions is available at

http://export.gov/safeharbor/.

7. Traditionally, charities have avoided litigation because it brings them bad publicity.

Recently, however, some nonprofit organizations, particularly museums, have begun

to pursue donors who have reneged on pledges. Some collectors are only willing to

donate partial interest in a work of art, which is a potential legal nightmare for

museums because heirs may not be willing to donate the remaining interests. Some

museums usually accept such arrangements only if donors sign an enforceable pledge

to turn over the artwork at or before their death. Information regarding a dispute

between Ryan O’Neil and the University of Texas regarding a drawing Andy Warhol

did of Farah Fawcett is available from The Dallas Morning News at

http://www.dallasnews.com/entertainment/celebrity-news/headlines/20140609-ut-aust

in-settles-with-ryan-o-neal-over-warhol-portrait-of-farrah-fawcett.ece. The article

reports that the parties settled and the University dropped its appeal resulting in

O’Neil keeping the drawing.

8. Point out to students that a binding contract involves each party in suffering a

detriment and each in receiving a benefit. If you offer to sell your watch to a student

for $25, you are promising to give up your legal right to keep your watch (your

detriment) in exchange for the student’s legal right to keep the $25 (the student’s

detriment). Your benefit is the promise of the money; the student’s benefit is the

promise of the watch.

9. Students may think that a bargained-for exchange must be verbally explicit or even

conducted orally. However, a bargained-for exchange may be implied by a price

marked on an item that a customer proves he or she is willing to pay by actually

purchasing the item. The merchant implies a promise that the item is worth its price

and the customer implies a promise that the form of payment for the item is good.

10. Remind students of their study of ethics in Chapter 1. Have them propose what

ethical character traits might be applied in cases in which the courts decide to refuse

enforcement of a contract because it is unconscionable.

11. Ask students to compare the bargaining practices involved in accord and satisfaction

to plea-bargaining in criminal cases.

12. Remind students that the law cannot enforce moral obligations. Personal ethics may

motivate a debtor to reaffirm debts and renew obligations to creditors. However, the

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Chapter 09 – Consideration and Cyber-Payments

law does not require it and has taken the position that it is more unethical for creditors

to pressure a debtor whose debts have legally been discharged through bankruptcy

than it is for the debtor to be unable to pay back debts.

13. Direct pairs of students to create three proposals for contracts – two that are

enforceable and one that is unenforceable because it contains an illusory promise.

Remind them that an illusory promise of consideration is usually phrased in

ambiguous terms or may seem to mean something that it does not. Each pair of

students can challenge another pair to identify which of the three proposed contracts

is the one with the illusory promise.

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