978-1285427003 Chapter 11 Lecture Note Part 1

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Suggested Additional Assignments

Research: Binding Promise

Using the library or the Internet, students should find a current article that raises a dispute about a

promise. Typically, someone made a statement that another person or company relied on, but the speaker

now declares the “promise” was never meant to be binding. These issues are common in political

disputes, entertainment industry contracts, commercial sales negotiations, labor negotiations, employment

arguments, and many other cases. Students should be prepared to summarize the dispute and analyze it,

declaring whether the promise is binding.

Chapter Overview

Chapter Theme

The law does not hold us accountable for every promise we make. The doctrine of consideration

determines which promises a court must enforce.

What is Consideration?

There are three rules of consideration:

1. Both parties must get something of measureable value from the contract.

2. A promise to give something of value counts as consideration.

3. The two parties must have bargained for whatever was exchanged and struck a deal: “If you do

this, I’ll do that.”

What is Value?

An essential part of consideration is that both parties must get something of value. That item of value

can be either an “act” (doing something not required by law) or a “forbearance” (agreeing to NOT do

something that is otherwise allowed by law.)

A Bargain and an Exchange

Consideration does not require counteroffers. Students may equate “bargained-for” with “haggled-over.”

A simple example can demonstrate the meaning of “bargained-for” in this context: Curt offers to mow

Pedro’s lawn once a week for $50 beginning May 1 and ending November 1. Pedro accepts. Where is the

bargained-for exchange? Curt promised to mow Pedro’s lawn to induce Pedro to promise in return to pay

Curt $50 a week. Pedro responded to Curt’s inducement by promising to pay Curt $50 per week if Curt

mows Pedro’s lawn.

To determine whether there was a bargained-for exchange, students should ask “did the offeree make

its promise or tender its performance in response to the offer?” One St. Patrick’s Day, Mark Trieste was

walking on the beach when he saw a body in the sand. Trieste reported the body to police. Police

identified the body as that of 21-year-old Brian Wilson, who had been missing since New Year’s Eve.

Distraught over his disappearance Wilson’s family had offered a $25,000 reward for information leading

to his whereabouts. When Trieste found the body and notified police he did not know about Wilson’s

disappearance or the offer of reward money. Looking at these facts strictly as a matter of contract law, is

Wilson’s family obligated to pay Trieste the reward?1

Question: What kind of contract did the reward offer seek to form—bilateral or unilateral?

1 Adapted from Contract Smontract: Mom Refuses to Pay Informant Reward Money, American Lawyer

Media, July 18, 2000.

Question: Trieste’s information led to discovery of Wilson’s body. What is the family’s argument that it

has no obligation to pay the reward?

Question: What is Trieste’s response to this consideration argument?

Landmark Case: Hamer v. Sidway2

Facts: William Story wanted his nephew to grow up healthy and prosperous. In 1869, he promised the

15-year-old boy $5,000 if the lad would refrain from drinking liquor, using tobacco, swearing and playing

cards or billiards for money until his twenty-first birthday. The nephew had a legal right to do those

things. The nephew agreed and kept his word. When he reached his twenty-first birthday, the nephew

notified his uncle that he had honored the agreement. The uncle congratulated the young man and

promised to give him the money, but said he would wait a few more years before handing over the cash,

until the nephew was more mature. The uncle died and his estate refused to pay. Hamer, to whom the

nephew had transferred his rights, sued. The estate argued that the nephew had given no consideration for

the uncle’s promise. The trial court found for the plaintiff and the uncle’s estate appealed.

Issue: Did the nephew give consideration for the uncle’s promise?

Decision: Yes, the nephew’s conduct was valid consideration and the contract must be enforced.

Reasoning: The uncle’s estate argues that the conduct, far from harming the boy, actually aided him.

Because it is wise to avoid tobacco, alcohol, and gambling, the nephew’s decision to give up those vices

could never be consideration for a contract. The agreement could be enforced only if the behavior

somehow benefited the uncle—which it did not. The estate’s argument, however, is unpersuasive. Courts

do not and should not ask whether agreed-on behavior actually helps anyone. What matters is simply this:

Did one party do something or refrain from doing something at the request of the other party? If so, that

conduct or forbearance is consideration, and the contract is enforceable.

Before making the agreement, the nephew had lawfully used alcohol and tobacco. When his uncle

promised him $5,000, the nephew gave up the various activities, restricting his freedom of action for

several years. Because the nephew did what his uncle requested, the contract must be enforced whether or

not anyone benefited.

Question: Before we discuss the contracts issue, can you explain how Hamer wound up as the

plaintiff?

Question: Why did the uncle’s estate deny payment to Hamer?

Answer: The estate argued that the nephew gave nothing to the uncle in exchange for the uncle’s

Question: How did the estate characterize this transaction?

Question: What was Hamer’s argument?

2 124 N.Y. 538, 27 N.E. 256, 1891 N.Y. LEXIS 1396 New York Court of Appeals, 1891.

Question: The uncle received no benefit from the nephew’s promise. Why does the court hold that

the nephew gave consideration?

Question: The nephew gave up activities that were bad for his health. What detriment did he suffer?

Answer: “Detriment” here does not mean that the nephew experienced adverse consequences. One

Question: Which of these concepts applies here?

Answer: The nephew promised to refrain from alcohol, tobacco, etc., all things that, when these

Question: Still, how is the nephew’s detriment a benefit to the uncle?

Answer: It is not a benefit in any economic sense, but that does not matter. What matters is that the

Question: Would a similar exchange of promises today between an adult and 15-year-old also result

in a contract?

Answer: No. In the U.S. persons under the age of 18 cannot purchase tobacco products and persons

You Be the Judge: Kim v. Son3

Facts: Stephen Son was a part owner and operator of two corporations. Because the businesses were

corporations, Son was not personally liable for the debts of either one.

Jinsoo Kim invested a total of about $170,000 in the companies. Eventually, both of them failed, and

Kim lost his investment. Son felt guilty over Kim’s losses.

Later, Son and Kim met in a sushi restaurant and drank heroic quantities of alcohol. At one point, Son

pricked his finger with a safety pin and wrote the following in his own blood: “Sir, please forgive me.

Because of my deeds you have suffered financially. I will repay you to the best of my ability.” In return,

Kim agreed not to sue him for the money owed.

Son later refused to honor the bloody document and pay Kim the money. Kim filed suit to enforce

their contract.

The judge determined that the promise did not create a contract because there had been no

consideration.

You Be The Judge: Was there consideration?

Argument for Kim: As a part of the deal made at the sushi restaurant, Kim agreed not to sue Son. What

could be more of a forbearance than that? Kim had a right to sue at any time and he gave the right up.

Even if Kim was unlikely to win, Son would still prefer not to be sued.

Besides, the fact that Son signed the agreement in blood indicates how seriously he took the

obligation to repay his loyal investor. At a minimum, Son eased his guilty conscience by making the

agreement and, surely, that is worth something.

3 2009 Cal. App. LEXIS 2011,Court of Appeal of California, 2009.

Argument for Son: A promise not to file a meritless lawsuit has no value at all. It did not matter to Son

whether or not Kim filed suit because Kim could not possibly win. If this promise counts as value then the

concept of consideration is meaningless because anyone can promise not to sue any time. Son had no

obligation to pay Kim. And the bloody napkin does not change that fact because it was made without

consideration of any kind. It is an ordinary promise and not a contract that creates any legal obligation.

Question: Does it matter that Son signed the agreement in blood?

Question: Kim did not sue Son for the losses –is this not a legal detriment?

Question: Why not?

Answer: The appellate court noted that the trial court had determined that Kim did not have valid

claims against Son in the first place. Son was not personally liable for the losses of either of the

Adequacy of Consideration

Courts seldom inquire into the adequacy of consideration. The question of adequacy is for the parties as

they bargain not for the courts.

Illusory Promises

An illusory promise is one where the promisor retains the right to back out of the deal for any reason at

all. An illusory promise is not consideration because there is no commitment to the deal.

Additional Case: You Be the Judge: Culbertson v. Brodsky4

Facts: Brodsky signed an option contract to buy land from Culbertson. Brodsky was to deliver a check

for $5,000, representing “earnest money,” to a bank. The Bank would hold the check in escrow, uncashed,

for 60 days. Brodsky could inspect the property and perform engineering studies. If he decided against

buying, he could terminate the agreement and demand his earnest money. Ultimately, Brodsky decided

that he did want to buy the land, but Culbertson refused to sell, claiming that Brodsky gave no

consideration. The trial court ordered Culbertson to convey the land, and he appealed.

You Be the Judge: Did Brodsky give valid consideration that makes Culbertson’s promise enforceable?

Holding: Brodsky gave no consideration. His promise was illusory because he reserved an absolute right

to nullify the deal at any time, for any reason. Brodsky did not even lose the use of the money, since the

check could not be cashed unless he exercised his option. The court reversed, giving judgment for

Culbertson.

Question: What is an option contract?

Answer: In an option contract the seller grants a prospective purchaser—the option holder—the right

Question: What is an “escrow?”

4 788 S.W.2d 156, 1990 Tex. App. LEXIS 1008 Texas Court of Appeals, 1990.

Question: How did the escrow work in this case?

Answer: The Bank agreed to hold Brodsky’s check without cashing it for 60 days, until Brodsky

Question: Brodsky gave a $5,000 check to the Bank. Why wasn’t that consideration?

Answer: In giving the check Brodsky did not incur a detriment and Culbertson did not receive a

Question: Brodsky performed tests on the land. Why weren’t the tests consideration, since they were

a detriment to him?

Answer: The bargain with Culbertson allowed Brodsky to perform such tests but did not obligate him

Question: Brodsky is the one who didn’t give consideration but he still wants to buy the property, so

why is Culbertson trying to get out of the deal?

Question: Is that ethical?

Applications of Consideration

The UCC: Consideration in Requirements and Output Contracts

In a requirements contract, the buyer agrees to purchase 100% of her goods from one seller. In an

output contract, the seller guarantees to sell 100% of its output to one buyer, and the buyer agrees to

accept the entire quantity.

Under the common law, requirements contracts and output contracts were unenforceable because of a lack

of consideration: the buyer made no real commitment in a requirements contract; the seller made no real

commitment in an output contract.

Under the Uniform Commercial Code (UCC), requirements and output contracts do not fail due to lack of

consideration. Although one side controls the quantity, its agreement to make demands in good faith is

consideration

Example: Requirements and Output Contracts

The textbook offers a hypothetical about an entrepreneur starting a novelty T-shirt business. The

entrepreneur needs to buy plain white T-shirts on which to print designs. The text suggests that a

requirements contract might be advantageous because it will be impossible to estimate exactly how many

T-shirts the new business will need. This exercise is designed to look at the issue from the opposite

perspective, that of the wholesaler of plain T-shirts.

Question: You are a clothing wholesaler. Allison and Kirk approach you and explain that they have

started a new business, X-streme Shirt. They propose a requirement contract, in which they agree to buy

from you 100 percent of the plain T-shirts they need, for the next year. They offer to pay you today’s

going rate per shirt. What advantages to you might there be in a requirements contract?

Answer: The contract should ensure you this one outlet for your merchandise. If X-streme succeeds, your

sales should expand, without additional marketing efforts. Your competitors will be blocked from selling

to this buyer. Finally, if X-streme is willing to pay a set price per unit, even with increasing sales, you

may achieve a higher price per unit than you would normally expect. A buyer making a contract for a

large number of T-shirts would demand a lower price per unit.

Question: If a requirements contract is potentially beneficial to you, why would the owners of X-streme

be interested?

Answer: Such a contract helps X-streme because it allows flexibility. The company does not have to

Question: Before deciding whether to accept their offer, what information do you want?

Answer: You probably want to know:

Allison and Kirk’s background and experience. How likely are they to succeed?

How will they finance their purchases (and their operation generally)?

Question: What are the potential dangers to the seller in this requirements contract?

Question: Suppose the buyer’s demands are suddenly far higher than expected and the seller cannot meet

them. So what? Can’t the seller just say, “I can’t meet your demand?”

Answer: It is not so simple. The seller is obligating itself to supply 100 percent of the buyer’s needs. If

Question: What is the major legal change that the UCC has made concerning requirements contracts?

Question: Why did the common law refuse to enforce a requirements contract?

Answer: The common law refused to enforce a requirements contract because the buyer was giving no

Question: If requirements contracts are so lopsided, why does the Code permit them?

Answer: The Code permits requirements contracts (and output contracts) for two reasons. First, business

people value these contracts and it makes no sense for the law to “protect” people from a form of

Preexisting Duty

A promise to do something that a party is already obligated to do is not consideration. Courts have created

exceptions for additional work, modification, and unforeseen circumstances because a rigid application of

the rule might interfere with legitimate business goals.

Exception: Additional Work

When a party agrees to do something above and beyond what he is obligated to do, his promise is

generally valid consideration.

Exception: Modi-cation

Under the common law, a modification of a contract requires consideration.

Courts will generally enforce a rescission and modification provided both parties voluntarily entered into

it, in good faith.

Modification of a contract under the UCC is binding despite no consideration, provided that the parties

intended to modify the contract and act in good faith.

Example: Modi-cation

Here are two cases with a related issue.

Case #1: Rock Singer agrees with Producer #1 that she will appear at Stadium on August 8 for one

concert, for a flat fee of $150,000. In June, Singer receives an offer of $300,000 for that same date from

Producer #2. Singer telephones Producer #1 and demands an extra $75,000. Producer #1 responds, “I

don’t like it, but I’ll do it.”

Case #2: Switch Company agrees to supply 5,000 electrical switches to Engine Manufacturer with

delivery on August 8, for a total cost of $50,000. In June, Switch informs Engine that it cannot meet the

production date because the switches are more complex than Switch realized and production time is

greater. The company can deliver the goods on time only by demanding that its employees work overtime.

It requests an extra $15,000 for overtime. Engine reluctantly agrees in writing to pay it.

Question: In each case, one party modified the original agreement by promising to pay more than the

original contract required. Is the modification enforceable?

Answer: These two cases have opposite outcomes. In Case #1 Rock Singer is providing no consideration

in exchange for Producer #1’s promise to pay an additional $75,000. She has not promised to incur some

Comment: One cannot overemphasize the result under the common law rule. Students will continue to

fall into the trap of believing that one party’s acquiescence to the other’s demand for additional payment

makes the demand enforceable.