Business Law Chapter 12 Homework Almost All Unilateral Contracts Begin As illusory Promises

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Chapter 12

CONSIDERATION

A. Legal Sufficiency

1. Adequacy

2. Unilateral Contracts

3. Bilateral Contracts

4. Illusory Promises

a. Output and Requirement Contracts

b. Exclusive Dealing Contracts

c. Conditional Promises

5. Preexisting Public Obligation

6. Preexisting Contractual Obligation

a. Modification of a Preexisting Contract

b. Substituted Contracts

c. Settlement of a Liquidated Debt

d. Settlement of an Unliquidated Debt

B. Bargained-For-Exchange

1. Past Consideration

2. Third Parties

C. Contracts Without Consideration

1. Promises to Perform Prior Unenforceable

Obligations

a. Promise to Pay Debt Barred by the

Statute of Limitations

b. Promise to Pay Debt Discharged in

Bankruptcy

c. Voidable Promises

d. Moral Obligation

2. Promissory Estoppel

3. Promises Made Under Seal

4. Promises Made Enforceable by Statute

a. Contract Modifications

b. Renunciation

c. Irrevocable Offers

Cases in This Chapter

Vanegas v. American Energy Services

Denney v. Reppert

New England Rock Services, Inc. v. Empire Paving, Inc.

DiLorenzo v. Valve and Primer Corporation

Chapter Outcomes

After reading and studying this chapter, the student should be able to:

Define consideration and explain what is meant by legal sufficiency.

Describe illusory promises, output contracts, requirements contracts, exclusive dealing contracts, and

conditional contracts.

Explain whether preexisting public and contractual obligations satisfy the legal requirement of

consideration.

Explain the concept of bargained-for exchange and whether this element is present with past

consideration and third-party beneficiaries.

Identify and discuss those contracts that are enforceable even though they are not supported by

consideration.

TEACHING NOTES

Consideration is the primary basis for the enforcement of promises in our legal

system. Promises are enforceable only when the parties have exchanged

something of value — consideration.

*** Chapter Outcome ***

Define consideration and explain what is meant by legal suffciency.

A. LEGAL SUFFICIENCY

Consideration is the legal value which supports a promise in a contract; it is the

inducement to make a contract enforceable. To be legally suffcient, the

consideration for the promise must be either a legal detriment to the promisee

or a legal benefit to the promisor. In other words, the promisor must receive

something of legal value or the promisee must give up something of legal value

in return for the promise.

Legal detriment does not mean harm, but rather something which the promisee

was previously under no legal obligation to do or refrain from doing. Legal

benefit means the obtaining by the promisor of that which he had no prior legal

right to obtain.

Adequacy

Legal suffciency has nothing to do with adequacy of consideration. The

requirement of legally suffcient consideration is not at all concerned with

whether the bargain was “fair” or either good or bad for either party. The

requirement is simply: (1) that the parties have freely agreed to an exchange

and (2) that the subject matter exchanged, or promised in exchange, either

imposed a legal detriment on the promisee or conferred a legal benefit on the

promisor.

Unilateral Contracts

In a unilateral contract, one party (the promisor) exchanges a promise for an

action (or restraint from acting) from another party (the promisee). The

promisee does not make a promise in return, but simply fulfills the action or the

restraint to complete the contract.

Bilateral Contracts

In a bilateral contract there is an exchange of promises, so each party is both a

promisor and a promisee.

NOTE: See Case 12-1.

*** Chapter Outcome ***

Describe illusory promises, output contracts, requirements contracts,

exclusive dealing contracts, and conditional contracts.

Illusory Promises

A statement that appears to be a promise but that, upon close examination of

the words, promises nothing real or legally binding; it may contain words such as

“desire” or “want” or “wish to buy,” making performance entirely optional.

The following types of contracts are NOT illusory because the promisor has

actually become obligated to do something.

Output and Requirements Contracts — The agreement of a seller to sell her

entire production to a particular purchaser is called an output contract. An

agreement to purchase all the materials of a particular kind that the purchaser

needs from a seller is called a requirements contract. These are not illusory

contracts because they are for a provable quantity, not for a desired amount.

conditional event cannot occur, the conditional promise will not be suffcient.

CASE 12-1

VANEGAS v. AMERICAN ENERGY SERVICES

Supreme Court of Texas, 2009

302 S.W.3D 299

http://scholar.google.com/scholar_case?case=3293885797327227839&q=302+S.W.3d+299+&hl=en&as_sdt=2,34

Green, J.

In this case, we are asked to decide the enforceability of an employer’s alleged promise to pay

five percent of the proceeds of a sale or merger of the company to employees who are still

employed at the time of the sale or merger. The employer, American Energy Services (AES), ***

was formed in the summer of 1996. AES hired the petitioners in this case (collectively, the

employees) that same year. The employees allege that in an operational meeting in June 1997,

they voiced concerns to John Carnett, a vice president of AES, about the continued viability of

the company. The employees complained that the company required them to work long hours

with antiquated equipment. The employees allege that, in an effort to provide an incentive for

them to stay with the company, Carnett promised the employees, who were at-will and therefore

free to leave the company at any time, that “in the event of sale or merger of AES, the original

[eight] employees remaining with AES at that time would get 5% of the value of any sale or

AES moved for summary judgment on [the ground] that the agreement was illusory and

therefore not enforceable * * *. The employees responded that the promise represented a

unilateral contract, and by remaining employed for the stated period, the employees performed,

thereby making the promise enforceable. The trial court granted AES’s motion for summary

judgment, and the employees appealed. The court of appeals affirmed, holding that the alleged

unilateral contract failed because it was not supported by at least one non-illusory promise, citing

this Court’s decision in Light v. Centel Cellular Co. of Texas, [citation]. The employees petitioned

this Court for review, which we granted.

Light involved an employee’s challenge to a covenant not to compete. [Citation.] * * *

We revisited the issue of illusory promises in covenants not to compete in Sheshunoff. * * *

We reaffirmed our previous holding in Light that covenants not to compete in bilateral contracts

must be supported by “mutual non-illusory promises.” [Citation.]

Citing our holdings in Light and Sheshunoff, the court of appeals [in this case] stated that “[a]

unilateral contract may be formed when one of the parties makes only an illusory promise but the

The issue turns on the distinction between bilateral and unilateral contracts. “A bilateral

contract is one in which there are mutual promises between two parties to the contract, each

party being both a promisor and a promisee.” [Citations.] A unilateral contract, on the other hand,

is “created by the promisor promising a benefit if the promisee performs. The contract becomes

enforceable when the promisee performs.” [Citation.] Both Sheshunoff and Light concerned

bilateral contracts in which employers made promises in exchange for employees’ promises not

The court of appeals held that even if AES promised to pay the employees the five percent,

that promise was illusory at the time it was made because the employees were at-will, and AES

could have fired all of them prior to the acquisition. [Citation.] But whether the promise was

illusory at the time it was made is irrelevant; what matters is whether the promise became

enforceable by the time of the breach. [Citations.] Almost all unilateral contracts begin as

illusory promises. Take, for instance, the classic textbook example of a unilateral contract: “I will

pay you $50 if you paint my house.” The offer to pay the individual to paint the house can be

withdrawn at any point prior to performance. But once the individual accepts the offer by

Furthermore, the court of appeals’ holding would potentially jeopardize all pension plans,

vacation leave, and other forms of compensation made to at-will employees that are based on a

particular term of service. * * *

The fact that the employees were at-will and were already being compensated in the form of

their salaries in exchange for remaining employed also does not make the promise to pay the

bonus any less enforceable.

* * *

*** Chapter Outcome ***

Explain whether preexisting public and contractual obligations

satisfy the legal requirement of consideration.

Pre-Existing Public Obligations

The law does not regard the performance of (or the promise to perform) a

preexisting obligation, whether public or private, as either a legal detriment or a

legal benefit.

CASE 12-2

DENNEY v. REPPERT

Court of Appeals of Kentucky, 1968

432 S. W.2d 647

http://scholar.google.com/scholar_case?case=14895092933351248292&q=432+S.W.2d+647&hl=en&as_sclt=2,34

Myre, Special Commissioner

On June 12th or 13th, 1963, three armed men entered the First State Bank, Eubank, Kentucky,

and with a display of arms and threats robbed the bank of over $30,000. Later in the day they

were apprehended by State Policemen Garret Godby, Johnny Simms, and Tilford Reppert, placed

under arrest, and the entire loot was recovered. Later all of the prisoners were convicted and

Garret Godby, Johnny Simms, and Tilford Reppert appeared as witnesses at the trial.

The First State Bank of Eubank was a member of the Kentucky Bankers Association which

provided and advertised a reward of $500.00 for the arrest and conviction of each bank robber.

At the time of the robbery the claimants Murrell Denney, Joyce Buis, Rebecca McCollum,

and Jewell Snyder were employees of the First State Bank of Eubank and came out of the

grueling situation with great credit and glory. Each one of them deserves approbation and an

accolade. They were vigilant in disclosing to the public and the peace officers the details of the

crime, and in describing the culprits, and giving all the information that they possessed that

would be useful in capturing the robbers. Undoubtedly, they performed a great service. It is in

the evidence that the claimant Murrell Denney was conspicuous and energetic in his efforts to

make known the robbery, to acquaint the officers as to the personal appearance of the criminals,

and to give other pertinent facts.

* * *

At the time of the robbery the claimants Murrell Denney, Joyce Buis, Rebecca McCollum,

and Jewell Snyder were employees of the First State Bank of Eubank. They were under duty to

protect and conserve the resources and moneys of the bank, and safeguard every interest of the

institution furnishing them employment. Each of these employees exhibited great courage and

cool bravery, in a time of stress and danger. The community and the county have recompensed

them in commendation, admiration, and high praise, and the world looks on them as heroes. But

in making known the robbery and assisting in acquainting the public and the officers with details

of the crime and with identification of the robbers, they performed a duty to the bank and the

public, for which they cannot claim a reward.

The claims of Corbin Reynolds, Julia Reynolds, Alvie Reynolds, and Gene Reynolds also

must fail. According to their statements they gave valuable information to the arresting officers.

It is * * * well established that a public officer with the authority of the law to make an arrest

may accept an offer of reward or compensation for acts or services performed outside of his

bailiwick or not within the scope of his official duties. * * *

* * *

Pre-Existing Contractual Obligations

Modi*cation of a Pre-Existing Contract — The Pre-Existing Duty rule under

common law requires that a contract modification or amendment be supported

by additional and new consideration. This rule is different from the UCC, which

provides that contract modifications are binding despite no new consideration

provided they intend to do so and act in good faith. Also, if a valid controversy

develops regarding a party’s obligations, a subsequent modification that clarifies

the dispute and that is unsupported by consideration, will be valid.

Substituted Contracts — A substituted contract results when the parties to a

contract mutually agree to rescind their original contract and enter into a new

one. This situation actually involves three separate contracts: the original

contract, the agreement of rescission, and the substituted contract.