978-1285860381 Chapter 13 Solution Manual 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.

Quote of the Day

“Promises are the uniquely human way of ordering the future.” –Hannah Arendt (1906-1975),

German-American political scientist, in Crises of the Republic.

What is Consideration?

There are two basic elements of consideration:

What is Value?

As we have seen, an essential part of consideration is that both parties must get something of value.

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?

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?

Answer: Trieste’s call to police was not induced by the reward offer. Trieste may have been a good

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?

Holding: Judgment for plaintiff affirmed. The nephew gave valid consideration by refraining from doing

things he was legally entitled to do. The estate argued that there was no consideration because the

nephew benefited from avoiding the proscribed actions, but the court was unpersuaded: “Courts will not

ask whether the thing which forms the consideration does in fact benefit the promisee or a third party, or

is of any substantial value to anyone. It is enough that something is promised, done, forborne, or suffered

by the party to whom the promise is made as consideration for the promise made to him.”

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?

Answer: Hamer argued that the nephew did give something to the uncle in exchange for the uncle’s

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

Media, July 18, 2000.

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: Who among you has not at one point or another become intoxicated, experienced

emotions more powerful than usual, and regretted them the next morning? Whether calling an

ex-girlfriend and professing endless love while crying or writing out an agreement in your own blood, it is

all the same.

A promise not to file a meritless law suit 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.

Holding: The trial court’s statement of decision sufficiently delineated the factual and legal basis of the

court’s ultimate decision Kim failed to show the blood agreement was an enforceable contract or that Son

defrauded him.

Question: What did the court determine?

Answer: Son, while extremely intoxicated, made a gratuitous unenforceable promise to repay what the

corporations owed “to the best of [his] ability.” The court also made the specific finding there was no

What is Bargained-for Exchange?

The parties must bargain for the consideration. Something is bargained for if it is sought by the promisor

and given by the promisee in exchange for their respective promises. Eliza hires Joe to be her public

relations manager for $15,000 a year. Both Eliza and Joe have made promises to induce the other’s action.

But what if the going rate for a PR manager with Joe’s experience is $65,000?

Joe made a bad deal, but that does not mean it lacked consideration. Courts do not analyze the

economic terms of an exchange to determine whether consideration was adequate. For consideration to be

adequate in the eyes of the law, it must provide some benefit to the promisor or some detriment to the

promisee, but these need not amount to much. Law professors often call this the “peppercorn rule,” a

reference to a Civil War–era case in which a judge mused, “What is a valuable consideration? A

peppercorn.”3 Here, both Eliza and Joe are promisor and promisee; each receives a benefit and incurs a

detriment.

Gold can make people crazy. At the turn of the 20th century, John Tuppela joined the gold rush to

Alaska. He bought a mine, but sadly, his prospecting proved futile. In 1914, a court declared him insane

and locked him in an institution. Four years later, Tuppela emerged and learned to his ecstasy that gold

had been discovered in his mine, now valued at over half a million dollars. Then the bad news hit: A

court-appointed guardian had sold the mine for pennies while Tuppela was institutionalized. Destitute and

forlorn, Tuppela turned to his lifelong friend, Embola, saying, “If you will give me $50 so I can go to

Alaska and get my property back, I will pay you $10,000 when I win my property.” After Tuppela won

back his mine, his court-appointed guardian refused to pay Embola, arguing that $50 was not enough

consideration to support Tuppela’s $10,000 promise. The court disagreed. Embola and Tuppela freely

bargained for those terms.

Although the difference between Embola’s $50 and Tuppela’s $10,000 was staggering, it was not for the

court to judge whether it was an intelligent bargain. Both parties knew what they were doing, Embola

undertook a risk, and his $50 was valid consideration. The question of adequacy is for the parties as they

bargain, not for the courts.

What Consideration is Not

For centuries, scholars and judges have tried unsuccessfully to craft a single, simple rule of consideration

but a rigid application of these rules would sometimes interfere with legitimate business goals or, in the

worst case, lead to an unfair outcome. As a result, courts have created three exceptions to the basic rule of

consideration: illusory promises, pre-existing duties, and past consideration. Of course, exceptions are the

spice of law, and these consideration rules provide us with a rackful. Why, in some cases, we have

exceptions to the exception.

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.

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.

In the following Landmark Case, many fishy things occurred. There was a catch. But was it sufficient

consideration?

Landmark Case: Alaska Packers’Ass’n v. Domenico

Facts: Twenty-one seamen entered into a written contract with the Alaska Packer’s Association (APA) to

sail from San Francisco to Pyramid Harbor, Alaska, where they would work as fisherman and sailors

during the salmon-fishing season. The workers agreed to perform “regular ship’s duty, both up and down,

discharging and loading; and to do any other work whatsoever when requested to do so by the captain.” In

return, the APA was to pay each worker $50 for the season, and two cents for each red salmon he caught.

A few days after arriving at Pyramid Harbor, the men collectively stopped working and demanded

an additional $50—or else they would return to San Francisco. At that point, it was impossible for the

APA to replace them, so after several days of unproductive negotiations, the APA’s superintendent in

Alaska yielded to their demands—and agreed to double their pay.

When they returned to San Francisco at the close of the fishing season, the seamen demanded

their $100, but the APA refused, claiming that the Alaska agreement failed for lack of consideration. The

lower court agreed with the seamen, but the APA appealed.

Issue: Was there consideration for the promise to pay more money?

Excerpts from Judge Ross’s Decision: The seamen agreed in writing, for certain stated compensation, to

render their services to the APA in remote waters where the season for conducting fishing operations is

extremely short, and in which enterprise the APA had a large amount of money invested; and, after having

entered upon the discharge of their contract, and at a time when it was impossible for APA to secure other

men in their places, the seamen, without any valid cause, absolutely refused to continue the services they

were under contract to perform unless the APA would consent to pay them more money.

Consent to such a demand, under such circumstances, if given, was, in our opinion, without

consideration, for the reason that it was based solely upon the seamen’s agreement to render the exact

services, and none other, that they were already under contract to render. The case shows that they

willfully and arbitrarily broke that obligation.

No astute reasoning can change the plain fact that the party who refuses to perform, and thereby

coerces a promise from the other party to the contract to pay him an increased compensation for doing

that which he is legally bound to do, takes an unjustifiable advantage of the necessities of the other party.

Surely it would be a travesty on justice to hold that the party so making the promise for extra pay was

estopped from asserting that the promise was without consideration. A party cannot lay the foundation of

an estoppel by his own wrong, where the promise is simply a repetition of a subsisting legal promise.

There can be no consideration for the promise of the other party, and there is no warrant for

inferring that the parties have voluntarily rescinded or modified their contract. The promise cannot be

legally enforced, although the other party has completed his contract in reliance upon it.

The judgment must be reversed. It is so ordered.

Past Consideration

A completed act cannot be the basis for consideration. When they learn that their son earned an “A” in

Advanced Business Law, Pablo’s doting parents promise to buy him a car. This star student will surely

know that the generous promise is unenforceable in court. It lacks consideration because it is based on

something Pablo has already done. However, if early in the semester, Pablo’s parents make the same

promise, consideration is present. Pablo’s detriment is his future work, which is induced by the promise of

a reward

Special Consideration Cases

We have seen what consideration is and what it is not. Now we will look at some special cases that

involve two very familiar four-letter words: debt and work

Settlement of Debts

Liquidated Debt — A liquidated debt is one in which there is no dispute about the amount owed. For a

liquidated debt, a creditor’s promise to accept less than the full amount is not binding.

Unliquidated Debt— For an unliquidated debt, if the parties agree that the creditor will accept less than

the full amount claimed and the debtor performs, there is an accord and satisfaction and the creditor may

not claim any balance.

Accord and Satisfaction by Check — In most states payment by a check that has a “full payment”

notation will create an accord and satisfaction unless the creditor is an organization that has notified the

debtor that full payment offers must go to a certain officer.

Case: Henches v. Taylor4

Facts: Jim Henches, a licensed massage therapist, treated Benjamin Taylor after he was injured in a car

accident. Henches billed Taylor for more than $7,000. Taylor’s insurance company thought the bill was

too high and paid only $2,625 for 24 massages.

4 138 Wash. App. 1026, 2007 WL 1241525, Washington Court of Appeals, 2007.

Henches continued to send bills to Taylor including charges for time spent consulting with Taylor’s

other health care providers, preparing to testify in Taylor’s personal injury lawsuit, and attempting to

collect his debts. In response to a bill for $11.945.86, Taylor’s lawyer sent Henches a letter stating:

I have reviewed your billing statements and am having a difficult time understanding a number of

charges you included. By my calculations, the amount owed to you is approximately $5,243.45.

I have enclosed a check for that amount as payment in full to settle Mr. Taylor’s account with

you.

The letter was accompanied by a check with “final payment: written on the notation line. Henches

filed suit seeking the full balance. The he wrote “attorney/fee” on the check over the word “final” and

deposited the check.

The trial court gave summary judgment to Taylor, holding that the deposit of the check was an accord

and satisfaction. Henches appealed.

Issue: Was there an accord and satisfaction discharging the debt?

Holding: Judgment for Taylor affirmed. Excerpts from Judge Ellington’s Decision: Accord and

satisfaction requires a bona fide dispute, an agreement to settle the dispute for a certain sum, and

performance of that agreement. Taylor met the first element: the parties’ contract did not establish a

liquidated amount for the services provided, and the letter that accompanied Taylor’s check to Henches

demonstrates a good faith dispute over the amount owed.

An accord and satisfaction cannot be found without a meeting of the minds. Intent is shown when

payment is offered in full satisfaction and there is conduct from which the creditor understands

acceptance of the amount constitutes satisfaction of the debt. Here, Henches had to understand that the

check was offered on condition of full settlement. Taylor tendered a check as final payment and Henches

deposited that check, thereby accepting it as final payment.

A creditor can accept payment and not form an accord only where both parties know before accepting

the payment that said payment will not settle the claim. That did not happen here. Henches claims that

his alteration of the notation on the check prevents an accord and satisfaction. But a creditor cannot

prevent formation by making a unilateral change to a check tendered in full payment.

When there is an amount in dispute and the debtor sends cash or a check for less than the amount

owed as full settlement, the retention and use of that payment by the creditor is almost always an

acceptance of the settlement as full satisfaction of the amount owed, even though the creditor may send

word to the debtor that the sum is received only in part payment. Henches unilateral change to the check

was not communicated to Taylor, and thus accord and satisfaction discharged Taylor’s debt.

Question: What is an accord and satisfaction?

Answer: An accord and satisfaction is an agreement in which parties to an unliquidated debt agree

Question: What is an unliquidated debt?

Question: What is the unliquidated debt in this case?

Question: How much did Taylor think he owed Henches?

Question: How much did Henches think Taylor owed him?

Question: How does an accord and satisfaction raise issues of consideration?

Question: How did Taylor create an accord and satisfaction?

Question: Was that all that was necessary in order for the accord and satisfaction to be valid?