978-1305575080 Chapter 14 Solution Manual

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Chapter 14

CONSIDERATION

RESTATEMENT

Consideration is the legal detriment each party to a contract gives in exchange for the benefit obtained under that

contract. Consideration generally comes in the forms of payment of money, rendering of services or delivery of

goods. However, there are other forms of consideration such as waiving a right. If consideration is not present,

there is no binding agreement. There are certain types of agreements that present special issues in consideration

such as conditional promises, rights to cancel, preexisting obligations, and composition agreements.

The adequacy of consideration is generally not an issue for courts with the parties free to negotiate their

detriment. However, the consideration must actually pass from one party to the other.

There are exceptions to the consideration requirement for an enforceable agreement. Those exceptions include

charitable subscriptions, certain types of agreements under the UCC, and reliance or promissory estoppel.

STUDENT LEARNING OUTCOMES

LO.1: Explain what constitutes consideration.

LO.2: Distinguish between a “preexisting legal obligation” and “past consideration”.

LO.3: Explain why promises based on moral obligations lack consideration.

LO.4: List the exceptions to the requirement of consideration.

LO.5: Explain the “fundamental idea” underlying promissory estoppel.

INSTRUCTOR’S INSIGHTS

Break the chapter down into three components – related Learning Outcomes are indicated in ( ):

1. What is the definition of consideration and what general principles apply to its presence in contracts?

Describe the requirements for valid consideration (LO.1)

2. What special situations exist in which adequacy of consideration has significance?

Explain preexisting legal obligations (LO.2)

Discuss past consideration (LO.2)

Cover moral obligations (LO.3)

3. What exceptions to the consideration requirement exist?

Cover the exceptions on adequacy of consideration (LO.4)

CHAPTER OUTLINE

I. What is the Definition of Consideration and What General Principles Apply to its Presence in Contracts?

A. Definition of consideration

1. Consideration is what each party to a contract gives up to the other in the making of their agreement

2. Consideration is a bargained-for exchange

a. What is agreed to in return for the promise

3. Benefit/detriment – promisor gives detriment which is benefit to promisee

B. Gifts – not enforceable under contract law

CASE BRIEF: Williams v. Ormsby

966 N.E. 2d 255 (Ohio 2012)

FACTS: Frederick Ormsby and Amber Williams lived together in a nonmarital relationship in a house

deeded to Ormsby in 2004. After a separation, Amber refused to move back into the house

unless Frederick granted her a half entrust in the property, which he did by a June 2, 2005,

document making themselves equal partners in the home. Amber ended the relationship in 2007

and sought specific performance of the June 2, 2005, agreement. Frederick defended that “love

and affection” is insufficient consideration for a contract.

ISSUE: Is love and affection sufficient consideration for a contract?

REASONING: The June 2, 2005, agreement is not a legally enforceable contract because it fails for want of

consideration. The only consideration offered by Amber was her resumption of a romantic

relationship with Frederick. “Giving” an entrust in property based on the consideration of love

and affection was a gratuitous promise – a promise to make a gift – which is not legally

enforceable.

AUTHORS’ COMMENT: Note that the Supreme Court of Ohio stated near its conclusion that: “To hold otherwise

would open the door to palimony claims and invite a number of evidentiary problems.” This single sentence

provides a glimpse into the court’s underlying caution at opening up the doors of the courts to resolve economic

arrangements cloaked in a contractual structure by couples living together out of wedlock based merely on the

love and affection provided by one of the parties.

C. Agreement to give property for consideration of love and attention is not enough

D. Adequacy of consideration – it’s not normally considered unless there’s a risk of possible fraud, mistake,

duress, etc.

CASE BRIEF: Dohrmann v. Swaney

14 N.E. 3d 605 (Ill. App. 2014)

FACTS: Dr. George Dohrmann made a contract with his very elderly childless neighbor, Mrs. Virginia

Rogers wherein she agreed to transfer to Dr. Dohrmann upon her death her valuable

condominium and its contents and $4,000,000 in cash in exchange for Dohrmann incorporating

the name Rogers into the names of his two children to help perpetuate the Rogers name after

her death. Dr. Dohrmann performed by taking the legal action necessary to add the Rogers

name into the legal names of his two boys. From a judgment against Dohrmann on his breach

of contract against the Rogers estate, he appealed.

ISSUE: Was the consideration inadequate in this case?

REASONING: Dohrmann did not change the boy’s surnames to Rogers, nor even change their middle names

to Rogers. He merely added Rogers after their middle names. This can hardly be said to

perpetuate the Rogers name after Mrs. Rogers’ death. Dohrmann’s argument that it is improper

for a court to consider the relative value or adequacy of the consideration is rejected in this

particular case. While the statement is generally true, it will not be applied where the

consideration is so grossly inadequate as to shock the conscience of the court.

E. Forbearance as consideration

1. Giving up a right can be consideration for a promise

2. Economic value idea is not required for consideration:

Uncle Bob has serious concerns and objections about the person his niece is currently dating. He

promises her that if she will refrain from dating this person for the remainder of the college year, he

3. Consideration in employment contracts

a. Promises not to compete following termination

F. Illusory promises are not enforceable because no duty is assumed

1. Cancellation provision does not affect consideration; the contract is binding until termination

II. What Special Situations Exist in Which Adequacy of Consideration Has Significance?

A. Preexisting legal obligations: past benefits received cannot be considered for a later promise

CASE BRIEF: Crookham & Vessels, Inc. v. Larry Moyer Trucking, Inc.

699 S.W.2d 414 (Ark. App. 1985)

FACTS: Crookham & Vessels had a contract to build an extension of a railroad for the Little Rock Port

Authority. They made a contract with Larry Moyer Trucking to dig drainage ditches. The ditch

walls collapsed because water would not drain off. This required that the ditches be dug over

again. Larry Moyer refused to do this unless extra money was paid. Crookham & Vessels

agreed to pay the additional compensation, but after the work was done, they refused to pay it.

Larry Moyer sued for the extra compensation promised.

ISSUE: Can a party obtain additional money for what it is already obligated to do?

REASONING: Moyer was bound by its contract to dig the drainage ditches. Its promise to perform that

obligation was not consideration for the promise of Crookham & Vessels to pay additional

compensation. Performance of an obligation is not consideration for a promise by a party

entitled to that performance. The fact that performance of the contract proved more difficult or

costly than originally contemplated does not justify making an exception to this rule.

1. Completion of contract threats – e.g., demanding more in order to complete performance

a. Can’t get more for what you’re already obligated to do

b. Can have a good-faith adjustment for unforeseeable difficulties/good faith

CASE BRIEF: Angel v. Murray

322 A. 2d 630 (R.I. 1974)

FACTS: John Murray was director of finance of the city of Newport. A contract was made with Alfred

Maher to remove trash. Later, Maher requested that the city council increase his compensation.

Maher’s costs were greater than had been anticipated because 400 new dwelling units had

been put into operation. The city council voted to pay Maher an additional $10,000 a year. After

two such annual payments had been made, Angel and other citizens of the city sued Murray

and Maher for a return of the $20,000. They said that Maher was already obligated by his

contract to perform the work for the contract sum, and there was, accordingly, no consideration

for the payment of the increased compensation. From a decision in favor of the plaintiffs, the

city and Maher appealed.

ISSUE: Should a good faith adjustment be enforced?

REASONING: Judgment for the city and Maher. When a promise modifying an original contract is made before

the contract is fully performed on either side due to unanticipated circumstances that prompt the

modification, and the modification is fair and equitable, such a good faith adjustment will be

enforced. The unanticipated increase in the number of new units from 20 to 25 per year to 400

units in the third year of this five-year contract, which prompted the additional yearly payments

of $10,000, was a voluntary good faith adjustment. It was not a “hold up” by a contractor

refusing to complete an unprofitable contract unless paid additional compensation, where the

preexisting duty rule would apply.

DISCUSSION POINTS: Ethics & the Law

More Money for a Promise

If Fulkins signs the agreement, there will be offer and acceptance, but no consideration. Tretorn can’t get more

money for its existing obligation. Tretorn also used economic duress to force Fulkins to sign. Tretorn’s conduct

takes advantage of another and is dishonest. Tretorn has breached its contract.

2. Compromise and release of claims

a. Early payment or payment in some other form is consideration

3. Part-payment checks

a. The areas of compromise and release of claims and part-payment checks will probably

generate considerable student interest. They will want to know whether they can pay off their

b. Composition of creditors – with regard to a composition of creditors, point out that this

composition is basically an agreement made outside of bankruptcy by creditors of an insolvent

B. Past consideration

C. Moral obligation

III. What Exceptions to the Consideration Requirement Exist? (See Figure 14-1 in text)

A. Exceptions to adequacy of consideration rule

B. Exceptions to requirement of consideration

1. Charitable subscriptions

2. Uniform Commercial Code

a. Modifications done in good faith under § 2-209 need not have additional consideration

3. Sealed and written instruments – a common law exception

C. Promissory estoppel

1. A substitute for missing consideration

CASE BRIEF: Chrysler Corp. v. Chaplake Holdings, Ltd.

822 A. 2d 1024 (Del. 2003)

FACTS: Portman Lamborghini, Ltd. (Portman) was owned by Chaplake Holdings, Ltd., a United

Kingdom company, which was owned by David Jolliffe and David Lakeman as equal

shareholders. Between 1984 and 1987 Portman sold approximately 30 new Lamborghinis each

year through its exclusive concession contract with the car maker. It was then the largest

Lamborghini dealer in the world, since Lamborghini’s production was just 250 cars per year.

These cars sold at a retail price between $200,000 and $300,000. In 1987, Chrysler Corporation

bought Lamborghini; and its chairman, Lee Iacocca presented plans to escalate production to

5,000 units within five years. The plan included the introduction of a new model, the P140 with a

retail price of $70,000. Between 1987 and 1991, all of the Chrysler/Lamborghini top executives

with whom Jolliffe and Lakeman and their top advisors came in contact with provided the same

message to them – Chrysler was committed to the Expansion Plan, and in order for Portman to

retain its exclusive UK market, it must expand its operational capacity from 35 cars in 1987 to

400 cars by 1992. Accordingly, Portman acquired additional financing, staff and facilities and

built a new distribution center. An economic downturn in the US and major development and

production problems at Lamborghini led Chrysler to reduce its expansion investment by

two-thirds. Factory production delays eroded Portman’s profitability and success; and it entered

into receivership in April of 1992. Suit was brought on behalf of the Portman and Chaplake

entities on a promissory estoppel theory against Chrysler, a Delaware Corporation.

ISSUE: Can Chaplake and Portman recover losses on a promissory estoppel claim?

REASONING: The court found that (1) a promise was made by Chrysler that the Lamborghini line would

expand ten fold and that Portman would retain its exclusivity deal only if it expanded its

operational capacity, (2) the promisor, Chrysler, should have reasonably expected that Portman

would rely on this promise, (3) Lakeman and Jolliffe were told by all of the top executives

involved of the same message and promise, it was therefore not unreasonable for them to rely

upon the promises made by these executives and to undertake the detriment of major

expansion activity that would have been unnecessary but for the Expansion Plan and the role

they were promised, and (4) the prevention of injustice is the “fundamental idea” underlying the

doctrine of promissory estoppel, and injustice can be avoided in this case only by the

enforcement of Chrysler’s promise. Portman is entitled to £ 569,321 for its costs to implement

its Expansion Plan; and Chaplake is entitled to £ 462,686 for its investment in Portman’s

expansion.

DISCUSSION POINTS: Have the students discuss promissory estoppel as a substitute of consideration using

the Chrysler Corp. v. Chaplake Holdings, Ltd. case.

3. Promissory estoppel distinguished from consideration

a. Applies only when the promisor has reason to foresee the detrimental reliance by the promisee

b. And the promisee in fact would sustain a substantial loss because of such reliance if the

promise were not performed

4. Detrimental reliance essential – substantial economic loss may not be necessary

ANSWERS TO QUESTIONS AND CASE PROBLEMS

1. Moral obligation as consideration. No. The fact that a person is under a moral obligation to pay for a particular

2. Forbearance as consideration. This classic case was decided in 1891. William II assigned his rights in this

stated:

“…the promisee used tobacco, occasionally drank liquor, and he had a legal right to do so. That

Consideration then may also consist of forbearance, which is refraining from doing an act that one has a

3. Adequacy of consideration. Yes. Ordinarily, the law is not concerned with the value or quantity of

consideration that the promisor demands and receives for the promise. Therefore, the employment contract

Authors’ Comment: Certain exceptions exist to the rule that the courts will not consider the adequacy of

4. Past Consideration. The general rule is that past consideration is no consideration. In this case, Stan

prepared Charles’s tax return and was paid for his work. The subsequent promise of an additional $400 for

5. Promissory estoppel. A basis existed for the jury to find that Dr. Schmidt’s: (1) “assured” Medistar that it

would be the developer of the project, even though Medistar and Schmidt did not bargain out final terms and

6. Past consideration; moral obligation. David may raise the defense of past consideration and moral obligation.

A son has a moral obligation to support his parents; but a provision based on moral obligation also lacks

7. Adequacy of consideration. The contract was binding. Atlas obtained the exact performance required by the

8. Relation of promissory estoppel to contract termination. No. Promissory estoppel did not prevent Sears from

terminating the contract. Because Sears had actually employed Forrer, there was no breach of its promise to

employ him; therefore, it was unnecessary to apply the concept of promissory estoppel to enforce the

Authors’ Comment: This case illustrates the fact that in spite of the “reform” currents of the twentieth century,

courts will not always protect a plaintiff from hardship. This in turn emphasizes the importance of preventive

Note that the decision of this case cannot be minimized on the theory that the court is opposed to promissory

estoppel because this court had adopted already the Restatement concept of promissory estoppel in

9. A promise as consideration. The promise of the corporation was not binding because there was no

consideration for it. While the concept of consideration developed as a way of determining which

agreements were serious and intended by the parties to be binding, the converse doesn’t follow that every

serious agreement is binding. It is necessary in every case to find that the promisor received the required

10. Past consideration. The agreement to pay Choi for work he had already done is unenforceable. Past

11. Preexisting obligation. No, the company had not broken a promise because Kelsoe already worked for the

12. Part payment by check. Judgment for Kathy. The parties had a good-faith dispute about the amount properly

13. Irrelevance of adequacy of consideration. Judgment for children. The promises between the father and the

children created a binding agreement. It was against the objection that it was not binding because the

14. Forbearance as consideration. The obvious purpose of the radio station’s offer was to increase its listening

audience. The station purchased conduct – a person listening to that station as opposed to another station –

by its promise. Jennings gave up a legal right to listen to any other radio station as a result of the station’s

15. Promissory estoppel. Judgment for the Hoffmans. Injustice would result under the circumstances of the case

if the Hoffmans were not granted relief. The plaintiffs had acted in reliance on a promise made by Red Owl’s

LAWFLIX

Baby Boom (1987) (PG)

Have the students review the scene near the end of the movie when Diane Keaton is presented with an offer for

management system for classroom use.