Homework Help

Business Law Chapter 13 Homework Iv Exceptions The Consideration Requirement Promissory Estoppel

Page Count
10 pages
Word Count
7821 words
Book Title
Business Law: Text and Cases 14th Edition
Frank B. Cross, Kenneth W. Clarkson, Roger LeRoy Miller
Chapter 13
Your students should now understand that not every promise is binding. Continuing the discussion of when a
promise is binding, this chapter focuses on consideration.
I. Elements of Consideration
Consideration is the value given in return for a promise. As noted above, there are two elements
This may be
A promise to do something that one has no prior legal duty to do.
The performance of an action that one is otherwise not obligated to undertake.
The refraining from an action that one has a legal right to undertake.
Case 13.1: Hamer v. Sidway
William Story, Sr., was the uncle of William Story II. Story, Sr., promised to pay Story II $5,000 if he
would refrain from drinking, using tobacco, swearing, and playing cards or billiards for money until he was
twenty-one. Story II agreed, performed his part of the bargain, and consented for the money to remain with
Story, Sr., accruing interest. After Story, Sr.’s death twelve years later, Sidway, the executor of the estate, did
not want to pay the $5,000 (with interest) to Hamer, a third party to whom Story II had transferred his rights in
the money. Sidway claimed that there had been no valid consideration for the promise. From a judgment for
Sidway, Hamer appealed.
The New York Court of Appeals ruled against Sidway. Story II had provided legally sufficient
consideration by giving up smoking, drinking, swearing, and gambling until he was twenty-one. Sidway ar-
gued that Story II had suffered no detriment, because what he had done was in his own best interest. “In
general a waiver of any legal right at the request of another party is a sufficient consideration for a promise.
. . . [I]t is of no moment whether such performance actually proved a benefit to the promisor.”
Notes and Questions
Few contract law books fail to mention this classic case. It is an excellent introduction to the question of
what promises should be binding.
Contract law held a special fundamental place in American law in the nineteenth century. The basic
principle of contract law was that what people voluntarily agreed on, the courts would enforce. Legal
philosophers believed that through free voluntary agreements, individuals made their own “law.” The
Constitution guaranteed that states could not enact laws that would impair the obligations of contracts. After
1868, the right to enter freely into contracts was considered to be protected under the new Fourteenth
Amendment. Contract law became one of the basic building blocks of legal study. Contract doctrines came
to be applied to most economic transactions. At the same time, however, contract law as it was applied in
cases was not a vital part of the economy because businesses tended to settle their own contract disputes
themselves. Thus, while the general philosophy of freedom of contract might have influenced the resolution
of many disputes, what came into the courts were special situations and unique cases.
Many promises relating to personal (as opposed to business) relationships are not legally
enforceable. Is Story’s promise of a financial reward for five years of good behavior on the part of his
nephew an appropriate subject for contract law? Not all important promises are commercial promises.
Thus it is well settled that the scope of contract law is not limited to “commercial” promises.
What if William Story agrees to pay his dangerously obese nephew $5,000 if he loses fifty pounds
within one year? Would the nephew’s loss of fifty pounds within one year provide legally sufficient
consideration under the reasoning of Hamer v. Sidway? Probablybecause the nephew has the legal
right to eat and refrain from exercise as much as he wants.
Cases considering the sufficiency of consideration include the following.
Blair v. Scott Specialty Gases, 283 F.3d 595 (3d Cir. 2002) (a mandatory arbitration provision in an
employee handbook was supported by “adequate” consideration: “[w]hen both parties have agreed to be
bound by arbitration, adequate consideration exists and the arbitration agreement should be enforced”).
Mona Electric Group, Inc. v. Truland Service Corp., 193 F.Supp.2d 874 (E.D.Va. 2002) (“the mere
continuation of employment does not furnish consideration for a non-competition agreement” not to solicit an
employer’s customers).
Martindale v. Sandvik, Inc., 173 N.J. 76, 800 A.2d 872 (2002) (the creation of an employment rela-
tionship, which occurs when an employer agrees to consider hiring or agrees to hire an applicant for
employment, was sufficient consideration to uphold an arbitration agreement contained in the employment
Oscar v. Simeonidis, 352 N.J.Super. 476, 800 A.2d 271 (A.D. 2002) (a modification to a commercial
lease, which changed the method for determining rent during the lease renewal period, was supported by
consideration: the parties adopted a formula that would permit them and any other interested person to
determine the rental upon renewal of the lease by reference to objective, readily ascertainable criteria. This is
itself valuable consideration sufficient to sustain the modification because the mutual agreement to abide by
such a formula has the capacity to remove an element of uncertainty from the parties’ future legal
England v. O’Flynn, __ Ohio App.3d __, __ N.E.2d __ (2 Dist. 2002) (a physician’s breach of an obligation
in an agreement with another physician caused a failure of consideration, which excused the non-breaching
physician from reimbursing the breaching physician for the amount of a promissory note).
The consideration given by the promisor must induce the promisee to offer a return promise, per-
formance, or forbearance, which must induce the promisor to make the promise. This element of
bargained-for exchange distinguishes contracts from gifts.
Case 13.2: USS-POSCO Industries v. Case
Floyd Case enrolled in an employer-paid program to become a maintenance technical electrical worker.
Case and his employer, USSPOSCO Industries (UPI), agreed that if he quit his job within thirty months of
completing the program, he would reimburse UPI a prorated portion of the $46,000 cost. Two months after
completing the program, Case left UPI. When he refused to reimburse UPI for the cost of the program, the
company filed a suit in a California state court against him for breach of contract. Case filed a cross-
complaint, asserting that the reimbursement agreement was unenforceable because it lacked consideration.
The court granted UPI’s motion for summary judgment on both complaints. Case appealed.
A state intermediate appellate court affirmed the summary judgment. The bargained-for exchange
“frankly, is obvious: Case got continued wages and fronted education costs, and UPI got Case’s agreement to
repay those costs if he both completed the training and left the company before it could benefit from the
Notes and Questions
Does the fact that either Case or UPI could have ended their employment relationship at any
timeincluding during the educational programrender the terms of their agreement to pay and
repay the costs of Case’s education too uncertain to enforce? No, that either Case or UPI could have
ended their employment relationship at any time, including during the educational program, does not render
the terms of their agreement to pay and repay the costs of Case’s education too uncertain to enforce.
It is true that if the terms of a contract express such uncertainty of performance that the promisor has not
definitely promised to do anything, the promise is illusorywithout consideration and unenforceable. In other
words, a promise is illusory when it fails to bind the promisor. Here, Case got continued wages and fronted
education costs, and UPI got Case’s agreement to repay those costs if he both completed the training and left
the company before it could benefit from the investment.” This was “the parties’ bargained-for exchange” and
the consideration for the reimbursement agreement.
Case received substantial benefits every day that he remained on UPI’s payroll and was provided
advanced training with no upfront cost and potentially no cost at all to him.
Consideration is something exchanged for something else. Often, the concept of consideration is broken
into the two elements that are discussed above and in the text. These elements are also discussed in the
Restatement (Second) of Contracts, Section 71. The following is the text of that section with selected
Comments and Illustrations.
§ 71. Requirement of Exchange; Types of Exchange
(1) To constitute consideration, a performance or a return promise must be bargained for.
(2) A performance or return promise is bargained for if it is sought by the promisor in exchange for his
promise and is given by the promisee in exchange for that promise.
(3) The performance may consist of
(4) The performance or return promise may be given to the promisor or to some other person. It may be
given by the promisee or by some other person.
* * * *
b. “Bargained for.” In the typical bargain, the consideration and the promise bear a reciprocal relation of
motive or inducement: the consideration induces the making of the promise and the promise induces the
furnishing of the consideration. Here, as in the matter of mutual assent, the law is concerned with the
external manifestation rather than the undisclosed mental state: it is enough that one party manifests an
intention to induce the other’s response and to be induced by it and that the other responds in accordance
l. A offers to buy a book owned by B and to pay B $10 in exchange therefore. B accepts the offer and deliv-
ers the book to A. The transfer and delivery of the book constitute a performance and are consideration for
A’s promise. See Uniform Commercial Code §§ 2-106, 2-301. This is so even though A at the time he makes
the offer secretly intends to pay B $10 whether or not he gets the book, or even though B at the time he
accepts secretly intends not to collect the $10.
2. A receives a gift from B of a book worth $10. Subsequently A promises to pay B the value of the book.
3. A promises to make a gift of $10 to B. In reliance on the promise B buys a book from C and promises to
pay C $10 for it. There is no consideration for A’s promise. As to the enforcement of such promises, see §
4. A desires to make a binding promise to give $1000 to his son B. Being advised that a gratuitous promise is
5. A desires to make a binding promise to give $1000 to his son B. Being advised that a gratuitous promise is
not binding, A offers to buy from B for $1000 a book worth less than $1. B accepts the offer knowing that the
purchase of the book is a mere pretense. There is no consideration for A’s promise to pay $1000.
c. Mixture of bargain and gift. In most commercial bargains there is a rough equivalence between the value
promised and the value received as consideration. But the social functions of bargains include the provision
of opportunity for free individual action and exercise of judgment and the fixing of values by private action,
either generally or for purposes of the particular transaction. Those functions would be impaired by judicial
6. A offers to buy a book owned by B and to pay B $10 in exchange therefore. B’s transfer and delivery of the
7. A owns land worth $10,000 which is subject to a mortgage to secure a debt of $6,000. A promises to make
8. A and B agree that A will advance $1000 to B as a gratuitous loan. B’s promise to accept the loan is not
consideration for A’s promise to make it. But the loan when made is consideration for B’s promise to repay.
d. Types of consideration. Consideration may consist of a performance or of a return promise. Consideration
by way of performance may be a specified act of forbearance, or any one of several specified acts or
* * * *
10. A says to B, the owner of a garage, “I will pay you $100 if you will make my car run properly.” The
production of this result is consideration for A’s promise.
11. A has B’s horse in his possession. B writes to A, “If you will promise me $100 for the horse, he is yours.”
12. A promises to pay B $1,000 if B will make an offer to C to sell C certain land for $25,000 and will leave the
13. A mails a written order to B, offering to buy specified machinery on specified terms. The order provides
1. The General Rule
2. When Voluntary Consent May Be Lacking
II. Agreements That Lack Consideration
Under most circumstances, a promise to do what one already has a legal duty to do is not legally suffi-
cient consideration. There are exceptions
1. Unforeseen Difficulties
When a party to a contract runs into unforeseen and substantial difficulties that could not have been
2. Rescission and New Contract
Promises made with respect to events that have already taken place are unenforceable. They lack the
element of bargained-for exchange.
If a contract expresses such uncertainty of performance that the promisor has not actually promised to
do anything, the promise is illusorywithout consideration and unenforceable.
1. Option-to-Cancel Clauses
2. Requirements and Output Contracts
Problems of consideration may arise in these circumstances because of the uncertainty of
III. Settlement of Claims
For an accord and satisfaction, the amount of the debt must be in dispute.
1. Liquidated Debts
2. Unliquidated Debts
An unliquidated debt can serve as the basis for an accord and satisfaction because, as
consideration, the parties give up the right to contest the amount
A release bars further recovery. A release is binding if
It is secured and given in good faith.
It is in a signed writing (not required in all states).
Consideration is given (not required under the UCC).
Unlike a release, a covenant not to sue does not bar further recovery. The covenant is binding if
It is secured and given in good faith.
It is in a signed writing (not required in all states).
Consideration is given (not required under the UCC).
Case 13.3: Already, LLC v. Nike, Inc.
Nike, Inc., designs, makes, and sells a line of athletic shoes known as Air Force 1s. Already, LLC,
designs and markets athletic shoe lines known as “Sugars” and “Soulja Boys.” Nike filed a suit in a federal
district court against Already, alleging that Soulja Boys and Sugars infringed the Air Force 1 trademark.
Already filed a counterclaim, contending that the Air Force 1 trademark is invalid. While the suit was pending,
Nike issued a “Covenant Not to Sue,” promising not to raise any trademark claims against Already or any
affiliated entity based on Already's existing footwear designs, or any future Already designs that constituted a
“colorable imitation” of Already's current products. Nike then filed a motion to dismiss its claims and Already's
counterclaim. The court granted the motion. The U.S. Court of Appeals for the Second Circuit affirmed.
Already appealed.
The United States Supreme Court affirmed. The Court held that “this case is moot.” Under the covenant
not to sue, Nike could not file a claim for trademark infringement against Already, and Already could not
assert that Nike’s trademark was invalid.
Notes and Questions
What is the likely next step in this case? The parties might attempt to arrive at a mutually agreeable
financial settlement of each other’s moot claims. The amount, if any, would likely be less than either party
sought in this litigation. But both parties will save the cost of a trial and further legal action against the
payment and settlement of the claim and both can continue to do business without changing their product
IV. Exceptions to the Consideration Requirement
1. Requirements to Establish Promissory Estoppel
Reasonable reliance on a promise may form a basis for enforceable contract rights and duties
under the doctrine of promissory estoppel (or detrimental reliance) if there is
A clear and definite promise.
The promisor’s expectation that the promisee will rely on the promise.
The promisee’s act or refraining from acting in reasonable reliance on the promise.
The promisee’s definite reliance results in substantial detriment.
Justice better served by enforcement of the promise.
2. Application of the Doctrine
Originally applied to gifts and charitable donations, this doctrine is now applied in other situations,
including business transactions, to prevent unfairness when a promise might otherwise be
In What Circumstances Does Promissory Estoppel Apply?
The rule is that only promises supported by consideration are enforceable. There are exceptions,
however. Among those exceptions are promises reasonably inducing another to act or to refrain from acting.
These promises are enforced under the doctrine of promissory estoppel. This doctrine is expressed in the
Restatement (Second) of Contracts, Section 90. The following are excerpts from the illustrations
accompanying the Comments to that section. These illustrations indicate the range of circumstances in
which the doctrine of promissory estoppel applies.
1. A, knowing that B is going to college, promises B that A will give him $5,000 on completion of his course. B
goes to college, and borrows and spends more than $5,000 for college expenses. When he has nearly
completed his course, A notifies him of an intention to revoke the promise. A’s promise is binding and B is
entitled to payment on completion of the course without regard to whether his performance was “bargained
for” * * *.
* * * *
2. A promises B not to foreclose, for a specified time, a mortgage which A holds on B’s land. B thereafter
3. A sues B in a municipal court for damages for personal injuries caused by B’s negligence. After the one
year statute of limitations has run, B requests A to discontinue the action and start again in the superior court
where the action can be consolidated with other actions against B arising out of the same accident. A does
so. B’s implied promise that no harm to A will result bars B from asserting the statute of limitations as a
4. A has been employed by B for 40 years. B promises to pay A a pension of $200 per month when A retires.
A retires and forbears to work elsewhere for several years while B pays the pension. B’s promise is binding.
* * * *
5. A holds a mortgage on B’s land. To enable B to obtain a loan, A promises B in writing to release part of the
6. A executes and delivers a promissory note to B, a bank, to give B a false appearance of assets, deceive
7. A and B, husband and wife, are tenants by the entirety of a tract of land. They make an oral promise to B’s
niece C to give her the tract. B, C and C’s husband expend money in building a house on the tract and C and
8. A applies to B, a distributor of radios manufactured by C, for a “dealer franchise” to sell C’s products. Such
franchises are revocable at will. B erroneously informs A that C has accepted the application and will soon
9. The facts being otherwise as stated in Illustration 8, B gives A the erroneous information deliberately and
with C’s approval and requires A to buy the assets of a deceased former dealer and thus discharge C’s “moral
* * * *
11. A is about to buy a house on a hill. Before buying he obtains a promise from B, who owns adjoining land,
12. A promises to make a gift of a tract of land to B, his son-in-law. B takes possession and lives on the land
for 17 years, making valuable improvements. A then dispossesses B, and specific performance is denied
13. A, a bank, lends money to B on the security of a mortgage on B’s new home. The mortgage requires B to
14. A sells an airplane to B, retaining title to secure payment of the price. After the closing A promises to
keep the airplane covered by insurance until B can obtain insurance. B could obtain insurance in three days
but makes no effort to do so, and the airplane is destroyed after six days. A is not subject to liability by virtue
of the promise.
A debtor who promises to pay a debt barred by a statute of limitations makes an enforceable promise.
The promise can be implied if the debtor acknowledges the debt by making a partial payment.
Subscriptions to religious, educational, and charitable institutions are promises to make gifts, but they
are often enforced under the doctrine of promissory estoppel or consideration is found as a matter of
public policy.
1. When explaining that a promise may itself be of legal value as consideration, it might be helpful to draw a
2. Students should be encouraged to note situations in which the common law alone applies and situations
in which the UCC applies. Also noteworthy are those principles on which the common law and the UCC
diverge. To call attention to the divergences, students might be asked whether they think the courts should
use the UCC as a guide even in nonUCC cases.
Of importance to the subject discussed in this chapter is UCC 2–209 (“An agreement modifying a contract
within this Article needs no consideration to be binding.”) If no consideration is necessary, what is to stop
an individual from setting a low price to get a contract and later insisting on an increase? What of a
situation in which a party bargains in good faith, but a cost later rises and the party insists on an
increase in the contract price? Sometimes it might seem cheaper to breach and wait to be sued than to
perform. According to UCC 1–203, “Every contract or duty within this act imposes an obligation of good faith
in its performance or its enforcement.” The section on unconscionability (UCC 2–302) might also apply.
Under the common law, some promises to pay additional amounts for the same consideration are binding
when certain conditions occurunforeseen difficulties, for examplebut an increase in price due to a
decrease in supply or an increase in demand is not enough.
Students might also be asked to read UCC 1–207 (“A party who with explicit reservation of rights per-
forms . . . in a manner demanded or offered by the other party does not thereby prejudice the rights re-
served.”). Under that section, if there is a disputed debt, and a check is sent for a lesser amount than the
payee wants to accept, but the check is marked “Paid in Full,” what should the payee do? If he or she
3. As noted in the TEACHING SUGGESTIONS in the previous chapter, students may find it helpful, when
confronted with difficult points of law, to reduce the points into short statements. Here is an example of an
abbreviated statement of the requirements for consideration:
The promise must be made to induce current performance by the promisee (this is the bargained-for
exchange element).
The promisor must suffer legal detriment, and
The promise must be binding, not illusory.
Cyberlaw Link
Does the requirement of consideration apply to contracts agreed to over the Internet? Are there
any reasons why it should not? Are there any reasons why consideration should be eliminated as a
requirement for entering into a contract (over the Internet or in any other situation)?
1. What is consideration? Consideration is the inducement exchanged to enter a contract. It must be (1)
legally sufficient and (2) part of a bargained-for exchange.
2. In most circumstances, parties are free to make whatever promises they wish, but only those
promises made with consideration may be enforced as contracts. What is the purpose of this requirement?
Legal rules exist not for their own sake but to further justice and convenience in the business of life. Economic and
commercial activities are encouraged by giving legal protection to such transactionsi.e., exchangesand not to
3. The courts generally do not weigh the sufficiency of consideration according to the comparative
economic value of what is exchanged. Should they? Why or why not? The legal sufficiency of a consideration for
a promise does not depend on the comparative economic value of the consideration and of what is promised in return,
4. Can a preexisting duty satisfy the requirements of consideration? Under most circumstances, a promise
5. What are some of the exceptions to the preexisting duty rule? Rescission and new contract. Rescission
is the unmaking of a contract, in which the parties are returned to the positions they held before the contract was
made. Preexisting duties are discharged by rescission. Parties can agree to rescind a contract, at least to the extent
that it is executory, and they can agree to make a new contract. In that situation, there are three separate
6. What is an illusory promise? If a contract calls for such uncertain performance that the promisor has not
7. Discuss agreements to settle claims or discharge debts. Accord and satisfaction. An accord occurs
when a debtor offers to pay and a creditor agrees to accept a lesser sum than the creditor claims was originally owed;
satisfaction occurs when the accord is executed. The amount of the debt must be unliquidated (unsettled). If so,
accepting a check on which is written “payment in full” may discharge it. Consideration exists in the parties’ giving up
8. Discuss the doctrine of detrimental reliance, or promissory estoppel. The doctrine of detrimental
reliance, or promissory estoppel, (not available in some jurisdictions) involves a promise given by one party that in-
9. When is consideration legally sufficient? Consideration is the inducement exchanged to enter a contract.
10. What are the circumstances in which a court will question whether consideration is adequate? Ade-
quacy of consideration refers to the fairness of the bargain. Ordinarily, courts will not evaluate the adequacy of
consideration, unless it is so grossly inadequate as to “shock the conscience” of the court, because under the doctrine
In discussing the use of accord and satisfaction as a means of settling a disputed debt, ask students who
work with accounts receivable whether they were instructed as to how to handle checks marked “Account Paid in
Footnote 5: Jamil Blackmon became friends with Allen Iverson in 1987 when Iverson was a promising high
school athlete. Blackmon provided financial and other support to Iverson and his family. One evening in 1994,
Blackmon suggested that Iverson use “The Answer” as a nickname. Later that night, Iverson said that he would give
Blackmon 25 percent of any proceeds from the merchandising of products that used “The Answer” as a logo or
slogan. In 1996, just before Iverson was drafted by the Philadelphia 76ers, Iverson told Blackmon that Iverson
In Blackmon v. Iverson, the court dismissed Blackmon’s complaint. The alleged contract between the parties
was not supported by sufficient consideration. The disclosure of the idea for the use of “The Answer” as a marketing
tool occurred before the formation of a promise to pay for the use of the idea. “[T]he suggestion that the defendant
use ‘The Answer’ as a nickname and for product merchandising [occurred] one evening in 1994. This was before the
Could the facts of the Blackmon case support an action based on unjust enrichment? No. The court
explained that there is no “allegation that the plaintiff expected payment if the defendant used the nickname ‘The
Answer.’ The plaintiff’s facts show that he wanted and intended the defendant to use the nickname in summer league
basketball tournaments, starting in 1994, without expecting any payment for that use. The plaintiff cannot make out a
claim that the defendant was unjustly enriched by the use of a nickname that the plaintiff freely offered.” Besides, “the
Suppose that only five minutes had elapsed between Blackmon’s suggestion that Iverson use “The
Answer” as a marketing slogan and Iverson’s promise to give Blackmon a percentage of the proceeds.
Would the court’s ruling in this case have been any different? Why or why not? The court might have been
more willing to rule in Blackmon’s favor under this set of facts. In this situation, too, whatever occurred between the
What might Blackmon have done to secure payment for Iverson’s use of “The Answer” as a nickname
before that use became valuable? The court pointed out that “[t]he plaintiff's facts show that he wanted and
intended the defendant to use the nickname in summer league basketball tournaments, starting in 1994, without
expecting any payment for that use. The plaintiff cannot make out a claim [for payment for] the use of a nickname that

Trusted by Thousands of

Here are what students say about us.

Copyright ©2022 All rights reserved. | CoursePaper is not sponsored or endorsed by any college or university.