Overview
Please answer question 1 on page 226 of the text (beginning with "In consideration of"), and question 10 on page 227 of the text (starting with "Carol/Anthony"). (From chapter 12).
————-questions one and 10 need to be answered. I provided it below.
1. In consideration of $1,800 paid to him by Joyce, Hill gave Joyce a written option to purchase his house for $180,000 on or before April 1. Prior to April 1, Hill verbally agreed to extend the option until July 1. On May 18, Hill, known to Joyce, sold the house to Gray, who was ignorant of the unrecorded option. On May 20, Joyce sent an acceptance to Hill, who received it on May 25. Is there a contract between Joyce and Hill? Explain.
10. Anthony lends money to Frank, who dies without having repaid the loan. Frank's widow, Carol, promises Anthony to repay the loan. Upon Carol's refusal to pay the loan, Anthony brings suit against Carol for payment. Is Carol bound by her promise to pay the loan?
Chapter 12 ( I COPIED THE CHAPTER 12 NOTES provided it below )
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Consideration is the primary-but not the only— basis for the enforcement of promises in our legal system. Consideration is the inducement to make a promise enforceable.
The doctrine of consideration ensures that promises are enforced only in cases in which the parties have exchanged something of value in the eye of the law. Gratuitous (gift) promises-those made without consideration-are not legally enforceable, except under certain circumstances, which are discussed later in the chapter.
Consideration, or that which is exchanged for a promise, is present only when the parties intend an exchange. The consideration exchanged for the promise may be an act, a forbearance to act, or a promise to do either of these. Thus, there are two basic elements to consideration: (1) legal sufficiency (something of value in the eye of the law) and (2) bargained-for exchange. Both must be present to satisfy the requirement of consideration.
LEGAL SUFFICIENCY [12-1]
To be legally sufficient, the consideration for the promise must be either a legal detriment to the promisee or a legal benefit to the promisor. In other words, in return for the promise, the promisee must give up something of legal value or the promisor must receive something of legal value.
Legal detriment means (1) the doing of (or the undertaking to do) that which the prom-isee was under no prior legal obligation to do or (2) the refraining from the doing of (or the undertaking to refrain from doing) that which he was previously under no legal obligation to refrain from doing. On the other hand, legal benefit means the obtaining by the promisor of that which he had no prior legal right to obtain. In most, if not all, cases in which there is legal detriment to the promisee, there is also a legal benefit to the promisor. However, the presenc of either is sufficient.
Adequacy [|2-la]
Legal sufficiency has nothing to do with adequacy of consideration. The items or actions that the parties agree to exchange do not need to have the same value. Rather, the law will regard the consideration as adequate if the parties have freely agreed to the exchange. The requirement of legally sufficient consideration, therefore, is not at all concerned with whether the bargain was good or bad or whether one party received disproportionately more or less than what he gave or promised in exchange. (Such facts, however, may be relevant to the availability of certain defenses- such as fraud, duress, or undue influence-or certain remedies-such as specific performance.) The requirement of legally sufficient consideration is simply (1) that the parties have agreed to an exchange and (2) that, with respect to each party, the subject matter exchanged, or promised in exchange, either imposed a legal detriment on the promisee or conferred a legal benefit on the promisor. If the purported consideration is clearly without value, however, such that the transaction is a sham, many courts would hold that consideration is lacking.
Unilateral Contracts [|2-Ib]
In a unilateral contract, a promise is exchanged for a completed act or a forbearance to act. Because only one promise exists, only one party, the offeror, makes a promise and is therefore the promisor while the other party, the offeree, is the person receiving the promise and thus is the promisee. For example, A promises to pay B $2,000 if B paints A's house. B paints A's house.
As promise to pay B $5,000 is binding because it is supported by consideration; B, the promisee (offeree), has incurred a legal detriment by refraining from bringing suit, which he was under no prior legal obligation to refrain from doing. A, the promisor (offeror), has received a legal benefit because she had no prior legal right to B's forbearance from bringing suit.
Bilateral Contracts [|2-Ic]
In a bilateral contract, there is an exchange of promises. Thus, each party is both a promisor and a promisee. For example, if A (the offeror) promises (offers) to purchase an automobile from B for $20,000 and B (the offeree) promises to sell the automobile to A for $20,000 (accepts the offer), the following relationship exists:
A (offeror) as promisor: A's promise (the offer) to pay B $20,000 is binding if that promise is supported by legal consideration from B (offeror), which may consist of either a legal detriment to B, the promisee, or a legal benefit to A, the promisor. B's promise to sell A the automobile is a legal detriment to B because he was under no prior legal duty to sell the automobile to A. More-over, B's promise is also a legal benefit to A because A had no prior legal right to that automobile.
Consequently, As promise to pay $20,000 to B is supported by consideration and is enforceable.
B (offeree) as promisor: For B's promise (the acceptance) to sell the automobile to A to be binding, it likewise must be supported by consideration from A (offeror), which may be either a legal detriment to A, the promisee, or a legal benefit to B, the promisor. As promise to pay B $20,000 is a legal detriment to A because he was under no prior legal duty to pay $20,000 to B. At the same time, As promise is also a legal benefit to B because B had no prior legal right to the $20,000. Thus, B's promise to sell the automobile is supported by consideration and is enforceable.
To summarize, for As promise to B to be binding, it must be supported by legally sufficient consideration, which requires that the promise A receives from B in exchange either provides a legal benefit to A or constitutes a legal detriment to B. B's return promise to A must also be supported by consideration. Thus, in a bilateral contract, each promise is the consideration for the other, a relationship that has been referred to as mutuality of obligation. A general consequence of mutuality of obligation is that each promisor in a bilateral contract must be bound or neither is bound. See Concept Review 12-1 for an overview of consideration in both unilateral and bilateral contracts.
Also see the Ethical Dilemma at the end of the chapter for a situation dealing with the disputed enforceability of a promise.
Illusory Promises [|2-Id]
Words of promise that make the performance of the purported promisor entirely optional do not constitute a promise at all. Consequently, they cannot serve as consideration. In this section, we will distinguish such illusory promises from promises that do impose obligations of performance up~ the promisor and thus can be legally sufficient consideration.
CHAPTER 12 Consideration 219
An illusory promise is a statement that is in the form of a promise but imposes no obligation upon the maker of the statement. An illusory promise is not consideration for a return promise.
Thus, a statement committing the promisor to purchase such quantity of goods as he may "desire" or "want" or "wish to buy" is an illusory promise because its performance is entirely optional. For example, if ExxonMobil offers to sell to Gasco as many barrels of oil as Gasco shall choose at $40 per barrel, there is no consideration. An offer containing such a promise, although accepted by the offeree, does not create a contract because the promise is illusory-Gasco's performance is entirely optional, and no constraint is placed on its freedom. It is not bound to do anything, nor can Exxon-Mobil reasonably expect it to do anything. Thus, Gasco, by its promise, suffers no legal detriment and confers no legal benefit.
FACTS American Energy Services (AES or employer) was formed in the summer of 1996. Employees, hired in 1996, 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 allege that, in an effort to provide an incentive for them to stay with the company, Carnett promised the employees, who were at-will employees 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 merger of AES." AES Acquisition, Inc., acquired AES in 2001. Seven of the eight original employees were still with AES at the time of the acquisition. These remaining employees demanded their proceeds, and when the company refused to pay, the employees sued, claiming AES had breached the oral agreement.
AES moved for summary judgment on the ground that the agreement was illusory. The employees argued 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 nonillusory promise.
DECISION Judgment of the court of appeals reversed, and case remanded.
OPINION 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." 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. This case involves a unilateral contract and does not depend upon a bilateral promise.
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. 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.
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 perform-ing, the promise to pay the $50 becomes binding. The employees allege that AES made an offer to split five percent of the proceeds of the sale or merger of the company among any remaining original employees. Assuming that allegation is true, the seven remaining employees accepted this offer by remaining employed for the requested period of time. At that point, AES's promise became binding. AES then breached its agreement with the employees when it refused to pay the employees their five percent share.
AES allegedly promised to pay any remaining original employees five percent of the proceeds when AES was sold. Assuming AES did make such an offer, the seven remaining employees accepted the offer by staying with AES until the sale. Regardless of whether the nromice wac illueory at the time it was made the promise became enforceable upon the employees performance.
INTERPRETATION An illusory promise is a statement that is in the form of a promise but imposes no obligation upon the maker of the statement.
ETHICAL QUESTION Did AES act ethically by inducing the employees to continue working in return for a promise that AES considered to be not binding? Explain.
CRITICAL THINKING QUESTION Do you agree with this decision? Explain.
Output and Requirements Contracts The agreement of a seller to sell her entire production to a particular purchaser is called an output contract. It gives the seller an ensured market for her product. Conversely, a purchaser's agreement to purchase from a particular seller all the materials of a particular kind that the purchaser needs is called a requirements contract.
It ensures the buyer of a ready source of inventory or supplies. These contracts are not illusory.
The buyer under a requirements contract does not promise to buy as much as she desires to buy,ut to buy as much as she needs. Similarly, under an output contract, the seller promises to sell to le buyer the seller's entire production, not merely as much as the seller desires.
Furthermore, the Code imposes a good faith limitation upon the quantity to be sold or pur-hased under an output or requirements contract. Thus, this type of contract involves such actual utput or requirements as may occur in good faith, except that no quantity unreasonably dispro-ortionate to any stated estimate or, in the absence of a stated estimate, to any normal prior output r requirements may be tendered or demanded. Therefore, after contracting to sell to Adler, Inc., ts entire output, Benevito Company cannot increase its production from one eight-hour shift per lay to three eight-hour shifts per day.
Exclusive Dealing Contracts An exclusive dealing agreement is a contract in which manufacturer of goods grants to a distributor an exclusive right to sell its products in a designated narket. Unless otherwise agreed, an implied obligation is imposed on the manufacturer to use its best fforts to supply the goods and on the distributor to use her best efforts to promote their sale. These mplied obligations are sufficient consideration to bind both parties to the exclusive dealing contract.
Conditional Promises A conditional promise is a promise the performance of which depends upon the happening or nonhappening of an event not certain to occur (the condition).
A conditional promise is sufficient consideration unless the promisor knows at the time of making the promise that the condition cannot occur.
Thus, if Joanne offers to pay Barry $8,000 for Barry's automobile, provided that Joanne receives such amount as an inheritance from the estate of her deceased uncle, and Barry accepts the ofter, the duty of Joanne to pay $8,000 to Barry is conditioned on her receiving $8,000 from her deceased uncle's estate. The consideration moving from Barry to Joanne is the transfer of title to the automobile. The consideration moving from Joanne to Barry is the promise of $8,000 subiect to the condition.
Preexisting Public Obligations [|2-le]
The law does not regard the performance of, or the promise to perform, a preexisting legal duty, public or private, as either a legal detriment or a legal benefit. A public duty does not arise out of a contract; rather, it is imposed on members of society by force of the common law or by statute. Illustrations, as found in the law of torts, include the duty not to commit assault, battery, false imprisonment, or defa-mation. The criminal law also imposes many public duties. Thus, if Norton promises to pay Holmes, the village ruffian, $100 not to injure him, Norton's promise is unenforceable because both tort and criminal law impose a preexisting public obligation on Holmes to refrain from such abuse.
Public officials, such as the mayor of a city, members of a city council, police, and firefighters, are under a preexisting obligation to perform their duties by virtue of their public office. See the Denney v. Reppert case below.
The performance of, or the promise to perform, a preexisting contractual duty, a duty the terms of which are neither doubtful nor the subject of honest dispute, is also legally insufficient consideration because the doing of what one is legally bound to do is neither a detriment to a promisee nor a benefit to the promisor. For example, if Anita employs Ben for one year at a salary of $1,000 per month, and at the end of six months promises Ben that in addition to the salary she will pay Ben $3,000 if Ben remains on the job for the remainder of the period originally agreed on, Anitas promise is not binding for lack of legally sufficient consideration. However, if Ben's duties were by agreement changed in nature or amount, Anitas promise would be binding because Ben's new duties are a legal detriment to Ben and a legal benefit to Anita.
The Denney v. Reppert case deals with both preexisting public and contractual obligations.
FACTS In June, three armed men entered and robbed the First State Bank of Eubank, Kentucky, of $30,000. Acting on information supplied by four employees of the bank, Denney, Buis, McCollum, and Snyder, three law enforcement officials apprehended the robbers. Two of the arresting officers, Godby andSimms, were state policemen, and the third, Reppert, was a deputy sheriff in a neighboring county. All seven claimed the reward for the apprehension and conviction of the bank robbers. The trial court held that only Reppert was entitled to the reward, and Denney appealed.
DECISION Judgment affirmed.
OPINION In general, when a reward is offered to the general public for the performance of some specified act, the reward may be claimed by the person who performs that act unless that person is an agent, employee, or public official acting within the scope of his employment or official duties. For this reason, the bank employees cannot recover. At the time of the robbery, they were under a duty to protect the bank's resources and to safeguard the institution furnishing them employment Thus, in assisting the police officers in apprehending the bank robbers, the bank employees were merely doing their duty and, therefore, are not entitled to share in the reward.Similarly, the state policemen, Godby and Simms, were exercising their duty as police officers in arresting the bank robbers and, thus, are not entitled to share in the reward. Reppert, on the other hand, was out of his jurisdiction at the time and, thus, was under no legal duty to arrest the bank robbers.
INTERPRETATION The law does not regard the performance of a preexisting duty as either a legal detriment or a legal benefit.
ETHICAL QUESTION Did the court treat all the parties fairly? Explain.
CRITICAL THINKING QUESTION Do you agree with the preexisting duty rule? Explain.
Modification of a Preexisting Contract A modification of a preexisting contract occurs when the parties to the contract mutually agree to change one or more of its terms. Under the common law, as shown in the following case, a modification of an existing contract must be supported by mutual consideration to be enforceable. In other words, the modification must be supported by some new consideration beyond that which is already owed under the original contract. Thus, there must be a separate and distinct modification contract. For example, Diane and Fred agree that Diane shall put in a gravel driveway for Fred at a cost of $2,000. Subsequently, Fred agrees to pay an additional $3,000 if Diane will blacktop the driveway. Because Diane was not bound by the original contract to provide blacktop, she would incur a legal detriment in doing so and is therefore entitled to the additional $3,000. Similarly, consideration may consist of the promisees refraining from exercising a legal right.
The Code has modified the common law rule for contract modification by providing that the parties can effectively modify a contract for the sale of goods without new consideration, provided they both intend to modify the contract and act in good faith. Moreover, the Restatement has moved toward this position by providing that a modification of an executory contract is binding if it is fair and equitable in the light of surrounding facts that the parties had not anticipated when the contract was made. Figure 12-1 demonstrates when consideration is required to modify an existing contract.
FACTS On October 26, 1995, the defendant, Empire Paving, Inc., entered into a contract with Rock Services under which Rock Services would provide drilling and blasting services as a subcontractor on the Niles Hill Road sewer project on which Empire was the general contractor and the city of New London was the owner.
Rock Services was to be paid an agreed-upon price of $29 per cubic yard with an estimated amount of five thousand cubic yards or on a time and materials basis, whichever was less. From the outset, Rock Services experienced problems on the job, the primary problem being the presence of a heavy concentration of water on the site.
The water problem hindered Rock Services ability to complete its work as anticipated. It is the responsibility of the general contractor to control the water on the work site, and on this particular job, Empire failed to control the water on the site properly. Rock Services attempted alternative methods of dealing with the problem but was prevented from using them by the city. Thereafter, to complete its work, Rock Services was compelled to use a more costly and time-consuming method.
In late November 1995 rock services advised Empire that it would be unable to complete the work as anticipated because
of the conditions at the site and requested that Empire agree to amend the contract to allow Rock Services to complete the project on a time and materials basis. On December 8, Empire signed a purchase order that so modified the original agreement. Upon completion of the work, Empire refused to pay Rock Services for the remaining balance due on the time and materials agreement in the amount of $58,686.63, and Rock Services instituted this action. The trial court concluded that the modified agreement was valid and ruled in favor of Rock Services. Empire brings this appeal.
DECISION Judgment in favor of Rock Services affirmed.
OPINION The general rule of contracts is that in the absence of consideration an executory promise is unenforceable. A modification of an agreement must be supported by valid consideration and requires a party to do, or promise to do, something further than, or different from, that which he is already bound to do. So, when a party negotiates a modification resulting in greater pay for the same, already-owed work, that modification is not valid without additional consideration.
However, an exception to the preexisting duty rule occurs:
[Where a contract must be performed under burdensome conditions not anticipated, and not within the contemplation of the parties at the time when the contract was made, and the promi-see measures up to the right standard of honesty and fair deal-ing, and agrees, in view of the changed conditions, to pay what is then reasonable, just, and fair, such new contract is not without consideration within the meaning of that term, either in law or in equity.
Empire argues that the water conditions on the site cannot qualify as a new circumstance that was not anticipated at the time the original contract was signed. The court, however, ruled that Empires duty to control or remove the water on the job site arosein accordance with the custom and practice in the industry and, therefore, Empire's failure to control or remove the water on the site constituted a new circumstance that Rock Services did not anticipate at the time the original contract was signed.
INTERPRETATION The Restatement provides that a modification of an executory contract is binding if it is fair and equitable in the light of surrounding facts that the parties had not anticipated when the contract was made.
CRITICAL THINKING QUESTION Which rule for contract modification do you believe is the best: the common law, the Restatement's, or the Uniform Commercial Code's? Why?
Substituted Contracts A substituted contract results when the parties to a contract mutually agree to rescind their original contract and to enter into a new contract. This situation involves three separate contracts: the original contract, the contract of rescission, and the substitute contract. Substituted contracts are perfectly valid, allowing the parties to effectively discharge the original contract and to impose obligations under the new one. The rescission is binding in that, as long as each party still had rights under the original contract, each has, by giving up those rights, provided consideration to the other.
Settlement of an Undisputed Debt An undisputed debt is an obligation that is not contested as to its existence and its amount. Under the common law, the payment of a lesser sum of money than is owed in consideration of a promise to discharge a fully matured, undisputed debt is legally insufficient to support the promise of discharge. To illustrate, assume that Barbara owes Arnold $100, and in consideration of Barbaras paying him $50, Arnold agrees to discharge the debt. In a subsequent suit by Arnold against Barbara to recover the remaining $50, at common law Arnold is entitled to a judgment for $50 on the ground that Arnold's promise of discharge is not binding, because Barbaras payment of $50
was no legal detriment to the promisee, Barbara, because she was under a preexisting legal obligation to pay that much and more. Consequently, the consideration for Arnold's promise of discharge was legally insufficient, and Arnold is not bound by his promise. If, however, Arnold had accepted from Barbara any new or different consideration, such as the sum of $40 and a fountain pen worth $10 or less, or even the fountain pen with no payment of money, in full satisfaction of the $100 debt, the consideration moving from Barbara would be legally sufficient because Barbara was under no legal obligation to give a fountain pen to Arnold. In this example, consideration would also exist if Arnold had agreed to accept $50 before the debt became due, in full satisfaction of the debt. Barbara was under no legal obligation to pay any of the debt before its due date. Consequently, Barbara's early payment would constitute a legal detriment to Barbara as well as a legal benefit to Arnold. The common law is not concerned with the amount of the discount, because that is simply a question of adequacy. Likewise, Barbara's payment of a lesser amount on the due date at an agreed-upon different place of payment would be legally sufficient consideration.
The Restatement, however, requires that the new consideration "differ [s) from what was required by the duty in a way which reflects more than a pretense of bargain."
duty in a way which reflects more than a pretense of bargain."
Settlement of a Disputed Debt A disputed debt is an obligation whose existence or amount is contested. A promise to settle a validly disputed claim in exchange for an agreed payment or other performance is supported by consideration. Where the dispute is based on contentions without merit or not made in good faith, the debtor's surrender of such contentions is not a legal detriment to the claimant. The Restatement adopts a different position by providing that the settlement of a claim that proves invalid is consideration if at the time of the settlement (1) the claimant honestly believed that the claim was valid or (2) the claim was in fact doubtful because of uncertainty as to the facts or the law.
For example, in situations in which a person has requested professional services from an accountant or a lawyer and no agreement has been made about the amount of the fee to be charged, the client has a legal obligation to pay the reasonable value of the services performed. Because no definite amount was agreed on, the client's obligation is uncertain. When the accountant or lawyer sends the client a bill for services rendered, even though the amount stated in the bill is an estimate of the reasonable value of the services, the debt does not become undisputed until and unless the client agrees to pay the amount of the bill. If the client honestly disputes the amount that is owed and offers in full settlement an amount less than the bill, acceptance of the lesser amount by the accountant or lawyer discharges the debt. Thus, if Andy sends to Bess, an accountant, a check for $120 in full payment of his debt to Bess for services rendered, which services Andy considered worthless but for which Bess billed Andy $600, Bess's acceptance (cashing) of the check releases Andy from any further liability. Andy has given up his right to dispute the billing further, and Bess has forfeited her right to further collection. Thus, there is mutuality of consideration.
BARGAINED-FOR EXCHANGE [12-2]
The central idea behind consideration is that the parties have intentionally entered into a bargained-for exchange with each other and have each given to the other something in a mutually agreed-upon exchange for his promise or performance. Thus, a promise to give someone a birthday present is without consideration, because the promisor received nothing in exchange for her promise of a present.
Past Consideration [|2-2a]
Consideration, as previously defined, is the inducement for a promise or performance. The element of exchange is absent where a promise is given for an act already done. Therefore, unbargained-for past events are not consideration, despite their designation as past consideration. A promise made on account of something that the promisee has already done is not enforceable. For example, Diana installs Tom's complex new car stereo and speakers. Tom subsequently promises to reimburse Diana for her expenses, but his promise is not binding because there is no bargained-for exchange.
See DiLorenzo v. Valve e Primer Corporation later in this chapter.
Third Parties [|2-2b]
Consideration to support a promise may be given to a person other than the promisor if the promisor bargains for that exchange. For example, A promises to pay B $15 if B delivers a specified book to C.
As promise is binding because B incurred a legal detriment by delivering the book to C, because B was under no prior legal obligation to do so, and A had no prior legal right to have the book given to C. A and B have bargained for A to pay B $15 in return for B's delivering the book to C. As promise
• to pay $15 is also consideration for B's promise to give C the book.
Conversely, consideration may be given by some person other than the promisee. For example, A promises to pay B $25 in return for D's promise to give a radio to A. As promise to pay $25 to B is consideration for D's promise to give a radio to A and vice versa.
A promises to pay B $25 in return for D's promise to give a radio to A. As promise to pay $25 to B is consideration for D's promise to give a radio to A and vice versa.
CONTRACTS WITHOUT CONSIDERATION |12-3]
Certain transactions are enforceable even though they are not supported by consideration. Such transactions include (1) promises to perform prior unenforceable obligations, (2) promises that induce detrimental reliance (promissory estoppel), (3) promises made under seal, and (4) promises made enforceable by statute.
Promises to Perform Prior Unenforceable Obligations [|2-3a]
In certain circumstances, the courts will enforce new promises to perform an obligation that originally was not enforceable or that has become unenforceable by operation of law. These situations include promises to pay debts barred by the statute of limitations, debts discharged in bankruptcy, and voidable obligations. In addition, some courts will enforce promises to pay moral obligations.
Promise to Pay Debt Barred by the Statute of Limitations Every state has a statute of limitations stating that legal actions to enforce a debt must be brought within a prescribed period of time after the rights to bring the action arose. Actions not begun within the specified period-such periods vary among the states and with the nature of the legal action— will be dismissed.
An exception to the past consideration rule extends to promises to pay all or part of a contractual or quasi-contractual debt barred by the statute of limitations. The new promise is binding according to its terms, without consideration, for a second statutory period. Any recovery under the new promise is limited to the terms contained in the new promise. Most states require that new promises falling under this rule, except those partially paid, must be in writing to be enforceable.
Promise to Pay Debt Discharged in Bankruptcy A promise to pay a debt that has been discharged in bankruptcy is also enforceable without consideration. The Bankruptcy Code, however, imposes a number of requirements that must be met before such a promise may be enforced. These requirements are discussed in Chapter 38.
Voidable Promises Another promise that is enforceable without new consideration is a new promise to perform a voidable obligation that has not previously been avoided. The power of avoidance may be based on lack of capacity, fraud, misrepresentation, duress, undue influence, or mistake. For instance, a promise to perform an antecedent obligation made by a minor upon reaching the age of majority is enforceable without new consideration. To be enforceable, the promise itself
must not be voidable. For example, if the new promise is made without knowledge of the original fraud or by a minor before reaching the age of majority, then the new promise is not enforceable.
Moral Obligation Under the common law and in most states, a promise made to satisfy a preexisting moral obligation is made for past consideration and therefore is unenforceable for lack of consideration. Instances involving such moral obligations include promises to pay another for board and lodging previously furnished to one's needy relative and promises to pay debts owed by a relative.
The Restatement and a minority of states recognize moral obligations as consideration. The Restatement provides that a promise made for "a benefit previously received by the promisor from the promisee is binding to the extent necessary to prevent injustice." For instance, under the Restatement, Tim's subsequent promise to Donna to reimburse her for expenses she incurred in rendering emergency services to Tim's son is binding even though it is not supported by new consideration.
in rendering emergency services to Tims son is binding even though it is not supported by new consideration.
Promissory Estoppel [|2-3b]
As discussed in Chapter 9, in certain circumstances in which there has been detrimental reliance, the courts enforce noncontractual promises under the doctrine of promissory estoppel. When appli-cable, the doctrine makes gratuitous promises enforceable to the extent necessary to avoid injustice.
The doctrine applies when a promise that the promisor should reasonably expect to induce detrimental reliance does induce such action or forbearance.
Promissory estoppel does not mean that a promise given without consideration is binding simply because it is followed by a change of position on the part of the promisee. Such a change of position in justifiable reliance on the promise creates liability if injustice can be avoided only by the enforcement of the promise. For example, Ann promises Larry not to foreclose for a period of six months on a mortgage Ann owns on Larry's land. Larry then changes his position by spending $100,000 to construct a building on the land. Ann's promise not to foreclose is binding on her under the doctrine of promissory estoppel.
The most common application of the doctrine of promissory estoppel is to charitable subscriptions. Numerous churches, memorials, college buildings, stadiums, hospitals, and other structures used for religious, educational, or charitable purposes have been built with the assistance of contributions made through fulfillment of pledges or promises to contribute to particular worthwhile causes. Although the pledgor regards herself as making a gift for a charitable purpose and gift promises tend not to be enforceable, the courts have generally enforced charitable subscription promises. Although various reasons and theories have been advanced in support of liability, the one most commonly accepted is that the subscription has induced a change of position by the promisee (the church, school, or charitable organization) in reliance on the promise.
The Restatement, moreover, has relaxed the reliance requirement for charitable subscriptions so that actual reliance need not be shown; the probability of reliance is sufficient.
FACTS DiLorenzo, a forty-year employee of Valve & Primer, was also an officer, director, and shareholder of one hundred shares of stock. DiLorenzo claims that in 1987 Valve & Primer offered him a ten-year stock option that would allow DiLorenzo to purchase an additional three hundred shares at the fixed price of $250 per share. DiLorenzo claims that in reliance on that employment agreement, he stayed in his job for over nine additional years and did not follow up on any of several recruitment offers from other companies. Valve & Primer claims the 1987 employment
agreement between it and DiLorenzo did not contain a stock purchase agreement. The only purported proof of the agreement is an unsigned copy of board meeting minutes of which DiLorenzo had the only copy.
In January 1996, DiLorenzo entered into a semi-retirement agreement with Valve & Primer, and he attempted to tender his remaining one hundred shares pursuant to a stock redemption agreement. Shortly thereafter, Valve & Primer fired DiLorenzo.
DiLorenzo argued before the trial court that, even if the purported
agreement was not found to be valid, it should be enforced on promissory estoppel grounds. Valve & Primer' moved for summary judgment, which the trial court granted for lack of consideration.
The trial court denied the promissory estoppel claim because of insufficient reliance. DiLorenzo appealed.
DECISION The trial court's grant of Valve & Primer's motion for summary judgment is affirmed.
OPINION Whether the 1987 corporate minutes are authentic is not an issue on appeal. The purported minutes of the June 8, 1987, special meeting contain the following relevant language:
That in order to retain and reward such dedication... that Ralph DiLorenzo be given an option to purchase additional shares not to exceed 300. Said option to be exercised within 10 years from below date at the price of $250.00 per share.
The first question is whether there was consideration for the stock options. DiLorenzo could have exercised the option the moment it was purportedly made, then immediately quit, thereby giving nothing to the employer. Though the exercise of the option would require the transfer of money for the stock, the option itself carries with it no detriment to DiLorenzo. Therefore, there was no consideration for the option.
The second issue is whether DiLorenzo is entitled to the value of the shares of stock based upon the theory of promissory estop-pel. DiLorenzo argues that he detrimentally relied upon Valve & Primer's promise in that he worked at Valve & Primer for an additional period in excess of nine years in reliance on the stock option agreement.
There is nothing in the language of the corporate minutes or any other source to be found in this record to suggest that Valve & Primer conditioned the alleged stock option on DiLorenzo's promise to remain in his employment. Since the corporate minutes lack a mandatory obligation on which DiLorenzo could have reasonably detrimentally relied, and he could have elected to buy the shares of stock immediately, DiLorenzo's decision to remain on the job for the additional period of over nine years must be viewed as a voluntary act. Under those circumstances, promissory estoppel would not apply.
INTERPRETATION Past consideration is not legal consideration to support a promise; promissory estoppel requires detrimental reliance.
ETHICAL QUESTION Did the parties act ethically? Explain.
CRITICAL THINKING QUESTION What would have satisfied the consideration requirement in this case?
Promises Under Seal [|2-3c]
Under the common law, when a person desired to bind himself by bond, deed, or solemn promise, he executed his promise under seal. He did not have to sign the document; rather, his delivery of a document to which he had affixed his seal was sufficient. No consideration for his promise was necessary. In some states, a promise under seal is still binding without consideration.
Nevertheless, most states have abolished by statute the distinction between contracts under seal and written unsealed contracts. In these states, the seal is no longer recognized as a substitute for consideration. The Code also has adopted this position, specifically eliminating the use of seals in contracts for the sale of goods.
Promises Made Enforceable by Statute [|2-3d]
Some gratuitous promises that otherwise would be unenforceable have been made binding by stat-ute. Most significant among these are (1) contract modifications, (2) renunciations, and (3) irrevocable offers.
Contract Modifications As mentioned previously, the Uniform Commercial Code (UCC) has abandoned the common law rule requiring that a modification of an existing contract be supported by consideration to be valid. Instead, the Code provides that a contract for the sale of goods can be effectively modified without new consideration, provided the modification is made in good faith.
Renunciations Under the Revised UCC Article 1, a claim or right arising out of an alleged breach may be discharged in whole or in part without consideration by agreement of the aggrieved party in an authenticated record. This provision is subject to the obligation of good faith and, as with all sections of Article 1, applies to a transaction to the extent that it is governed by one of the other articles of the UCC.
Firm Offers Under the Code, a firm offer, a written offer signed by a merchant offering to buy or sell goods, is not revocable for lack of consideration during the time within which it is stated to be open, not to exceed three months or, if no time is stated, for a reasonable time. For a summary of consideration, see Figure 12-2.