Business Law Chapter 4: Consideration (Bargained for Exchange) Introduction • Consideration is often defined as “some right, interest, profit or benefit accruing to one party” or the loss, detriment or responsibility assumed by another party to the contract. • Consideration is also a requirement of a legally valid contract. What is consideration? • The basic reason for a contract; a person gives up something of value in exchange for receiving something of value through the contract. Why is consideration required? • Consideration is required for the formation of a valid contract for the simple reason that it shows the parties’ intent to be bound. • A one-sided promise does not put the other party in any different footing than he or she had prior to the promise. Types of Consideration • A right • A profit • An interest • A physical object • A responsibility undertaken • A legal detriment Legal Detriment • Consideration can also be satisfied through actions. • When a person assumes a legal detriment, this can also satisfy the requirement of a consideration. Detriment • The “bargained for exchange" in a contract, where the parties take on some responsibility that they are not legally obligated to undertake Proving Consideration • When the consideration for a contract is under dispute, the parties involved must devote time and energy in proving (or disproving) the existence of consideration. • Many times, the contract itself will recite the actual consideration. • In many jurisdictions, there are legal presumptions that may also help to establish the existence of consideration. • Written contracts, for example, are often presumed to have consideration, although the other party can rebut this presumption. • As a general rule, there is no requirement that consideration for a contract be recited or expressed in the writing. Quid Pro Quo • The phrase “quid pro quo” is a Latin term that is usually translated as “something for something.” Quid pro quo and Consideration • Quid pro quo is a general term; consideration is a specific, legal term. Inadequate or Insufficient Consideration • Courts often refrain from determining the value of the consideration. • Parties are free to negotiate any contract terms that they choose, as long as the contract does not involve fraud, duress or undue influence over one party, or a contract that is void for public policy reasons. • Inadequate consideration is not considered insufficient consideration and therefore will not automatically void a contract. Grossly Inadequate Consideration • Grossly inadequate consideration is often a feature of unconscionable contracts. • An unconscionable contract is one in which the terms or bargain is so obviously one-sided that the contract should be voided for public policy reasons. Contracts “Under Seal” • Seals are rare in modern contracts. • Under the common law, a contract under seal was presumed to have consideration and therefore no additional evidence or testimony about the consideration was required. Legal doctrines that affect consideration • Courts have created several legal doctrines that affect the analysis of consideration in a contract. Promissory Estoppel • The basic idea behind estoppel is that when person A makes a statement that person B relies upon, A is prevented from denying the truth of his statement. What is Estoppel? • When a person is barred by prior actions from claiming a right or a duty against another person who relied, in good faith, on those actions. Promissory Estoppel and Consideration • Under the theory of promissory estoppel, when Party B suffers some legal detriment as a result of the contract, Party A cannot claim that there was no consideration for the contract. The Elements of Promissory Estoppel • 1) there was a clear and definite promise; 2) the promisor intended to induce reliance, and that reliance occurred; and 3) the only way to avoid injustice is to enforce the contract. Waiver • When a person gives a waiver, he or she surrenders a right, requirement or obligation. Accord and Satisfaction • When parties change the terms of their contracts, or negotiate entirely new contracts based partly on a previously existing contract. Contracts for an Illegal Purpose • A contract that contemplates an illegal purpose, such as a criminal act, will not become enforceable simply because it is supported by consideration.
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