Buisness Law Today Chapter 10

CHAPTER IO

CHAPTER OUTTINE TEARNING OBIECTIVES

.ELEMENTS OF CONSIDERATION

-LEGAL SUFFICIENCY ANDADEQUACY OF CONSIDERATION

.CONTRACTS THAT LACKCONSIDERATION

.SETTLEMENT OF CLAIMS

-PROMISSORY ESTOPPEL

AFTER READING THIS CHAPTER, YOU SHOULD BE ABLE TOANSWER THE FOLLOWING QUESTIONS:

What rs conslcleratloni

What is required for consideration to be legally

sufficient?

What are some exampies of contracts that lack

consideration?

4 Wl'rat is an accord and satisfaction?

5 In what circurnstances might a prornise be enforced

despite a lack of consideration?

5 6No cause ofaction arisesfrom a bare

. a lpr0mlse,/ /

Legal Maxini

CONSIDERATIONGenerally, the value given in returnfor a promise. The considerationmust be something of legallYsufficient value, and there mustbe a bargained-for exchange. Theconsideration must result in adetriment to the Promisee or abenefit to the promisor.

27t ffiuCONSIDERATION

I

2

fll "

erery legal system, some promises will be enforced, and some promises will not

I r I U. .,rftr.""d. A the chapter-opening quotation sr-rggests, the simpie fact that a party

has made a promise cloes not mean tl-rat the promise is enforceable' Under Roman law, a

oromise was not enforceable without some sort of causa-that is, a reason for rnaking the

pro*ir. that was also deemed to be a sufficient reason for enforcing it. Under the common

in*, "

pri*^ry basis for the enforcement of prornises is consideration, which is usually

defined as the vah-re given in return for a promise'

In this chapter, *'. fitrt examine the basic elernents of consideration and the require-

ment that consideration be legally sufficient. we then describe certain types of contracts

in which consideration is lacking. Next, we discuss the requirement of consideration with

respect to the settlement of claiis. The chapter concludes with a discussion of a doctrine

unber which promises may be enforceable despite the lack of consideration.

Often, consideration is broken down into hvo parts: (1) something of legally sufficientwlue

must be given in exchange for the promise, and (2) there must be abargained-for exchange'

Legal ValueThe "something of legally sufficient value" may consist of ( I ) a promise to do something

that one has .ro"prio, i.gri a"ty to do (to pay on receipi of certain goods' for example), (2)

the performance of an-action that one is otherwise not obligated to undertake (such as

272 llNili!ilCONTRACTS

FORBEARANCEThe act of refraining from an actionthat one has a legal right toundertake.

providing accounting sewices), or (3) the refraining from an action that one has a legal

right to undertake (called a forbearance).Consideration in bilateral contracts normally consists of a promise in return for a prom-

ise, as explained in Chapter 8. FExIMFLE tor I In a conhact for the sale of goods, the seller

promises to ship specific goods to the buyer, and the buyer promises to pay for those goods

when they are received. Eich of these promises constifutes consideration for the contract. EIn contrast, unilateral contracts involve a promise in return for a performance.

IEExAMpt-E 10.21Anita says to her neighbor, "If you paint my garuge,I will pay you $800."Anita's neighbor paints the gange. The act of painting the garage is the consideration that

creates Anita's contrachral obligation to pay her neighbor $800. trWhat if, in return for a promise to pay, a person refrains from pursuing harmful habits,

such as the use of tobacco and alcohol? Does such forbearance create consideration for

the contract? This was the issue in Hamer v. Sidway, a classic case concerning considera-

tion that we present as this chapter's Landmark in the Law feature on page 275.

Bargained-for ExchangeThe second element of consideration is that it must provide the basis for the bargain

struck behveen the contracting parties. The promise given by the promisor must induce

the promisee to incur a legal detriment either now or in the future, and the detriment

incurred must induce the promisor to make the promise. This element of bargained-for

exchange distinguishes contracts from gifts.lr i]Exnrvtpt.rtorl Roberto says to his son, "ln consideration of the Fact that you are not as

wealthy as your brothers, I will pay you $5,000." This promise is not enforceable because

Roberto's son has not given any return consideration for the $5,000 promised.l The son

(the promisee) incurs no legal detriment; he does not have to promise anything or under-

take (or refrain from undertaking) any action to receive the $5,000. Here, Roberto has

simply stated his motive for giving his son a gift. The fact that the word consideration is

used does not, by itself, mean that consideration has been given. SDoes asking a bank for change for a $50 or $100 bill initiate a bargained-for exchange?

The bank in the following case argued that obtaining change is not a contractual transac-

tion because there is no consideration.

l . Foraclassiccaseexanple, seeFinkv Cor, 18fohns. 1 '15,9Am.Dec. 191 (N.Y. 1820)

United States Court o{ Appeals, Tenth Circuit, 484 F.3d 1276 (2OO7).

vuww.(a l0.uscoutts.EovD

BACKGROUND AND FACTSChris Barfield, an African

American man, entered a branch of Commerce Bank, N.A., in

Wichita, Kansas, and requested change for a $50 bill. He wasrefused change on the ground that he did not have an accountwith the bank. The next day, Chris Barfield's fathet James

a. N/. is an abbreviation for National Association.

b. Click on "Docket Filing & Opinions" tab. Scroll down and under "Search

Opinions by Keyword," type in "BarfieldJ' Hit "Search." ln the result, click on

"06-3087.pdf" to access the opinion.

Barfield, asked a white friend, John Polson, to make the same

request at the bank. The teller gave Polson change without

asking whether he had an account. A few minutes later,

James Barfield entered the bank, asked for change for a $l0obil l, and was told that he could not be given change unless he

was an account holder. The Barfields filed a suit in a federaldistrict court against Commerce Ban( alleging discrimination

on the basis of race in the impairment of their ability to

contract. The court granted the bank's motion to dismiss the

suit for failure to state a claim. The Barfields appealed this

ruling to the U.S. Court of Appeals for the Tenth Circuit.

275 E!EEnCONSIDERATION

€ASE l0. l -Cont inued

lN THE WORDS 0F THE COURT . . . MccoNNErf circuitJudge.

***x

Orieinally enacted in the wake of the Civil War,l42 U.S.C.] Section 1981(a) states:

All f,"rro,r, within the lurisdiction of the United States shall have the same right in

every State and Territory to make and enforce contracts * * '' as is enjoyed by white

citizens * * x'

A part of the Civil Rights Act of 1991, Congress added part b to the statute: "For purposes

of this section, the term 'make and enforce conhacts' includes the making, performance,

modification, and termination of contracts, and the enjoyment of all benefits, privileges,

terms, and conditions of the conhactual relationship." The purpose of part b was to expand

ah._U?y._,o encompass all phases and incidents of the contractual relationship.

All courts to have addressed the issue have held that a customer's offer to do busi-

ness in a retail setting qualif ies as a phase and incident of the contractual relationship* :r ' * When a merchant denies service or outright refuses to engage in business

with a consumer attempting to contract with the merchant, that is a violation of

Sect ion 1981.The question, then, is whether the Barfields' proposal to exchange money at a bank is

a contract offer in the same way as an offer to purchase dor-rghnuts or apple iuice. The

claim made by the appellees lCommerce Bankl, and accepted by the district court, is that

the Barfields' proposed exchange was not a contract because it involved no consideration:

"The bank would not have received any benefit or incurred a detriment if it had agreed

to change the Barfields'biils." That reasoning, however, departs in several significar-it ways

from our understanding of contract law.* x * A contract must be supported by consideration in order to be enforceable.

Consideration is defined as some right, interest, profit, or benefit acauing to one party,

or some forbearance, detriment, loss, or responsibility, fit,en, suffered, or undertaken by

the other. A promise is without consideration when the promise is given by one party to

another without anything being bargained for and given in exchange for il. lEmphasisadded. l

In the n'rost straightforward sense, the transaction proposed by the Barfields was a con-

tract of exchange: they would give up something of value (a large-denomination bill) in

exchange for something they valued more (smaller-denomination bills). It is hard to see

why this is not a contract. If hvo boys exchange marbles, their transaction is a conttact, even

if it is hard for or-rtsiders to fathom why eitirer preferred the one or the other. Consideration

does not need to hate a quantifiable financial value * * * lEmphasis added.]

The Bank, however, argues that the proposed exchange was not a contract because it

received no rerruneration for performing the service of bill exchange. In other words,

ratl-rer than view the transaction as an exchange of one thing for another, the Bank r,rrges

us to treat the transaction as a gratuitous service provided by the Bank, for no considera-

tion. We cannot regard the Bank's provision of bill exchange services as "gratuitor-rs" ir-r

any legal sense. Profit-making establishments often offer to engage in transactions with no

immediate gain, or even at a loss, as a means of inducing customers to engage in other

transactions that are more lucrative; such offers may nonetheless be contractual, and they

do not lack consideration. If, as is alleged in the complaint, the Bank effectively extends

bill exchange services to persons of one race and not tl-ie other, that is srrfficient to come

within the ambit frealm] of Section I98l. CASE l0. l -Cont inues next page

275rltlrfnirrilCONSIDERATION

ln Homer v. Sidwoy,a the issue before the courtarose from a contract created in 1869 betweenWill iam Story Sr., and his nephew, Will iam Story l l.

The uncle promised his nephew that if the nephew

refrained from drinking alcohol, using tobacco, and playing bil l iards and cards for money

until he reached the age of twenty-one, the uncle would pay him $5,000 (about $75,000

in today's dollars). The nephew, who indulged occasionally in all of these "vices," agreed

to refrain from them and did so for the next six years. Following his twenty-first birthday

in 1875, the nephew wrote to his uncle that he had performed his part of the bargain

and was thus entitled to the promised $5,000. A few days later, the uncle wrote the

nephew a letter stating, "ff iou shall have the five thousand dollars, as I promised you."

The uncle said that the money was in the bank and that the nephew could "consider

this money on interesti'

The lssue Of COnSideratiOn The nephew left the money in the care of his uncle,

who held it for the next twelve years. When the uncle died in I88Z however, the execu-

tor of the uncle's estate refused to pay the $5,OOO claim brought by Hamer, a third party

to whom the promise had been ossigned. (The law allows parties to assign, or transfer,

rights in contracts to third parties; see Chapter 16.) The executor, Sidway, contended that

the contract was invalid because there was insufficient consideration to suPPort it. The

uncle had received nothing, and the nephew had actually benefited by fulf i l l ing the

uncle's wishes. Therefore, no contract existed.

The Court's €onclusion Although a lower court upheld sidway's position, the

New York Court of Appeals reversed and ruled in favor of the plaintiff, Hamer. "The

promisee used tobacco, occasionally drank l iquor, and he had a legal right to do so,"

the court stated. "That right he abandoned for a period of years upon the strength of the

promise of the testator [one who makes a wil l] that for such forbearance he would give

him g5,O0O. We need not speculate on the effort which may have been required to give

up the use of those stimulants. lt is sufficient that he testricted his lawful freedom of

action within certain prescribed limits upon the faith of his uncle's agreement."

Although this cose wos decided more than

a century ogo, the principles enuncioted by the court remain opplicoble to controcts

formed today, including online controcts. For o controct to be valid and binding,

consideration must be given, and that consideration must be something of legally

sufficient value.

ffi To locote informotion on the web concerning fhe Hamer v.

Sidway decision, go to this text's Web sife of www.cengage.com/blaw/blt, select "Chapter

IO," ond click on "lJRLs for Landmorks."

a. 124 N.Y.538,27 N.E.256 (1891).

276 rwIIroUCONTRACTS

To learn more about howthe courts decide such issues aswhether consideration was lackingfor a particular contract, look atrelevant case law which can beaccessed through the Web site ofCornell UniversiVs School of Law at

contracts.

Sometimes, one or both of the parties to a contract may think that they have exchangedconsideration when in fact they have not. Here, we look at some situations in which theparties' promises or actions do not qualifi, as contractual consideration.

Preexisting DutyUnder most circumstances, a promise to do what one already has a legal duty to do doesnot constitute legally sufficient consideration because no legal detriment is incurred. Thepreexisting legal duty may be imposed by law or may arise out of a previous contract. Asheriff, for example, cannot collect a reward for information leading to the capture of acriminal if the sheriff already has a legal duty to capture the criminal. Likewise, if a partyis already bound by contract to perform a certain duty, that duty cannot serve as consid-eration for a second contract.

IbExAMPLE t0.51 Bauman-Bache. Inc., begins construction on a seven-story office build-ing and after three months demands an extra $75,000 on its contract. If the extra $75,000is not paid, the firm will stop working. The owner of the land, having no one else to com-plete construction, agrees to pay the extra $75,000. The agreement is not enforceablebecause it is not supported by legally sufficient consideration; Bauman-Bache had a pre-existing contractual duty to complete the building. E

Unforeseen Difficulties The rule regarding preexisting duty is meant to prevent extortionand the so-called holdup game. What happens, though, when an honest conhactor, whohas contracted with a landowner to build a house, runs into exhaordinary difficulties thatwere totally unforeseen at the time the conhact was formed? In the interests of fairness andequity, the courts sometimes allow exceptions to the preexisting duty rule. In the examplejust mentioned, if the landowner agrees to pay extra compensation to the contractor for over-coming the unforeseen difficulties (such as having to use dynamite and special equipmentto remove an unexpected rock formation to excavate for a basement), the court may refrainfrom applying the preexisting duty rule and enforce the agreement. When the "unforeseen

difficulties" that give rise to a contract modification are the types of risks ordinarily assumedin business, however, the courts will usually assert the preexisting duty rule.3

Normally, contracting parties are supposed to anticipate the risk that costs mayfluctuate during the duration of the contract. Thus, a party who has a preexistingduty to build a house cannot ask for a modification due to an increase in the theprice of lumber. Not all risks can be anticipated, however, and sometimes a courtwill allow the parties to modify a contract because of unforeseen difficulties thatwill make performance much more expensive or complicated. Nevertheless,because it is hard for the parties to determine whether a court will enforce theagreed-on modification or apply the preexisting duty rule, modifying a preexistingcontract without consideration is risky. Parties should retain counsel and be clearabout all other options before negotiating chanSes to a preexisting duty.

Rescission and New Contractto rescind their contract, at least

EThe law recognizes that h.vo parties can mutually agreeto the extent that it is executory (still to be carried out).

3. Note that under the Uniform Commercial Code (UCC), any agreement modifying a sales contract needs no con

sideration to be binding. See UCC 2-209(l).

277@CONSIDERATION

Rescissiona is the unmaking of a contract so as to return the parties to the positions they REsclsstoN

occupied berore the contralt was made. s"-.ti-"i p,,ties re-,cind::;liili:1"1"::li HT':1t#lit"iffliiiil''

"-".i,.o'tr^ct at the same time. When this occurs, it is often diff icult to determtne returnedtothePositionsthey

whether there was consideration for the new contract or whether the parties had a pre- occupied before the contract was

existing duty under the previous contract. If a court finds there rrr Jp'i."iJ;;ilt, il|f"';'T:1ffff:i:"tl'","'"f[ii!.then the new contract *iil U. invalid because there was no consideration' parties' conduct, or by court decree'

Past Considetat ionPromises made in return for actions or events that have already taken place are unenforce-

;i;.'ih;. fro-ir., t".t .o"ria.tation in that the element of bargained-for exchange

is missing. In short, yo,-r t'n bargain for,something to take place now or in the future

but not for something ,h* h^, "i?eady

taken place. Therefore, past consideration is no tTI::tli:1Ti:$ace before the

ConsideratiOn . t . ' :-- T.,r,.,^ contract is made and that ordinarily'

trEnxEMFiE*I'..l Elsie, a real estate agent, does her friend fudy a favor by seliing ]udy's ;;il*n .unnot uu con-sideration for

house and not charging any commission. Later, |udy says to Elsie, "In return for your gen- a rater promise to pay for the act'

erous act, I will pay yJ,,, gi,ooo.,' This promise is made in return for past consideration

and is thus unenforceable; in effect, Judy is stating her intention to give trlsie a gift' E .

An employer *ilf oft."'"k "'

t-ployt" to sign a noncompett -"91:"-t"t'

aiso called

a covenant .,or ao "o-f.i.,

by *hi.h thl emplolee agrees not to work for co*rpetitors of

the employer for a ;;i* period of timo afier tf,e employment relationship ends.

(Noncompete ogrnn*nrrr-*tl l te discussed further in Chapter l1') In the following case'

the court had to decide ii l""ti"t.a employment constiiuted valid consideration for a

noncompete ageement or if it was past constderatton'

4. Pronounced reh-sih-zhen

Hernandez to sell organic produce for her sole proprietorship'

O*"tt Organics, Inc' Three months later' he was promoted to

sales manager. Soon after, he signed a noncomPete

ufr""*"nt in which he agreed "not to directly or indirectly

clmpete with the business ' ' ' for a period of tvvo years

following termination of employmentl' Later' the business

encountlred financial difficulties' Hernandez left and went into

business with another former employee to compete with

Access Organics in the sale of produce in the same part of

Supreme Court of Montana,34l Mont' 73,

BACKGROUND AND FACTSBonnie Poux hired AndY

l7s P.5d 8ee (2008).

Montana. Poux then sued to enforce the noncompete

agreement. The trial court found that Hernandez was in direct

cJmpetition with Access Organics and was contacting former

customers. That was held to be a violation of the noncompete

agreement' The agreement was upheld as valid because it was

sJpported by consideration, which was continued

employment at Access Organics at the time the agreement

was signed. The court ordered Hernandez not to compete

directly with Access Organics for the trruo-year period called for

in the agreement' Hernandez appealed'

|NTHEW0RDSoFTHEC0URT,. 'WWILLIAMLEAPHART,JuSt ice'

**t : 'F

Hernandezarguesthatthenon-competeagreement is inval idandunenforceable,because it is not ,"pi"uJ-uf good considJration. Access organics contends that

H.'r.*"a.rt ,"lrty ,'tt?'-tti'-tt'ed Zmployment supplied sufficient consideration'

consideration exrsts if the employee enters into ihe non-compete agreement at the time

of hiring. t)uring pre-employment negotiatio"r,'il;;;pily." ",'td tht";;i;y;; engage in CASE l0'2-Continues next pase

279@EUCONSIDERATION

n|llfiIilrillET[ Businesspersonsshould consider settling potentiallegal disputes to save both theirown time and resources and thoseof the courts.

ACCORD AND SATISFACTIONA common means of settling adisputed claim, wherebY a debtoroffers to pay a lesser amount thanthe creditor purPorts is owed. Thecreditor's acceDtance of the offercreates an accord (agreement), andwhen the accord is executed,satisfaction occurs.

LIQUIDATED DEBTA debt for which the amount hasbeen ascertained, fixed, agreed on,settled, or exactly determined. lf theamount of the debt is in disPute, thedebt is considered unliquidated'

t,

cent bonus at the end of the year will be giver-r-if management ihinks it is warranted."

This is an illusory promise, or no promise at all, because performance depends solely on

the discretion of the president (the management). There is no bargained-for considera-

tion. The statement declares merely that management may or may not do something in

the future. ElOption-to-cancel clauses in contracts for specified time periods sometimes present

probi.-s in regard to consideration. lEExnrvrpr-r ro.slAbe contracts to hire Chris for one

year at $5,000 per month, reserving the right to cancel the contract at any time. On

close e"amirrati,on of these words, you can see that Abe has not actualiy agreed to hire

Chris, as Abe could cancel without l iabil i ty before Chris started performance' Abe has

not given up the opportunity of hiring someone else. This contract is iherefore i l lusory.

No,i ,uppore thai Abe contracts to hire Chris for a one-year period at $5,000 per

month, i.r.ruit-rg the right to cancel the contract at any time after Chris has begun_per-

formance by giving Chiis thirty days' notice. Abe, by saying that he will give Chris thirty

days' notice, is relinquishing the opportunity (legal right) to hire someone else instead

of 'chri,

for a thirty-d"y p.ti,rd. If chris works for one month, at the end of which Abe

gives him thirty days' notice, Chris has a valid and enforceable contractual claim for

$10,000 in salary. le l

Businesspersons or others can settle legal claims in several ways. It is important to under-

stand the nature of the consideration given in these settlementagreements, or contracts.

Claims are commonly settled through an accord and satisfaction, in which a debtor offers

to pay a lesser amouni than the creditor purports is owed. Two other methods that are also

often used to settle claims are the release and the coyenant not to sue.

Accord and Sat isfact ionI1 an accord and satisfaction, a debtor offers to pay, and a crediior accepts, a lesser amount

than the creditor originally claimed was owed. Thus, in an accord and satisfaction, the

debtor attempts to teiminate an existing obligation. The accord is the settlement agree-

ment. In an accord, the debtor offers to give or perform something less than tl-re parties

originally agreed on, and ihe crediior accepts that offer in satisfaction of the claim'

Saiisfact'ion"is the performance (usually payment), which takes place after the accord is

execr-rted. A basic rule is that there can be no satisfaction unless there is first an accord.

For accord and satisfaction to occur, the amount of the debt must be in dispute' lf iI

is a liquidated debt, then accord and satisfaction cannot take place. A debt is liquidated

if its ;ount has been ascertained, fixed, agreed on, settled, or exactly determined' An

example of a liquidated debt is a loan contract in which the borrower agrees to pay a

stioulated amount every month until the amount of the loan is paid. In the majority of

states, acceptance of (an accord for) a lesser sun'i than the entire amount of a liquidated

debt is not satisfaction, and the balance of the debt is still legally owed. The rationale

for this rule is that the debtor has given no consideration to satisfii the obligation of pay-

ins the balance to the creditor-because the debtor has a preexisting legal obligation to

oav the entire debt.Antmliquidated debtis the opposite of a liquiclated debt. Here, teasonable persons may

differ over ihe amount owed. It is not settled, fixed, agreed on, ascertained, or determined'

In these circumstances, acceptance of payment of the lesser sum operates as a satisfaction,

or discharge, of the debt. One argumer-it to support this rule is that tl're parties give up a

iegal righito contest the amount in dispute, and thus consideration is given.

290 lr$Irlrir,rCONTRACTS

REIEA5EA contract in which one partry forfeitsthe right to pursue a legal claimagainst the other party.

@You can find an example ofa release form and theinformation that should be includedin a release by going to

xwaiverp.htm.

ReleaseA release is a conhact in which one par[u forfeits the right to pursue a legal claim against theother party. Releases will generally be binding if they are ( 1 ) given in good faith, (2) stated ina signed writing (required by many states), and (3) accompanied by consideration.5 Clearly,parties are better off if they know the extent of their injuries or damages before signingreleases.

IEEXAMPLE to5l Suppose that you are involved in an automobile accident caused byRaoul's negligence. Raoul offers to give you $2,000 if you will release hin-r from furtherliability resulting from the accident. You believe that this amount will cover the damageto your car, so you agree to and sign the release. Later you discover that the car repairswil l cost $4,200. Can you collect the balance from Raoul? The answer is normally no; youare l imited to the $2,000 in the release. Why? The reason is that a valid contract existed.You and Raoul both assented to the bargain (hence, agreement existed), and sufficientconsideration was present. Your consideration for the contract was the legal detriment yousuffered (by releasing Raoul from liability, you forfeited your right to sue to recover dam-ages, should they be more than $2,000). This legal detriment was induced by Raoul'spromise to give you the $2,000. Raoul's promise was, in turn, induced by your promisenot to pursue your legai right to sue him for damages. p

Before agreeing to a release, a party should be certain of its terms. The following caseemphasizes this point.

5. Under the UCC, a witten, signed waiver or renunciation by an aggrieved party discharges any, further liability fora breach, even without consideration IUCC l-1071.

l-=-']H'"=i Oakridge at Winegard, Inc., and months later, when BP learned of the sale and switch to CitgoMahammad Qureshi operated a gas station and convenience fuel, it f i led a suit in a federal district court asainst OakridseNlanammao quresnl oPerateo a $as statton and convenrence tuel, it f i led a suit in a federal district court against Oakridgestore in Orlando, Florida, subject to an exclusive fuel supply and the others to void the deal. The parties fi led claims,agreement with BP Products North America, lnc. Under the counterclaims, and cross-claims, and attempted unsuccessfullyagreement, BP had a "right to first refusal" with respect to the to mediate a resolution. Later, during a phone conference,sale of the premises if Oakridge received an offer. In Oakridge offered BP 9265,616.95 to cover its advance of fundsNovember 2005, without notifying BP, Oakridge contracted to under the fuel supply agreement, with ownership of thesell the premises to Pacific Energy, Inc., and Arooj Ahmed. premises to be retained by pacific and all of the other claimsPacific wanted to sell Citgo, not BP, fuel. Qureshi told Ahmed among the parties to be released. Everyone agreed. Twothat terminating the agreement with BP would cost weeks later, however, Oakridge refused to sign the release.$100,000-the amount that BP had provided to build the BP and Pacific asked the court to order its enforcement.

f N THE WORDS 0F THE C0URT . . . FAWSETTr chief Judge.

l l '***nornrmmad Qureshi had given Attorney Schillinger clear and unequivocal

"trl?tlrt_" settle the case on behalf of Defendants Oakridge and Mr. Qureshi.

On July 28, 2006, Mr. Schillinger telephoned Mr. Blumstein, counsel for BP, andoffered a settlement proposal whereby oakridge would pay to BP $263,616.95, theamount allegedly due to BP for the unamortized advance of funds under the DealerSupply Agreement.

@CONSIDERATION

CASE t0 '5-Cont lnued

,. * x In the late afternoon of July Zg, 2006, counsel for ail three parties condr-rcted a

telephonic meeti'ig r,'r *1tiJ BP and Pacific co'tend that the parties verbally agreed to a

sett lementref lect ingMr.Sclr i l l inger,stertns 'At5: ]4p. tvt . ,Mr,Blumsteirrsentarre-mai lto Mr. Schillinger and Ms, W.rtoit fthat rnemorialized the material ter''rs of the parties'

agreement]., .*r .X* x *. Mr. Schillinger electronically replied that "The agreenent must reference the

terminatron of rff "(tigatrons

under'thq slipP\ agreement and resignage agreelrielrt'

acknowledging thrt ,lf TJrr,r't,*. U".,'r pridi,r f.,tt] ,"a please retun the origrnal notes

n-iarked paid in full." Mr. Schillinger ier-rt no further to""'pottdt'tce regarding Mr'

gi;a.i"'t memorialization of tl-ie parties' conversation'

Mr. Schilling., d".;;;idirp,rt. ihrt he. generally agreed to the settlement terms dur-

ing the iate afternoon";;i*;;;. call or-r 1ulf ZS, 2006'"but states that he considered these

negotiatio's to U" i,,to'oll, initial negoii^iio,rr, and that he t1iought it was understood

tl-iat the agreeme't would be reduced io r"riting and subject to Mr' Qureshi's re'iew a'd

approval of a written J".","""r. Mr. Schilling"er also testified that he believed that the

proposed settlement *""fa "",

release Pacific" from its allegecl obligation to indemni['

U;ffi;; i"r-rp . sioilooolo of the eariy te'nination fee and that the indemni$ pro-

vision would still have to be litigated behveen Oakriclge- and Pacific' Mr' Schillinger ftir-

ther admitted during the evide'"tiary }iearing that he did not qualify the settlernent terms

dr_rring tl,re three-way "o.,Lr..."

*tl o, iJ his electronic response to Mr' Blumstein's

e-mai lonJuly28tyrtr t i ' , ' ,gt l - , "set t lementwas"subiect tohiscl ient 'sapproval ' "x*xiThemakingofacontractdependsnotontheagreementof twomindsinone

intention, but on trrn'ogrnn*nrt of twct sets o.f external signs-not on the parties hatirtg

meant the same thingi|t o, thnir'having said the same thing'" While Mr' Schil l inger may

hatte pritately beLieved that the indemnity provisions weri yet to be litigated between

oakr idgeandPaci f ic , l teclear ly,basedonunequiuocalauthar i tyfromhiscl ient ,owrt lyagreecl toacomplete 'set t lement inthecaseatbar|be{orethecor.rr t ] . |Emphasisadded.]

oakridge ,rgr., tr.rf ; i * Bp and pacific knew or had reason to kr-row that oakridge

inadvertently omitted liscussion of the $100,000'00 reinibursement amount ffor early ter-

mination] * * * . 11"'"lfij;";t does not show and Oakridge fails to^dernonstrate how' as

it contends, Bp and P;;i. k;;; or should have know' that the $100'000'00 reimbr'rrse-

rnent amount hrd b;;; inadvertent\' ornitted' especially when the evidence clearly

demonstrates thrt tl-r" p"rrti., ,tt ,gt..i to release all "laims

against eacl'r other arising ottt

of the instant litigation during tlte 1uly 2B conference call'

DECISI0N AND REMEDY rfre court concluded that there

wu, a te"ting of the minds and that the parties entered into

an enforceable settlement agreement during the conference

ca| l 'Thecourt thereforeenteredajudgment infavorofBPand.g.i"U Oakridge and Qureshi for $263'616'95' plus interest'

and dismissed the other claims'

f f i *& FoR cRITIcAt ANAl.Ysls-social$ru C o n s i d e r a t i o n why ore settlement ond releose

ffir"rtt encouroged ond reodily enforced?

@

Covenant Not to Sue

Unlike a release, a covenant not to sue cloes not alwavs bar further lecovery The parties

simply substitute , ."";;;;i obligation for some oti'rer type of lega1 action based on a

valicl claim. Suppose (r;li;; the eariier exan"rpie) that 1,61 agree with Raoul not to sr-re

COVENANT NOT TO SUEAn aRreement to substitute a

contiactual obligation for.some other

type of tegal aciion based on a valid

claim.

2S2 IIEIIMCONTRACTS

PROMISSORY ESTOPPEL

A doctrine that aPPlies when aoromisor makes a clear and definitepromise on which the Promiseejustifiably relies. Such a promise isbinding if lustice will be betterserved by the enforcement of thepromise.

ESTOPPEDBarred, impeded, or Precluded.

for damages in a tort action if he will pay for the damage to your car. If Raoul fails to pay,

vou can bring an action for breach of contract.

Sometimes, individuals rely on promises, and such reliance n'ray form a basis for contract

,ight, ,.rd duties. Under ihe doctrine of promissory estoppel (also called detrimental

,fiiorrn1,a person who has reasonably relied on the promise-of another can often obtdin

some measure of recovery. When the doctrine of promissory estoppel is applied, the

promisor (the offeror) is esiopped (barredor impeded) from revoking the promise. For the

doctrine of promissory estoppel to be applied, the following elements are required:

I There must be a clear and definite promise.

2 The promisee must justifiably rely on the promise'

5 The reliance normally must be of a substantial and definite character.

4 iustice will be better served by the enforcement of the promise'

l"ExTMFLE l0.lo1 Your uncle tells you, "l '11 pay you $1,500 a week so that you won't

haue to work anymore." In reliance on youl uncle's promise, you quii your job, but your

uncle refuses to pay you. Under the dochine of promissory estoppef you may be able to

enforce hi, pro-ir".6 Now your uncle makes a promise to give you $20,000 to buy a car.

if you buy th" .", with youi own funds and he does not pay you, you may once again be

abie to enforce the promise under this doctrine. E

shoutd the doctrine of promissory estoppel be opplied to promises of employmenf? A num-

ber of cases have come before the courts in which the story is strikingly similar: in reliance on

an offer of employment, a person has left a job, sold her or his home, and moved to another

location-only to learn that the offer has been revoked. In those jurisdictions that are gov-

erned by the common law doctrine of employment at wilt,7 these persons often have little

recourse. Courts in these jurisdictions often hold that even though an employer has made an

offer of employment to a particular job candidate, under the at-will doctrine the employer

need not hire that Person.Occasionally, however, a court will apply the doctrine of promissory estoppel in such cir-

cumstances. For example, in one case, Thomas Frey had been working for a firm at which he

had substantial benefits and would have been entitled to stock options. Then Andrew Taitz of

workhorse custom chassis, LLC, offered Frey a position, promising him a large bonus if the

company's earnings exceeded $39.1 million by the end of 2OO2. In reliance on that promise,

Frey left his job and took the position at Workhorse.

By the end ol 2OO2, projections indicated that Workhorse's earnings would exceed the

required level. Frey therefore believed that he was entitled to the bonus when he left the

company in January 2005. In the spring ol 2OO3, Frey asked for his bonus, but Taitz responded

that tecause Frey no longer worked for the comPany, he was not entitled to the bonus' Frey

filed a lawsuit against Workhorse, claiming, among other things, that he was entitled to dam-

ages under the doctrine of promissory estoppel because he had left a lucrative and secure

position to take the job at Workhorse'

Although Workhorse claimed at the trial that its 2002 earnings were only around $37'6 mil-

lion, the audited financial statements it presented had been completed ten months late and

6. A classic exanple is Rickettsv. Scothom,5T Neb. 51, 77 N W 365 (1898)

7. Embloyment at will ts an employment relationship that either pady nay ielminate at any time for any reason-see

Chapter 40 for a further discussion ofthis doctrine.

were subject to a 5 percent margin of error. Workhorse also admitted that many employees

would have received substantial bonuses if the earnings had exceeded $39.1 mill ion. A jury

found Frey's argument convincing and awarded him $648,220. Workhorse moved for a judg-

ment as a matter of law and for a new trial, but the court ruled that Frey had presented

enough evidence to support the jury's verdict.s _

B. Frey y. Workhorse Custom Chassis, LLC, -F.Supp.2d - (S.D.lnd. 2007). For a case allowing a job candidate

io recover damages fron a prospective employer, see Coff-Hamel v. Obstetricians & Cynecologists, P C., 256 Neb. 19,

;58 N.W.2d 798 (1999).

285 E!nEHUCONSIDERATION

Are the basic elements of consideration present in the

neighbor's promise to help John reassemble the garage?

Why or why not?

Suppose that the neighbor starts to help John but then

realizes that, because of the layout of John's ProPerty, PUt-ting the building back together wil l take much more work

than dismantling it took. Under which principle discussed

in the chapter might the neighbor be allowed to ask for

additional compensation?

What if John's neighbor made his promise to help

reassemble the garage at the time he and John were mov-

ing it to John's property, saying, "Since you helped me

take it down, I wil l help you Put it back upJ'Would John

be able to enforce this promise? Why or why not?

Under what doctrine discussed in the chapter might John

seek to recover the profits he lost when he declined to do

reoair work for one week?

I

John operates amotorcycle repairshop from his homebut finds that hisbusiness is l imited by

the small size of his garage. Driving by a neighbor'sproperry he notices a {or-sale sign on a large, metal-sided

garage. John contacts the neighbor and offers to buy the

building, hoping that it can be dismantled and moved to his

own property. The neighbor accepts John's payment and

makes a generous offer in return: if John wil l help him

dismantle the garage, which wil l take a substantial amount

of t ime, he wil l help John reassemble it after it has been

transported to John's ProPerty. They agree to have the

entire job completed within two weeks' John spends every

day for a week working with his neighbor to disassemble

the building. In his rush to acquire a larger workspace, he

turns down several lucrative repair jobs' Once the

disassembled building has been moved to John's ProPerryhowever, the neighbor refuses to help John reassemble it as

he originally promised. Using the information presented in

the chapter, answer the following questions.

accord and satisfaction 279consideration 271covenant not to sue 281estopped 282

forbearance 272liquidated debt 279past considerataon 277promissory estoppel 282

release 280rescission 277

Elements ofConsideration(See pages 271-274.)

Consideration is broken down into two parts: (l) something of legally sufficient volue must begiven in exchange for the promise, and (2) there must be a borgained-for exchonge.

(Continued)

284 l!trilUuCONTRACTS

Legal Sufficiencyand Adequacvof consideration(See pages 214-275.)

Contracts ThatLack Consideration(See pages 276-279.)

Legal sufficiency of consideration relates to the first element of consideration-something of legalvalue must be given in exchange for a promise. Adequacy of consideration relates to how muchconsideration is given and whether a fair bargain was reached. Courts will inquire into theadequacy of consideration (whether the consideration is legally sufficient) only when fraud,undue influence, duress, or unconscionability may be involved.

Consideration is lacking in the following situations:

1. Preexisting duty-Consideration is not legally sufficient if one is either by law or by contractunder a preexisting duty to perform the action being offered as consideration for a newcontract.

2. Post considerotion-Actions or events that have already taken place do not constitute legallysuff icient consideration.

3. lllusory promises-When the nature or extent of performance is too uncertain, the promise isrendered illusory (without consideration and unenforceable).

1. Accord and sotisfoction-An accord is an agreement in which a debtor offers to pay a lesseramount than the creditor claims is owed. Sofisfocfion takes place when the accord is executed,

2. Releose-An agreement in which, for consideration, a pafi forfeits the right to pursue furtherrecovery beyond the terms specified in the release.

3. Covenant not to sue-An agreement not to sue on a present, valid claim.

The equitable doctrine of promissory estoppel applies when a promisor makes a clear anddefinite promise on which the promisee reasonably relies, and the promise substantially alters thepromisee's actions. The court will enforce such promises only if an injustice would occurotheruvise. Also known as the doctrin e ol detrimental relionce.

Settlementof Claims(See pages 279-282.)

P.romissory Estoppel(See pages 282-283)

Answers for the even-numbered questions in this tor Review section con be found on this text's accomponying Web site otwrivwcengage.com/blaw/blt. Select "Chopter t0" and click on "For Review."

I What is consideration?

2 What is required for consideration to be legally sr-rfficient?

5 \\4rat are some examples of contracts that lack consideration?

4 What is an accord and satisfaction?

5 In wl-rat circumstances might a promise be enforced despite a lack of consideration?

E

ffi HypoTHETrcA[ scENARros AND cAsE pR0Br.EMst#-i Contract Modification. Tabor is a buyer of file cabinets rnanu-

factured by Martin. Martint contract rvith Tabor calls fordeliverl of fifty file cabinets at $40 per cabinet in five equalinstallments. After delivery of two installments (twenty cabi-

nets), Martin informs Thbor that because of inflation, Martinis losing money and will promise to deliver the remainingthirty cabinets only if Tabor will pay $50 per cabinet. Taboragrees in writing to do so. Discuss wl.rether Mariin can legally