Professional Documents
Culture Documents
Chapter 10
Agreement and Consideration
Learning Objectives:
Teacher-to-Teacher Dialogue
Agreement
The first element of a contract is finding mutual assent between the contracting parties.
Mutual assent is defined as a reciprocal agreement between all of the parties to a contract. The
steps leading to mutual assent start with the offer and acceptance process. These steps can be
broken down into subparts, and a familiarization with these subparts is essential to the study of
contract law.
The offer is broken down into three main subcomponents: intent, certainty, and
communication. As an alternate memorization device, students may consider using an anagram
called the QQC test. The first Q represents quality of the offer. In the eyes of the offeree, does
this offer sincerely represent an objective intent to be bound? The second Q stands for quantity of
the offer. If necessary, can a court, looking at this offer, find a basis upon which it could be
measured, that is, is the quantity of the offer readily determinable? The C represents
communication. The offer must be communicated to the offeree in order to be effective.
Once a good offer is made, the other player must make his or her opening response.
Remember, that the response is dictated in many ways by the terms of the offer. Under the
traditional common law mirror image rule, the acceptance must reflect the terms of offer. If it
fails to do so, it may be deemed to be a rejection of the offer. And if it brings new terms to the
table, it may be deemed a counteroffer. A counteroffer is, in fact, a new offer and sets the whole
cycle of play into motion again from the reverse angle. The original offeror is now the new
offeree. Of additional importance is the application of the mailbox rule, especially as it relates to
digital contracts. Remember, as long as the acceptance, usually sent by mail (or a similar
medium), is the agreed upon method or is an answer to a previously mailed offer, it is usually
effective upon dispatch.
Once we have a good offer coupled with a good acceptance, the first element of contract,
agreement, or mutual assent is arrived at. There are many variations on this basic theme as
illustrated by the common law rules on advertising, auctions, and implied contracts based on the
actions of the parties. They all have one common denominator: sooner or later some sort of basis
for mutual assent must be found before a court will go forward with enforcement of the
agreement.
Consideration
In case one examines an agreement for consideration and finds it lacking, then one still has a
contractual result based on either the equitable doctrine of promissory estoppel or on specific
statutory grounds that allow for a consideration waiver or substitute. Promissory estoppel literally
means that a promise made, even though not supported by consideration, will not be allowed to
be withdrawn because of the harm that would befall the other party. The second major category
of consideration exceptions from contracts is found in statutory provisions based on public policy.
For example, the U.S. Bankruptcy Code allows for court-approved reaffirmation of debts that
have already been discharged. Another example is found in many state statutes that provide
protection to charitable organizations making pledges as enforceable contracts even though the
donors may not be getting any consideration in return for their gifts.
Text Materials
Contracts are voluntary agreements between the parties. One party makes an offer that is accepted
by the other party. Without mutual assent, there is no contract. To be enforceable, a contract must
be supported by consideration, which is broadly defined as something of legal value.
II. Agreement
III. Offer
The process of reaching an agreement begins when one party makes an offer to another party to
sell or lease property or provide services to another party. The person who makes the offer is
called the offeror and the person to whom the offer is made is called the offeree.
The U.S Supreme Court defines an offer as “The manifestation of willingness to enter into a
bargain, so made as to justify another person in understanding that his assent to that bargain is
invited and will conclude it.” (Section 24 of the Restatement (Second) of Contracts)
A. Express Terms
Most offers and contracts set forth express terms that identify the parties, the subject matter
of the contract, the consideration to be paid by the parties, and the time of performance as well
as other terms of the offer and contract. If the terms are indefinite, the courts usually cannot
enforce the contract or determine an appropriate remedy for its breach.
B. Implied Terms
The court can supply a missing term if a reasonable term can be implied. The definition of
reasonable depends on the circumstances. Terms that are supplied in this way are called
implied terms.
C. Communication of an Offer
There are several special types of offers. These include advertisements, rewards, and auctions.
A. Advertisements
As a general rule, advertisements for the sale of goods, even at specific prices, generally are
treated as invitations to make an offer. There is one exception to this rule: An advertisement
is considered an offer if it is so definite or specific that it is apparent that the advertiser has the
present intent to bind himself or herself to the terms of the advertisement.
B. Rewards
An offer to pay a reward is an offer to form a unilateral contract. To be entitled to collect the
reward the offeree must:
• Have knowledge of the reward offer prior to completing the requested act.
• Perform the requested act.
C. Auctions
In an auction, the seller offers goods for sale through an auctioneer. Unless otherwise
expressly stated, an auction is an auction with reserve, that is, it is an invitation to make an
offer. The seller retains the right to refuse the highest bid and withdraw the goods from sale. If
an auction is expressly announced to be an auction without reserve, the participants reverse
the roles: The seller is the offeror, and the bidders are the offerees.
V. Termination of an Offer
An offer may be terminated either by certain acts of the parties or by operation of law.
An offeror may revoke an offer any time prior to its acceptance by the offeree. The revocation
may be communicated to the offeree by the offeror or by a third party and made by:
• The offeror’s express statement.
• An act of the offeror that is inconsistent with the offer.
An offer is terminated if the offeree rejects it. A rejection may be evidenced by the offeree’s
express words (oral or written) or conduct. A rejection of an offer is not effective until it is
actually received by the offeror.
A counteroffer by the offeree simultaneously terminates the offeror’s offer and creates a new
offer. A counteroffer terminates the existing offer and puts a new offer into play. It is not
effective until it is actually received by the offeror.
An offeree can prevent the offeror from revoking his or her offer by paying the offeror
compensation to keep the offer open for an agreed-upon period of time. This creates what is
called an option contract. In other words, the offeror agrees not to sell the property to anyone
except the offeree during the option period. An option contract is a contract in which the
original offeree pays consideration (usually money) in return for the original offeror giving
consideration (time of the option period).
An offer can be terminated by operation of law. The ways that an offer can be terminated
are as follows:
• Destruction of the subject matter—an offer terminates if the subject matter of the offer
is destroyed through no fault of either party prior to the offer’s acceptance.
• Death or incompetency of the offeror or offeree—prior to acceptance of an offer, the
death or incompetency of either party terminates an offer.
• Supervening illegality—if the object of an offer is made illegal prior to the acceptance
of the offer, the offer terminates. This situation, which usually occurs when a statute is
enacted, or a decision of a court is announced that makes the object of the offer illegal,
is called a supervening illegality.
• Lapse of time—an offer expires at the lapse of time of an offer.
VI. Acceptance
Acceptance is “a manifestation of assent by the offeree to the terms of the offer in a manner
invited or required by the offer as measured by the objective theory of contracts.”
Only the offeree has the legal power to accept an offer and create a contract. Third persons
usually do not have the power to accept an offer. If an offer is made individually to two or
more persons, each has the power to accept the offer.
B. Unequivocal Acceptance
and unambiguous, and it must have only one possible meaning. However, an equivocal
response by the offeree does not create a contract.
For an acceptance to exist, the offeree must accept the terms as stated in the offer. This is
called the mirror image rule.
D. Time of Acceptance
Acceptance of a bilateral contract occurs when the offeree dispatches the acceptance by an
authorized means of communication. This rule is called the acceptance-upon-dispatch rule
or, the mailbox rule. Under this rule, the acceptance is effective when it is dispatched,
even if it is lost in transmission.
E. Mode of Acceptance
An offer can stipulate that acceptance must be by a specified means of communication. Such
stipulation is called express authorization.
VI. Consideration
Consideration is defined as something of legal value given in exchange for a promise. The most
common types consist of either tangible payment or the performance of an act.
A. Requirements of Consideration
B. Gift Promise
Gift promises, also called gratuitous promises, are unenforceable because they lack
consideration. To change a gift promise into an enforceable promise, the promisee must offer
to do something in exchange—that is, in consideration—for the promise.
Some contracts seem as though they are supported by consideration even though they are not.
These contracts lack consideration and are therefore unenforceable.
A. Illegal Consideration
A contract cannot be supported by a promise to refrain from doing an illegal act because that
is illegal consideration.
B. Illusory Promise
If parties enter into a contract but one or both of the parties can choose not to perform their
contractual obligations, the contract lacks consideration. Such promises, which are known as
illusory promises or (illusory contracts), are unenforceable.
C. Preexisting Duty
D. Past Consideration
Problems of past consideration often arise when a party promises to pay someone some
money or other compensation for work done in the past.
If the two parties agree to a compromise, a settlement of the claim has been reached. The
Promissory estoppel or (detrimental reliance) is an equity doctrine that permits a court to order
enforcement of a contract that lacks consideration. The doctrine of promissory estoppel estops
(prevents) the promisor from revoking his or her promise based on lack of consideration. For the
doctrine of promissory estoppel to be applied, the following elements must be shown:
• The promisor made a promise.
• The promisor should have reasonably expected to induce the promisee to reply on the
promise.
• The promisee actually relied on the promise and engaged in an action or forbearance of a
right of a definite and substantial nature.
• Injustice would be caused if the promise were not enforced.
Facts: The movie “Flashdance” was based on the life of Maureen Marder. Marder was paid
$2,300 and signed a general release contract releasing Paramount Picture Corporation from any
claims, even those based on any filming or exploitation of the film. The movie grossed over $150
million. Marder sued for rights as a co-author and co-owner of the movie. This is an appeal of the
district court’s dismissal of the claims.
Decision: The court of appeals affirmed the judgment of the district court that dismissed
Marder’s complaint against Paramount
Reason: The U.S. court of appeals held that the general release Marder signed was an
enforceable contract.
Facts: Paul Ehlen signed a document presented to him by John M. and LynnDee Melvin. Then
the Melvins modified the terms of the Agreement and returned it to Ehlen. In response, Ehlen
sued the Melvins to enforce the modified Purchase Agreement. The trial court held that since the
Melvins had made a counteroffer and that Ehlen had rejected it, the contract no longer existed.
Issue: Was a counteroffer made by the Melvins that had been accepted by Ehlen?
Decision: The Supreme Court of North Dakota held that no agreement existed between Ehlen and
the Melvins.
Reason: The contract was no longer binding since Ehlen didn’t sign or accept the counteroffer
that the Melvins had offered.
Facts: Cooper purchased a number of items for Smith (while they were engaged) without any
bargained-for consideration. After they split up, he sued for the gifts or the value of the gifts he
had purchased for them on their value. The case was dismissed by the magistrate and the
dismissal was affirmed by the trial courts.
Decision: The court of appeals affirmed the judgment of the trial court, allowing Julie and Janet
Smith to keep these gifts.
Reason: The court of appeals held that the gifts made by Cooper to Julie (other than the
engagement ring) and to Janet were irrevocable gifts that he could not recover simply because his
engagement with Julie ended.
No, there was no contract between the Mesaros and the United States Mint. This was because the
U.S. Mint’s advertisement was a solicitation to make an offer and not an offer. Mesaros contends
that the materials sent by the Mint, including the order form, constituted an offer that upon
acceptance by the Mint created a binding contract between Mesaros and the government whereby
the government was bound and obligated to deliver the coins ordered by Mesaros. But this is not
the case here. A thorough reading and interpretation of the materials sent to Mesaros by the Mint
makes clear that Mesaros’s contention that the materials were intended as an offer is
unreasonable. This is especially true in view of the words “YES, Please accept my order” that
were printed on the credit-card form, which showed that the credit-card order was an offer to the
Mint to buy the coins, which offer might or might not be accepted by the Mint. Accordingly, the
Mint materials were intended solely as solicitations of offers from customers that were subject to
acceptance by the Mint before the Mint would be bound by a contract. Otherwise, the Mint could
be bound by an excessive number of contracts requiring delivery of goods far in excess of the
500,000 gold coins authorized by the act of Congress. Thus, the advertising materials sent out by
the U.S. Mint were a solicitation to make an offer and not an offer. Mesaros v. United States, 845
F.2d 1576, Web 1988 U.S. App. Lexis 6055 (United States Court of Appeals for the Federal
Circuit)
10.2. Agreement
No. A contract to convey the real property does not exist between Heikkila and McLaughlin. A
written offer does not evidence a completed contract and a written acceptance is required.
Minnesota has applied the “mirror image rule” in analyzing acceptance of offers. Under that rule,
an acceptance must be coextensive with the offer and may not introduce additional terms or
conditions. Heikkila’s alterations of the Purchase Agreements constituted a rejection of
McLaughlin’s offer and constituted a counteroffer. Heikkila withdrew the counteroffer before
McLaughlin provided a written acceptance of the counteroffer. Only a written acceptance by
McLaughlin of the exact written terms proposed by Heikkila on the Purchase Agreements would
have created a binding contract for the sale of land. Without a written acceptance and delivery to
the other party to the agreement, no contract was formed. The court of appeals held that because
McLaughlin did not sign or otherwise accept in writing Heikkila’s counteroffer, there was no
contract for the sale of land between the parties. McLaughlin v. Heikkila, 697 N.W.2d 231, Web
2005 Minn. App. Lexis 591 (Court of Appeals of Minnesota)
Gift Promise
No. Presley’s promise to pay the mortgage is not enforceable. Presley’s promise to pay Ms.
Allen’s mortgage was not executed by the time Presley died. That is, Presley died before he had
paid Allen’s mortgage. Pressley’s promise to pay Alden’s mortgage was a gift promise that was
not supported by any consideration from Allen. Allen had not promised to do anything in return
for Presley’s promise to pay her mortgage off. In addition, Presley had not paid off the mortgage
by the time he died, so there was no performance on Presley’s part that executed the promise.
Because the gift promise was not performed and there was no consideration given by Allen,
Presley’s gift promise to pay Allen’s mortgage is unenforceable. Thus, Presley’s estate does not
have to pay Allen’s mortgage. Alden v. Presley, 637 S.W.2d 862, Web 1982 Tenn. Lexis 340
(Supreme Court of Tennessee)
10.4. Consideration
No, there was no consideration supporting Tallas’s promise to pay Dementas. Tallas had not
changed his will to pay Dementas $50,000 when Tallas died, so Dementas cannot recover as a
beneficiary of the will. Dementas is trying to enforce the promise that Tallas made prior to
Tallas’s death whereby he promised to pay Dementas for past services that were rendered to
Tallas. The burden of proving consideration is on the party seeking to recover on the contract.
Even though the testimony showed that Dementas rendered past services for Tallas, the promise
by Tallas to pay $50,000 for services that were previously performed by Dementas is not a
promise supported by legal consideration. Events which occur prior to the making of the promise
and that are not made with the purpose of inducing a promise in exchange are viewed as “past
consideration” and are the legal equivalent of no consideration. There is no bargaining, there was
no saying that if you will do this for me I will do that for you. A benefit conferred or detriment
incurred in the past is not adequate consideration for a present bargain. Thus, Tallas’s promise to
pay Dementas $50,000 was unenforceable because it was based on past consideration. Dementas
v. Estate of Tallas, 764 P.2d 628, Web 1988 Utah App. Lexis 174 (Court of Appeals of Utah)
10.5. Counteroffer
No, there has not been a settlement of the lawsuit. A valid acceptance of an offer must be absolute
and unqualified. A qualified acceptance that contains terms or conditions materially different
from those in the original offer constitutes a counteroffer that terminates the power of the original
offeree to accept the offer. In the instant case, the court held that the process of settlement is best
served by allowing the law of contracts to control. Thus, the court held that the tenant’s qualified
acceptance of the settlement offer, conditioned upon the execution of a new lease, constituted a
counteroffer that terminated its ability to accept the settlement offer. The trial court’s denial of the
tenant’s motion to compel entry of judgment due to the existence of the settlement was therefore
affirmed. Glende Motor Company v. Superior Court, 159 Cal.App.3d 389, 205 Cal.Rptr. 682,
Web 1984 Cal.App. Lexis 2435 (Court of Appeal of California)
Yes. The appellate court held that the pledge agreement made by Raymond P. Wirth to pay
$150,000 to Drexel University was supported by consideration and was therefore enforceable
against the estate of Wirth. Even if Wirth anticipated consideration in return for his promise, there
was no failure of consideration. The Pledge Agreement, which also was executed by
representatives of Drexel, provided that the pledged sum “shall be used by” Drexel to create an
endowed scholarship fund in the decedent’s name, per the terms of the attached Letter of
Understanding. The Pledge Agreement further stated: “I acknowledge that Drexel’s promise to
use the amount pledged by me shall constitute full and adequate consideration for this pledge.”
The court concluded, “In our view, pursuant to the terms of the Pledge Agreement, Drexel
provided sufficient consideration by expressly accepting the terms of the Pledge Agreement and
by promising to establish the scholarship fund in the decedent’s name.” The court further held
that the fact that Mr. Wirth died before the initial gift was transferred into a special account set up
by Drexel and therefore the scholarship fund was not yet implemented, did not negate the
sufficiency of the promise as consideration to set up the fund. The appellate court held that the
pledge agreement was supported by consideration and was therefore enforceable against the
estate of Wirth. Based on the promise to Drexel, it was most likely unethical for Mr. Wirth’s
estate to deny payment of the pledge amount. In the Matter of Wirth, 14 A.D.3d 572, 789
N.Y.S.2d 69, Web 2005 N.Y. App. Div. Lexis 424 (Supreme Court of New York, Appellate
Division)
Yes. Dees is bound to the contract. The trial court agreed with Saban Entertainment, Inc., finding
that the “Work-for-Hire/Independent Contractor Agreement” was an enforceable contract
between the parties. The court held that Dees had transferred his ownership interests in the
Mighty Morphin Power Rangers’ logo that he designed to Saban pursuant to an enforceable
contract. The Court of Appeals affirmed the judgment in favor of Saban, stating, “The disputed
agreement transferred plaintiff’s copyright in the Mighty Morphin Power Rangers’ logo with as
much specificity as the law requires.” The Court applied the adage “a contract is a contract is a
contract”, at least in this case.
There seems to be is no equity doctrine that Dees can raise in this case to save him from the
contract he signed. He was an adult who choose not to obtain legal representation before he
negotiated and signed the contract with Saban. Later developments—the success of the Mighty
Morphin Power Rangers—cannot be introduced to change his contract. Does Saban owe an
ethical duty to pay Dees more money? Probably not. When Saban signed the contract there was
no certainty that the Mighty Morphin Power Rangers would be so successful or that the design
Dees provided would work. Dees, d/b/a David Dees Illustration v. Saban Entertainment, Inc.,
131 F.3d 146, Web 1997 U.S. App. Lexis 39173 (United States Court of Appeals for the Ninth
Circuit)