 Hello, this is Waylon Chao and welcome to this series on forming contracts. This video is part E on consideration. Remember there are three essential elements to form a contract. We will focus on the exchange of consideration. These are our dear friends, Sonia and Ahmed. Sonia has made an offer to sell her laptop for $700 to Ahmed. Ahmed has accepted. He says, yes, sure. I'll take it for $700. So the exchange of consideration here was Sonia gave a promise to Ahmed to give ownership of her Apple laptop to Ahmed and Ahmed in exchange promised to pay $700 to Sonia. So there is a valid exchange of consideration here. Now if if there is a lack of an exchange of consideration, if only one party is making a promise or providing consideration, then that exchange of consideration requirement is not met. It's considered to be a gratuitous or one-sided promise which is void for lack of consideration unless it is under seal and we'll talk further about the significance of a seal later on in this video. Let's try to understand what is consideration, especially the legal meaning of consideration which is very different than the general meaning of the same word. Consideration can be either giving or promising to give a benefit to someone else. So that benefit can be provided to the other party to the contract or to another person, a third party. Consideration can also be suffering or promising to suffer a detriment to yourself. So if you're offering to give up smoking in exchange for someone paying you $1,000, giving up smoking is suffering a detriment and is considered to be valid consideration. Consideration has to have value. Now that is value that the law considers to be valuable. That includes obviously money, goods, land or services, but it does not include love and affection or good feelings. The law does not consider those things to be valuable. Consideration does not need to be adequate. Whatever parties decide to exchange can be is enough to satisfy the exchange of consideration. A deal does not have to be considered fair. To illustrate this there is something called the peppercorn theory. So if I owned a horse and I wanted to sell it to you and you offered to provide me as payment for the horse, one tiny little peppercorn, and if I was foolish enough to agree to that, then that deal would satisfy the requirement of an exchange of consideration. Even though the value of that peppercorn is minuscule, it's far less than the economic value of the horse. But the fact that the peppercorn has some value is enough to satisfy the requirement of consideration. Hello again, Sonia and Ahmed. So Ahmed saying, oh man, my laptop broke and I can't afford to buy another one. Sonia says, I'm going to get a new laptop in a few days. Once I get it, I'll give you my old one. Ahmed says, that would be awesome. Thank you so much. A few days later, Sonia says to Ahmed, hey, Ahmed, it's time to give my old laptop to my little brother. Sorry about that. So let's think about why there is no contract between Sonia and Ahmed and also think about how the deal between Sonia and Ahmed may have been changed so that there was a binding contract between Sonia and Ahmed. With regard to the first question, why there is no contract between Sonia and Ahmed. So although Ahmed did accept Sonia's offer of the laptop, there was no exchange of consideration. Ahmed did not provide any consideration in exchange for Sonia's promise of the laptop. Therefore, a contract was not formed. With regard to the second question about how the deal between Sonia and Ahmed may have been changed so that there was a binding contract. If Ahmed had provided any amount of consideration, for example, a promise to pay even just $1, there would have been a binding contract because there would have been an exchange of consideration. Alternatively, if Sonia had put her promise in writing and signed it under seal, there would have been a binding contract. Pass consideration is value given before a contract was contemplated. Pass consideration cannot be used to support a contract. If an agreement is formed but it does not mention the price, a court may find an implied promise to pay a reasonable price instead of finding a lack of consideration due to past consideration. So back to Sonia and Ahmed. Ahmed is saying again that his laptop broke and he can't afford to buy another one. Sonia says, I'm going to get a new laptop in a few days. Since you helped me so much this semester to pass this course, I'll give you my old laptop. Ahmed says, that would be awesome. Thank you so much. So Sonia has given a promise to give ownership of her Apple laptop to Ahmed. And Ahmed has given this past consideration of helping Sonia pass the course. So this is assistance and help that Ahmed has already provided in the past before there was any contemplation, any discussion about the laptop, about giving the laptop to Ahmed. So that consideration given by Ahmed is past consideration. Therefore it's not valid consideration. So therefore there is no exchange of consideration in this scenario. Let's look at the issue of whether a pre-existing obligation can be used as consideration for a new contract. So if one party is already obligated to do something or to deliver something under a previous contract, can that obligation under the previous contract be used as consideration for a brand new contract? The summary of the law on this is on this chart. We'll look at each type of pre-existing obligation in further detail in the context of the leading cases on this issue. The first type of pre-existing obligation is a pre-existing contractual obligation owed to a third party. So for example, I will do for you what I already promised to do for someone else. So that is considered to be consideration for a new contract because that pre-existing or old obligation is considered to be a new benefit for the other party under the new contract. The second type of pre-existing obligation is where the obligation is owed to the same party. In other words, I'll perform our existing contract if you pay me $500 extra. With that type of pre-existing obligation, it is not considered to be consideration for the new contract because there is no new benefit being given to the other party. The leading decision on pre-existing contractual obligations owed to a third party is the case of Pao An and Lao Yi Long, or I call it the Food Chip case because it involves a corporation by that name. The plaintiff in the Food Chip case had entered into an agreement with Food Chip Corp for the purchase of shares. So the consideration exchange there was that Food Chip shares would be sold by the corporation to the plaintiff in exchange for the payment of a certain price for the shares and also a promise not to resell those shares or not to resell more than 60% of those shares within a year. Now, another agreement that the plaintiff entered into was an indemnification agreement with the majority shareholders of Food Chip Corp. So this is the agreement that was called into question as to whether or not it was a valid contract. Under that indemnification agreement, the majority shareholders of the defendants had promised to indemnify for any losses that the plaintiff may suffer. So if the price of those shares had gone down below a certain level, the majority shareholders would have compensated the plaintiff for that loss under that promise. In exchange for that promise, the consideration provided by the plaintiff to the majority shareholders was a promise not to resell more than 60% of the shares within the year. So it was the exact same promise that the plaintiff had made to Food Chip Corporation under the other agreement, the agreement for the purchase of the shares. So the issue was, is that promise not to resell more than 60% within a year made to the majority shareholders? Is that considered to be valid consideration? Because it was a preexisting contractual obligation that the plaintiff already had to someone else, which was the corporation. And the court there found that that promise was valid consideration, that this previous promise is a new benefit for the majority shareholders under the indemnification agreement, and therefore it is valid consideration. The leading decision involving preexisting contractual obligation owed to the same party is the case of Gilbert Steele and University Construction, which is a decision of the Ontario Court of Appeal. In that case, we have two agreements, and they both involve the same parties. One party, the first party, which is the plaintiff, is Gilbert Steele, and the second party is University Construction. Gilbert Steele was a supplier of Steele for construction, and University Construction was the general contractor. So agreement number one between these two parties involved a promise by University Construction to pay a set price for the supply of Steele by Gilbert Steele. So Gilbert Steele had promised to supply several shipments of Steele at that set price. Now, after a few shipments had been made, the world price of Steele had gone up. So Gilbert Steele went back to University Construction and told them about the increase in the price of Steele to see if University Construction would be willing to pay a higher price for the remaining shipments of Steele. So that led to agreement number two between Gilbert Steele and University Construction. Under agreement number two, University Construction had agreed to pay an additional amount for the Steele. And that additional amount was for Gilbert Steele to supply the remaining shipments as per the original agreement number one. The court found that that promise to supply the remaining shipments under agreement number two was not valid consideration because that promise had already been made under agreement number one and that University Construction did not receive any new benefit from that promise to supply the remaining shipments. And therefore, that second contract, agreement number two, is void for lack of consideration. Situation involving a promise to forgive debt also involves an issue regarding consideration. For example, if you owe me $500 and you tell me that you will have a lot of difficulty paying me back since you lost your job, and I agree to forgive your debt if you pay me $200, then that is a promise to discharge debt upon part payment. The legal problem there is that the promise to discharge debt is unenforceable because no new consideration is being provided by the debtor. So in effect, I am discharging $300 of your debt in exchange for nothing from you. So there is no exchange of consideration. Now the solution to that legal problem is one of three possible solutions. If the situation occurs in Ontario, there is a piece of legislation called the Ontario Mercantile Law Amendment Act which says that you can't have a valid contract to accept part payment to fully discharge a debt obligation even though there is no new consideration. So that legislation essentially changes the common law position that there is no agreement. So the legislation overrides the common law position. Now for other provinces in Canada that don't have the equipment of the Mercantile Law Amendment Act, there the other way of making a promise to discharge debt, an enforceable contract is to make that promise under seal and we'll talk about a seal on the next slide. And a third way of getting around this problem is to have the debtor promise to provide some kind of new benefit in exchange for the forgiveness of the debt. So if you promise to pay me $200 and I'll forgive you the remaining $300, but in addition, you promise to pay me that $200 sooner than the usual deadline, than the required deadline, then you are giving me a new benefit which is the benefit of early payment and there is an exchange of consideration which makes it into an enforceable contract. So we know that a one-sided promise where one party is making a promise to the other and the other party is not giving anything in exchange, a one-sided promise lacks an exchange of consideration and therefore is not an enforceable contract. Those one-sided promises can be made into enforceable contracts by one of two ways even though there is no exchange of consideration. The first way is by using a seal and the second way is under the legal doctrine of promissory estoppel, which by the way is not covered in this course so you're not responsible for that so we won't talk about that any further. Now what is this seal? A seal is a special mark on a written contract to indicate a party's intention to be bound by the terms of the contract. So what it would involve is simply the person who's making that one-sided promise put that in writing and sign it and put a special red sticker on it so I call it a magic sticker. So the effect of that magic sticker is to make that one-sided promise into a legally binding contract.