 Hello, it's Waylon Chow. This is Law of Contract Formation, Module 3A, Part F. In this part, we will look at consideration, which is the third essential element of a contract. Let's go back to our old friends Daria and Jamal. Out of the goodness of her heart, Daria offers to give up her laptop to Jamal for free at the end of the semester. Jamal gratefully agrees. At the end of the semester, Daria changes her mind and does not give her laptop to Jamal. I will tell you upfront that Daria did not have a legal obligation to give the laptop to Jamal. But I'd like you to think about explaining why there is no contract between Daria and Jamal, and also suggest how the deal between Daria and Jamal may have been changed so that there is a binding contract. So we have two parties. One person makes an offer to the other, and that second person accepts the offer, provides an acceptance. So what that results in is an agreement or a meeting of minds. So we talked about that in Module 3A, the previous module. Now, what we also need to have a legally binding contract is an exchange or a mutuality of consideration. So consideration has to flow from one party to the other and vice versa in order to have the valid contract. So in other words, if we have just a one-sided promise or a gratuitous promise where one party is making a promise to the other and the other party is not providing anything in exchange, that promise is void for lack of consideration. In other words, it's not a valid contract. However, there is one exception where if that gratuitous promise is made under seal, it is a valid contract. We'll talk further about what is a seal later on in this module. What exactly is consideration from a legal standpoint? Forget about whatever normal meaning of that word that you know about. It has nothing to do with being thoughtful or nice or considerate. There is a specific legal meaning. Consideration is said to exist when one party gives or promises to give a benefit to someone else. Another way consideration exists is instead of giving or promising a benefit, it could also happen where someone suffers or promises to suffer a detriment to themselves. For example, if someone promises to give a smoking in exchange for a promise from someone else to pay them a certain amount of money to give up smoking. So giving up the smoking is not giving someone a benefit, but is that person giving or suffering a detriment to themselves. Consideration has to be what's called sufficient. Now, what that means is that the consideration has to be of some value. So that obviously includes things like money, goods, land or services, but it specifically does not include what's considered to be love and affection or gratitude or good feelings. So if you give a gift to someone and they are very thankful and they express their gratitude and good feelings. That gratitude and good feelings is not legally considered to be consideration. Consideration does not need to be adequate. You can pay whatever amount that you want or agree to pay whatever amount that you want regardless of the value of the item that you are getting. So if something is worth a million dollars, but someone agrees to pay one dollar for it does not seem to be a fair deal, but the requirement of consideration is considered to be satisfied. There is something in the cases that's called the peppercorn theory where someone agrees to sell this valuable horse in exchange for like a tiny peppercorn, which is practically almost worthless, but it does have some minute value. So in that situation where a horse is agreed to be exchanged for a peppercorn, the requirement of consideration is said to be satisfied. In our scenario, the first question, explain why there is no contract between Daria and Jamal. Although Jamal did accept Daria's offer of the computer, so there was offer and acceptance and therefore an agreement, there was no exchange of consideration. Jamal did not provide anything in exchange for Daria's promise of the laptop. Therefore, a contract was not formed between Daria and Jamal. The second question suggests how the deal between Daria and Jamal may have been changed so that there was a binding contract. If Jamal had provided any kind of consideration of any value, even something as small as a promise to pay one dollar to Daria, there would have been a binding contract. Or alternatively, if Daria had put her promise in writing and signed it under seal, there would have been a binding contract. Let's now look at the issue of past consideration. We already know that mutuality of consideration requires each party to provide consideration in exchange for the other party's consideration. The key word there is that there has to be an exchange. With past consideration, that's where the consideration was given before the contract was contemplated or entered into. In that type of situation, there is no mutuality and therefore there is no consideration that has been exchanged. For example, if you're my neighbor and you mow my lawn as a favor, and once you've already done that, I promise to pay you $100 for mowing my lawn. That promise to pay is one-sided. There is no consideration being given in exchange because the service has already been rendered, the service being the mowing of my lawn. Now, an exception to that treatment is where if an agreement to provide services or goods does not include any mention of price and those services or goods are actually provided, the court may find an implied promise to pay a reasonable price instead of finding a lack of consideration due to past consideration. If my neighbor agreed to mow my lawn and we didn't talk about a price, there was no mention of it being a favor, and then my neighbor goes ahead and mows my lawn and then asks for payment, then a court could interpret that as being that there was an implied promise on my part to pay him a reasonable price even though we did not discuss or negotiate a specific price. 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 chart will 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 Corp 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 pre-existing 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 pre-existing 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, as 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 equivalent of a Mercantile Law Amendment Act, the other way of making a promise to discharge debt, an unenforceable 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 unenforceable 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.