Monday, October 1, 2012

How it's Tested: Consideration

There are a number of ways that the MBE tests the concept of consideration in regard to contract formation. One common fact pattern deals with a situation in which a debtor owes money to a creditor, and promises to pay less than the amount owed if the creditor will discharge the debt. The obligation to pay the debt has been barred by the statute of limitations, and the lender agrees to the lower payment.

A question arises as to whether the debtor's promise to pay the debt (which he had no obligation to pay because it was barred by the statute of limitations) is enforceable, or whether it should merely be deemed a gift because the debtor took on no addional detriment when making the promise, and detriment is an essential element of consideration.

The rule is that such a promise to pay a debt barred by the statute of limitations is, in fact, enforceable if the promise to pay the barred debt is in writing. In addition, the promise to pay the debt will only be enforeceable up to the amount promised, so that the creditor will not be able to collect on the full amount of the original debt. In other words, if X owed Y $2,000, but that debt had been barred by the statute of limitations, and X later, in writing, promises to pay Y $1,000 if Y will discharge X from any further obligation to pay, Y can hold X to his promise to pay, but only up to $1,000, the amount promised in the subsequent writing.

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