Brooks v. Military College Co.

New Jersey Court of Errors and Appeals · Contracts

ContractsConsiderationCompromise of disputed claimsPromissory notesconsiderationcompromisedisputed claimforbearance to sue

Facts

Plaintiff operated a military school and enrolled defendant's son for a full school year at a stated annual fee, half payable at entrance and half six months later. After the first half was paid, the son was dismissed before the first semester ended, and defendant claimed the dismissal was wrongful and that this created a failure of consideration as to tuition. When plaintiff demanded the unpaid balance and threatened suit, defendant, who said litigation would injure his credit because of his financial difficulties, gave plaintiff a $900 note for the claimed balance and later renewed it with the $927 note sued upon. Defendant admitted making the renewal note but asserted failure of consideration as a defense.

Issue

Whether the defendant could avoid liability on the renewal note by asserting failure of consideration based on the alleged wrongful dismissal of his son, where the note had been given after plaintiff threatened suit on a genuinely disputed claim and thereby postponed litigation. The court found it unnecessary to decide whether a renewal note independently estops defenses available on the original note.

Rule

The bona fide compromise of a disputed claim is valid consideration for a promise to pay, whether or not suit has already been filed and even if the claim later proves wholly unfounded. The only necessary elements are the reality of the claim and the bona fides of the compromise; courts do not examine the adequacy of consideration for a fair and deliberate compromise, and absent fraud or blackmail such an agreement is enforceable.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

In Newark, Olivia Mercer hired Ridgeway Event Works to produce a three-day trade expo. After the second day, the company shut down the event, claiming Olivia had breached safety rules; Olivia insisted the shutdown was unjustified and refused to pay the final invoice. When Ridgeway threatened immediate suit, Olivia signed a six-month promissory note for the disputed amount to avoid litigation that she feared would damage her credit, and Ridgeway delayed filing suit until the note matured.

If Olivia later argues that the shutdown was actually wrongful and that the original invoice was therefore not owed, what is the strongest argument for enforcing the note?

Explanation. The majority rule is that a fair, bona fide compromise of a real disputed claim is sufficient consideration for a promise or note. The creditor's postponement of threatened litigation is a legal detriment that supports the note, and the court does not require proof that the underlying claim was actually valid. That is so even where suit had not yet been filed.