Forbearance is Adequate Consideration for Note and Guarantee

March 14, 2017

The Wisconsin Court of Appeals has affirmed a trial court determination that a company’s agreement to forego or postpone legal action was adequate consideration for a note and guarantee.  Hart, et al. v. ASFFH Corp., et al., 15AP2365.  A Corporation and its owner purchased the assets of a Company that made and sold novelty foam hats.  The Corporation gave the Company a $210,000 promissory note to pay the purchase price.  The Corporation later defaulted on the note.  The Company agreed not to sue to enforce the note in exchange for a new note given by the defaulting Corporation directly to the owners of the Company.  The owner of the Corporation also guaranteed the new note.  The Corporation then defaulted on the new note.  The Company’s owners sued to enforce the note and the trial court entered judgment in their favor.  On appeal, the Corporation and guarantor argued that the Company’s forbearance was insufficient consideration for the new note.  The Court of Appeals disagreed.

As the Court of Appeals explained, the elements of an enforceable contract are:  (1) offer; (2) acceptance; and (3) consideration.  The existence of an offer and acceptance are mutual expressions of assent and consideration evidencing intent to be bound.  Consideration is a detriment incurred by the promisee or a benefit received by the promisor at the request of the promisor.  Historically, Wisconsin courts have not required significant consideration to find that a contract is enforceable.

In this case, the Corporation offered a new note to the owners of the Company and the owners accepted the new note.  Consideration for the new note was not money or a reduction in the debt, but instead was the Company’s agreement to forestall litigation on the old note.  The Corporation argued that forbearance was not legally sufficient because it did not reduce the liability of the Corporation.  The Court of Appeals rejected this argument.  “It is irrelevant whether the parties jointly agreed to reduce the Corporation’s liability.”  The Company “agreed to forgo legal action, which constituted sufficient consideration” for the note and guarantee.  In fact, the Court of Appeals went on to explain that an agreement to merely postpone litigation would be sufficient consideration.  The court also pointed out that it did not matter that the consideration came from a third party – the Company – rather than the owners of the Company, who were the parties to the new note.

The Hart case is not new law.  It reaffirms that “consideration” for a note does not require new money or a reduction in the debt of the borrower.  Adequate consideration exists when a detriment is incurred or a benefit is requested and received.  In this case, the Company agreed to its determent not to sue the Corporation and the Corporation benefitted from the Company’s forbearance by not getting sued when it defaulted on the original note.

If you have any questions about how the information in this article may affect you or your business, please contact Norm Farnam at or (608) 257-2281 or your Stroud attorney.

DISCLAIMER: The information in this article is provided for general informational purposes only, is not necessarily updated to account for changes in the law, and should not be considered tax or legal advice.  This article is not intended to create, nor does the receipt of it constitute, an attorney-client relationship.  You should consult with your own legal and/or financial advisors for legal and tax advice tailored to your specific circumstances.