CONTRACTS
The Consideration
A. Definition of Enforceability
B. Legal Detriment or Benefit
C. Bargained-for Exchange
D. Mutuality of Obligation
E. Sufficiency and Adequacy of
Consideration
F. Past and Moral Consideration
G. Preexisting Legal Duty
CONSIDERATION
A. Definition of Enforceability. One of the basic requirements for a valid contract is
legally sufficient consideration or a substitute for it (e.g., promissory estoppel).
1. Generally, if a promise is not supported by consideration, it is not enforceable.
a. Some promises are not enforceable. Purely social or gratuitous promises are
not legally enforceable.
1) EXAMPLE: John said to June, "I promise to attend your party on Saturday
night." Without more, John made a social or perhaps gratuitous promise,
which is not enforceable.
2. Consideration is something of value given in a bargained-for exchange but only
when the parties intend an exchange.
a. According to Section 11 of the Restatement (Second) of Contracts,
To constitute consideration, a performance or a return promise must be
bargained for. A performance or return promise is bargained for if it is sought
by the promisor in exchange for his promise and is given by the promise in
exchange for that promise. The performance may consist of an act other than a
promise, a forbearance, or the creation, modification, or destruction of a legal
relation.
b. A simple illustration of consideration
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c. Thus, there are two basic elements of consideration:
1) Legal sufficiency (something of value)
a) A party's promise is supported by legally sufficient consideration when
one of the following occurs:
i) The other party incurs a legal detriment.
ii) The promising party receives a legal benefit.
2) Bargained-for exchange
d. Both elements must be present to satisfy the requirement of consideration.
B. Legal Detriment or Benefit. There is legally sufficient consideration to render a promise
enforceable if the promisee incurs a legal detriment.
1. The promisee gives consideration when (s)he incurs a legal detriment in response to
the promisor's promise.
a. To incur a legal detriment, the promisee must act in one of the following
ways:
1) Do (or promise to do) something (s)he is not legally obligated to do
a) EXAMPLE: John said to Donna, "I'll pay you $50,000 to manage my
apartment building." If Donna manages the building, she suffers a legal
detriment by performing an act she was not otherwise legally obligated
to perform.
2) Refrain from doing (or promise to refrain from doing) something (s)he is
legally privileged to do
b. There must be a cause-and-effect relationship between the offeror's promise
and the detriment. The promise must induce the detriment.
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2. When a promisee suffers a legal detriment, the promisor gains a directly related
legal benefit.
a. EXAMPLE: Ken drives negligently and injures Sue. Ken says to Sue, "I'll pay
you $25,000 not to sue me." Sue accepts. Sue gives up a legal right, suffers a
legal detriment, and thereby gives Ken consideration that makes his promise
enforceable by her.
b. In the example above, Ken receives a legal benefit: the right not to be sued by
Sue.
c. The courts recognize an important distinction between legal and actual
benefits and detriment.
1) When entering into a contract, most people expect an actual benefit.
However, consideration requires only that the promisee incur a legal
detriment.
a) EXAMPLE: Ed offered his cousin Sean $25,000 if Sean (who was 21
years old) would refrain from drinking alcohol until he was 25. Sean
refrained from drinking alcohol until he was 25. Ed did not pay. Sean
sued. The court may hold that Sean had the legal right to drink alcohol
and that, by not exercising that right, he suffered a legal detriment, even
though abstaining from alcohol consumption may be an actual benefit.
There was consideration for Ed's promise to pay $25,000.
d. By defining consideration in terms of legal rather than actual benefits and
detriments, the courts have
1) Generally left the issue of economic value (actual benefit) to the parties
2) Supplied a standard that can be applied to differing fact situations
3. Consideration must not be confused with motives for making a promise.
a. Love and affection may be admirable motives for making a promise, but they
do not represent the act of bargaining.
1) EXAMPLE: Judy writes to her daughter, "In consideration of our love and
affection, I promise to send you $100,000 on your twenty-fifth birthday."
Judy has made a gratuitous promise. She has not bargained for something
in exchange for her promise.
C. Bargained-for Exchange
1. The Restatement (Second) of Contracts defines consideration as something
bargained for and given in exchange for the promise.
a. EXAMPLE: Manuel said to Craig, "I'll pay you $2,000,000 to play football
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for my team." Craig suited up and played football. The prospect of Craig's
playing football induced Manuel to promise him payment. Manuel's promise
of payment induced Craig to play football for Manuel. These facts illustrate
the reciprocal relationship required for Craig's performance to constitute a
bargained-for exchange (consideration) for Manuel's promise to pay. Because
Manuel received consideration for his promise, it is enforceable.
2. The legal detriment is incurred by a party in exchange for the promise or
performance by the other.
a. EXAMPLE: Rick said to his daughter Karen, "I'm going to purchase a new
yacht this week. I promise to give you my old yacht at that time." Rick sought
nothing in return for his promise; there was no bargained-for exchange. Rick
has promised to make a gift to Karen. Because Rick has not received
consideration for his promise, it is unenforceable. Rick's promise is gratuitous.
D. Mutuality of Obligation. The requirement of mutuality of obligation arises in the
bilateral contract situation. Because most contracts are bilateral, this discussion is
particularly important.
1. Both parties to a contract must give consideration for a contract to be enforceable.
2. The doctrine of mutuality of obligation applies to bilateral contracts only.
3. In a bilateral contract, each promise acts as the consideration for the other.
a. The parties must be mutually obligated to perform their respective promises.
1) Otherwise, the agreement will lack consideration and will not be a valid
contract.
b. Thus, the foundational requirement that a bilateral contract be supported by
consideration is sometimes formulated as a requirement for mutuality of
obligation.
c. Unless consideration is legally sufficient, there will be no mutuality of
obligation.
4. Analysis of consideration in a bilateral contract is illustrated by the following
modified version of the diagram that appeared at the beginning of this chapter:
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E. Sufficiency and Adequacy of Consideration. Consideration must be legally sufficient.
Under most circumstances, its adequacy is irrelevant.
1. Courts tend to treat "sufficient consideration" and "consideration" as synonymous
terms.
2. Sufficiency of consideration should not be confused with adequacy of
consideration.
a. Courts have repeatedly emphasized that they will not inquire into the equality
of the consideration exchanged between the parties to a contract.
1) EXAMPLE: Dean agrees to sell to Tina a piano worth $100,000 in
exchange for Tina's promise to pay $50,000. The contract is supported by
sufficient consideration by both parties. Without more, e.g., evidence of
fraud, a court will not inquire into the inequality of the consideration.
3. In theory, the adequacy of consideration is irrelevant. However, driving too hard a
bargain may not be prudent business.
a. A bargain that is too good may be voidable on grounds such as fraud, mistake,
or unconscionability.
4. Whether a promise constitutes consideration also depends on its content.
a. A promise may be illusory because its literal terms impose no obligation on
the promisor.
1) EXAMPLE: Tex promises to sell to Benny, and Benny promises to buy
from Tex, as many barrels of oil as Benny might decide to order from Tex
at $28 a barrel. Lack of consideration prevents formation of a contract.
Benny may buy no oil. His promise is illusory. The agreement lacks the
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mutuality of obligation required for a bilateral contract. Benny, by his
promise, incurs no legal detriment and confers no legal benefit. The rule is
that both parties must be bound or neither is bound.
b. In contrast, if Benny had promised to buy as many barrels as he would need in
his business, the promise would not be illusory. Such an arrangement is called
a requirements contract.
1) Benny's business needs provide an objective standard for determining
some minimum amount of purchase.
a) Requirements contracts are useful. The amount to be purchased does not
depend solely on the whim of a party to the contract. However, if a
promisor has an unrestricted right to cancel an agreement, the promise is
illusory.
5. Generally, any legal detriment, no matter how economically inadequate, may
constitute consideration. However, gross inadequacy of consideration may be
evidence that only a gift was intended.
a. EXAMPLE: Niece persuades Uncle to pay her $100,000 for $10 worth of
foreign coins. The gross disparity between the economic value of what Niece
gave ($10) and what she received ($100,000) is evidence that Uncle intended a
gift of $99,990.
1) When an agreement states that a promise was made "in consideration of
$1," even though the $1 was neither bargained for by the promisor nor
paid by the promisee, courts view the consideration as a sham and
generally do not accept it as either adequate or sufficient consideration.
Likewise, when the consideration is merely token (nominal) consideration,
e.g., something almost devoid of value, it will generally not be sufficient.
The primary difference between sham consideration and token or nominal
consideration is that sham consideration is never actually paid.
F. Past and Moral Consideration. Under the bargain theory, past consideration and moral
consideration are not valid forms of consideration.
1. Consideration is something given in exchange for a promise. It is something given
to induce the promise. Anything that occurs prior to a promise cannot constitute
consideration.
a. EXAMPLE: A father said to his daughter, "Because you graduated with
honors, I promise to pay you $10,000 at the end of next month." The father
had a motive for his promise. But graduation occurred before the promise was
made. Graduation with honors was not something bargained for, or induced
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by, the father's promise. The promise was one to make a gift.
2. Likewise, promises made out of a sense of honor or moral obligation are not legally
enforceable if they lack the bargain element.
a. EXAMPLE: A heavy object falls from a shelf. Jane pushes Sam out of its
path, but it strikes and injures her. Sam promises to pay her $500 a month for
life. There is no consideration. Sam might have committed himself morally,
but he is under no contractual obligation.
G. Preexisting Legal Duty. At common law, performing or promising to perform an act
that one was already obligated to perform is not consideration for another party's
promise.
1. The rule is still followed in many jurisdictions and is known as the preexisting duty
rule. Consideration does not exist if
a. An existing duty was imposed by statute or by the common law.
b. A person is already under a contractual obligation to render a specified
performance but demands more or insists on doing less than originally
promised.
1) EXAMPLE: Lee stole Bob's yacht. Snap, the county sheriff, witnessed the
theft. Bob told Snap, "I'll pay you $100 to arrest Lee." Snap arrests Lee.
Bob's promise is not legally enforceable because Snap already had a duty
to arrest Lee. In making the arrest, Snap suffered no new legal detriment
and conferred no new legal benefit on Bob.
2. A basis for the preexisting duty rule is that enforcement of the second promise
would encourage coercion.
a. EXAMPLE: Bubba Cain, a contractor, tells Jill, a homeowner, that, unless she
pays him an extra $500, he will leave her roof half-repaired. Cain has a
preexisting duty to repair the entire roof.
b. Some courts recognize an exception to the preexisting duty rule.
1) EXAMPLE: Cain agrees to build a barn for Jimmy. A flood destroys the
half-constructed barn. Cain demands more money to start again and build
the barn. Jimmy agrees to pay the additional sum. A court may find that
Jimmy's subsequent promise to pay the contractor is binding, even though
the contractor has not agreed to do anything more than was called for by
the original contract. Coercion is less of a concern under these
circumstances than under those in the previous example.
c. The Restatement (Second) of Contracts adopts a similar position. Section 89
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provides that the parties may modify an executory contract (a contract in
which some performance is incomplete) if the modification is fair and
equitable in light of surrounding facts that were not anticipated by either party
when the contract was entered into.
3. The preexisting duty issue often arises in the context of debtor- creditor relations.
Parties frequently attempt to settle disputed and undisputed debts.
a. A liquidated debt exists when there is no dispute about its existence or
amount.
1) If the debtor made an express promise to pay a specific sum of money, the
debt is liquidated. Moreover, if the obligation can, by computation, be
reduced to a fixed amount of money, the debt is liquidated.
a) EXAMPLE: Scott agrees to repair Terry's tractor for $500. Scott makes
the repairs and sends Terry a bill for $500. Terry's debt is liquidated.
b. Part payment of a liquidated debt is not consideration for a promise by the
creditor to accept the part payment as payment in full.
1) EXAMPLE: Terry insists that $500 is just too high a price for the work
performed by Scott. Scott agrees to accept $250 as payment in full but
later sues Terry for the additional $250 owed under the original contract.
Scott may prevail because his promise is not supported by consideration.
Scott and Terry's original agreement for $500 gave rise to a liquidated
debt. Terry has a preexisting duty to pay the full $500. Terry will suffer no
new legal detriment for Scott's promise to accept $250. Scott will receive
no new legal benefit by accepting the $250 in lieu of the $500.
2) The part payment rule has long been criticized as tending to defeat the
legitimate expectations of debtors who bargain in good faith with creditors
to reduce an unwarranted price.
3) Accordingly, courts are quick to find consideration if the debtor has done
anything at all, in connection with the payment of the reduced debt, that
might constitute new or additional consideration.
a) EXAMPLE: Terry agrees not to declare bankruptcy in exchange for
Scott's promise to accept $250 in full satisfaction of the debt. Scott's
promise is enforceable. This new agreement is called an "accord and
satisfaction" of Scott's original claim against Terry. The new agreement
is the accord, and its performance is the satisfaction. Terry will suffer a
legal detriment by forgoing the opportunity to file for bankruptcy, and
Scott will receive the legal benefit of Terry's agreeing not to file for
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bankruptcy. A court may find that there is sufficient consideration to
render the modification enforceable.
c. In contrast, an unliquidated debt is an obligation that is contested as to either
its existence or its amount.
1) The part payment rule does not apply if the debt is unliquidated. A claim is
unliquidated when there is an honest dispute about the existence of a debt
or its amount.
a) EXAMPLE: Scott repairs Terry's tractor, saying nothing about price.
Scott sends Terry a bill for $1,000. Terry protests the amount, but not
the existence, of a debt. Terry offers Scott $500 as payment in full.
Scott accepts but later sues Terry for the remaining $500. In the absence
of an agreement on price, Scott is entitled to reasonable compensation
for his services. Terry and Scott reach an accord (an agreement on a
price that replaces the reasonable price that a court would have
imposed). Each gives up his right to have a court decide what is
reasonable and thereby provides consideration for the other's promise.
Terry's actual payment of the $500 is a satisfaction of the accord.
1) The result would have been the same if (with no prior agreement on
price) Terry had sent Scott a check for $500 marked "payment in full
for tractor repair," and Scott had cashed the check. The creditor's act
of cashing the check is generally considered acceptance of the
debtor's compromise offer, and the debt will be considered
discharged. There is an accord even if Scott crosses out the notation
before cashing the check and later sues Terry for the additional $500.
[In the case of a liquidated claim, the effect of accepting such a check
may not prevent the creditor from seeking the additional amount due.
Thus, under the UCC, accepting a check generally operates to
discharge the debt only to the extent of the amount of the check (on
condition the check is honored)]. Most courts have held that a
creditor may cash a check marked "payment in full" and later seek
the balance still owed, by writing the words "under protest" or
"without prejudice" on the check.
4. But if parties bargain and one party agrees to relinquish a legal right, relinquishment
of that right is adequate consideration to support a contract.
a. EXAMPLE: Insurance Company promises to pay an agreed-upon settlement
amount. In return, claimant agrees not to sue for an alleged injury.
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A. Enforceable without Consideration
B. Promissory Estoppel
C. Quasi-Contract
D. Public Policy
E. Contracts under Seal
SUBSTITUTES FOR CONSIDERATION
A. Enforceable without Consideration. The vast majority of all contracts are supported by
bargained-for consideration. However, on rare occasions, an agreement will lack
consideration and yet be enforceable on the basis of promissory estoppel,
quasi-contract, or public policy, or as a contract under seal.
B. Promissory Estoppel. Promissory estoppel is an alternative to consideration but is used
only to avoid injustice.
1. Promissory estoppel always involves a gratuitous promise.
a. The promisor does not expect the promisee to accept an offer by performing
an act or making a return promise.
1) The bargain element is lacking because no bargain is intended.
b. EXAMPLE: Mary pledges to donate $10 million to the University of Florida.
The University begins construction of a new building. Mary retracts her
pledge. The pledge may be enforceable under the doctrine of promissory
estoppel. Mary's promise was gratuitous. The doctrine would be invoked as an
alternative to bargained-for consideration.
2. Section 90 of the Restatement (Second) of Contracts sets forth three requirements
for the doctrine of promissory estoppel:
a. A promise that the promisor should reasonably expect to induce action or
forbearance by the promisee
b. Action or forbearance by the promisee that is induced by the promise
1) Charitable subscriptions and marriage settlements may be enforced under
the doctrine of promissary estoppel without proof that the promise induced
action or forbearance.
c. Enforcement of the promise as the only means of avoiding injustice
3. A prerequisite for applying promissory estoppel is the lack of bargained-for
consideration.
a. EXAMPLE: Scott, a general contractor, plans to submit a bid to construct a
school. He must first obtain quotes from subcontractors. John submits to Scott
a quote of $30,000 for the plumbing work. Scott relies on John's quote in
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submitting his own offer. Scott is obligated to build the school for the amount
he bid. Before Scott can accept John's offer, but after submission of Scott's
bid, John raises his quoted price. John has no obligation to Scott under classic
contract rules. Under the doctrine of promissory estoppel, however, Scott can
enforce John's original promise. Scott's action should be expected because, as
John must know, general contractors rely on subcontractors' bids. Scott relied
to his detriment by committing to a contract based on John's original price.
John, who should have reasonably expected that his promise would induce the
general contractor's action, is said to be estopped from denying the existence
of a contract.
C. Quasi-Contract. A quasi-contract imposes an obligation to prevent unjust enrichment.
1. The parties to a quasi-contract make no promises and reach no agreement.
a. However, one of the parties is substantially benefited at the expense of the
other party.
1) EXAMPLE: Alan contracts to paint Craig's house. Alan mistakenly paints
the house next door, which belongs to Sharon. Sharon observes Alan
painting her house but voices no objection. To prevent unjust enrichment
of Sharon, equity will require her to pay Alan the reasonable value of his
services.
b. Refer to Chapter 8.
D. Public Policy. Sometimes, courts cite public policy to support enforcement of a promise
despite lack of bargained-for consideration, promissory estoppel, or a quasi-contract.
1. Debts barred by the statute of limitations. When a debtor promises to pay a debt,
even when collection is barred by the statute of limitations, courts hold the promise
to pay enforceable without consideration.
a. The rationale is that, when the debtor acknowledges the debt and promises to
pay it, public policy favors upholding the promise notwithstanding the lack of
bargained-for consideration.
b. An enforceable promise to pay an entire debt is inferred from any partial
payment accompanied by an acknowledgment of the larger debt.
c. If the debtor does not make a partial payment, the mere promise to pay must
generally be in writing and signed by the debtor to be enforceable.
2. Debts barred by a bankruptcy proceeding. The Federal Bankruptcy Act of 1978 as
amended governs the rights of debtors and creditors. Refer to Chapter 20,
Bankruptcy.
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a. Promises made by a debtor to a creditor during bankruptcy proceedings but
prior to discharge may be enforceable without consideration.
1) However, the bankruptcy court must hold a hearing and explain that the
debtor need not promise to repay the debt.
E. Contracts under Seal. At common law, a seal is a substitute for consideration.
1. A sealed promise (contract) is enforceable merely because it is sealed.
2. For a promise to be sealed, the parties to the agreement, by all appearances, must
have intended it to be a sealed instrument.
3. The other requirements of a sealed promise are
a. A writing
b. The seal
c. Delivery
4. Statutes of many states have abolished any distinction between sealed and unsealed
contracts.
5. The first seals were made by a signet ring in hot wax. Eventually, any impression
on the paper was considered a seal. Modern trends permit the word "seal" or the
letters "L.S." (locus sigilli) to constitute a valid seal. Many attorneys incorporate a
recital of a common phrase to substitute for a seal; e.g., "In witness whereof I have
hereunto set my hand and seal."
F. Statutes. A statute may provide that certain gratuitous promises may be unenforceable.
1. Examples under the UCC include modification of a control for the sale of goods, a
written waiver of renunciation of rights arising from a breach of contract, and an
irrevocable offer to buy or sell goods.
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