Chapter 17: Consideration
Lisa Buckley, Holly Embree, Jennifer Darlington, Laura Hill, Andrew Hansen
Introduction
One of the most important things to understand when working with contract law is that
not all agreements are considered enforceable contracts. In order for a social agreement/promise
to become an enforceable legal contract both parties must have consideration. In the past the
courts used to support contracts involving free promises (a situation in which one side gains
nothing while the other side benefits). That, however, is no longer the case. Now both parties
must benefit from the contract or have consideration, defined as “legal value, bargained for and
given in exchange for an act or a promise.” There are several ways in which consideration can
effectively be achieved. However, there are also many agreements originally thought to be
enforceable contracts, but in fact are not because they lack consideration. Similarly, there are
many exceptions to the rules of consideration the courts have put in place over the years.
I. Elements of Consideration
The concept of consideration is very complex. Though the simple definition was outlined
earlier, a more intricate explanation must be given. In order for a contract to be legally
enforceable, both parties must gain something of value, often legal value, from the contract. If,
for example, the promisee has not given anything
Parties in consideration:
of legal value in exchange for the promise of the
promisor, then the contract cannot be enforced
Promisor: Party who makes the promise.
against either party. The contracts can include
Promisee: Party to whom the promise is
consideration as simple as one person paying
given.
another for a candy bar or as detailed as a
promise to perform a future event for money
now. Consideration often protects the promisor from being held liable for contracts in which
gratuitous promises were made.
Unfortunately because of that protected liability, the consideration requirement often
leads to situations in which the outcome seems unfair. Normally, a gratuitous promise is
unenforceable because of a lack of consideration—there is consideration from the person making
the promise of a gift but not from the person receiving the promised gift. Some gifts get more
complicated.
For example, suppose a long time friend promises to buy you whatever laptop you want
as a graduation gift and you find the perfect one and place a nonrefundable down payment on it.
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If after making the down payment, you find out later that your friend has changed his mind; the
question arises of who will pay. According to the rules above, it would seem that you would still
have to pay, because there was no consideration given to your friend, but does this seem fair?
No, and this is why exceptions to the consideration requirement have been made, such as
promissory estoppel. These exceptions will be discussed later in the chapter.
A. Legal Value
Because consideration is such a complex concept, it follows that there are many ways to
achieve consideration. In a basic case of consideration, both of the parties must gain something
of value from the agreement. In a unilateral contract, consideration can be an act, whereas in a
bilateral contract, consideration can be a promise. The most important requirement of
consideration is that the promisee gives something of legal value in exchange for the promise of
the promisor. The first way that the promisee can give something of legal value is by either
agreeing to do, or simply doing, something he had no preexisting duty to do. The second way
legal value can be achieved is if the promisee promises not to do something, also known as
forbearance. An example of forbearance would be the promise not to smoke for a certain length
of time. A particular court case that exemplifies this idea is Hamer v. Sidway.
Case Study: Hamer v. Sidway 124 N.Y. 538, 27 N.E. 256 (N.Y. 1891)
In this case, an uncle promised to pay his nephew a sum of money if he did not partake in the use of
tobacco, drinking, swearing, and gambling until his 21st birthday. Though the uncle did not receive any
monetary consideration, the nephew’s promise not to take part in these activities counted as legal value
and therefore was determined to be consideration. Another important factor to note is that
consideration does not have to involve money and does not have to meet certain standards of
adequacy.
B. Adequacy of Consideration
The legitimacy of an agreement’s consideration does not rely on the actual value that
each party is receiving. This means that each party is free to make their own agreements whether
or not they are actually good or bad deals. As long as they are getting what they asked for,
consideration is taking place. One must be careful, however, when dealing with inadequacy of
consideration. It may give rise to the discussion of fraud, duress, or unconscionability which
could render a contract unenforceable and lead to even more legal trouble. Similarly, cases
dealing with nominal consideration, ones in which one side is essentially giving a gift to the
other, are also questioned by the courts. These agreements are sometimes considered to be gifts
(gratuitous promises) and as such are not valid.
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For example, years ago Truman State University rented out Ophelia Parrish to a local
elementary school for $1. Though it is obvious that the University was not getting the actual
value of the cost of renting the building, as long as both sides were receiving something (no
matter how much), consideration, and thus an enforceable agreement was present.
Another example of nominal consideration is Bennett v. American Electric Power
Service Corp. in which the employees of AEP received $1 in exchange for the Corporation’s
rights to the patent for an invention that was discovered while they were working there. The
employees sued because they claimed that AEP did not give them the nominal consideration of
$1 in exchange for the rights to the patents. The courts ruled in favor of AEP, saying that the
patents were very clearly designated to AEP and that even if the nominal consideration of $1 was
not paid the contract was still valid.1
C. Bargained-For Exchange
Finally, it is important to note that for consideration to be present the terms of the
agreement must be expressed and accepted. It is not enough for both sides to be gaining
something. Instead, both sides must understand what they are receiving in exchange for the legal
value that they are giving up. After that, both sides must agree to the “price” in exchange for the
promise of the other party.
II. Applications of Consideration
A. Illusory Promises
An illusory promise is “a contract into which parties enter, but one or both of the parties
can choose not to perform their contractual obligations. Thus the contract lacks consideration2.”
Sometimes it is difficult to determine whether or not the promisee is getting anything of legal
value in exchange for their promise. In order for consideration to take place in a bilateral
contract, the promisee must promise to do something, or not to do something, at the request of
the promisor. Once that condition is met, as long as there is legal value present, there is no
question as to the enforceability of the contract. However, if there is a lack of mutual obligation
present in the agreement, the contract is considered illusory and is therefore unenforceable.
For example, if Bill promises to shovel Kyle’s driveway “if Bill wants to”, that would
not count as mutual consideration. The promise is indefinite; one does not know whether Bill
will actually shovel Kyle’s driveway. Because he has not promised anything of legal value, the
contract is not enforceable. In conclusion, an illusory promise is one in which the promisee is not
bound to do something, or to refrain from something, and so lacks mutuality of obligation.
1
2
Bennett v. American Electric Power Service Corp., 2001 WL 1136150 (Ct. App., Ohio, 2001)
Cheeseman, Henry. Business Law. 3rd. Saddle River, NJ: Prentice Hall, 1998. 190. Print.
Chapter 17: Consideration
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B. Terminable at Will
If a contract is terminable at will, it can be canceled by either party at any given time.
These contracts are not necessarily illusory and can be good because while the contract can end
at any time during the time of the contract, both sides have obligations. For example, if
limitations do exist, such as the requirement of a tenant or landlord to notify each other within 30
days of termination, then the contract would no longer be considered illusory. The reasoning
behind this is that each party has bound themselves to do something in exchange for the
execution of the other’s promise. In this example, they are each promising to give each other 30
days’ notice in exchange for the other’s promise to do the same. In addition, both the landlord
and tenant have obligations during the time of the lease.
C. Effect of Output and Requirements Contracts
Additional subjects of dispute in regards to illusory promises are output and requirements
contracts. An output contract is a contract in which one party agrees to buy all of a company’s
output for a certain period of time. A requirement contract is when one party agrees to buy all of
a particular product they need from a certain company for a designated period of time. Before the
Uniform Commercial Code (which only applies to goods) was put into effect, there were
questions as to whether or not output and requirements contracts fell under the illusory category.
These contracts do not specify the quantity of goods purchased and it was feared that the terms
were too vague. However, the UCC now says that these contracts are enforceable as long as the
demands in the contract occur in good faith and the quantities involved are reasonable. This also
helps ward off exploitation by any party involved.
Case study: Feld v. Henry S. Levy & Sons, Inc. 373 N.Y.S.2d 102, 335 N.E.2d 320 (N.Y.
1975)
In this case, Feld wanted Henry’s company to make breadcrumbs for
for him.
him. He
He created
created aa
renewable one-year contract for all of Henry’s output. Henry stopped making the breadcrumbs
before the end of the contract. Feld was upset and sued Henry. Was the promise implied that
Henry’s company would continue making breadcrumbs for
for the
the entire
entire length
length of
of the
the contract?
contract?
The ruling was that because the contract had the seller exclusively providing breadcrumbs, the
seller had an obligation to supply the breadcrumbs to the best of their abilities.
D. Preexisting Duties
In order for consideration to be present in an agreement, the promisee must promise to do
something they had no prior legal duty to do, or had not previously agreed to do, through a
contract. One cannot make an agreement to obey the law because every member of society has a
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preexisting duty to follow the law. Suppose that a woman’s house catches on fire and once she is
outside she realizes that her son is still inside the burning building. She offers $1,000,000 to
anyone who will go inside and save her son. A fireman arrives on the scene and saves her child.
He is not, however, entitled to the promised reward because he had a preexisting duty, as a
public official, to save anyone who would have been trapped inside that building.
Furthermore, in the case of Denney v. Reppert, a bank was robbed and offered a reward
for the capture of the robber. The robber was captured by several police officers (two within their
jurisdiction, one not) with the help of the descriptions made by some employees of the bank, the
question arose as to who was entitled to receive the reward. The two policemen within their
jurisdiction could not claim the reward because they had a pre-existing to protect the community.
Likewise, the employees of the bank were also subject to the preexisting duty rule as they had a
duty to act in the best interests of the bank. Additionally, public officials such as policemen or
firemen have a preexisting duty to do their job. However, the third policeman (who was outside
of his jurisdiction) was entitled to all of the reward because he had no preexisting duty in that
jurisdiction.3
a. Modifications of Contracts under the Common Law
Many preexisting duty cases involve the modification of contractual agreements.
Generally, in order for the modifications to be considered binding, they must involve new
consideration by both parties. Suppose a city makes a contract with a contractor to build a bridge
within two years for the price of $1,000,000. After one year of work, the contractor realizes that
he will not be able to finish within the remaining year and says that in exchange for extra
payment he will work harder and pay his workers overtime in order to finish on time. The city
accepts this offer, but due to the contractor’s preexisting duty to complete the job within two
years, they do not have to pay, even after accepting. There was no new consideration for the city.
However, if the contractor were to move the due date up at least one day or promise to throw in
something extra, such as a streetlamp to light the bridge, then new consideration exists and the
contract would be enforceable due to modification of contracts under common law.
A case that exemplifies this idea even further is Alaska Packers Assn v. Domenico, in
which Domenico and a group of other fishermen went on strike, demanding that the Alaska
Packers Association increase their wages. Since there was no new consideration for the APA (the
fishermen already had a preexisting duty to complete their job at the salary they were being
paid), the modification could not be made.4 Once again, in order for a modification to be made to
an already existing contract, new consideration must be present.
One exception to this rule occurs when unforeseen circumstances arise. In the bridge
example above, if abnormal rock formations were found when trying to secure a foundation for
the bridge, then the contractor could reasonably ask for more money. The unforeseen
3
4
Denney v. Reppert 432 S.W.2d 647 (Ky. 1968)
Alaska Packers' Ass'n v. Domenico 117 F. 99 (9th Cir. 1902)
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circumstances must make the job much more costly and time-consuming than was originally
thought. Therefore, if there was simply bad weather for a few days during construction of the
bridge, this exception would not apply.
b. Contract Modification under the UCC
Another exception to this rule exists under the Uniform Commercial Code and contracts
dealing with goods. Under the UCC, the initial contract must have consideration going both
ways, but a modification of that contract can be made in good faith even if consideration does
not exist for both parties. This can come about in regards to quantity or price. It is to be noted
that if one of the parties does not agree to this modification, it is not enforceable.
For example, suppose that a furniture company initially contracts to purchase 500 tables
from a manufacturing company for $60 each. Two weeks after the contract was made, the
furniture company realizes that they can only store 450 tables in their inventory. Even though
consideration does not exist for the manufacturing company in this new contract, as long as they
agree to it in good faith (meaning it is not malicious in nature), the contract will still be
considered valid.
c. Agreements to Settle Debts
The preexisting duty rule also applies to settling debts, liquidated or unliquidated. A
liquidated debt is one in which there is no reasonable dispute over the existence or amount of the
debt. Suppose Lisa borrowed $100 from Amanda and agreed to pay her back within one year.
After one year had passed, and Lisa had yet to pay her debt, she offered to give Amanda $50
instead, along with the promise that Amanda would not sue her for the remaining amount. Even
if Amanda agrees to this, she can still sue Lisa for the remaining amount based on the preexisting
duty rule. Because of the original contract, there is no new consideration for Amanda if Lisa
offers to give her less money than was originally owed to her.
An unliquidated debt is one in which there is a reasonable dispute over the existence or
amount of the debt. For example, suppose Tony did not turn on his blinker, causing Rhonda to
crash into him on the highway while switching lanes. There is a dispute over the amount of the
damages to the cars. Because the cost of the damage to Rhonda’s car is not clear, there is an
unliquidated debt, meaning it is subjective (different mechanics could come up with different
amounts of damages). At the time of the crash, Rhonda offers not to sue if Tony pays her $3,000
and Tony accepts. Both sides think that they are getting the better deal and are taking that risk. If
Tony later realizes that the damages are only $1,000 he cannot sue for money he lost because
contracts dealing with unliquidated debts are binding.
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E. Past Consideration
Past consideration occurs when a current promise is made in exchange for actions that
have already been completed. If past consideration exists, then the contract is not valid. One
cannot make a promise based on something that happened in the past. In order for a valid
contract to be made, new consideration must be present.
For example, suppose Maria fell into a river and John jumped in to save her. She then
promised to give him $4,000 for saving her life. She would not be legally obligated to give
him that money because the action (saving her life) had already been completed once the
promise (to give John money) was made. Though there was an exchange of legal value, the
timing does matter in these situations.
III. Exceptions to Consideration
Because consideration is a tricky concept, there are several exceptions to the requirement
that the courts have come up with over the years. Though several have already been discussed
(the Uniform Commercial Code, firm offer, and contract modification rules), there are a few
more exceptions that also pertain to the consideration requirements.
A. Promissory Estoppel
Promissory Estoppel originated as a way to attain fair outcomes when dealing with
donative promises that cause the promisee to act in reliance on that promise. A donative promise
is a promise to make a gift or donation to an individual or an institution. In the past, donative
promises were not legally enforceable because the promisor had no consideration in the
agreement. However, in cases where substantial performance was made by the promisee
resulting from reliance on the promise, then the agreement can become enforceable.
Requirements for promissory estoppel:
1. There is a clear and definite promise.
2. It is reasonable that the promisee would rely on the promise.
3. The promisee reasonably relied on the promise either by acting or refraining from an act.
4. The promisee’s reliance was definite and resulted in substantial harm.
5. Enforcement of the promise is necessary to avoid injustice.
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For example, suppose that a grandfather promised to give his grandson a car for his 18th
birthday. The grandson then went out and signed a contract to purchase a Corvette. Several days
later, the grandfather decided to revoke his offer and the grandson was left to pay for the car
himself. Because the grandson relied on the grandfather’s promise and then acted on it by
signing the contract for the car, this case falls under promissory estoppel, which would take the
place of consideration in this situation. In cases where promissory estoppel applies, the contract
would be legally enforceable.
B. Debts Barred by a Statute of Limitations
In all states, creditors are required to sue within a specified time period to recover debts
under the statute of limitations. The statute of limitations bars recovery of the debt if the creditor
does not sue within the specified period. If a debtor promises to pay a previous debt, even though
the statute of limitations bars recovery, there is an enforceable promise which needs no
consideration (although some states require that the promise is in writing). This promise extends
the limitations period and the creditor can sue to recover either the whole debt or the amount
promised. The promise may be implied if the debtor acknowledges the barred debt by making a
partial payment.5
C. Charitable Subscriptions
A charitable subscription is a commitment to make a gift to a religious, educational, or
charitable organization. Similar to donation promises, charitable subscriptions were originally
unenforceable because they lacked legally sufficient consideration. However, the current view is
to make exceptions to the general rule by applying the doctrine of promissory estoppel.6
For example, suppose Truman State University takes pledges from alumni to construct a new
swimming pool. Relying on these pledges, the university purchases land, hires contractors, and
makes contracts related to the new swimming pool. Due to the university’s detrimental
reliance, a court may enforce the pledges under promissory estoppel.
5
Clarkson, Kenneth, Roger Miller, Gaylord Jentz, and Frank Cross. Business Law Text and Cases Legal, Ethical,
Global, and E-Commerce Environments. 11th. Mason, OH: South-Western Cengage Learning, 2009. 259-260. Print.
6
Ibid.
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Chapter Review Questions:
1.
2.
3.
4.
5.
Suppose Holly promises to give Lisa $100 in exchange for Lisa washing her car. In this
example, who is the promisee and promisor and what is the consideration given by each
party?
Mike offers George his financial planning services in exchange for a “fair price.” Has
consideration occurred in this example? Why or why not?
Bryce bets Steve $75 the Cardinals will not win the World Series in 2010. Is this a valid
contract? Why or why not?
Danielle’s cat runs up the oak tree in her front yard after a squirrel. The squirrel escapes
but the cat gets nervous and is afraid to come down. Danielle calls the fire department to
come get her cat out of the tree. A fireman comes to her house and successfully gets the
cat out of the tree. Danielle is so thankful she promises to give the fireman $600 for
rescuing Fluffy. Is she obligated to pay him? Why or why not?
The March of Dimes organizes a fundraising effort for a new NICU at the Northeast
Regional Medical Center. Citizens in the community and across the state pledge generous
donations. Construction is started on the new unit and the necessary equipment is
purchased. If the people who pledged donations decide they do not want to actually give
the money, are these pledges enforceable by court? Why or why not?
Answers:
1. Holly is the promisor and she is giving $100. Lisa is the promise and she is washing the
car.
2. Probably. The rules for services are more lax. The fair price probably would be the fair
market value for services rendered.
3. Bryce would not make such a bet. There is consideration going both ways though the
gambling aspect would make the deal illegal.
4. No, Danielle is not obligated to pay the fireman because he probably has a previously
existing duty to rescue cats. Even if he does not have a previously existing duty to rescue
cats she is still not obligated to pay him because of the past consideration rule. Since she
receives no new consideration for the $600 she does not have to pay him.
5. Some courts might enforce it despite the lack of consideration. Generally, though,
charities don’t sue.
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