Consideration
McGraw-Hill/Irwin
©2008 The McGraw-Hill Companies, All Rights Reserved
Objectives
Chapter Objectives:
– Use vocabulary regarding consideration properly
– Discuss the requirements of valid consideration
– Identify invalid, not legally recognizable
consideration
– Differentiate between sufficiency and adequacy of
consideration
– Determine if the obligation falls within one of the
four “special agreements” that do not require
consideration
2-2
Legal Value
Consideration is the
“why” of the contract.
It must be valid in
order for a binding
contract to exist
2-3
Legal Value, continued
Both parties must
gain (benefit)
or
give (detriment)
This exchange is the consideration for the
agreement
2-4
Legal Value, continued
Benefit
conferred
Detriment
incurred
2-5
Legal Value: Exceptions
Five Rules indicating when the
exchange is NOT Legal Consideration:
1. Gifts
2. Moral Obligations
3. Illusory Promises
4. Past Consideration
5. Preexisting Duties
2-6
Five Rules
1. Gifts:
Bestowing a benefit without any
expectations on the part of the giver
to receive something in return and
the absence of any obligation on the
part of the receiver to do anything in
return
2-7
2-8
Five Rules, continued
2.
Moral Obligations:
A social goal or personal aspiration
that induces a party to act without
any expectation of a return
performance from the recipient
Five Rules, continued
Both gifts and moral obligations
fail as valid consideration due to lack
of mutual obligation.
2-9
Five Rules, continued
3.
Illusory Promises:
A statement that appears to be a
promise but actually enforces no
obligation upon the promisor
because he retains the subjective
option whether or not to perform
on it
2-10
Five Rules, continued
4.
Past Consideration:
A benefit conferred in a previous
transaction between the parties
before the present promise was
made
2-11
Five Rules, continued
5. Pre-existing Duties:
An obligation to perform an act that
existed before the current promise was
made that requires the same
performance presently sought
2-12
Preexisting Duty Rule
• The Preexisting Duty Rule has several
exceptions:
– New or different consideration
– Voidable obligation
– Duty is owed to a third person
– Unforeseen circumstances
2-13
Legal Value: Exceptions
Gifts, moral obligations,
illusory promises, past
consideration, and preexisting
duties lack legal value and
are therefore invalid
consideration
2-14
Sufficiency of Consideration
There is a distinction between
sufficient consideration and
adequate consideration.
2-15
Sufficiency of Consideration
– Sufficient consideration: the exchanges
have recognizable legal value and are
capable of supporting an enforceable
contract. The actual values are irrelevant
– Adequate consideration: exchanges that
are fair and reasonable as a result of equal
bargaining for the things of relatively
equal value.
2-16
Sufficiency of Consideration
Insufficient types of Consideration:
− Nominal Consideration
− Good Consideration
− Sham Consideration
2-17
Nominal Consideration
• Nominal Consideration
The value of the things exchanged are
grossly disproportionate to each other so
that very little is given in exchange for
something of great value
2-18
Good Consideration
•Good Consideration
Similar to nominal consideration. An
exchange made based on love and
affection, which have no legal value.
(example: parents selling their home to
their child for a dollar)
2-19
Sham Consideration
•Sham Consideration
An unspecified and indeterminable
recitation of consideration that cannot
support an exchange
2-20
Sufficiency of Consideration
Conditions attached to the consideration
are generally regarded as valid as long
as there is an objective standard to
determine whether that condition has
been met:
- Condition
An event that may or may not happen upon which
the rest of the performance of the contract rests
2-21
Sufficiency of Consideration
• Conditions to contracts:
– allow parties to be released from their
obligations if certain events do or do not
occur
– must be determined by a measurable
standard
2-22
Special Agreements
• Special Agreements:
−
−
−
−
Pledges to charity
Repayment of debts
Guarantees
Formal Contracts
Special Agreements are enforced
as contracts,
even though no consideration exists.
2-23
Special Agreements
• Pledges to charity:
−A legally enforceable gift to a qualifying
institution. (example: when people call in
to a public broadcasting telethon and
pledge a donation)
2-24
Special Agreements
• Guarantees
− An agreement in which a third party
assures the repayment of a debt owed by
another party
2-25
Special Agreements
• Repayment of debts
−A voluntary repayment of a debt: an
agreement to pay back a debt that cannot
be collected upon using legal means
because the obligation to make payments
has been discharged
2-26
Special Agreements
• Formal Contracts
−An agreement made that follows a
certain prescribed form like negotiable
instruments. (example: when you write a
check to pay for groceries you have
executed a formal contract)
2-27
Summary
• Consideration is the substance of the
offer, it is that for which the parties
have bargained
• Consideration requires mutuality of
obligation and must have legal value
recognizable by the courts
2-28