Business Law
Chapter 4: Consideration
(Bargained for Exchange)
Introduction
• Consideration is often defined as “some
right, interest, profit or benefit accruing
to one party” or the loss, detriment or
responsibility assumed by another party
to the contract.
• Consideration is also a requirement of a
legally valid contract.
What is consideration?
• The basic reason for a contract; a
person gives up something of value in
exchange for receiving something of
value through the contract.
Why is consideration
required?
• Consideration is required for the
formation of a valid contract for the
simple reason that it shows the parties’
intent to be bound.
• A one-sided promise does not put the
other party in any different footing than
he or she had prior to the promise.
Types of Consideration
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A right
A profit
An interest
A physical object
A responsibility undertaken
A legal detriment
Legal Detriment
• Consideration can also be satisfied
through actions.
• When a person assumes a legal
detriment, this can also satisfy the
requirement of a consideration.
Detriment
• The “bargained for exchange" in a
contract, where the parties take on
some responsibility that they are not
legally obligated to undertake
Proving Consideration
• When the consideration for a contract is
under dispute, the parties involved must
devote time and energy in proving (or
disproving) the existence of
consideration.
• Many times, the contract itself will recite
the actual consideration.
• In many jurisdictions, there are legal
presumptions that may also help to
establish the existence of consideration.
• Written contracts, for example, are often
presumed to have consideration,
although the other party can rebut this
presumption.
• As a general rule, there is no
requirement that consideration for a
contract be recited or expressed in the
writing.
Quid Pro Quo
• The phrase “quid pro quo” is a Latin
term that is usually translated as
“something for something.”
Quid pro quo and
Consideration
• Quid pro quo is a general term;
consideration is a specific, legal term.
Inadequate or Insufficient
Consideration
• Courts often refrain from determining
the value of the consideration.
• Parties are free to negotiate any
contract terms that they choose, as long
as the contract does not involve fraud,
duress or undue influence over one
party, or a contract that is void for public
policy reasons.
• Inadequate consideration is not
considered insufficient consideration
and therefore will not automatically void
a contract.
Grossly Inadequate
Consideration
• Grossly inadequate consideration is
often a feature of unconscionable
contracts.
• An unconscionable contract is one in
which the terms or bargain is so
obviously one-sided that the contract
should be voided for public policy
reasons.
Contracts “Under Seal”
• Seals are rare in modern contracts.
• Under the common law, a contract
under seal was presumed to have
consideration and therefore no
additional evidence or testimony about
the consideration was required.
Legal doctrines that affect
consideration
• Courts have created several legal
doctrines that affect the analysis of
consideration in a contract.
Promissory Estoppel
• The basic idea behind estoppel is that
when person A makes a statement that
person B relies upon, A is prevented
from denying the truth of his statement.
What is Estoppel?
• When a person is barred by prior
actions from claiming a right or a duty
against another person who relied, in
good faith, on those actions.
Promissory Estoppel and
Consideration
• Under the theory of promissory
estoppel, when Party B suffers some
legal detriment as a result of the
contract, Party A cannot claim that there
was no consideration for the contract.
The Elements of Promissory
Estoppel
• 1) there was a clear and definite
promise; 2) the promisor intended to
induce reliance, and that reliance
occurred; and 3) the only way to avoid
injustice is to enforce the contract.
Waiver
• When a person gives a waiver, he or
she surrenders a right, requirement or
obligation.
Accord and Satisfaction
• When parties change the terms of their
contracts, or negotiate entirely new
contracts based partly on a previously
existing contract.
Contracts for an Illegal
Purpose
• A contract that contemplates an illegal
purpose, such as a criminal act, will not
become enforceable simply because it
is supported by consideration.