Excerpted from West Bus. Law
The key points in this chapter include:
1. The elements of consideration.
2. The difference between the legal sufficiency and the adequacy of consideration.
3. The preexisting duty rule and its exceptions.
4. The effect of a lack of consideration.
5. Problem areas concerning consideration.
Good reasons for enforcing promises have been held to include
something given as an agreed exchange, a benefit that the promisor
received, and a detriment that the promisee incurred. These are
referred to as consideration. No contract is enforceable without
Consideration is the value given in return for a promise. For example, the value can consist of money given in return for a promise to deliver certain goods. Thus, when Roy pays for a computer to be delivered by Sam, there is consideration. This chapter outlines the concepts and principles of consideration
I. ELEMENTS OF CONSIDERATION
Consideration has two elements: (1) there must be a bargained-for exchange between the
parties (if a party intends to make a gift, he or she is not bargaining) and (2) what is bargained
for must have legal value.
II. LEGAL SUFFICIENCY OF CONSIDERATION
Something of legal value must be given in exchange for a promise. It may be a return promise. If it is performance, that performance may be (1) an act (other than a promise); or (2) a forbearance (refraining from action). Whatever it is, it must be either
A. LEGALLY DETRIMENTAL TO THE PROMISEE
Legal detriment is not always economic detriment. A person can incur legal detriment
by (1) doing or promising to do something that he or she had no prior legal duty to do or (2)
refraining from or promising to refrain from doing something that he or she had no prior
legal duty to refrain from doing (that is, by forbearance).
B. LEGALLY BENEFICIAL TO THE PROMISOR
III. ADEQUACY OF CONSIDERATION
Adequacy of consideration refers to the fairness of a bargain. Normally, a court will not
question the adequacy of consideration.
A. EXTREME CASES
A court of law may consider the adequacy of consideration if inadequate consideration indicates fraud, duress, incapacity, undue influence, or a lack of bargained-for exchange.
1. General Rule
In an equity suit, a court will more likely question the adequacy of consideration. The defendant must show that the transaction was not so one-sided under the circumstances as to be unfair.
2. Adhesion Contract
A contract written for the benefit of one party only and presented to the other party, who must agree to the terms or put aside the deal. These contracts may be held unconscionable.
IV. CONTRACTS THAT LACK CONSIDERATION
Situations in which promises or acts do not qualify as consideration include
A. PREEXISTING DUTY
A promise to do what one already has a legal duty to do is not constitute legally sufficient
If a merchant contracts to sell a computer to a consumer, that duty cannot serve as consideration for a second contract with the consumer to raise the price.
a. Unforesnne Difficulties
When a party runs into extraordinary difficulties that were unforeseen at the time the
contract was formed, some courts will enforce an agreement to pay more.
1) Ordinary business Risks Not Included
2) Typical Cases
Cases involving unforeseen difficulties frequently arise under construction contracts and relate to soil conditions.
b. Recission and New Contract
Two parties can agree to rescind their contract to the extent that it is executory.
1) Preexisting Duties Discharged by Rescission
There are three separate agreementsthe initial agreement, the rescission agreement, and the later
agreement. Preexisting duties are discharged by the rescission.
2) When Rescission and New Contract Occur at the Same Time
Some courts hold that the new agreement is unenforceable on the ground of insufficient consideration. Others hold that as long as the rescission is express, the new promises furnish consideration for each other. Others hold that the original consideration carries over into the new agreement.
B. PAST CONSIDERATION
Promises made with respect to events that have already taken place are unenforceable.
IV. PROBLEM AREAS CONCERNING CONSIDERATION
A. UNCERTAIN PERFORMANCE
If the terms of a contract express such uncertainty of performance that the promisor
has not definitely promised to do anything, the promise is illusorywithout consideration and
Tios Restaurant promises to buy from Pizza King, Inc., such pizza ingredients as we may
wish to order from Pizza King. Tios promise is illusory, because performance depends solely
on the discretion of Tios. There is no bargained-for consideration.
2. Option-to-Cancel Clauses
Reserving, in a contract, the right to cancel or withdraw at any time can be an illusory
promise. If the right is at all restricted, howeversuch as by requiring thirty days
noticethere is consideration.
B. SETTLEMENT OF CLAIMS
1. Accord and Satisfaction
Accord and satisfaction deals with a debtors offer of payment and a creditors acceptance
of a lesser amount than the creditor originally purported to be owed.
The agreement under which one of the parties undertakes to give or perform, and the other to
accept, in satisfaction of a claim, something other than that which was originally agreed on.
Satisfaction takes place when the accord is executed. There can be no satisfaction unless
there is first an accord.
c. Amount of the Debt Must Be Unliquidated (in Dispute)
1) Unliquidated DebtConsideration
When the amount of the debt is in dispute, acceptance of a lesser sum discharges the
debt. Consideration is given by the parties giving up a legal right to contest the amount of debt.
2) Liquidated DebtNo Consideration
Acceptance of less than the entire amount of a liquidated debt is not satisfaction, and the balance of the debt is still owed. No consideration is given by the debtor, because the debtor has a preexisting
obligation to pay the entire debt.
A release (a promise to refrain from suing on a valid claim) bars any further recovery beyond the terms stated in the release. Releases will generally be binding if they are (1) given in good faith, (2) stated in a signed writing, and (3) accompanied by consideration.
3. Covenant Not to Sue
The parties substitute a contractual obligation for some other type of legal action based on a
valid claim (such as promising not to sue on a valid claim if the cost of all damage is paid). In
this case, if all damage is not paid, an action can be brought for breach of contract.
C. PROMISES ENFORCEABLE WITHOUT CONSIDERATION
1. Promises to Pay Debts Barred by a Statute of Limitations
Creditors must sue within a certain period to recover debts. If a debtor promises to pay a debt barred by a statute of limitations (promise can be implied if debtor acknowledges debt by
making part payment), a creditor can sue to recover the entire debt, or at least the amount
2. Detrimental Reliance, or Promissory Estoppel
In some states, the doctrine of promissory estoppel prevents a promisor from asserting a
lack of consideration as a defense. This occurs when
a. Justifiable Reliance
A promise given by one party induces another party to rely (justifiably) on that promise to his
or her detriment.
The promisor must have known or had reason to believe that the promisee would likely be
induced to change position. The change usually must be of substantial nature.
If injustice cannot be avoided, the promise will be enforced.
3. Charitable Subscriptions
Promises to make gifts to charitable institutions are unenforceable because they are not
supported by legally sufficient consideration.
a. Specific Use
Consideration may be found if the promisor bargained for and received a promise that the
gift would be used in a specific way.
b. Promissory Estoppel
Some courts enforce these promises under the doctrine of promissory estoppel if a charity
changes its position in reliance on the promise.