Chapter - Consideration
excerpted from West Bus.Law

The fact that a promise has been made does not mean the promise can or will be enforced. Under Roman law, a promise was not enforceable without some sort of causathat is, a reason for making the promise that was also deemed to be a sufficient reason for enforcing it. Since the beginning of the common law tradition in England, good reasons for enforcing informal promises have been held to include something given as an agreed-on exchange, a benefit that the promisor received, and a detriment that the promisee incurred. Over time, these reasons came to be referred to legally as consideration.
Thus, for centuries, it has been said that no informal promise is enforceable without consideration. Consideration is usually defined as the value (such as money) given in return for a promise (such as the promise to sell a stamp collection upon receipt of payment). Often, consideration is broken down into two parts: (1) something of legal value must be given in exchange for the promise, and (2) there must be a bargained-for exchange. The something of legal value may consist of a return promise that is bargained for. If it consists of performance, that performance may be (1) an act (other than a promise); (2) a forbearance (a refraining from action); or (3) the creation, modification, or destruction of a legal relation.(1)
For example, Anita says to her son, When you finish painting the garage, I will pay you $100. Anitas son paints the garage. The act of painting the garage is the consideration that creates the contractual obligation of Anita to pay her son $100. Suppose, however, that Anita says to her son, In consideration of the fact that you are not as wealthy as your brothers, I will pay you $500. This promise is not enforceable, because Anitas son has not given any consideration for the $500 promised.(2) Anita has simply stated her motive for giving her son a gift. The fact that the word consideration is used does not, alone, mean that consideration has been given.

Section 1: Legal Sufficiency of Consideration

For a binding contract to be created, consideration must be legally sufficient. To be legally sufficient, consideration for a promise must be either legally detrimental to the promisee (the one receiving the promise) or legally beneficial to the promisor (the one making the promise). Note that legal detriment is not synonymous with actual (economic) detriment. A person can incur legal detriment in either of two ways: (1) by doing or promising to do something that he or she had no prior legal duty to do or (2) by 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).
Suppose that Santana owns the right to use the name The Brickhouse Restaurant. Katz offers Santana $5,000 to stop using the name for her restaurant, and Santana agrees. The consideration flowing from Santana to Katz is a promise to refrain from doing something that Santana is legally entitled to dothat is, use the name The Brickhouse Restaurant for her restaurant. The consideration flowing from Katz to Santana is the promise to pay a sum of money that need not otherwise be paid.
The following case is one of the classic cases of contract law. The issue before the court is whether refraining from certain behavior at the request of another is sufficient consideration to support a promise to pay a sum of money.

Case 14.1

Court of Appeals of New York, Second Division, 1891.
124 N.Y. 538, 27 N.E. 256.

Landmark in the Law: Hamer v. Sidway (1891)

BACKGROUND AND FACTS William E. Story, Sr., was the uncle of William E. Story II. In the presence of family members and guests invited to a family gathering, the elder Story promised to pay his nephew $5,000 if he would refrain from drinking, using tobacco, swearing, and playing cards or billiards for money until he reached the age of twenty-one. (Note that in 1869, when this contract was formed, it was legal in New York to drink and play cards for money prior to the age of twenty-one.) The nephew agreed and fully performed his part of the bargain. When he reached the age of twenty-one, he wrote and told his uncle that he had kept his part of the agreement and was therefore entitled to $5,000. The uncle replied that he was pleased with his nephews performance, writing, I have no doubt but you have, for which you shall have five thousand dollars, as I promised you. I had the money in the bank the day you was twenty-one years old that I intend for you, and you shall have the money certain. . . . P.S. You can consider this money on interest. The nephew received his uncles letter and thereafter consented that the money should remain with his uncle according to the terms and conditions of the letter. The uncle died about twelve years later without having paid his nephew any part of the $5,000 and interest. The executor of the uncles estate (Sidway, the defendant in this action) did not want to pay the $5,000 (with interest) to Hamer, a third party to whom the nephew had transferred his rights in the note, claiming that there had been no valid consideration for the promise. The court disagreed with the executor and reviewed the doctrine of detriment and benefit as valid consideration under the law.

PARKER, J. [Justice]
* * * *
The defendant contends that the contract was without consideration to support it, and therefore invalid. He asserts that the promisee, by refraining from the use of liquor and tobacco, was not harmed, but benefited; that which he did was best for him to do, independently of his uncles promise,and insists that it follows that, unless the promisor was benefited, the contract was without consideration,a contention which, if well founded, would seem to leave open for controversy in many cases whether that which the promisee did or omitted to do was in fact of such benefit to him as to leave no consideration to support the enforcement of the promisors agreement. Such a rule could not be tolerated and is without foundation in the law.
* * * Courts will not ask whether the thing which forms the consideration does in fact benefit the promisee or a third party, or is of any substantial value to any one. It is enough that something is promised, done, forborne, or suffered by the party to whom the promise is made as consideration for the promise made to him. In general a waiver of any legal right at the request of another party is a sufficient consideration for a promise. Any damage, or suspension, or forbearance of a right will be sufficient to sustain a promise. * * * Now, applying this rule to the facts before us, the promisee used tobacco, occasionally drank liquor, and he had a legal right to do so. That right he abandoned for a period of years upon the strength of the promise of the testator that for such forbearance he would give him $5,000. We need not speculate on the effort which may have been required to give up the use of those stimulants. It is sufficient that he restricted his lawful freedom of action within certain prescribed limits upon the faith of his uncles agreement, and now, having fully performed the conditions imposed, it is of no moment whether such performance actually proved a benefit to the promisor, and the court will not inquire into it; but, were it a proper subject of inquiry, we see nothing in this record that would permit a determination that the uncle was not benefited in a legal sense.

DECISION AND REMEDY The court ruled that the nephew had provided legally sufficient consideration by giving up smoking, drinking, swearing, and playing cards or billiards for money until he reached the age of twenty-one and was therefore entitled to the money.

ETHICAL CONSIDERATIONS The Hamer v. Sidway case is a good illustration of the distinction between benefits to the promisor and detriment to the promisee. Here the court did not inquire as to whether a benefit had flowed to the promisor but required only that there had been a legally sufficient detriment to the promisee. The court did note, however, that arguably the promisor had also benefited by the contractto the extent that the uncle considered it a benefit that his nephew had given up various vices, protected the familys reputation, and so on.

Section 2: Adequacy of Consideration

Adequacy of consideration refers to the fairness of the bargain. In general, a court will not question the adequacy of consideration if the consideration is legally sufficient. Under the doctrine of freedom of contract, parties are normally free to bargain as they wish. If people could sue merely because they had entered into an unwise contract, the courts would be overloaded with frivolous suits. In extreme cases, a court of law may consider the adequacy of consideration in terms of its amount or worth because inadequate consideration may indicate fraud, duress, undue influence, or a lack of bargained-for exchange. It may also reflect a partys incompetence (for example, an individual might have been too intoxicated or simply too young to make a contract). Suppose Dylan has a house worth $100,000 and he sells it for $50,000. A $50,000 sale could indicate that the buyer unduly pressured Dylan into selling or that Dylan was defrauded into selling the house at far below market value. (It might also indicate that Dylan was in a hurry to sell.)
In an equity suit, courts will more likely question the adequacy of consideration. (Remember from Chapter 1 that actions at law allow for remedies that consist of some form of compensation. Actions in equity allow for such remedies as specific performance, injunction, and rescission.) In an equity suit, the defendant must show that the transaction was not unconscionable (3) that is, generally speaking, so one sided under the circumstances as to be unfairand that consideration was exchanged. Adhesion contracts, for example, may be held unconscionable. As will be discussed in Chapter 16, these contracts are written for the benefit of one of the contracting parties onlythe dominant party. The adhesion contract (ordinarily a form contract) is presented to the other party, who must either agree to the dominant partys terms or put aside the deal. The adhesion contract is characterized by little, if any, actual bargaining between the parties.

Section 3: Contracts that lack consideration
Sometimes, one of the parties (or both parties) to a contract may think that they have exchanged consideration when in fact they have not. Here we look at some situations in which the parties promises or actions do not qualify as contractual consideration.

Under most circumstances, a promise to do what one already has a legal duty to do does not constitute legally sufficient consideration, because no legal detriment is incurred.(4) The preexisting legal duty may be imposed by law or may arise out of a previous contract. A sheriff, for example, cannot collect a reward for providing information leading to the capture of a criminal if the sheriff already has a legal duty to capture the criminal. Likewise, if a party is already bound by contract to perform a certain duty, that duty cannot serve as consideration for a second contract. For example, suppose that Bauman-Bache, Inc., begins construction on a seven-story office building and after three months demands an extra $75,000 on its contract. If the extra $75,000 is not paid, it will stop working. The owner of the land, having no one else to complete construction, agrees to pay the extra $75,000. The agreement is not enforceable, because it is not supported by legally sufficient consideration; Bauman-Bache was under a preexisting contract to complete the building.

UNFORESEEN DIFFICULTIES The rule regarding preexisting duty is meant to prevent extortion and the so-called holdup game. What happens, though, when an honest contractor who has contracted with a landowner to construct a building runs into extraordinary difficulties that were totally unforeseen at the time the contract was formed? In the interests of fairness and equity, the courts sometimes allow exceptions to the preexisting duty rule. In the example just mentioned, if the landowner agrees to pay extra compensation to the contractor for overcoming unforeseen difficulties, the court may refrain from applying the preexisting duty rule and enforce the agreement. When the unforeseen difficulties that give rise to a contract modification involve the types of risks ordinarily assumed in business, however, the courts will usually assert the preexisting duty rule.(5)

RESCISSION AND NEW CONTRACT The law recognizes that two parties can mutually agree to rescind their contract, at least to the extent that it is executory (still to be carried out). Rescission (6) is defined as the unmaking of a contract so as to return the parties to the positions they occupied before the contract was made. When rescission and the making of a new contract take place at the same time, the courts frequently are given a choice of applying the preexisting duty rule or allowing rescission and letting the new contract stand.

Promises made in return for actions or events that have already taken place are unenforceable. These promises lack consideration in that the element of bargained-for exchange is missing. In short, you can bargain for something to take place now or in the future but not for something that has already taken place. Therefore, past consideration is no consideration.
Suppose, for example, that Elsie, a real estate agent, does her friend Judy a favor by selling Judys house and not charging any commission. Later, Judy says to Elsie, In return for your generous act, I will pay you $3,000. This promise is made in return for past consideration and is thus unenforceable; in effect, Judy is stating her intention to give Elsie a gift.

Section 4: Problems areas concerning consideration

Problems concerning consideration usually fall into one of the following categories:

1. Promises exchanged when total performance by the
parties is uncertain.
2. Settlement of claims.
3. Promises that are enforceable without consideration.

The courts solutions to these types of problems give insight into how the law views the complex concept of consideration.

If the terms of the contract express such uncertainty of performance that the promisor has not definitely promised to do anything, the promise is said to be illusorywithout consideration and unenforceable. For example, suppose that the president of Tuscan Corporation says to her employees, All of you have worked hard, and if profits continue to remain high, a 10 percent bonus at the end of the year will be givenif management thinks it is warranted. The employees continue to work hard, and profits remain high, but no bonus is given. This is an illusory promise, or no promise at all, because performance depends solely on the discretion of the president (the management). There is no bargained-for consideration. The statement declares merely that the management may or may not do something in the future. The president is not obligated (incurs no detriment) now or in the future.
Option-to-cancel clauses in contracts sometimes present problems in regard to consideration. For example, suppose that I contract to hire you for one year at $5,000 per month, reserving the right to cancel the contract at any time. On close examination of these words, you can see that I have not actually agreed to hire you, as I could cancel without liability before you started performance. I have not given up the opportunity of hiring someone else. This contract is therefore illusory.

There are several ways in which businesspersons or others can settle legal claims, and it is important to understand the nature of consideration given in these kinds of settlement agreements, or contracts. A common means of settling a claim is through an accord and satisfaction, in which a debtor offers to pay a lesser amount than the creditor purports to be owed. Other methods that are commonly used to settle claims include the release and the covenant not to sue.

ACCORD AND SATISFACTION The concept of 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 accord is defined as 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. A basic rule is that there can be no satisfaction unless there is first an accord.
For accord and satisfaction to occur, the amount of the debt must be in dispute. If a debt is liquidated, accord and satisfaction cannot take place. A liquidated debt is one whose amount has been ascertained, fixed, agreed on, settled, or exactly determined. For example, if Baker signs an installment loan contract with her banker in which she agrees to pay a specified rate of interest on a specified sum of borrowed money at monthly intervals for two years, that is a liquidated debt. The amount owing is precisely known to both of the parties, and reasonable persons will not differ over the amount owed. Suppose that Baker has missed her last two payments on the loan and the creditor demands that she pay the overdue debt. Baker makes a partial payment and states that she believes this payment is all she should have to pay and that, if the creditor accepts the payment, the debt will be satisfied, or discharged. In the majority of states, acceptance of a lesser sum than the entire amount of a liquidated debt is not satisfaction, and the balance of the debt is still legally owed. The rationale for this rule is that no consideration is given by the debtor to satisfy the obligation of paying the balance to the creditorbecause the debtor has a preexisting legal obligation to pay the entire debt.
An unliquidated debt is the opposite of a liquidated debt. Here, reasonable persons may differ over the amount owed. It is not settled, fixed, agreed on, ascertained, or determined. In these circumstances, acceptance of payment of the lesser sum can operate as satisfaction, or discharge, of the debt. For example, suppose that Devereaux goes to the dentists office. The dentist tells him that he needs three special types of gold inlays. The price is not discussed, and there is no standard fee for this type of work. Devereaux leaves the office. At the end of the month, the dentist sends him a bill for $3,000. Devereaux, believing that this amount is grossly out of proportion with what a reasonable person would believe to be the debt owed, sends a check for $2,000. On the back of the check he writes payment in full for three gold inlays. The dentist cashes the check. Because we are dealing with an unliquidated debtthe amount has not been agreed onpayment accepted by the dentist normally will eradicate the debt. One argument to support this rule is that the parties give up a legal right to contest the amount in dispute, and thus consideration is given.
The following case involves an unliquidated amount due under a contract to buy blueberries.

Case 14.2

Supreme Judicial Court of Maine, 1996.
670 A.2d 944.

BACKGROUND AND FACTS E. S. Herrick Company grows and sells blueberries. Maine Wild Blueberry Company agreed to buy all of Herricks 1990 crop under a contract that left the price unliquidated. Herrick delivered the berries, but a dispute arose over the price. Maine Wild sent Herrick a check with a letter that stated the check was the final settlement. Herrick cashed the check but filed a suit in a Maine state court against Maine Wild, on the ground of breach of contract, alleging that the buyer owed more. The court awarded Herrick some, but not all, of the damages sought. Both parties appealedHerrick contended that it was owed more, and Maine Wild that it owed less.

DANA, Justice.
* * * *
* * * [A]n accord and satisfaction is created by cashing a check that is accompanied by a letter bearing restrictive language.
* * * *
Maine Wild considered the check to be the final payment. Herricks president admitted that he read the letter that included the language regarding final settlement but interpreted it as a statement made by Maine Wild not as a condition between them. He admits that he cashed the check, but that it did not occur to him that by cashing the check he was surrendering any claim under the contract.
* * * The language in the letter, however, was unambiguous. It represented final settlement, and there is no exchange of correspondence of such a nature as to create doubt as to what Maine Wild intended or should reasonably have been understood by Herrick. * * * The law gave [Herrick] the choice of accepting the check on [Maine Wilds] terms or of returning it.

DECISION AND REMEDY The Supreme Judicial Court held that the accord and satisfaction created by Herricks cashing the check barred any recovery. The court vacated (set aside, nullified) the lower courts award and remanded the case.
Full text of case

RELEASE A release bars any further recovery beyond the terms stated in the release. Assume that you are involved in an automobile accident caused by Donovans negligence. Donovan offers to give you $1,000 if you will release him from further liability resulting from the accident. You believe that this amount will cover your damages, so you agree to the release. Later you discover that it will cost $1,200 to repair your car. Can you collect the balance from Donovan? The answer is normally no; you are limited to the $1,000 specified in the release because the release represents a valid contract. You and Donovan both assented to the bargain (hence, agreement existed), and sufficient consideration was present. The consideration was the legal detriment you suffered (by releasing Donovan from liability, you forfeited your right to sue to recover damages, should they be more than $1,000).
Clearly, you are better off if you know the extent of your injuries or damages before signing a release. Releases will generally be binding if they are (1) given in good faith, (2) stated in a signed writing (which is required in many states), and (3) accompanied by consideration.(7) The following case illustrates how important it is to know the extent of injuries or damages before signing a release.

Case 14.3

Supreme Court of Washington, 1987.
108 Wash.2d 386, 739 P.2d 648.

BACKGROUND AND FACTS In August 1982, James Bennett was driving his automobile when it was struck from behind by a Shinoda Floral, Inc., truck driven by George Wasilche in the course of his employment. Following the collision, Bennett was told by his physician that he had incurred a lumbosacral and dorsal sprain, which would only temporarily disable him; eventually he would be able to return to his job. Aetna Casualty and Surety Company, Shinoda Florals insurance company, paid Bennetts medical expenses and lost wages until December 1982, at which time Aetna offered Bennett $5,000 to settle his claim, stating that this was all Aetna would pay. Bennett accepted the offer and signed a release of all claims of every nature and kind whatsoever . . . that are known and unknown, suspected and unsuspected. Later, Bennetts back condition worsened, and medical examinations revealed a herniated intravertebral disc in Bennetts lower backa much more serious condition than the sprain that was originally diagnosed. The examining physicians concluded that Bennett was permanently and totally disabled. Bennett brought an action for damages against Wasilche and Shinoda Floral, the defendants. The defendants asserted the release as a defense to liability, and the trial court granted their motion for summary judgment. The appellate court reversed the decision. The case was consolidated with a similar case, and the consolidated appeals were heard by the Supreme Court of Washington.

DURHAM, Justice.
* * * *
When a person signs a release of all claims and has no knowledge that he has any personal injury, * * * it is supportable to permit avoidance of the release once it is found that the release was not executed fairly and knowingly. * * * [I]n such a case the policy favoring just compensation of accident victims outweighs the policy favoring finality of private settlements. Because the plaintiff is unaware of any personal injury at the time he signs the release, it is unjust to hold him to the release where it is clear that he did not contemplate the possibility that an injury would arise in the future.
In contrast, when a person signs a release knowing that he has been injured, he assumes some risk that his condition may worsen. * * * By signing a release when he knows he is injured, a person is aware that there is a chance that he could be left insufficiently compensated if the prognosis changes. He knowingly takes a gamble in agreeing to a settlement. * * *
If we allowed a challenge to the validity of the releases in these cases, we would severely impair the policy favoring private settlements and promoting their finality. In every case where the known circumstances of the injury changed after settlement, the validity of the release would be open to question.
* * * The absence of finality would greatly reduce the incentive to settle personal injury claims, thus impeding timely compensation to injury victims and adding to the congestion crisis in our courts.

DECISION AND REMEDY The Supreme Court of Washington held that Bennett was bound by the release that he had signed. The trial courts decision was affirmed.

ETHICAL CONSIDERATIONS The law assumes that individuals will look after their own interests and, in the case of releases, will not sign away rights without first exploring the possible consequences of such actions. Ethical questions arise, however, when an insurance company pressures an individual to sign a release. Certainly, the injured party should be allowed to make such a decision freely after having first been given all relevant information about the true options available.
Full text of case

COVENANT NOT TO SUE A covenant not to sue, is an agreement to substitute a contractual obligation for some other type of legal action based on a valid claim. Unlike a release, the covenant not to sue does not always bar further recovery. Suppose (following the earlier example) that you agree with Donovan not to sue for damages in a tort action if he will pay for the damage to your car. If Donovan fails to pay, you can bring an action against him for breach of contract.

There are exceptions to the rule that only promises supported by consideration are enforceable. Circumstances in which promises will be enforced despite the lack of what one normally considers legal consideration are as follows:

1. Promises to pay debts barred by a statute of limitations.
2. Detrimental reliance, or promissory estoppel.
3. Charitable subscriptions.

PROMISES TO PAY DEBTS BARRED BY A STATUTE OF LIMITATIONS Statutes of limitations in all states require a creditor to sue within a specified period to recover a debt. If the creditor fails to sue in time, recovery of the debt is barred by the statute of limitations. A debtor who promises to pay a previous debt even though recovery is barred by the statute of limitations makes an enforceable promise. The promise needs no consideration. (Some states, however, require that it be in writing.) In effect, the promise extends the limitations period, and the creditor can sue to recover the entire debt, or at least the amount promised. The promise can be implied if the debtor acknowledges the barred debt by making a partial payment.

DETRIMENTAL RELIANCE, OR PROMISSORY ESTOPPEL As discussed in Chapter 13, under the doctrine of detrimental reliance (or promissory estoppel), a person who has reasonably and substantially relied on the promise of another may be able to obtain some measure of recovery. This doctrine is applied in a wide variety of contexts in which a promise is otherwise unenforceable, including that of a promise not supported by consideration. Under this doctrine, a court may enforce an otherwise unenforceable promise to avoid the injustice that would otherwise result. For the doctrine to be applied, the following elements are required:

1. There must be a clear and definite promise.
2. The promisee must justifiably rely on the promise.
3. The reliance normally must be of a substantial and
definite character.
4. Justice will be better served by enforcement of the

If these requirements are met, a promise may be enforced even though it is not supported by consideration. In essence, the promisor will be estopped (prevented) from asserting the lack of consideration as a defense. The estoppel arises from the promise, and hence promissory estoppel is the term used.
In the following case, a general contractor sought to recover damages under the doctrine of detrimental reliance from a subcontractor that reneged on its bid.

Case 14.4

United States District Court,
Middle District of Louisiana, 1995.
915 F.Supp. 818.

BACKGROUND AND FACTS The St. James Parish School Board invited bids on renovations to Lutcher High School in Lutcher, Louisiana. Before submitting a bid, Percy J. Matherne Contractor, Inc., asked Grinnell Fire Protection Systems Company what it would charge to install a system as part of the renovation. Grinnell responded with a bid of $79,500. Relying on this figure, Matherne bid on, and was awarded, the school contract. Later, Grinnell estimated that its cost could be three times as much as its bid and refused to perform. Matherne hired Superior Sprinkler Corporation to do the work for $192,985. Matherne then filed a suit against Grinnell to recover the difference between GrinnellÕs bid and the substitute contract price.

VANCE, District Judge.
* * * *
* * * [T]he bid submitted by Grinnell constituted a promise. Upon submission of the bid, Grinnell knew that if its bid were the lowest, Matherne would rely to its detriment on the bid by incorporating it into its bid for the prime contract.
* * *
* * * *
* * * [A] subcontractor who submits a bid offer to a general contractor, knowing that the general contractor is going to rely on its bid in submitting the general bid, is bound unless it is clearly shown that the subcontractors bid offer was not final.

DECISION AND REMEDY The court applied the doctrine of detrimental reliance to hold that Grinnell was bound by its bid. Matherne was entitled to the difference between that bid and the price charged by Superior.
Full text of case

CHARITABLE SUBSCRIPTIONS Subscriptions to religious, educational, and charitable institutions are promises to make gifts and are unenforceable on traditional contract grounds because they are not supported by legally sufficient consideration. A gift, after all, is the opposite of bargained-for consideration.
There have been cases in which it was held that a promise to give money to a charity was supported by consideration. For example, the promisor may have bargained for and received a promise from the charity that the gift would be used in a specific way or that it would be memorialized with the promisors name. The modern view, however, is to enforce these promises under the doctrine
of promissory estoppel or to find consideration simply as a matter of public policy.
The premise for enforcement is that a promise is made and an institution changes its position because of reliance on that promise. For example, suppose a church solicits and receives donative subscriptions to erect a new church building. On the basis of these pledges, the church purchases land, employs architects, and makes other contracts that change its position. Courts may enforce the pledges under promissory estoppel. Alternatively, they may find consideration in the fact that each promise was made in reliance on the other promises of support or that the trustees, by accepting the subscriptions, impliedly promised to complete the proposed undertaking. Such cases represent exceptions to the general rule that consideration must exist for a contract to be formed. These exceptions come about as a result of public policy.
Concept Summary 14.1

Accessing the Internet

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