U.S. Contract Law

Consideration

Overview

GiftCommercialExchange

No K Contract

Consideration Extremes

General Considerations . . .

about consideration:

Why have this doctrine? To allow court differentiate between contracts that

should be enforced and those that should not. Consideration is really concerned with the validity of

outstanding promises.

What is it? An element of an exchange that makes a contract

enforceable.

Two Main Theories

Benefit/Detriment Approach “An act or forbearance of one party, or the promise

thereof, is the price for which the promise of the other is bought, and the promise thus given for value is enforceable.”

See Hamer v. Sidway Bargain Approach

See Restatement 2nd §71 Promises must be bargained for NOTE: Both approaches call for some kind of detriment

and benefit. The difference is whether there must be inducement on both sides.

Elements of Consideration

Detriment – the promisee must be giving up something

Benefit – the promisor must be gaining something.

Bargained For – the parties must have agreed to the exchange

What is Detriment

Detriment is giving something of value or any relinquishment of a legal right. Could take the form of immediate act, or Forbearance, or Partial or complete abandonment of a right.

It could also be a PROMISE to act, forbear or abandon a right.

Detriment Example

Condi Hillary

Condi's flat

Payment of €2000or promise to pay

Condi's detriment

Hillary's detriment

Standard bilateral K, in which the promise by each party is exchanged forand induces the promise by the other.

Legal Right Example:Hamer

Uncle Nephew

Promise to give $5,000

Promise to quit smoking, etc.

Uncle's detriment

detriment?

How Does Benefit Fit In?

Usually, promisee's detriment translates easily into promisor's benefit.

But what about the Hamer case? How did the uncle benefit? Benefit here is defined broadly to mean “to get what

one bargained for”.

Bargained For Exchange

Under Bargain Approach: Promise or performance must be sought by the

promissory and given to the promisee in exchange for a promise or performance. These promises must induce each other! It means nothing if a party suffers a legal detriment unless

the parties agree that it is the price for the promise. Bargain simply means agreement.

Firm Offer/Options

A promise to keep an offer open for a stated period of time.

Consideration must be given in exchange for this promise to keep open. We will discuss consideration later.

An offeror is considered to be in breach if he revokes “firm offer.”

Option w/ Consideration Example

Offeror Offeree

Option (Prelim K)promise to keep offer open

$100

if exercised, will lead to

Offeror Offeror

Underlying Exchange(proposed K)

Farm

$2 million

Option w/out Consideration

There are two instances where an option K can be formed without consideration being given:

Court applies doctrine of Estoppel UCC §2-205

Merchant selling or buying goods offer placed in writing writing contains assurance the offer will be held

open signed by the parties

Estoppel Example

Seller writes to buyer offering to sell farm, stating that offer will be held open until Friday.

No consideration is given, thus not binding. Buyer, intending to accept offer by Friday,

quits his job in the city on Tuesday to devote his full attention to his new farm.

Wednesday, seller revokes Thursday, buyer disregards revocation and

tenders acceptance.

Estoppel Example

Buyer claims reliance on promise not to revoke offer until Friday caused him to quit his job.

If offer is not enforced, buyer claims he will suffer unfair detriment

A court may apply the doctrine of promissory estoppel (to be discussed in more detail later). Seller did promise to keep open the offer It's reasonable to expect that buyer would rely on this. Buyer did in fact rely, to his detriment. Whether buyer's reliance was justified is Q for court.

Consideration Problem Areas

Generally, consideration is not an issue. However, it does arise in a few instances that we call here “problem areas:”

Gifts Promissory Estoppel Pre-Existing Duty Accord and Satisfaction Modification Past/Moral Consideration

Gifts

General Rule - promise to make a gift is NOT enforceable If only it were so simple.

Common law generally does not enforce the promise of a gift because motivated by affection, gratitude or altruism nothing was given in exchange the gift maker should therefore be able to recant

without facing legal liability.

Promissory Estoppel

A promise coupled with detrimental reliance. Sometimes called a substitute for

consideration. Grew from the equitable remedy of estoppel.

Promissory Estoppel

The promisor's conductand intent (objective)

The promisee's reaction

The consequence: Detriment

Limits on relief

Promise does induce action or forbearanceReliance is justified

Injustice can be avoided only by enforcement

A promise+

A reasonable expectation by the promisor that it will induce reliance

Remedy may be limited as justice requires

Consideration?

Alaska Packers' Assnv.

Domenico

Pre-Existing Duty Rule

One does not suffer detriment by doing something or promising to do something that one is already obliged to do or by forbearing to do something that is already forbidden. Pre-existing duty could be legal or contractual.

§ 73. Performance Of Legal Duty Performance of a legal duty owed to a promisor which is

neither doubtful nor the subject of honest dispute is not consideration; but a similar performance is consideration if it differs from what was required by the duty in a way which reflects more than a pretense of bargain.

Pre-Existing Duty Example

Flat

$1500

$2000

Condi Hillary

Agreement 1

Agreement 2

Accord & Satisfaction

Process of completely discharging party from prior obligation:

Have the parties gone through a process of offer and acceptance (accord)?

Has the accord been carried out (satisfaction)?

Was the offer and acceptance supported by consideration?

Accord & Satisfaction Example

Don owes Robert $24,000 for past work. (outstanding promise).

Don Robert

Flat for 1 year

discharge of $24.000

bargained for new consideration

NOTE - An accord and satisfaction differs from a modification in that a modification immediately discharges a preexisting duty, whereas an accord and satisfaction does not discharge a preexisting duty until the agreed upon, alternate performance occurs.

Modification of On-Going Transaction

§89. Modification Of Executory Contract

A promise modifying a duty under a contract not fully performed on either side is binding (a) if the modification is fair and equitable in view of

circumstances not anticipated by the parties when the contract was made; or

(b) to the extent provided by statute; or (c) to the extent that justice requires enforcement in view of

material change of position in reliance on the promise.

A Different Result?

Manufacturer (M) contracts for sale of 100,000 of these @ $10/pc to lawnmower maker (LM).

Price of metal increase after M has already delivered¼ of the pieces to LM.

OBI agrees to buy 100,000mowers at fixed price from LM

M refuses to sell LMremaining pieces unlessLM agrees to pay $13/pc

Past/Moral Consideration

§ 86. Promise For Benefit Received

(1) A promise made in recognition of a benefit previously received by the promisor from the promisee is binding to the extent necessary to prevent injustice.

(2) A promise is not binding under Subsection (1) (a) if the promisee conferred the benefit as a gift or for

other reasons the promisor has not been unjustly enriched; or

(b) to the extent that its value is disproportionate to the benefit.

Mills v.

Wyman

Consideration?