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The Consideration C O N T R A C T S

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C O N T R A C T S

The Consideration

CONSIDERATION A. Definition of Enforceability B. Legal Detriment or Benefit C. Bargained-for Exchange D. Mutuality of Obligation E. Sufficiency and Adequacy of Consideration

F. Past and Moral Consideration

G. Preexisting Legal Duty A. Definition of Enforceability. One of the basic requirements for a

valid contract is legally sufficient consideration or a substitute for it (e.g., promissory estoppel).

1. Generally, if a promise is not supported by consideration, it is not enforceable.

a. Some promises are not enforceable. Purely social or gratuitous promises are not legally enforceable.

1) EXAMPLE: John said to June, "I promise to attend your party on Saturday night." Without more, John made a social or perhaps gratuitous promise, which is not enforceable.

2. Consideration is something of value given in a bargained-for exchange but only when the parties intend an exchange.

a. According to Section 11 of the Restatement (Second) of Contracts,

To constitute consideration, a performance or a return promise must be bargained for. A performance or return promise is bargained for if it is sought by the promisor in exchange for his promise and is given by the promise in exchange for that promise. The performance may consist of an act other than a promise, a forbearance, or the creation, modification, or destruction of a legal relation.

b. A simple illustration of consideration

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c. Thus, there are two basic elements of consideration:

1) Legal sufficiency (something of value)

a) A party's promise is supported by legally sufficient consideration when one of the following occurs:

i) The other party incurs a legal detriment.

ii) The promising party receives a legal benefit.

2) Bargained-for exchange

d. Both elements must be present to satisfy the requirement of consideration.

B. Legal Detriment or Benefit. There is legally sufficient

consideration to render a promise enforceable if the promisee incurs a legal detriment.

1. The promisee gives consideration when (s)he incurs a legal detriment in response to the promisor's promise.

a. To incur a legal detriment, the promisee must act in one of the following ways:

1) Do (or promise to do) something (s)he is not legally obligated to do

a) EXAMPLE: John said to Donna, "I'll pay you $50,000 to manage my apartment building." If Donna manages the building, she suffers a legal detriment by

performing an act she was not otherwise legally obligated to perform.

2) Refrain from doing (or promise to refrain from doing) something (s)he is legally privileged to do

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b. There must be a cause-and-effect relationship between the offeror's promise and the detriment. The promise must induce the detriment.

2. When a promisee suffers a legal detriment, the promisor gains a directly related legal benefit.

a. EXAMPLE: Ken drives negligently and injures Sue. Ken says to Sue, "I'll pay you $25,000 not to sue me." Sue accepts.

Sue gives up a legal right, suffers a legal detriment, and thereby gives Ken consideration that makes his promise enforceable by her.

b. In the example above, Ken receives a legal benefit: the right not to be sued by Sue.

c. The courts recognize an important distinction between legal and actual benefits and detriment.

1) When entering into a contract, most people expect an actual benefit. However, consideration requires only that the promisee incur a legal detriment.

a) EXAMPLE: Ed offered his cousin Sean $25,000 if Sean (who was 21 years old) would refrain from drinking alcohol until he was 25. Sean refrained from drinking alcohol until he was 25. Ed did not pay. Sean sued. The court may hold that Sean had the legal right to drink alcohol and that, by not exercising that right, he suffered a legal detriment, even though abstaining from alcohol consumption may be an actual benefit.

There was consideration for Ed's promise to pay

$25,000.

d. By defining consideration in terms of legal rather than actual benefits and detriments, the courts have

1) Generally left the issue of economic value (actual benefit) to the parties

2) Supplied a standard that can be applied to differing fact situations

3. Consideration must not be confused with motives for making a promise.

a. Love and affection may be admirable motives for making a promise, but they do not represent the act of bargaining.

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1) EXAMPLE: Judy writes to her daughter, "In consideration of our love and affection, I promise to send you

$100,000 on your twenty-fifth birthday." Judy has made a gratuitous promise. She has not bargained for

something in exchange for her promise.

C. Bargained-for Exchange

1. The Restatement (Second) of Contracts defines consideration as something bargained for and given in exchange for the promise.

a. EXAMPLE: Manuel said to Craig, "I'll pay you $2,000,000 to play football for my team." Craig suited up and played football. The prospect of Craig's playing football induced Manuel to promise him payment. Manuel's promise of payment induced Craig to play football for Manuel. These facts illustrate the reciprocal relationship required for

Craig's performance to constitute a bargained-for exchange (consideration) for Manuel's promise to pay. Because

Manuel received consideration for his promise, it is enforceable.

2. The legal detriment is incurred by a party in exchange for the promise or performance by the other.

a. EXAMPLE: Rick said to his daughter Karen, "I'm going to purchase a new yacht this week. I promise to give you my old yacht at that time." Rick sought nothing in return for his promise; there was no bargained-for exchange. Rick has promised to make a gift to Karen. Because Rick has not received consideration for his promise, it is unenforceable.

Rick's promise is gratuitous.

D. Mutuality of Obligation. The requirement of mutuality of

obligation arises in the bilateral contract situation. Because most contracts are bilateral, this discussion is particularly important.

1. Both parties to a contract must give consideration for a contract to be enforceable.

2. The doctrine of mutuality of obligation applies to bilateral contracts only.

3. In a bilateral contract, each promise acts as the consideration for the other.

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a. The parties must be mutually obligated to perform their respective promises.

1) Otherwise, the agreement will lack consideration and will not be a valid contract.

b. Thus, the foundational requirement that a bilateral contract be supported by consideration is sometimes formulated as a requirement for mutuality of obligation.

c. Unless consideration is legally sufficient, there will be no mutuality of obligation.

4. Analysis of consideration in a bilateral contract is illustrated by the following modified version of the diagram that appeared at the beginning of this chapter:

E. Sufficiency and Adequacy of Consideration. Consideration must be legally sufficient. Under most circumstances, its

adequacy is irrelevant.

1. Courts tend to treat "sufficient consideration" and

"consideration" as synonymous terms.

2. Sufficiency of consideration should not be confused with adequacy of consideration.

a. Courts have repeatedly emphasized that they will not inquire into the equality of the consideration exchanged between the parties to a contract.

1) EXAMPLE: Dean agrees to sell to Tina a piano worth

$100,000 in exchange for Tina's promise to pay $50,000.

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The contract is supported by sufficient consideration by both parties. Without more, e.g., evidence of fraud, a court will not inquire into the inequality of the

consideration.

3. In theory, the adequacy of consideration is irrelevant. However, driving too hard a bargain may not be prudent business.

a. A bargain that is too good may be voidable on grounds such as fraud, mistake, or unconscionability.

4. Whether a promise constitutes consideration also depends on its content.

a. A promise may be illusory because its literal terms impose no obligation on the promisor.

1) EXAMPLE: Tex promises to sell to Benny, and Benny promises to buy from Tex, as many barrels of oil as Benny might decide to order from Tex at $28 a barrel.

Lack of consideration prevents formation of a contract.

Benny may buy no oil. His promise is illusory. The

agreement lacks the mutuality of obligation required for a bilateral contract. Benny, by his promise, incurs no legal detriment and confers no legal benefit. The rule is that both parties must be bound or neither is bound.

b. In contrast, if Benny had promised to buy as many barrels as he would need in his business, the promise would not be illusory. Such an arrangement is called a requirements contract.

1) Benny's business needs provide an objective standard for determining some minimum amount of purchase.

a) Requirements contracts are useful. The amount to be purchased does not depend solely on the whim of a party to the contract. However, if a promisor has an unrestricted right to cancel an agreement, the promise is illusory.

5. Generally, any legal detriment, no matter how economically inadequate, may constitute consideration. However, gross inadequacy of consideration may be evidence that only a gift was intended.

a. EXAMPLE: Niece persuades Uncle to pay her $100,000 for

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$10 worth of foreign coins. The gross disparity between the economic value of what Niece gave ($10) and what she received ($100,000) is evidence that Uncle intended a gift of $99,990.

1) When an agreement states that a promise was made "in consideration of $1," even though the $1 was neither bargained for by the promisor nor paid by the promisee, courts view the consideration as a sham and generally do not accept it as either adequate or sufficient

consideration. Likewise, when the consideration is merely token (nominal) consideration, e.g., something almost devoid of value, it will generally not be sufficient.

The primary difference between sham consideration and token or nominal consideration is that sham

consideration is never actually paid.

F. Past and Moral Consideration. Under the bargain theory, past consideration and moral consideration are not valid forms of consideration.

1. Consideration is something given in exchange for a promise. It is something given to induce the promise. Anything that occurs prior to a promise cannot constitute consideration.

a. EXAMPLE: A father said to his daughter, "Because you graduated with honors, I promise to pay you $10,000 at the end of next month." The father had a motive for his

promise. But graduation occurred before the promise was made. Graduation with honors was not something

bargained for, or induced by, the father's promise. The promise was one to make a gift.

2. Likewise, promises made out of a sense of honor or moral obligation are not legally enforceable if they lack the bargain element.

a. EXAMPLE: A heavy object falls from a shelf. Jane pushes Sam out of its path, but it strikes and injures her. Sam promises to pay her $500 a month for life. There is no consideration. Sam might have committed himself morally, but he is under no contractual obligation.

G. Preexisting Legal Duty. At common law, performing or

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promising to perform an act that one was already obligated to perform is not consideration for another party's promise.

1. The rule is still followed in many jurisdictions and is known as the preexisting duty rule. Consideration does not exist if

a. An existing duty was imposed by statute or by the common law.

b. A person is already under a contractual obligation to render a specified performance but demands more or insists on doing less than originally promised.

1) EXAMPLE: Lee stole Bob's yacht. Snap, the county sheriff, witnessed the theft. Bob told Snap, "I'll pay you

$100 to arrest Lee." Snap arrests Lee. Bob's promise is not legally enforceable because Snap already had a duty to arrest Lee. In making the arrest, Snap suffered no new legal detriment and conferred no new legal benefit on Bob.

2. A basis for the preexisting duty rule is that enforcement of the second promise would encourage coercion.

a. EXAMPLE: Bubba Cain, a contractor, tells Jill, a homeowner, that, unless she pays him an extra $500, he will leave her roof half-repaired. Cain has a preexisting duty to repair the entire roof.

b. Some courts recognize an exception to the preexisting duty rule.

1) EXAMPLE: Cain agrees to build a barn for Jimmy. A flood destroys the half-constructed barn. Cain demands more money to start again and build the barn. Jimmy agrees to pay the additional sum. A court may find that Jimmy's subsequent promise to pay the contractor is binding, even though the contractor has not agreed to do anything more than was called for by the original contract. Coercion is less of a concern under these circumstances than under those in the previous example.

c. The Restatement (Second) of Contracts adopts a similar position. Section 89 provides that the parties may modify an executory contract (a contract in which some

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performance is incomplete) if the modification is fair and equitable in light of surrounding facts that were not

anticipated by either party when the contract was entered into.

3. The preexisting duty issue often arises in the context of debtor- creditor relations. Parties frequently attempt to settle disputed and undisputed debts.

a. A liquidated debt exists when there is no dispute about its existence or amount.

1) If the debtor made an express promise to pay a specific sum of money, the debt is liquidated. Moreover, if the obligation can, by computation, be reduced to a fixed amount of money, the debt is liquidated.

a) EXAMPLE: Scott agrees to repair Terry's tractor for

$500. Scott makes the repairs and sends Terry a bill for $500. Terry's debt is liquidated.

b. Part payment of a liquidated debt is not consideration for a promise by the creditor to accept the part payment as payment in full.

1) EXAMPLE: Terry insists that $500 is just too high a price for the work performed by Scott. Scott agrees to accept

$250 as payment in full but later sues Terry for the additional $250 owed under the original contract. Scott may prevail because his promise is not supported by consideration. Scott and Terry's original agreement for

$500 gave rise to a liquidated debt. Terry has a

preexisting duty to pay the full $500. Terry will suffer no new legal detriment for Scott's promise to accept $250.

Scott will receive no new legal benefit by accepting the

$250 in lieu of the $500.

2) The part payment rule has long been criticized as

tending to defeat the legitimate expectations of debtors who bargain in good faith with creditors to reduce an unwarranted price.

3) Accordingly, courts are quick to find consideration if the debtor has done anything at all, in connection with the payment of the reduced debt, that might constitute new

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or additional consideration.

a) EXAMPLE: Terry agrees not to declare bankruptcy in exchange for Scott's promise to accept $250 in full satisfaction of the debt. Scott's promise is enforceable.

This new agreement is called an "accord and

satisfaction" of Scott's original claim against Terry. The new agreement is the accord, and its performance is the satisfaction. Terry will suffer a legal detriment by forgoing the opportunity to file for bankruptcy, and Scott will receive the legal benefit of Terry's agreeing not to file for bankruptcy. A court may find that there is sufficient consideration to render the modification enforceable.

c. In contrast, an unliquidated debt is an obligation that is contested as to either its existence or its amount.

1) The part payment rule does not apply if the debt is unliquidated. A claim is unliquidated when there is an honest dispute about the existence of a debt or its amount.

a) EXAMPLE: Scott repairs Terry's tractor, saying nothing about price. Scott sends Terry a bill for $1,000. Terry protests the amount, but not the existence, of a debt.

Terry offers Scott $500 as payment in full. Scott

accepts but later sues Terry for the remaining $500. In the absence of an agreement on price, Scott is

entitled to reasonable compensation for his services.

Terry and Scott reach an accord (an agreement on a price that replaces the reasonable price that a court would have imposed). Each gives up his right to have a court decide what is reasonable and thereby

provides consideration for the other's promise. Terry's actual payment of the $500 is a satisfaction of the accord.

1) The result would have been the same if (with no prior agreement on price) Terry had sent Scott a check for $500 marked "payment in full for tractor repair," and Scott had cashed the check. The

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creditor's act of cashing the check is generally considered acceptance of the debtor's compromise offer, and the debt will be considered discharged.

There is an accord even if Scott crosses out the notation before cashing the check and later sues Terry for the additional $500. [In the case of a liquidated claim, the effect of accepting such a check may not prevent the creditor from seeking the additional amount due. Thus, under the UCC,

accepting a check generally operates to discharge the debt only to the extent of the amount of the check (on condition the check is honored)]. Most courts have held that a creditor may cash a check marked "payment in full" and later seek the balance still owed, by writing the words "under protest" or

"without prejudice" on the check.

4. But if parties bargain and one party agrees to relinquish a legal right, relinquishment of that right is adequate consideration to support a contract.

a. EXAMPLE: Insurance Company promises to pay an agreed- upon settlement amount. In return, claimant agrees not to sue for an alleged injury.

SUBSTITUTES FOR CONSIDERATION

A. Enforceable without Consideration

B. Promissory Estoppel C. Quasi-Contract D. Public Policy

E. Contracts under Seal A. Enforceable without Consideration. The vast majority of all

contracts are supported by bargained-for consideration. However, on rare occasions, an agreement will lack consideration and yet be enforceable on the basis of promissory estoppel, quasi-contract, or public policy, or as a contract under seal.

B. Promissory Estoppel. Promissory estoppel is an alternative to consideration but is used only to avoid injustice.

1. Promissory estoppel always involves a gratuitous promise.

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a. The promisor does not expect the promisee to accept an offer by performing an act or making a return promise.

1) The bargain element is lacking because no bargain is intended.

b. EXAMPLE: Mary pledges to donate $10 million to the

University of Florida. The University begins construction of a new building. Mary retracts her pledge. The pledge may be enforceable under the doctrine of promissory estoppel.

Mary's promise was gratuitous. The doctrine would be invoked as an alternative to bargained-for consideration.

2. Section 90 of the Restatement (Second) of Contracts sets forth three requirements for the doctrine of promissory estoppel:

a. A promise that the promisor should reasonably expect to induce action or forbearance by the promisee

b. Action or forbearance by the promisee that is induced by the promise

1) Charitable subscriptions and marriage settlements may be enforced under the doctrine of promissary estoppel without proof that the promise induced action or

forbearance.

c. Enforcement of the promise as the only means of avoiding injustice

3. A prerequisite for applying promissory estoppel is the lack of bargained-for consideration.

a. EXAMPLE: Scott, a general contractor, plans to submit a bid to construct a school. He must first obtain quotes from subcontractors. John submits to Scott a quote of $30,000 for the plumbing work. Scott relies on John's quote in submitting his own offer. Scott is obligated to build the school for the amount he bid. Before Scott can accept John's offer, but after submission of Scott's bid, John raises his quoted price. John has no obligation to Scott under classic contract rules. Under the doctrine of promissory estoppel, however, Scott can enforce John's original promise. Scott's action should be expected because, as John must know, general contractors rely on

subcontractors' bids. Scott relied to his detriment by

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committing to a contract based on John's original price.

John, who should have reasonably expected that his promise would induce the general contractor's action, is said to be estopped from denying the existence of a contract.

C. Quasi-Contract. A quasi-contract imposes an obligation to prevent unjust enrichment.

1. The parties to a quasi-contract make no promises and reach no agreement.

a. However, one of the parties is substantially benefited at the expense of the other party.

1) EXAMPLE: Alan contracts to paint Craig's house. Alan mistakenly paints the house next door, which belongs to Sharon. Sharon observes Alan painting her house but voices no objection. To prevent unjust enrichment of Sharon, equity will require her to pay Alan the

reasonable value of his services.

b. Refer to Chapter 8.

D. Public Policy. Sometimes, courts cite public policy to support enforcement of a promise despite lack of bargained-for

consideration, promissory estoppel, or a quasi-contract.

1. Debts barred by the statute of limitations. When a debtor promises to pay a debt, even when collection is barred by the statute of limitations, courts hold the promise to pay

enforceable without consideration.

a. The rationale is that, when the debtor acknowledges the debt and promises to pay it, public policy favors upholding the promise notwithstanding the lack of bargained-for consideration.

b. An enforceable promise to pay an entire debt is inferred from any partial payment accompanied by an

acknowledgment of the larger debt.

c. If the debtor does not make a partial payment, the mere promise to pay must generally be in writing and signed by the debtor to be enforceable.

2. Debts barred by a bankruptcy proceeding. The Federal Bankruptcy Act of 1978 as amended governs the rights of

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debtors and creditors. Refer to Chapter 20, Bankruptcy.

a. Promises made by a debtor to a creditor during bankruptcy proceedings but prior to discharge may be enforceable without consideration.

1) However, the bankruptcy court must hold a hearing and explain that the debtor need not promise to repay the debt.

E. Contracts under Seal. At common law, a seal is a substitute for consideration.

1. A sealed promise (contract) is enforceable merely because it is sealed.

2. For a promise to be sealed, the parties to the agreement, by all appearances, must have intended it to be a sealed instrument.

3. The other requirements of a sealed promise are a. A writing

b. The seal c. Delivery

4. Statutes of many states have abolished any distinction between sealed and unsealed contracts.

5. The first seals were made by a signet ring in hot wax.

Eventually, any impression on the paper was considered a seal.

Modern trends permit the word "seal" or the letters "L.S."

(locus sigilli) to constitute a valid seal. Many attorneys incorporate a recital of a common phrase to substitute for a seal; e.g., "In witness whereof I have hereunto set my hand and seal."

F. Statutes. A statute may provide that certain gratuitous promises may be unenforceable.

1. Examples under the UCC include modification of a control for the sale of goods, a written waiver of renunciation of rights arising from a breach of contract, and an irrevocable offer to buy or sell goods.

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