Chapter 2
CONSIDERATION
I. INTRODUCTION
A. Definition of consideration: As a general rule, a contract will not be enforceable unless it is supported by "consideration." (The few exceptions are treated in "Promises binding without consideration" below.) A promise is supported by consideration if:
1. Detriment: The promisee gives up something of value, or circumscribes his liberty in some way (i.e., he suffers a "legal detriment"); and
2. Exchange: The promise is given as part of a "bargain"; that is, the promisor makes his promise in exchange for the promisee's giving of value or circumscription of liberty.
B. Uses of doctrine: The requirement of consideration renders unenforceable two main types of transactions:
1. Promises to make gifts (which do not satisfy the "bargain" element); and
2. Business situations in which one party has not really promised to do something or given anything up, even though he may appear to have done so (the "detriment" element is missing here).
A. Promises to make gifts: A promise to make a gift is generally unenforceable, because it lacks the "bargain" element of consideration.
Example: A says to B, his daughter, "When you turn 21 in four years, I will give you a car worth $10,000." The four years pass, A refuses to perform, and B sues for breach of contract. B will lose, because there was no consideration for A's promise. In particular, A's promise was not "bargained for."
1. Existence of condition: Even if the person promising to make a gift requires the promisee to meet certain conditions in order to receive the gift, there will still be no consideration (and the promise will thus be unenforceable) if the meeting of the conditions is not really "bargained for" by the promisor.
Example: A promises his widowed sister-in-law B a place to live "if you will come down and see me." In response, B travels to see A, thereby incurring expenses. Even though B has suffered a "detriment" (the expenses), the "bargain" element is lacking — A was not promising B a place to live because he wanted to see her, but was merely imposing a necessary pre-condition for her to get the gift. Therefore, his promise is unenforceable for lack of consideration. [Kirksey v. Kirksey]
a. Occurrence of condition is of benefit to promisor: But if the promisor imposes a condition, and the occurrence of this condition is of benefit to him, then the bargain element probably will be present. (Example: A promises his nephew B $5,000 if B will refrain from smoking, drinking and gambling until age 21. B so abstains. Here, A's promise was "bargained for" (and thus supported by consideration), because A was attempting to obtain something he regarded as desirable. [Hamer v. Sidway])
i. Altruistic pleasure not sufficient: But the fact that one who promises to make a gift expects to derive altruistic pleasure, or love and affection, from making the gift is not sufficient to constitute a "bargain."
2. Executed gifts: It is only the promise to make a gift, not the actual making of a gift, that is unenforceable for lack of consideration. Once the promisor makes the gift, he cannot rescind it for lack of consideration.
B. Sham and nominal consideration: Even though a deal looks on its face as if it is supported by consideration, the court may conclude that the purported consideration is sham or nominal, and is thus not consideration at all.
1. Nominal amount: Thus where the "consideration" that has been paid is so small as to be nominal, the court may conclude as a factual matter that there is no real "bargain" present at all. If so, the promise will not be enforced, due to lack of consideration. (Example: A says to B, his son, "In consideration for $1 paid and received, I promise to give you a car worth $10,000 four years from now." Even if the $1 is actually paid, the court will probably conclude that A did not "bargain" for the $1, and that there is thus no consideration; A's promise will therefore be unenforceable.)
a. "Adequacy" irrelevant: But if the consideration is big enough to suggest that there was a bargain, the fact that it is "inadequate" is irrelevant. (See infra.)
2. Payment not in fact made: If a non-trivial payment is recited, but the payment was not in fact made, most courts will take this as evidence that no bargain was present. Always, the question is whether there was in fact a bargain, and payment or non-payment is merely non-dispositive evidence of whether there was a bargain.
C. Promisee unaware: Generally, the promisee must be aware of the promise, for the act performed by him to be consideration for the promise. This means that if a reward is promised for a certain act, and the act is performed without the actor's being aware of the reward, he cannot recover.
D. "Past consideration" no good: If the promise is made in return for detriment previously suffered by the promisee, there is no bargain, and thus no consideration. Thus promises to pay a pre-existing debt, and promises to pay for services already received, usually lack the "bargain" element (but these may be binding even without consideration, as discussed below).
A. Generally: For consideration to be present, the promisee must suffer a "detriment." That is, he must do something he does not have to do, or refrain from doing something that he has a right to do. (Example: After P has already retired from working for D, D promises P a lifetime pension, for which P need not do anything. At common law, this promise would probably be unenforceable, because P has not suffered any detriment in return for it.)
1. Non-economic detriment: Even a non-economic detriment will suffice. (Example: If A promises B $5,000 in return for B's abstaining from alcohol and tobacco, B's refraining will be a "detriment" that will serve as consideration for A's promise. Thus A's promise will be enforceable.)
2. Adequacy not considered: The court will not inquire into the "adequacy" of the consideration. As long as the promisee suffers some detriment, no matter how small, the court will not find consideration lacking merely because what the promisee gave up was of much less value than what he received. (Example: D is desperate for funds during WWII, and promises to pay P $2,000 after the war in return for $25 now. Held, there is consideration for D's promise, so P may collect. Mere "inadequacy of consideration" is no defense. [Batsakis v. Demotsis])
a. Lack of bargain: But remember that extreme disparity in value between what the promisee gives up and receives may suggest that there is not in fact a "bargain," in which case there will be no consideration even though the detriment requirement is satisfied.
B. Pre-existing duty rule: If a party does or promises to do what he is already legally obligated to do, or if he forbears or promises to forbear from doing something which he is not legally entitled to do, he has not incurred a "detriment" for purposes of consideration. This is the pre-existing duty rule.
1. Modification: This general rule means that if parties to an existing contract agree to modify the contract for the sole benefit for one of them, the modification will usually be unenforceable at common law, for lack of consideration. Be on the lookout for this scenario especially in construction cases.
a. Restatement: The Second Restatement, and most modern courts, follow this general rule, but they make an exception where the modification is "fair and equitable in view of circumstances not anticipated by the parties when the contract was made."
2. Extra duties: Even under the traditional pre-existing duty rule, if the party who promises to do what he is already bound to do assumes the slightest additional duties (or even different duties), his undertaking of these new duties does constitute the required "detriment."
3. UCC: For contracts for the sale of goods, the UCC abolishes the pre-existing duty rule. Section 2-209(1) provides that "an agreement modifying a contract…needs no consideration to be binding." But there must be good faith, and any no-oral-modification clause must be complied with.
4. Agreement to accept part payment of debt: Some courts apply the pre-existing duty rule to render unenforceable a creditor's promise not to require payment by his debtor of the full debt. These courts also treat as unenforceable a creditor's promise to allow the debtor extra time to pay. These courts reason that the debtor already owes the money, and is therefore not promising to do something he was not already required to do. This is known as the rule of Foakes v. Beer.
a. Modern trend: But the modern trend is to abolish or limit the rule of Foakes v. Beer. For instance, the UCC, in §2-209(1), says that "an agreement modifying a contract within this article needs no consideration to be binding.…" This seems to overrule Foakes v. Beer, and to make a seller's promise to take partial payment in return for goods enforceable.
b. Disputed debt: Also, the rule of Foakes v. Beer applies only to debts where the parties are in agreement about amount and liability, called "liquidated" debts. If the debtor in good faith and reasonably disputes his liability, or the amount of that liability, then a settlement by which the creditor agrees to take less than he thinks is due is enforceable (even in courts following the traditional Foakes v. Beer rule).
c. Cashing of check tendered as settlement: Debtors sometimes send a check for less that the amount due, and mark it "in full settlement." If the creditor writes "In protest" on the check, but cashes it, courts are split about whether the cashing constitutes an acceptance by the creditor of the proposed settlement. Most courts say that the creditor has accepted a settlement, and cannot sue for the balance. A new UCC section (approved in 1990), §3-311, agrees that the cashing normally constitutes acceptance.
5. Other settlements: Settlements of other kinds of suits (e.g., tort suits) will generally be found to meet the consideration requirement. But if the plaintiff surrenders a claim which he knows is invalid, this will not be consideration, and the other party need not pay.
IV. ILLUSORY, ALTERNATIVE AND IMPLIED PROMISES
A. Illusory promises: An "illusory" promise is not supported by consideration, and is therefore not enforceable. An illusory promise is a statement which appears to be promising something, but which in fact does not commit the promisor to do anything at all.
Example: A says to B, "I'll sell you as many widgets, up to 1,000, at $4 as you choose to order in the next 4 weeks." B answers, "Fine, we've got a deal." B then gives A an order for 100 widgets, and A refuses to sell at the stated price because the market has gone up. B's promise is illusory, since he has not committed himself to do anything. Therefore, A's promise is not supported by consideration, and is not binding on him.
1. Right to terminate: If the contract allows one or both parties to terminate the agreement at his option, this right of termination might make the promise illusory and the contract therefore unenforceable.
a. Unfettered right: If the agreement allows one party to terminate simply by giving notice at any time, the traditional common law view is that the party with the termination right has not furnished consideration. But the modern trend is to hold that as long as the terminating party has the obligation to give notice (even if this obligation is an implied one), this duty of notice itself furnishes consideration.
B. Implied promises: Courts try to avoid striking down agreements for lack of consideration. One way they do this is by finding that the promisee has made an implied promise in return.
Example: D, a fashion designer, gives P the exclusive right to sell products made from D's designs. P promises to pay royalties on any product sold, but the agreement does not expressly require P to make sales. D violates the agreement by letting someone else sell her designs. P sues D, who defends on the grounds that P did not really promise to do anything, and that there is thus no consideration for D's promise of exclusivity. Held, for P — P can be impliedly found to have promised to use reasonable efforts to market D's designs, thus furnishing consideration for D's counter-promise. [Wood v. Lucy, Lady Duff Gordon].