U.S. Contract Law

Consideration

Overview

GiftCommercialExchange

No KContract

Consideration Extremes

Gift Now that she is out of a job in Washington, Condi tells her replacement Hillary: don't go looking for a place to live, just live in my apartment. Hillary thinks this is a good idea and accepts. This is a generous gift but not a contract as Hillary has given Condi nothing in return.

Commercial Exchange still a bit miffed that Hillary criticized the Bush foreign policy during the 2008 campaign, Condi offers Hillary use of her flat for $2000/month, payable up front. Hillary agrees to pay. This is a K as the flat was clearly rented for a fee. Both parties are exchanging something of value.

Consideration questions of consideration fall somewhere in between these two extreme examples. For instance, Condi says to Hillary, if you allow me to still take part in the annual State Department Christmas party, I'll let you stay in my flat for free for a year. This fits somewhere in between the prior examples.

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.

Some History: This doctrine derives from three very old common law writsWrit of Covenant available to enforce contracts made under seal.Served a similar role as the notary serves in civil law countries.

The ceremony of dripping wax and placing a seal on something was evidence of intent of parties to bind one another.Evidence that the court could use to determine that the contract should be enforeced.

Today in many states something made under seal can be a substitution for consideration.

Action of Debt used to enforce promises not made under seal to pay a certain amount of money.Classic case concerned instance where one party had already performed and now the party who was enriched refused to abide be his promise to pay for the performance.

Today the doctrine of unjust enrichment can be used to enforce instances where:Benefits are conferred by mistake

Aid is rendered in an emergency

Necessities of life are supplied

Work is performed under an unenforceable contract

Writ of Assumpsit allowed recovery for injury suffered in a consensual undertaking.However, the court would only enforce an agreement if it could be shown the each party suffered some kind of detriment.Since the 16th Century, mutual promises have been deemed sufficient detriment.

Two Main Theories

Benefit/Detriment ApproachAn 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 ApproachSee Restatement 2nd 71Promises 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

Detriment:Condi gave up use of her apartment

Hillary gave up $2,000/month

BenefitCondi gets cash

Hillary gets an apartment

Bargained Forthe parties gave something to one another in valid exchange. There were no favors or gifts here. Each party gave something in return for getting something of value from the other.

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.

To be a promise, the undertaking must be a genuine commitment.

Condi hands over the keys as Hillary pays up front a years worth of rent. OR

Condi promises to hand over keys at date lease takes effect in return for Hillary's promise to pay $2,000 each month on a date determined by the parties.

Detriment Example

CondiHillaryCondi'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.

Both the apartment and money have economic value

They are each giving up something and they are each benefiting

They gave up something in RETURN for something.

Legal Right Example:Hamer

UncleNephewPromise to give $5,000

Promise to quit smoking, etc.

Uncle's detriment

detriment?

Hamer v. Sidway can best be understood as a money/legal right exchange.Uncles gave money

Nephew gave up legal right.

BUT would it be decided differently under the Bargain Approach?YES facts seem to indicate that there was only inducement on one side.Uncle induced nephew to give up legal right with cash.

But facts to not indicate that nephew in any way induced uncle to give cash return for giving up legal right.

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.

Restatement 2nd says: a gain or advantage to the promisor is not a requirement for consideration.Looking at Don's motive may help.

we need only ask whether Don intended his promise $100 to induce Robert to quit.Was it given in exchange for Robert giving up a legal right?

EXAMPLE: mother says to one of her sons in consideration of the fact that you are not as wealthy as you brothers, I promise to pay you $50,000 within 30 days.This promise is not enforceable:mother has neither requested nor induced anything in exchange

it's basically a gift.

thus, motive alone is not consideration

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.

In most commercial transactions and the examples we had so far, the bargain for exchange was obvious. But what about?

Condi says to Hillary, if you walk over to my apartment right now, I'll let you stay in it rent-free.

What's the detriment?This is really pushing the envelope.

Did Condi really make this promise to induce Hillary to walk across the street.

Or was this a gift to Hillary?THESE ARE CLOSE CALLS!

Hillary didn't have to walk over to Condi's, so arguably walking there is detriment.But do the parties really see this as the price for free rent?

Or is this really a gift, and walking there is a condition of of the gift?

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

Modification

Past/Moral Consideration

Gifts

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

Common law generally does not enforce the promise of a gift becausemotivated by affection, gratitude or altruism

nothing was given in exchange

the gift maker should therefore be able to recant without facing legal liability.

Gratuitous Promises Not Relied UponPromise to make a gift

Generally unenforceable for lack of consideration

Exceptions (in some states)in writing = nominal consideration

under seal (must be more than just writing)

In UK deed signed, witnessed and delivered

EXAMPLEOn Sunday morning I turn on the TV and I am captivated by what a televangist is saying.

I immediately call into the show the pledge to give a gift $50,000

The next day I happen to tell my wife about this little pledge and she goes crazy, explaining that we would have no money left and we would have to sell our house just to cover the pledge.

If the televangist could enforce the pledge, he would be on the same footing as my other creditors who have given me something of value in return for my promise to pay. That cannot be so.

Consideration doctrine ensures that the creditors (who gave me something of value) can hold me to my promise before the televanglist (who didn't give me anything of value or suffer any detriment) could attempt to do.

Promissory Estoppel

A promise coupled with detrimental reliance.

Sometimes called a substitute for consideration.

Grew from the equitable remedy of estoppel.

EXAMPLE:Uncle Rich says to niece Penny Less if you enroll in college, I will pay your first year tuition.

Relying on the promise, Penny enrolls.

Enforceable K?detriment? bargain for exchange?

Gift?

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 justifiedInjustice can be avoided only by enforcementA promise+A reasonable expectation by the promisor that it will induce relianceRemedy may be limited as justice requires

UNCLE RICH EXAMPLELet's say court finds consideration lacking (i.e. Penny had no detriment).

Penny would then try to claim Promissory Estoppel.

Apply the principle.

Remedyif one year tuition was $5,000, a court could limit damages to $5,000 not $20,000.

Half Truths?

ALLEGHENY COLLEGEv.NATIONAL CHAUTAUQUA COUNTY BANK OF JAMESTOWN

Why study a case that is over 80 years old?This case illustrates how judges shape and mold precedent.Here the commonly held rule was gifts are not enforceable.

Cordozo, like he did in so many other instances, reshapes the rule.NOTE today it is commonly held that gifts of this sort are enforceable without resorting to discussions of promissory estoppel or even consideration!

This case also shows why promissory estoppel was developed.In this instance, it did act as the classic replacement for consideration.

Truths and Half-TruthsTruth Holmes bargain theory is what Cardozo thinks is the purist theory of consideration (a bargained for exchange!)

Half-Truth The benefit theory is New York's half truth.

NOTE by the middle of the second page, he has called into question whether there is really a firm theory of consideration.Even more so by telling us that promissory estoppel serves as consideration in many instances.

What does Cardozo achieveHe first shows that consideration doctrine is not rigid, but instead flexible.

He then aims to use the benefit theory for this gift and fit it within consideration theory.

Modern Approach Post-Allegheny

90. Promise Reasonably Inducing Action Or Forbearance

(1) A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise. The remedy granted for breach may be limited as justice requires.

(2) A charitable subscription or a marriage settlement is binding under Subsection (1) without proof that the promise induced action or forbearance.

NOTE Section (1) sets forth promissory estoppel as a substitute for consideration. (2) expressly makes gifts like the one in Allegheny County enforceable.NOTE FURTHER this is NOT a binding rule!

EXAMPLES:A promises B $5000, knowing that B desires money in order to buy a piece of land. Induced by this promise, B secures without any payment an option to buy the parcel of land from S (seller).

A then tells B that he withdraws his promise.

Binding Promise?NO A's promise is not binding.

Where is the reliance to his detriment. He only has an option to buy. He can simply not exercise the option. Nothing lost.

CHAGE THE FACTS: B enters into a purchase agreement for the land and signs a promissory note.Now if A withdraws his promise, B can be left on the hook for $5,000 leaving him in a position where he may have to default on the note and get sued.

A orally promises to give her son B a house to live in. As A intended, B breaks the lease for his apartment in anticipation of moving into the house, then takes possession of the house, lives there for a year and makes substantial improvements. Can A break this promise and get the house back?

Consideration?NONE on B's side.

HOWEVER under estoppel, A's promise is binding.

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 DutyPerformance 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.

Thus, performance or promise to perform pre-existing duty is not consideration.

Pre-Existing Duty Example

Flat$1500$2000CondiHillary

Agreement 1

Agreement 2

1st agreementCondi offers flat to Hillary for $1,500. She agrees.

2nd AgreementBefore handing over the keys, Condi realizes that she is getting too little in rent from Hillary, so she demands that the contract be changed and Hillary pay $2,000. Hillary agrees.

2nd agreement is not enforceable because Condi didn't give any new form of consideration. Condi was already obligated to rent the flat to Hillary under first agreement.

NEW FACTSLet's say she said If you instead pay $2,000, I'll pay for your weekly cleaning service. This new K is enforceable because Condi gave new consideration.Both parties suffered new detriment

Condi has to pay cleaning service

Hillary has to pay more for rent.

NEW EXAMPLEA offers a reward to whoever produces evidence leading to the arrest and conviction of the murderer of B. C produces such evidence in the performance of his duty as a police officer.

CONSIDERATION? N0, C's performance is not consideration for A's promise.

In the above example, C's duties as a police officer are limited to crimes committed in a particular State, and while on vacation he gathers evidence as to a crime committed elsewhere. C's performance is consideration for the promise.

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.

An exception to 73 can be found when the parties have already begun performance and then wish to make a modification to the contract.

EXAMPLES:By a written contract A agrees to dig a cellar for B for a stated price. Solid rock is unexpectedly encountered and A so notifies B.

A and B then orally agree that A will remove the rock at a unit price which is reasonable but nine times that used in computing the original price, and A completes the job.

QUESTION is new consideration necessary for this new contract?B is bound to pay the increased amount. The parties mutually agreed to modify the contract, and the modification was fair and equitable under the circumstances.

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 delivered 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

A contracts to manufacture and sell to LM 100,000 metal blades for riding mowers at $10 each. After partial delivery and after LM has contracted to sell a substantial number of lawn mowers at a fixed price, M notifies LM that increased metal costs require that the price be increased to $13. Substitute blades are available at $10.50 cents, but only after several months delay. LM protests but is forced to agree to the new price to keep its plant in operation and complete the sale to OBI.

Is the new agreement binding?The modification is not binding. WHY?

Does justice and fairness call for this modification? Or is one party being unjustly enriched at the expense of another?

Can you distinguish this case from the prior one?

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.

Promises made with respect to events that have already taken place are unenforceable.Lack inducement/bargained for exchange

Sometimes called prior detriment.

EXAMPLE: Mother says to her son, in consideration for the fact that you named your first child after me, I am giving you $50,000.Not enforceable. No inducement. No unjust enrichment.

Remember, the general rule is exchange = each party's detriment must induce and be induced by the other's.Thus, if promisee suffered detriment before promise was made, it cannot be said that the detriment was done in exchange of a promise.

NOTE prior detriment is often called past consideration which is confusing because it is not consideration.

EXAMPLEPresident Obama says to former President Bush, Because you were a fine President and because you are a patriot, I am going to let you stay at Camp David whenever you want.

Enforceable?

Mills v. Wyman

Consideration?

Different Results?

Compare Harrington v. Taylor and Webb v. McGowin.Aren't these facts basically the same? If so, don't these decision conflict?

Exceptions

Promise to correct mistakesExample - A is employed by B to repair a vacant house. By mistake A repairs the house next door, which belongs to C. The subsequent promise by C to pay A the value of the repairs is binding.

Promise to pay for past emergency services or necessaries.Webb v. McGowin is classic example.

Mistakes

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