Consideration

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Consideration is the concept of value offered and accepted by people or organisations entering into contracts. Anything of value promised by one party to the other when making a contract can be treated as "consideration": for example, if A signs a contract to buy a car from B for $5,000, A's consideration is the $5,000, and B's consideration is the car.

Additionally, if A signs a contract with B such that A will paint B's house for $500, A's consideration is the service of painting B's house, and B's consideration is $500 paid to A. Further, if A signs a contract with B such that A will not repaint his own house in any other color than white, and B will pay A $500 per year to keep this deal up, there is also consideration. Although A did not promise to affirmatively do anything, A did promise not to do something that he was allowed to do, and so A did pass consideration. A's consideration to B is the forbearance in painting his own house in a color other than white, and B's consideration to A is $500 per year. Conversely, if A signs a contract to buy a car from B for $0, B's consideration is still the car, but A is giving no consideration, and so there is no valid contract. However, if B still gives the title to the car to A, then B cannot take the car back, since, while it may not be a valid contract, it is a valid gift.

In common law it is a prerequisite that both parties offer consideration before a contract can be thought of as binding. The doctrine of consideration is irrelevant in many jurisdictions, although contemporary commercial litigant relations have held the relationship between a promise and a deed is a reflection of the nature of contractual considerations. If there is no element of consideration found, there is thus no contract formed.

However, even if a court decides there is no contract, there might be a possible recovery under the doctrines of quantum meruit (sometimes referred to as a quasi-contract) or promissory estoppel.

Legal rules regarding consideration

There are a number of common issues as to whether consideration exists in a contract:

1. Consideration must move from the promisee but need not flow to the promisor
2. Consideration must be sufficient but need not be adequate
3. Consideration cannot be illusory
4. Consideration must not be past. Past consideration is not good consideration
5. Moral consideration is not sufficient
6. Performance of existing duties is not good consideration
7. Part payment is not good consideration

History and comparative law

Systems based on Roman law (including Germany ^[1] and Scotland) do not require consideration, and some commentators consider it unnecessary and have suggested that the doctrine of consideration should be abandoned, and estoppel used to replace it as a basis for contracts.^[2] However, legislation, rather than judicial development, has been touted as the only way to remove this entrenched common law doctrine. Lord Justice Denning famously stated that "The doctrine of consideration is too firmly fixed to be overthrown by a side-wind".^[3]

The reason that both exist in common law jurisdictions is thought by leading scholars to be the result of the combining by 19th century judges of two distinct threads: first the consideration requirement was at the heart of the action of assumpsit, which had grown up in medieval times and remained the normal action for breach of a simple contract in England and Wales until 1884, when the old forms of action were abolished; secondly, the notion of agreement between two or more parties as being the essential legal and moral foundation of contract in all legal systems, was promoted by the 18th century French writer Pothier in his Traite des Obligations, much read (especially after translation into English in 1805) by English judges and jurists. The latter chimed well with the fashionable will theories of the time, especially John Stuart Mill's influential ideas on free will, and got grafted on to the traditional common law requirement for consideration to ground an action in assumpsit.^[4]

Civil law systems take the approach that an exchange of promises, or a concurrence of wills alone, rather than an exchange in valuable rights is the correct basis. So if A promises to give B a book, and B accepts the offer without giving anything in return, B would have a legal right to the book and A could not change her mind about giving it to B as a gift. However, in common law systems the concept of culpa in contrahendo, a form of estoppel, is increasingly used to create obligations during pre-contractual negotiations.^[5] Estoppel is an equitable doctrine that provides for the creation of legal obligations if a party has given another an assurance and the other has relied on the assurance to his detriment.

Monetary value of consideration

Generally, courts do not inquire whether the deal between two parties was monetarily fair—merely that each party passed some legal obligation or duty to the other party.^[6] The dispositive issue is presence of consideration, not adequacy of the consideration. The values between consideration passed by each party to a contract need not be comparable.

For instance, if A offers B $200 to buy B's mansion, luxury sports car, and private jet, there is still consideration on both sides. A's consideration is $200, and B's consideration is the mansion, car, and jet. Courts in the United States generally leave parties to their own contracts, and do not intervene. The old English rule of consideration questioned whether a party gave the value of a peppercorn to the other party. As a result, contracts in the United States have sometimes have had one party pass nominal amounts of consideration, typically citing $1. Thus, licensing contracts that do not involve any money at all often cite as consideration, "for the sum of $1 and other good and valuable consideration."

However, some courts in the United States may take issue with nominal consideration, or consideration with virtually no value. Some courts have since thought this was a sham. Since contract disputes are typically resolved in state court, some state courts have found that merely providing $1 to another is not a sufficiently legal duty, and therefore no legal consideration passes in these kinds of deals, and consequently, no contract is formed. However, this is a minority position. Supreme Court of Texas (1464-EIGHT, LTD. & MILLIS MANAGEMENT CORP, v. GAIL ANN JOPPICH See section III)

Pre-existing legal duties

A party that already has a legal duty to provide money, an object, a service, or a forbearance, does not provide consideration when promising merely to uphold that duty.^[7][8] That legal duty can arise from law, or obligation under a previous contract.

The prime example of this sub-issue is where an uncle gives his seven-year-old nephew (a resident of the US) the following offer: "if you do not smoke cigarettes or marijuana until your 18th birthday, then I will pay you $500". On the nephew's 18th birthday, he tells the uncle to pay up, and the uncle says no. In the subsequent lawsuit, the uncle wins, because the nephew, by U.S. criminal law, already had a duty to refrain from smoking cigarettes while under 18, or marijuana at any age.

The same applies if the consideration is a performance for which the parties had previously contracted. For example, A agrees to paint B's house for $500, but halfway through the job A tells B that he will not finish unless B increases the payment to $750. If B agrees, and A then finishes the job, B still only needs to pay A the $500 originally agreed to, because A was already contractually obligated to paint the house for that amount.

An exception to this rule holds for settlements, such as an accord and satisfaction. If a creditor has a credit against a debtor for $10,000, and offers to settle it for $5,000, it is still binding, if accepted, even though the debtor had a legal duty to repay the entire $10,000.

Pre-existing duties relating to at-will employment depend largely on state law. Generally, at-will employment allows the employer to terminate the employee for good or even no reason, and allows the employee to resign for any reason. There are no duties of continued employment in the future. Therefore, when an employee demands a raise, there is no issue with consideration because the employee has no legal duty to continue working. Similarly, when an employer demands a pay-cut, there is also no contractual issue with consideration, because the employer has no legal duty to continue employing the worker. However, certain states require additional consideration other than the prospect of continued employment, to enforce terms demanded later by the employer, in particular, non-competition clauses.

Bundled terms

Contracts where a legally valueless term is bundled with a term that does have legal value are still generally enforceable.

Consider the uncle's situation above. If the same uncle had instead told his 17-year-old nephew the following offer: "if you do not smoke cigarettes and do not engage females before your 18th birthday, then I will pay you $500". On the nephew's 18th birthday, he asks the uncle to pay up, and this time, in the subsequent lawsuit, the nephew may win. Although the promise of not smoking was not valuable consideration (it was already legally prohibited), virtually all states allow some sort of engagement by minors. Even though the engagement by minors is legally restricted, there are circumstances where it is legal, and thus the promise to forbear from it entirely has legal value. However, the uncle would still be relieved from the liability if his nephew smoked a cigarette, even though that consideration is valueless, because it was paired with something of legal value; therefore, adherence to the entire, collective agreement is necessary.

Past consideration

Generally, past consideration is not a valid consideration and has no legal value. Past consideration is consideration that has already flowed from the promisee to the promisor. That is, the promisee's act or forbearance predates the promisor's promise. Past consideration therefore cannot be used as a basis when claiming damages.^[9]

An exception to this rule is where there is a duty owed to a third party. An act done before the giving of a promise to make a payment or to confer some other benefit can sometimes be consideration for the promise. For this to hold, three conditions must be satisfied (Pao On v Lau Yiu Long [1980]):

1. The act must have been done at the promisor’s request
2. The parties must have understood the act was to be remunerated either by a payment or the conferment of some other benefit
3. Payment/conferment of the benefit must have been legally enforceable had it been promised in advance

Option contracts and conditional consideration

Generally, conditional consideration is valid consideration.

Suppose A is a movie script writer and B runs a movie production company. A says to B, "buy my script." B says "How about this – I will pay you $5,000 so that you do not let anyone else produce your movie until one year from now. If I do produce your movie in that year, then I will give you another $50,000, and no one else can produce it. If I do not produce your movie in that year, then you're free to go." If the two subsequently get into a dispute, the issue of whether a contract exists is answered. B had an option contract—he could decide to produce the script, or not. B's consideration passed was the $5,000 down, and the possibility of $50,000. A's consideration passed was the exclusive rights to the movie script for at least one year.

In settlements

Suppose B commits a tort against A, causing $5,000 in compensatory damages and $3,000 in punitive damages. Since there is no guarantee that A would win against B if it went to court, A may agree to drop the case if B pays the $5,000 compensatory damages. This is sufficient consideration, since B's consideration is a guaranteed recovery, and A's consideration is that B only has to pay $5,000, instead of $8,000.

Treatments by different legal systems

• Consideration under English law
• Consideration under American law
• Consideration is not required for a contract under Scots contract law

References