Consideration

Contract Formation Requirement - Rest. 2d (17)

“The formation of a contract requires a bargain in which there is a manifestation of mutual assent to the exchange and consideration.”

The elements of Contract Formation.

·       “Manifestation of mutual assent to the exchange” represents Offer & Acceptance.

·       “Consideration” represents consideration.

Hamer v. Sidway

Facts.               Uncle promised nephew $5,000 to refrain from smoking, drinking, and cursing until he was 21 years old. The uncle died before giving the nephew his money.

Issue.               Did the nephew’s detriment (refraining from cursing/smoking) induce the uncle to pay him $5,000?

Reasoning.       Consideration is a bargained for exchange. Today, detriment asks both whether the detriment induced individual to do/not do something they were not legally obligated to do.

Holding.           Because the nephew refrained from his legal rights, it was at his detriment, and the uncle was induced to pay him $5,000.

Bargained-for Exchange

·      The legal detriment of the promise must induce the promisor to make the promise. (I.e., the promisor makes the promise at least in part because she wants the detriment.)

·      And the promise of the promisor must induce the promise to furnish the detriment. (I.e., the promise furnishes the detriment at least in part because he wants the promise.)

Rest. 2d § 71 - Consideration Definition.

(1) To constitute consideration, a performance or a return promise must be bargained for.

(2) A performance or return promise is bargained for if it sought by the promisor in exchange for his promise and is given by the promise in exchange for that promise.

(3) The performance may consist of…

                        (a) An act other than a promise, or

                        (b) A forbearance, or

                        (c) The creation, modification, or destruction of a legal relation.

(4) The performance or return promise may be given to the promisor or to some other person. It may be given by the promise or by some other person.

 

·       “Reciprocal Inducement.” The promise of the promisor must induce the detriment and vice versa. Did the promise induce the detriment? Did the detriment induce the promise?

Congregation Kadminah Toras-Moshe v. DeLeo

Facts.               Man on his deathbed promised Jewish church that he would pay $25,000 to the church. The church tried to argue that his oral agreement was enforceable, because they were going to name a library after him and put the $25,000 into their budget.

Issue.               Was the budget/library efficient detriments for the offer to have a consideration?

Reasoning.      The man was not induced to make the offer, and so it was a gift.

Holding.          The church did not receive the money because the offer lacked consideration.

Pennsy Supply, Inc. v. American Ash Recycling Corp

Just because something is “free” does not mean it is a gift if it comes at the other party’s detriment and they were induced to do so.

Facts.               Pennsy contracted with a highschool to pave their parking lot. Pennsy then received Aggrite material from American Ash for free to complete this project. However, a year after completing the project, the pavement began to crack. Further, American Ash gave them the Aggrite because its disposal was expensive. Pennsy had to dispose of the Aggrite and repave the highschool, so they sued for damages.

Issue.               Was the Aggrite considered a promise to American Ash for purposes of consideration?

Reasoning.      Yes, the Aggrite was considered a promise, and Pennsy, by using the Aggrite, completed a detriment.

Holding.          Because American Ash showed proper inducement to make the promise to Pennsy to supply the Aggrite, this was considered a consideration.

Gift

A transfer of property or money without consideration and typically lacking legal enforceability.

How to Approach Consideration Questions

·      Identify the Promise

·      Identify the Detriment

·      Did the Promise induce the Detriment?

·      Did the Detriment induce the Promise?

Elements of Consideration

 (1) There must be a bargained for exchange between the parties.

(2) That which is bargained for must be considered of legal value, or constitute a benefit to the promisor or a detriment to the promisee.

·      There must be a bargained-for exchange to satisfy the requirement of consideration. Although “exchange” and “bargain” are interrelated, they will be inquired upon separately.

·      Where there is no exchange (ex. Gift), the general rule is that there is no consideration and therefore no contract.

Rationale behind the general rule that courts will not inquire into the adequacy of consideration is based on…

• Promotion of autonomy and free exchange: Once reciprocal inducement has been found to exist, the court should not second-guess the value each party places on that which is being exchanged at the time of the contract.

• Practical Problem of Assigning Value: How do you put a price on the value of Willy Story’s physical health and moral well-being? (See Hamer)

• Fairness: So long as there was nothing improper in the bargaining process, neither party has a basis to complain.  Should not allow a party who negotiated poorly or bet wrong to escape obligations after the fact.

Exception to the general rule that courts will not look into the adequacy of consideration…

• Only applies where there is evidence of something improper or illegitimate in the bargaining process (fraud, duress, unsconscionability).

• A vast imbalance in the values exchanged in combination with a defect in the bargaining process may lead a court to avoid enforcement.

• Unless there is some defect in the bargaining process, the courts will not inquire into the adequacy of otherwise valid consideration. m

Intentionally manufacturing the appearance of an exchange..

•If there is reason to believe (based on objective manifestations) that consideration is not genuine—e.g., it is never actually exchanged (“sham” consideration) or is such that it can be objectively determined that it did not induce the promise (“nominal” consideration)—some courts have refused to find consideration.

•Restatement §71 Comment (b): “…a mere pretense of bargain does not suffice, as where there is a false recital of consideration or where the purported consideration is merely nominal.  In such cases there is no consideration….”

Preexisting Duties

Restatement §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 is required by the duty in a way which reflects more than a pretense of bargain.”

there can be no legal detriment on the part of the promisee if he/she already has a legal/contractual duty to make the requested performance.