Legal Consideration in Contracts Study Notes

Consideration in Contracts

  • Definition: Consideration is the value exchanged for a promise in a contract. It must be legally sufficient and bargained for.

Basic Example of Consideration

  • Scenario: Buying a pizzeria for $500,000.
    • Buyer: Receives the pizzeria.
    • Seller: Receives $500,000.
    • Consideration: The $500,000 paid is the consideration for the promise to transfer ownership of the pizzeria.

Importance of Consideration

  • If a promise is made without consideration, it is not binding. Examples:
    • If you promise to drive someone’s car to LA without compensation, it is a favor or a gift, not a contract.

Necessary Elements of Consideration

  1. Value Must Be Exchanged: There must be something of value given in the bargaining process.
    • Example: I promise to pay you $10,000 to drive my car to LA. Your consideration is your promise and act of driving my car.
  2. Legally Sufficient: The law does not care about the adequacy of value, only that something of value is exchanged.
    • Example: Selling a $1,000,000 pizzeria for $5,000 is valid; selling it for nothing is not valid (as it would be considered a gift).

Types of Consideration

  • Consideration can be:

    1. A promise to do something that one is not legally obligated to do (e.g. driving the car).
    2. The performance of an action that one is not otherwise obligated to undertake (e.g. actually driving the car after promising to do so).
    3. Refraining from an action one is legally entitled to take (e.g. refraining from eating ice cream for a year as a contract with proper compensation).

  • Example Case: Hamer v. Sidway (1891)

    • Background: William Story promised his nephew $5,000 if he refrained from drinking alcohol, using tobacco, and playing games until the age of 21. The nephew complied and sought the money later.
    • Court Ruling: The NY court ruled in favor of the nephew, establishing that refraining from an action that one has a right to undertake constitutes valid consideration.

Violations of Consideration

  • Three key violations that invalidate consideration:
    1. Preexisting Duty:
    • Definition: A party’s offer to perform a duty already legally obligated is not valid consideration.
    • Example: If you are already contracted to do a job, you cannot demand more money for completing it.
    1. Past Consideration:
    • Definition: An act that occurred before a contract cannot be used as consideration for a new contract.
    • Example: If a friend offers to pay you for a service after you have completed it without prior agreement, it is a gift, not enforceable.
    1. Illusory Promises:
    • Definition: A promise that lacks mutuality or definite terms is unenforceable.
    • Example: A promise to pay someone based on vague conditions like “if I feel like it” is illusory.

Accord and Satisfaction

  • Definition: This refers to an agreement where a debtor offers to pay a creditor a lesser amount than originally promised, and the creditor accepts.

  • Conditions for Valid Accord and Satisfaction:

    1. The debt must be unliquidated (not settled).
    2. There must be a good faith dispute about the amount owed.

  • Process:

    • Example Scenario: You owe $1,000 for goods, but receive damaged goods valued at $900. You offer $900, writing "payment in full" on the check.
    • Acceptance: If the creditor accepts the check without further demand, it discharges the full obligation. If they notify you of a reserve of rights, the agreement doesn't satisfy the original amount.

Practical Applications

  • Real-Life Considerations: In real life, if you have a dispute (like damaged goods), it’s wise to document it (photos, clear writing about the dispute) before offering a settlement.
  • Establishing Agreements: Always provide clear terms when documenting agreements like payments to avoid ambiguity and potential disputes.

Important Legal Cases

  • Hamer v. Sidway emphasizes that relinquishing a legal right is valid consideration.
  • Eris Corp Case illustrates the faulty reasoning surrounding past consideration (no obligation to provide pension after the promise without enforceable contract).

Conclusion

  • Understanding consideration is crucial for maintaining valid and enforceable contracts. Each type of consideration has specific implications for contract law. Review common cases to familiarize with precedents that help clarify these principles in practical situations.