Business Law

Chapter 4: Consideration (Bargained for Exchange)

Introduction

• Consideration is often defined as “some right, interest, profit or benefit accruing to one party” or the loss, detriment or responsibility assumed by another party to the contract.

• Consideration is also a requirement of a legally valid contract.

What is consideration?

• The basic reason for a contract; a person gives up something of value in exchange for receiving something of value through the contract.

Why is consideration required?

• Consideration is required for the formation of a valid contract for the simple reason that it shows the parties’ intent to be bound.

• A one-sided promise does not put the other party in any different footing than he or she had prior to the promise.

Types of Consideration

• A right

• A profit

• An interest

• A physical object

• A responsibility undertaken

• A legal detriment

Legal Detriment

• Consideration can also be satisfied through actions.

• When a person assumes a legal detriment, this can also satisfy the requirement of a consideration.

Detriment

• The “bargained for exchange" in a contract, where the parties take on some responsibility that they are not legally obligated to undertake

Proving Consideration

• When the consideration for a contract is under dispute, the parties involved must devote time and energy in proving (or disproving) the existence of consideration.

• Many times, the contract itself will recite the actual consideration.

• In many jurisdictions, there are legal presumptions that may also help to establish the existence of consideration.

• Written contracts, for example, are often presumed to have consideration, although the other party can rebut this presumption.

• As a general rule, there is no requirement that consideration for a contract be recited or expressed in the writing.

Quid Pro Quo

• The phrase “quid pro quo” is a Latin term that is usually translated as “something for something.”

Quid pro quo and Consideration

• Quid pro quo is a general term; consideration is a specific, legal term.

Inadequate or Insufficient Consideration

• Courts often refrain from determining the value of the consideration.

• Parties are free to negotiate any contract terms that they choose, as long as the contract does not involve fraud, duress or undue influence over one party, or a contract that is void for public policy reasons.

• Inadequate consideration is not considered insufficient consideration and therefore will not automatically void a contract.

Grossly Inadequate Consideration

• Grossly inadequate consideration is often a feature of unconscionable contracts.

• An unconscionable contract is one in which the terms or bargain is so obviously one-sided that the contract should be voided for public policy reasons.

Contracts “Under Seal”

• Seals are rare in modern contracts.

• Under the common law, a contract under seal was presumed to have consideration and therefore no additional evidence or testimony about the consideration was required.

Legal doctrines that affect consideration

• Courts have created several legal doctrines that affect the analysis of consideration in a contract.

Promissory Estoppel

• The basic idea behind estoppel is that when person A makes a statement that person B relies upon, A is prevented from denying the truth of his statement.

What is Estoppel?

• When a person is barred by prior actions from claiming a right or a duty against another person who relied, in good faith, on those actions.

Promissory Estoppel and Consideration

• Under the theory of promissory estoppel, when Party B suffers some legal detriment as a result of the contract, Party A cannot claim that there was no consideration for the contract.

The Elements of Promissory Estoppel

• 1) there was a clear and definite promise; 2) the promisor intended to induce reliance, and that reliance occurred; and 3) the only way to avoid injustice is to enforce the contract.

Waiver

• When a person gives a waiver, he or she surrenders a right, requirement or obligation.

Accord and Satisfaction

• When parties change the terms of their contracts, or negotiate entirely new contracts based partly on a previously existing contract.

Contracts for an Illegal Purpose

• A contract that contemplates an illegal purpose, such as a criminal act, will not become enforceable simply because it is supported by consideration.