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Consideration
Chapter Introduction
12-1 Elements of Consideration
12-1a Legal Value
12-1b Bargained-for Exchange
12-2 Adequacy of Consideration
12-2a Courts Typically Will Not Consider Adequacy
12-2b Evidence of Grossly Inadequate Consideration
12-3 Agreements That Lack Consideration
12-3a Preexisting Duty
12-3b Past Consideration
12-3c Illusory Promises
12-4 Settlement of Claims
12-4a Accord and Satisfaction
12-4b Release
12-4c Covenant Not to Sue
12-5 Exceptions to the Consideration Requirement
12-5a Promissory Estoppel
12-5b Promises to Pay Debts Barred by a Statute of Limitations
12-5c Charitable Subscriptions
Chapter Recap
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Chapter Introduction
The fact that a promise has been made does not mean the promise can or will be enforced. Under Roman law, a promise was not enforceable
without some sort of causathat is, a reason for making the promise that was also deemed to be a sufficient reason for enforcing it. Under
the common law, a primary basis for the enforcement of promises is consideration. Consideration is usually defined as the value (such as
cash) given in return for a promise (such as the promise to sell a stamp collection on receipt of payment) or in return for a performance.
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Elements of Consideration
Ask the Instructor Video: Agreement and Consideration: What is consideration?
Often, consideration is broken down into two parts: (1) something of legally sufficient value must be given in exchange for the promise; and
(2) usually, there must be a bargained-for exchange.
12-1a
Legal Value
The "something of legally sufficient value" may consist of (1) a promise to do something that one has no prior legal duty to do, (2) the
performance of an action that one is otherwise not obligated to undertake, or (3) the refraining from an action that one has a legal right to
undertake (called a forbearance). Consideration in bilateral contracts normally consists of a promise in return for a promise, as explained
in Chapter 10. For example, suppose that in a contract for the sale of goods, the seller promises to ship specific goods to the buyer, and the
buyer promises to pay for those goods when they are received. Each of these promises constitutes consideration for the contract.
In contrast, unilateral contracts involve a promise in return for a performance. Suppose that Anita says to her neighbor, "When you finish
painting the garage, I will pay you $100." Anita's neighbor paints the garage. The act of painting the garage is the consideration that creates
Anita's contractual obligation to pay her neighbor $100.
What if, in return for a promise to pay, a person refrains from pursuing harmful habits (a forbearance), such as the use of tobacco and
alcohol? Does such forbearance constitute legally sufficient consideration? This was the issue before the court in the following case, which is
one of the classics in contract law with respect to consideration.
Case 12.1: Hamer v. Sidway
Court of Appeals of New York, Second Division, 1891. 124 N.Y. 538, 27 N.E. 256.
Background and Facts. William E. Story, Sr., was the uncle of William E. Story II. In the presence of family members and guests
invited to a family gathering, the elder Story promised to pay his nephew $5,000 ($72,000 in today's dollars) if he would refrain
from drinking, using tobacco, swearing, and playing cards or billiards for money until he reached the age of twenty-one. (Note that
in 1869, when this contract was formed, it was legal in New York to drink and play cards for money prior to the age of twenty-one.)
The nephew agreed and fully performed his part of the bargain. When he reached the age of twenty-one, he wrote and told his uncle
that he had kept his part of the agreement and was therefore entitled to $5,000. The uncle replied that he was pleased with his
nephew's performance, writing, "I have no doubt but you have, for which you shall have five thousand dollars, as I promised you. I
had the money in the bank the day you was twenty-one years old that I intend for you, and you shall have the money certain. . . . P.S.
You can consider this money on interest." The nephew received his uncle's letter and thereafter consented that the money should
remain with his uncle according to the terms and conditions of the letter. The uncle died about twelve years later without having
paid his nephew any part of the $5,000 and interest. The executor of the uncle's estate (Sidway, the defendant in this action)
claimed that there had been no valid consideration for the promise and therefore refused to pay the $5,000 (plus interest) to
Hamer, a third party to whom the nephew had transferred his rights in the note. The court reviewed the case to determine whether
the nephew had given valid consideration under the law.
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IN THE LANGUAGE OF THE COURT
PARKER, J. [Justice]
****
* * * Courts will not ask whether the thing which forms the consideration does in fact benefit the promisee or a third party, or is of any
substantial value to any one. It is enough that something is promised, done, forborne, or suffered by the party to whom the promise is made
as consideration for the promise made to him. In general a waiver of any legal right at the request of another party is a sufficient
consideration for a promise. Any damage, or suspension, or forbearance of a right will be sufficient to sustain a promise. * * * Now,
applying this rule to the facts before us, the promisee used tobacco, occasionally drank liquor, and he had a legal right to do so. That right he
abandoned for a period of years upon the strength of the promise of the testator [his uncle] that for such forbearance he would give him
$5,000. We need not speculate on the effort which may have been required to give up the use of those stimulants. It is sufficient that he
restricted his lawful freedom of action within certain prescribed limits upon the faith of his uncle's agreement * * * . [Emphasis added.]
Decision and Remedy. The court ruled that the nephew had provided legally sufficient consideration by giving up smoking,
drinking, swearing, and playing cards or billiards for money until he reached the age of twenty-one and was therefore entitled to
the money.
Impact of This Case on Today's Law. Although this case was decided more than a century ago, the principles enunciated in
the case remain applicable to contracts formed today, including online contracts. For a contract to be valid and binding,
consideration must be given, and that consideration must be something of legally sufficient value.
What If the Facts Were Different? If the nephew had not had a legal right to engage in the behavior that he agreed to forgo,
would the result in this case have been different? Explain.
12-1b
Bargained-for Exchange
The second element of consideration is that it must provide the basis for the bargain struck between the contracting parties. The promise
given by the promisor (offeror) must induce the promisee (offeree) to offer a return promise, a performance, or a forbearance, and the
promisee's promise, performance, or forbearance must induce the promisor to make the promise.
This element of bargained-for exchange distinguishes contracts from gifts. For example, suppose that Paloma says to her son, "In
consideration of the fact that you are not as wealthy as your brothers, I will pay you $5,000." The fact that the word consideration is used
does not, by itself, mean that consideration has been given. Indeed, this is not an enforceable promise because the son does not have to do
anything in order to receive the promised $5,000. The son need not give Paloma something of legal value in return for her promise, and the
promised $5,000 does not involve a bargained-for exchange. Rather, Paloma has simply stated her motive for giving her son a gift.
Does asking a bank for change for a $50 or $100 bill initiate a bargained-for exchange? The bank in the following case argued that obtaining
change is not a contractual transaction because there is no consideration.
Case 12.2: Barfield v. Commerce Bank, N.A.
United States Court of Appeals, Tenth Circuit, 2007. 484 F.3d 1276.
Background and Facts. Chris Barfield, an African American man, entered a branch of Commerce Bank, N.A., in Wichita, Kansas,
and requested change for a $50 bill. He was refused change on the ground that he did not have an account with the bank. The next
day, Chris Barfield's father, James Barfield, asked a white friend, John Polson, to make the same request at the bank. The teller gave
Polson change without asking whether he had an account. A few minutes later, James Barfield entered the bank, asked for change
for a $100 bill, and was told that he could not be given change unless he was an account holder. The Barfields filed a suit in a federal
district court against Commerce Bank, alleging discrimination on the basis of race in the impairment of their ability to contract. The
court granted the bank's motion to dismiss the suit for failure to state a claim. The Barfields appealed this ruling to the U.S. Court of
Appeals for the Tenth Circuit.
IN THE LANGUAGE OF THE COURT
McCONNELL, Circuit Judge.
****
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Originally enacted in the wake of the Civil War, [42 U.S.C.] Section 1981(a) states:
All persons within the jurisdiction of the United States shall have the same right in every State and Territory to make and enforce contracts
* * * as is enjoyed by white citizens * * * .
As part of the Civil Rights Act of 1991, Congress added part b to the statute: "For purposes of this section, the term 'make and enforce
contracts' includes the making, performance, modification, and termination of contracts, and the enjoyment of all benefits, privileges,
terms, and conditions of the contractual relationship." The purpose of part b was to expand the statute to encompass all phases and
incidents of the contractual relationship.
****
All courts to have addressed the issue have held that a customer's offer to do business in a retail setting qualifies as a phase and incident of
the contractual relationship * * * . [W]hen a merchant denies service or outright refuses to engage in business with a consumer attempting
to contract with the merchant, that is a violation of Section 1981.
The question, then, is whether the Barfields' proposal to exchange money at a bank is a contract offer in the same way as an offer to
purchase doughnuts or apple juice. The claim made by the appellees [Commerce Bank], and accepted by the district court, is that the
Barfields' proposed exchange was not a contract because it involved no consideration: "The bank would not have received any benefit or
incurred a detriment if it had agreed to change the Barfields' bills." That reasoning, however, departs in several significant ways from our
understanding of contract law.
* * * A contract must be supported by consideration in order to be enforceable. Consideration is defined as some right, interest, profit, or
benefit accruing to one party, or some forbearance, detriment, loss, or responsibility, given, suffered, or undertaken by the other. A
promise is without consideration when the promise is given by one party to another without anything being bargained for and given in
exchange for it. [Emphasis added.]
In the most straightforward sense, the transaction proposed by the Barfields was a contract of exchange: they would give up something of
value (a large-denomination bill) in exchange for something they valued more (smaller-denomination bills). It is hard to see why this is not
a contract. If two boys exchange marbles, their transaction is a contract, even if it is hard for outsiders to fathom why either preferred the
one or the other. Consideration does not need to have a quantifiable financial value * * * . [Emphasis added.]
The Bank, however, argues that the proposed exchange was not a contract because it received no remuneration for performing the service of
bill exchange. In other words, rather than view the transaction as an exchange of one thing for another, the Bank urges us to treat the
transaction as a gratuitous service provided by the Bank, for no consideration. We cannot regard the Bank's provision of bill exchange
services as "gratuitous" in any legal sense. Profit-making establishments often offer to engage in transactions with no immediate gain, or
even at a loss, as a means of inducing customers to engage in other transactions that are more lucrative; such offers may nonetheless be
contractual, and they do not lack consideration. If, as is alleged in the complaint, the Bank effectively extends bill exchange services to
persons of one race and not the other, that is sufficient to come within the ambit [realm] of Section 1981.
Decision and Remedy. The court reversed the lower court's dismissal of the plaintiffs' complaint and remanded the case "for
further proceedings in accordance with this opinion." There is consideration in an exchange of paper money as there can be in
any other bargained-for exchange.
The Ethical Dimension. In most circumstances, parties are free to make whatever promises they wish, but only those promises
made with consideration will be enforced as contracts. What is the purpose of this requirement?
The Legal Environment Dimension. The courts generally do not weigh the sufficiency of consideration according to the
comparative economic value of what is exchanged. Should they? Why or why not?
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Adequacy of Consideration
Legal sufficiency of consideration involves the requirement that consideration be something of legally sufficient value in the eyes of the law.
Adequacy of consideration involves "how much" consideration is given. Essentially, adequacy of consideration concerns the fairness of the
bargain.
12-2a
Courts Typically Will Not Consider Adequacy
On the surface, when the items exchanged are of unequal value, fairness would appear to be an issue. In general, however, a court will not
question the adequacy of consideration based solely on the comparative value of the things exchanged. In other words, the determination of
whether consideration exists does not depend on a comparison of the values of the things exchanged. Something need not be of direct
economic or financial value to be considered legally sufficient consideration. In many situations, the exchange of promises and potential
benefits is deemed sufficient as consideration.
Under the doctrine of freedom of contract, courts leave it up to the parties to decide what something is worth, and the parties are normally
free to make bad bargains. If people could sue merely because they had entered into an unwise contract, the courts would be overloaded with
frivolous suits.
12-2b
Evidence of Grossly Inadequate Consideration
When there is a gross disparity in the amount or value of the consideration exchanged, the inadequate consideration may raise a red flag for
a court to look more closely at the bargain. This is because shockingly inadequate consideration can indicate that fraud, duress, or undue
influence was involved or that the element of bargained-for exchange was lacking.
Judges are uneasy about enforcing unequal bargains, and it is the courts' task to police contracts and make sure that there was not some
defect in a contract's formation that negates mutual assent. If an elderly person sells her Mercedes-Benz convertible to her neighbor for
$5,000 even though it is worth well over $50,000, the disparity in value may indicate that the sale involved undue influence or fraud. When
the consideration is grossly inadequate, a court may also declare the contract unenforceable because it is unconscionable, which generally
means that the contract is so one sided under the circumstances as to be clearly unfair. (Unconscionability will be discussed further in
Chapter 13.)
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Agreements That Lack Consideration
Sometimes, one of the parties (or both parties) to an agreement may think that consideration has been exchanged when in fact it has not.
Here, we look at some situations in which the parties' promises or actions do not qualify as contractual consideration.
12-3a
Preexisting Duty
Under most circumstances, a promise to do what one already has a legal duty to do does not constitute legally sufficient consideration. The
preexisting legal duty may be imposed by law or may arise out of a previous contract. A sheriff, for example, cannot collect a reward for
providing information leading to the capture of a criminal if the sheriff already has a legal duty to capture the criminal.
Likewise, if a party is already bound by contract to perform a certain duty, that duty cannot serve as consideration for a second contract.
For example, suppose that Bauman-Bache, Inc., begins construction on a seven-story office building and after three months demands an
extra $75,000 on its contract. If the extra $75,000 is not paid, the contractor will stop working. The owner of the land, having no one else to
complete the construction, agrees to pay the extra $75,000. The agreement is unenforceable because it is not supported by legally sufficient
consideration; Bauman-Bache was bound by a preexisting contract to complete the building.
Unforeseen Difficulties
The rule regarding preexisting duty is meant to prevent extortion and the so-called holdup game. What happens, though, when an honest
contractor who has contracted with a landowner to construct a building runs into extraordinary difficulties that were totally unforeseen at
the time the contract was formed? In the interests of fairness and equity, the courts sometimes allow exceptions to the preexisting duty rule.
In the example just mentioned, if the landowner agrees to pay extra compensation to the contractor for overcoming unforeseen difficulties,
the court may refrain from applying the preexisting duty rule and enforce the agreement. When the "unforeseen difficulties" that give rise to
a contract modification involve the types of risks ordinarily assumed in business, however, the courts will usually assert the preexisting duty
rule.
Rescission and New Contract
The law recognizes that two parties can mutually agree to rescind, or cancel, their contract, at least to the extent that it is executory (still to
be carried out). Rescission is the unmaking of a contract so as to return the parties to the positions they occupied before the contract was
made. Sometimes, parties rescind a contract and make a new contract at the same time. When this occurs, it is often difficult to determine
whether there was consideration for the new contract, or whether the parties had a preexisting duty under the previous contract. If a court
finds there was a preexisting duty, then the new contract will be invalid because there was no consideration.
12-3b
Past Consideration
Promises made in return for actions or events that have already taken place are unenforceable. These promises lack consideration in that the
element of bargained-for exchange is missing. In short, you can bargain for something to take place now or in the future but not for
something that has already taken place. Therefore, past consideration is no consideration.
Suppose, for example, that Elsie, a real estate agent, does her friend Judy a favor by selling Judy's house and not charging any commission.
Later, Judy says to Elsie, "In return for your generous act, I will pay you $3,000." This promise is made in return for past consideration and
is thus unenforceable; in effect, Judy is stating her intention to give Elsie a gift.
Is a party's suggestion that a professional athlete use a certain nickname for marketing products sufficient consideration for the athlete's
later promise to pay the party a portion of the profits? That was the question in the following case.
Extended Case 12.3: Blackmon v. Iverson
United States District Court, Eastern District of Pennsylvania, 2003. 324 F.Supp.2d
602.
McLAUGHLIN, District Judge.
* * * [Jamil] Blackmon met [Allen] Iverson and his family in 1987. At that time, Mr. Iverson was a young high school student who showed
tremendous promise as an athlete. * * * At various times in their friendship, Mr. Blackmon provided Mr. Iverson and his family with
financial support * * * and provided other support to Mr. Iverson * * * .
In July of 1994, Mr. Blackmon suggested that Mr. Iverson use "The Answer" as a nickname in the summer league basketball tournaments in
which Mr. Iverson would be playing. Mr. Blackmon told Mr. Iverson that Mr. Iverson would be "The Answer" to all of the National
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Basketball Association's ("NBA's") woes. Mr. Blackmon and Mr. Iverson also discussed the fact that the nickname "The Answer" had
immediate applications as a label, brand name, or other type of marketing slogan for use in connection with clothing, sports apparel, and
sneakers. The parties also discussed using "The Answer" as a logo.
Later that evening, Mr. Iverson promised to give Mr. Blackmon twenty-five percent of all proceeds [from] the merchandising of products
sold in connection with the term "The Answer." * * *
Mr. Blackmon thereafter began to invest significant time, money, and effort in the refinement of the concept of "The Answer." * * *
****
In 1996, just prior to the NBA draft, during which Mr. Iverson was drafted by the Philadelphia 76ers, Mr. Iverson advised Mr. Blackmon
that Mr. Iverson intended to use the phrase "The Answer" in connection with a contract with Reebok for merchandising of athletic shoes
and sports apparel. * * *
****
Many months later, Reebok began manufacturing, marketing, and selling a line of athletic sportswear and sneakers using and incorporating
"The Answer" slogan and logo. * * *
****
* * * [D]uring the 19971998 season, Mr. Iverson persuaded Mr. Blackmon to relocate to Philadelphia * * * .
****
Reebok has continued to sell products bearing "The Answer" slogan and Mr. Iverson has continued to receive profits from the sale of
products bearing "The Answer" slogan. Despite repeated requests and demands from Mr. Blackmon, Mr. Iverson has never compensated
Mr. Blackmon * * * [with] proceeds from the merchandising of [these] products * * * .
[Blackmon filed a suit in a federal district court against Iverson, alleging, among other things, breach of contract.] * * * [T]he plaintiff
conceded that his graphics were not incorporated into any of Reebok's products * * * .
****
The plaintiff claims that he entered into an express contract with the defendant pursuant to which he was to receive twenty-five percent of
the proceeds that the defendant received from marketing products with "The Answer" on them. The defendant [filed a motion to dismiss] *
* *.
****
Under [the] law, a plaintiff must present clear and precise evidence of an agreement in which both parties manifested an intent to be
bound, for which both parties gave consideration, and which contains sufficiently definite terms. [Emphasis added.]
Consideration confers a benefit upon the promisor or causes a detriment to the promisee and must be an act, forbearance, or return
promise bargained for and given in exchange for the original promise. Under [the] law, past consideration is insufficient to support a
subsequent promise. [Emphasis added.]
****
The plaintiff has argued that, in exchange for the defendant's promise to pay the twenty-five percent, the plaintiff gave three things as
consideration: (1) the plaintiff's idea to use "The Answer" as a nickname to sell athletic apparel; (2) the plaintiff's assistance to and
relationship with the defendant and his family; and (3) the plaintiff's move to Philadelphia.
According to the facts alleged by the plaintiff, he made the suggestion that the defendant use "The Answer" as a nickname and for product
merchandising one evening in 1994. This was before the defendant first promised to pay; according to the plaintiff, the promise to pay was
made later that evening. The disclosure of the idea also occurred before the defendant told the plaintiff that he was going to use the idea in
connection with the Reebok contract in 1996, and before the sales of goods bearing "The Answer" actually began in 1997.
Regardless of whether the contract was formed in 1994, 1996, or 1997, the disclosure of "The Answer" idea had already occurred and was,
therefore, past consideration insufficient to create a binding contract.
****
According to the complaint, the plaintiff's relationship and support for the defendant, * * * began in 1987, seven years before the first
alleged promise to pay was made. There is no allegation that the plaintiff began engaging in this conduct because of any promise by the
defendant, or that the plaintiff continued his gratuitous conduct in 1994, 1996, or 1997 in exchange for the promise to pay. These actions are
not valid consideration.
The plaintiff also alleged at oral argument that his move to Philadelphia during the 19971998 season was consideration for the promise to
pay. If the parties reached a mutual agreement in 1994, the plaintiff has not properly alleged that the move was consideration * * * .
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Nor is there any allegation that the move was part of the terms of any contract created in 1996 or 1997. The complaint states only that the
defendant "persuaded" him to move to Philadelphia to "begin seeking the profits from his ideas." Even when the complaint is construed
broadly, there is no allegation that the move was required in exchange for any promise by the defendant to pay. In the absence of valid
consideration, the plaintiff has no claim for breach of an express contract.
****
* * * IT IS HEREBY ORDERED that the [defendant's] motion is GRANTED and the plaintiff's * * * complaint is DISMISSED * * * .
Questions
1.
What might Blackmon have done to secure payment for Iverson's use of "The Answer" as a nickname before that use became
valuable?
2.
Suppose that only five minutes had elapsed between Blackmon's suggestion that Iverson use "The Answer" as a marketing slogan
and Iverson's promise to give Blackmon a part of the proceeds. Would the ruling in this case have been any different? Why or why
not?
12-3c
Illusory Promises
If the terms of the contract express such uncertainty of performance that the promisor has not definitely promised to do anything, the
promise is said to be illusorywithout consideration and unenforceable. A promise is illusory when it fails to bind the promisor. For
example, suppose that a corporate president says to her employees, "All of you have worked hard, and if profits continue to remain high, a 10
percent bonus at the end of the year will be givenif management thinks it is warranted." The employees continue to work hard, and profits
remain high, but no bonus is given. This is an illusory promise, or no promise at all, because performance depends solely on the discretion of
the president (the management). There is no bargained-for consideration, only a declaration that management may or may not do something
in the future. The president is not obligated (incurs no detriment) now or later.
Option-to-Cancel Clauses
Option-to-cancel clauses in term contracts sometimes present problems in regard to consideration. When the promisor has the option to
cancel the contract before performance has begun, then the promise is illusory. For example, suppose that Abe contracts to hire Chris for one
year at $5,000 per month, reserving the right to cancel the contract at any time. On close examination of these words, you can see that Abe
has not actually agreed to hire Chris, as Abe could cancel without liability before Chris started performance. This contract is therefore
illusory. But if Abe had instead reserved the right to cancel the contract at any time after Chris has begun performance by giving Chris thirty
days' notice, the promise would not be illusory. Abe, by saying that he will give Chris thirty days' notice, is relinquishing the opportunity
(legal right) to hire someone else instead of Chris for a thirty-day period. If Chris works for one month, at the end of which Abe gives him
thirty days' notice, Chris has an enforceable claim for $10,000 in salary.
Requirements Contracts and Output Contracts
Problems with consideration may also arise in other types of contracts because of uncertainty of performance. Uncertain performance is
characteristic of requirements and output contracts, for example. In a requirements contract, a buyer and a seller agree that the buyer will
purchase from the seller all of the goods of a designated type that the buyer needs, or requires. In an output contract, the buyer and seller
agree that the buyer will purchase from the seller all of what the seller produces, or the seller's output. These types of contracts will be
discussed further in Chapter 20. Concept Summary 12.1 provides a convenient summary of the main aspects of consideration.
Concept Summary 12.1: Consideration
Elements of
Consideration
Consideration is the value given in exchange for a promise. A
contract cannot be formed without sufficient consideration.
Consideration is often broken down into two elements:
Legal valueSomething of legally sufficient value must be
given in exchange for a promise. This may consist of a
promise, a performance, or a forbearance.
Bargained-for exchangeThere must be a bargained-for
exchange.
Adequacy of
Adequacy of consideration relates to how much consideration is
Consideration
given and whether a fair bargain was reached. Courts will
inquire into the adequacy of consideration (if the consideration
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is legally sufficient) only when fraud, undue influence, duress,
or the lack of a bargained-for exchange may be involved.
Agreements That
Lack
Consideration
Consideration is lacking in the following situations:
Preexisting dutyConsideration is not legally sufficient if
one is either by law or by contract under a preexisting duty
to perform the action being offered as consideration for a
new contract.
Past considerationActions or events that have already
taken place do not constitute legally sufficient
consideration.
Illusory promisesWhen the nature or extent of
performance is too uncertain, the promise is rendered
illusory and unenforceable.
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Settlement of Claims
Businesspersons or others can settle legal claims in several ways, and it is important to understand the nature of consideration given in these
kinds of settlement agreements, or contracts. In an accord and satisfaction, which is a common means of settling a claim, a debtor offers to
pay a lesser amount than the creditor purports to be owed. Other methods that are commonly used to settle claims include a release and a
covenant not to sue.
12-4a
Accord and Satisfaction
The concept of accord and satisfaction involves a debtor's offer of payment and a creditor's acceptance of a lesser amount than the
creditor originally claimed was owed. The accord is the agreement under which one of the parties undertakes to give or performand the
other to accept, in satisfaction of a claimsomething other than that on which the parties originally agreed. Satisfaction takes place when the
accord is executed. A basic rule is that there can be no satisfaction unless there is first an accord. For accord and satisfaction to occur, the
amount of the debt must be in dispute.
Liquidated Debts
If a debt is liquidated, accord and satisfaction cannot take place. A liquidated debt is one whose amount has been ascertained, fixed, agreed
on, settled, or exactly determined. For example, if Kwan signs an installment loan contract with her banker in which she agrees to pay a
specified rate of interest on a specified amount of borrowed funds at monthly intervals for two years, that is a liquidated debt. The total
obligation is precisely known to both parties, and reasonable persons cannot dispute the amount owed.
Suppose that Kwan has missed her last two payments on the loan and the creditor demands that she pay the overdue debt. Kwan makes a
partial payment and states that she believes this payment is all she should have to pay and that the debt will be satisfied if the creditor
accepts the payment. In the majority of states, acceptance of a lesser sum than the entire amount of a liquidated debt is not satisfaction, and
the balance of the debt is still legally owed. The rationale for this rule is that the debtor has not given any consideration to satisfy the
obligation of paying the balance to the creditorbecause the debtor has a preexisting legal obligation to pay the entire debt.
Unliquidated Debts
An unliquidated debt is the opposite of a liquidated debt. Here, reasonable persons may differ over the amount owed. It is not settled, fixed,
agreed on, ascertained, or determined, and thus acceptance of the payment of a lesser amount operates as satisfaction, or discharge, of the
debt. For example, Devereaux goes to the dentist's office and the dentist tells him that he needs three special types of gold inlays. The price is
not discussed, and there is no standard fee for this type of procedure. Devereaux has the work done and leaves the office. At the end of the
month, the dentist sends him a bill for $3,000.
Devereaux, believing that this amount grossly exceeds what a reasonable person would believe the debt owed should be, sends a check for
$2,000. On the back of the check he writes, "payment in full for three gold inlays." The dentist cashes the check. Because the situation
involves an unliquidated debtthe amount has not been agreed onthe payment accepted by the dentist normally will eradicate the debt.
One argument to support this rule is that the parties give up a legal right to contest the amount in dispute, and thus consideration is given.
12-4b
Release
A release is a contract in which one party forfeits the right to pursue a legal claim against the other party. It bars any further recovery
beyond the terms stated in the release. For example, your car is damaged in an automobile accident caused by Donovan's negligence.
Donovan offers to give you $1,000 if you will release him from further liability resulting from the accident. You believe that this amount will
cover your damages, so you agree and sign the release. Later, you discover that it will cost $1,500 to repair your car. Can you collect the
balance from Donovan?
The answer is normally no; you are limited to the $1,000 specified in the release because the release represents a valid contract. You and
Donovan both agreed to the bargain, and sufficient consideration was present. The consideration was the legal detriment you suffered (by
releasing Donovan from liability, you forfeited your right to sue to recover damages in exchange for $1,000).
Clearly, you are better off if you know the extent of your injuries or damages before signing a release. Releases will generally be binding if
they are (1) given in good faith, (2) stated in a signed writing (which is required in many states), and (3) accompanied by consideration.
12-4c
Covenant Not to Sue
A covenant not to sue is an agreement to substitute a contractual obligation for some other type of legal action based on a valid claim.
Unlike a release, a covenant not to sue does not always bar further recovery. Suppose (continuing the earlier example) that you agree with
Donovan not to sue for damages in a tort action if he will pay for the damage to your car. If Donovan fails to pay, you can bring an action
against him for breach of contract.
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Exceptions to the Consideration Requirement
There are some exceptions to the rule that only promises supported by consideration are enforceable. The following types of promises may
be enforced despite the lack of consideration:
1.
2.
Promises to pay debts that are barred by a statute of limitations.
3.
12-5a
Promises that induce detrimental reliance, under the doctrine of promissory estoppel.
Promises to make charitable contributions.
Promissory Estoppel
As discussed in Chapter 11, under the doctrine of promissory estoppel (also called detrimental reliance), a person who has reasonably and
substantially relied on the promise of another may be able to obtain some measure of recovery. This doctrine is applied in a wide variety of
contexts in which a promise is otherwise unenforceable, such as when a promise is not supported by consideration. Under this doctrine, a
court may enforce an otherwise unenforceable promise to avoid the injustice that would otherwise result.
Requirements to State a Claim for Promissory Estoppel
For the doctrine to be applied, the following elements are required:
1.
There must be a clear and definite promise.
2.
The promisor should have expected that the promisee would rely on the promise.
3.
The promisee reasonably relied on the promise by acting or refraining from some act.
4.
The promisee's reliance was definite and resulted in substantial detriment.
5.
Enforcement of the promise is necessary to avoid injustice.
If these requirements are met, a promise may be enforced even though it is not supported by consideration. In essence, the promisor will be
estopped (prevented) from asserting the lack of consideration as a defense.
Application of the Doctrine
Promissory estoppel was originally applied to situations involving gifts (I promise to pay you $150 a week so that you will not have to work)
and donations to charities (I promise to contribute $50,000 a year toward the orphanage). Later, courts began to apply the doctrine to avoid
inequity or hardship in other situations, including business transactions.
For example, suppose that the Air Force has opened the bidding process for construction of a new building at Elmendorf Air Force Base in
Anchorage, Alaska. A general contractor, Vern Hickel, anxious to get the job, contacts eight different subcontractors to find the lowest price
on electrical work. Bussell, an electrical subcontractor, tells Hickel that he will do the electrical portion of the project for $477,498. Hickel
reasonably relies on this amount when he submits his primary bid for the entire project to the Air Force and wins the contract. After the
bidding is over, Bussell realizes that he made a mistake and refuses to perform the electrical work for Hickel for $477,498. Hickel has to hire
another subcontractor at a substantially higher cost to complete the electrical work.
Under the doctrine of promissory estoppel, Hickel can sue Bussell for the cost difference because he detrimentally relied on Bussell's bid
even though there was no consideration for Bussell's promise to do the work for $477,498. (See this chapter's Contemporary Legal Debates
feature for a discussion of promissory estoppel and promises of employment.)
Contemporary Legal Debates: Promissory Estoppel and Employment
Contracts
Today, approximately 85 percent of American workers have the legal status of "employees at will." Under this common law employment
doctrine, which applies in all states except Montana, an employer may fire an employee for any reason or no reason. The at-will doctrine,
however, does not apply to any employee who has an employment contract or who falls under the protection of a state or federal statute
which is, of course, a large number of employees. Even when an employee is subject to the employment-at-will doctrine, the courts
sometimes make exceptions to the doctrine based on tort theory or contract principles or on the ground that a termination violates an
established public policy (see Chapter 33).
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These exceptions to the at-will doctrine, however, apply only when a current employee's employment is terminated. Should they also apply
when a company fails to hire a job candidate after promising to do so? For example, suppose that a job candidate, relying on a company's
offer of employment, quits his or her existing job, moves to another city, and rents or buys housing in the new location. Then the company
decides not to hire the candidate after all. Given the candidate's detrimental reliance on the company's job offer, should the company be
prevented from revoking its offer under the doctrine of promissory estoppel? This question has come before a number of courts. As yet,
however, the courts have not reached a consensus on the issue. Some jurisdictions allow the doctrine of promissory estoppel to be applied,
but others do not.
Promissory Estoppel Should Not Be Applied
Many jurisdictions believe that reliance on a prospective employer's promise of at-will employment is unreasonable as a matter of law.
Courts in these jurisdictions reason that a job applicant should know that, even if she or he is hired, the employer could terminate the
employment at any time for any reason without liability. According to these courts, it would be contrary to reason to allow someone who has
not yet begun work to recover damages under a theory of promissory estoppel, given that the same person's job could be terminated without
liability one day after beginning work.
Consider a case example. Arlie Thompson had worked for nine years at a hospital as a technician assistant when she was laid off. A year
later, the same hospital offered her a clerical position, which she accepted. She was measured for a new uniform, given a security badge, and
provided with the password for the computer system. Thompson, who was then working at another job, quit the other position in reliance
on the hospital's job offer. Shortly thereafter, the hospital asked her to take a test. When she failed the test, the hospital refused to hire her.
Thompson filed a suit claiming that the doctrine of promissory estoppel should prevent the hospital from revoking its offer. The court,
however, held that the hospital's promise of employment was not sufficiently "clear and definite" for that doctrine to be applied.
Promissory Estoppel Should Be Applied
A number of other jurisdictions, however, have held that a person can recover damages incurred as a result of resigning from a former job in
reliance on an offer of at-will employment. These jurisdictions have determined that when a prospective employer knows or should know
that a promise of employment will induce the future employee to leave his or her current job, the employer should be responsible for the
prospective employee's damages. After all, without the offer from the prospective employer, the prospective employee would have continued
to work in his or her prior position.
This approach is reflected in a case from 2007 involving Thomas Frey. In 1999, Frey was working for a firm at which he had substantial
benefits and would have been entitled to stock options. Then Andrew Taitz of Workhorse Custom Chassis, LLC, offered Frey a position,
promising him a large bonus if the company's earnings exceeded $39.1 million by the end of 2002. In reliance on that promise, Frey left his
job and took the position at Workhorse.
By the end of 2002, projections indicated that Workhorse's earnings would exceed the required level. Frey therefore believed that he was
entitled to the bonus when he left the company in January 2003. In the spring of 2003, Frey asked for his bonus, but Taitz responded that
because Frey no longer worked for the company, he was not entitled to the bonus. Frey filed a lawsuit against Workhorse, claiming, among
other things, that he was entitled to damages under the doctrine of promissory estoppel because he had left a lucrative and secure position
to take the job at Workhorse.
Although Workhorse claimed at the trial that its 2002 earnings were only around $37.6 million, the audited financial statements it
presented had been completed ten months late and were subject to a 5 percent margin of error. Workhorse also admitted that many
employees would have received substantial bonuses if the earnings had exceeded $39.1 million. A jury found Frey's argument convincing
and awarded him $648,220. Workhorse moved for a judgment as a matter of law and for a new trial, but the court ruled that Frey had
presented enough evidence to support the jury's verdict.
WHERE DO YOU STAND?
Some jurisdictions maintain that it is irrational to apply the doctrine of promissory estoppel to a promise of at-will
employment, given that the employee could be fired after working for only one day on the job. Other jurisdictions conclude
that the doctrine should apply because the employer should reasonably expect a job candidate in this situation to act in
reliance on the promise. Does one of these two arguments have greater merit than the other? What is your position on this
issue?
12-5b
Promises to Pay Debts Barred by a Statute of Limitations
Statutes of limitations in all states require a creditor to sue within a specified period to recover a debt. If the creditor fails to sue in time,
recovery of the debt is barred by the statute of limitations. A debtor who promises to pay a previous debt even though recovery is barred by
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the statute of limitations makes an enforceable promise. The promise needs no consideration. (Some states, however, require that it be in
writing.) In effect, the promise extends the limitations period, and the creditor can sue to recover the entire debt or at least the amount
promised. The promise can be implied if the debtor acknowledges the barred debt by making a partial payment.
12-5c
Charitable Subscriptions
Subscriptions to religious, educational, and charitable institutions are promises to make gifts. Traditionally, these promises were
unenforceable because they are not supported by legally sufficient consideration. A gift, after all, is the opposite of bargained-for
consideration. The modern view, however, is to make exceptions to the general rule by applying the doctrine of promissory estoppel.
For example, suppose that a church solicits and receives pledges (commitments to contribute funds) from church members to erect a new
church building. On the basis of these pledges, the church purchases land, hires architects, and makes other contracts that change its
position. Because of the church's detrimental reliance, a court may enforce the pledges under the theory of promissory estoppel.
Alternatively, a court may find consideration in the fact that each promise was made in reliance on the other promises of support or that the
trustees, by accepting the subscriptions, impliedly promised to complete the proposed undertaking.
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Chapter Recap: Reviewing: Consideration
John operates a motorcycle repair shop from his home but finds that his business is limited by the small size of his garage. Driving by a
neighbor's property, he notices a for-sale sign on a large, metal-sided garage. John contacts the neighbor and offers to buy the building,
hoping that it can be dismantled and moved to his own property. The neighbor accepts John's payment and makes a generous offer in
return: if John will help him dismantle the garage, which will take a substantial amount of time, he will help John reassemble it after it has
been transported to John's property. They agree to have the entire job completed within two weeks. John spends every day for a week
working with his neighbor to disassemble the building. In his rush to acquire a larger workspace, he turns down several lucrative repair jobs.
Once the disassembled building has been moved to John's property, however, the neighbor refuses to help John reassemble it as he
originally promised. Using the information presented in the chapter, answer the following questions.
1.
2.
Are the basic elements of consideration present in the neighbor's promise to help John reassemble the garage? Why or why not?
Suppose that the neighbor starts to help John but then realizes that, because of the layout of John's property, putting the building
back together will take much more work than dismantling it took. Under which principle discussed in the chapter might the neighbor
be allowed to ask for additional compensation?
3.
What if John's neighbor made his promise to help reassemble the garage at the time he and John were moving it to John's property,
saying, "Since you helped me take it down, I will help you put it back up." Would John be able to enforce this promise? Why or why
not?
4.
Under what doctrine discussed in the chapter might John seek to recover the profits he lost when he declined to do repair work for
one week?
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Chapter Recap: Questions and Case Problems
121. Tabor is a buyer of file cabinets manufactured by Martin. Martin's contract with Tabor calls for delivery of fifty file cabinets at $40 per
cabinet in five equal installments. After delivery of two installments (twenty cabinets), Martin informs Tabor that because of inflation,
Martin is losing money and will promise to deliver the remaining thirty cabinets only if Tabor will pay $50 per cabinet. Tabor agrees in
writing to do so. Discuss whether Martin can legally collect the additional $100 on delivery to Tabor of the next installment of ten cabinets.
122. Question with Sample Answer. Bernstein owns a lot and wants to build a house according to a particular set of plans and
specifications. She solicits bids from building contractors and receives three bids: one from Carlton for $160,000, one from Friend for
$158,000, and one from Shade for $153,000. She accepts Shade's bid. One month after beginning construction of the house, Shade contacts
Bernstein and informs her that because of inflation and a recent price hike for materials, he will not finish the house unless Bernstein agrees
to pay an extra $13,000. Bernstein reluctantly agrees to pay the additional sum. After the house is finished, however, Bernstein refuses to
pay the extra $13,000. Discuss whether Bernstein is legally required to pay this additional amount.
For a sample answer to Question 122, go to Appendix I at the end of this text.
123. Daniel, a recent college graduate, is on his way home for the Christmas holidays from his new job. He gets caught in a snowstorm and
is taken in by an elderly couple, who provide him with food and shelter. After the snowplows have cleared the road, Daniel proceeds home.
Daniel's father, Fred, is most appreciative of the elderly couple's action and in a letter promises to pay them $500. The elderly couple, in
need of funds, accept Fred's offer. Then, because of a dispute between Daniel and Fred, Fred refuses to pay the elderly couple the $500.
Discuss whether the couple can hold Fred liable in contract for the services rendered to Daniel.
124. Costello hired Sagan to drive his racing car in a race. Sagan's friend Gideon promised to pay Sagan $3,000 if she won the race. Sagan
won the race, but Gideon refused to pay the $3,000. Gideon contended that no legally binding contract had been formed because he had
received no consideration from Sagan in exchange for his promise to pay the $3,000. Sagan sued Gideon for breach of contract, arguing that
winning the race was the consideration given in exchange for Gideon's promise to pay the $3,000. What rule of law discussed in this chapter
supports Gideon's claim?
125. Accord and Satisfaction. E. S. Herrick Co. grows and sells blueberries. Maine Wild Blueberry Co. agreed to buy all of Herrick's
1990 crop under a contract that left the price unliquidated. Herrick delivered the berries, but a dispute arose over the price. Maine Wild sent
Herrick a check with a letter stating that the check was the "final settlement." Herrick cashed the check but filed a suit in a Maine state court
against Maine Wild, on the ground of breach of contract, alleging that the buyer owed more. What will the court likely decide in this case?
Why? [E. S. Herrick Co. v. Maine Wild Blueberry Co., 670 A.2d 944 (Me. 1996)]
126. Case Problem with Sample Answer. As a child, Martha Carr once visited her mother's 108-acre tract of unimproved land in
Richland County, South Carolina. In 1968, Betty and Raymond Campbell leased the land. Carr, a resident of New York, was diagnosed as
having schizophrenia and depression in 1986, was hospitalized five or six times, and subsequently took prescription drugs for the illnesses.
In 1996, Carr inherited the Richland property and, two years later, contacted the Campbells about selling the land. Carr asked Betty about
the value of the land, and Betty said that the county tax assessor had determined that the land's agricultural value was $54,000. The
Campbells knew at the time that the county had assessed the total property value at $103,700 for tax purposes. A real estate appraiser found
that the real market value of the property was $162,000. On August 6, Carr signed a contract to sell the land to the Campbells for $54,000.
Believing the price to be unfair, however, Carr did not deliver the deed. The Campbells filed a suit in a South Carolina state court against
Carr, seeking specific performance of the contract. At trial, an expert real estate appraiser testified that the real market value of the property
was $162,000 at the time of the contract. Under what circumstances will a court examine the adequacy of consideration? Are those
circumstances present in this case? Should the court enforce the contract between Carr and the Campbells? Explain. [Campbell v. Carr, 361
S.C. 258, 603 S.E.2d 625 (S.C. App. 2004)]
127. Preexisting Duty. New England Rock Services, Inc., agreed to work as a subcontractor on a sewer project on which Empire Paving,
Inc., was the general contractor. For drilling and blasting a certain amount of rock, Rock Services was to be paid $29 per cubic yard or on a
time-and-materials basis, whichever was less. From the beginning, Rock Services encountered problems. The primary obstacle was a heavy
concentration of water, which, according to the custom in the industry, Empire should have controlled but did not. Rock Services was
compelled to use more costly and time-consuming methods than anticipated, and it was unable to complete the work on time. The
subcontractor asked Empire to pay for the rest of the project on a time-and-materials basis. Empire signed a modification of the original
agreement. On completion of the work, Empire refused to pay Rock Services the balance due under the modification. Rock Services filed a
suit in a Connecticut state court against Empire. Empire claimed that the modification lacked consideration and was thus not valid and
enforceable. Is Empire right? Why or why not? [New England Rock Services, Inc. v. Empire Paving, Inc., 53 Conn.App. 771, 731 A.2d 784
(1999)]
128. Consideration. In 1995, Helikon Furniture Co. appointed Tom Gaede as an independent sales agent for the sale of its products in
parts of Texas. The parties signed a one-year contract that specified, among other things, the commissions that Gaede would receive. Over a
year later, although the parties had not signed a new contract, Gaede was still representing Helikon when it was acquired by a third party.
Helikon's new management allowed Gaede to continue to perform for the same commissions and sent him a letter stating that it would make
no changes in its sales representatives "for at least the next year." Three months later, in December 1997, the new managers sent Gaede a
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letter proposing new terms for a contract. Gaede continued to sell Helikon products until May 1997, when he received a letter effectively
reducing the amount of his commissions. Gaede filed a suit in a Texas state court against Helikon, alleging breach of contract. Helikon
argued, in part, that there was no contract because there was no consideration. In whose favor should the court rule, and why? [Gaede v. SK
Investments, Inc., 38 S.W.3d 753 (Tex.App.Houston [14 Dist.] 2001)]
129. Settlement of Claims. Shoreline Towers Condominium Owners Association in Gulf Shores, Alabama, authorized Resort
Development, Inc. (RDI), to manage Shoreline's property. On Shoreline's behalf, RDI obtained a property insurance policy from Zurich
American Insurance Co. In October 1995, Hurricane Opal struck Gulf Shores. RDI filed claims with Zurich regarding damage to Shoreline's
property. Zurich determined that the cost of the damage was $334,901. Zurich then subtracted an applicable $40,000 deductible and sent
checks to RDI totaling $294,901. RDI disputed the amount. Zurich eventually agreed to issue a check for an additional $86,000 in return for
RDI's signing a "Release of All Claims." Later, contending that the deductible had been incorrectly applied and that this was a breach of
contract, among other things, Shoreline filed a suit against Zurich in a federal district court. How, if at all, should the agreement reached by
RDI and Zurich affect Shoreline's claim? Explain. [Shoreline Towers Condominium Owners Association, Inc. v. Zurich American Insurance
Co., 196 F.Supp.2d 1210 (S.D.Ala. 2002)]
1210. A Question of Ethics. John Sasson and Emily Springer met in January 2002. John worked for the U.S. Army as an engineer.
Emily was an attorney with a law firm. Six months later, John bought a townhouse in Randolph, New Jersey, and asked Emily to live with
him. She agreed but retained the ownership of her home in Monmouth Beach. John paid the mortgage and the other expenses on the
townhouse. He urged Emily to quit her job and work from "our house." In May 2003, Emily took John's advice and started her own law
practice. In December, John made her the beneficiary of his $150,000 individual retirement account (IRA) and said that he would give her
his 2002 BMW M3 car before the end of the next year. He proposed to her in September 2004, giving her a diamond engagement ring and
promising to "take care of her" for the rest of her life. Less than a month later, John was critically injured by an accidental blow to his
head during a basketball game and died. On behalf of John's estate, which was valued at $1.1 million, his brother Steven filed a complaint
in a New Jersey state court to have Emily evicted from the townhouse. Given these facts, consider the following questions. [In re Estate of
Sasson, 387 N.J.Super. 459, 904 A.2d 769 (App.Div. 2006)]
(a) Based on John's promise to "take care of her" for the rest of her life, Emily claimed that she was entitled to the townhouse, the
BMW, and an additional portion of John's estate. Under what circumstances would such a promise constitute a valid, enforceable
contract? Does John's promise meet these requirements? Why or why not?
(b) Whether or not John's promise is legally binding, is there an ethical basis on which it should be enforced? Is there an ethical basis
for not enforcing it? Are there any circumstances under which a promise of support should beor should not beenforced? Discuss.
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Chapter Recap: Law on the Web
A good way to learn more about how the courts decide whether consideration was present or lacking is to look at relevant case law. To find
recent cases on contract law, access Cornell University's School of Law site at
www.law.cornell.edu/wex/index.php/Contracts (http://www.law.cornell.edu/wex/index.php/Contracts)
The New Hampshire Consumer's Sourcebook provides information on contract law, including consideration, from a consumer's perspective.
You can access this site at
www.doj.nh.gov/consumer/sourcebook (http://www.doj.nh.gov/consumer/sourcebook)
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Chapter Recap: Key Terms
accord and satisfaction
An agreement for payment (or other performance) between two parties, one of whom has a right of action against the other. After the
payment has been accepted or other performance has been made, the "accord and satisfaction" is complete and the obligation is
discharged.
consideration
Generally, the value given in return for a promise or a performance. The consideration, which must be present to make the contract
legally binding, must be something of legally sufficient value and bargained for.
covenant not to sue
An agreement to substitute a contractual obligation for some other type of legal action based on a valid claim.
forbearance
The act of refraining from an action that one has a legal right to undertake.
past consideration
An act done before the contract is made, which ordinarily, by itself, cannot be consideration for a later promise to pay for the act.
release
A contract in which one party forfeits the right to pursue a legal claim against the other party.
rescission
(pronounced reh-sih-zhen) A remedy whereby a contract is canceled and the parties are returned to the positions they occupied
before the contract was made; may be effected through the mutual consent of the parties, by their conduct, or by court decree.
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