With some exceptions ,
a promise must be supported by consideration in order to be enforceable.
Consideration requires a bargained exchange in which each party incurs a legal
detriment.
[1] Bargained exchange
Consideration is a
bargained-for performance or return promise which is given by the promisee in
exchange for the promisor's promise. Consideration need not be furnished by or
to the parties themselves as long as it is part of the bargained exchange.
Even if the promisor's
promise induced performance or a return promise by the promisee, if such
inducement was not sought by the promisor, there is no bargained exchange. In
such circumstances, the promise is merely an unenforceable gift.
[2] Legal Detriment
A legal detriment
exists where the party:
- engages in an act that the party was not previously obligated – whether statutorily or contractually – to perform; or
- refrains from exercising a legal right
Under the pre-existing
duty rule, a promise regarding a pre-existing obligation to the other party
does not constitute a legal detriment.
[1] Adequate vs.
Sufficient Consideration
Adequacy of
consideration relates to whether the bargain involves an exchange of equal
value. Generally, however, courts do not concern themselves with whether consideration
is adequate, honoring the concept of freedom of contract. On the other hand,
courts do require consideration to be "sufficient", which relates to
whether there is a legal detriment incurred as part of a bargained exchange of
promises or performances.
If a bargain gives a
party a choice of alternative obligations, each alternative on its own must
constitute sufficient consideration for the return promise. If a promise is
void or voidable – e.g., due to the incapacity of the promisor – the sufficiency
of the consideration is not necessarily negated.
[2] Forbearance of
Claims and Defenses
Surrender of a validly
disputed claim – one for which there is a factual or legal uncertainty as to
its merits – or the release of a validly asserted defense is sufficient
consideration for a return promise. Forbearance of an invalid claim or defense
may also serve as consideration if the proponent of such claim or defense had a
good faith belief in its validity and if there exists an objective uncertainty
as to its validity.
[3] Discharge of
Obligation by Lesser or Greater Performance
Generally, a promise to
pay a lesser amount than is owed or to partially perform a pre-existing
obligation does not constitute a legal detriment since the promisor is merely
doing that which he is already obligated to do. [Foakes v. Beer , H.L.
1884] However, if the promisor undertakes a greater obligation than is
promised, such as paying or performing before the obligation is due, he incurs
a legal detriment sufficient to form consideration for the discharge of the
obligation.
[4] Illusory Promises
An illusory promise
cannot serve as consideration. An illusory promise may exist where a promise is
subject to a condition which is within the control of the promisor, especially
where such condition is related to the contract performance, or when the
promisor, at the time of the promise is made, knows that such condition cannot
occur.
[5] Implied Promises of
Best Efforts and Good Faith Dealing
Agreements for
exclusive dealings may appear to be based on an illusory promise since the
promisor's performance is subject to conditions within its control.
Nevertheless, common law and the UCC have recognized an implied promise to use
best efforts in an agreement for exclusive dealings, which furnishes the
necessary consideration. [See Wood v. Lucy, Lady Duff-Gordon, 222
N.Y. 88(1917) (involving an agreement by the defendant to
give the plaintiff the exclusive right to market its name and designs);
[6] False Recitals of
Consideration
Where there is a false
recitation of consideration, the agreement will not be enforced for lack of
sufficient consideration. Consideration must in fact be rendered.
There is some conflict
as to whether a sham recital of consideration in option contracts is sufficient
to enforce the promise. However, most courts
continue to deny enforcement where there is a false recital of consideration in
option contracts.
[7] Nominal
consideration
If nominal
consideration is given as a mere formality in order to create a binding
contract rather than as a bargained exchange, the consideration is
insufficient. In option contracts, a payment or promise to pay nominal consideration
is sufficient consideration to make enforceable a promise not to revoke,
provided the option time is relatively short (e.g., 10 days) and the price to
be paid if the option is exercised is a fair price.
The following types of
promises are enforceable without consideration:
1) promises that induce
a foreseeable and detrimental change of position by the promisee (promissory
estoppel)
2) a new express or implied
promise to pay a debt that has become barred by the statute of limitations
3) a new express
promise to perform all or part of a pre-existing obligation that has become
discharged in bankruptcy
4) where an original
promise is voidable due to the promisor's incapacity, a new promise by such
promisor upon attaining capacity
5) where an original
promise is voidable due to a valid defense by the promisor such as mistake,
misrepresentation or undue influence, a subsequent promise by such promisor
6) in contracts for the
sale of goods, contract modifications, release of a claim by a signed writing , and a written promise by a merchant not to
revoke an offer
7) in some states,
contract modifications in non-sale-of-goods transactions.
adapted from lexis nexis
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