CONSIDERATION IN THE LAW OF CONTRACT

Elements of Consideration

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.

Sufficiency of Consideration

[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.

Enforceable Promises Without Consideration

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