U.S. Contract Law

Consideration

Overview

GiftCommercialExchange

No K Contract

Consideration Extremes

General Considerations . . .

. . . . about consideration: Why have this doctrine?

To allow court differentiate between contracts that should be enforced and those that should not.

Consideration is really concerned with the validity of outstanding promises.

What is it? An element of an exchange that makes a contract

enforceable.

Evidence that the parties intended to enter into a contract.

Restatement 2nd Contacts §71

§71. REQUIREMENT OF EXCHANGE; TYPES OF EXCHANGE

(1) To constitute consideration, a performance or a return promise must be bargained for.

(2) A performance or return promise is bargained for if it is sought by the promisor in exchange for his promise and is given by the promisee in exchange for that promise.

(3) The performance may consist of

(a) an act other than a promise, or

(b) a forbearance, or

(c) the creation, modification, or destruction of a legal relation.

(4) The performance or return promise may be given to the promisor or to some other person.

It may be given by the promisee or by some other person.

Elements of Consideration

Detriment – the promisee must be giving up something

Benefit – the promisor must be gaining something.

Bargained For – the parties must have agreed to the exchange

What is Detriment

Detriment is giving something of value or any relinquishment of a legal right. Could take the form of immediate act, or

Forbearance, or

Partial or complete abandonment of a right.

It could also be a PROMISE to act, forbear or abandon a right.

Detriment Example

Hillary Susan

Hillary's flat

Payment of €2000or promise to pay

Hillary's detriment

Susan's detriment

Standard bilateral K, in which the promise by each party is exchanged forand induces the promise by the other.

Legal Right Example: Hamer v. Sidway

Uncle Nephew

Promise to give $5,000

Promise to quit smoking, etc.

Uncle's detriment

detriment?

How Does Benefit Fit In?

Usually, promisee's detriment translates easily into promisor's benefit.

But what about the Hamer case? How did the uncle benefit? Benefit here is defined

broadly to mean “to get what one bargained for”.

Bargained For Exchange

Under Bargain Approach: Promise or performance must be sought by the

promissory and given to the promisee in exchange for a promise or performance. These promises must induce each other!

It means nothing if a party suffers a legal detriment unless the parties agree that it is the price for the promise.

But bargain here simply means agreement. This doctrine rarely invalidates contracts;

courts generally try to enforce contracts whenever possible.

Consideration Problem Areas

However, it does arise in a few instances that we call here “problem areas:”

Gifts

Promissory Estoppel

Pre-Existing DutyPre-Existing Duty

Modification

Past/Moral Consideration

Learning About Rules Using the Pre-Existing Duty Rule

Through this exercise I hope to illustrate: that learning black letter law (rules) is only a part of

the American legal education experience.

how and why rules develop and change over time.

the role that rationale plays in both perpetuating a rule and changing it.

how courts deal with one of the “problem areas” concerning consideration.

Pre-Existing or Legal Duty Rule

Legal Duty Rule – agreement to modify an existing contract is not valid when one party only offers to do what s/he is already legally (contractually) obligated to do. Under the old common law rule, it is irrelevant why

the parties agreed to the modification.

Example

$25

ME

Mow Lawn

YOU

$20

Origins of the Rule:Harris v. Watson (1791)

Lord Kenyon: If this action was to be supported, it would materially

affect the navigation of this kingdom. It bas been long since determined, that when the freight is lost, the wages are also lost. This rule was founded on a principle of policy, for if sailors were in all events to have their wages, and in times of danger entitled to insist on an extra charge on such a promise as this, they would in many cases suffer a ship to sink, unless the captain would pay any extravagant demand they might think proper to make.

Stylik v. Myrick (1809)

Lord Ellenborough: I think Harris v. Watson was rightly decided; but I

doubt whether the ground of public policy, upon which Lord Kenyon is stated to have proceeded, be the true principle on which the decision is to be supported. Here, I say, the agreement is void for want of consideration. There was no consideration for the ulterior pay promised to the mariners who remained with the ship. Before they sailed from London they had undertaken to do all that they could under all the emergencies of the voyage. They had sold all their services till the voyage should be completed.

Pinnel's Case

Sir Edward Coke opined: payment of a lesser sum on the day in satisfaction

of a greater, cannot be any satisfaction for the whole, because it appears to the Judges that by no possibility, a lesser sum can be a satisfaction to the plaintiff for a greater sum: but the gift of a horse, hawk, or robe, etc. in satisfaction is good... [as] more beneficial to the plaintiff than the money.

Foakes v Beer (1884)

Lord Shelbourne: The doctrine, as stated in Pinnel's Case, is "that

payment of a lesser sum on the day" (it would of course be the same after the day), "in satisfaction of a greater, cannot be any satisfaction for the whole, because it appears to the Judges, that by no possibility a lesser sum can be a satisfaction to the plaintiff for a greater sum."

I think it has always, since the sixteenth century, been accepted as law . . . . (ruling in favor of D ignores) a doctrine which has been accepted as part of the law of England for 280 years.

Foakes v. Beer (concurring)

Lord Blackburn: What principally weighs with me in thinking that Lord

Coke [in Pinnel's case] made a mistake of fact is my conviction that all men of business, whether merchants or tradesmen, do every day recognise and act on the ground that prompt payment of a part of their demand may be more beneficial to them than it would be to insist on their rights and enforce payment of the whole.

He seems to be stating a different policy that might justify an exception to the Legal Duty Rule.

Why a Legal Duty Rule?

After looking at these cases, what might we say are some rationales for it?

Keep in mind some of the overriding reasons for having law of contracts.

Extending the Rule by Analogy

Denny v. Reppert In what court are we in?

The court cites several cases as precedent in this case. Are these cases binding on this court?

Why does the Court ultimately not allow the plaintiffs (outside of Reppert) to collect the reward?

Why does the Court allow Reppert to collect?

Does the Court give a rationale for applying the rule that they did?

The Effectiveness of “Simple” Rules

The Pre-Existing Duty or Legal Duty rule is straight forward, simple: an agreement to modify

an existing contract is not valid when one party only offers to do what s/he is already legally (contractually) obligated to do.

Should we always strictly apply a “simple” rule like this?

Do one-sided modifications always lack consideration?

Might there be other purposes that override the stated purpose?

Might there be other ways to achieve the purpose?

Overinclusive Rule?

In addition to prohibiting bad behavior, it also stopped innocent, uncoerced, even beneficial behavior.

Some one-sided modifications might be done voluntarily for the “benefit” of both parties or done pursuant to sound business calculation.

Example – Goebel v. Linn Example – Angel v. Murray

Goebel v. Linn

While the Court appears focused on the defense of duress, the rationale the court uses for not applying the defense is equally applicable to the legal duty rule. Not to mention, the policy behind the duress

defense is exactly the same as the policy rationale behind the legal duty rule.

Why does the Court decided not to apply the defense here?

Are there conflicting policy goals here?

Angel v. Murray

Here the Court deals directly with the pre-existing rule.

What policy rationale does the court give for having a pre-existing duty rule?

Why does the court reject its application here? What justifications does the court give for not

using the pre-existing rule? Is the rule dead?

Avoiding Rules

Restatement §73 Performance of a legal duty owed to a promisor

which is neither doubtful nor the subject of honest dispute is not consideration; but a similar performance is consideration if it differs from what was required by the duty in a way which reflects more than a pretense of bargain.

Courts wanting to avoid the rule have interpreted this exception broadly.

Avoiding Rules

Schwartzreich v. Bauman-Basch, Inc The issue here is whether the judge's instruction to

the jury was proper. What did the judge say the law was regarding the legal duty rule and modifications when the parties agree to abandon the prior agreement?

The court notes some other exceptions made by other courts as well. What are some of these exceptions to the legal duty rule?

From this case, what can we say is another exception to the legal duty rule?

Avoiding Rules

Restatement 2nd §89 A promise modifying a duty under a contract not

fully performed on either side is binding (a) if the modification is fair and equitable in view of

circumstances not anticipated by the parties when the contract was made; or

(b) to the extent provided by statute; or

(c) to the extent that justice requires enforcement in view of material change of position in reliance on the promise.

“Extent Provided by Statute”

UCC §2-209. Modification, Rescission and Waiver. (1) An agreement modifying a contract within this

Article needs no consideration to be binding.

Official Comment: purpose is to “protect . . . all necessary and

desirable modifications of sales contracts without regard to the technicalities which at present hamper such adjustments,” and that “an agreement modifying a sales contract needs no consideration to be binding.”

Accommodating Other Values?

What other values were courts trying to accommodate in these cases?

Why did they try to avoid the pre-existing duty rule in these cases?

What policy considerations in these cases seem to override the policy considerations that justify the pre-existing rule?

So What About Extortion?

Defense of Duress: contract is voidable where assent was induced by

an “improper threat” that left the victim with “no reasonable alternative.”

For centuries, the threat had to amount to criminal act or involve physical violence.

Economic Duress improper threats expanded to include those that

breached “the duty of good faith and fair dealing under a contract with the recipient” of the threat.

Lessons: Rules Serve Purposes

Rules are designed to serve purposes. They are fashioned with some goal in mind. prevent extortion

support the role of consideration as means of legitimizing a contract. A means of providing some kind of evidence as to the parties' intent.

Lessons: Rules Can Serve Many Purposes

Rules can have multiple purposes: sometimes they reinforce each other

other times they give skeptics of one purpose of the rule another reason to use it.

However, sometimes emphasis on one purpose defeats the other purpose. EXAMPLE – new, nominal consideration given for

modification satisfies consideration issues but leaves open possibility of extortion.

Lessons: Rules can be eroded or eventually die

When can you tell that a rule is being chipped away at? when courts frequently invent excuses or fictions to

avoid the rule

when the rule is heavily criticized by academia

when exceptions become more common

when alternative rules are developed, e.g. UCC §2-209

Lessons: Why to Rules Erode?

underlying rationales become less convincing EXAMPLE – rule of consideration itself is eroding

the fit between the purpose and the rule become less perfect EXAMPLE – this is too heavy handed to root out

extortion. It is getting in the way of other purposes that would be better served by a more lenient rule.

other rules are developed to better meet the purposes of the rule Duress seems to be a much better vehicle for

stopping extortion.

Lessons: Advantages of Different Types of Rules

Bright-line v. Multifaceted Legal Duty Rule – when strictly applied, no one-

sided modifications allowed. it made no difference whether the parties had good

intentions.

Restatement Approach Generally, one-sided modifications are prohibited

UNLESS: done in good faith, done pursuant to a statute, done when justice

requires, etc..

UCC §2-209: Bright line or Multifaceted?

Lessons: The Role of Precedent

While courts do feel compelled to follow it, they will, when warranted, try to avoid it. Each one of these judge-made exceptions were an

attempt to avoid precedent.

Each one was justified by some higher policy goal.

Nevertheless, each exception required judges to “ignore” precedent.

Exceptions create new precedent Restatement §89 is a good example!

Lessons: Statutes Can be Agents of Change

UCC §2-209 changed how modifications can be made in the sales of goods context.

HOWEVER, Many courts have started drawing analogies to to

the sales of goods context to change the common law rule when the contract by modified has nothing to do with sales of goods.