Formation: Consideration

Why Consideration Matters

Consideration is the legal system's way of distinguishing enforceable contracts from mere promises. Without consideration, a promise is gratuitous — morally binding perhaps, but legally unenforceable.

The fundamental question: Did each party GIVE something to GET something? If yes, there is consideration. If one party received nothing in return for their promise, the promise is a gift — and gifts are not contracts.

What IS Consideration?

The Restatement Definition

Consideration requires two things: 1. A bargained-for exchange — each party's promise or performance is sought by the other in exchange for their own 2. Legal value — each party incurs a legal detriment or receives a legal benefit

Legal Detriment (Modern Approach)

Legal detriment means the promisee: - Does something they were not previously obligated to do, OR - Refrains from doing something they had a legal right to do, OR - Promises to do either of the above

Example: Alice promises to pay Bob $10,000 if Bob quits smoking for one year. Bob's forbearance (giving up a legal right to smoke) is legal detriment — valid consideration for Alice's promise.

The Bargain Element

The exchange must be bargained for — not merely coincidental: - A promise made because of a past benefit (gratitude) ≠ bargained for - A promise made to induce future action = bargained for

| Scenario | Consideration? | Why? | |----------|---------------|------| | "I'll pay you $500 to paint my house" | Yes | Exchange: money for service | | "I'll give you $500 because you're my friend" | No | Gratuitous promise — no exchange | | "I'll pay you $500 because you painted my house last week" | No | Past consideration — no bargain | | "I'll pay you $500 if you don't sue me" | Yes | Forbearance from legal right |

Adequacy of Consideration

The General Rule: Courts Don't Inquire

Courts generally will NOT examine whether the exchange is fair or equal. A promise to sell a $100,000 house for $1 — if truly bargained for — has valid consideration.

Rationale: Freedom of contract. Adults are free to make good deals and bad deals. Courts are not in the business of evaluating fairness.

Exceptions

- Nominal/sham consideration — When the "consideration" is obviously not bargained for but recited to create the appearance of a contract ($1 for a $500,000 painting from a family member = likely a gift with sham consideration) - Unconscionability — may void a contract independently - Duress — negates the voluntariness of the exchange

The Pre-Existing Duty Rule

The Rule

A promise to do what one is already legally obligated to do is NOT valid consideration.

Application

If Contractor agrees to build a house for $100,000, and halfway through demands $120,000 for the same work, the homeowner's promise to pay the extra $20,000 is unsupported by consideration — Contractor is merely promising to do what they were already obligated to do.

Exceptions (Ways Around the Rule)

1. UCC section 2-209: Modifications to contracts for the sale of goods need NO new consideration — only good faith 2. Unforeseen difficulties: If genuinely unforeseen circumstances make performance dramatically more burdensome, some courts find new consideration in the modified obligation 3. Rescission + new contract: Parties can mutually rescind the old contract and enter a new one on different terms 4. Additional or different performance: If the promisor agrees to do MORE or DIFFERENT work, there is new consideration 5. Third-party promise: If a third party (not already obligated) promises to pay for the same performance

Past Consideration

The Rule

A promise made in exchange for something already done (before the promise was made) is NOT supported by consideration because there is no bargain — you cannot bargain for something that has already occurred.

Example

"Last month, you saved my dog from drowning. In gratitude, I promise to pay you $1,000." - The rescue is past — it cannot be consideration for a present promise - There was no bargain at the time of the rescue - This is a moral obligation, not a legal one

The Moral Obligation Exception (Minority/Restatement)

Under Restatement (Second) section 86, a promise made in recognition of a benefit previously received IS enforceable to the extent necessary to prevent injustice — when: 1. The promisor received a material benefit 2. The promise is not disproportionate to the benefit 3. Enforcement is necessary to prevent injustice

Illusory Promises

The Rule

An illusory promise commits the promisor to nothing — it is not valid consideration because it imposes no obligation.

Examples

| Promise | Illusory? | Why? | |---------|----------|------| | "I'll buy from you if I want to" | Yes | No commitment — promisor can choose not to buy | | "I'll buy from you if I need widgets" | No | Requirements contract — commits to buy all needs from seller | | "I reserve the right to cancel at any time for any reason" | Possibly | Depends on whether cancellation right is limited | | "I'll use my best efforts to sell your product" | No | Best efforts is an implied obligation (Wood v. Lucy) |

Saving Illusory Promises

Courts try to find consideration when possible: - Implied obligations — courts may imply a duty of good faith or best efforts - Conditional promises — a promise conditioned on an uncertain event is NOT illusory (the condition makes it uncertain, but the commitment is real if the condition occurs)

Requirements and Output Contracts (UCC)

Requirements Contract

"Buyer will purchase all the widgets Buyer requires from Seller."

Output Contract

"Seller will sell all the widgets Seller produces to Buyer."

Both are valid under UCC section 2-306: - The promisor gives up the right to buy from/sell to others - Quantities must be set in good faith - Cannot be unreasonably disproportionate to stated estimate or normal output/requirements

Baby Bar Connection

Consideration issues appear frequently on the Baby Bar: - Modification without new consideration (pre-existing duty rule) - Gratuitous promises vs. bargained-for exchanges - Past consideration traps - Illusory promise identification - Promissory estoppel as a consideration substitute

Exam Tip: When a promise lacks traditional consideration, ALWAYS check promissory estoppel — the examiners expect you to discuss it as an alternative theory.