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What is “consideration” in the context of contract formation?
Consideration is anything of value. Recall that a valid contract must include an exchange of value between the offeror and offeree. The value should be the inducement or incentive for the other party entering into the agreement. That is, it must be the subject of the bargain between the parties. A promise to make a gift is not binding because the party receiving the gift gives no value in return for the promise. When the existence of consideration is not clear, the court will examine the transaction as a whole to determine if consideration exits and the contract is enforceable.
Types of Consideration – The amount or value of the consideration present does not matter. It need not be money or goods. Acceptable types of consideration include:
Agreement to Refrain: An agreement to refrain from doing something that you have the right and ability to do may constitute consideration.
- Example: I really want to stand up and sing in the middle of a crowded restaurant. You would be very embarrassed if I do so. You offer me $5 to not stand up and start singing. My refraining form doing this may constitute consideration.
Agreement Not to Sue: An agreement not to sue the other party may be sufficient consideration when reasonable grounds exist to make a lawsuit possible.
- Example: You claim that I owe you additional funds under a contract. I disagree and argue that all accounts are settled. You threaten to sue me. I offer to pay you a small sum of money in exchange for your agreement not to bring a legal action against me. Forgoing your right to sue me in exchange for money is a valid exchange of consideration.
Prior Consideration – Generally, consideration in a prior agreement is not valid consideration in a new agreement, except in very limited circumstances. The reason is because the individual is already obligated under the old agreement. Trying to promise to do the same thing does not provide a new form of value. Under the UCC, however, a preexisting obligation can constitute valid consideration if the offeror is a purchaser of $500 or more in goods, and she offers to pay more than an additional $500 for the same goods. This exception exists to protect certain business arrangement from failing.
- Example: We are both merchants. You enter into a contract to purchase goods from me for $5,000. In the pendency of the contract, you realize that I am likely breach the contract. You really do not want to find another seller, so you offer to pay an additional $1,000 for me to perform the contract. May agreement to perform my existing contractual obligation (sell you the goods) is valid consideration – even though it is the consideration for a prior agreement.
Discussion: How do you feel about the requirement for consideration? Should there be a value requirement for the consideration? Why or why not? What do you think is the purpose or objective behind requiring any form of consideration, regardless of the nature or value?
Practice Question: Donna is merchant and enters into a contract with Ashley to purchase bricks from me for $10,000. In the pendency of the contract, the cost of bricks rises dramatically. Ashley will lose money by selling the bricks to Donna for $10,000. Donna realizes that Ashley is going to lose money and will likely breach the contract. Donna really needs the bricks and it is most convenient to purchase from Ashley. She offers to pay an additional $1,000 for the bricks. If, after Ashley ships the bricks, Donna decides not to pay the additional $1,000, what is the probable result?
- Generally, prior consideration is adequate to make a contract binding. This is because the parties are already bound by the past terms set in the contract. However, there are some exceptions to this general rule. For instance, in contracts for the sale of goods, if the value of the goods is more than $500, the general rule does not apply. Where the party offers to pay an extra amount of more than $500 to make certain that the other pay upholds its end of the obligation, then this additional promise to pay is enforceable – even though there is no new exchange of consideration. So, if Donna refuses to pay the additional $1000, she will be held liable to pay damages to Ashley.