Chapter 12: Consideration 1
Chapter 12
Consideration
Introduction
Your students should now understand that not every promise is binding. Continuing the discussion of when a promise is binding, this chapter focuses on consideration.
The first concept students should understand about consideration is that it means something of legal value. They may find it difficult to understand that a promise has legal value as consideration, distinct from the economic value (if any) of the thing promised. The thing of legal value may be goods, money, performance, or a return promise. If it is performance, that performance may be an act (other than a promise), a forbearance (refraining from doing something that one has a legal right to do), or the creation, modification, or destruction of a legal relation.
The second concept that should be explained is that consideration must be bargained for. Performance or a promise is bargained for if the promisor seeks it in exchange for his or her promise and the promisee gives it in exchange for that promise. It is not enough that the promise induces the conduct of the promisee or that the conduct of the promisee induces the making of the promise. They must induce each other, or the bargained-for exchange element does not exist.
Chapter Outline
I.Elements of Consideration
Consideration is the value given in return for a promise. As noted above, there are two elements—
Additional Cases Addressing this Issue —Sufficiency of Consideration
Cases considering the sufficiency of consideration include the following.
•Blair v. Scott Specialty Gases, 283 F.3d 595 (3d Cir. 2002) (a mandatory arbitration provision in an employee handbook was supported by “adequate” consideration: “[w]hen both parties have agreed to be bound by arbitration, adequate consideration exists and the arbitration agreement should be enforced”).
•Mona Electric Group, Inc. v. Truland Service Corp., 193 F.Supp.2d 874 (E.D.Va. 2002) (“the mere continuation of employment does not furnish consideration for a non-competition agreement” not to solicit an employer’s customers).
•Martindale v. Sandvik, Inc.,173 N.J. 76, 800 A.2d 872 (2002) (the creation of an employment relationship, which occurs when an employer agrees to consider hiring or agrees to hire an applicant for employment, was sufficient consideration to uphold an arbitration agreement contained in the employment application).
•Oscar v. Simeonidis,352 N.J.Super. 476, 800 A.2d 271 (A.D. 2002) (a modification to a commercial lease, which changed the method for determining rent during the lease renewal period, was supported by consideration: “the parties adopted a formula that would permit them and any other interested person to determine the rental upon renewal of the lease by reference to objective, readily ascertainable criteria. This is itself valuable consideration sufficient to sustain the modification because the mutual agreement to abide by such a formula has the capacity to remove an element of uncertainty from the parties’ future legal relationship”).
•England v. O’Flynn, __ Ohio App.3d __, __ N.E.2d __ (2 Dist. 2002) (a physician’s breach of an obligation in an agreement with another physician caused a failure of consideration, which excused the non-breaching physician from reimbursing the breaching physician for the amount of a promissory note).
A.Legally Sufficient Value
This may be—
•A promise to do something that one has no prior legal duty to do.
•The performance of an action that one is otherwise not obligated to undertake.
•The refraining from an action that one has a legal right to undertake.
B.Bargained-for Exchange
The consideration given by the promisor must induce the promisee to offer a return promise, performance, or forbearance, which must induce the promisor to make the promise. This element of bargained-for exchange distinguishes contracts from gifts.
Additional Background—Bargained-for Exchange
Consideration is something exchanged for something else. Often, the concept of consideration is broken into the two elements that are discussed above and in the text. The element of exchangeis also discussed in the Restatement (Second) of Contracts, Section 71. The following is the text of that section with selected Comments and Illustrations.
§ 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.
Comment:
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b. “Bargained for.” In the typical bargain, the consideration and the promise bear a reciprocal relation of motive or inducement: the consideration induces the making of the promise and the promise induces the furnishing of the consideration. Here, as in the matter of mutual assent, the law is concerned with the external manifestation rather than the undisclosed mental state: it is enough that one party manifests an intention to induce the other’s response and to be induced by it and that the other responds in accordance with the inducement. *** But it is not enough that the promise induces the conduct of the promisee or that the conduct of the promisee induces the making of the promise; both elements must be present or there is no bargain. Moreover, a mere pretense of bargain does not suffice, as where there is a false recital of consideration or where the purported consideration is merely nominal. In such cases there is no consideration and the promise is enforced, if at all, as a promise binding without consideration ***.
Illustrations:
l. A offers to buy a book owned by B and to pay B $10 in exchange therefore. B accepts the offer and delivers the book to A. The transfer and delivery of the book constitute a performance and are consideration for A’s promise. See Uniform Commercial Code §§ 2-106, 2-301. This is so even though A at the time he makes the offer secretly intends to pay B $10 whether or not he gets the book, or even though B at the time he accepts secretly intends not to collect the $10.
2. A receives a gift from B of a book worth $10. Subsequently A promises to pay B the value of the book. There is no consideration for A’s promise. This is so even though B at the time he makes the gift secretly hopes that A will pay him for it. As to the enforcement of such promises, see § 86.
3. A promises to make a gift of $10 to B. In reliance on the promise B buys a book from C and promises to pay C $10 for it. There is no consideration for A’s promise. As to the enforcement of such promises, see § 90.
4. A desires to make a binding promise to give $1000 to his son B. Being advised that a gratuitous promise is not binding, A writes out and signs a false recital that B has sold him a car for $1000 and a promise to pay that amount. There is no consideration for A’s promise.
5. A desires to make a binding promise to give $1000 to his son B. Being advised that a gratuitous promise is not binding, A offers to buy from B for $1000 a book worth less than $1. B accepts the offer knowing that the purchase of the book is a mere pretense. There is no consideration for A’s promise to pay $1000.
c. Mixture of bargain and gift. In most commercial bargains there is a rough equivalence between the value promised and the value received as consideration. But the social functions of bargains include the provision of opportunity for free individual action and exercise of judgment and the fixing of values by private action, either generally or for purposes of the particular transaction. Those functions would be impaired by judicial review of the values so fixed. Ordinarily, therefore, courts do not inquire into the adequacy of consideration, particularly where one or both of the values exchanged are difficult to measure. *** Even where both parties know that a transaction is in part a bargain and in part a gift, the element of bargain may nevertheless furnish consideration for the entire transaction.
On the other hand, a gift is not ordinarily treated as a bargain, and a promise to make a gift is not made a bargain by the promise of the prospective donee to accept the gift, or by his acceptance of part of it. This may be true even though the terms of gift impose a burden on the donee as well as the donor. *** In such cases the distinction between bargain and gift may be a fine one, depending on the motives manifested by the parties. In some cases there may be no bargain so long as the agreement is entirely executory, but performance may furnish consideration or the agreement may become fully or partly enforceable by virtue of the reliance of one party or the unjust enrichment of the other. * * *
Illustrations:
6. A offers to buy a book owned by B and to pay B $10 in exchange therefore. B’s transfer and delivery of the book are consideration for A’s promise even though both parties know that such books regularly sell for $5 and that part of A’s motive in making the offer is to make a gift to B. ***
7. A owns land worth $10,000 which is subject to a mortgage to secure a debt of $6,000. A promises to make a gift of the land to his son B and to pay off the mortgage, and later gives B a deed subject to the mortgage. B’s acceptance of the deed is not consideration for A’s promise to pay the mortgage debt.
8. A and B agree that A will advance $1000 to B as a gratuitous loan. B’s promise to accept the loan is not consideration for A’s promise to make it. But the loan when made is consideration for B’s promise to repay.
d. Types of consideration. Consideration may consist of a performance or of a return promise. Consideration by way of performance may be a specified act of forbearance, or any one of several specified acts or forbearances of which the offeree is given the choice, or such conduct as will produce a specified result. Or either the offeror or the offeree may request as consideration the creation, modification or destruction of a purely intangible legal relation. Not infrequently the consideration bargained for is an act with the added requirement that a certain legal result shall be produced. Consideration by way of return promise requires a promise as defined in § 2 [of the Restatement]. Consideration may consist partly of promise and partly of other acts or forbearances, and the consideration invited may be a performance or a return promise in the alternative. Though a promise is itself an act, it is treated separately from other acts. ***
Illustrations:
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10. A says to B, the owner of a garage, “I will pay you $100 if you will make my car run properly.” The production of this result is consideration for A’s promise.
11. A has B’s horse in his possession. B writes to A, “If you will promise me $100 for the horse, he is yours.” A promptly replies making the requested promise. The property in the horse at once passes to A. The change in ownership is consideration for A’s promise.
12. A promises to pay B $1,000 if B will make an offer to C to sell C certain land for $25,000 and will leave the offer open for 24 hours. B makes the requested offer and forbears to revoke it for 24 hours, but C does not accept. The creation of a power of acceptance in C is consideration for A’s promise.
13. A mails a written order to B, offering to buy specified machinery on specified terms. The order provides “Ship at once.” B’s prompt shipment or promise to ship is consideration for A’s promise to pay the price. See *** Uniform Commercial Code § 2-206(1) (b).
II.Adequacy of Consideration
A.The General Rule
Adequacy of consideration refers to the fairness of the bargain. Ordinarily, courts will not evaluate the adequacy of consideration, regardless of the comparative economic value of the things exchange. Parties are generally free to bargain as they will.
B.When Voluntary Consent May Be Lacking
A court will evaluate the adequacy of consideration if it is so grossly inadequate as to “shock the conscience” of the court—if, in terms of its amount or worth, it indicates fraud, duress, or undue influence. The contract may be declared unconscionable.
III.Agreements That Lack Consideration
A.Preexisting Duty
Under most circumstances, a promise to do what one already has a legal duty to do is not legally sufficient consideration. There are exceptions—
1.Unforeseen Difficulties
When a party to a contract runs into unforeseen and substantial difficulties that could not have been anticipated at the time the contract was entered into, the parties may agree to extra compensation for overcoming the difficulties, and a court may enforce the agreement. These unforeseen difficulties do not include risks ordinarily assumed in business.
2.Rescission and New Contract
Two parties can agree to rescind their contract, at least to the extent that it is executory. When rescission and the making of the new contract take place at the same time, some courts may find a the preexisting duty and refuse to enforce the new promise.
B.Past Consideration
Promises made with respect to events that have already taken place are unenforceable. They lack the element of bargained-for exchange.
Case Synopsis—Case 12.1: Baugh v. Columbia Heart Clinic, P.A.
Columbia Heart Clinic, P.A., in South Carolina is a corporate medical practice that provides comprehensive cardiology services. Its physician-shareholders, including Kevin Baugh, are all cardiologists. Several years after joining the practice, Baugh signed a non-compete agreement. Later, Baugh filed a suit in a South Carolina state court against the clinic, asking the court to declare that the agreement was unenforceable.. The court ruled in the plaintiff’s favor. The clinic appealed.
A state intermediate appellate court reversed. The non-compete agreement “was supported by new consideration *** where [it] provided that the cardiology practice would pay shareholders $5,000 per month for twelve months following separation from employment, so long as the shareholders did not compete with the cardiology practice.”
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Notes and Questions
Unless employees have access to trade secrets or other proprietary information, is it ethical to require them to sign non-compete agreements as a condition of employment? In some states, courts view continued employment as consideration, but other states take the opposite view, requiring a payment, such as $100, for there to be consideration. To give $1, which some contracts state, is generally, alone not seen by the courts as real consideration, so it would be better to offer a larger amount.
Some employers require all employees to sign a standard form, even when there is no purpose in so doing because some employees pose no competitive threat. The non-compete clause can, however, serve as a barrier to other employers who are afraid of hiring a person and then possibly facing litigation. Even if the suit by the former employer is not successful, other employers may not want to risk such expense so they simply do not hire such persons. Thus widespread usage not related to trade secrets, customer lists, or other valuable information that deserves protection, is a business tactic hard to justify, particularly from an ethical standpoint.
Would an economic recession and global financial crisis excuse a former employee from having to comply with a noncompete clause that he or she had signed? Why or why not? Yes, because any agreement that bars a person from accepting employment during a recession only makes it harder to find work. No, because the purpose of a noncompete clause is to protect a business from unfair competition—excusing a party from complying with the clause for reasons that are outside the control of the business would be unfair.
When a non-compete agreement is entered into before employment, would additional compensation constitute sufficient consideration for the agreement? Yes. In a bilateral contract, consideration is something of legally sufficient value given in return for a promise. The “something of legally sufficient value” can be a promise to do something that one has no prior legal duty to do. In the facts of this question, consideration for the non-compete agreement exists in the form of the additional compensation. The employer receives the signed non-compete agreement, and the employee receives the added pay.
In this case, did the court hold that the non-compete agreement at the heart of the dispute was supported by consideration? Yes. In this case, the court held that the non-compete agreement at the heart of the parties’ dispute was supported by consideration. The agreement provided that Columbia Heart would pay its former employee-shareholders $5,000 per month for twelve months following their separation from the clinic’s employment, so long as they did not compete with the clinic’s cardiology practice. “Consequently, the Agreements are supported by new consideration.”
C.Illusory Promises
•If a contract expresses such uncertainty of performance that the promisor has not actually promised to do anything, the promise is illusory—without consideration and unenforceable.
•An option-to-cancel clause that allows the promisor to cancel the deal before performance has begun creates uncertainty of performance and is illusory.
IV.Settlement of Claims
A.Accord and Satisfaction
For an accord and satisfaction, the amount of the debt must be in dispute.
1.Liquidated Debts
A liquidated debt cannot serve as the basis for an accord and satisfaction because the debtor has a preexisting obligation to pay it and gives no consideration to reduce the amount due.
2.Unliquidated Debts
An unliquidated debt can serve as the basis for an accord and satisfaction because, as consideration, the parties give up the right to contest the amount
B.Release
A release bars further recovery. A release, is binding if—
•It is secured and given in good faith.
•It is in a signed writing (not required in all states).
•Consideration is given (not required under the UCC).
C.Covenant Not to Sue
Unlike a release, a covenant not to sue does not bar further recovery. This covenant is binding if—
•It is secured and given in good faith.
•It is in a signed writing (not required in all states).
•Consideration is given (not required under the UCC).
Case Synopsis—Case 12.2: Already, LLC v. Nike, Inc.
Nike, Inc., designs, makes, and sells a line of athletic shoes known as Air Force 1s. Already, LLC, designs and markets athletic shoe lines known as “Sugars” and “Soulja Boys.” Nike filed a suit in a federal district court against Already, alleging that Soulja Boys and Sugars infringed the Air Force 1 trademark. Already filed a counterclaim, contending that the Air Force 1 trademark is invalid. While the suit was pending, Nike issued a “Covenant Not to Sue,” promising not to raise any trademark claims against Already or any affiliated entity based on Already's existing footwear designs, or any future Already designs that constituted a “colorable imitation” of Already's current products. Nike then filed a motion to dismiss its claims and Already's counterclaim. The court granted the motion. The U.S. Court of Appeals for the Second Circuit affirmed. Already appealed.
The United States Supreme Court affirmed. The Court held that “this case is moot.”Under the covenant not to sue, Nike could not file a claim for trademark infringement against Already, and Already could not assert that Nike’s trademark was invalid.
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Notes and Questions
What is the likely next step in this case? The parties might attempt to arrive at a mutually agreeable financial settlement of each other’s moot claims. The amount, if any,would likely be less than either party sought in this litigation. But both parties will save the cost of a trial and further legal action against the payment and settlement of the claim and both can continue to do business without changing their product lines.
Which types of contracts are similar to a covenant not to sue? Types of contracts that are similar to a covenant not to sue include an accord and satisfaction, and a release. In a covenant not to sue, the parties substitute a contractual obligation for some other type of legal action based on a valid claim.In an accord and satisfaction, a debtor offers to pay, and a creditor accepts, a lesser amount than the creditor originally claimed was owed. When the amount of a debt is not certain, and reasonable persons differ over the amount owed, acceptance of payment of a lesser sum operates as satisfaction of the debt because there is valid consideration—the parties give up a legal right to contest the amount in dispute.A releaseis a contract in which one party forfeits the right to pursue a legal claim against the other party. The consideration for a release is the legal right that the party forfeits in exchange for the other’s promise to pay a stipulated amount.
V.Promissory Estoppel