The Building Blocks of a Binding Agreement: Consideration

Contract Consideration-Bargained for Legal Detriment

            Contracts are formed every day in our society. Did you make a purchase with your credit card recently? Did you click “I agree” on a website today? If so, a contract was created. A contract is defined as “a promise or set of promises, for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty.”[1] To form an enforceable contract there must be an offer, acceptance, and consideration. This presentation focuses on the consideration.

Elements of Consideration

            Consideration is the bargained-for exchange of a “legal detriment” between the contracting parties. Agreeing to a “legal detriment” means agreeing to do something that one is not obligated to do or to agree to refrain from doing something that one has the legal right to do. The latter type of consideration is known as a “forbearance.”

The case of Hamer v. Sidway (dating all the way back to the 1870s) illustrates the concept of forbearance as consideration.  In that case, an uncle promised his nephew that if he quit drinking, smoking, swearing, playing cards and billiards for money until reaching the age of twenty-one, he would be paid $5,000 (a substantial sum in those days). The nephew fully performed his end of the agreement. Unfortunately, the uncle died without having paid his nephew. The uncle’s estate refused to pay the nephew, arguing that the contract lacked consideration. The court held in favor of the nephew, finding adequate consideration in the nephew’s forbearance of legal activities in exchange for the uncle’s promise to pay him $5,000.[2] That the uncle did not gain any direct material benefit from the nephew’s behavior is irrelevant. The nephew gave up his legal right to engage in those behaviors, and that was sufficient consideration.

Generally, a court will not inquire into the adequacy of consideration of the contract, unless it is so "grossly inadequate as to shock the conscience of the court."[3] The mere fact that an agreed-upon price is not fair mar market value or that one party is getting a bad deal is insufficient reason to void a contract.        

Past Consideration-Material Benefit Rule

            The general rule is that past consideration lacks the bargained for exchange element of contract consideration. Past consideration refers to events that occurred prior to a promise that were not intended to induce the promise.[4] Past consideration is usually not adequate contract consideration because, by definition, one cannot bargain for something to occur if it has already occurred.

            However, there are exceptions to this rule. Under the “Material Benefit Rule,” past consideration can be adequate when one person confers a material benefit on another that was not intended to be a gift and the other person then promises to pay for this benefit.

            For example, Nancy finds Farmer Frank’s escaped bull. Nancy takes the bull home and cares for it by providing shelter and food, intending to bill the owner for that care once the owner is found. When Farmer Frank learns of Nancy’s generosity, he promises to pay her reasonable compensation for her efforts. Although Farmer Frank’s offer to pay Nancy is supported by past consideration (Nancy’s caring for the bull already took place), Frank received a material benefit from Nancy when she took the bull in and cared for it. Nancy never intended to care for Farmer Frank’s bull as a gift.[5]  As a result, the Material Benefit Rule applies and the contract is enforceable.

Preexisting Legal Duty Rule

            Traditionally, a performance of a preexisting legal duty lacks consideration. A preexisting legal duty is defined as anything that is received in exchange for a promise to do what one is already obligated to do in any case.[6] For example, if a police officer solves a theft for which there is a reward offer posted, but the officer was acting within the scope of his job responsibilities in investigating the theft, he has not provided the owner anything more than he was legally obligated to do. Therefore, his actions do not constitute consideration, and the reward offer is unenforceable.    

    Promissory Estoppel

            The doctrine of promissory estoppel allows for enforcement of certain promises, even where there is no consideration, where a person relied on the promise to his or her detriment. There are four requirements of promissory estoppel:

(1)  A person made a promise (the “promissor”) to another person (the “promisee”);

(2)  It was foreseeable that the promisee would rely on the promise;

(3)  The promisee relied on the promise in a foreseeable manner; and

(4)  Injustice cannot be avoided without enforcement of the promise.[7]

             For example: Patient Pam promises to bequeath $1,000,000 to Good Hospital to allow it to build a new pediatric wing. Good Hospital puts up a plaque announcing the new building plans and hires an architect to design it. It spends $100,000 in preparation to build the wing. Pam later decides not to provide Hospital with the promised money. While Pam’s promise was unsupported by consideration, the hospital reasonably relied on her promise.

            However, the promise will be enforceable only to the extent of the $100,000, since that is the extent of the hospital’s reliance on the promise. The hospital would not be entitled to the full benefit of the promise; i.e., the full million.

            Consideration is one of the fundamental building blocks of an enforceable contract. Though the rule is nuanced and can be analyzed on many different levels, the basic principle is that each party must agree to incur a legal detriment so that the agreement is considered “bargained for” and thus enforceable.