consideration

Something of value given by both parties to a contract that induces them to enter into the agreement to exchange mutual performances.

Consideration is an essential element for the formation of a contract. It may consist of a promise to perform a desired act or a promise to refrain from doing an act that one is legally entitled to do. In a bilateral contract—an agreement by which both parties exchange mutual promises—each promise is regarded as sufficient consideration for the other. In a unilateral contract, an agreement by which one party makes a promise in exchange for the other's performance, the performance is consideration for the promise, while the promise is consideration for the performance.

Consideration must have a value that can be objectively determined. A promise, for example, to make a gift or a promise of love or affection is not enforceable because of the subjective nature of the promise.

Traditionally, courts have distinguished between unilateral and bilateral contracts by determining whether one or both parties provided consideration and at what point they provided the consideration. Bilateral contracts were said to bind both parties the minute the parties exchanged promises, as each promise was deemed sufficient consideration in itself. Unilateral contracts were said to bind only the promisor and did not bind the promisee unless the promisee accepted by performing the obligations specified in the promisor's offer. Until the promisee performed, he or she had provided no consideration under the law.

For example, if someone offered to drive you to work on Mondays and Tuesdays in exchange for your promise to return the favor on Wednesdays and Thursdays, a Bilateral Contract would be formed binding both of you once you provided consideration by accepting those terms. But if that same person offered to pay you $10 each day you drove him to work, a unilateral contract would be formed, binding only upon the promisor until you provided consideration by driving him to work on a particular day.

Modern courts have de-emphasized the distinction between unilateral and bilateral contracts. These courts have found that an offer may be accepted either by a promise to perform or by actual performance. An increasing number of courts have concluded that the traditional distinction between unilateral and bilateral contracts fails to significantly advance legal analysis in a growing number of cases where performance is provided over an extended period of time.

Suppose you promise to pay someone $500.00 to paint your house. The promise sounds like an offer to enter a unilateral contract that binds only you until the promisee accepts by painting your house. But what constitutes lawful performance under these circumstances? The act of beginning to paint your house or completely finishing the job to your satisfaction?

Most courts would rule that the act of beginning performance under these circumstances converts a unilateral contract into a bilateral contract, requiring both parties to fulfill the obligations contemplated by the contract. However, other courts would analyze the facts of each case so as not to frustrate the reasonable expectations of the parties. In neither of these cases are the legal rights of the parties ultimately determined by courts by applying the concepts of unilateral and bilateral contracts.

In still other jurisdictions, courts have simply expressed a preference for interpreting contracts as creating bilateral obligations in all cases where no clear evidence suggests that a unilateral contract was intended. The rule has been stated that in case of doubt an offer will be presumed to invite the formation of a bilateral contract by a promise to perform what the offer requests, rather than the formation of a unilateral contract commencing at the time of actual performance. The bottom line across most jurisdictions is that as courts have been confronted by a growing variety of fact patterns involving complicated contract disputes, courts have turned away from rigidly applying the concepts of unilateral and bilateral contracts and moved towards a more ad hoc approach.

consideration n. 1) payment or money. 2) a vital element in the law of contracts, consideration is a benefit which must be bargained for between the parties, and is the essential reason for a party entering into a contract. Consideration must be of value (at least to the parties), and is exchanged for the performance or promise of performance by the other party (such performance itself is consideration). In a contract, one consideration (thing given) is exchanged for another consideration. Not doing an act (forbearance) can be consideration, such as "I will pay you $1,000 not to build a road next to my fence." Sometimes consideration is "nominal," meaning it is stated for form only, such as "$10 as consideration for conveyance of title," which is used to hide the true amount being paid. Contracts may become unenforceable or rescindable (undone by rescission) for "failure of consideration" when the intended consideration is found to worth less than expected, is damaged or destroyed, or performance is not made properly (as when the mechanic does not make the car run properly). Acts which are illegal or so immoral that they are against established public policy cannot serve as consideration for enforceable contracts. Examples: prostitution, gambling where outlawed, hiring someone to break a skater's knee or inducing someone to breach an agreement (talk someone into backing out of a promise.)

Elements Of Consideration

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It would be unfair for courts to hold people to every promise that they make because many promises are made in jest or without sufficient forethought. Thus, to be legally enforceable, a promise must be made in return for consideration, which consists of two general elements: bargained-for exchange and legal detriment.

A. Bargained-for Exchange

A performance or return promise is bargained-for if it is sought by the promisor in exchange for his promise, and it is given by the promisee in exchange for that promise. (Rest. 2d. § 71(2).) The bargain requirement serves the purpose of distinguishing between enforceable promises and ordinary gifts.

1. Gifts 
A promise to make a gift is unenforceable, not only because it is not bargained-for but also because the offeree suffers no legal detriment. Example: A says to B, “I promise to buy you a new car.” A is not legally bound to buy B a car because A’s promise was not made as part of a bargain in exchange for some return benefit from B. There is no consideration for A’s promise.

2. Bargain v. Precondition 
Performance of a bargain benefits the promisor and therefore is valid consideration. Performance of a precondition does not benefit the promisor and is not consideration. Example: X promises his sister a place to raise her family if she comes to visit him. She incurs the expense of moving, but X changes his mind. X is not legally bound to keep his promise, because no consideration was given for it. The moving expenses were incurred as a precondition to fulfilling his request. X did not bargain that he would give his sister a place to stay in exchange for her incurring moving expenses.3. Benefit 

a. The benefit a promisor receives as part of a bargain does not have to be economic in nature. Example: A promises B $100 if B does not smoke.

b. However, the benefit must be more than just altruistic pleasure or love. Example: There is no consideration if A promises to pay B’s debts as a gesture of gratitude for all the happiness B has given A. Moral obligation does not constitute legal consideration.

4. Adequacy of Consideration

a. Nominal Consideration

Often an agreement between two parties will state something like “A promises B . . . in consideration of $1.00 paid to A.” Although courts will not ordinarily examine the adequacy of consideration, courts will do so in cases involving purely token consideration, in order to thwart attempts to make gratuitous promises appear legally enforceable. Nominal or sham consideration is usually evidence that a gift is masquerading as a bargained-for exchange.

b. Recited Consideration

A majority of courts allow a promisor who is opposing enforcement of a contract to prove that the consideration recited in the agreement was not actually given. Nonpayment of recited consideration may be used as partial evidence that there was no bargained-for exchange.

c. Past Consideration

As a general rule, “past consideration is no consideration.” Logically, a current promise cannot be exchanged for some benefit that the promisor has already received. Example: A promises to pay B, A’s employee, $100 a week “in consideration” of B’s many years of hard work, or A promises to pay B $1,000,000 after B saves A’s life. In both cases, A has received the benefit before he made the promise, and thus nothing was actually given in exchange for the promise. There are some exceptions to the general rule:

i. Pre-existing Debt

A promise to repay a pre-existing debt that was excused because of a technical defense, such as the running of the statute of limitations, is enforceable without consideration. (Rest. 2d. §§ 82, 83.)

ii. New Promise for Benefits Received

A new promise to pay for benefits received will sometimes be enforceable without consideration on grounds of moral obligation to prevent injustice. (Rest. 2d. § 86.)

 Legal Detriment

The second requirement for valid consideration is that it must constitute a legal detriment to the promisee. Legal detriment is liberally construed to mean either a promise to do something that one is not legally obligated to do (e.g., cross the street) or to refrain from doing something that one has a right to do (e.g., stop smoking). There is no requirement that the promisee suffer any actual hardship. Likewise, the benefit that the promisor receives is not necessarily related to pleasure or advantage. All that is required is that the promisor does something he does not have to do.
1. Minority View 
Some courts broaden the test such that valid consideration exists if the promisor received a benefit, even if the promisee did not “suffer” a detriment.

2. Bilateral Contract 
In a bilateral contract, the detriment is in the form of a promise.
3. Unilateral Contract
In a unilateral contract, the detriment is in the form of an action. No consideration exists prior to performance.
4. Pre-existing Duty Rule 
Generally, there is no legal detriment if a party promises to do something that he is already obligated to do, or forbears from doing something that he is not legally entitled to do. (Rest. 2d. § 73.) Example: A promises not to use illegal drugs. Many courts dislike the pre-existing duty rule and have avoided its application in many ways. A promise to perform an act that one is already legally obligated to do may be consideration under certain circumstances.5. Partial Payment as Satisfaction of a Debt 

A promise to pay part of a debt, instead of the whole, is not consideration for a return promise by the creditor to relinquish the debt, because the debtor is obligated to pay anyway (“pre-existing duty”). This rule has been overruled by the UCC and by some jurisdictions. Also, courts will consider a promise of partial payment to be valid consideration if:

a. The payment terms are slightly changed.

b. The debtor refrains from declaring bankruptcy.

c. There is an honest dispute as to the debt.

d. A check marked “payment in full” is cashed.

i. At common law, a creditor forfeited no rights to the rest of the debt still outstanding.
ii. Under the UCC, the entire debt is discharged unless a creditor expressly reserves his rights by writing “with recourse,” or something to that effect, on the check. (UCC § 1-207.)

6. Forbearance to Bring Suit 
A promise not to sue, made in exchange for some return benefit, is valid consideration if either;

a. The claim was valid, or

b. The claim was not valid, and

i. The parties reasonably believed the claim was valid (majority rule), or
ii. The validity was uncertain or the promisor subjectively believed that it was valid (Rest. 2d. § 74).