*Reserved for Ultimate_Writer

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Chapter 11

Consideration

LEARNING OBJECTIVES

After reading this chapter, you should understand the following:

1. What “consideration” is in contract law, what it is not, and what purposes it serves

2. How the sufficiency of consideration is determined

3. In what common situations an understa nding of consideration is important

4. What promises are enforceable without consideration

11.1 General Perspectives on Consideration

LEARNING OBJECTIVES

1. Understand what “consideration” is in contract law.

2. Recognize what purposes the doctrine serves.

3. Understand how the law determines whether consideration exists.

4. Know the elements of consideration.

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The Purpose of Consideration

This chapter continues our inquiry into whether the parties created a valid contract. InChapter 9 "The

Agreement", we saw that the first requisite of a valid contract is an agreement: offer and acceptance. In

this chapter, we assume that agreement has been reached and concentrate on one of its crucial aspects:

the existence of consideration. Which of the following, if any, is a contract?

1. Betty offers to give a book to Lou. Lou accepts.

2. Betty offers Lou the book in exchange for Lo u’s promise to pay twenty-five dollars. Lou

accepts.

3. Betty offers to give Lou the book if Lou prom ises to pick it up at Betty’s house. Lou

agrees.

In American law, only the second situation is a binding contract, because only that contract

contains consideration, a set of mutual promises in which each party agrees to give up something to the

benefit of the other. This chapter will explore the meaning and rationale of that statement.

The question of what constitutes a binding contract has been answered differently throughout history and

in other cultures. For example, under Roman law, a contract without consideration was binding if certain

formal requirements were met. And in the Anglo-American tradition, the presence of a seal—the wax

impression affixed to a document—was once sufficient to make a contract binding without any other

consideration. The seal is no longer a substitute for consideration, although in some states it creates a

presumption of consideration; in forty-nine states, the Uniform Commercial Code (UCC) has abolished

the seal on contracts for the sale of goods. (Louisiana has not adopted UCC Article 2.)

Whatever its original historical purposes, and howeve r apparently arcane, the doctrine of consideration

serves some still-useful purposes. It provides objective evidence for asserting that a contract exists; it

distinguishes between enforceable and unenforceable bargains; and it is a check against rash,

unconsidered action, against thoughtless promise making. [1]

A Definition of Consideration

Consideration is said to exist when the promisor receives some benefit for his promise and the promisee

gives up something in return; it is the bargained-for price you pay for what you get. That may seem simple

enough. But as with much in the law, the complicating situations are never very far away. The

“something” that is promised or delivered cannot be just anything, such as a feeling of pride, warmth, Saylor URL: http://www.saylor.org/books Saylor.org

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amusement, or friendship; it must be something known as a legal detriment—an act, forbearance, or a

promise of such from the promisee. The detriment need not be an actual detriment; it may in fact be a

benefit to the promisee, or at least not a loss. The detriment to one side is usually a legal benefit to the

other, but the detriment to the promisee need not conf er a tangible benefit on the promisor; the promisee

can agree to forego something without that something being given to the promisor. Whether

consideration is legally sufficient has nothing to do with whether it is morally or economically adequate to

make the bargain a fair one. Moreover, legal consideration need not even be certain; it can be a promise

contingent on an event that may never happen. Consideration is a legal concept, and it centers on the

giving up of a legal right or benefit.

Consideration has two elements. The first, as just ou tlined, is whether the promisee has incurred a legal

detriment—given up something, paid some “price,” though it may be, for example, the promise to do

something, like paint a house. (Some courts—although a minority—take the view that a bargained-for

legal benefit to the promisor is sufficient consideration.) The second element is whether the legal

detriment was bargained for: did the promisor specific ally intend the act, forbearance, or promise in

return for his promise? Applying this two-pronged test to the three examples given at the outset of the

chapter, we can easily see why only in the second is there legally sufficient consideration. In the first, Lou

incurred no legal detriment; he made no pledge to act or to forbear from acting, nor did he in fact act or

forbear from acting. In the third example, what might appear to be such a promise is not really so. Betty

made a promise on a condition that Lou comes to her house; the intent clearly is to make a gift.

KEY TAKEAWAY

Consideration is—with some exceptions—a required element of a contract. It is the bargained-for giving

up of something of legal value for something in return. It serves the purposes of making formal the

intention to contract and reducing rash promise making.

EXERCISES

1. Alice promises to give her neighbor a bluebe rry bush; the neighbor says, “Thank you!”

Subsequently, Alice changes her mind. Is she bound by her promise?

2. Why, notwithstanding its relative antiquity, does consideration still serve some useful

purposes? Saylor URL: http://www.saylor.org/books Saylor.org

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3. Identify the exchange of consideration in this example: A to B, “I will pay you $800 if you

paint my garage.” B to A, “Okay, I’ll paint your garage for $800.”

[1] Lon L. Fuller, “Consideration and Form,” Columbia Law Review 41 (1941): 799.

11.2 Legal Sufficiency

LEARNING OBJECTIVES

1. Know in general what “legal sufficiency” means when examining consideration.

2. Recognize how the concept operates in such co mmon situations as threat of litigation,

and accord and satisfaction.

3. Understand why illusory promises are unenfor ceable, and how courts deal with needs,

outputs, and exclusive dealings contracts.

The Concept of Legal Sufficiency

As suggested in Section 11.1 "General Perspectives on Consideration" , what is required in contract is the

exchange of a legal detriment and a legal benefit; if that happens, the consideration is said to

have legal sufficiency.

Actual versus Legal Detriment

Suppose Phil offers George $500 if George will quit smoking for one year. Is Phil’s promise binding?

Because George is presumably benefiting by making an d sticking to the agreement—surely his health will

improve if he gives up smoking—how can his act be considered a legal detriment? The answer is that there

is forbearance on George’s part: George is legally entitled to smoke, and by contracting not to, he suffers a

loss of his legal right to do so. This is a legal de triment; consideration does not require an actual

detriment.

Adequacy of Consideration

Scrooge offers to buy Caspar’s motorcycle, worth $700, for $10 and a shiny new fountain pen (worth $5).

Caspar agrees. Is this agreement supported by adequate consideration? Yes, because both have agreed to

give up something that is theirs: Scrooge, the cash and the pen; Caspar, the motorcycle. Courts are not

generally concerned with the economic adequacy of the consideration but instead with whether it is

present. As Judge Richard A. Posner puts it, “To ask whether there is consideration is simply to inquire

whether the situation is one of exchange and a bargai n has been struck. To go further and ask whether the Saylor URL: http://www.saylor.org/books Saylor.org

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consideration is adequate would require the court to do what…it is less well equipped to do than the

parties—decide whether the price (and other essential terms) specified in the contract are

reasonable.” [1] In short, “courts do not inquire into the adequacy of consideration.”

Of course, normally, parties to contracts will not make such a one-sided deal as Scrooge and Caspar’s. But

there is a common class of contracts in which nominal consideration—usually one dollar—is recited in

printed forms. Usually these are option contracts, in which “in consideration of one dollar in hand paid

and receipt of which is hereby acknowledged” one party agrees to hold open the right of the other to make

a purchase on agreed terms. The courts will enforce these contracts if the dollar is intended “to support a

short-time option proposing an exchange on fair terms.” [2] If, however, the option is for an unreasonably

long period of time and the underlying bargain is unfair (the Restatement gives as an example a ten -year

option permitting the optionee to take phosphate rock from a widow’s land at a per-ton payment of only

one-fourth the prevailing rate), then the courts are unlikely to hold that the nominal consideration makes

the option irrevocable.

Because the consideration on such option contracts is nominal, its recital in the written instrument is

usually a mere formality, and it is frequently never pa id; in effect, the recital of nominal consideration is

false. Nevertheless, the courts will enforce the contract—precisely because the recital has become a

formality and nobody objects to the charade. Moreover, it would be easy enough to upset an option based

on nominal consideration by falsifying oral testimony that the dollar was never paid or received. In a

contest between oral testimonies where the incentive to lie is strong and there is a written document

clearly incorporating the parties’ agreement, the courts prefer the latter. However, as Section 11.4.1

"Consideration for an Option", Board of Control of Eastern Mi chigan University v. Burgess,

demonstrates, the state courts are not uniform on this po int, and it is a safe practice always to deliver the

consideration, no matter how nominal.

Applications of the Legal Sufficiency Doctrine

This section discusses several common circumstances where the issue of whether the consideration

proffered (offered up) is adequate.

Threat of Litigation: Covenant Not to Sue

Because every person has the legal right to file suit if he or she feels aggrieved, a promise to refrain from

going to court is sufficient consideration to support a promise of payment or performance. In Dedeaux v. Saylor URL: http://www.saylor.org/books Saylor.org

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Young, Dedeaux purchased property and promised to make certain payments to Young, the broker. [3] But

Dedeaux thereafter failed to make these payments, an d Young threatened suit; had he filed papers in

court, the transfer of title could have been blocked. To keep Young from suing, Dedeaux promised to pay a

5 percent commission if Young would stay out of court. Dedeaux later resisted paying on the ground that

he had never made such a promise and that even if he had, it did not amount to a contract because there

was no consideration from Young. The court disagreed, holding that the evidence supported Young’s

contention that Dedeaux had indeed made such a promise and upholding Young’s claim for the

commission because “a request to forbear to exercise a legal right has been generally accepted as sufficient

consideration to support a contract.” If Young had had no grounds to sue—for example, if he had

threatened to sue a stranger, or if it could be show n that Dedeaux had no obligation to him originally —

then there would have been no consideration because Young would not have been giving up a legal right.

A promise to forebear suing in return for settlement of a dispute is called

a covenant not to sue(covenant is another word for agreement).

Accord and Satisfaction Generally

Frequently, the parties to a contract will dispute the meaning of its terms and conditions, especially the

amount of money actually due. When the dispute is genuine (and not the unjustified attempt of one party

to avoid paying a sum clearly due), it can be settled by the parties’ agreement on a fixed sum as the

amount due. This second agreement, which substitute s for the disputed first agreement, is called an

accord, and when the payment or other term is discharged, the completed second contract is known as

an accord and satisfaction. A suit brought for an alleged breach of the original contract could be defended

by citing the later accord and satisfaction.

An accord is a contract and must therefore be supported by consideration. Suppose Jan owes Andy

$7,000, due November 1. On November 1, Jan pays only $3,500 in exchange for Andy’s promise to release

Jan from the remainder of the debt. Has Andy (the promisor) made a binding promise? He has not,

because there is no consideration for the accord. Jan has incurred no detriment; she has received

something (release of the obligation to pay the remaining $3,500), but she has given up nothing. But if

Jan and Andy had agreed that Jan would pay the $3,500 on October 25, then there would be

consideration; Jan would have incurred a legal detriment by obligating herself to make a payment earlier

than the original contract required her to. If Jan had paid the $3,500 on November 11 and had given Andy Saylor URL: http://www.saylor.org/books Saylor.org

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something else agreed to—a pen, a keg of beer, a peppercorn—the required detriment would also be

present.

Let’s take a look at some examples of the accord and sa tisfaction principle. The dispute that gives rise to

the parties’ agreement to settle by an accord and satisfaction may come up in several typical ways: where

there is an unliquidated debt; a disputed debt; an “in-full-payment check” for less than what the creditor

claims is due; unforeseen difficulties that give rise to a contract modification, or a novation; or a

composition among creditors. But no obligation ever arises—and no real legal dispute can arise—where a

person promises a benefit if someone will do that which he has a preexisting obligation to, or where a

person promises a benefit to someone not to do that which the promisee is already disallowed from doing,

or where one makes an illusory promise.

Settling an Unliquidated Debt

An unliquidated debt is one that is uncertain in amo unt. Such debts frequently occur when people consult

professionals in whose offices precise fees are rarely discussed, or where one party agrees, expressly or by

implication, to pay the customary or reasonable fees of the other without fixing the exact amount. It is

certain that a debt is owed, but it is not certain how much. (A liquidated debt, on the other hand, is one

that is fixed in amount, certain. A debt can be liquidated by being written down in unambiguous terms—

“IOU $100”—or by being mathematically ascertaina ble—$1 per pound of ice ordered and 60 pounds

delivered; hence the liquidated debt is $60.)

Here is how the matter plays out: Assume a patient go es to the hospital for a gallbladder operation. The

cost of the operation has not been discussed beforehand in detail, although the cost in the metropolitan

area is normally around $8,000. After the operation, the patient and the surgeon agree on a bill of

$6,000. The patient pays the bill; a month later the surgeon sues for another $2,000. Who wins? The

patient: he has forgone his right to challenge the reas onableness of the fee by agreeing to a fixed amount

payable at a certain time. The agreement liquidating the debt is an accord and is enforceable. If, however,

the patient and the surgeon had agreed on an $8,000 fee before the operation, and if the patient

arbitrarily refused to pay this liquidated debt unless the surgeon agreed to cut her fee in half, then the

surgeon would be entitled to recover the other half in a lawsuit, because the patient would have given no

consideration—given up nothing, “suffered no detriment”—for the surgeon’s subsequent agreement to cut

the fee. Saylor URL: http://www.saylor.org/books Saylor.org

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Settling a Disputed Debt

A disputed debt arises where the parties did agree on (liquidated) the price or fee but subsequently get

into a dispute about its fairness, and then settle. When this dispute is settled, the parties have given

consideration to an agreement to accept a fixed sum as payment for the amount due. Assume t hat in the

gallbladder case the patient agrees in advance to pay $8,000. Eight months after the operation and as a

result of nausea and vomiting spells, the patient undergoes a second operation; the surgeons discover a

surgical sponge embedded in the patient’s intestine. The patient refuses to pay the full sum of the original

surgeon’s bill; they settle on $6,000, which the patient pays. This is a binding agreement because

subsequent facts arose to make legitimate the patient’s quarrel over his obligation to pay the full bill. As

long as the dispute is based in fact and is not trumped up, as long as the promisee is acting in good faith,

then consideration is present when a disputed debt is settled.

The “In-Full-Payment” Check Situation

To discharge his liquidated debt for $8,000 to the surgeon, the patient sends a check for $6,000 marked

“payment in full.” The surgeon cashes it. There is no dispute. May the surgeon sue for the remaining

$2,000? This may appear to be an accord: by cashin g the check, the surgeon seems to be agreeing with

the patient to accept the $6,000 in full payment. But consideration is lacking. Because the surgeon is

owed more than the face amount of the check, she causes the patient no legal detriment by accepting the

check. If the rule were otherwise, debtors could easily tempt hard-pressed creditors to accept less than the

amount owed by presenting immediate cash. The key to th e enforceability of a “payment in full” legend is

the character of the debt. If unliquidated, or if there is a dispute, then “payment in full” can serve as

accord and satisfaction when written on a check that is accepted for payment by a creditor. But if the debt

is liquidated and undisputed, there is no consideration when the check is for a lesser amount. (However, it

is arguable that if the check is considered to be an agreement modifying a sales contract, no consideration

is necessary under Uniform Commercial Code (UCC) Section 2-209.)

Unforeseen Difficulties

An unforeseen difficulty arising after a contract is made may be resolved by an accord and satisfaction,

too. Difficulties that no one could foresee can someti mes serve as catalyst for a further promise that may

appear to be without consideration but that the courts will enforce nevertheless. Suppose Peter cont racts

to build Jerry a house for $390,000. While excavating, Peter unexpectedly discovers quicksand, the Saylor URL: http://www.saylor.org/books Saylor.org

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removal of which will cost an additional $10,000. To ensure that Peter does not delay, Jerry promises to

pay Peter $10,000 more than originally agreed. But when the house is completed, Jerry reneges on his

promise. Is Jerry liable? Logically perhaps not: Pete r has incurred no legal detriment in exchange for the

$10,000; he had already contracted to build the house. But most courts would allow Peter to recover on

the theory that the original contract was terminated, or modified, either by mutual agreement or by an

implied condition that the original contract would be discharged if unforeseen difficulties developed. In

short, the courts will enforce the parties’ own mutual recognition that the unforeseen conditions had

made the old contract unfair. The parties either have modified their original contract (which requires

consideration at common law) or have given up their original contract and made a new one (called

anovation).

It is a question of fact whether the new circumstance is new and difficult enough to make a preexisting

obligation into an unforeseen difficulty. Obviously, if Peter encounters only a small pocket of quicksand —

say two gallons’ worth—he would have to deal with it as part of his already-agreed-to job. If he encounters

as much quicksand as would fill an Olympic-sized swimming pool, that’s clearly unforeseen, and he

should get extra to deal with it. Someplace between the two quantities of quicksand there is enough of the

stuff so that Peter’s duty to remove it is outside the original agreement and new consideration would be

needed in exchange for its removal.

Creditors’ Composition

A creditors’ composition may give rise to debt settlement by an accord and satisfaction. It is an agreement

whereby two or more creditors of a debtor consent to the debtor’s paying them pro rata shares of the debt

due in full satisfaction of their claims. A composition agreement can be critically important to a business

in trouble; through it, the business might manage to stave off bankruptcy. Even though the share accepted

is less than the full amount due and is payable after the due date so that consideration appears to be

lacking, courts routinely enforce these agreements. The promise of each creditor to accept a lesser share

than that owed in return for getting something is taken as consideration to support the promises of the

others. A debtor has $3,000 on hand. He owes $3,000 each to A, B, and C. A, B, and C agree to accept

$1,000 each and discharge the debtor. Each creditor has given up $2,000 but in return has at least

received something, the $1,000. Without the composition, one might have received the entire amount

owed her, but the others would have received nothing. Saylor URL: http://www.saylor.org/books Saylor.org

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Preexisting Duty

Not amenable to settlement by an accord and sa tisfaction is the situation where a party has

a preexisting duty and he or she is offered a benefit to discharge it. When the only consideration offered

the promisor is an act or promise to act to carry out a preexisting duty, there is no valid contract.

As Denney v. Reppert (Section 11.4.2 "Consideration: Preexisting Obligation" ) makes clear, the promisee

suffers no legal detriment in promising to undertake that which he is already obligated to do. Where a

person is promised a benefit not to do that which he is already disallowed from doing, there is no

consideration. David is sixteen years old; his uncle promises him $50 if he will refrain from smoking. The

promise is not enforceable: legally, David already must refrain from smoking, so he has promised to give

up nothing to which he had a legal right. As noted previously, the difficulty arises where it is unclear

whether a person has a preexisting obligation or whether such unforeseen difficulties have arisen as to

warrant the recognition that the parties have modified the contract or entered into a novation. What if

Peter insists on additional payment for him to re move one wheelbarrow full of quicksand from the

excavation? Surely that’s not enough “unforeseen difficulty.” How much quicksand is enough?

Illusory Promises

Not every promise is a pledge to do something. Sometime s it is an illusory promise, where the terms of the

contract really bind the promisor to give up nothing, to suffer no detriment. For example, Lydia offers to

pay Juliette $10 for mowing Lydia’s lawn. Juliette promises to mow the lawn if she feels like it. May

Juliette enforce the contract? No, because Juliette has incurred no legal detriment; her promise is illu sory,

since by doing nothing she still falls within the literal wording of her promise. The doctrine that such

bargains are unenforceable is sometimes referred to as the rule of mutuality of obligation: if one party to a

contract has not made a binding obligation, neither is the other party bound. Thus if A contracts to hire B

for a year at $6,000 a month, reserving the right to dismiss B at any time (an “option to cancel” clause),

and B agrees to work for a year, A has not really promised anything; A is not bound to the agreement, and

neither is B.

The illusory promise presents a special problem in agreements for exclusive dealing, outputs, and needs

contracts. Saylor URL: http://www.saylor.org/books Saylor.org

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Exclusive Dealing Agreement

In an exclusive dealing agreement, one party (the franchisor) promises to deal solely with the other party

(the franchisee)—for example, a franchisor-designer agrees to sell all of her specially designed clothes to a

particular department store (the franchisee). In return, the store promises to pay a certain percentage of

the sales price to the designer. On closer inspection, it may appear that the store’s promise is illusory: it

pays the designer only if it manages to sell dresses, but it may sell none. The franchisor-designer may

therefore attempt to back out of the deal by arguing that because the franchisee is not obligated to do

anything, there was no consideration for her promise to deal exclusively with the store.

Courts, however, have upheld exclusive dealing cont racts on the theory that the franchisee has an

obligation to use reasonable efforts to promote and se ll the product or services. This obligation may be

spelled out in the contract or implied by its terms. In the classic statement of this concept, Judge

Benjamin N. Cardozo, then on the New York Court of Appeals, in upholding such a contract, declared:

It is true that [the franchisee] does not promise in so many words that he will use reasonable efforts to

place the defendant’s endorsements and market her designs. We think, however, that such a promise is

fairly to be implied. The law has outgrown its primitive stage of formalism when the precise word was the

sovereign talisman, and every slip was fatal. It takes a broader view today. A promise may be lacking, and

yet the whole writing may be “instinct with an obliga tion,” imperfectly expressed.…His promise to pay the

defendant one-half of the profits and revenues resulting from the exclusive agency and to render accounts

monthly was a promise to use reasonable efforts to bring profits and revenues into existence. [4]

The UCC follows the same rule. In the absence of language specifically delineating the seller’s or buyer’s

duties, an exclusive dealing contract under Section 2-306(2) imposes “an obligation by the seller to use

best efforts to supply the goods and by the buyer to use best efforts to promote their sale.”

Outputs Contracts and Needs Contracts

A similar issue arises with outputs contracts and needs contracts. In anoutputs contract, the seller—say a

coal company—agrees to sell its entire yearly output of coal to an electric utility. Has it really agreed to

produce and sell any coal at all? What if the coal-m ine owner decides to shut down production to take a

year’s vacation—is that a violation of the agreement? Yes. The law imposes upon the seller here a duty to

produce and sell a reasonable amount. Similarly, if the electric utility contracted to buy all its Saylor URL: http://www.saylor.org/books Saylor.org

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requirements of coal from the coal company—aneeds contract—could it decide to stop operation entirely

and take no coal? No, it is required to take a reasonable amount.

KEY TAKEAWAY

Courts do not inquire into the adequacy of consideration, but (with some exceptions) do require the

promisor to incur a legal detriment (the surrender of any legal right he or she possesses—to give up

something) in order to receive the bargained-for bene fit. The surrender of the right to sue is a legal

detriment, and the issue arises in analyzing various kinds of dispute settlement agreements (accord and

satisfaction): the obligation to pay the full amount claimed by a creditor on a liquidated debt, an

unliquidated debt, and a disputed debt. Where unforeseen difficulties arise, an obligor will be entitled to

additional compensation (consideration) to resolve them either because the contract is modified or

because the parties have entered into a novation, bu t no additional consideration is owing to one who

performs a preexisting obligation or forbears from pe rforming that which he or she is under a legal duty

not to perform. If a promisor gives an illusory promise, he or she gives no consideration and no contract is

formed; but exclusive dealing agreements, needs cont racts, and outputs contracts are not treated as

illusory.

EXERCISES

1. What is meant by “legally sufficient” consideration?

2. Why do courts usually not “inquire into the adequacy of consideration”?

3. How can it be said there is consideration in the following instances: (a) settlement of an

unliquidated debt? (b) settlement of a disputed debt? (c) a person agreeing to do more

than originally contracted for because of un foreseen difficulties? (d) a creditor agreeing

with other creditors for each of them to accept less than they are owed from the

debtor?

4. Why is there no consideration where a pers on demands extra compensation for that

which she is already obligated to do, or for forbearing to do that which she already is

forbidden from doing?

5. What is the difference between a contract modification and a novation? Saylor URL: http://www.saylor.org/books Saylor.org

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6. How do courts resolve the problem that a needs or outputs contract apparently imposes

no detriment—no requirement to pass any consideration to the other side—on the

promisor?

[1] Richard A. Posner, Economic Analysis of Law (New York: Aspen, 1973), 46.

[2] Restatement (Second) of Contracts, Section 87(b).

[3] Dedeaux v. Young , 170 So.2d 561 (1965).

[4] Otis F. Wood v. Lucy, Lady Duff-Gordon , 118 N.E. 214 (1917).

11.3 Promises Enforceable without Consideration

LEARNING OBJECTIVE

1. Understand the exceptions to the requirement of consideration.

For a variety of policy reasons, courts will enforce certain types of promises even though consideration

may be absent. Some of these are governed by the Uniform Commercial Code (UCC); others are part of

the established common law.

Promises Enforceable without Consideration at Common Law

Past Consideration

Ordinarily, past consideration is not sufficient to su pport a promise. By past consideration, the courts

mean an act that could have served as consideration if it had been bargained for at the time but that was

not the subject of a bargain. For example, Mrs. Ace’s dog Fluffy escapes from her mistress’s condo at dusk.

Robert finds Fluffy, sees Mrs. Ace, who is herself ou t looking for her pet, and gives Fluffy to her. She says,

“Oh, thank you for finding my dear dog. Come by my place tomorrow morning and I’ll give you fifty

dollars as a reward.” The next day Robert stops by Mrs. Ace’s condo, but she says, “Well, I don’t know.

Fluffy soiled the carpet again last night. I think may be a twenty-dollar reward would be plenty.” Robert

cannot collect the fifty dollars. Even though Mrs. Ace might have a moral obligation to pay him and honor

her promise, there was no consideration for it. Robert incurred no legal detriment; his contribution —

finding the dog—was paid out before her promise, an d his past consideration is invalid to support a

contract. There was no bargained-for exchange.

However, a valid consideration, given in the past to support a promise, can be the basis for another, later

contract under certain circumstances. These occur when a person’s duty to act for one reason or another Saylor URL: http://www.saylor.org/books Saylor.org

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has become no longer binding. If the person then makes a new promise based on the unfulfilled past duty,

the new promise is binding without further consideration. Three types of cases follow.

Promise Revived after Statute of Limitations Has Passed

A statute of limitations is a law requiring a lawsuit to be filed within a specified period of years. For

example, in many states a contract claim must be sued on within six years; if the plaintiff waits longer

than that, the claim will be dismissed, regardless of its merits. When the time period set forth in the

statute of limitations has lapsed, the statute is said to have “run.” If a debtor renews a promise to pay or

acknowledges a debt after the running of a statute of limitations, then under the common law the promise

is binding, although there is no consideration in the usual sense. In many states, this promise or

acknowledgment must be in writing and signed by th e debtor. Also, in many states, the courts will imply a

promise or acknowledgment if the debtor makes a partial payment after the statute has run.

Voidable Duties

Some promises that might otherwise serve as consider ation are voidable by the promisor, for a variety of

reasons, including infancy, fraud, duress, or mistake. But a voidable contract does not automatically

become void, and if the promisor has not avoided the contract but instead thereafter renews his promise,

it is binding. For example, Mr. Melvin sells his bicycle to Seth, age thirteen. Seth promises to pay Mr.

Melvin one hundred dollars. Seth may repudiate the contract, but he does not. When he turns eighteen, he

renews his promise to pay the one hundred dollars. This promise is binding. (However, a promise made

up to the time he turned eighteen would not be binding, since he would still have been a minor.)

Promissory Estoppel

We examined the meaning of this forbidding phrase in Chapter 8 "Introduction to Contract Law" (recall

the English High Trees case). It represents another type of promise that the courts will enforce without

consideration. Simply stated,promissory estoppel me ans that the courts will stop the promisor from

claiming that there was no consideration. The doctrine of promissory estoppel is invoked in the interests

of justice when three conditions are met: (1) the promise is one that the promisor should reasonably

expect to induce the promisee to take action or forb ear from taking action of a definite and substantial

character; (2) the action or forbearance is taken; an d (3) injustice can be avoided only by enforcin g the

promise. (The complete phraseology is “promissory estoppel with detrimental reliance.”) Saylor URL: http://www.saylor.org/books Saylor.org

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Timko served on the board of trustees of a school. He recommended that the school purchase a building

for a substantial sum of money, and to induce the trustees to vote for the purchase, he promised to help

with the purchase and to pay at the end of five years the purchase price less the down payment. At the end

of four years, Timko died. The school sued his estate, which defended on the ground that there was no

consideration for the promise. Timko was promised or given nothing in return, and the purchase of the

building was of no direct benefit to him (which would have made the promise enforceable as a unilateral

contract). The court ruled that under the three-pronged promissory estoppel test, Timko’s estate was

liable. [1]

Cases involving pledges of charitable contributions ha ve long been troublesome to courts. Recognizing the

necessity to charitable institutions of such pledges, the courts have also been mindful that a mere pledge

of money to the general funds of a hospital, universi ty, or similar institution does not usually induce

substantial action but is, rather, simply a promise wi thout consideration. When the pledge does prompt a

charitable institution to act, promissory estoppel is available as a remedy. In about one-quarter of the

states, another doctrine is available for cases involving simple pledges: the “mutual promises” theory,

whereby the pledges of many individuals are taken as consideration for each other and are binding against

each promisor. This theory was not available to the plaintiff in Timko because his was the only promise.

Moral Obligation

The Restatement allows, under some circumstances, th e enforcement of past-consideration contracts. It

provides as follows in Section 86, “Promise for Benefit Received”:

A promise made in recognition of a benefit previously received by the promisor from the promisee is

binding to the extent necessary to prevent injustice.

A promise is not binding under Subsection (1)

if the promisee conferred the benefit as a gift or for other reasons the promisor has not been unjustly

enriched; or

to the extent that its value is disproportionate to the benefit.

Promises Enforceable without Consideration by Statute

We have touched on several common-law exceptions to the consideration requirement. Some also are

provided by statute. Saylor URL: http://www.saylor.org/books Saylor.org

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Under the UCC

The UCC permits one party to discharge, without consideration, a claim or right arising out of an alleged

breach of contract by the other party. This is accomplished by delivering to the other party a signed

written waiver or renunciation. [2] This provision applies to any contract governed by the UCC and is not

limited to the sales provisions of Article 2.

The UCC also permits a party to discharge the other si de without consideration when there is no breach,

and it permits parties to modify their Article 2 contract without consideration. [3] The official comments to

the UCC section add the following: “However, modifications made thereunder must meet the test of good

faith imposed by this Act. The effective use of bad faith to escape performance on the original contract

terms is barred, and the extortion of a “modification” without legitimate commercial reason is ineffective

as a violation of the duty of good faith.”

Seller agrees to deliver a ton of coal within seven days. Buyer needs the coal sooner and asks Seller to

deliver within four days. Seller agrees. This promise is binding even though Seller received no additional

consideration beyond the purchase price for the additi onal duty agreed to (the duty to get the coal to

Buyer sooner than originally agreed). The UCC allows a merchant’s firm offer, signed, in writing, to bind

the merchant to keep the offer to buy or sell open without consideration. [4] This is the UCC’s equivalent of

a common-law option, which, as you recall, does require consideration.

Section 1-207 of the UCC allows a party a reservation of rights while performing a contract. This section

raises a difficult question when a debtor issues an in-full-payment check in payment of a disputed debt. As

noted earlier in this chapter, because under the co mmon law the creditor’s acceptance of an in-full-

payment check in payment of a disputed debt constitutes an accord and satisfaction, the creditor cannot

collect an amount beyond the check. But what if the creditor, in cashing the check, reserves the right

(under Section 1-207) to sue for an amount beyond what the debtor is offering? The courts are split on the

issue: regarding the sale of goods governed by the UCC, some courts allow the creditor to sue for the

unpaid debt notwithstanding the check being marked “paid in full,” and others do not.

Bankruptcy

Bankruptcy is, of course, federal statutory law. The rule here regarding a promise to pay after the

obligation is discharged is similar to that governing statutes of limitations. Traditionally, a promise to

repay debts after a bankruptcy court has discharged them makes the debtor liable once again. This Saylor URL: http://www.saylor.org/books Saylor.org

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traditional rule gives rise to potential abuse; after undergoing the rigors of bankruptcy, a debtor could be

badgered by creditors intoreaffirmation, putting him in a worse position than before, since he must wait

six years before being allowed to avail himself of bankruptcy again.

The federal Bankruptcy Act includes certain procedural protections to ensure that the debtor knowingly

enters into a reaffirmation of his debt. Among its provisions, the law requires the debtor to have

reaffirmed the debt before the debtor is discharged in bankruptcy; he then has sixty days to rescind his

reaffirmation. If the bankrupt party is an individual, the law also requires that a court hearing be held at

which the consequences of his reaffirmation must be explained, and reaffirmation of certain consumer

debts is subject to court approval if the debtor is not represented by an attorney.

International Contracts

Contracts governed by the Convention on Contracts for the International Sale of Goods (as mentioned

in Chapter 8 "Introduction to Contract Law" ) do not require consideration to be binding.

KEY TAKEAWAY

There are some exceptions to the consideration requirement. At common law, past consideration doesn’t

count, but no consideration is necessary in these cases: where a promise barred by the statute of

limitations is revived, where a voidable duty is reaffirmed, where there has been detrimental reliance on a

promise (i.e., promissory estoppel), or where a court simply finds the promisor has a moral obligation to

keep the promise.

Under statutory law, the UCC has several exceptions to the consideration requirement. No consideration is

needed to revive a debt discharged in bankruptcy, and none is called for under the Convention on

Contracts for the International Sale of Goods.

EXERCISES

1. Melba began work for Acme Company in 1975 as a filing clerk. Thirty years later she had

risen to be comptroller. At a thirty-year celebration party, her boss, Mr. Holder, said,

“Melba, I hope you work here for a long time, and you can retire at any time, but if you

decide to retire, on account of your years of good service, the company will pay you a

monthly pension of $2,000.” Melba continued to work for another two years, then

retired. The company paid the pension for three years and then, in an economic Saylor URL: http://www.saylor.org/books Saylor.org

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downturn, stopped. When Melba sued, the company claimed it was not obligated to her

because the pension was of past consideration. What will be the result?

2. What theories are used to enforce charitable subscriptions?

3. What are the elements necessary for the a pplication of the doctrine of promissory

estoppel?

4. Under what circumstances does the Restatem ent employ moral obligation as a basis for

enforcing an otherwise unenforceable contract?

5. Promises unenforceable because barred by ba nkruptcy or by the running of the statute

of limitations can be revived without further consideration. What do the two

circumstances have in common?

6. Under the UCC, when is no consideration required where it would be in equivalent

situations at common law?

[1] Estate of Timko v. Oral Roberts Evangelistic Assn. , 215 N.W.2d 750 (Mich. App. 1974).

[2] Uniform Commercial Code, Section 1-107.

[3] Uniform Commercial Code, Sections 2-209(4) and 2-209(1).

[4] Uniform Commercial Code, Section 2-205.

11.3 Promises Enforceable without Consideration

LEARNING OBJECTIVE

1. Understand the exceptions to the requirement of consideration.

For a variety of policy reasons, courts will enforce certain types of promises even though consideration

may be absent. Some of these are governed by the Uniform Commercial Code (UCC); others are part of

the established common law.

Promises Enforceable without Consideration at Common Law

Past Consideration

Ordinarily, past consideration is not sufficient to su pport a promise. By past consideration, the courts

mean an act that could have served as consideration if it had been bargained for at the time but that was

not the subject of a bargain. For example, Mrs. Ace’s dog Fluffy escapes from her mistress’s condo at dusk.

Robert finds Fluffy, sees Mrs. Ace, who is herself ou t looking for her pet, and gives Fluffy to her. She says, Saylor URL: http://www.saylor.org/books Saylor.org

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“Oh, thank you for finding my dear dog. Come by my place tomorrow morning and I’ll give you fifty

dollars as a reward.” The next day Robert stops by Mrs. Ace’s condo, but she says, “Well, I don’t know.

Fluffy soiled the carpet again last night. I think may be a twenty-dollar reward would be plenty.” Robert

cannot collect the fifty dollars. Even though Mrs. Ace might have a moral obligation to pay him and honor

her promise, there was no consideration for it. Robert incurred no legal detriment; his contribution —

finding the dog—was paid out before her promise, an d his past consideration is invalid to support a

contract. There was no bargained-for exchange.

However, a valid consideration, given in the past to support a promise, can be the basis for another, later

contract under certain circumstances. These occur when a person’s duty to act for one reason or another