"Consideration" Defined

Any act or forbearance which is of benefit to the promisor or detriment to the promisee. (Rest.2d §71; Cal.Civ.Code §1605.) The waiver of any legal right at the request of another is sufficient consideration for a promise. (Hamer v. Sidway,124 N.Y. 538, 27 N.E. 256 (1891).) To be sufficient, the consideration must have some value. Something that is completely worthless cannot constitute sufficient consideration. Promises by the parties bargained for and given in exchange for each other constitute consideration.

Consideration is what distinguishes enforceable promises from those promises which are gratuitous. Courts will not enforce gift or gratuitous promises but they will enforce promises which are supported by consideration. Consideration may consist of an act, i.e., doing that which one is not legally obligated to do, or a forbearance, i.e., refraining from conduct which one is privileged to engage in. Consideration is not simply doing what you are legally obligated to do in any event.

Settlement of Claims or Disputes

The compromise of a doubtful claim is supported by consideration so long as the claim is pressed in good faith and is the subject of a bona fide dispute. It is sufficient that the parties entering into the settlement or compromise thought at the time that there was a bona fide question between them, even if it later turns out otherwise. On the other hand, the release from the mere annoyance of unfounded litigation does not furnish valuable consideration.

Bargained for Exchange

In addition to meeting the above test, consideration must arise in the context of a bargained for exchange. This means that the promise must induce the detriment and the detriment must induce the promise. Stated another way, the act or forbearance must have been bargained for and given in exchange for that very promise for legal consideration to be present. Receipt of unrequested benefits creates no legal obligation. If a subsequent promise is made to pay for these benefits the promise is unenforceable. (Mills v. Wyman, 3 Pick 207 (Mass.1825).) Therefore, promises made in recognition of a benefit previously received fail the "bargained for exchange" test and are considered to be merely gratuitous promises.  In other words, past consideration is no consideration!

Past Consideration - Modern Trend

A moral obligation is a sufficient consideration to support a subsequent promise to pay where the promisor has received a material benefit, although there was no original duty or liability resting on the promisor. (Webb v. McGowin, 27 Ala.App. 82, 168 So. 196 (1935); Cal.Civ.Code §1606.)

Promissory Estoppel - A Substitute for Consideration

Reasonably expected reliance may under some circumstances make binding a promise for which nothing has been given or promised in exchange. (Earhart v. William Low Co. (1979) 25 Cal.3d 503, 600 P.2d 1344.) Where legal consideration is lacking courts sometimes enforce gratuitous promises under the theory of "Promissory Estoppel" (Rest.2d §90)

Three elements must exist in order to invoke promissory estoppel:

1) Was there a promise which the promisor reasonably expected to induce action or forbearance? (foreseeability)

2) Did the promise actually induce such action or forbearance? (reliance)

3) Can injustice be avoided only by enforcement of the promise? (injustice)

Rest.2d § 87 does not impose the requirement that the promise giving rise to the cause of action must be so comprehensive so as to meet the requirements of an offer. Promissory estoppel can sustain a cause of action despite the absence of an intent to be bound. Promissory estoppel is more than an equivalent of or a substitute for consideration. (Hoffman v. Red Owl Stores 26 Wis.2d 683, 133 N.W.2d 267 (1965).)

Illusory Promises

A promise which is conditioned upon the whim of the promisor is not consideration. (See, Rest.2d § 77(1).) Such a promise is called an illusory promise.

The trend of the courts is to avoid construing promises as illusory by, whenever possible, implying conditions of good faith and best efforts in the absence of express language in the contract. An example of this would be found in the case of Wood v. Lucy, Lady Duff-Gordon. In that case, Lady Duff Gordon, argued that she was free to break a contract because the other party's promise to perform was illusory resulting in a lack of mutual obligation. The Court of Appeal of New York implied a condition of good faith and an obligation to use best efforts and held the contract to be binding.

Contract Modification

A modification of a contract is a change in an obligation by a modifying agreement. With the exception of contracts for the sale of goods, (see UCC 2-209) to be effective the modifying agreement must be supported by additional consideration.

Accord and Satisfaction

An accord and satisfaction is the offering of some performance different from that originally called for and the acceptance of the different performance as a full and complete performance. However, California Civil Code section 1526 provides that a payment in full check does not operate as an accord and satisfaction if the creditor strikes out the restrictive words or can prove that she cashed the check without knowledge of the restriction.

For plain English explanations of contract law, The Essential Contract Law Casebook
© 2015 by and Craig A. Smith