Session 09 - Consideration

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Overview of Consideration

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Definition

Consideration is a bargain for exchange involving a legal benefit for a legal detriment.

• Consideration is the glue that binds the offer and acceptance together to make an enforceable contract
• Without consideration or a consideration substitute, there is no enforceable contract
• An agreement without consideration is not enforceable

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Express vs. Implied Contracts (Review)

• Express Contract: Contract in which the offer, acceptance, and consideration are all expressly stated by the parties (can be oral or written)
• Implied Contract (Implied-in-Fact): Contract in which the offer, acceptance, or consideration is evidenced by the party’s actions rather than words

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Consideration Substitutes

When consideration is lacking, certain substitutes may make a promise enforceable:

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1. UCC § 2-205: Merchant Firm Offers

• An offer by a merchant to buy or sell goods in a signed writing which by its terms gives assurance that it will be held open is not revocable for lack of consideration
• The statute acts as a consideration substitute
• Does not require both parties to be merchants—only the offeror
• Maximum duration: 3 months

Important: Signature requirement exists to trace the communication back to the merchant who sent it. Emails, mail, and other traceable communications satisfy the signature requirement as long as you can prove who sent it.

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2. UCC § 2-209: Modifications

• An agreement modifying a contract within Article 2 (UCC) does not need consideration to be enforceable or binding
• Requirement: The parties must act in good faith
• Different from common law, which requires consideration for modifications

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3. Promissory Estoppel

• Last resort consideration substitute
• Enforces a promise to avoid injustice
• Used when there is detrimental reliance

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4. Moral Obligations (Minority of Jurisdictions)

• Some courts believe that a moral obligation may substitute for consideration
• NOT the prevailing view
• Most jurisdictions reject moral obligation as a consideration substitute
• Example: Saving someone’s life and being promised payment—enforceable in minority jurisdictions only

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5. Unforeseen Difficulties (Minority of Jurisdictions)

A modification in a minority of jurisdictions will not need new consideration as long as:

1. Neither party has fully performed
2. The difficulties were unforeseen at the formation stage of the contract (judged by reasonable person standard)
3. The resulting modification is fair and equitable

Key Points:

• Not a UCC rule—applies across the board in minority jurisdictions
• “Unforeseen” is judged by a reasonable person standard
• The standard may be heightened based on the party’s expertise (e.g., reasonable contractor, reasonable doctor)
• Example: Developer discovers underground gas that everyone in the area knows about—NOT unforeseen for a developer

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Accord and Satisfaction

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Definition

Accord and Satisfaction is a specialized form of modification where consideration is supplied by a dispute involving an unliquidated debt.

• Accord = the offer
• Satisfaction = cashing the check/accepting payment
• Unliquidated debt = debt that is still outstanding, not yet satisfied

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Requirements

1. Genuine dispute about how much is owed
2. Unliquidated debt (amount in dispute)
3. Offer of payment as “full and final payment”
4. Acceptance of that offer

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How It Works

Example: Doctor bills you $1,200. You genuinely dispute the amount. You offer$500 as “full and final payment.” Doctor cashes the check. The original $1,200 debt is now discharged.

• Consideration is supplied by the genuine dispute—both parties give up something
• Original contract is substituted by the new accord and satisfaction agreement
• Usually comes up as a defense raised by the defendant

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Rescission

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Definition

Rescission is a special form of modification where both parties agree to discharge an existing contract.

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Requirements

• Neither party has fully performed
• Consideration is supplied by the fact that neither party has fully performed
• New consideration is necessary for rescission to be effective
• New consideration may be the mutual promises of the parties to walk away from their obligations

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Application

• Common between contractors and property owners
• May come up as a formation defense (not remedies, which is next semester)

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Restatement (Second) of Contracts Provisions

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§ 87: Option Contracts Without Consideration

An offer is binding as an option contract if it:

1. Is in writing
2. Signed by the offeror
3. Recites the purported consideration for making the offer (doesn’t have to actually be paid)
4. Proposes an exchange on fair terms within a reasonable time
5. OR is made irrevocable by statute (e.g., UCC § 2-205)

Key Insight: Restatement Second follows UCC approach—only requires recitation of consideration, not actual payment

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§ 45: Option Contract Created by Part Performance or Tender

• Where an offer invites the offeree to accept by rendering a performance (unilateral contract), an option contract is created when the offeree:
  • Tenders performance, OR
  • Begins the invited performance, OR
  • Tenders a beginning of it

Modern Majority View (Holland case):

• An offer for a unilateral contract becomes irrevocable once the offeree starts to perform
• The offeree does NOT become bound when performance begins
• The offeree must fully perform within the time granted by the offeror to enforce the promisor’s promise
• Offeree has no obligation to complete the work—can stop without liability

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Key Principles

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Consideration Does Not Have to Be Equal

• Courts do not examine the adequacy of consideration
• As long as parties act in good faith, a huge disparity in value is acceptable
• Example: $1 million prize for swiping a casino card is valid consideration
• Example: Buying a stamp for $5 that's worth$10 million is valid

Exception: “Bullshit promises” intended to avoid taxes or other obligations

• Example: “Selling” $10 million home to child for$1 to avoid gift tax—unenforceable

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Consideration Need Not Run From Promisee or To Promisor

• Consideration can run from a third party
• Example: Father pays dealer $30,000 for car to be delivered to son. Son can enforce the promise even though he paid no consideration.

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Pre-Existing Duty

• Performing a duty you already owe is NOT consideration
• Example: School promises professor extra $20,000 to finish teaching class—unenforceable because professor already has duty to teach
• Example: Police officers cannot collect rewards for arrests—they have pre-existing duty to arrest criminals (even off-duty under Penal Code § 842)
• Exception: Doctors on airplanes have NO pre-existing duty to treat passengers—acting as Good Samaritan

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Case Law

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Beale v. Beale (1968) - Option Without Consideration

Facts:

• Carlton Beale bought farm from Pearl Beale in 1968
• Executed option to buy Calvin and Cecilia’s adjoining property for $28,000
• First option: 3 years, supported by $100 consideration
• Second option: 5 years, supported by another $100 consideration
• Extension: Additional 3 years to February 1, 1979, provided in written addendum signed by both, but NO additional consideration
• Calvin died in 1977; Cecilia assumed full ownership
• Carlton exercised option in May and September 1978
• Cecilia refused to sell

Issue: Where an option contract is not supported by consideration, can the optionee force specific performance? Rule: If a purported option agreement is not supported by consideration, it is deemed to be a mere offer, which the offeree can enforce if accepted before it expires or is revoked. Holding:

• Under Maryland law, option agreement is valid if supported by consideration
• Without consideration, the option is deemed an offer to sell for the period set forth or until withdrawn
• Offer may be withdrawn at any time before acceptance
• If offer is accepted before revocation or expiration, offeror can be legally compelled to sell

Conclusion: Judgment reversed and remanded Key Takeaway: Traditional view—consideration is necessary, BUT if the offer is still open and you accept it, it’s enforceable because mutual promises to be bound constitute consideration

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Holland Case (Beginning Performance)

Modern Majority View: An offer for a unilateral contract becomes irrevocable once the offeree begins performance, but the offeree does not become bound and has no obligation to complete the work. Example: “If you cross the Brooklyn Bridge on Saturday at noon, I will pay you $5,000.” You begin crossing, then decide it’s too hot and stop. The offer became irrevocable when you started, but there’s no contract, so the offeror cannot sue you.

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Kim v. Son (Blood Promise Case)

Facts:

• Son and Kim were friends and business partners
• Son was majority shareholder; Kim loaned money for business ventures
• At sushi bar, both heavily intoxicated
• Son pricked finger and wrote in blood promising to repay Kim
• Son later failed to pay; Kim sued based on blood note

Issue: Was there a legal obligation to pay based on the blood note? Rule: A promise must be supported by consideration—a bargained-for exchange. Holding: No legal obligation. The blood agreement lacked sufficient consideration because:

• It was NOT a result of bargained-for exchange
• It was a gratuitous promise (gift promise)
• Son wrote the note while intoxicated and feeling sorry—out of guilt, not as part of a bargain
• This was a prior act—the money was already lost

Key Quote: “The blood agreement lacked sufficient consideration because it was not a result of bargained for exchange, but rather a gratuitous promise.” Key Takeaway: Past consideration is not valid consideration. Moral obligation alone (majority rule) is not enforceable.

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Hamer v. Sidway (1891) - Uncle-Nephew Promise

Facts:

• At family celebration in 1869, William E. Story Sr. promised nephew $5,000 if he refrained from drinking, smoking, swearing, and gambling until age 21
• Nephew agreed and fully performed
• When nephew turned 21 (1875), he wrote confirming performance
• Uncle acknowledged promise and deposited money in bank to accrue interest
• Uncle died in 1887 without paying
• Louise Hammer (assignee of nephew’s rights) filed claim against executor
• Executor rejected claim

Issue: Was the uncle’s promise to pay $5,000 supported by valid consideration? Rule: Consideration does not depend on whether the promisee benefits or suffers harm, but whether they forbear or do something they have a legal right to do at the promisor’s request. Holding: Yes, valid consideration existed.

• Legal detriment: Nephew had legal right to drink, smoke, swear, and gamble, but refrained at uncle’s request
• Legal benefit: Uncle benefited from seeing nephew healthy and avoiding destructive behavior (not just financial benefit)

Defendant’s Argument (Rejected): No consideration because nephew’s abstention was beneficial to him and did not benefit the uncle. Court’s Response: There IS legal benefit to family members who encourage another family member to pursue positive paths. Key Takeaway:

• Consideration can be refraining from a legal right
• Benefit doesn’t have to be financial—legal benefit to family member is sufficient
• $5,000 in 1891 ≈$200,000 today

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Kirksey v. Kirksey (1845) - Widow and Brother-in-Law

Facts:

• Plaintiff was widow of defendant’s brother with several children
• She lived on public land under lease 60-70 miles away
• Defendant wrote letter saying he felt bad for her situation and promised if she came to see him, he would provide a place to raise her family
• One month later, plaintiff moved her family to defendant’s land
• Defendant provided comfortable house for 2 years
• After 2 years, defendant notified her to leave and moved her to uncomfortable house
• Plaintiff sued for performance of promise

Issue: Is a promise to provide free land for residence enforceable after it is revoked? Rule: A promise to provide free land for residence that is fulfilled for a defined amount of time and then revoked is gratuitous and therefore unenforceable. Holding:

• Defendant made a gift promise on a condition
• Promise to make a gift is not enforceable even if the condition is satisfied
• There was donative intent
• Although traveling 70 miles was a legal detriment, it was NOT bargained for
• She kept her lease (didn’t give it up)

Dissent: One judge believed the loss and inconvenience of moving 70 miles constituted sufficient consideration. Key Takeaway:

• Legal detriment exists BUT must be bargained for to be consideration
• She didn’t give up her lease in reliance on promise—weakened her argument
• Better argument: Promissory estoppel/detrimental reliance (last resort)—if she had given up the lease in reliance on his promise, injustice argument stronger

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Pensy Supply, Inc. v. American Ash Recycling (Reciprocal Conventional Inducement)

Facts:

• Pensy Supply contracted to pave driveways and parking lot for Northern York High School
• Required to use base aggregate called “AgRite”
• American Ash notified Pensy it would supply AgRite for free
• By supplying AgRite to Pensy, American Ash avoided paying disposal costs
• Pensy collected AgRite and completed paving project
• After one year, pavement developed defects due to AgRite
• Pensy requested American Ash remove and dispose of AgRite; American Ash refused
• Trial court sustained demurrer, finding contract lacked consideration

Issue: Was there consideration in the “free” supply agreement? Rule: Consideration exists if there is benefit to the promisor OR detriment to the promisee. Holding: Yes, consideration existed.

• Benefit to promisor (American Ash): Avoided disposal costs by having Pensy take the AgRite
• Court called this “reciprocal conventional inducement”—promise appears to be a gift but actually benefits the promisor

Key Takeaway:

• Even if promise appears to be a gift promise, it may still be bargained-for exchange if promisor legally benefits
• Like putting items for free on OfferUp—you benefit by not having to pay to dispose of them

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Gott v. Tropicana Hotel and Casino (2000) - Casino Promotion

Facts:

• Tropicana ran promotion inviting guests to fill out form with personal information
• In exchange for providing gambling data, guests received daily spin on $1 million wheel
• Plaintiff claims her spin landed on grand prize
• Attendant immediately began new spin
• Tropicana argued inadequate consideration (1-minute spin vs. $1 million)

Issue: Was there adequate consideration to form a contract? Rule: Consideration exists in the form of detriment or inconvenience to promisee at request of promisor AND benefit to promisor. Holding: Yes, sufficient consideration existed. Detriment to promisee:

• Had to go to casino
• Wait in line
• Present Diamond Club card
• Allow card to be swiped
• Permit gathering of personal information

Benefit to promisor:

• Gathered customer data for marketing/promotions

Key Takeaway:

• Consideration does not have to be of equal value
• Huge discrepancy between consideration exchanged doesn’t matter
• Courts don’t examine adequacy of consideration as long as parties act in good faith

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Barfield v. Commerce Bank (Racial Discrimination)

Facts:

• Barfield entered bank and requested change for $50 bill
• Refused change because he was not account holder
• Next day, his friend John made same request and was given change without being asked about account
• Barfield entered again, asked for change for $100 bill
• Told he would not be given change unless he was account holder
• Sued alleging racial discrimination and impairment of ability to contract

Issue: Does exchanging bills constitute a contract for purposes of civil rights statutes? Rule: 42 U.S.C. § 1981—All persons shall have the same right to make and enforce contracts regardless of race. The statute defines “making an enforceable contract” to include: making, performance, modification, termination of contract, and enjoyment of all benefits, privileges, terms, and conditions of contractual relationship. Holding:

• Proposed exchange of bills constitutes a contract because transaction involves consideration
• Barfield offered something of value ($100 bill) in exchange for something else (smaller bills)
• Racial discrimination in offering this service violates § 1981

Key Takeaway:

• Contract law intersects with civil rights law
• Smart lawyering—using contract law as basis for civil rights claim
• Similar to Hawkins v. McGee (hairy hand case)—using contract instead of tort

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Fink v. Bohm (Paternity Agreement)

Facts:

• Hilda Bohm alleged Louise Fink impregnated her
• Fink agreed to pay expenses and support for child if Bohm did not bring bastardy proceedings against him
• Fink made payments between 1951-1953
• Bohm refrained from bringing proceedings
• Fink stopped making payments in 1953 after paternity blood test showed he could NOT be the father
• Fink was acquitted of bastardy charge
• Bohm sued for breach of contract
• Fink argued Bohm’s claim was invalid for lack of consideration (since he wasn’t the father)

Issue: Is there adequate consideration to support a binding agreement if one party agrees to refrain from bringing legal action where there is some question to be resolved at time of agreement, but the claim is later unsuccessful? Rule: A deal is valid if one person agrees not to take legal action, as long as there was some question about it when the deal was made. The legal action must seem valid, and both people must believe there are questions to be resolved, even if it turns out there isn’t. Holding: Yes, valid consideration. Court applied Restatement (First) § 76B.

• Even if Fink was not actually the father, the parties genuinely believed at the time there was a dispute
• The genuine belief and dispute at the time of agreement supplies consideration
• Similar to accord and satisfaction with unliquidated debt

Key Takeaway:

• Consideration can exist based on genuine belief at time of agreement
• Later discovery that the underlying claim was invalid doesn’t retroactively eliminate consideration
• Similar to accord and satisfaction—genuine dispute supplies consideration even if you don’t actually owe the money

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Practice Problems

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Problem 1 (Page 213): Merchant Firm Offer Analysis

Facts: A merchant makes an offer to sell goods to B by mail, which states that the offer will be open for 30 days. Before B accepts, A calls and revokes the offer. Question: Is the revocation effective? Will the result be different if the offer had read:

• “This offer is irrevocable for 30 days”
• “This is a firm offer for 30 days”
• “I must have your answer within 30 days”

Analysis: UCC § 2-205 Requirements:

1. Offer by a merchant ✓
2. To buy or sell goods ✓
3. In a signed writing ✓ (mail satisfies—traceable)
4. Gives assurance it will be held open ✓ (states “open for 30 days”)

First scenario: “offer will be open for 30 days”

• Result: Revocation is NOT effective
• This is a merchant firm offer—irrevocable for 30 days
• “Open for 30 days” provides sufficient assurance

“This offer is irrevocable for 30 days”:

• Result: Same—NOT revocable
• Even clearer assurance language

“This is a firm offer for 30 days”:

• Result: Same—NOT revocable
• Even clearer assurance language

“I must have your answer within 30 days”:

• Result: Revocation IS effective
• This language merely indicates the duration of the offer
• Does NOT give assurance that it will be held open
• This satisfies general offer rules but not § 2-205

Key Takeaway: Analyze each element of § 2-205. The critical issue is whether the language gives “assurance” the offer will be held open, not just a deadline for response.

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Problem 1 (Page 235): College GPA Promise

Facts: As Alexandria was dropping off her son Bob for his college orientation program in September, she promised him that if he achieved a GPA of at least 3.5 in his freshman year, she will give him $3,000 next June. Question: Is there consideration for Alexandria’s promise? Analysis: Answer: NO, there is no consideration at the present time. Why:

• Bob has not yet achieved a 3.5 GPA
• He is only at orientation—hasn’t even started classes
• The bargain-for exchange requires him to achieve 3.5 GPA
• He hasn’t fulfilled his end of the bargain

Comparison to Hamer v. Sidway:

• In Hamer, nephew fully performed by refraining from drinking, smoking, gambling until age 21
• Here, Bob has done nothing yet

Question clarification: The question asks if there is consideration NOW, not whether the promise will be enforceable in the future. If Bob achieves 3.5 GPA: THEN consideration exists and promise becomes enforceable

• Legal benefit to Alexandria: satisfaction of seeing son succeed academically
• Legal detriment to Bob: achieving 3.5 when he could get away with 2.5 (or whatever minimum)

If facts were different: If Bob had already started school and went out of his way (extra lectures, tutoring, etc.) in response to promise, then arguably consideration might exist. Distinguish from pre-existing duty: Bob has NO pre-existing duty to achieve 3.5 GPA (unlike professor who has duty to teach class).

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Problem 2 (Page 235): Third-Party Payment

Facts: A promises B that A will sell and deliver a set of books to B if B’s father, C, pays $150 for the set. C pays, but A fails to deliver the books. Question: May B enforce A’s promise? Answer: YES Rule: Consideration need not run either from the promisee or to the promisor. Analysis:

• Consideration can run from a third party (C)
• Benefit runs to the party A made the promise to (B)
• A knew the benefit was supposed to run to B
• Therefore, B can enforce the promise even though B paid no consideration

Example: Father takes son to car dealer. Father pays $30,000 for car to be delivered to son. Son can enforce the contract even though he didn’t pay. IRAC application: You MUST raise this issue if it appears on exam. Identify that consideration runs from third party but promisee can still enforce.

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Problem 3 (Page 235): Extra Payment After Performance

Facts: A and B enter into contract under which A would do specified work, and B will pay $10,000 when work was done. After work was completed, B said to A, "You have done such a good job that I'll pay you$5,000 extra.” B paid A $15,000. May B recover the$5,000? Answer: NO Analysis: What is the $5,000?

• Gratuitous gift / tip
• Gift promise

Is A’s work consideration for the $5,000?

• NO
• A’s work was consideration for the original $10,000
• A already completed the work—had pre-existing duty to complete work under original contract

Why can’t B recover?

• B made a gift promise and delivered the gift
• No consideration for B’s promise to pay extra $5,000
• Once gift is delivered, you cannot take it back
• Courts won’t allow restitution without consideration

If B had NOT paid: A could not enforce promise to pay extra $5,000 (pre-existing duty) If facts were different: If B said “install this extra light and I’ll give you $5,000,” and A installed light poorly, then B might recover because:

• There was consideration (additional work A had no pre-existing duty to do)
• B could argue poor performance or breach

Not accord and satisfaction: No genuine dispute about unliquidated debt—both parties fully performed original contract Similar to tip at restaurant: Once you give the tip, you can’t dispute it to get it back—it was a gratuitous gift.

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Exam Tips

1. Always identify consideration issues: If facts suggest lack of consideration, analyze consideration substitutes (§ 2-205, § 2-209, promissory estoppel, minority rules)
2. Analyze each element: For merchant firm offers and other rules, go through each element systematically (IRAC)
3. Bargained-for exchange is key: Look for “this for that”—was there mutual inducement?
4. Pre-existing duty: If party already had duty to perform, there’s NO consideration for a promise to pay extra
5. Prior acts: Past consideration is not valid consideration
6. Timing matters: Distinguish between “is there consideration NOW?” vs. “will this be enforceable in the FUTURE?”
7. Adequacy doesn’t matter: Courts don’t examine whether consideration is equal in value (with exceptions for sham transactions)
8. Beginning performance: Makes unilateral offer irrevocable but doesn’t create obligation to finish
9. Third-party consideration: Valid—consideration need not run from promisee or to promisor
10. Gift promises: Generally unenforceable, but if gift is delivered, donor can’t recover it back

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Important Distinctions

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UCC vs. Common Law

• UCC: Modifications don’t need consideration (§ 2-209), just good faith
• Common Law: Modifications require new consideration

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Majority vs. Minority Rules

• Moral obligation: Minority only
• Unforeseen difficulties: Minority only

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Revocability

• General rule: Offers revocable at will
• Merchant firm offers: Irrevocable if meets § 2-205
• Part performance begun: Makes unilateral offer irrevocable
• Option with consideration: Irrevocable

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Gift Promise vs. Bargained-for Exchange

• Gift promise: “I will give you $X”—unenforceable
• Conditional gift: “I will give you $X if Y happens”—still gift promise if Y was happening anyway
• Bargained-for exchange: “If you do Y for me, I will give you $X”—enforceable if Y is not pre-existing duty