Chapter 4: Consideration (Bargained for Exchange) Business Law Chapter 4: Consideration (Bargained for Exchange)

Introduction Consideration is often defined as “some right, interest, profit or benefit accruing to one party” or the loss, detriment or responsibility assumed by another party to the contract.

Consideration is also a requirement of a legally valid contract.

What is consideration? The basic reason for a contract; a person gives up something of value in exchange for receiving something of value through the contract.

Why is consideration required? Consideration is required for the formation of a valid contract for the simple reason that it shows the parties’ intent to be bound.

A one-sided promise does not put the other party in any different footing than he or she had prior to the promise.

Types of Consideration A right A profit An interest A physical object A responsibility undertaken A legal detriment

Legal Detriment Consideration can also be satisfied through actions. When a person assumes a legal detriment, this can also satisfy the requirement of a consideration.

Detriment The “bargained for exchange" in a contract, where the parties take on some responsibility that they are not legally obligated to undertake

Proving Consideration When the consideration for a contract is under dispute, the parties involved must devote time and energy in proving (or disproving) the existence of consideration.

Many times, the contract itself will recite the actual consideration.

In many jurisdictions, there are legal presumptions that may also help to establish the existence of consideration.

Written contracts, for example, are often presumed to have consideration, although the other party can rebut this presumption.

As a general rule, there is no requirement that consideration for a contract be recited or expressed in the writing.

Quid Pro Quo The phrase “quid pro quo” is a Latin term that is usually translated as “something for something.”

Quid pro quo and Consideration Quid pro quo is a general term; consideration is a specific, legal term.

Inadequate or Insufficient Consideration Courts often refrain from determining the value of the consideration.

Parties are free to negotiate any contract terms that they choose, as long as the contract does not involve fraud, duress or undue influence over one party, or a contract that is void for public policy reasons.

Inadequate consideration is not considered insufficient consideration and therefore will not automatically void a contract.

Grossly Inadequate Consideration Grossly inadequate consideration is often a feature of unconscionable contracts.

An unconscionable contract is one in which the terms or bargain is so obviously one-sided that the contract should be voided for public policy reasons.

Contracts “Under Seal” Seals are rare in modern contracts.

Under the common law, a contract under seal was presumed to have consideration and therefore no additional evidence or testimony about the consideration was required.

Legal doctrines that affect consideration Courts have created several legal doctrines that affect the analysis of consideration in a contract.

Promissory Estoppel The basic idea behind estoppel is that when person A makes a statement that person B relies upon, A is prevented from denying the truth of his statement.

What is Estoppel? When a person is barred by prior actions from claiming a right or a duty against another person who relied, in good faith, on those actions.

Promissory Estoppel and Consideration Under the theory of promissory estoppel, when Party B suffers some legal detriment as a result of the contract, Party A cannot claim that there was no consideration for the contract.

The Elements of Promissory Estoppel 1) there was a clear and definite promise; 2) the promisor intended to induce reliance, and that reliance occurred; and 3) the only way to avoid injustice is to enforce the contract.

Waiver When a person gives a waiver, he or she surrenders a right, requirement or obligation.

Accord and Satisfaction When parties change the terms of their contracts, or negotiate entirely new contracts based partly on a previously existing contract.

Contracts for an Illegal Purpose A contract that contemplates an illegal purpose, such as a criminal act, will not become enforceable simply because it is supported by consideration.