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Chapter 8
Consideration

Here is why consideration, the topic of this chapter, is important. If you have an agreement based
on mutual assent (the last chapter) and consideration (this chapter), then you have a contract. Yes,
there are other requirements for contract formation. We’ll cover those in Chapter 9. But I can
safely state that if you know the rules of agreeing and consideration, then you know the most of
rules for contract formation.

Consideration: The Validation Device

Consideration is sometimes called the validation device in contract law. This is so because
consideration is the contract requirement that often separates enforceable agreements, contracts,
from unenforceable agreements – Consideration validates agreements, elevating them to legally
enforceable agreement – contracts.

The rules for consideration begin with some overarching principles, but then can become a bit
abstract. I have a suggestion for you regarding our coverage. Give yourself some time to think
about these rules, and, as important, ask questions. I’ve been teaching this topic long enough to
know that once you grasp these concepts - and you will - you’ll find them both sensible and easy
to remember.

The Basics

So, for an agreement to be a contract, there must be consideration. Three basic principles describe
the concept of consideration. I will set them out with both explanations and examples.

Consideration is some legal benefit or detriment flowing

from each side of an agreement to the other.

Let’s start with an example. Suppose you and I agree that, in exchange for your delivery to me of
a cashier’s check for $21,000, I will deliver to you my 2018 Honda CRV and a notarized copy of
the certificate of title for the car. We both agree on the time and place for this exchange. I believe
that you can look at this agreement and intuitively take it as a contract. It is. We can already see
that there’s mutual assent – we both believe that an agreement exists – and the agreement includes
at least the minimum of essential terms, in this case the subject matter and price. Before you go
any further, read the bold and italicized sentence above and think about what the considerations
are in this case.

I’ve been doing this long enough that I expect, at this point, most of my students to say that the
considerations are the buyer’s cashier’s check and the seller’s car and certificate of title. In
response to this, I will say to them and those of you who feel the same: Sorry, you’re on the right
track, but those two things aren’t the considerations.

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I’m not messing with you here. Think about it this way. We’re trying to figure out if the two
parties’ agreement, once made, is a contract. If we identify the check, car, and CT as the
considerations, then we’re saying that the contract doesn’t exist until those things are actually
exchanged. You know that isn’t the case. So, what are the considerations? Simple. Your
consideration is the promise to deliver the cashier’s check to me. My consideration is my promise
to deliver the car and CT to you.

The contract between me and you is a bilateral contract (defined in Chapter 6) in which exchanged
promises form the agreement. It’s often the case that there is a lot of time between when the
agreement is made (i.e. the promises are exchanged) and the time of performance. So, in bilateral
agreements, we examine the promises to determine if they are consideration. In this case, we would
call the things exchanged legal benefits, promises to exchange assets such as money, cars etc.

In the less common unilateral contracts – promises exchanged for performance – we look at the
promisor’s promise and the promisee’s performance to determine if consideration exists.

So, what about legal detriments? How about another famous contract case, Hamer v. Sidway
(incidentally, a unilateral contract)? Please watch this short video.

https://www.youtube.com/watch?v=zSA3HOUgXQ4

A legal detriment is forbearing to do something one has a legal right to do. Young William Story
had a legal right to drink, smoke etc., so the fact that he chose to forbear doing those things in
return for his uncle’s promise to pay him $5000 formed a contract, in this case a unilateral contract,
in which the uncle’s promise was exchanged with the nephew’s actual performance. Today, the
most typical example of legal detriments as consideration is in settlement contracts in which a
plaintiff promises not to sue a defendant in exchange for the defendant’s promise to pay the
plaintiff some sum of money.

You may think that the distinction between legal detriments and legal benefits is a bit fuzzy, and
I’ll agree. One may argue that the uncle in Hamer benefitted by his nephew’s abstinence because
of the family relationship or that a defendant benefitted from the plaintiff’s promise not to sue. The
best way to respond to this is to let you know that it doesn’t matter – i.e. you needn’t worry about
a benefit if a detriment exists. If a person bargains for another’s forbearance to do something one
has a right to do, then it’s a legal detriment – stop.

Consideration is a Bargained-for Exchange Between the Parties

For consideration to exist, each party must bargain for the other party’s consideration. This is an
objective requirement. A third party should be able to look at the facts and reasonably conclude
that each side of a contract bargained for the other’s promise or performance. For example, anyone
who looks at our agreement for the sale and purchase of my Honda CRV would objectively

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conclude that you bargained for my promise of the car and CT and that I bargained for your
promise of the cashier’s check. Likewise, William Story clearly bargained for his nephew’s
performance, and the nephew clearly chose to forbear his “vices” because of his uncle’s promise.

The bargained-for-exchange requirement helps us understand that we look only at the time of an
agreement to determine whether consideration exists. For example, let’s say you decide to move
to Pratt, Kansas to help your ailing uncle and aunt on their farm. You work there all summer
without pay planting and harvesting crops, taking care of animals, and tending to their other needs.
The following fall, your uncle and aunt, because of your selfless work that summer, promise to
give you a ¼ share of the farm. You humbly agree to take that share. Well, you have every reason
to believe you’ll receive that ¼ share. But what if the uncle and aunt change their minds? Do you
notice that this is NOT a bargained-for exchange? Rather, it’s a promise to give you a gift. Why?
When your uncle and aunt made the promise to give you a share of their farm, they bargained for
nothing from you. You had already done your good work of helping them. Because this isn’t a
bargained for exchange, there is no consideration given by you for your uncle and aunt’s promise;
therefore, there is no contract.

Let’s all resolve that your uncle and aunt, like most who promise to make gifts, will likely honor
their promise to you, despite the absence of a contract between them and you.

The Law Does Not Care About Adequacy of Consideration.

What does it mean for consideration to be adequate? Adequacy of consideration examines the
relative fairness of the exchange. Let’s suppose that your friend, Jack, owns a vintage car, say a
1957 Ford Thunderbird in mint condition. The fair market value for this car is over $300,000. Jack
knows how much you like the car and that you will take good care of it, so he agrees to give you
the Thunderbird for a price of $2,000. You agree to pay that amount, about .66% of the car’s value.
So, what if Jack changes his mind? What if he argues that the consideration flowing from you to
him is inadequate? Sorry, Jack, but on that point, you’ll lose. Assuming Jack is of sound mind, his
promise to give you the car and your promise to pay the $2000 is a bargained for exchange, and
his argument of inadequate consideration will fail. If you’re wondering about this principle, then
consider one of the most important contract policies, freedom of contract. In this case, it means
that if two people voluntarily enter into an agreement, then the law should honor their agreement
and not consider whether both parties are getting a “fair deal.”

There Is Some Nuance in Determining Consideration

In the introduction to this chapter, I cautioned you about the rules of consideration – that they can
be a bit abstract and, at least initially, difficult to grasp. Take some time and try to think these
concepts through as you read about them. Here are some additional rules for consideration.

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The Preexisting Duty Rule

How about this case? What if, in Hamer v. Sidway, the nephew had been in and out of legal trouble
multiple times. In light of this, the Uncle promised the nephew $5000 if the nephew did not commit
a single crime in the next five years? The nephew complied. Do you think he’s entitled to the
$5000?

I don’t. Neither does the law of consideration. Why? Because the nephew’s performance in this
case, albeit exhibiting much better behavior than before, is simply doing something that he already
had a legal obligation to do – in this case, obeying the law. Acting legally is a very good thing;
however, it seems pretty dubious allowing someone to claim they’re giving consideration by doing
something they’re legally obliged to do. So, doing something that one has a preexisting legal
obligation to do is not consideration.

Here’s where things get a bit more complicated. Let’s suppose you enter into a contract to have
XYZ Construction build a covered deck in your backyard. The contract price is $35,000, which
includes all materials and labor. Two days after construction begins, Xavier, XYZ’s owner,
approaches you asking that the total price increase to $40,000. This is so, Xavier insists, because
of the increase in his costs for materials. Although you are displeased with this increase and argue
about it a bit, you finally concede to pay the extra $5000. Does XYZ have a right to the extra
amount upon completion?

I would argue that XYZ cannot enforce the new price. You and XYZ had a contract: You would
pay $35,000, and XYZ would procure the materials and build your covered deck. So, the key issue
in this case is: Is the modification of the contract between you and XYZ a contract? The answer is
likely NO. Why? Because of the preexisting duty rule. First, you should know that, just like when
you form a contract, consideration is required when you change or modify that contract. Look at
your modified deal. You’re agreeing to pay an extra $5000, clearly a new legal benefit to XYZ,
but XYZ is promising to do what the company already had a preexisting contract obligation to do.

It’s okay for contracting parties to modify their existing contract, but the general rule is that each
side must give NEW consideration to make that modification a contract. The new considerations
need not be ambitious or equal. For example, if, as part of your and XYZ’s modification, they
agreed to upgrade the deck material or even modestly expand the deck’s area, that would have
been new consideration and the modification would be enforceable.

Unforeseen Difficulties

Let’s suppose that, once it begins to lay out the footprint for the deck, XYZ discovers that someone
who lived in your house before had dumped toxic dry-cleaning fluids in their backyard. Testing
reveals that these chemicals have leached into the soil, reaching depths of over four feet in places.
City and state laws require that these chemicals be removed before any construction can occur.
Because of this, XYZ asks that you pay the costs of this removal, an additional $1,500. You agree.

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If XYZ could not have foreseen this problem, then it can enforce the modified price against you.
If you think about it, then this makes sense. Neither you nor XYZ could reasonably have foreseen
this problem, so XYZ is actually agreeing to do more than it had agreed in the original contract –
i.e. XYZ is giving new consideration.

Modifying Contracts under the UCC

As you know, the Uniform Commercial Code liberalized the rules for contracts involving the sale
and lease of goods. Under the UCC, the parties can modify the contract without both sides giving
new consideration. The most typical example of this is when a buyer asks for additional time to
pay for delivered goods. So, if the contract requires that the buyer pay for goods within 30 days,
but the buyer asks for an extension and the seller agrees, then the buyer may enforce the seller’s
promise to extend payment, even though the buyer is giving no additional consideration for the
seller’s promise.

Mutuality of Obligation

Sometimes introductory topics, like the one above, can be somewhat intimidating. By now, you
know that I’m inclined to start with a case. You won’t be surprised that it’s another classic. In fact,
one of the parties to this case, Lucy Lady Duff Gordon, was on the Titanic on that fateful and
horrific evening. Both she and her husband survived.

Wood v. Lady Lucy Duff-Gordon

118 N.E. 214 (N.Y. 1917)

Cardozo J. The defendant styles herself "a creator of fashion." Her favor helps a sale.
Manufacturers of dresses, millinery, and like articles are glad to pay for a certificate of her
approval. The things which she designs, fabrics, parasols, and what not, have a new value in the
public mind when issued in her name. She employed the plaintiff to help her to turn this vogue
into money. He was to have the exclusive right, subject always to her approval, to place her
indorsements on the designs on sale, or to license others to market them. In return she was to have
on-half of "all profits and revenues" derived from any contracts he might make. The exclusive
right was to last at least on year from April 1, 1915, and thereafter from year to year unless
terminated by notice of 90 days. The plaintiff says that he kept the contract on his part, and that
the defendant broke it. She placed her indorsement of fabrics, dresses, and millinery without his
knowledge, and withheld the profits. He sued her for the damages, and the case comes here on a
demurrer.
* * *

Question: Whether there was a contract between Duff-Gordon and Wood depends on whether each
side’s promise represents consideration. Is there consideration flowing from Duff-Gordon to

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Wood? From Wood to Duff-Gordon? As you think about this, try your best specifically to identify
the considerations from both sides.
Do you think both sides gave consideration in this case? Your predecessors, the students in my
previous classes, have primarily said yes. They say that Duff Gordon’s’ consideration to Wood is
her promise to him of the exclusive right to use her name in the creation and marketing and
fashions. Wood’s consideration, they claim, is his promise to share ½ the profits of all sales,
licensing agreements etc. with her.
So, let’s think about this more. Forgive me for this digression, but I think it’s useful. What if you
and I agree that I’ll rent you my cabin on Rainbow Lake, Colorado this coming summer from July
1 until July 15? We agree on rent and all the other things relating to the cabin, its availability and
cleanliness. In return, you agree to pay a certain amount, including a deposit now, and the balance
on July 1. Oh, one other thing: The agreement also states that I can nullify the agreement at any
time for any reason, with my only obligation being to return your deposit if I nullify.
We clearly have an agreement supported by mutual assent. Have both of us given consideration?
The answer is a very strong NO. Your promise to pay a deposit and the balance clearly is a legal
benefit flowing from you to me; i.e. you’re clearly giving consideration. What is my consideration
to you? Answer: I’m giving no consideration to you because I have the right to cancel at any time
for any reason. In the law, we would say that, because I enjoy the right to cancel, I have no legal
obligation to you and there is no mutuality of obligation because of this. The same would be true
if you promised to buy my car for $20,000 and I promised to deliver the car and a CT to you on a
certain date, “if I choose to.” If one side of an agreement retains the right to back out with no other
obligation, then that side is giving no consideration.
Now, let’s return to the Duff Gordon and Wood case. Think critically about Wood’s promise to
Duff Gordon. Why might that promise not be consideration?
Does Wood have an obligation to Duff Gordon? I would answer NO. The agreement between the
two has all the appearances of validity but lacks mutuality of obligation, because there’s nothing
in the agreement that requires Wood to do anything. Does the agreement require Wood to sell or
try to profit from Duff Gordon’s name? NO. The reason Duff Gordon started exploiting her name
after the agreement is she believed that Wood’s promises amounted to zero obligation. She may
also have feared that Wood may intentionally choose not to use her name, perhaps to reduce her
visibility.
I’m going to give you a link to this case with a CAVEAT. When you watch and listen to the video
– and it’s an excellent account of the case – you will learn that the writer of the New York Court
of Appeals decision is Benjamin Cardozo and that, in the case, he said there WAS consideration
given by Wood because his promise implied that he would have to perform. I and many others
disagree with Cardozo. I would argue that Wood’s promise might have amounted to a legal
obligation if he merely had to account to Duff Gordon every month beginning one month after the
agreement. In the actual case, Wood had to account only if he sold an item or made money from
Duff Gordon’s name. Once again, he could have done nothing.

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The video is 10 minutes long, and optional rather than required viewing.
https://www.youtube.com/watch?v=wPniV1FY5zs
An Exception to Consideration: Promissory Estoppel
It may seem like for every contract rule you learn, there are exceptions. Well, there aren’t a lot of
exceptions to the consideration requirement to form a contract, but there is one. It’s called
promissory estoppel, yet another legal term you may want to avoid using in your social circle. The
term, estoppel, is a legal term based on one’s reasonable reliance.1 There are times in our lives
where our reliance on another’s words or actions matters in the law.
Promissory estoppel applies specifically to contract law. Here’s an example. Let’s suppose that
you rent an apartment from a local landlord and, because you lost your job, are having trouble
paying rent. You’ve secured a new job but have directed your modest savings to pay other bills.
You tell your landlord about your problem, and the landlord promises to defer enforcing rent from
you for two months. Your rent payments for those two months will be due at the beginning of
month three. In this case, your landlord is making a gratuitous promise to you – i.e. you’re giving
no new consideration for the landlord’s promise to defer enforcement of rent. You’re very grateful
for that promise and use what funds you have for utilities, food and other necessities.
We know enough about consideration to wonder whether you can enforce the landlord’s generous
promise even though you gave no consideration for it. The doctrine of promissory estoppel would
conclude that you can. Here’s why: Your landlord made a promise to you, and it was reasonable
for you both to believe that promise and to rely upon it. You did rely, to your economic detriment
– i.e. economically or financially. Given this and that it would be unjust to allow the landlord to
breach that promise, you may contractually enforce that promise against the landlord.
One of the places where promissory estoppel routinely applies is to promised donations made by
donors to universities and philanthropic organizations. When donors pledge money to these
organizations, the recipients of the promise typically do rely on the donors’ promises – by
contracting for TV or radio shows (e.g. PBS or NPR) or with architects to fashion building plans.
Moving On
Once again, when you combine an agreement based on mutual assent with consideration, you have
a contract. The other formation requirements, capacity and the writing requirement – are the topics
of Chapter 9. What you will see there is that both of these other requirements may or may not
affect an otherwise valid contract’s enforceability.

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The word “estoppel” is derived from Old French, literally meaning “stoppage.” The law of equity, or fairness, has
developed several estoppel doctrines to deal with situations people find themselves in when one person relies upon
another person's conduct or words.
Estoppel Doctrines - Civil Litigation Services
https://donaldlange.com › estoppel-doctrines

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