Consideration

An item of value given in exchange for a promise or act.

Consideration is the concept of legal value in connection with contracts. It is anything of value promised to another when making a contract. It can take the form of money, physical objects, services, promised actions, abstinence from a future action and much more.

Under the notion of "pre-existing duties," if either the promisor or the promisee already had a legal obligation to render such payment, it cannot be seen as consideration in the legal sense. In common law it is a prerequisite that both parties offer some consideration before a contract can be thought of as binding.

However, even if a court decides there is no contract, there might be a possible recovery under Quantum meruit (sometimes referred to as a Quasi-contract) or promissory estoppel. If A signs a contract to buy a car from B for $5,000, A's consideration is the $5,000, and B's consideration is the car. Additionally, if A signs a contract with B such that A will paint B's house for $500, A's consideration is the service of painting B's house, and B's consideration is $500 paid to A.

Further, if A signs a contract with B such that A will not repaint his own house in any other color than white, and B will pay A $500 per year to keep this deal up, there is also consideration.

Although A did not promise to affirmatively do anything, A did promise not to do something that he was allowed to do, and so A did pass consideration. A's consideration to B is the forbearance in painting his own house in a color other than white, and B's consideration to A is $500 per year. Conversely, if A signs a contract to buy a car from B for $0, B's consideration is still the car, but A is giving no consideration, and so there is no valid contract. However, if B still gives the title to the car to A, then B cannot take the car back, since, while it may not be a valid contract, it is a valid gift.

There are a number of common issues as to whether consideration exists in a contract. Generally, courts do not inquire whether the deal between two parties was monetarily fair - merely that each party passed some legal obligation or duty to the other party. The dispositive issue is presence of consideration, not adequacy of the consideration. The values between consideration passed by each party to a contract need not be comparable.

For instance, if A offers B $200 to buy B's mansion, luxury sports car, and private jet, there is still consideration on both sides. A's consideration is $200, and B's consideration is the mansion, car, and jet. Courts in the United States generally leave parties to their own contracts, and do not intervene when parties knowingly make bad deals. However, courts in the United States may take issue with nominal consideration, or consideration with virtually no value.

The old English rule of consideration questioned whether a party gave the value of a peppercorn to the other party. As a result, contracts in the United States have sometimes have had one party pass nominal amounts of consideration, typically citing $1. Some courts have since thought this was a sham.

Since contract disputes are typically resolved in state court, some state courts have found that merely providing $1 to another is not a sufficiently legal duty, and therefore no legal consideration passes in these kinds of deals, and subsequently, no contract is formed. Still today, licensing contracts that do not involve any money at all will often cite as consideration, "for the sum of $1 and other good and valuable consideration".

If analyzed under state law, these contracts may very well be found invalid. A party which already has a legal duty to provide money, an object, a service, or a forbearance, does not provide consideration when promising merely to uphold that duty. The prime example of this sub-issue is where an uncle gives his 17 year old nephew (a resident of the USA) the following offer: "if you do not smoke cigarettes or marijuana until your 18th birthday, then I will pay you $500" (it is a criminal offense in most states in the US for people under the age of 18 to smoke). On the nephew's 18th birthday, he tells the uncle to pay up, and the uncle says no. In the subsequent lawsuit, the uncle will win, because the nephew, by U. S. law, already had a duty to refrain from smoking cigarettes.

The same applies if the consideration is a performance for which the parties had previously contracted. For example, A agrees to paint B's house for $500, but halfway through the job A tells B that he will not finish unless B increases the payment to $750. If B agrees, and A then finishes the job, B still only needs to pay A the $500 originally agreed to, because A was already contractually obligated to paint the house for that amount. An exception to this rule holds for settlements, such as an accord and satisfaction. If a creditor has a credit against a debtor for $10,000, and offers to settle it for $5,000, it is still binding, if accepted, even though the debtor had a legal duty to repay the entire $10,000. Pre-existing duties relating to at-will employment depend largely on state law.

Generally, at-will employment allows the employer to terminate the employee for good or even no reason, and allows the employee to resign for any reason. There are no duties of continued employment in the future. Therefore, when an employee demands a raise, there is no issue with consideration because the employee has no legal duty to continue working. Similarly, when an employer demands a pay-cut, there is also no issue with consideration, because the employer has no legal duty to continue employing the worker. However, courts have used the pre-existing duty rule to void terms later added by employers like non-competes. Contracts where a legally valueless term is bundled with a term that does have legal value are still generally enforceable. Consider the uncle's situation above. If the same uncle had instead told his 17 year old nephew the following offer: "if you do not smoke cigarettes and do not engage females before your 18th birthday, then I will pay you $500".

On the nephew's 18th birthday, he asks the uncle to pay up, and this time, in the subsequent lawsuit, the nephew will win. Although the promise of not smoking was not valuable consideration (it was already legally prohibited), virtually all states allow some sort of engagement by minors. Even though the engagement by minors is legally restricted, there are circumstances where it is legal, and thus the promise to forbear from it entirely has legal value.

However, the uncle would still be relieved from the liability if his nephew smoked a cigarette, even though that consideration is valueless, because it was paired with something of legal value; therefore, adherence to the entire, collective agreement is necessary. Generally, past consideration has no legal value. Past consideration therefore cannot be used as a basis to form a new contract.

Suppose A is driving in his car on a sunny Sunday afternoon, and he sees smoke coming from a vehicle on the side of the road ahead. A pulls over, sees B injured in the vehicle, and pulls B out of the car to safety. B makes a full recovery, and the next day, says to A, "because you saved me, I will pay you $5,000 per year until you die. " Five years later, B dies of cancer and even though B paid A $5,000 each of those years, the executor of B's estate refuses to pay A any more money. In the subsequent lawsuit, A will lose, because no contract existed. At the time that B took up this $5,000 per year obligation, A did not offer any consideration.

Applying the "value of consideration" rule, A might actually win if A had merely replied, "I will only accept, if you require that I do not walk backwards on Tuesdays between 4:00pm and 4:10pm EST while holding a red pen". Even though A's consideration has little monetary value to pretty much anyone, it does have legal value, as it is a promise of forbearance.

Some courts however, will see that past actions and moral obligations can provide consideration. Following the Restatements (Second) of Contracts, 86, a promise made (by a promisor) in recognition of a benefit received (from the promisee) is binding to the extent necessary to prevent injustice.

The promisee must have conferred a benefit on the promisor, not intended that benefit as a gift, and the promisor must have received a material benefit and has been unjustly enriched. Furthermore, the value of the subsequent promise must not be disproportionate to the benefit originally received by the promisor.

From the example above, the courts could find that saving B's life provided material benefit to B. (Life insurance policies for example, dictate 'value' of life) Furthermore, it could be argued that B, if in hindsight had known that his life would be in danger, would have bargained for A to save his life. The courts will also see the value of $5,000 a year is not disproportionate to the benefit received by A. Common Law Case discussing past consideration: Webb v. McGowin, 168 So. 199 (Ala. 1936).

Generally, conditional consideration is valid consideration. Suppose A is a movie script writer and B runs a movie production company. A says to B, "buy my script. " Instead, B says "How about this -- I will pay you $5,000 so that you do not let anyone else produce your movie until one year from now. If I do produce your movie in that year, then I will give you another $50,000, and no one else can produce it.

If I do not produce your movie in that year, then you're free to go. " If the two subsequently get into a dispute, the issue of whether a contract exists is answered. B had an option contract—he could decide to produce the script, or not. B's consideration passed was the $5,000 down, and the possibility of $50,000. A's consideration passed was the exclusive rights to the movie script for at least one year. B committed a tort against A, causing $5,000 in compensatory damages and $3,000 in punitive damages.

Since there is no guarantee that A would win against B if it went to court, A will agree to drop the case if B pays the $5,000 compensatory damages. This is sufficient consideration, since B's consideration is a guaranteed recovery, and A's consideration is that B only has to pay $5,000, instead of $8,000.