This article is written by Sonal Sinha. This article covers everything you need to know about consideration as an essential requirement of a contract under US law, from the basic requirements to the detailed rules involved in determination of a valid consideration by the courts.
Introduction
A contract arises out of an agreement between two or more parties who intend to form obligations towards each other that is enforceable by law. These obligations between the parties are created voluntarily. For an agreement to be a contract, one party must extend an offer that is accepted by the other party. However, along with offer and acceptance, there are five other requirements that need to be satisfied for a valid contract formation, which include,
- Agreement: offer by a party and acceptance by the other
- Intention: intent to form a legal relation between the parties
- Certainty: the terms of the contract must be clear and unambiguous
- Capacity of the parties to enter into a valid agreement: the parties must be capable and competent to understand the terms of the agreement and give their acceptance to be bound by it.
- Consideration: there must be a material exchange between the parties, i.e., each party must give something of value to the other party.
Consideration forms an essential aspect of contracts. An agreement does not form a binding relationship between the parties unless there is a consideration. Consideration as a part of the agreement requires that the gain by one party must be accompanied by a corresponding gain to the other party. Something must be given in return for what is gained. This article will discuss in detail all aspects of consideration in US contract law along with relevant case laws.
What is consideration
In Dunlop v. Selfridge (1915), the House of Lords used the concept of sale to define the meaning of consideration, i.e, a party’s promise to do or not to do something is bought by another party to the contract in exchange of some act, omission or promise in return. A consideration is defined as a material benefit accrued to a person making a promise, the promisor or a material detriment to the other party that enjoys the benefits of the promise, the promisee. In simpler terms, a consideration is a reason for the enforcement of a promise made between the parties.
Tracing the history of contracts, we can see how the concept of consideration that we see today has evolved over the years. During the early common law systems, promises were made enforceable via specific rituals or forms, often involving bizarre traditions. Evidence of countless ritualistic traditions have been found through the ages, from simpler traditions like holding hands over a sacred stone, to more complex ones such as blood sacrifice, drawing up of a scroll and fortifying the promise using the sacrificed blood. Over time, as commerce grew, the use of promises became commonplace, and the traditions grew simpler. There was no time for such elaborate and cumbersome ritual practices any more. At the same time, cross-cultural trade and interaction also increased, calling for simpler rituals and practices, acceptable to all. In England, rituals gave way to simpler methods wherein the use of wax seal embossed by a signet. A correctly embossed seal was a sign of an enforceable contract.
However, with further passage of time, use of seals became cumbersome and not everyone had access to elaborate tools readily available. Hence, there arose a need for a different approach to ascertain enforceability in contracts. In order to accommodate the change, the courts began analyzing the material of the agreements, by focusing on their kind, rather than the form. By the 19th century, the common law courts began holding that a promise becomes enforceable only when they were supported by an underlying consideration. Thereby, by the end of the 20th century American Courts had adopted and confirmed the notion that for contracts to be enforceable, there must be a consideration. The court in Currie v. Misa (1875), had defined a legally valid consideration as a right, interest or profit gained by one party or a duty, loss or detriment being suffered by another party. The concept of consideration may be understood in light of the maxim, quid pro quo which literally translates to something for something and means a benefit granted in exchange for something.
In Coretta Scott King, v. Trustees of Boston University (1995), Martin Luther King Jr., at the request of his alma mater, Boston University, had submitted a few of his papers to the newly constructed library of the University. However, King also sent a letter wherein he mentioned that the submitted papers would continue to be his legal property even though they shall be in the custody of the University. The letter further went on to state that after his death, the property in the papers shall absolutely pass on to the University. After his death, the Plaintiff and King’s widow, Coretta Scott King raised the issue that the submission of the papers to the University was not supported by a valid consideration owing to the lack of a quid pro quo. In this case, the court held that the submission of the papers was a charitable pledge and not a contract due to the lack of a consideration. The parties had not entered into a contract as there was no bargaining, barter or exchange of promises between the parties. Hence, for a contract to be valid, there must be a consideration, which is an exchange of promises between the parties.
Consider the example, that A promises to sell his laptop to B, for 500 U.S. Dollars. In this example, the consideration is the cost of the laptop to be paid by B to A. While both the parties get a benefit out of this transaction, there is also a corresponding loss to both. A gets the money, and B gets the laptop, whereas A also loses the laptop and B loses the money. Majority of the contracts consist of a transaction consisting of two promises being exchanged by the parties. Take the above example, there are two promises in this example. A’s promise is to sell the laptop and B’s promise is to pay 500 U.S. Dollars. If certain issues arise, and A fails to give away his laptop to B even after the payment is complete, B can file a lawsuit against A. For the issue of consideration, B will have to prove that the promise to pay 500 Dollars was B’s consideration for A’s promise to sell the laptop. Alternatively, if A gives his laptop to B and B does not pay the agreed sum of money, A can then file a lawsuit against B. In this scenario, A will have to prove that his promise to sell his laptop was the consideration for B’s promise to make the payment.
Sell the laptop
A B
Promissor Promissee
Payment of 500 U.S. Dollars
B A
Promissor Promissee
The contract between A and B
Sell the laptop 500 $
A B
Promissor Promissee
Promissee Promissor
Basic requirements of consideration
As we saw above, consideration is one of the five essentials of a contract and the basis of a valid contract. A contract without consideration may be deemed invalid. For a consideration to be valid, there are certain essential and basic conditions that must be met. The concept of consideration originated from the idea of quid pro quo, literally translating to “this for that”. Illustrated in the above example. Over the passage of time, the basics of consideration have evolved beyond the idea of quid pro quo, with statutory law laying down further elaborate requirements to be fulfilled. In fact, without a valid consideration fulfilling the basic requirements, a contract is invalid, i.e., nudum pactum ex quo non oritur actio. The Latin phrase literally translates to, “a naked promise from which no action can arise”. A contract without a consideration is considered a bare promise, from which no legal action can arise. The following discusses the various essentials to be fulfilled in respect of a consideration for the same to be considered valid.
Consideration cannot be in the past
Consideration may either be executed or executory but it cannot be in the past.
- Executory consideration
An executory consideration is the one that takes place in the future, i.e., a consideration that arises by way of a promise by one party of the contract in return of a corresponding promise to be fulfilled by the other party. A classic example of an executory contract is where a party agrees to buy certain goods from the other on credit, and the delivery of the subject goods shall take place subsequently. For example, Patrick promises to buy a car from Charles on credit, and the delivery of the car will be done next week. As you can see, considerations from both the parties shall take place in the future, i.e., next week.
- Executed consideration
In an executed consideration, one party has completed their duty of the agreed consideration by fulfilling all of the requirements under their promise, and the requirements of the consideration to be fulfilled by the other party still remain. In such a scenario, the unperformed considerations of the other party that are to be completed in the future are executory. Simply put, an executed consideration is one where a consideration has already been fulfilled at the time of making of contract. For example, Stephen promises to pay 1000$ to anyone who finds his lost smartwatch. Here, delivering the lost smartwatch to Stephen by someone is an acceptance of the offer on their part as well as an executed consideration of Stephen’s promise.
- Past consideration
When it comes to contract law, it is important that there is a consideration given in return of an act or promise fulfilled by a party to the contract. A consideration must not be in the past. This essentially lays down that there must be a quid pro quo in the present. Something must be done or given in exchange for the fulfillment of a promise by the other party under a contract. The emphasis of this requirement is not concerned with the time when the consideration was given, but rather inquires as to whether there was a consideration in return of a corresponding promise. If one party to the contract completes their performance even before a consideration has been offered by the other party, then the act of the first party was not done in return of the consideration by the second party, thereby defeating the reason and meaning of the consideration, i.e., quid pro quo. Such a performance by the first party is a past consideration and hence, not valid. For example, if Robert looks after Greene’s plants and waters them daily while Greene is on a holiday and when Greene returns, she promises to give Robert some money, then Robert later cannot enforce this promise if Greene goes back on it, as he did not take care of the plants in return of the money, but did so voluntarily.
Determining whether a consideration is a past consideration is a question of fact that is to be determined from case to case, depending on the surrounding facts and circumstances, and by examining the wordings of the agreement in question. Re McArdle [1951] Ch 669 (1951), a family home was left behind by a man in the name of his widow. The will stated that on the death of his widow, the house shall be inherited by their five children. During the lifetime of the widow, the house was occupied by one of their sons and his wife. The wife, or the widow’s daughter-in-law paid for and made certain changes and improvements in the house. Subsequent to the conclusion of the changes, the four children signed an agreement wherein they agreed to pay the daughter-in-law a sum of money in consideration of the work done under her supervision. After the mother’s death, when the daughter-in-law claimed the said amount, she was refused the same by her husband’s siblings. The court held that the home improvements were done before the signing of the contract and not in exchange of the amount agreed upon; hence, the improvements were a past consideration. The promise to pay the sum was a consideration for something that was already done, hence not binding.
The condition that a past consideration is not a consideration has an exception. The exception to this rule comes into the play where a past consideration has been furnished by a party on an understanding and the request of the promisor that a payment would be made or a promise would be subsequently fulfilled in return. This exception was laid down in Lampleigh v. Braithwait (1792). In this case, Braithwait had been convicted for killing a man and had requested Lampleigh to acquire a pardon from the king. After spending a considerable amount of money and spending a lot of effort, Lampleigh was able to secure a pardon for Braithwait. Excited by the same, Braithwait promised to pay a sum of £100 to Lampleigh, but later went back on his promise. On the failure to make the payment, Lampleigh sued Braithwait for the same. While the act of going to considerable efforts for securing the pardon seems like a past consideration and hence, unenforceable, the court held a different conclusion. The court concluded that the request made by Braithwait contained an inherent promise to pay or make certain rewards in return for the work done by Lampleigh. Therefore, the work done by Lampleigh and the subsequent promise of payment made by Braithwait were a part of the same transaction, making the promise of the latter legally enforceable.
The concept laid down in Lampleigh v Braithwait was also affirmed in subsequent cases, one of them being the case of Re Casey’s Patents (1895), the defendants were the owners of certain patents and plaintiff was their employee. The defendants promised to give the plaintiff a one-third of interest in the patent rights, in exchange of his services rendered in relation to the management of the said patents. When the plaintiff asked for the enforcement of their promise by the defendants, they claimed that since their promise was made in respect of work already done by the plaintiff, it was not enforceable. The court, however, relying on the Lampleigh rule, held that the services of the plaintiff were provided on an implied promise that he shall be paid in return of the services and the promise of giving a share in the patents was a manifestation of that payment, regardless of the fact that there was no tacit agreement in the same terms before the services were rendered by the plaintiff.
In Wood v. Lucy, Lady Duff-Gordon (1917), reiterated the concept of implied terms and expected duties of the parties, resounding the Lampleigh rule. Lady Duff-Gordon was a famous fashion designer and a fashion icon, whose endorsement has a huge impact on the fashion community. Lady Duff-Gordon signed a contract to exclusively hire the services of Wood as an advertisement agent. Lady Duff-Gordon granted Wood with the rights of marketing her designs and products bearing her endorsements, and the profits were to be shared equally by both the parties. Wood found out that Lady Duff-Gordon had been endorsing other products without Wood’s permission and was therefore sued to breach of contract. Lady Duff-Gordon defended herself by stating that there was no express promise or consideration in the contract defining the scope of duties and what Wood was supposed to do and was employed merely to place endorsements. Hence, she maintained that there was a lack of consideration. The court held that the promise by wood to exclusively represent Lady Duff-Gordon was sufficient consideration, and gave rise to assumption of duties to be carried out by the parties.
Consideration must be sufficient
While the theory of quid pro quo underlying concept of consideration states that there must be a benefit or loss to the parties, such consideration need not amount to a huge sum or value, and are merely required to be sufficient. The concept may seem confusing at first, however, it simply means that when dealing with the question of validity of a consideration under a contract, the courts will just see if there was a consideration or not, even if for just one dollar, and will not go into the inquiry of whether the said consideration was adequate in respect to the promises so fulfilled. In a contract, if something is provided by a party in return of a promise fulfilled by the other party, the same is sufficient. It is not a concern of the courts if something so provided was not of a great value or if it was not at par with the commonly considered value of the promise. For example, if Samantha promises to sell Emma her luxury handbag for 10 dollars, it is evident that being a luxury item, the handbag is worth more, and by selling it for the agreed amount, Samantha may be at a loss. Regardless of the same, the contract is binding and the consideration from both sides is valid. The idea behind the sufficiency of consideration is that the parties must be free to enter into a contract, as per the terms of the agreement that are suitable to them, without any interference from the courts.
The concept of sufficiency of consideration essentially creates a distinction between the terms “adequacy” and “sufficiency”. While the two seem synonymous, from a legal standpoint, there is a considerable difference between them. The term “adequacy” concerns the economic value of the consideration and whether the value of the consideration sits at par with the market value of the promise in exchange for which the consideration is being provided. Adequacy helps the parties to a contract ascertain if they have made a good profit out of the contractual transaction, which is not a concern of the courts. In the eyes of the court, it is the “sufficiency” of the consideration that matters the most. As long as there is some consideration, the same is fine. The sufficiency of consideration does not concern itself with the economic value of it, but inquires whether the consideration can be considered a valid one in the eyes of law. In terms of adequacy, it is a settled principle under the law of contracts that the court shall not concern itself with the same. The court shall not inquire whether the economic values of the corresponding considerations to be fulfilled by each party to the contract is in sufficiency with each other. The court shall only be concerned with whether the considerations are of certain economic value, regardless of whether the value is less or extraordinary.
In the case of Midland Bank Trust Co. Ltd v. Green, (1981), a father, in order to avoid giving his land to his son, sold the same to his wife for £500. However, the fair market value of the farmland was approximately £40,000. When the sale was challenged in the court, the House of Lord held that the adequacy of the consideration was not a concern of the court. So long as the consideration was real, the court shall analyze whether the amount of the consideration is enough or in accordance with the market value of the land. Thus, the consideration, though below the market value, was valid and the contract of sale was enforceable.
Concerning sufficiency of consideration, while it must be of certain value, it must also be recognizable by the law. For example, if under a contract, a person promises to do something that they are already bound to do as per law, the same shall not constitute a valid consideration. A mere fulfillment of a legal obligation under a contract does not amount to a valid consideration or an enforceable promise under the eyes of law.
In Thomas v. Thomas, (1942), the plaintiff was a widow whose husband had promised her that she shall be permitted to live in his house post his death, for her lifetime. When he died, the defendant, his executor, had permitted the widow to live in the house, on fulfillment of the promise that she shall pay £1 each year and keep the house in a good condition. Later on, the defendant tried to evict the plaintiff, relying on the claim that the consideration was insufficient in respect of the promise. The court, however, sided with the widow, stating that the promise of upkeep of the house and payment of £1 each year was enough consideration to create a binding contract.
In Gottlieb v. Tropicana Hotel & Casino (2000), even a minute detriment caused to a party was held as a valid and sufficient consideration. In the present case, the Plaintiff was a regular member of the Casino run by the Defendant, and held a membership of the Diamond Club, that carried certain benefits. As a Diamond Club member, the Plaintiff was given a card, and was also given access to one free spin of Million Dollar Wheel, under the Casino’s promotional campaign. The promotion allowed the players to spin a wheel and get a chance to earn a million dollars. The promotional campaign was widely advertised by the Defendant. The Plaintiff, when spinned the wheel, won a million dollars, however, immediately after, the operator swiped another card which caused the wheel to land on a lower amount. The issue arose with respect of the adequacy of consideration, as to whether participation in the promotion by the Plaintiff was adequate. The court held that there was adequate consideration on part of the plaintiff, as she had to undertake efforts in order to participate. These included her driving to the casino, waiting in the line of the Million Dollar Wheel to spin and her Diamond Club Card, which all added up to enough consideration in the eyes of the court. The court further added that entertainment and element of thrill provided by the game to the participants was also a consideration that benefitted the Defendant.
Consideration must move from the promisee
The rule states that a promise can be enforceable only if the claimant proves that a consideration in exchange of the promise is provided by them. In Price v. Easton, (1833), Price owed a certain amount to the plaintiff. In order to repay the same, Price agreed to work for the defendant, who shall pay Price’s salary to the Plaintiff as a repayment of the money owed by the Price. However, the defendant failed to pay the money to the plaintiff. The court held that the plaintiff could not claim the money from the defendant, as the consideration had not moved from the plaintiff. This rule in contract law falls under the concept of privity of contract, which states that only those who are parties to the contract can enforce the same in a court of law.
On the other hand, exchange of promises amongst the parties can be considered a valid consideration. For example, if Ariel makes a promise to Rachel, who in turn promises to give her book to Monica, then Ariel can enforce the contract against Rachel if she fails to follow through on her promise. This is because the contract between Ariel and Rachel is based on their reciprocal promises. This example is in essence, an exception to the rule of privity of contracts. Regardless of the fact that it seems like an exception, the reason why this is valid is because Ariel, being a part of the bargain, automatically becomes a party to the contract.
An interesting case illustrating the concept of privity of contract and that consideration need not move from the promissor, is Tweddle v. Atkinson (1861). In this case, the plaintiff’s father and future father-in-law had each agreed to pay the plaintiff a sum of money as consideration for the plaintiff’s marriage. However, the father-in-law died before he could make the payment and his executors were sued by the plaintiff for payment of the sum. The court held that plaintiff was not a party to the contract and his action shall fail as even though he stood to gain benefit from the contract. The plaintiff failed the suit as there was no consideration that moved away from him. On the contrary, it was his father who could effectively bring an action against the executors to make the payment as he can establish that a consideration had moved away from him, even though he did not gain any benefit from the contract.
The case of De Cicco v. Schweizer (1917), elaborated on the concept of privity of contracts. In this case, an agreement was entered into between Count Oberto Gulinelli and the Defendant, Joseph Schweizer and his wife, that the former shall marry latter’s daughter and in exchange, they shall pay their daughter a sum of $2500 each year till they remain married. Regular payments were made by the defendant and abruptly stopped after a few years. In the present case, the court held that there was sufficient consideration in the contract, even though the benefits flowed to the Defendant’s daughter who was not a party to the contract, but was aware of the promise and acted in accordance with the same. Similar to the above example involving Ariel, Rachel and Monica, the wife/daughter, in the present case, being a part of the bargain, automatically became a part of the contract.
In MacPherson v. Buick Motor Co. (1916), another exception to the case of privity to contract, was laid down in cases of duty of care and negligence. The Plaintiff was injured after the wheels to his car collapsed. The Plaintiff brought an action against the Defendant, who was the original car manufacturer. However, the Plaintiff had purchased the car from a retail dealer who had in turn bought it from the Defendant. Further, the wheels of the car had been manufactured by someone else, who used defective material. In the present case, even though the consideration did not directly move between the Plaintiff and the Defendant, the court held that the latter owed a duty of care to the plaintiff as the product being sold could be dangerous if proper care and caution is not employed. It was held that in such cases, where the nature of the product is such that negligence may cause injury to life and limb of the ultimate purchaser, then a higher duty of care is required. Hence, even though the manufacturer was not a part of the immediate sale, due to the duty of care, he was held responsible.
Promise to not sue may also be a valid consideration
In situations where a person may have a potential civil claim against another, an agreement between the two that former shall not bring a suit for enforcement of the claim is a valid consideration. For example, if Michael damages Joey’s valuable goods, then an agreement between the two that Joe shall not sue Michael if he promises to repair the goods and pay for their repairs, is a valid consideration.
In Hamer v. Sidway (1981), waiver of a legal right was held to be a valid consideration. In the present case, the Defendant had agreed to pay the Plaintiff, his nephew, a sum of money if he refrained from drinking, smoking tobacco, and profanities until the age of 21. When the Plaintiff turned 21, he approached the Defendant for money, and it was agreed that the Plaintiff shall refrain from claiming the money until it is decided that he is capable of taking care of it, and the amount, plus a certain interest shall stay with the Defendant. Shortly after, the Defendant passed away and Plaintiff then claimed the amount. The court held that agreeing to refrain from his lawful right of taking action was a consideration enough.
Special issues with consideration
Discharge of an obligation
In situations where the promisee in an agreement already obligated to perform a legal duty in favor of the promissor, then performance of the legal obligation shall not be considered a valid consideration. The reasoning behind this rule arises from the fact that via performance of the legal obligation, the promisee does not necessarily suffer a detriment and the promissor does not gain any benefit out of that transaction. As we have seen above, the basic concept of consideration involves a quid pro quo, and there must be a benefit gained by one party and a corresponding detriment suffered by the other party. This essential requirement in fulfillment of a legal obligation is absent.
Public duty
There are certain duties and obligations that a person is required to carry out, owing to their role or position in the society. In such cases, fulfillment of these duties shall not be a valid consideration. Examples of such duties include, the duty of maintaining peace and protection of citizens by a police officer, the duty of courts to hear, etc. In Collins v. Godefroy (1831), the plaintiff was summoned by court to give evidence and the defendant had promised to pay him a sum of money for the same. After the obligations of the plaintiff were fulfilled, the defendant refused to pay the agreed sum, and was sued by the plaintiff. The court held that the duty to give evidence in court of law was a legal obligation on part of the plaintiff and the same cannot be seen as a valid consideration for the payment of the money.
An exception to the above concept is when a person goes above and beyond what is prescribed as their legal obligation in discharge of their duties. In such situations, the extra efforts taken by the person may be held as a valuable consideration for a promise. In Glasbrook Brothers v. Glamorgan County Council (1924), the Glassbrook brothers were owners of a coal mine and their employees had announced to go on a strike. In order to keep the workers in check and avoid damage to the mines, the Glassbrook brothers requested the police to guard the mines by paying special attention. However, the police was of the opinion that regular patrolling of the area shall be sufficient and thereby refused the request of the Glassbrook brothers. They subsequently offered the police to pay the cost of stationing the police officers at the mines and for paying extra attention and providing security to their premises. Hence, the police agreed. Once the strike was concluded, the Glasbrooke brothers refused to make the payment as agreed, claiming that protection of the mines and providing security to its premises was the existing duty of the police. The court, however, held that police had gone beyond their prescribed line of duty by providing security at the mine premises. The police merely have a public duty to maintain law and order and the same may be done as per the decision of the police. Hence, the sum of money as agreed by the Glasbrooke brothers was a valid consideration.
Contractual obligation
Where a person performs or promises to perform an already existing contractual duty as a consideration to a new agreement, the same is not considered a valid consideration. For instance, in the case of Stilk v. Myrick (1809), the plaintiff, a captain of the ship, was on a voyage, sailing a ship from London to the Baltic. During the middle of the journey, two of the sailors abandoned their duties. Unable to find a replacement for them, the plaintiff agreed to pay extra salary to the crew members for sailing the ship back safely, despite being short staffed. Once they reached their destination, the captain went back on his promise and refused to pay the extra amount. He was therefore sued by the sailors. The court held that sailing the ship back to its destination was an obligation that they had already agreed to perform under their original contract when they agreed to be a part of the voyage. Hence, their act of sailing the ship back was not a valid consideration for the extra payment promised by the captain.
However, a contrary position was taken by the court in Hartley v. Ponsonby (1857). In this case, half of the crew had deserted the ship, as compared to just two in the previous case. The captain promised to pay extra wages to the remaining crew and at the end of the voyage, refused to do so. However, in contrast to the above case, herein, the court held the promise of extra wage by the captain to be a valid consideration. The difference arose from the fact that due to the abandonment by almost half of the crew, the voyage had become an arduous task by the remaining members. Hence, they put themselves through immense effort and danger, as compared to the simpler obligation mentioned in their original contract of sailing the ship back. Hence, by agreeing to carry the ship back to its destination safely, the crew had gone beyond their existing contractual duty and the promise by the captain to pay extra wage in return was an actual consideration.
Similar to the Stilk concept, in Bartlett v. Wyman 14 Johns. 260 (N.Y. Sup. Ct. 1817), a sailor had claimed a higher wage on the basis of the promise made by the captain during the course of the voyage. However, due to non-existence of extraordinary circumstances justifying the higher pay, the Supreme Court of New York refused the payment of extra wage, as the duties that he performed during the voyage were well within the original contract, hence did not form enough consideration for higher pay. However, in another case, Lattimore v. Harsen 14 Johns. 330 (N.Y. Sup. Ct. 1817), a group of builders had halted their work, and had refused to carry on under the original contract. However, they were promised a higher payment and thus, resumed. In this case, the court took a contrary position, and held that there was enough consideration, as the builders agreed to continue only on the promise of the extra payment.
In Tri-City Concrete Co. v. A.L.A. Construction Co. (1962), it was verbally agreed to between the parties that Tri-City shall sell concrete to A.L.A. Construction, and each delivery was to be done along with a memorandum to be signed and approved by the agent of A.L.A. Construction. As the deliveries began, Tri-City had added a clause in the memoranda starting that A.L.A. Construction shall be responsible for any damage that may occur to the delivery vehicle. In one such instance, a delivery truck fell and was damaged, when Tri-City claimed the damages, A.L.A. Construction refused. Therefore, Tri-City sued for recovery of damage. The court, siding with A.L.A. Construction held that the original agreement did not contain any such provision for recovery of damage, and under the existing contractual arrangement, there was no such duty upon the defendant, A.L.A. Construction. The memorandum fails to be a modification as there was a lack of sufficient consideration therein.
Duty under a contract to supply goods and services
In Williams v. Roffey Bros & Nicholls (Contractors) Ltd (1989), the defendant, Roffey entered into a contract to refurbish 27 blocks of flats with building owners. The carpentry work was subcontracted to Williams, who had agreed to do the work for a payment of £20,000. However, more than halfway through the work, Williams was falling behind due to certain financial troubles and it became evident that he would not be able to finish the work within the due date. Further, the agreement between Roffey and the owners contained a penalty clause wherein if the work was not completed on time, Roffey would lose out on the deal and the agreed payment. It was agreed amongst the parties that the original contract price was too low for completion of the project on time, and a further amount was sanctioned on top of the agreed amount for completion of the project on time. While the project was completed on time thereafter, Roffey went back on his promise and refused to make the extra payment so agreed. When challenged in the court of law, Roffey claimed that Williams was already under a contract to finish the work on time. The court concluded that there was extra and sufficient consideration behind the promise of extra consideration that included finishing of the work on time by Williams, avoiding the loss of contract by Roffey and time saved by the building owners, as well as the cost of finding an alternate contractor to finish the remaining job.
While on the face of it, the above judgment appears to be an exception to the rule laid down in Stilk v. Myrick (1809), on a closer examination, it becomes clear that former is only an extension of the latter. The economic hardship faced by Williams was a fact that was absent when the original agreement was made, and became apparent later on. Hence, the rule regarding sufficiency of consideration is sufficient in most cases, barring the instances of economic duress and fraud, the awareness of which may arise at a later stage.
Similarly, in Angel v. Murray (1974), the Plaintiff was under a long-term contract with the defendant for providing the services of collection and disposal of waste generated within the limits of the city. It was agreed between the parties that for the services provided by the Plaintiff, he shall be paid $137,000 per year. However, during the period of the contract, the Plaintiff had to claim an extra sum of $10,000 per year twice, owing to an unprecedented increase in the waste production in the city. The requests of the Plaintiff were approved. It was contested whether the modification in the agreement was made with sufficient consideration in exchange. In this case, the Rhode Island Supreme Court the modification was valid and there was sufficient consideration behind the extra payment so requested. The court stated that the requests for additional payments were made in good faith and were accepted by the Defendant. Further, there was enough and sufficient consideration for the extra amount as the requirement for the same arose due to unanticipated events, making the changes to the contract equitable.
Duty to pay debt
There are certain exceptions and special considerations that are applicable in contracts dealing with repayment of debt. Consider an example, where Alice owes money to Dexter, however, she finds herself unable to pay the full amount. They may reach an agreement where Dexter agrees to a smaller sum and agrees not to bring a suit for repayment of full amount against Alice. As per the law of contract, such an agreement is valid and shall bind the parties only if there is some consideration flowing from the debtor, via addition of an extra element. This rule was laid down in the case of Pinnel’s Case, (1616), and is commonly referred to as the Pinnel’s Case.
In the Pinnel’s Case, the court had laid down that payment of a lesser sum in place of an original and larger sum does not amount to a satisfactory compensation of the whole amount. The judges opined that a reduced amount cannot be justified as a satisfaction of the whole amount for the plaintiff. But along with the repayment of a reduced amount, if there is another added benefit, for example, a gift, can be considered a valuable satisfaction. The reason for acceptance of the gift as a satisfactory compensation is that the gift in exchange of the amount may prove to be beneficial to the plaintiff even more than the amount.
Therefore, repayment of debt in part is not a valid consideration, however, a part payment accompanied with another component of material value shall be considered sufficient. The only prerequisite in acceptance of the new component as valid consideration is that the same must be brought at the request of the creditor and not the debtor. The reason behind this condition is to protect the financially weak creditor against any manipulation by the debtor and avoid any economic duress to the former.
Promissory estoppel as a consideration substitute
The doctrine of promissory estoppel provides a method for making a promise binding even in situations where there is a lack of consideration. An example of when the waiver of consideration comes into the picture is acceptance of a pizza delivery even after the promised delivery time of thirty minutes has lapsed.
In Charles Rickards Ltd v. Oppenheim (1950), the defendant had delivered his car at the plaintiff’s workshop for repair works and the same was to be completed within 6-7 months. The work was not finished within the stipulated time period and the defendant agreed to provide another three months to the plaintiff. However, the work was not completed even within the extended time period and the defendant served a notice to the plaintiffs, notifying them to complete the work within four weeks, or else the order was to be canceled. Despite the notice, the plaintiff did not complete the work for another three months and when the car was finally delivered, the defendant refused to accept the delivery. The court held that while the original completion date was of essence initially, the defendant had waived the same by granting an extension. If the car were to be delivered during this extended time period, the defendant was to accept the delivery. However, after the lapse of the extended time period, when the defendant sent the notice to the plaintiff, by not finishing the work and delivering the car within the stipulated time period, the plaintiffs were in breach of the agreement.
The doctrine of promissory estoppel arose from the concept of waiver of consideration, and is based on the concept of equity. Hence, it is also known as the doctrine of equitable estoppel. The element of equity was introduced into the concept of promissory estoppel in the case of Central London Property Trust Ltd v. High Trees House Ltd (1946), wherein it was held that a party to the contract who undertakes not to enforce their right under the contract, will not be able to do so at a later stage, especially if the enforcement would equitable. In the present case, the plaintiff had leased a block of flats to the defendant, who in turn rented out the individual flats to earn an income out of these. However, due to the outbreak of the second world war, many people had started vacating the flats and a lot of flats were left empty and the defendant was unable to raise sufficient amount to pay the defendant. Therefore, the plaintiff agreed to accept half of the lease rent. No time period was fixed for this arrangement and the defendants continued to pay half the rent to the plaintiff even after the flats were full. The plaintiff claimed the full amount from the defendant including the rent of the last quarters when all the flats were full. The court, agreeing with the plaintiff held that it was an implied understanding that the agreement was to be in place only till the flats were affected by the war, and was inapplicable when all the flats were full.
In Drennan v. Star Paving Co. (1958), the Plaintiff was a general contractor preparing for a bid regarding construction for a school. The Plaintiff also invited bits from subcontractors for pavement work. As the plaintiff won the bid, he awarded the subcontract for pavement work to the Defendant and promptly informed him of the same. However, later on, the Defendant backtracked from his promise, stating that he had made a mistake in calculating the total amount involved in pavement work, and quoted a higher amount. The Plaintiff sued the Defendant for damages caused for looking for alternatives. The court held that the principles of promissory estoppel applied in the present case and the defendant was liable to pay the damages.
The doctrine of promissory estoppel, while seemingly straightforward, has certain essential aspects that must be fulfilled before the same can be applied. These are,
Existence of a contractual relationship and a promise
While this goes without saying, there must be a pre-existing contractual relationship between the parties. However, what is also required is an unequivocal promise by a party to the contract, that they forgo their legal right to enforce the agreement against the other person. This promise must be of such a nature that it impacts the legal obligations of the parties to the contract and is not a mere act of goodwill on the part of the party. The same has been established by the courts time and again, and finds its origin in the cases of Woodhouse Israel Cocoa Ltd v. Nigerian Produce Marketing Co. Ltd (1972) and Scandinavian Trading Tanker Co. AB v. Flota Petrolera Ecuatoriana, The Scaptrade (1983).
The promisee acts in reliance of the promise
Subsequent to the abovementioned promise by the promissor, the promisee must have acted in reliance to the same. This means that the subsequent actions of the promisee undertaken in pursuance of the contract must have been influenced by the promise. For example, in the above case of Central London Property Trust Ltd v High Trees House Ltd (1946), the promisee, instead of proceeding with selling his interest in lease, had continued to rent the flats, basis the promise and assurance given by the promissor that he shall accept the reduced rent for the duration of the war.
Applicable only where equitable
The doctrine of promissory estoppel is based on equity, and also known as the doctrine of equitable estoppel. Hence, the doctrine shall be applicable only in cases where reverting to the promise and taking an action for enforcement of their rights would be inequitable for the promissor. In the case of D & C Builders Ltd v. Rees (1965), Lord Denning had held that if the party claiming promissory estoppel has acted in such a way that it would be inequitable to allow him or her to take advantage of the doctrine, then the doctrine will not be applied. In this case, the plaintiffs had done some construction work on the land of the defendant, for which the defendant owed them a sum of money, amounting to a total of £732. However, the defendants refused to pay the full amount claiming that the work was defective and had only made a part payment of £250. The plaintiffs, on the other hand, were facing financial hardships and needed the full payment. On being pressed further by the plaintiffs, the defendant agreed to offer the plaintiffs £300 as the final settlement and stated that if they did not accept the same, they would not be given anything. Although the amount offered was not enough, the plaintiffs nevertheless agreed and later sued the defendant for the balance amount. Relying on the theory laid down in the Pinnel’s case, the court held the claims of the plaintiff to be successful. On the question of the doctrine of promissory estoppel in favor of the defendants, the court stated that they had taken advantage of the financial hardships of the plaintiffs and caused further economic duress to them by withholding their payment.
In Salsbury v. Northwestern Bell Telephone Co (1974), the plaintiff had provided help in establishing a college and in order to raise money, the plaintiff approached the defendant company for donations. It was agreed between the parties that the defendant Shall make donations of $5,000 each year for the next 3 years. However, the defendant only made the first payment, and failed to make the remaining two payments. Thereafter, the college sued the defendant for breach of contract and recovery of the remaining donation amount. The defendant argued that the contract between the parties was legally unenforceable due to the lack of a valid consideration, as there was no quid pro quo and they received nothing in exchange for the donation. Relying on the concept of equity and equitable estoppel, the court held that charitable donations and promises to make charitable donations are enforceable even though they lack appropriate consideration or a benefit to the donor.
The case of Aspex Eyewear v. Clariti Eyewear (2010), deals with the applicability of equity and promissory estoppel where a party is lead to believe by the other party’s acts, that the latter forfeits their right to seek legal recourse. The Plaintiff, Aspex held patent rights to magnetically attachable glass frames. The Defendant started selling similar products, but promptly stopped when notified by the Plaintiff. However, the Defendant again resumed the sale and marketing of attachable frames, and was again notified by the Plaintiff of their infringing activities. Following back and forth discussions between the parties, the Defendant refused to comply with the Plaintiff’s demands and continued the sale. After the lapse of three years, the Plaintiff brought an action against the Defendant. The court applied the principle of promissory estoppel and stated that the Plaintiff misled the defendant into understanding that they did not intend to pursue their patent rights. Relying on the inaction by the Plaintiff, the Defendant continued the sale of the products. Given that the sale had continued uninterrupted for 3 years, it would not be fair or just to injunct the defendant now.
Not applicable to future rights
A waiver under promissory estoppel can be applied only for avoiding the exercise of rights for a period of time, and it cannot be used as an excuse to suspend the rights of the parties in perpetuity. This rule was laid down in the case of Tool Metal Manufacturing Co Ltd v Tungsten Electric Co Ltd (1955). As per the license agreement between the patent owner and licensee, the former was entitled to a certain amount of compensation if the latter manufactured more than the set number of devices under the patented technology. Subsequently, in the year 1942, war broke out and the patent owners agreed to suspend their compensation rights in the interest of public good. After the war ended, there were issues during the negotiations for the new agreement between the parties and the patent owners subsequently claimed the compensation due to them for the time period beginning since the end of the war. The court held that the agreement to suspend the compensation rights made by the patent owners was applicable only for the time period of the war, and not for perpetuity. Hence, they were entitled to compensation after the war period.
Cannot create new rights
The doctrine of promissory estoppel cannot be used as a tool to create new rights in favor of the promisee or to even expand the scope of the existing rights and obligations under the contract. This rule is stated in the terms that a promissory estoppel is a shield and not a sword. This further means that the doctrine of promissory estoppel cannot be used as a defense or a course of action. This rule under the doctrine of promissory estoppel was laid down in the case of Combe v. Combe (1952), where a couple was after the conclusion divorce proceedings, the husband had agreed to pay the wife a fixed amount per annum as maintenance. However, the husband failed to make the payment so agreed and even though the wife pressed him time and again to make the payment, she did not bring an action in the court for the maintenance. She brought an action against him after seven years, claiming that her not exercising the right to claim maintenance via a proceeding in the divorce court was a consideration for his maintenance. In this case, the court held that the wife cannot use the doctrine of estoppel as a cause of action. Use of the doctrine in such a manner would be against the principle of consideration itself and would allow the parties to enter into an agreement without any valid consideration. Herein, since there was no agreement between the husband and the wife, there was no creation of legal right in favor of the latter.
Types of consideration
Executory consideration
An executory consideration refers to those that form part of an agreement wherein there are two promises made in exchange of each other, i.e., a promise for promise, or a quid pro quo of promises. For example, in a contract of sale between buyer and seller, there is a promise to make the payment of an agreed price on part of the buyer in exchange of the promise by the seller that they shall part away with the goods forming the subject matter of the contract. In contracts involving executory consideration, there is an exchange of promises that is majorly found in bilateral contracts, and the consideration so promised is known as an executory consideration.
Executed consideration
On the contrary to executory considerations, executed considerations are mostly found in unilateral contracts. In contracts consisting of executed consideration, one party makes a promise as a reciprocation to an act or omission by the other party. In these kinds of contracts, the act completed by one party is a consideration on their part and a promise in return is the consideration from the other party. The example dealing with and adequately explaining executed consideration is that of a contract where A promises to give a sum of money as a reward for finding his lost dog. In this case, if B finds and brings back the dog to A, the act of B would be the consideration on his part and promise to make the payment would be the consideration on A’s part.
Past consideration
A past consideration is an act that is performed prior to the execution of the contract. And as discussed previously, a past consideration is not considered to be a valid consideration, owing to the lack of its potential to establish the intent of entering into an agreement by the parties. As per the law of contract, a consideration is valid only if it is given at the time of performance of the reciprocal promise or before. A promise that is made after the reciprocal consideration has been fulfilled shall be invalid and unenforceable in contract law. In Re McArdle [1951] Ch 669, a promise to make payment for some construction work was made subsequent to its conclusion. Given that the promise of this consideration of payment was made after the construction, it became a past consideration, and hence, invalid.
Adequate consideration and valuable consideration
As established previously, while under contract law, value of the consideration must be sufficient to the promise in exchange, however, whether the consideration is adequate or not, is not a concern under contract law. The courts in the cases dealing with the monetary or economic value of consideration shall only be concerned with fairness and equity of the contracts. It is not a concern of the courts if the parties are getting themselves into a loss by getting the bad end of a bargain. As mentioned before, the consideration merely needs to exist, whether or not the consideration is sufficient is not an issue to be dealt with by the courts.
In Chappell & Co Ltd v. Nestle Co Ltd, (1959), the court had held that parties to a contract are free to choose the consideration as they deem fit and the courts shall stay away from judging whether the parties got a beneficial deal or not. Further, in Thomas v. Thomas (1942), a property was leased for £1 as the rent. On the argument that the amount was too less, the court held that it was not a concern for the court that the actual value of the property was more than the agreed rent amount. As long as there was a consideration of some economic value, it was sufficient and valid in the eyes of law.
The case of White v Bluett [1853] 23 LJ Ex 36. explains what it means when the court in the above judgment stated that there should be some consideration. In this case, a father had agreed to waive the debt owed to him by his son, on a promise for the son that he will stop complaining about his father’s will. The court herein ruled that the consideration on the part of the son to stop complaining was not a valid consideration as it lacked economic value. Hence, as long as there is a consideration of some economic value, the same shall be fine. This economic value can be as miniscule as possible.
In Kirksey v. Kirksey (1845), the Plaintiff was the Defendant’s sister-in-law and was a widow with several children. Hearing of his brother’s demise the Defendant promised to give his land to the Plaintiff if she agreed to live on the land. On the basis of the promise, the Plaintiff moved to the land with her children and lived comfortably for 2 years. However, the defendant later on asked her to move out and offered her to live someplace else, which was an uncomfortable house located in the woods. The Plaintiff thereafter sued the Defendant for breach of contract. In this case the court held that there was lack of consideration and that the Defendant’s promise was merely gratuitous. There was a lack of appropriate consideration of economic value from the Plaintiff’s end, and moving to the land did not constitute a sufficient bargain for a quid pro quo.
When is consideration invalid in a contract
As seen above, consideration is one of the five basic essentials of a contract. A contract without a valid consideration becomes unenforceable. Flowing from the essentials of a valid consideration, a consideration becomes invalid if the basic requirements of a consideration are not fulfilled. A consideration is invalid when it does not contain appropriate legal value as established previously. Below are certain situations wherein a consideration would be invalid:
Past consideration
A part consideration is a promise made in exchange of an act already performed by the other party. As stated previously, a past consideration is not a valid consideration owing to the lack of quid pro quo as an essential element of the consideration. Further, a past consideration also lacks the potential to establish the intent of entering into an agreement by the parties. As per the law of contract, a consideration is valid only if it is given at the time of performance of the reciprocal promise or before. A promise that is made after the reciprocal consideration has been fulfilled shall be invalid and unenforceable in contract law.
Unreal or illusory consideration
An illusory consideration is a promise that is so uncertain or conditional that it lacks a real obligation on the promissor. Such considerations are usually optional, depending upon the whims of the person making such a promise under consideration. An illusory consideration is a promise where the promisor does not have any real intentions of following through on their promise and has no intention of keeping their promise. The reason why an illusory consideration is in invalid, is due to the fact that it lacks the essential requirement of quid pro quo, owing to its non-existence. A contract where Shiro agrees to sell his smartwatch to Hiral on the condition that on the day of delivery, he must “feel like it”, would be invalid as the consideration on part of Shiro is illusory, and lacks any genuine interest to enter into a valid agreement.
Illegal consideration
An illegal consideration is a promise that seeks an illegal or legally unenforceable act, omission, or goods in exchange. Such considerations are invalid and unenforceable as they lack legal validity and are against public policy. Contracts involving illegal consideration are unenforceable in a court of law. An illegal consideration involves promises such as, an agreement for sale of prohibited goods such as drugs, an agreement for undertaking an illegal activity by the parties, agreement where the parties hire child labors, agreement for human trafficking, etc.
Case laws related to consideration
Kirksey v. Kirksey
The case of Kirksey v. Kirksey (1845), discusses the concept of bargained for exchange, or quid pro quo as an essential to a valid contract. The Plaintiff was the Defendant’s sister in law and was a widow with several children. Hearing of his brother’s demise the Defendant promised to give his land to the Plaintiff if she agreed to live on the land. On the basis of the promise, the Plaintiff moved to the land with her children and lived comfortably for 2 years. However the defendant later on asked her to move out and offered her to live someplace else, which was an uncomfortable house located in the woods. The Plaintiff thereafter sued the Defendant for breach of contract. In this case the court held that there was lack of consideration and that the Defendant’s promise was merely gratuitous. There was a lack of appropriate consideration of economic value from the Plaintiff’s end, and moving to the land did not constitute sufficient bargain for a quid pro quo.
Roscorla v. Thomas
The case of Roscorla v. Thomas (1842) deals with the rule against validity of past considerations. The plaintiff had purchased a horse from the defendant and both the parties had agreed on a particular price. After the negotiations and once the agreement was finalized, the defendant made a guarantee to the plaintiff regarding the mental state of the horse, by agreeing that the horse was of sound mind. However, contrary to the claims of the defendant, the horse turned out to be ferocious and dangerous, and the plaintiff thereafter sued the defendant for breach of contract. On examining the matter, the court held the promise of the defendant to be unenforceable, as it was made after the agreement was concluded, hence, becoming a past consideration. In this case, the consideration on part of the plaintiff was already completed when the promise regarding the horse’s soundness of mind was made by the defendant. Further, the guarantee regarding the horse’s mental state was not a part of the negotiations at all and was not the reason behind consideration of payment made by the plaintiff. If the promise and guarantee regarding the mental state of the horse was made during the negotiations and before the conclusion of the agreement, it would have been a valid consideration.
Lampleigh v. Brathwait
The case of Lampleigh v. Braithwait (1792) deals with the exception to the rule laying down that past consideration is not a valid consideration. The exception to the rule against validity of past consideration comes into the play where the consideration has been furnished by a party on an understanding and the request of the promisor that a payment would be made or a promise would be subsequently fulfilled in return. In Lampleigh v. Braithwait (1615) Hob 105, Braithwait had been convicted for killing a man and had requested Lampleigh to acquire a pardon from the king. After spending a considerable amount of money and spending a lot of effort, Lampleigh was able to secure a pardon for Braithwait. Excited by the same, Braithwait promised to pay a sum of £100 to Lampleigh, but later went back on his promise. On the failure to make the payment, Lampleigh sued Braithwait for the same. While the act of going to considerable efforts for securing the pardon seems like a past consideration and hence, unenforceable, the court held a different conclusion. The court concluded that the request made by Braithwait contained an inherent promise to pay or make certain rewards in return for the work done by Lampleigh. Therefore, the work done by Lampleigh and the subsequent promise of payment made by Braithwait were a part of the same transaction, making the promise of the latter legally enforceable.
Combe v. Combe
This case dealt with the concept that the doctrine of promissory estoppel cannot be used as a tool to create new rights in favor of the promisee, by stating that the doctrine is a shield and not a sword. In the case of Combe v. Combe (1952), after the conclusion of divorce proceedings, the husband had agreed to pay the wife a fixed amount per annum as maintenance. However, the husband failed to make the payment so agreed and even though the wife pressed him time and again to make the payment, she did not bring an action in the court for the maintenance. She brought an action against him after seven years, claiming that her not exercising the right to claim maintenance via a proceeding in the divorce court was a consideration for his maintenance. In this case, the court held that the wife cannot use the doctrine of estoppel as a cause of action. Use of the doctrine in such a manner would be against the principle of consideration itself and would allow the parties to enter into an agreement without any valid consideration. Herein, since there was no agreement between the husband and the wife, there was no creation of legal right in favor of the latter.
Stilk v. Myrick
The case of Stilk v. Myrick (1809) deals with the validity of consideration arising out an already existing contractual duty being used as a consideration to a new agreement. In this case, it was held that when a pre-existing contractual duty owed to a promisor is used as a consideration in a new agreement, the same shall not be valid. The plaintiff, a captain of the ship, was on a voyage, sailing a ship from London to the Baltic. During the middle of the journey, two of the sailors abandoned their duties. Unable to find a replacement for them, the plaintiff agreed to pay extra salary to the crew members for sailing the ship back safely, despite being short staffed. Once they reached their destination, the captain went back on his promise and refused to pay the extra amount. He was therefore sued by the sailors. The court held that sailing the ship back to its destination was an obligation that they had already agreed to perform under their original contract when they agreed to be a part of the voyage. Hence, their act of sailing the ship back was not a valid consideration for the extra payment promised by the captain.
Pinnel’s Case
The Pinnel’s Case (1616) is a landmark judgment dealing with the concept of contractual duty to pay debt and the waiver or part-waiver of the same. It laid down that if the debtor offers to pay back a reduced amount as a remittance of debt and the lender accepts the same, then such an arrangement will be binding as an agreement only if there is an extra element of material consideration provided by the debtor. In the Pinnel’s Case, Mr. Pinnel had loaned Mr. Cole a sum of £16 and the latter was supposed to repay a sum of £8 10s. However, Mr Cloe re-paid only £5 2s and a tuppence. Mr. Pinnel subsequently brought an action against Mr. Cole for repayment of the whole amount, and Mr. Cole argued that by accepting the reduced amount, Mr. Pinnel had agreed to accept the reduced amount as the full and final settlement of the loan. The court laid down that payment of a lesser sum in place of an original and larger sum does not amount to a satisfactory compensation of the whole amount. The judges opined that a reduced amount cannot be justified as a satisfaction of the whole amount for the plaintiff. But along with the repayment of a reduced amount, if there is another added benefit, for example, a gift, can be considered a valuable satisfaction. The reason for acceptance of the gift as a satisfactory compensation is that the gift in exchange of the amount may prove to be beneficial to the plaintiff even more than the amount.
Coretta Scott King, v. Trustees of Boston University
The Coretta Scott King, v. Trustees of Boston University (1995), deals with the essential meaning of consideration, that states that there must be a detriment/benefit accruing to the parties in a contract. The case also focuses on the meaning of consideration in contracts involving charitable donations. As the case goes, Martin Luther King Jr., at the request of his alma mater, Boston University, had submitted a few of his papers to the newly constructed library of the University. However, King also sent a letter wherein he mentioned that the submitted papers would continue to be his legal property even though they shall be in the custody of the University. The letter further went on to state that after his death, the property in the papers shall absolutely pass on to the University. After his death, the Plaintiff and King’s widow, Coretta Scott King raised the issue that the submission of the papers to the University was not supported by a valid consideration owing to the lack of a quid pro quo. In this case, the court held that the submission of the papers was a charitable pledge and not a contract due to the lack of a consideration. The parties had not entered into a contract as there was no bargaining, barter or exchange of promises between the parties. Hence, for a contract to be valid, there must be a consideration, which is an exchange of promises between the parties.
Wood v. Lucy, Lady Duff-Gordon
The case of Wood v. Lucy, Lady Duff-Gordon (1917), deals with the concept of implied terms and expected duties of the parties as considerations to the contract, that arise out of the standard contractual relationship between the parties. Lady Duff-Gordon was a famous fashion designer and a fashion icon, whose endorsement has a huge impact on the fashion community. Lady Duff-Gordon signed a contract to exclusively hire the services of Wood as an advertisement agent. Lady Duff-Gordon granted Wood with the rights of marketing her designs and products bearing her endorsements, and the profits were to be shared equally by both the parties. Wood found out that Lady Duff-Gordon had been endorsing other products without Wood’s permission and was therefore sued to breach of contract. Lady Duff-Gordon defended herself by stating that there was no express promise or consideration in the contract defining the scope of duties and what Wood was supposed to do and was employed merely to place endorsements. Hence, she maintained that there was a lack of consideration. The court held that the promise by Wood to exclusively represent Lady Duff-Gordon was sufficient consideration, and gave rise to assumption of duties to be carried out by the parties.
Gottlieb v. Tropicana Hotel & Casino
The case Gottlieb v. Tropicana Hotel & Casino (2000), deals with the meaning and sufficiency of consideration, wherein it was held that even a minute detriment caused to a party was held as a valid and sufficient consideration. In the present case, the Plaintiff was a regular member of the Casino run by the Defendant, and held a membership of the Diamond Club, that carried certain benefits. As a Diamond Club member, the Plaintiff was given a card, and was also given access to one free spin of Million Dollar Wheel, under the Casino’s promotional campaign. The promotion allowed the players to spin a wheel and get a chance to earn a million dollars. The promotional campaign was widely advertised by the Defendant. The Plaintiff, when spinned the wheel, won a million dollars; however, immediately after, the operator swiped another card which caused the wheel to land on a lower amount. The issue arose with respect of the adequacy of consideration, as to whether participation in the promotion by the Plaintiff was adequate. The court held that there was adequate consideration on part of the plaintiff, as she had to undertake efforts in order to participate. These included, her driving to the casino, waiting in the line of the Million Dollar Wheel to spin and her Diamond Club Card, which all added up to enough consideration in the eyes of the court. The court further added that entertainment and element of thrill provided by the game to the participants was also a consideration that benefitted the Defendant.
De Cicco v. Schweizer
The case of De Cicco v. Schweizer (1917), elaborated on the concept of privity of contracts. The rule under contract law states that a promise can be enforceable only if the claimant proves that a consideration in exchange of the promise is provided by them. However, an exchange of promises amongst the parties can be considered a valid consideration. In this case, an agreement was entered into between Count Oberto Gulinelli and the Defendant, Joseph Schweizer and his wife, that the former shall marry latter’s daughter and in exchange, they shall pay their daughter a sum of $2500 each year till they remain married. Regular payments were made by the defendant and abruptly stopped after a few years. In the present case, the court held that there was sufficient consideration in the contract, even though the benefits flowed to the Defendant’s daughter who was not a party to the contract, but was aware of the promise and acted in accordance with the same. Similar to the above example involving Ariel, Rachel and Monica, the wife/daughter, in the present case, being a part of the bargain, automatically became a part of the contract.
MacPherson v. Buick Motor Co.
The case of MacPherson v. Buick Motor Co. (1916), provides another exception to the case of privity to contract, in cases of duty of care and negligence. Where a third party may be impleaded even if there was no real promise flowing to and from them. In this case, the Plaintiff was injured after the wheels to his car collapsed. The Plaintiff brought an action against the Defendant, who was the original car manufacturer. However, the Plaintiff had purchased the car from a retail dealer who had in turn bought it from the Defendant. Further, the wheels of the car had been manufactured by someone else, who used defective material. In the present case, even though the consideration did not directly move between the Plaintiff and the Defendant, the court held that the latter owed a duty of care to the plaintiff as the product being sold could be dangerous if proper care and caution is not employed. It was held that in such cases, where the nature of the product is such that negligence may cause injury to life and limb of the ultimate purchaser, then a higher duty of care is required. Hence, even though the manufacturer was not a part of the immediate sale, due to the duty of care, he was held responsible.
Hamer v. Sidway
The case of Hamer v. Sidway (1981), deals with waiver of a legal right and whether the same can be a valid consideration. In the present case, the Defendant had agreed to pay the Plaintiff, his nephew, a sum of money if he refrained from drinking, smoking tobacco, and profanities until the age of 21. When the Plaintiff turned 21, he approached the Defendant for money, and it was agreed that the Plaintiff shall refrain from claiming the money until it is decided that he is capable of taking care of it, and the amount, plus a certain interest shall stay with the Defendant. Shortly after, the Defendant passed away and Plaintiff then claimed the amount. The court held that agreeing to refrain from his lawful right of taking action was a consideration enough.
Angel v. Murray
The case of Angel v. Murray (1974), deals with the contracts consisting of duty to provide goods or services and the standards used to measure the validity of modifications to the contract as appropriate consideration. The Plaintiff was under a long-term contract with the defendant for providing the services of collection and disposal of waste generated within the limits of the city. It was agreed between the parties that for the services provided by the Plaintiff, he shall be paid $137,000 per year. However, during the period of the contract, the Plaintiff had to claim an extra sum of $10,000 per year twice, owing to an unprecedented increase in the waste production in the city. The requests of the Plaintiff were approved. It was contested whether the modification in the agreement was made with sufficient consideration in exchange. In this case, the Rhode Island Supreme Court the modification was valid and there was sufficient consideration behind the extra payment so requested. The court stated that the requests for additional payments were made in good faith and were accepted by the Defendant. Further, there was enough and sufficient consideration for the extra amount as the requirement for the same arose due to unanticipated events, making the changes to the contract equitable.
Salsbury v. Northwestern Bell Telephone Co
Salsbury v. Northwestern Bell Telephone Co (1974), deals with the concept of equity in promissory estoppel and validity of charitable donations as considerations. The plaintiff had provided help in establishing a college and in order to raise money, the plaintiff approached the defendant company for donations. It was agreed between the parties that the defendant Shall make donations of $5,000 each year for the next 3 years. However, the defendant only made the first payment, and failed to make the remaining two payments. Thereafter, the college sued the defendant for breach of contract and recovery of the remaining donation amount. The defendant argued that the contract between the parties was legally unenforceable due to the lack of a valid consideration, as there was no quid pro quo and they received nothing in exchange for the donation. Relying on the concept of equity and equitable estoppel, the court held that charitable donations and promises to make charitable donations are enforceable even though they lack appropriate consideration or a benefit to the donor.
Conclusion
Consideration, a price to be paid or a promise to be fulfilled by one party in exchange of a promise by another party, is a central requirement in the law of contracts. It is a valuable pre-requisite to be present and fulfilled by the parties to a contract in almost all cases of contract. A consideration can of many types, including but not limited to, a promise to perform an act, or a promise to refrain from an act, money, goods or services, or any material property. In the case of Currie v. Misa (1875), the court had held that consideration can be any right, title, interest, gain, advantage, or on the contrary, it can also be a deprivation, creation of responsibility, or duty. From a simple definition as above, the courts have defined the contours of the essentials required to be fulfilled in order to create a valid consideration in a contract. On the most basic understanding of it, a consideration must be an exchange of legally enforceable promises amongst the parties to a contract, that contains some economic value.
Frequently Asked Questions (FAQs)
What are the basic requirements of a valid consideration?
The concept of consideration originated from the idea of quid pro quo, literally translating to “this for that”. A consideration is defined as a material benefit accrued to a person making a promise, the promisor or a material detriment to the other party that enjoys the benefits of the promise, the promisee. Consideration is one of the essential elements of a legally enforceable contract, and for a consideration to be valid, following conditions must be fulfilled:
- Consideration may either be executed or executory but it cannot be in the past.
- Consideration must be sufficient.
- Consideration must move from the promisee.
- Promise to not sue may also be a valid consideration.
What is an invalid consideration under contract law?
A consideration becomes invalid when it fails to fulfill the essence of quid pro quo, i.e., something in exchange for something, between the parties to the contract. A consideration becomes invalid in the following circumstances:
- Past consideration: A part consideration is a promise made in exchange of an act already performed by the other party. A past consideration is not a valid consideration owing to the lack of quid pro quo as an essential element of the consideration.
- Unreal/Illusory consideration: An illusory consideration is a promise that is so uncertain or conditional that it lacks a real obligation on the promisor and the promisor does not have any real intentions of following through on their promise.
- Illegal consideration: An illegal consideration is a promise that seeks an illegal or legally unenforceable act, omission, or goods in exchange.
What is a sufficient consideration?
A consideration is considered to be sufficient under contract law when it is of some economic and material value. The exact amount of the economic value is irrelevant and it is not a concern of the courts if the parties are getting themselves into a loss. Sufficiency of consideration is different from adequacy, which concerns the economic value of the consideration and whether the value of the consideration sits at par with the market value of the promise in exchange for which the consideration is being provided. In the eyes of the court, it is the “sufficiency” of the consideration that matters the most.
What is the role of equity in promissory estoppel?
The doctrine of promissory estoppel provides a method for making a promise binding even in situations where there is a lack of consideration, based on the concept of waiver of consideration and equity. Hence, the doctrine shall be applicable only in cases where reverting to the promise and taking an action for enforcement of their rights would be inequitable for the promisor. In the case of D & C Builders Ltd v Rees (1965), Lord Denning had held that if the party claiming promissory estoppel has acted in such a way that it would be inequitable to allow him or her to take advantage of the doctrine, then the doctrine will not be applied.
When does public duty become a valid consideration?
There are certain duties and obligations that a person is required to carry out, owing to their role or position in the society. In such cases, fulfillment of these duties shall not be a valid consideration. Examples of such duties include, the duty of maintaining peace and protection of citizens by a police officer, the duty of courts to hear, etc. However, when a person goes above and beyond what is prescribed as their legal obligation in discharge of their duties, then the extra efforts taken by the person may be held as a valuable consideration for a promise.
When does contractual obligation become a valid consideration?
Where a person performs or promises to perform an already existing contractual duty as a consideration to a new agreement, the same is not considered a valid consideration. However, when in the performance of the promise, one goes through efforts and labor that extend beyond what is expected under the original contractual obligation, then such performance becomes a valid consideration.
