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Chapter 12 - Consideration
12-1
CHAPTER 12
CONSIDERATION
I. OBJECTIVES
This chapter is designed to familiarize students with the concept of consideration, which has been
described as "the glue that holds the bargain together" at common law. After reading the chapter
and attending class, a student should be able to:
A. Define the concept of consideration and describe its significance in the formation of a valid
contract.
B. Explain the elements of consideration.
C. Explain why illusory promises, past consideration, and promises to perform preexisting
obligations are not consideration.
D. Determine what is required to create a valid modification of a contract under both the UCC
and common law of contracts.
II. ANSWER TO INTRODUCTORY PROBLEM
consideration.
C. One important fact to know is how old Chad is and whether he is legally permitted to smoke
value then?
III. SUGGESTIONS FOR LECTURE PREPARATION
A. The Idea of Consideration
1. Discuss the idea of consideration and note how the consideration requirement reflects the
common law notion that the purpose of contract law is to enforce private bargains:
consideration requirement:
a. It limits a promisor's liability for his promises: he is not liable for gratuitous
promises, or for a promisee's reliance on such promises.
Chapter 12 - Consideration
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3. Discuss the terms promisor and promisee. Note that in a bilateral contract situation both
parties are promisors (each made a promise to the other) and promisees (each received a
a. Which promise is at issue? This is the promise made by the party seeking to avoid
performance of the agreement.
b. Who is the promisee? Which party was the promise at issue made to (who is seeking
to enforce it)?
c. Has the promisee given consideration? Here begin discussion of the definition of
consideration given in the text: "legal value, bargained for and given in exchange for
consideration.
4. Work a simple bilateral contract example to illustrate the application of the above
a. Ace refuses to honor the agreement, having received a more lucrative contract.
Smith files suit for breach of contract.
1) Which promise is at issue? Ace's promise to paint Smith's house.
2) Who is the promisee? Smith.
b. Smith tries to cancel the contract, having received an offer from Budget Painting
house.
5. Point out to students the importance of mastering this problem-solving technique and the
situations.
Example: Problem Case #6.
Chapter 12 - Consideration
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B. Legal Value
1. Note that consideration can be either an act (unilateral contract) or a promise (bilateral
contract). One thing students sometimes find confusing is that in bilateral contract cases
its side of the agreement.
Example: Problem Case #8.
text.
b. It is not essential that the promisor personally derive any value from the promisee's
promise. You may wish to work a simple guaranty contract example to illustrate this
point. Tom Jones has a younger brother named Mike. Mike wishes rent an
apartment. The landlord refuses to rent to Mike unless Tom agrees to guarantee
Note how this rule reflects the laissez-faire assumptions underlying classical contract law,
illustrates the "hands-off" posture courts traditionally assumed toward private
agreements, and promotes certainty in contract cases at the potential cost of enforcing
unfair agreements.
subsidiary organizations, not paying one of its principals any compensation, and giving
plaintiff access to financial records of its subsidiary organizations. If the defendant failed
in any of these requirements, the plaintiff’s agreement to stay execution of the full default
judgment would lift, and plaintiff could seek to collect the full amount. After two and a
that it didn’t provide consideration in the agreement, which would make the agreement
invalid and cause the claim the plaintiff was pursuing to have no basis (because it was a
Chapter 12 - Consideration
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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
suit based on a breach of the agreement). Ask the students whether the defendant gave
consideration. Pick one student to present the defendant’s argument that there was no
consideration (i.e., that the defendant already owed more; that the defendant was not
pursuing any challenge to the judgment, so the agreement to drop any challenges didn’t
do anything; and that the plaintiff didn’t really get anything else of value, because
plaintiff already could accomplish everything else defendant agreed to do by other
means). Have another student present the counterargument from the plaintiff’s
perspective (i.e., that defendant had no obligation to do the payment plan, provide the
of consideration.)
Additional Examples: The following Gottlieb case (p. 384) also implicates the issue of
adequacy in addition to bargained-for exchange.
Meram v. MacDonald (text case in Chapter 10)—consideration given by Meram was
doing the requested acts of putting his business card in the basket and staying until the
end of the presentation, Problem Case #9.
consideration is subject.
1) Inadequacy "on the face" of the agreement may justify denying enforcement.
capacity.
a party seeking to enforce the agreement.
4) Many courts will not enforce agreements supported by mere nominal
for.
5) A few courts have simply refused to enforce contracts involving consideration
which is so inadequate as to "shock the conscience of the court." There are a few
recent Code cases where consumer contracts involving grossly unfair price
provisions have been stricken down as unconscionable under section 2-302.
Day v. Fortune Hi-Tech Marketing, Inc. (p.386): Day represented a class of “Independent
Representatives” for Fortune Hi-Tech Marketing, Inc. (“FHTM), which was a multi-level
marketing company. Day sued FHTM under state and federal consumer protection and
anti-racketeering laws on the theory that FHTM was an illegal pyramid scheme. FHTM
Chapter 12 - Consideration
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notice. The district court refused to compel arbitration, so FHTM filed an interlocutory
appeal.
bound by anything in the contract. It could just change the terms if it felt like it or did not
want to perform on them.) Have the students explain simple steps FTHM could have
taken in drafting the Policies and Procedures to avoid this problem.
a. Note how a unilateral right to cancel or terminate an agreement can sometimes
consideration.
5. Discuss the general rule that performing or agreeing to perform a preexisting duty will
not amount to consideration. Note the relationship between this rule and the legal value
requirement: the promisor who receives such a promise or performance has in effect
received nothing in exchange for his promise because he has only received something he
involving Acme Construction Company in the text. This situation also occurs quite
frequently in house construction contracts.
1) Discuss the criticism of the preexisting duty rule as a basis for determining the
enforceability of contract modification agreements. Note that many observers
agreements by finding that the parties mutually agreed to terminate their original
contract and subsequently entered a new agreement.
the sale price at $155,000, with $135,000 payable at the closing and the
remainder in installments. At the closing, the buyer paid the $135,000, using
unenforceable because of the absence of consideration. The court found that the
addendum was nothing more than a “unilateral price hike,” and ruled for Artis.
Chapter 12 - Consideration
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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Points for Discussion: Why weren’t the addendum’s financing plan, flexibility in
payments, and ability to renegotiate the payment terms considered to be new
consideration?
Additional Examples: Problem Cases #2 and 3.
2) You may wish to point out, although this point is not covered in the text, that the
Restatement Second, in section 89 provides that an agreement modifying a
to modify.
c. Ethics in Action (p. 392): This problem plumbs the ethical underpinnings of the
preexisting duty rule as well as those that underlie the enforcement of contracts in
general. Here, the O’Neills gave their consent contingent on a particular price offered
by Rex Roofing. They played no role in its underbidding the job, nor were there
another party’s reliance on the contract.
d. Contrast the CISG approach to modifications of contracts (Global Business
Environment, p. 391).
e. Discuss contract modification under the Code. Point out how section 2-209(1) has
changed the preexisting duty rule for agreements to modify sales contracts.
agreements.
7. Discuss the application of the pre-existing duty rule to debt settlement agreements. Note
that these everyday commercial problems are resolved at common law by referring to
consideration principles.
a. Distinguish liquidated debts from unliquidated debts. Discuss the general rule that an
unenforceable for lack of consideration.
Example: Problem Cases #4 and 10.
1) Note that, by negative implication, this rule says two other things. First, an
payment is also enforceable.
satisfaction of his claim.
