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Chapter Seven | Consideration
Consideration may be defined as “something bargained for in return for a promise.” Some promises have little or no legal significance because the element of bargain is missing. For example, if a person promises to give a gift to another person, a court would not generally impose an obligation to complete the gift because the bargain element is missing. Gifts are legally classified as donative transactions and are not enforceable as contractual promises — they are considered as gratuitous and not supported by consideration.
Consideration may consist of the following:
- In a bilateral contract, the consideration for the promisor’s promise is a promise made by the promisee.
- In a unilateral contract, the consideration for the promisor’s promise is the act of the promisee.
- In a forbearance on the part of the promisee, which is defined as the giving up of a valid legal right. For example, “I will give up my right to sue you for defamation if you agree to retract your comments.”
- In the creation, modification, or destruction of a legal relationship. (Example: I promise to pay you $500 if you will agree to let me out of my apartment lease/revise my employment contract.)
The common law placed great emphasis on the concepts of “benefit” and “detriment” in deciding if a promise would be enforced. Under a modern view, courts look instead to the existence of the bargain to determine if a promise will be enforced.
Moral Obligations And Past Consideration
A promise based on past consideration (an act that occurred in the past), or upon a moral obligation, a moral duty, a sense of honor, or love or affection is generally not enforceable. For example, “in consideration of the fact that you named your first son Stanislaus in my honor, I promise to pay you $10,000.” This promise is generally not enforceable because the act had occurred in the past. How does this differ from the following promise; “If you agree to name your first son Stanislaus in my honor, I promise to pay you $10,000”?
The Rules of Consideration
There are two general rules that supply the basis for an understanding of consideration.
First, a court will not usually question the adequacy of consideration. That is, simply stated, courts are not generally concerned if the transaction was a good bargain or a bad bargain in an economic sense, only that there in fact was a bargain! This rule has one major exception: where a bargain is made between parties within a fiduciary or confidential relationship, a court of equity may be concerned with the adequacy of the bargain and will carefully scrutinize such a bargain in order to assure that any consideration was adequate.
The second general rule may be stated as follows: Once parties enter into an agreement, they are bound by the terms agreed upon. Any attempt to change the terms of the agreed-upon bargain (especially the compensation term), “hold out” or renegotiate a “better deal,” will be met with a “consideration problem” found in the application of what is known as the pre-existing duty rule.
Pre-Existing Duty Rule
The pre-existing duty rule states: “Where a party does or promises to do what he is already legally bound to do or promises to refrain from doing or refrains from doing what he is not legally permitted to do, he has not incurred legally sufficient detriment.” Under these circumstances, there is no consideration for the underlying promise. The pre-existing duty may arise in the context of a prior contract or may be imposed by a statute or law. Let’s look at three examples of the application of the pre-existing duty rule.
Frederick agrees to hire Williams for a two-year period at $500 per week. After a six-month period, Frederick orally promises to increase Williams’ wages to $600 per week. Later, when Williams notices that his pay has remained at $500, he contacts Frederick and Frederick refuses to increase the pay. Frederick’s promise to pay the additional $100 is unenforceable because it is essentially gratuitous and is not supported by consideration. Williams was already under a preexisting duty (a contract) to work for a two-year period for $500 per week.
Ray Ryker is a Sheriff in Bergen County. When a drunk driver kills Mrs. Gyros’ husband, she posts a $5,000 reward for the capture of the driver. Later, when Ryker apprehends the driver in a drunk-driving stop, he seeks the reward. Since Ryker was already under a preexisting duty to perform the act in question by virtue of his job as an under-sheriff, he is not entitled to the reward because he has suffered no legal detriment. Ryker has furnished no new or additional consideration to Mrs. Gyros for her promise.
The pre-existing duty rule has been seen as overly harsh and rigid in some circumstances where conditions change and where there may be legitimate reasons to seek a revision in contract terms. As a result, several exceptions to the pre-existing duty rule developed.
Jacobs, a contractor, agrees to build a home for the Martins. After completing about half of the job, Jacobs demands an additional $10,000 or he will “walk out on the job.” Even if the Martins agree to the payment of the additional $10,000, their promise would not generally be enforceable because Jacobs was already under a preexisting duty to construct the home at the original contract price. Their promise to pay the additional amount of $10,000 is not supported by consideration and would be barred by the pre-existing duty rule.
It is entirely possible that two parties can mutually agree to terminate an existing agreement if the agreement is executory and has not yet been performed. The surrender of rights under the agreement by each party is the consideration for the mutual agreement of rescission. For example, Carr and Hanner enter into a contract whereby Carr will purchase Hanner’s Honda. Carr later calls Hanner and informs him that he is no longer interested and “could he just back out.” Hanner agrees. This results in a rescission of the original contract and a termination of the obligations of both parties.
During the performance of a contract, a party might encounter unforeseen and substantial problems that could not have been anticipated at the time the contract was entered into. These problems must be of the type and character that are “entirely beyond the contemplation of the parties.” One such problem is seen in the concept of force majeure. Unforeseen difficulties would ordinarily not include occurrences such as strikes, labor shortages, inclement weather, or an increase in the price of components or goods. These types of “difficulties” indeed should have been foreseen and provided for in a contract, as risks which might be ordinarily or normally encountered in an “arms length” business relationship.
Secondly, if the “unforeseen difficulty” involves a severe and unexpected increase in price, as in Westinghouse Corporation Uranium Contract Litigation (405 F. Supp. 316 (1975), some courts will hold that the contract has been “frustrated” and will permit an increase in the price or will permit a party to remove him or herself from a contract. However, the increase in price or circumstances must be unusual, extreme, or severe.
Unforeseen difficulties may be analogized to the doctrine of “commercial impracticability” found in UCC Section 2-715 which provides a valid excuse for breach of contract “if performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid.”
It should be noted that while a plea to a court on grounds of “unforeseen difficulties” or “commercial impracticability” might be successful on the first occasion where a severe price increase occurs, most analysts agree that such a plea might not be appropriate or successful on a subsequent occasion.
Special Aspects of Consideration
Accord and Satisfaction
An issue may arise where a debtor realizes that he or she is in a relative position of strength with respect to the desire of a creditor to secure some amount of repayment on a debt. In such a case, the debtor may attempt to hold the payment hostage to a demand that the creditor will accept less than a contract requires. In contrast, there may be a case where the debtor has a genuine dispute with a creditor as to any amount owed that the debtor wishes to resolve the dispute by making a final payment. In this case, a debtor may attempt to discharge a disputed amount through an accord and satisfaction.
An accord and satisfaction is an attempt by a debtor to legally extinguish a debt by paying or tendering a lesser amount than that stipulated in the contract or that is demanded by a creditor. The accord is defined as the agreement whereby one of the parties undertakes to give or perform, and the other to accept, in satisfaction of a claim, something other than that which was originally promised or agreed upon. Satisfaction takes place when the accord is executed (when a party agrees to accept the lesser amount in satisfaction of the debt).
Read the following case carefully.
A. G. King Tree Surgeons v. Deeb
356 A.2d 87 (NJ 1976)
This is a contract action brought by A. G. King Tree Surgeons for the contract price of $480, plus tax and interest, for tree pruning work performed at the home of defendant George Deeb on or about May 30, 1975.
Plaintiff alleges the work was performed pursuant to an oral contract made by telephone, after an estimate of $480 had been transmitted orally, also by phone, to defendant. The work agreed on and actually performed was, according to plaintiff, the pruning of 15 trees on defendant’s property.
Defendant states by way of affirmative defense that * * * an accord and satisfaction was reached before the filing of this lawsuit. * * *
First, it is undisputed that defendant, upon receipt of the invoice for $504 (representing the $480 contract price plus $24 tax), protested to plaintiff by telephone that he had never entered into a contract for this amount and had only authorized an estimate from plaintiff, nor did he ever sign a contract or an acknowledgment of work performed. This is not, therefore, a case of a liquidated sum which is due and owing but rather a genuine dispute between the parties as to what liability, if any, defendant owes to plaintiff for the work performed.
Second, it is undisputed that shortly after this controversy arose defendant’s attorney forwarded to plaintiff defendant’s check in the amount of $100 with a notation typed on the reverse side (above the space for the endorser’s signature) to the effect that this $100 was in full and final settlement of all claims of A. G. King against defendant for work performed in May 1975. Along with the check defendant’s attorney sent a letter of transmittal which stated in no uncertain terms that although defendant denied that authorization was ever given to plaintiff to perform work for defendant, nevertheless the $100 check was submitted in good faith in an attempt to amicably settle the claim, and that if plaintiff wished to settle for this amount, he should deposit the check. Plaintiff corporation, through its president A. G. King, did deposit the check but only after he obliterated the notation placed on it by the drawer and substituted in its place a notation that the check was only in partial payment of the amount due. Based on this set of facts defendant argues that an accord and satisfaction was reached between the parties at the time the check was deposited, notwithstanding the fact that the president of plaintiff corporation altered the notation on the reverse side of the check. This court agrees.
The traditional elements of an accord and satisfaction are the following: (1) a dispute as to the amount of money owed; (2) a clear manifestation of intent to settle the dispute; (3) acceptance of satisfaction by the creditor.
The president of plaintiff corporation alleges, of course, that there could be no acceptance of any offer of settlement since he deliberately altered the check before depositing it, making it clear that he considered the $100 only a partial payment and not a full settlement of the matter. However, it is clear that plaintiff had no right to alter the check. If the check was unacceptable as a final settlement, plaintiff’s remedy was to return the check to defendant and sue for the full amount claimed due. Plaintiff chose rather to alter the check, accept the $100 “in partial payment” and sue for the difference.
In this case, however, the check did not stand alone; it was accompanied by a letter from defendant’s attorney which made it clear that (1) there was a genuine dispute between the parties as to what amount of money, if any, was due plaintiff; (2) defendant intended that the $100 check was to be in full satisfaction of the dispute between the parties; and (3) if, and only if, plaintiff agreed to settle the dispute for this amount, the check was to be deposited.
It is the opinion of this court that the check and letter can, and indeed must, be read together as constituting an offer to settle this dispute for $100, and that the depositing of the check constituted the acceptance of this offer. Once the check was deposited by plaintiff, no matter what alterations the corporation’s president personally made on its reverse side, an accord and satisfaction was reached. * * *
The letter of transmittal * * * recites the basis of the genuine dispute between the parties and the intent of defendant to have the enclosed payment totally satisfy the dispute, and this satisfies the first two requirements of an accord and satisfaction. The third requirement of an accord and satisfaction is the acceptance of the offer and, in this case, the deposit of the check by plaintiff operated ipso facto as such an acceptance. * * *
Judgment for defendant.
Substitutes for Valuable Consideration
Some promises may be enforced without consideration, either on grounds of public policy or in the exercise of a court’s equitable jurisdiction. These include:
A composition of creditors’ agreement is an agreement between an insolvent debtor and his/her creditors under which the creditors will accept either a specified amount or a percentage of the amount owed. Such an agreement is fully enforceable without consideration. These agreements frequently are substitutes for a filing of a petition in bankruptcy and are favored by courts.
The doctrine of promissory estoppel: This equitable doctrine is usually applied where a promisor makes a gratuitous promise, often involving a promise to make a gift. The parties are not bargaining for anything in a true commercial sense. For example, Aunt Edna tells her godson, Richard: “I promise to pay you $500 per week so you won’t have to teach any longer.” Later, Richard quits his job, but Aunt Edna now refuses to pay. The doctrine of promissory estoppel may permit the court to enforce Aunt Edna’s promise under certain circumstances if Richard has relied on the promise and changed his position by resigning from his teaching job.
The doctrine of promissory estoppel is based on the requirement of reliance on the part of the promisee. It is found in Section 90 of the Restatement of the Law of Contracts:
“A promise which the promisor should reasonably expect to induce action or forbearance of a definite and substantial character on the part of the promisee and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise.”
One final point. In enforcing a promise based on promissory estoppel, a court may only enforce the promise to the extent of the reasonable reliance damages of the promise — not necessarily the full amount of the contract.
For example, suppose Jerry Lynch promises to donate $500,000 to St. Rose Church for the Athletic Fund and its drive to build an athletics complex. Based on Lynch’s pledge, St. Rose hires an engineer and clears two fields of underbrush. Later, Lynch backs out of his promise. If Lynch were sued on his promise under a contract theory, a court would probably dismiss the suit because, as we know, a promise to make a gift is generally not enforceable because it is not supported by consideration. However, if a court were to apply the doctrine of promissory estoppel, St. Rose might be able to enforce the promise to the extent of its reasonable reliance damages—the monies actually expended by St. Rose in reliance on Lynch’s promise. Remember, promissory estoppel is not consideration; it is a substitute for consideration.
Berry and Cleary
Berry Publishing is in a dispute with the Cleary Corporation, a book printing company located in South Bend, Indiana. Berry claims that Cleary has breached its contract with Berry by failing to deliver on its promise to produce sufficient copies of the “History of The Chicago Cubs” for distribution in several “Chicagoland” banks as a premium for opening up a new checking or savings account. After months of frustration and protracted negotations regarding acquiring a credit, Berry sends a check to Cleary, deducting $100,000, an amount it calculates represents its losses on the project. Cleary receives a letter explaining this deduction and a check reflecting the deduction. However, Cleary has crossed out the notation “Paid In Full” on the memo portion of the check and wrote “Partial Payment” instead.
Should a court enforce the alleged “accord and satisfaction” even though Cleary maintains that it was Berry who actually was responsible for the loss because they had delayed in providing the page proofs to Cleary? Shouldn’t this case proceed to a trial on the issues rather than on a “technical rule” like an “accord and satisfaction?”
- Find the unusual case of Fiege v. Boehm. Read it carefully. Do you agree with the court’s conclusion?
A. G. King Tree Surgeons v. Deeb
- What did King do when he received Deeb’s check?
- What are the elements of an “accord and satisfaction”? Were they present here?