Consideration
Consideration
is a central concept in the common law of
contracts. Under classical contract theory,
consideration is required for a contract to be
enforceable. (Modern contract theory has also
permitted remedies on alternate theories such as
promissory estoppel).
There are two common theories for consideration.
The first is the "benefit-detriment
theory", in which a contract must be either
to the benefit of the promisor or to the
detriment of the promisee to constitute
consideration. The second is the "bargain
theory", in which the parties subjectively
view the contract to be the product of an
exchange or bargain. The bargain theory has
largely replaced the benefit-detriment theory in
modern contract theory, instance, a deal i which
the promisee feels subjectively relieved, but
hasn't actually gained any legal rights, might
satisfy the bargain theory but not the
benefit-detriment theory. Alternately, a deal in
which an actor takes detrimental actions possibly
in reaction to an offer, without having viewed
the deal as a bargain, wouldn't be viewed as a
contract under the law.
The main purpose of the shift from
benefit-detriment to bargain theory is to
reconcile consideration theory with other aspects
of contract theory. For instance, courts will not
inquire as to the adequacy of consideration. If
someone honestly dislikes their car and wants to
sell it for fifty dollars, the law will not
consider this an invalid deal. However, the court
will reject "consideration" that was
not truly bargained for. Occasionally the court
may refer to "adequate" or
"valuable" consideration, but in
reality the court is not examining the adequacy
of consideration, but whether or not it was
bargained for. Another term for this sort of
non-bargained-for payment is nominal
consideration. The traditional notion that courts
won't look into the adequacy of consideration, an
ancient notion in the English common law, doesn't
square with the benefit-detriment theory (in
which courts are implicitly analyzing if the
parties are receiving a sufficient benefit) but
does square with the bargain theory (in which
only the subjective intentions of the parties are
considered).
For example, in Fischer v. Union Trust Co., 101
N.W. 852, the court held that $1.00 paid in
exchange for the sale of real property within the
city of Detroit in 1902 was not "bargained
for" by the seller, and thus the transaction
was void. The point was NOT that the amount of
money involved was too small to be adequate
consideration, but that the seller did not convey
the property in exchange for the buyer's promise
to pay $1.00. There was no consideration, not
because $1.00 was too small an amount to
"count", but because the $1.00 offered
the seller by the buyer did not induce the seller
to part with the property.
There are three main purposes cited for the
consideration requirement. The first is the
cautionary requirement - parties are more likely
to look before they leap when making a bargain
than when making an off-the-cuff promise of a
gift. The second is the evidentiary requirement -
parties are more likely to commemorate, or at
least remember, a promise made due to a
bargaining process. The third is the channeling
requirement - parties are more likely to
coherently stipulate their specific desires when
they are forced to bargain for them. Each of
these rationales ensure that contracts are made
by serious parties and are not made in error.
Certain other stipulations regarding
consideration include the following:
* Past consideration is not valid. Something that
is already done is done, and it does not change
the legal position of the promisor. Any goods or
services to be exchanged must be exchanged at or
after the time of contract formation. However, a
promise to pay a pre-existing debt or obligation
IS enforceable.
* Preexisting duty does not count as
consideration.
* An illusory promise, or one which the promisor
actually has no obligation to keep, does not
count as consideration. The promise must be real
and unconditional. This doctrine rarely
invalidates contracts; it is a fundamental
doctrine in contract law that courts should try
to enforce contracts whenever possible.
Accordingly, courts will often read
implied-in-fact or implied-in-law terms into the
contract, placing duties on the promisor. For
instance, if a promisor promises to give away a
third of his earnings for the year, he has no
actual obligation to do anything; if he earns
nothing, a third of zero is zero. However, courts
will generally read in an implied term that he
will use reasonable efforts to try to gain
income. Another, more modern approach to illusory
promises is to treat them as "bargaining for
a chance". Even though the promisor has no
actual duties, the promisee may still benefit by
the possibility that the contract may lead to the
promisor fulfilling certain duties, and that
possibility itself is beneficial.
* Liquidated debt, or a payment which is fixed
and undisputed, cannot be negotiated for
consideration. Unliquidated debt, or a payment
which is disputed, can be used for consideration.
While the concept of consideration is not
generally accepted in civil law systems, some
recognize the similarity between consideration
and cause, as some civil codes recognize that all
contracts must have a cause, though this is not
generally accepted.
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