Chapter 7 – Consideration

7.2 Requirements of Consideration

Consideration is said to exist when the promisor receives some benefit for his promise and the promisee gives up something in return; it is the bargained-for price you pay for what you get. In a simple transaction, working with such a definition may be enough to recognize the consideration in an agreement, or whether that agreement lacks consideration. Business transactions are not always simple, though, which is why it is helpful to break down the concept of consideration into requirements or elements.

Consideration can come in many forms of legal value. A common type of consideration in a contract is money. When money is exchanged, the person receiving the money is enriched, quite literally, while the other person gives up the money, an item of value. Other common types of legal value that can support consideration are a promise (“I promise to sell you my car”) or an action (I mow your lawn). Less usual forms of consideration include promising to give up a legal right, called forbearance (“I promise to give up drinking until I am 25”), and the creation or change in a legal relationship. If I represent you in court, I’ve become your lawyer. This legal relationship has legal value, even if I’ve taken the case pro bono (Latin for free).

Once the legal value is identified, the next element is legal sufficiency. Legal sufficiency is the identification of the legal detriments in a contract – an action, forbearance, or a promise of such from the promisee. The detriment need not be an actual detriment; it may in fact be a benefit to the promisee, or at least not a loss. For instance, a teacher may find teaching students to be the very best job in the universe, but for purposes of their contract to teach with the school that has hired them, teaching is an action that the promisee must take and therefore is a legal detriment.

The detriment to one side is usually a legal benefit to the other, but the detriment to the promisee need not confer a tangible benefit on the promisor; the promisee can agree to forego something without that something being given to the promisor. For example, if Anjali offers a $100 prize to the first person to win a race, the $100 prize is Anjali’s legal detriment. The winner of the race will receive a benefit, but it doesn’t matter if that win does not return a tangible benefit to Anjali. There is still legal sufficiency as a result of Anjali’s promise.

For a final example, suppose Phil offers George $500 if George will quit smoking for one year. Is Phil’s promise binding? Because George is presumably benefiting by making and sticking to the agreement—surely his health will improve if he gives up smoking—you might wonder how this act is considered a legal detriment. There is the legal value of forbearance on George’s part: George is legally entitled to smoke, and by contracting not to, he suffers a loss of his legal right to do so. The loss of this legal right is the detriment; consideration does not require a tangible detriment.

A requirement in a contract is the exchange of a legal detriment and a legal benefit; if that happens, the consideration is said to have legal sufficiency.

Whether consideration is legally sufficient has nothing to do with whether it is morally or economically adequate to make the bargain a fair one. Yet to be enforceable, consideration must arise from a bargained-for exchange. In other words, we must evaluate whether the legal detriment was bargained for: did the promisor specifically intend the act, forbearance, or promise in return for his promise? Applying this two-pronged test to the three scenarios given at the outset of this Chapter, we can see why only the second scenario has legally sufficient consideration. In the first, Lou incurred no legal detriment; he made no pledge to act or to forbear from acting, nor did he in fact act or forbear from acting. In the third scenario, what might appear to be a promise is not really so. Betty made a promise on a condition that Lou come to her house; the intent clearly is to make a gift.

Activity 7A

Case Debate: Should forbearance have value?

When William Story II was a teenager, his uncle (William Story I) promised to pay the teen $5000 to abstain from drinking, using tobacco, swearing, or gambling until he turned 21. Story II grew up in the 1800s, so at that time there were no age restrictions on any of these activities. After many years of NOT drinking, NOT using tobacco, NOT swearing, and NOT gambling, Plaintiff sought the promised money from the Uncle’s Estate after his passing. The Estate representatives argued that the Uncle derived no benefit and Story was better off for never having participated in such vices.

This is the case of Hamer v. Sidway, 27 N.E. 256 (1891), which is featured in many legal classes because how the case was decided still surprises students of law. While this particular case found for the Plaintiff and awarded the money on the principle of forbearance, some legal scholars are skeptical that NOT taking action should amount to valid consideration.

Question: What are some of the reasons why it make sense that forbearance has legal value? In what ways is forbearance similar to other types of consideration? Can you think of an example using forbearance as consideration which makes common sense?

Question: What are some of the reasons why it does not make sense for forbearance to have legal value? In what ways is forbearance different than the other types of consideration? Can you think of an example using forbearance as consideration which does not make common sense?

Question: Consider both sides of the debate about forbearance and whether it indeed has legal value. If you were a judge, would you want to change the requirements for consideration in any way after considering this case?

It is also essential that consideration be adequate. Ordinarily, courts don’t question the equivalency of an exchange. This makes it is possible to sell a highly valued item, such as a house, for a small amount of money, say $1.00. Courts will only review the adequacy of consideration when there is a suggestion that an imbalance in consideration has resulted from factors that call into question the fairness of the entire transaction – such as an extreme difference in the bargaining power of the parties.

Scrooge offers to buy Caspar’s motorcycle, worth $700, for $10 and a shiny new fountain pen (worth $5). Caspar agrees. This agreement is supported by adequate because both have agreed to give up something that is theirs: Scrooge, the cash and the pen; Caspar, the motorcycle. As Judge Richard A. Posner puts it, “To ask whether there is consideration is simply to inquire whether the situation is one of exchange and a bargain has been struck. To go further and ask whether the consideration is adequate would require the court to do what…it is less well equipped to do than the parties—decide whether the price (and other essential terms) specified in the contract are reasonable.”   In short, “courts do not inquire into the adequacy of consideration.”

Of course, one-sided deals like the one above are not the norm, but there are contracts that make use of nominal consideration. For instance, when one party wants to give another party a gift, but wants to do so in such a way that the rights of contract attach to that gift, perhaps they will agree to exchange the item being gifted for $1.00. Another such contract is the option contract, where one party agrees to hold open the right of the other to make a purchase on agreed terms, and nominal consideration like $1.00 is exchanged for that right.

Case 7.1

Board of Control of Eastern Michigan University v. Burgess, 206 N.W.2d 256 (Mich. 1973)

BURNS, J.

On February 15, 1966, defendant signed a document which purported to grant to plaintiff a 60-day option to purchase defendant’s home. That document, which was drafted by plaintiff’s agent, acknowledged receipt by defendant of “One and no/100 ($1.00) Dollar and other valuable consideration.” Plaintiff concedes that neither the one dollar nor any other consideration was ever paid or even tendered to defendant. On April 14, 1966, plaintiff delivered to defendant written notice of its intention to exercise the option. On the closing date defendant rejected plaintiff’s tender of the purchase price. Thereupon, plaintiff commenced this action for specific performance.

At trial defendant claimed that the purported option was void for want of consideration, that any underlying offer by defendant had been revoked prior to acceptance by plaintiff, and that the agreed purchase price was the product of fraud and mutual mistake. The trial judge concluded that no fraud was involved, and that any mutual mistake was not material. He also held that defendant’s acknowledgment of receipt of consideration bars any subsequent contention to the contrary. Accordingly, the trial judge entered judgment for plaintiff.

Options for the purchase of land, if based on valid consideration, are contracts which may be specifically enforced. [Citations] Conversely, that which purports to be an option, but which is not based on valid consideration, is not a contract and will not be enforced. [Citations] One dollar is valid consideration for an option to purchase land, provided the dollar is paid or at least tendered. [Citations] In the instant case defendant received no consideration for the purported option of February 15, 1966.

A written acknowledgment of receipt of consideration merely creates a rebuttable presumption that consideration has, in fact, passed. Neither the parol evidence rule nor the doctrine of estoppel bars the presentation of evidence to contradict any such acknowledgment. [Citation]

It is our opinion that the document signed by defendant on February 15, 1966, is not an enforceable option, and that defendant is not barred from so asserting.

The trial court premised its holding to the contrary on Lawrence v. McCalmont…(1844). That case is significantly distinguishable from the instant case. Mr. Justice Story held that ‘(t)he guarantor acknowledged the receipt of one dollar, and is now estopped to deny it.’ However, in reliance upon the guaranty substantial credit had been extended to the guarantor’s sons. The guarantor had received everything she bargained for, save one dollar. In the instant case defendant claims that she never received any of the consideration promised her.

That which purports to be an option for the purchase of land, but which is not based on valid consideration, is a simple offer to sell the same land. [Citation] An option is a contract collateral to an offer to sell whereby the offer is made irrevocable for a specified period. [Citation] Ordinarily, an offer is revocable at the will of the offeror. Accordingly, a failure of consideration affects only the collateral contract to keep the offer open, not the underlying offer.

A simple offer may be revoked for any reason or for no reason by the offeror at any time prior to its acceptance by the offeree. [Citation] Thus, the question in this case becomes, ‘Did defendant effectively revoke her offer to sell before plaintiff accepted that offer?’…

Defendant testified that within hours of signing the purported option she telephoned plaintiff’s agent and informed him that she would not abide by the option unless the purchase price was increased. Defendant also testified that when plaintiff’s agent delivered to her on April 14, 1966, plaintiff’s notice of its intention to exercise the purported option, she told him that ‘the option was off’.

Plaintiff’s agent testified that defendant did not communicate to him any dissatisfaction until sometime in July, 1966.

If defendant is telling the truth, she effectively revoked her offer several weeks before plaintiff accepted that offer, and no contract of sale was created. If plaintiff’s agent is telling the truth, defendant’s offer was still open when plaintiff accepted that offer, and an enforceable contract was created. The trial judge thought it unnecessary to resolve this particular dispute. In light of our holding the dispute must be resolved.

An appellate court cannot assess the credibility of witnesses. We have neither seen nor heard them testify. [Citation] Accordingly, we remand this case to the trial court for additional findings of fact based on the record already before the court.…

Reversed and remanded for proceedings consistent with this opinion. Costs to defendant.

Case questions

  1. Why did the lower court decide the option given by the defendant was valid?
  2. Why did the appeals court find the option invalid?
  3. The case was remanded. On retrial, how could the plaintiff (the university) still win?
  4. It was not disputed that the defendant signed the purported option. Is it right that she should get out of it merely because she didn’t really get the $1.00?

Consideration Required for Contract Modification

Just as consideration is required for a valid contract, consideration is generally required for a modification of a contract to be legally binding. When parties want to modify an existing contract, the modification itself is treated as a new agreement. This means that the same principles that apply to the formation of a new contract, including the requirement of consideration, also apply to contract modifications.

In simple terms, if one party is seeking a modification to the contract, they typically need to offer something of value to the other party in exchange for the modification. Without consideration, the modification may not be enforceable, and the parties might not be legally obligated to follow through with the changes.

For example, a contract with a catering company to provide food and services for a corporate event states that the company will provide a buffet dinner for 100 people at a cost of $5,000. A week before the event the number of guests attending rise to 150 people. Since this is a much larger number, a contract modification is necessary.

The modification would involve an increase in the number of guests and additional costs for food, drinks, and staffing. The catering company agrees to the modification but requests an increase in the contract price to $7,000 to cover the extra expenses.

The breakdown of modifications in consideration in this example is:

  • The corporation holding the event offers new consideration of the higher payment ($7,000) to the catering company in exchange for their agreement to provide services for 150 people instead of the original 100.
  • The catering company is providing the consideration of providing services for 150 people instead of the original 100, as well as adjusting their preparations and staffing to accommodate the larger event.

This exchange of consideration makes the modified contract legally binding and enforceable.

Case 7.2

Gross v. Diehl Specialties International, Inc., 776 S.W.2d 879 (Missouri Ct. App. 1989)

SMITH, J.

Plaintiff appeals from a jury verdict and resultant judgment for defendant in a breach of employment contract case.…

Plaintiff was employed under a fifteen year employment contract originally executed in 1977 between plaintiff and defendant. Defendant, at that time called Dairy Specialties, Inc., was a company in the business of formulating ingredients to produce non-dairy products for use by customers allergic to cow’s milk. Plaintiff successfully formulated [Vitamite]…for that usage.

Thereafter, on August 24, 1977, plaintiff and defendant corporation entered into an employment contract employing plaintiff as general manager of defendant for fifteen years. Compensation was established at $14,400 annually plus cost of living increases. In addition, when 10% of defendant’s gross profits exceeded the annual salary, plaintiff would receive an additional amount of compensation equal to the difference between his compensation and 10% of the gross profits for such year. On top of that plaintiff was to receive a royalty for the use of each of his inventions and formulae of 1% of the selling price of all of the products produced by defendant using one or more of plaintiff’s inventions or formulae during the term of the agreement. That amount was increased to 2% of the selling price following the term of the agreement. The contract further provided that during the term of the agreement the inventions and formulae would be owned equally by plaintiff and defendant and that following the term of the agreement the ownership would revert to plaintiff. During the term of the agreement defendant had exclusive rights to use of the inventions and formulae and after the term of agreement a non-exclusive right of use.

At the time of the execution of the contract, sales had risen from virtually nothing in 1976 to $750,000 annually from sales of Vitamite and a chocolate flavored product formulated by plaintiff called Chocolite. [Dairy’s owner] was in declining health and in 1982 desired to sell his company. At that time yearly sales were $7,500,000. [Owner] sold the company to the Diehl family enterprises for 3 million dollars.

Prior to sale Diehl insisted that a new contract between plaintiff and defendant be executed or Diehl would substantially reduce the amount to be paid for [the company]. A new contract was executed August 24, 1982. It reduced the expressed term of the contract to 10 years, which provided the same expiration date as the prior contract. It maintained the same base salary of $14,400 effective September 1982, thereby eliminating any cost of living increases incurred since the original contract. The 10% of gross profit provision remained the same. The new contract provided that plaintiff’s inventions and formula were exclusively owned by defendant during the term of the contract and after its termination. The 1% royalty during the term of the agreement remained the same, but no royalties were provided for after the term of the agreement. No other changes were made in the agreement. Plaintiff received no compensation for executing the new contract. He was not a party to the sale of the company by [Owner] and received nothing tangible from that sale.

After the sale plaintiff was given the title and responsibilities of president of defendant with additional duties but no additional compensation. In 1983 and 1984 the business of the company declined severely and in October 1984, plaintiff’s employment with defendant was terminated by defendant. This suit followed.…

We turn now to the court’s holding that the 1982 agreement was the operative contract. Plaintiff contends this holding is erroneous because there existed no consideration for the 1982 agreement. We agree. A modification of a contract constitutes the making of a new contract and such new contract must be supported by consideration. [Citation] Where a contract has not been fully performed at the time of the new agreement, the substitution of a new provision, resulting in a modification of the obligations on both sides, for a provision in the old contract still unperformed is sufficient consideration for the new contract. While consideration may consist of either a detriment to the promisee or a benefit to the promisor, a promise to carry out an already existing contractual duty does not constitute consideration. [Citation]

Under the 1982 contract defendant assumed no detriment it did not already have. The term of the contract expired on the same date under both contracts. Defendant undertook no greater obligations than it already had. Plaintiff on the other hand received less than he had under the original contract. His base pay was reduced back to its amount in 1977 despite the provision in the 1977 contract for cost of living adjustments. He lost his equal ownership in his formulae during the term of the agreement and his exclusive ownership after the termination of the agreement. He lost all royalties after termination of the agreement and the right to use and license the formulae subject to defendant’s right to non-exclusive use upon payment of royalties. In exchange for nothing, defendant acquired exclusive ownership of the formulae during and after the agreement, eliminated royalties after the agreement terminated, turned its non-exclusive use after termination into exclusive use and control, and achieved a reduction in plaintiff’s base salary. Defendant did no more than promise to carry out an already existing contractual duty. There was no consideration for the 1982 agreement.

Defendant asserts that consideration flowed to plaintiff because the purchase of defendant by the Diehls might not have occurred without the agreement and the purchase provided plaintiff with continued employment and a financially viable employer. There is no evidence to support this contention. Plaintiff had continued employment with the same employer under the 1977 agreement. Nothing in the 1982 agreement provided for any additional financial protection to plaintiff. The essence of defendant’s position is that [the owner] received more from his sale of the company because of the new agreement than he would have without it. We have difficulty converting [the owner’s] windfall into a benefit to plaintiff.

[Remanded to determine how much plaintiff should receive.]

Case questions

  1. Why did the court determine that Plaintiff’s postemployment benefits should revert to those in his original contract instead being limited to those in the modified contract?
  2. What argument did Defendant make as to why the terms of the modified contract should be valid?

Common Issues in Consideration

Now that you are aware of the requirements of consideration it is possible to use this knowledge to identify situations were there is a lack of consideration. This section discusses some common situations that may appear to have consideration but when critically analyzed are lacking an important requirement of consideration.

The problem of preexisting duty in consideration arises when a party to a contract promises to do something that they are already legally obligated to do. This means that the promise does not represent new consideration, as the party was already obligated to do it anyway. Offering a preexisting duty as consideration lacks legal detriment.

For example, a construction company agrees to build a house for a client for $100,000. Midway through the project, the client requests changes to the design that were not part of the original contract. The construction company agrees to make the changes, but afterward demands an additional $20,000 for the work. In this case, the construction company has a preexisting duty to fulfill their original contract and cannot use the additional work as new consideration. Therefore, the promise of the additional work in exchange for the extra payment will not be enforced since there is no new consideration to support it.

The problem of preexisting duty in consideration can also arise in situations where a party to a contract promises to do something they are already legally obligated to do, but under different terms. For example, if an employee is already obligated to perform certain duties as part of their job, a client cannot offer them additional compensation in exchange for doing those same duties. This is because the employee already had a preexisting duty to do the work as part of their original employment contract. Similarly, a police officer in your community cannot charge you a weekly fee to patrol your neighborhood if your neighborhood is already part of the same beat.

Where a person is promised a benefit not to do that which he is already disallowed from doing, there is no consideration due to preexisting duty. David is sixteen years old; his uncle promises him $50 if he will refrain from smoking. The promise is not enforceable: legally, David already must refrain from smoking, so he has promised to give up nothing to which he had a legal right. This promise therefore lacked legal sufficiency.

Video on Preexisting Duty

View this video for examples of the preexisting duty rule.

Case 7.3 

Denney v. Reppert, 432 S.W.2d 647 (Ky. 1968)

R. L. MYRE, Sr., Special Commissioner.

The sole question presented in this case is which of several claimants is entitled to an award for information leading to the apprehension and conviction of certain bank robbers.…

On June 12th or 13th, 1963, three armed men entered the First State Bank, Eubank, Kentucky, and with a display of arms and threats robbed the bank of over $30,000 [about $302,000 in 2024 dollars]. Later in the day they were apprehended by State Policemen Garret Godby, Johnny Simms and Tilford Reppert, placed under arrest, and the entire loot was recovered. Later all of the prisoners were convicted and Garret Godby, Johnny Simms and Tilford Reppert appeared as witnesses at the trial.

The First State Bank of Eubank was a member of the Kentucky Bankers Association which provided and advertised a reward of $500.00 for the arrest and conviction of each bank robber. Hence the outstanding reward for the three bank robbers was $1,500.00 [about $15,000 in 2024 dollars]. Many became claimants for the reward and the Kentucky State Bankers Association being unable to determine the merits of the claims for the reward asked the circuit court to determine the merits of the various claims and to adjudge who was entitled to receive the reward or share in it. All of the claimants were made defendants in the action.

At the time of the robbery the claimants Murrell Denney, Joyce Buis, Rebecca McCollum and Jewell Snyder were employees of the First State Bank of Eubank and came out of the grueling situation with great credit and glory. Each one of them deserves approbation and an accolade. They were vigilant in disclosing to the public and the peace officers the details of the crime, and in describing the culprits, and giving all the information that they possessed that would be useful in capturing the robbers. Undoubtedly, they performed a great service. It is in the evidence that the claimant Murrell Denney was conspicuous and energetic in his efforts to make known the robbery, to acquaint the officers as to the personal appearance of the criminals, and to give other pertinent facts.

The first question for determination is whether the employees of the robbed bank are eligible to receive or share in the reward. The great weight of authority answers in the negative. [Citation] states the rule thusly:

‘To the general rule that, when a reward is offered to the general public for the performance of some specified act, such reward may be claimed by any person who performs such act, is the exception of agents, employees and public officials who are acting within the scope of their employment or official duties. * * *.’…

At the time of the robbery the claimants Murrell Denney, Joyce Buis, Rebecca McCollum, and Jewell Snyder were employees of the First State Bank of Eubank. They were under duty to protect and conserve the resources and moneys of the bank, and safeguard every interest of the institution furnishing them employment. Each of these employees exhibited great courage, and cool bravery, in a time of stress and danger. The community and the county have recompensed them in commendation, admiration and high praise, and the world looks on them as heroes. But in making known the robbery and assisting in acquainting the public and the officers with details of the crime and with identification of the robbers, they performed a duty to the bank and the public, for which they cannot claim a reward.

The claims of Corbin Reynolds, Julia Reynolds, Alvie Reynolds and Gene Reynolds also must fail. According to their statements they gave valuable information to the arresting officers. However, they did not follow the procedure as set forth in the offer of reward in that they never filed a claim with the Kentucky Bankers Association. It is well established that a claimant of a reward must comply with the terms and conditions of the offer of reward. [Citation]

State Policemen Garret Godby, Johnny Simms and Tilford Reppert made the arrest of the bank robbers and captured the stolen money. All participated in the prosecution. At the time of the arrest, it was the duty of the state policemen to apprehend the criminals. Under the law they cannot claim or share in the reward and they are interposing no claim to it.

This leaves the defendant, Tilford Reppert the sole eligible claimant. The record shows that at the time of the arrest he was a deputy sheriff in Rockcastle County, but the arrest and recovery of the stolen money took place in Pulaski County. He was out of his jurisdiction, and was thus under no legal duty to make the arrest, and is thus eligible to claim and receive the reward. In [Citation] it was said:

‘It is * * * well established that a public officer with the authority of the law to make an arrest may accept an offer of reward or compensation for acts or services performed outside of his bailiwick or not within the scope of his official duties. * * *.’…

It is manifest from the record that Tilford Reppert is the only claimant qualified and eligible to receive the reward. Therefore, it is the judgment of the circuit court that he is entitled to receive payment of the $1,500.00 reward now deposited with the Clerk of this Court.

The judgment is affirmed.

Case questions

  1. Why did the Bankers Association put the resolution of this matter into the court’s hands?
  2. Several claimants came forward for the reward; only one person got it. What was the difference between the person who got the reward and those who did not?

 

Past consideration is not sufficient to support a promise as it lacks legal sufficiency. The problem of past consideration arises when one party promises to pay or provide something in exchange for something that the other party has already done in the past. In other words, the promise is based on an act that has already been performed outside of any contractual agreement and cannot be exchanged for anything in the future.

For example, imagine that John mows his neighbor’s lawn every week for a month without any agreement of payment. At the end of the month, the neighbor promises to pay John $100 for his work. However, the neighbor cannot enforce the promise because John’s work was already performed before the promise was made. This means that John’s legal detriment was in the past – it cannot serve as consideration in a contract entered today. The lawn mowing was an act of past consideration and cannot be exchanged for something in the future.

An illusory promise is a statement that appears to be a promise, but in reality, it does not actually impose any obligation on the person making the statement and, therefore, lacks legal sufficiency. In the context of contract law, an illusory promise is not considered to be valid consideration. Not every promise is a pledge to do something.

For example, if Lydia says “I promise to sell you my car if I feel like it,” that statement is an illusory promise because it does not create a binding commitment to sell the car. By doing nothing Lydia still falls within the literal wording of her promise. Since the promise has no certain legal detriment, it cannot be considered valid consideration for a contract because it is not a true commitment.

The doctrine that such bargains are void is sometimes referred to as the rule of mutuality of obligation: if one party to a contract has not made a binding obligation, neither is the other party bound. Thus, if A contracts to hire B for a year at $6,000 a month, reserving the right to dismiss B at any time (an “option to cancel” clause), and B agrees to work for a year, A has not really promised anything; A is not bound to the agreement, and neither is B.

A promise to refrain from suing someone in return for the settlement of a legal dispute is called a covenant not to sue. The legal value in such a covenant is forbearance – giving up the legal right to sue for redress in the Courts, in exchange for the agreed upon settlement of a dispute. Ordinarily, these agreements will have legal sufficiency and adequacy of consideration. It is possible, however, for a situation to arise in which this would not represent a fair bargain, such as where there is coercion to sign such an agreement. In that case, there would still be legal sufficiency, but the agreement would lack of adequacy of consideration as it was not the product of a fair bargain.

Accord and Satisfaction Generally

Sometimes, the parties to an ongoing contract may dispute the meaning of its terms and conditions, especially the amount of money actually due. When the dispute is genuine (and not the unjustified attempt of one party to avoid paying a sum clearly due), it can be settled by the parties’ agreement on a fixed sum as the amount due. This second agreement, which substitutes for the disputed original agreement, is called an accord, and when the payment or other term is discharged, the accord is said to be satisfied. Therefore, this process is known as accord and satisfaction.

Lilac owes $1,000 to Juniper for services provided. Lilac is unable to pay the full amount owed. If Juniper agrees to accept $750 as full payment in return for Lilac paying that amount today, this is an accord. When Lilac pays the $750 today, the accord is satisfied, and the original contract is discharged. Juniper’s agreement to accept less than the original contract required for payment is a detriment of forbearance. Lilac’s promise to make payment earlier than would have been required under the original contract is also a legal detriment. Both promises, therefore, have legal sufficiency.

It’s important to note that an accord and satisfaction must be made in good faith, meaning that both parties must enter into the agreement voluntarily and with a genuine intent to settle the debt or dispute. If either party feels pressured or coerced into the agreement, it may not be considered valid.

The dispute that gives rise to the parties’ agreement to settle by an accord and satisfaction may come up in several typical ways: where there is an unliquidated debt; a disputed debt; an “in-full-payment check” for less than what the creditor claims is due; unforeseen difficulties that give rise to a contract modification, or a novation; or a composition among creditors. But no obligation ever arises—and no real legal dispute can arise—where a person promises a benefit if someone will do that which he has a preexisting obligation to, or where a person promises a benefit to someone not to do that which the promisee is already disallowed from doing, or where one makes an illusory promise.

Settling an Unliquidated Debt

An unliquidated debt is one that is uncertain in amount. Such debts frequently occur when people consult professionals in whose offices precise fees are rarely discussed, or where one party agrees, expressly or by implication, to pay the customary or reasonable fees of the other without fixing the exact amount. It is certain that a debt is owed, but it is not certain how much.

Assume a patient goes to the hospital for a gallbladder operation. The cost of the operation has not been discussed beforehand in detail, although the cost in the metropolitan area is normally around $8,000. After the operation, the patient and the surgeon agree on a bill of $6,000. The patient pays the bill; a month later the surgeon sues for another $2,000. The patient will not have to pay the additional $2,000 as the original unliquidated debt was settled with the bill of $6,000. The agreement liquidating the debt (i.e. converting the uncertain debt to a fixed amount) is an accord and is enforceable. If instead the patient and the surgeon had agreed on an $8,000 fee before the operation, and if the patient arbitrarily refused to pay this liquidated debt unless the surgeon agreed to cut her fee in half, then the surgeon would be entitled to recover the other half in a lawsuit, because the patient would have given no consideration—given up nothing, “suffered no detriment”—for the surgeon’s subsequent agreement to cut the fee.

Settling a Disputed Debt

A disputed debt arises where the parties did agree on (liquidated) the price or fee but subsequently get into a dispute about its fairness, and then settle. When this dispute is settled, the parties have given consideration to an agreement to accept a fixed sum as payment for the amount due. Assume that in the gallbladder case the patient agrees in advance to pay $8,000. Eight months after the operation and as a result of nausea and vomiting spells, the patient must undergo a second operation; the surgeons discover a surgical sponge embedded in the patient’s intestine. The patient refuses to pay the full sum of the original surgeon’s bill; they settle on $6,000, which the patient pays. This is a binding agreement because subsequent facts arose to make legitimate the patient’s quarrel over his obligation to pay the full bill. As long as the dispute is based in fact and is not trumped up, as long as the promisee is acting in good faith, then consideration is present when a disputed debt is settled.

The “In-Full-Payment” Check Situation

To discharge his liquidated debt for $8,000 to the surgeon, the patient sends a check for $6,000 marked “payment in full.” The surgeon cashes it and there is no dispute about the amount owed. In this case, the surgeon is still entitled to the remaining $2,000. At first glance, it may appear that the surgeon is agreeing to take the reduced amount by cashing the check. However, there is no legal sufficiency here. Because the surgeon is owed more than the face amount of the check, the surgeon causes the patient no legal detriment by accepting the check.

The key to the enforceability of a “payment in full” legend on the check is the character of the debt. If unliquidated, or if there is a dispute, then “payment in full” can serve as accord and satisfaction when written on a check that is accepted for payment by a creditor. But if the debt is liquidated and undisputed, there is no consideration when the check is for a lesser amount.

Unforeseen Difficulties

An unforeseen difficulty arising after a contract is made may be resolved by an accord and satisfaction, too. Difficulties that no one could foresee can sometimes serve as catalyst for a further promise that may appear to be without consideration but that the courts will enforce nevertheless. Suppose Peter contracts to build Jerry a house for $390,000. While excavating, Peter unexpectedly discovers quicksand, the removal of which will cost an additional $10,000. To ensure that Peter does not delay, Jerry promises to pay Peter $10,000 more than originally agreed. But when the house is completed, Jerry reneges on his promise. In such a situation, most courts would allow Peter to recover on the theory that the original contract was terminated, or modified, either by mutual agreement or by an implied condition that the original contract would be discharged if unforeseen difficulties developed. In short, the courts will enforce the parties’ own mutual recognition that the unforeseen conditions had made the old contract unfair. The parties either have modified their original contract (which requires consideration at common law) or have given up their original contract and made a new one (a novation).

It is a question of fact whether the new circumstance is new and difficult enough to make a preexisting obligation into an unforeseen difficulty. Obviously, if Peter encounters only a small pocket of quicksand—say two gallons’ worth—he would have to deal with it as part of his already-agreed-to job. If he encounters as much quicksand as would fill an Olympic-sized swimming pool, that’s clearly new and unforeseen, and he should get extra to deal with it. Someplace between the two quantities of quicksand there is enough difficulty that Peter’s duty to remove it is outside the original agreement and new consideration would be needed in exchange for its removal.

Creditors’ Composition

A creditors’ composition may give rise to debt settlement by an accord and satisfaction. This is an agreement whereby two or more creditors of a debtor consent to the debtor paying them pro rata shares of the debt due in full satisfaction of their claims. A composition agreement can be critically important to a business in trouble; through it, the business might manage to stave off bankruptcy. Even though the share accepted is less than the full amount due and is payable after the due date so that consideration appears to be lacking, courts routinely enforce these agreements. The promise of each creditor to accept a lesser share than that owed in return for getting something is taken as consideration to support the promises of the others. A debtor has $3,000 on hand. He owes $3,000 each to A, B, and C. A, B, and C agree to accept $1,000 each and discharge the debtor. Each creditor has given up $2,000 but in return has at least received something, the $1,000. Without the composition, one might have received the entire amount owed her, but the others would have received nothing.

Exclusive Dealing Agreement

In an exclusive dealing agreement, one party (the franchisor) promises to deal solely with the other party (the franchisee)—for example, a franchisor-designer agrees to sell all of her specially designed clothes to a particular department store (the franchisee). In return, the store promises to pay a certain percentage of the sales to the designer. On closer inspection, it may appear that the store’s promise is illusory: it pays the designer only if it manages to sell dresses, but it may sell none. The franchisor-designer may therefore attempt to back out of the deal by arguing that because the franchisee is not obligated to do anything, there was no consideration for her promise to deal exclusively with the store.

Courts, however, have upheld exclusive dealing contracts on the theory that the franchisee has an obligation to use reasonable efforts to promote and sell the product or services.

The UCC follows the same rule. In the absence of language specifically delineating the seller’s or buyer’s duties, an exclusive dealing contract under Section 2-306(2) imposes “an obligation by the seller to use best efforts to supply the goods and by the buyer to use best efforts to promote their sale.”

Outputs Contracts and Needs Contracts

An output contract and a needs contract are two types of contracts that are commonly used in business transactions. When analyzing these types of contracts, it is important to read into them a requirement of reasonableness so that they have legal sufficiency.

An output contract is a contract in which one party agrees to sell all of the goods or services that they produce to the other party. The quantity of goods or services is not predetermined or fixed, but rather depends on the seller’s output. The buyer agrees to purchase all of the seller’s output, and the seller agrees to sell all of their output to the buyer. Output contracts are commonly used in industries where the output of one party is critical to the operations of the other party, such as in manufacturing or agriculture.

For example, a farmer may enter into an output contract with a food processing company, in which the farmer agrees to sell all of their wheat crop to the processing company, and the processing company agrees to buy all of the wheat that the farmer produces.

A needs contract is a contract in which one party agrees to purchase all of their goods or services from the other party. The quantity of goods or services is not predetermined or fixed, but rather depends on the buyer’s needs. The seller agrees to provide all of the goods or services that the buyer requires, and the buyer agrees to purchase all of their goods or services from the seller. Needs contracts are commonly used in industries where the buyer has a continuous need for a particular product or service, such as in healthcare or utilities.

For example, a hospital may enter into a needs contract with a medical supply company, in which the hospital agrees to purchase all of their medical supplies from the supply company, and the supply company agrees to provide all of the medical supplies that the hospital requires.

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Business Law I - Interactive Copyright © 2024 by Melanie Morris is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted.