7.3 Promises Enforceable without Consideration

For a variety of policy reasons, courts will enforce certain types of promises even though consideration may be absent. Some of these are governed by the UCC; others are part of the established common law and promote public policy.

Promise Revived after Statute of Limitations Has Passed

A statute of limitations is a law which sets the maximum period of time which one can wait before filing a lawsuit. In many states a contract claim must be brought within six years; if the plaintiff waits longer than that, the claim will be dismissed regardless of its merits. When the time period set forth in the statute of limitations has lapsed, the statute is said to have “run.” If a person renews a promise to pay or acknowledges a debt after the running of a statute of limitations, then under the common law the new promise to pay is binding, although there is no consideration in the usual sense. In many states, this new promise or acknowledgment must be in writing and signed by the person with the debt. Some courts have determined that if a person makes a partial payment after the statute has run, a promise to pay or acknowledgment of a debt has been implied.

Voidable Duties

Some promises that might otherwise serve as consideration are voidable by the promisor for a variety of reasons, including infancy, fraud, duress, or mistake. But a voidable contract does not automatically become void, and if the promisor has not avoided the contract but instead thereafter renews his promise, it is binding. For example, Mr. Melvin sells his bicycle to Seth, who is age thirteen and legally an infant. Seth promises to pay Mr. Melvin one hundred dollars. Seth may disaffirm the contract until he reaches the age of majority, but he does not. When Seth turns eighteen, he renews his promise to pay the one hundred dollars to Mr. Melvin. This promise is binding.

Charitable Contributions

A charitable contribution is a promise to donate money to a charity. Recognizing the necessity to charitable institutions of such pledges, the courts have also been mindful that a mere pledge of money to the general funds of a hospital, university, or similar institution does not usually induce substantial action but rather a promise without consideration. Generally, these promises are enforceable even if they lack consideration. As a matter of public policy, enforcing these contracts without consideration promotes the charitable purpose of the promise, and assures that a charity that has relied on the promise of a donation can receive that benefit without exchanging a detriment in return. In about one-quarter of the states, another doctrine is available for cases involving simple pledges: the “mutual promises” theory, whereby the pledges of many individuals are taken as consideration for each other and are binding against each promisor.

Promissory Estoppel

Promissory estoppel is a legal principle that allows a party to enforce a promise, even if the promise was made without consideration, provided that certain conditions are met. In essence, promissory estoppel prevents one party from going back on their promise, even if no actual contract was created.

The doctrine of promissory estoppel is invoked in the interests of justice when three conditions are met:

1. the promise is one that the promisor should reasonably expect to induce the promisee to take action or forbear from taking action of a definite and substantial character
2. the action or forbearance is taken in reliance on the promise to a detriment
3. the only way to avoid injustice is to enforce the promise

For example, let’s say that John promises to give Sally a car as a gift, but then changes his mind and refuses to give her the car. If Sally can show that she relied on John’s promise to her detriment, such as by selling her old car in anticipation of receiving the new one, she may be able to enforce the promise through the doctrine of promissory estoppel, even though there was no actual contract created.

For another example, Timko served on the board of trustees of a school. He recommended that the school purchase a building for a substantial sum of money, and to induce the trustees to vote for the purchase, he promised to help with the purchase and to pay at the end of five years the purchase price less the down payment. At the end of four years, Timko died. The school sued his estate, which defended on the ground that there was no consideration for the promise. Timko was promised or given nothing in return, and the purchase of the building was of no direct benefit to him (which would have made the promise enforceable as a unilateral contract). The court ruled that under the three-pronged promissory estoppel test, Timko’s estate was liable. 

Video on Promissory Estoppel

This video describes promissory estoppel.

Promises Enforceable without Consideration by Statute

We have touched on several common-law exceptions to the consideration requirement. Some also are provided by statute.

Under the UCC

Under the UCC, a contract must generally have consideration to be enforceable, but there are some exceptions that allow promises to be enforceable without consideration.

The UCC permits one party to discharge, without consideration, a claim or right arising out of an alleged breach of contract by the other party. This is accomplished by delivering to the other party a signed written waiver or renunciation. This provision applies to any contract governed by the UCC and is not limited to the sales provisions of Article 2.

The UCC also permits a party to discharge the other side without consideration when there is no breach, and it permits parties to modify their Article 2 contract without consideration so long as the modification is made in good faith. For example, Seller agrees to deliver a ton of coal within seven days. Buyer needs the coal sooner and asks Seller to deliver within four days. Seller agrees. This promise is binding even though Seller received no additional consideration beyond the purchase price for the additional duty agreed to (the duty to get the coal to Buyer sooner than originally agreed).

The UCC allows a merchant’s firm offer, signed, in writing, to bind the merchant to keep the offer to buy or sell open without consideration.  This is the UCC’s equivalent of a common-law option, which, as you recall, does require consideration.

Section 1-207 of the UCC allows a party a reservation of rights while performing a contract. This section raises a difficult question when a debtor issues an in-full-payment check in payment of a disputed debt. As noted earlier in this chapter, because under the common law the creditor’s acceptance of an in-full-payment check in payment of a disputed debt constitutes an accord and satisfaction, the creditor cannot collect an amount beyond the check. But what if the creditor, in cashing the check, reserves the right (under Section 1-207) to sue for an amount beyond what the debtor is offering? The courts are split on this issue: regarding the sale of goods governed by the UCC, some courts allow the creditor to sue for the unpaid debt notwithstanding the check being marked “paid in full,” while others do not.

Bankruptcy

Bankruptcy is federal statutory law. Like the situation described above where it was possible to revive an obligation after the statute of limitations had run, traditionally a promise to repay debts after a bankruptcy court has discharged them makes the debtor liable once again. The federal Bankruptcy Act includes certain procedural protections to ensure that the debtor knowingly enters into a reaffirmation of his debt. Among its provisions, the law requires the debtor to have reaffirmed the debt before the debtor is discharged in bankruptcy; he then has sixty days to rescind his reaffirmation. If the bankrupt party is an individual, the law also requires that a court hearing be held at which the consequences of his reaffirmation must be explained, and reaffirmation of certain consumer debts is subject to court approval if the debtor is not represented by an attorney.

International Contracts

Contracts governed by the Convention on Contracts for the International Sale of Goods do not require consideration to be binding.

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