Contract Elements: Consideration

Recall from previous posts that an enforceable contract requires there to be an offer, an acceptance, and consideration.

Consideration is a bargained-for exchange. That means each party must be giving something or giving something up—known as a legal detriment—and whatever the legal detriment is must be bargained for as part of the exchange. The value of the legal detriment is not important. One court, when describing the minimum value of consideration for a contract to be valid, said it must be worth as much as a peppercorn—that is to say, not very much. Thus, it would not be a defense to a breach of contract claim to say that the contract was invalid because not enough was exchanged or because what one party gives up far outweighs what the other party gives up.

If Person A offers to give Person B a haircut in exchange for $5, then Person A is giving up his time and hair-cutting talents in exchange for Person B giving up money. Further, what each party is giving up is bargained for. This is consideration.

Some (even lawyers) assume that for there to be consideration, both parties must be getting something of value. Although in a normal exchange both parties do get some benefit, that is not required. (In legal speak, a benefit is a sufficient condition but not a necessary condition.) All that is necessary is for each person to be giving something up.

For example, if Person A offers to purchase Person B a new car if Person B will stop smoking, this is sufficient consideration even though Person A may not be getting any benefit—her motives may have been purely altruistic. The consideration is present because Person A is giving something—a car—and Person B is giving something up—the right to smoke. In other words, both are incurring some legal detriment.

Like in our analysis of an offer, sometimes it is easier to know what constitutes consideration by demonstrating what is not consideration.

Past Consideration

If the bargain is made after one side of the agreement has already provided the bargained-for value (i.e. past consideration), then the consideration is insufficient. Thus, in the example above, if Person A gives Person B a haircut, and then afterwards, Person B promises to pay Person A $5, this is not an enforceable promise because Person A is not giving anything up in exchange for the $5 that hasn’t already been provided.

Thus, timing becomes important. A promise to pay a $50 reward to someone who brings you your lost dog is binding if your dog is still lost when the offer is made. A promise to pay a $50 reward to someone who has already brought you your dog is not binding because past consideration (bringing the dog before the promise is made) is not sufficient consideration.

Pre-Existing Duty

Consideration requires that both parties give something or give something up. If a party already has a duty to perform whatever they are promising to do as part of the contract, the contract fails for want of consideration.

Consider a reward the government posts for the apprehension of a violent criminal. The reward is meant to induce the public to act—to keep their eyes open for any of these wanted criminals. If a member of the public fulfills the terms of the offer—providing information that leads to the capture of the criminal, then the government is bound to pay the reward. The person who responds is giving up his or her time and potentially safety to respond, and the government is giving up money.

If, however, a police officer who is already being paid to apprehend these criminals finds the criminal and turns him in, the government does not have to pay the reward because there is no consideration. The police officer already had a duty to apprehend the criminal, so he or she is not giving anything up in the apprehension.

A Mere Condition

Remember, consideration is a bargained-for exchange. If someone gives something up that is not bargained for, this constitutes a mere condition and not consideration.

A well-known example (well known among lawyers, anyway) illustrating this principle is that of the benevolent man and the tramp. If a benevolent man says to a tramp, “if you go around the corner to the clothing shop there, you may purchase an overcoat on my credit,” both parties are giving something up and incurring a legal detriment. The benevolent man is giving up his money to purchase the coat, and the tramp is giving up his time to walk around the corner. However, this is not consideration because the legal detriment agreed to by the tramp—the short walk—is not something the benevolent man has bargained for. It is a mere condition to accepting a gratuitous promise (gratuitous meaning made without consideration and therefore unenforceable).

The Promise of a Future Gift

The promise of a future gift alone does not constitute consideration. This, too, is a gratuitous promise.

If a father promises his son $10,000 on his twenty-first birthday, this is not enforceable because there is no consideration. The father has not bargained for anything in exchange for the gift, and the son has not given anything up in exchange. Thus, such promises are not legally enforceable.

What Constitutes Consideration?

Consideration is a bargained-for exchange where both parties incur some sort of legal detriment. Past consideration, pre-existing duties, mere conditions, and promises of future gifts do not qualify as consideration and result in unenforceable promises.

However, just because a contract fails for want of consideration does not mean that you are without legal recourse. There are often other legal avenues available to compensate for loss, including promissory estoppel (a substitution for consideration) and unjust enrichment (an alternative to a contract action), among others.

 

Zachariah B. Parry is an attorney and founding partner at the law firm Parry & Pfau and is an adjunct professor who teaches torts, contracts, and Nevada practice and procedure for UNLV’s paralegal program. He can be reached at 702-912-4451 or zach@p2lawyers.com.