Consideration

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Consideration defined/tentative working guide

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legal detriment to the P, bargained for by the D and given by the P in exchange for D's promise

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Steps of analysis

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1. Identify promise by the D which P wants the court to enforce
2. identify every promise, act, or forbearance which P might treat as consideration for D's promise
3. Test each act, forbearance, or promise by P to determine whether it constitutes legally sufficient consideration
4. If there is no conventional consideration, look for a substitute: either moral obligation or promissory estoppel

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Bargain component

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1. Did D bargain for it (P's act, forbearance or promise)? (Focus on D's state of mind) Kirksey - gratuitous promise case
2. Did P give "it" in exchange for D's promise? (Focus on P's state of mind) a. Feinberg - deposit case
b. majority/minority (peppercorn) views

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Bargain component - Inducement

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i. Did the detriment induce the promise? D must desire detriment prior to incurring it
1. The detriment must at least purport to be part of the inducement; “bargained for by D”
a. This examines the D’s state of mind
b. It is not necessary to be the sole inducement—just a substantial part
c. There is S/A with regard to “at least” and modern “actually”
i. The trend is to say that there must be a real economic advantage involved (to find if there is a bargain element)
ii. Did the promise induce the detriment?
1. The D’s promise must at least purport to be part of the P’s inducement and given by P in exchange for D’s promise
a. This looks at the P’s state of mind
b. It is not necessary to be the sole inducement

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Bargain component - Conditional gifts

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1. Gratuitous promises, not bargained for by the P—thus not usually considered conventional consideration
2. Ex: “If it rains tomorrow I’ll pay you $100.” No K P has no control over the weather
3. Kirksey: Brother writes to sister-in-law offering her a place to live because her husband died. She lives there for 2 years and then he kicks her out. Held: no K; gratuitous promise, not supported by consideration. Ct said the P’s detriment was not even purported to be part of the inducement of the D’s promise. IF P had duty to care for land, MAY have been enforced.
a. This looked at D’s state of mind
4. Feinburg: D’s father promised P worker $200 a month upon retirement because of work she had done for the company. After promise made, P continued to work and then retired. Held: No K; past consideration = no consideration. The promise was gratuitous and could not purport to be any part of the inducement for P’s detriment. D didn’t bargain for P’s retirement, said she could retire whenever she wanted to

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Bargain component - Nominal or formal consideration

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1. S/A as to if this is consideration
a. Majority says no—calls it a “cloaked” gift
i. There must be some real economic benefit/detriment
ii. Thomas: Husband left house to widow so long as she paid a small amount of $ per year and maintained the house. Held: K; formal consideration is real in this case; the upkeep of the house is a detriment to the P and a benefit to the D. Real consideration is upkeep and not money.
b. Older view: “peppercorn”
i. Any consideration no matter how small will suffice
ii. Father offers son house for $1—this is sufficient consideration under this view
v. Sham consideration
1. Nominal consideration that is only stated and not really given
2. Few jurisdiction will accept this as consideration

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Legal value component

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1. Does it entail a legal detriment to the P?
2. Does it entail a legal benefit to the D?

ii. The P must either do, or promise to do something that he is not already legally obligated to do, or he must refrain or promise to refrain from doing something that he is legally privileged to do. This can be seen as a new duty to the P and a new benefit to the D.
1. Legal does not necessarily mean economic
2. Variations of past consideration is no consideration

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Ways to show P's consideration was legally insufficient (6 ways)

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1. Illusory promise
2. Implied promise (may be consideration - Wood case "implied best efforts")
3. Termination clauses
4. Output/requirement Ks
5. Pre-existing Duty
6. Claims settlements

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(1) Implied promises

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1. Even if a promise on one side is not explicit, consideration can still be found
2. Wood: P gets to use D’s name in return for using reasonable efforts to market clothes with D’s name on it and keep records. Held: K, reasonable efforts is an implied promise—the duty to find clothes to market which D would receive a benefit from. Also, court could have found keeping the records a new duty for the P and a benefit to the D—taxes.

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(2) Illusory promises:

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1. Wording can lead to a “free way out”—no consideration
a. Strong: P agreed not to deposit D’s check of security of a debt owed by the D’s husband until he needed to and also that he would not put it in regular banking channels. Held: no K, because P had a free way out because he could deposit it when he needed to. Wrongly decided: the legal detriment was that he promised not to deposit the check in regular banking circles.

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(3) Requirement and output Ks:

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a. View 1: Under CL—illusory and fatally indefinite, no consideration
i. Some courts will say that without a quantity, a K is not enforceable at all
b. View 2: Under CL—OK. If buyer had established needs or the seller had established output, court finds an implied promise to keep that general quantity = consideration
c. View 3: Under CL—OK. A conditional promise will suffice as long as you don’t have complete, unfettered way out
i. This is the UCC 2-036(1) view
d. Modern view: the consideration is that the buyer has give up a right to buy elsewhere, but only if a reasonable level of requirement or output can be determined.
i. McMichael: K stated D agreed to furnish all sand that the P could sell. Held: K, P gave up his legal right to buy elsewhere and that is a benefit to the D, because the P can’t buy from his competitors.

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(4) Termination clauses

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a. Can invalidate consideration because if the P can terminate the K at any time, then there is no real legal benefit to the D.
b. There are 4 types
i. Won’t invalidate consideration if the termination clause is outside (either partially or totally) of P’s control.
1. DiBenedetto: P had an option K to buy property with a clause that said if the buyer couldn’t make the settlement $ he could cancel the agreement. Held: K, because there was not a full termination clause, it was only if the P couldn’t come up with the $, thus not wholly within his control; he had a good faith duty to come up with the $.
ii. If the termination clause requires a written notice to the P it will not invalidate consideration. Even if it is not immediate. There is legal benefit received here—it is notice of termination
1. The requirement of a written notice is a legal duty. (UCC implica)
iii. If the termination requires notice but is effective immediately, consideration is still valid.
1. The requirement to give notice is still there, it is just less valuable.
iv. If it is silent with respect to notice, consideration will still be valid.
1. Courts usually hold that notice is still required for fairness
2. Sylvan: P to supply rocks to the D but could cancel at any time. Held: K, consideration because if want to cancel must do it within a reasonable time, this is a new legal duty.

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(5) Pre-existing duty

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a. If a party does or promises to do what he already has a legal obligation to do, then he has incurred no legal detriment and there can be no consideration
i. This prevents Ks formed by economic extortion
1. Alaska Packers: After workers got to Alaska to work on a K, they said they wouldn’t work unless they got more $. The owner agreed and then reneged. Held: 2nd K was invalid, packers already had a duty to work  coercion doesn’t work, i.e. threat to break “K”
2. Debtor owes P $100, offers $50, the debtor pays and then wins lottery. P sues and wins; the second K of part payment is not valid because there was no consideration.
b. To see if there is a pre-existing duty, look to see if the duty existed before the K was formed, if so, no K because there would be no consideration
c. The courts will often circumvent the pre-existing duty rule once a K is in the performance phase to protect good faith actors
i. It is still necessary in the formation phase

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6 methods of circumventing the pre-existing duty rule

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1. Court will find additional or different consideration
2. Court can hold that the promisee surrendering a legal power to breach the K is consideration
3. Court can find that the parties rescinded the original K and thus there was no longer a pre-existing duty in existence at the time the new K was formed.
4. Court can hold that the party surrendered his right to a K of rescission
5. The court can refuse to apply the rule to 3rd party cases
6. The court can hold that additional consideration is unnecessary if there are unforeseen difficulties or events

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1. Court will find additional or different consideration

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1. Any small thing added, such as a change of date or payment or the place of payment, but it must still have been bargained for
a. There is S/A on nominal consideration

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2. Court can hold that the promisee surrendering a legal power to breach the K is consideration

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1. This is rare, there must be legal power, not just an actual power, to breach

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3. Court can find that the parties rescinded the original K and thus there was no longer a pre-existing duty in existence at the time the new K was formed. (3 types)

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a. Express rescission: 3 Ks—old K, K of rescission, and new K
i. All courts will recognize the new K
b. Simultaneous rescission:
i. S/A:
ii. Some courts say that it must not be simultaneous or else the pre-existing duty was always there [there must be a time lapse].
iii. Some courts will recognize
- Schwarzreich: the tearing up of an old K and signing a new K was sufficient to circumvent the pre-existing duty rule.
c. Purported modifications:
i. S/A of whether K will be valid
ii. Arzani: P (subcontractor) worked on a K, then workers went on strike, D agreed to pay more $ to subcontractor. Work was finished and D refused to pay. Held: 2nd K not valid, pre-existing duty, and thus the modification is invalid. Different from Schwarzreich because no rescission here.
- Majority view
iii. Watkins: P agreed to excavate a house for a specified amount of $. Then he found hard rock, approached D who agreed to pay more $. Work was done and the D refused to pay. Held: 2nd K valid, rescission can be implied by a modification. Court distinguishes this from Arzani by making a business practice argument: commercial practice that allows business people to effect these modifications.
- Minority View

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4. Court can hold that the party surrendered his right to a K of rescission

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1. DeCicco: Held that a K to an engaged couple had consideration. They surrender the right to decide together not to get married.
2. This argument only applies if the court applies pre-existing duty rule in three-party situations

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5. The court can refuse to apply the rule to 3rd party cases

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1. Jockey case: jockey had K with horse owner to race horse. 3rd party tells jockey he will pay him $100 if he wins. Held: K with 3rd party not valid due to the pre-existing duty with the horse owner. This is wrongly decided: the duty is not the same; he has a separate duty not to rescind with both parties
a. This overlooks that Ks are personal
2. DeCicco: the duty the Count owes to the father-in-law is not the same as the duty he owes his fiancée
3. S/A over whether this should be done
a. Ks are personal
b. Make one promise twice is = to the same duty, no matter that it is to different people

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6. The court can hold that additional consideration is unnecessary if there are unforeseen difficulties or events

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1. If the motivation of the request is due to something unforeseen, the promise to pay more should be enforced even if there is no mutual mistake
2. An example is above, Watkins
3. Minority view
vii. Don’t assume that any of these methods of circumvention apply in all jurisdictions

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Ways to show that P's consideration was legally insufficient -
6. Claim settlements (surrender of a valid claim is detriment)

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a. Valid claims: As consideration for a promise, P purports to release D from the possibility of the filing of a claim
i. Claim settlements are important to encourage. 97% of settlements are settled. If any less, the justice system would grind to a halt.
ii. The surrender of a claim will be consideration if it is a valid claim
b. There are 4 views with regard to invalid claims:
i. Can’t be consideration
ii. Valid only if the promisee had a belief that the claim is valid and this belief is both subjectively honest and objectively reasonable at the time the claim is surrendered.
1. Fiege: P gave up right to bastardy suit v. the D, if he would pay child support. D agreed and then took a blood test and found out that he was not the father so he stopped the payments. Held: K with valid consideration because at the time she gave up the suit she believed that she had a valid claim and as she had sex with the D, this was a reasonable belief. Policy at work here: looking out for future bastard children
2. Majority view
iii. Valid if there is a subjective belief
1. Minority view
iv. Always valid as consideration
1. But this doesn’t require reasonable belief, allows people to proceed in bad faith
c. The Restatement says a surrendered claim is valid consideration if:
i. (1) The claim is in fact doubtful as to uncertainty to fact or law or,
ii. (2) The surrendering party believes it was valid
iii. This view has not gained favor in the courts because it rewards people who proceed in bad faith

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Related problems

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i. Unliquidated claims (amount in dispute): generally valid as consideration when they become liquidated because there is a legal detriment involved in settling. Someone is giving up the right to go to court and the right to have the amount determined later
ii. Composition with creditors (multiple creditors): this is an agreement between debtors and creditors where the creditors get less money, it surrenders the pre-existing duty because usually the debtor is bankrupt and the creditor is getting less money but now at least getting the benefit of controlling how much less money it gets (in bankruptcy, may not get any at all)
iii. Check cashing cases: depends on if disputed or undisputed
1. Disputed: consideration is mutual assent on how much money is owed
2. Undisputed: owed $1000, check for $500 says “cashing this check is equal to full payment”
a. S/A
i. Majority: ignore words: “payment in full”
ii. Minority: by cashing check you gave up your right to the rest of the $
b. Kibler: D issues check to P for unliquidated claim. D has fine print on check that was on all checks that he issued. Held: Court looks for subjective meeting of the minds in order to find equity for the P and conclude that there was no agreement. Social policy: court is thinking of debtors who will have an easier time evading paying creditors by using fine print on preprinted checks, even creditors with undisputed, liquidated claims.

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Substitutes for conventional consideration

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i. Two kinds
1. Seal at common law: there was no requirement of consideration if a K was under a seal
2. Statutory substitutions = to seal, for some kinds of Ks in some jurisdictions there is no requirement of consideration. UCC §2-209: signed agreement is enough
3. (1) Moral obligation
4. (2) Promissory estoppel: doesn’t enforce “K,” only reimburses for actual losses to P

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Moral obligation

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ii. Moral obligation: no bargain component, but legal value component
1. When D’s promise was not induced by the P’s detriment
a. Man saved drowning woman and the woman promises to pay him $. The $ was not the inducement to save her life
b. P saved D’s life by deflecting an axe. P mutilated hand in the act and the D promised to pay and reneged. Held: no K; no expectation of payment was made at the time of the act.
i. This is the majority view

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Moral obligation general rule

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2. The general rule is that the courts do not usually recognize past consideration or moral obligation as consideration
a. If the duty is wholly moral and is not connected to any legal liability or material benefit
i. D’s son is sick and P nurses him. Father says he will pay for some of the expenses incurred by the P and then reneges. Held: no K; past consideration is no consideration.
ii. Mills v. Wyman: All out of pocket expenses had been made before P got the letter. Timing is fatal here—past consideration won’t work. No PE either because P changed position, not because of the promise that was forthcoming, but because he was a Good Samaritan. What D did was morally wrong, but court says moral obligation is not enough

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Moral obligation - exceptions to the general rule

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3. Exceptions to the general rule
a. There is a minority view that where there is a material benefit that leads to a sense of moral obligation that prompts a promise
i. P saved man’s life and was injured. Man promised to pay $ to P for rest of his life, executor of P reneged. Held: K conferred to the man and the P received the promise in return. This ignores that there was no expectation of payment at the time. Webb v. McGowan
ii. A gratuitous promise will not suffice, but if there is a material benefit, a resulting promise that has an ethical duty and there is no close relationship, a K could be found enforceable—the case is a bit stronger when the moral obligation is conferred to strangers
b. A voidable or unenforceable promise was renewed:
i. If a new promise is not subject to the defect of the old (i.e. insanity, infancy), most courts will hold that the second K is valid
c. The original K was enforceable but later became unenforceable (due to bankruptcy, etc.)
i. Can be revived if expressed
ii. More than a moral obligation is found; there is an antecedent legal obligation
iii. However, a promise voluntarily discharged can’t be revived by one party
d. If the initial conferring of the benefit created an implied-in-fact or implied-in-law K AND D then makes an express promise, express promise may be enforced

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Promissory estoppel

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1. Can be invoked as a substitute for consideration when bargaining for detriment was not part of the inducement of the promise
2. Antecedents of the doctrine
a. Part performance limits to the offeror’s power to revoke after an offeree has begun performance
b. Equitable estoppel in pais—reliance due to a mistake of fact, not a promise
c. Originally promissory estoppel applied only to
i. Family promises
ii. Promises to convey land
iii. Gratuitous bailments
iv. Charitable subscriptions

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Promissory estoppel - 3 uses

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3. Modern doctrine
a. There are 3 possible uses (not just as substitute for consideration)
i. Limits power to revoke—see Mutual Assent
1. Courts likely to enforce the K (expectation relief)
ii. Substitute for consideration (Hand/Traynor debate)
1. Courts likely to enforce the K (expectation relief)
iii. Separate (hybrid) cause of action
1. Courts likely to give reliance interest (out-of-pocket losses)
b. Reasons why it was extended beyond charitable contributions: to protect reasonable expectations
i. It does not restrict a D’s economic freedom because the D is the one who made the promise in the first place

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Promissory estoppel - elements

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a. (1) D made concrete promise
b. (2) D could reasonably have foreseen that the P would rely on that promise
c. (3) P did rely and actually changed position (subjectively honest and objectively reasonable)
i. The promise must trigger something the P would not have done but for the promise.
ii. East Providence: The D relied on a promise that the P made that the P would insure a car that was collateral for a loan between the P and the D. Uninsured car was wrecked in an accident. Held: D relied on the P’s promise and continued to use the car, no $ for P and the D recovers the $ for the car. This was a bad court decision.
d. (4) Reliance was objectively reasonable
e. (5) Reliance was substantial
i. Feinburg: D made promise to P to pay her retirement $. P quit and relied on this $. Held: reliance was substantial; the P could have continued to work for $ but did not because of the promise.
ii. Variations on Feinburg:
1. P is healthy and young enough to re-enter the job market. Held: She can’t argue PE because she didn’t detrimentally change position
2. P became ill during the year, but her early retirement did not cause the illness or accelerate the onset of symptoms. Held: No connection between the cost and reliance.
3. P’s inactivity accelerated the onset of her symptoms by one year. Held: There is a change in position, an unforeseeably consequence. She gets negative loss (one year worth of medical expenses)—vindicate reliance interest retrospectively.
4. If P had remained in the workforce, she could’ve continued working for another 5 years. However, at her age, it’s virtually impossible to re-enter the job market. Held: There is detrimental change in position. There would be a dispute over damages
f. Note: to use promissory estoppel as a substitute for consideration, all other elements of a definite agreement must be met

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Remedies

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i. Expectation interest:
1. This is the position that the P would’ve been in if the K is fulfilled. Can be profits, benefit of the bargain
a. This is not usually awarded.
ii. Restitution interest:
1. Compensate the P for the benefit that the P conferred to the D using fair market value
iii. Reliance interest:
1. Out of pocket expenses
2. Usual remedy sought in promissory estoppel actions
iv. Analyze the facts with respect to the remedy
1. Expectation could be greater than reliance.
a. Use status quo ante and then look to actual loss

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PE's future

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a. The use of promissory estoppel as its own c/a
i. This is a hybrid with a tort action; the P could recover for reliance even if no K was formed
1. Goodman: P was promised a radio franchise but no K was ever formed. Held: P can recover; the reliance should be protected even if a K was never formed
a. Thus mutual assent is not necessary here
b. Courts will sometimes not allow promissory estoppel if the reliance is in a commercial setting
i. Thus, Traynor’s view is slipping, and Hand’s view of no promissory estoppel in the marketplace may be on the upswing due to the conservative judges being appointed.
ii. Keys: detrimental change in position must be substantial and reasonable