Kat has a Master of Science in Organizational Leadership and Management and teaches Business courses.
One of the main elements of a contract is consideration. Lack of consideration in contract law can make a contract unenforceable when both parties do not receive a benefit from entering into an agreement.
What Is Consideration?
There are essentially six elements that must be present for a contract to be enforceable. There must be an offer, acceptance of the offer, consideration, capacity, mutuality and the terms and conditions must be legal and not in violation of any laws or ordinances. Our focus in this lesson is on consideration, or the benefit each party to a contract receives by entering into a contract. In other words, when two parties enter into an agreement, both parties must exchange one thing of value for another.
Let's take a very simple example to demonstrate how consideration works. If Joe offers to sell his scooter to Bill for $50, Bill can accept the offer. Once the offer is accepted, Bill must fork up the 50 bucks in order to secure the scooter. Consideration can take on two forms:
A promise to do something one is not legally bound to do otherwise, or
A promise not to do something
A promise to do something one is not legally bound to do is simply performing the acts, or following through on the promises made in a contract, like the exchange between Joe and Bill in the scooter sale. On the flip side, if there is a legal obligation to perform an act, one cannot view performing the act a contract condition. For instance, a reward for information that leads to the arrest and conviction of a criminal cannot be claimed by a police officer if the criminal is captured in the line of the officer's duty. After all, it is his obligation to catch a slippery criminal.
A promise not to do something could be a promise not to sue a party after restitution has been made. Let's revisit Joe and Bill. Once Bill took ownership of the scooter, he attempted to speed away. Bill did not realize that the scooter was in reverse. As Bill tried to stop the scooter, he ran into Joe's mailbox, knocking it to the ground. The mangled mailbox was in disrepair. Joe demanded $100 from Bill in exchange for waiving his right to sue in small claims court. Once Bill coughed up the cash, Joe could no longer sue for damages. The value of consideration must be determined objectively. Joe's mailbox has a specific value regardless of how sentimental he feels toward it. Lack of consideration in contract law means that one party to the contract had little or no imposing obligation to any terms of the agreement.
Lack of Consideration
Lack of consideration means that one of the parties to a contract is not obligated in any way, while the other party holds all obligation to act. Generally, courts will not interfere with parties to a contract. Adequacy of consideration is the doctrine of freedom in cutting a mutually beneficial deal and means that parties are free to negotiate any way they see fit. A bad negotiation, like paying too much for a car or hiring an inexperienced housepainter, is of no consequence. Bottom line: the buyer and seller have full authority to negotiate as they please. However, there are several instances when a court will declare a contract unenforceable because consideration was lacking:
When one party is already legally bound to perform,
When consideration is more like a gift,
When consideration is made as a result of a past event, or
When consideration is based on an illusory promise
When a party seeks payment for an act that they are already obligated to perform, the contract is unenforceable. When Pugsley the Pit Bull went missing, his owners placed 'Reward for Lost Dog' signs all over the neighborhood. They offered a hefty reward of $45 for the return of their prodigal pooch. Richard, the local dogcatcher, noticed the sign and remembered picking up a canine with the same characteristics that very day. He dialed in to announce that he was in possession of Pugsley and demanded the reward. Although a reward was posted for Pugsley's safe return, the owners are in no way obligated to pay Richard a dime. It is Richard's primary responsibility as city dogcatcher to locate and secure stray dogs.
A gift cannot be used as consideration in a contract. Brenda promised to give her sister Betsy her old necklace when she replaced it. Betsy noticed that Brenda was wearing a sparkly new one around a week later. When confronted about pitching over the pearls, Brenda refused. Betsy threatened to take her to court, stating that they had an oral contract. In reality, no agreement had ever been reached because no consideration was ever decided upon. Brenda was the only acting party to this agreement. Betsy had made no promise to act in exchange for the necklace. This agreement would not be enforceable in any court.
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Consideration cannot be based on past events either. Greta's cat was caught in a tree. She tried to lure the finicky feline with her favorite food to no avail. Slim, a local teen, noticed Greta staring into the tree and quickly sprang to action. Slim shimmied up the spruce, snatched the cautious cat and returned her to her owner's arms. Greta told Slim that she would give him $5 for his good deed. When Slim came to collect the cash, Greta refused to pay as promised. Slim had no recourse but to learn from his lesson. Had Slim and Greta established a dollar amount prior to Slim's rescue effort, he would have been able to collect handsomely. However, the consideration came after the rescue; it was a past event.
For consideration to be met, the promise of both parties must be objective and clear. An illusory promise is unacceptable and makes a contract unenforceable. Dooley's garage doors were in tatters. He contracted Peppo's Painting Service to restore the doors to their original condition. In the contract, Dooley states that he will pay Peppo the sum of $100 only if he likes the end result. Peppo agreed and proceeded to scrape and paint with fury. When he wrapped up the restoration, Dooley complained that it was not to his liking. Dooley's agreement with Peppo is unenforceable because consideration was a vague promise where one party would benefit, while the other does not. Since paying for the paint job was based on whether Dooley liked the finished product, Peppo could not objectively plan his work to satisfy his client's needs.
In Dooley and Peppo's sticky situation, alternative consideration may have been a better way to go. Alternative consideration allows for a promise to perform one or more acts, and it takes only one act to satisfy consideration. Peppo could have added a clause in the contract stating that if Dooley did not like the restoration, he would owe Peppo only for materials. If he did like the paint job, Dooley would pay for materials and Peppo's hourly rate of pay. This way, both parties receive a benefit for their acts. When it comes to contracts, consideration is an important element. Even though parties are free to wheel and deal as they please, certain conditions apply.
One of the elements of a contract is consideration, or the benefit both parties receive for their acts. Consideration can be made in exchange for a promise to perform or a promise not to perform. A promise to perform can simply be the exchange of goods for money, like when Bill bought Joe's scooter. A promise not to act occurred when Joe promised not to sue in exchange for receiving payment for the mailbox Bill mowed down while riding the scooter.
Lack of consideration occurs when only one party is obligated to act while the other holds no obligation at all. Generally, the courts do not involve themselves in individual negotiations. The adequacy of consideration is the freedom to bargain without interference. However, there are times when a contract is just not enforceable because it lacks consideration. A contract lacks consideration when:
One party is already legally bound to perform
Consideration is more like a gift
Consideration is made as a result of a past event
Consideration is based on an illusory promise
When entering into a contractual agreement, it is important to objectively state consideration in a clear way. As we learned, a gift or a vague promise is not proper consideration.
After completing this lesson, you should be prepared to:
Define consideration, adequacy of consideration and lack of consideration
Name and give examples of the four ways a contract can be unenforceable because of lack of consideration
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