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Lack of Consideration in Contract Law

Lack of Consideration in Contract Law
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  • 0:06 What Is Consideration?
  • 2:29 Lack of Consideration
  • 7:03 Lesson Summary
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Lesson Transcript
Instructor: Kat Kadian-Baumeyer

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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