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Rules of Consideration in Contract Law: Elements & Case Examples

Lesson Transcript
Instructor: Kat Kadian-Baumeyer

Kat has a Master of Science in Organizational Leadership and Management and teaches Business courses.

In contract law, there are six rules that must be present for a contract to be legally enforceable, one of which is called the rules of consideration, which requires an exchange of bargain-for commitments. Discover the remaining five elements of contract law and take an in-depth look at rules of consideration by studying the outcomes of an actual case decided in a court of law.

What Makes a Contract Enforceable?

They say a rose is a rose is a rose. And for the most part, that is true. But in contract law, a contract is not always a contract. In other words, a contract needs six elements to be considered enforceable. It must contain:

  1. An offer made by the promisor
  2. An acceptance of the offer by the promisee
  3. Consideration in the form of money or a promise to do or not do something
  4. Mutuality between parties to carry out the promises of the contract
  5. Capacity of both parties in mind and age
  6. Legality of terms and conditions

For this purpose, we will focus on consideration or an exchange of bargained-for promises between two or more parties.

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What's In It for Me?

Consideration, as we learned, is simply something of value exchanged between the parties to a contract. To qualify consideration, it must be:

  • Legally sufficient, and
  • Bargained-for

That is to say, the value the promisor places on the consideration must be of the same value the promisee places on performance of the contract terms. In other words, both parties want to know, 'What's in it for me?'

To illustrate this, if John (promisor) offers Jamal (promisee) $200.00 to repair his car, and Jamal accepts, the $200.00 is consideration (the value) for the repair (performance).

There are conditions consideration has to meet to have legally sufficient value. A party cannot promise to do something where there is already a legal obligation to do so. A police officer cannot collect a reward for the capture and arrest of an outlaw. The promisee must perform an act not ordinarily obligated to perform. A police officer cannot contract independent security services for his neighborhood while he is on duty at his regular job. He has a pre-existing obligation to secure the neighborhood.

Finally, for consideration to be of legally sufficient value, a party may refrain from exercising a right that the party is entitled to, like giving up the right to sue someone in exchange for restitution. For instance, let's say that in fixing the car, Jamal dented John's fender. Jamal apologizes and tells John that he will fix the dent for free and also give him a 10% discount on the original repair. If John accepts the deal, he cannot later sue Jamal for denting the car.

Consideration must also be bargained-for, meaning there is an exchange of promise and something of value where both parties gain a reward and receive a detriment in the contract. It's real simple! Let's say John and Jamal are now negotiating the sale of a bicycle that was displayed in the auto repair shop. John wants to take up biking, so he offers $50 to Jamal in exchange for the product. Jamal will give the bike to John upon receipt of the cash. So both parties bargain and receive a detriment. John's bank account is reduced by $50.00, but he received some new wheels. Jamal no longer has his bike, but has an extra $50.00.

Let's examine an interesting case where consideration was in question between an employer and an employee in a contract for employment.

Labriola V. Pollard Group, Inc. (2004)

In 1997, Pollard Group, Inc. hired Anthony Labriola as a commercial print salesperson. Upon hiring, Labriola signed an employment agreement. Under this agreement, Labriola agreed to at-will employment, meaning he could be terminated without cause. Also included in the employment contract was the agreed upon salary and commission structure.

But the most important clause in Labriola's contract was the restrictive covenant that prohibited him from working for a competitive company for a three-year period. Further, there was no pre-determined geographical area mentioned. This meant that Labriola, if separated from Pollard Group, Inc., would be restricted from working for any commercial printer for a period of three years regardless of where on the planet the new job is located! That is a restrictive clause, indeed!

Five years into Labriola's tenure, Pollard Group asked him to sign a Non-Competition and Confidentiality Agreement requiring Labriola to refrain from accepting employment with a competitor within a distance of 75 miles from Tacoma, Washington for a period of three years. The problem with the new non-competitive agreement is that it did not contain legally sufficient consideration.

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