Business Law - The Rules of Consideration

Hey, thanks for joining me for this lecture. In this session, we're going to be exploring the concept of consideration, some of its different types, as well as the rules that govern its validity and enforceability in contracts. So to start, let's talk about what consideration is. Consideration refers to something of value that is exchanged between the parties in a contract.

Now, consideration can take different forms and is essential to the formation of a contract. Now, there are four common types of consideration. The first is that consideration can be a benefit conferred upon the promisey. This means that the promisey gains something of value or receives a positive outcome as a result of the contract.

For example, if John promises to pay Sarah $500 for painting his house, the benefit to Sarah is the payment that she will receive upon completion of the work. Consideration can also be a detriment incurred by the promiseor. For this to exist, the promiseor willingly gives up or sacrifices something of value to the promisey. For instance, let's say two parties were engaged in an exchange to purchase a vehicle and the seller or promiseor promised not to sell their car to anyone for a specified period of time with the intent of the vehicle being sold to the other party.

So this individual would be undertaking a detriment by restricting her options to the benefit of the other party. If the other party backs out, obviously they are left with less options to sell their vehicle. In that case, consideration could exist because there is a detriment to the promiseor. Consideration can also be a promise to perform an action or provide a service.

Both parties in a contract have obligations and are bound by their promises. For example, if Jane promises to deliver a shipment of goods to Mark's store, her promise to perform the delivery is the consideration. Lastly, consideration can also be a promise to refrain from doing a certain action. This means that one party is obligated not to engage in a particular activity.

For example, if Mark promises not to sell similar products in the same area as Jane's store, his promise to refrain from competition is the consideration. Now that we've explored the different types of consideration, let's discuss the rules that govern its validity. The first rule is a lack of consideration. In general, a contract must have valid consideration for it to be enforceable.

Now if there's a lack of consideration, the contract may be deemed unenforceable. However, there are exceptions to this and that is known as promissory a stop-all. Essentially, promissory a stop-all allows a party to enforce a promise even in the absence of consideration when one party has made a clear promise and the other party has relied on that promise to their detriment. Let me give you an example of what this might look like.

Let's say that you have a friend who's selling their car. Now you express an interest in buying it and you negotiate a price of $10,000. Your friend tells you that they're going to hold the car until the end of the week so you can go ahead and go to the bank and secure the loan and do all those sorts of things. Based on this promise, you cancel your plans to search for other cars and you focus on getting the loan.

However, a few days later, your friend calls and says that they've changed their mind. They've sold the car to someone else who's offered a higher price. Now you're left without a car and you've incurred expenses and applying for this loan and there's time involved in that sort of thing. You argued to your friend that they made a promise to hold the car and that created a legal obligation for you or for her rather to sell it to you.

In this case, even though there's no consideration involved, you haven't given up anything in return for the promise. Promissory a stop-all could come into play. That's because you relied on your friend's promise and took action by canceling your plans, incurring expenses to secure a loan and those sorts of things. So it would be unfair for your friend to go back on their promise and sell the car to someone else.

Now as a result, you might have a valid claim under promissaria stop-all where you could seek damages for your reliance on your friend's promise. However, given the fact that your friend's maybe that's not something that you would take advantage of. The next rule of consideration is what is known as adequacy of consideration. Now courts generally do not examine the adequacy of consideration.

As long as there is legal value exchange between the parties, the consideration is considered sufficient itself. This means that the value or the benefit doesn't necessarily have to be equal and that in fact is kind of subjective in its own right. But as long as both parties agree to the terms willingly, then consideration is present. The next rule of consideration is elucary promise.

Now an elucary promise is a statement that appears to be a promise but does not create any legal obligation. So if one party has the discretion to perform or not perform a certain action, the promise lacks consideration and may not be enforceable. Now that can be a little bit abstract. So let me give you an example.

Let's say that a company is seeking a new supplier for some sort of raw material. So they enter into negotiations with the potential supplier and they put together a contract. However, in the contract, the company includes a clause that states that they have the right to cancel the agreement at any time without providing any sort of valid reason. Now the supplier on the other hand is bound by strict obligations to provide the materials and fulfill their under the contract.

Now in this scenario, the promise made by the company to purchase the raw materials is elucary. The clause that allows them to cancel the agreement at any time renders the promise unenforceable because it lacks mutuality and consideration. So the company has the option to walk away from the contract without any sort of consequences leaving the supplier with zero legal recourse. So in this example, the elucary promise occurs because one party appears to make a commitment but retains the ability to avoid any actual obligation or performance.

The next rule of consideration is what is known as past consideration. Now generally past consideration is not considered valid consideration because it lacks the element of exchange or bargaining. However, there are certainly exceptions to this rule, such as when the past act was requested or when there was an understanding of future compensation. The last rule of consideration that we're going to discuss is pre-existing duty.

Now if a person is already legally obligated to perform an action, promising to do the same action does not constitute valid consideration. However, there could be exceptions to this, such as when an unforeseen circumstance arises or when there is an agreement to modify the existing duties. Now let me give you a quick example. Let's say a company hires an employee and offers a new employment contract that includes a salary increase.

The company informs the employee that the salary increase is contingent upon the employee signing a non-compete agreement. The employee is already performing their duties and providing services to the company under the existing employment agreement. Now in this scenario, if the employee signs the non-compete agreement as a condition for receiving the salary increase, their promise to abide by the non-compete agreement is considered pre-existing consideration. The employee's performance of their existing job responsibilities is the basis for the promise made in the new non-compete agreement.

So the important thing to take away in this example is the employee is already providing services to the company and their promise to abide by their non-compete is not considered new consideration but rather a promise related to their existing obligations. Now if this pre-existing consideration is the only consideration offered in response to the offer, it may not be sufficient to create a binding contract.