Consideration and the bargain requirement

The Exchange Requirement: Bargain Without Price Comparison

Consideration exists when the promisor seeks a performance or return promise as the price of the promise, and the promisee gives that performance or promise in exchange. The governing common-law rule is the bargained-for exchange requirement in Restatement (Second) of Contracts § 71.

Run two questions:

1. What did the promisor seek in return? The sought-for return may be an act, a forbearance, a promise, or a change in a legal relationship.

2. Was that return actually given in exchange for the promise? The promisee’s conduct must be part of the agreed exchange, not merely something that happened to satisfy a condition attached to a gift.

The promisor need not receive an economic benefit. A legal detriment to the promisee can be enough. For example, a promise to pay a neighbor $500 if the neighbor refrains from entering the promisor’s land may be supported by consideration even if the promisor receives no measurable financial benefit. The neighbor surrendered a legal privilege in exchange for the payment.

The central near miss is a conditional gift. “I will give you $10,000 if you graduate from college” may make graduation a condition to receiving the gift, not consideration, if the promisor is not seeking graduation as the price of the promise. By contrast, “I will pay you $10,000 to graduate because I want you to complete your degree” can be a bargain if graduation was sought as the return performance. The fact that separates the two is not the word “if”; it is whether the promisor sought the conduct in exchange for the promise.

The same distinction applies to actions that benefit the promisor. If an uncle says, “I will pay you $1,000 if you clean my garage,” cleaning is likely bargained-for performance. If he says, “I will give you $1,000 because you cleaned my garage yesterday,” the cleaning is past consideration unless the facts show that the work was originally requested and understood to be performed for payment.

Adequacy concerns whether the exchange was economically equivalent. Under Restatement (Second) of Contracts § 79, once the consideration requirement is satisfied, courts generally do not require equivalence between the values exchanged. A promise to sell a valuable car for one dollar can be supported by consideration if the dollar was genuinely bargained for. The court ordinarily does not ask whether the bargain was wise, fair, or proportionate.

But inadequacy can be evidence that there was no real bargain. If the alleged return promise is a sham, the promisor did not actually seek it, or the promisee incurred no real legal detriment, the problem is not that the consideration was too small. The problem is that consideration was absent. “One dollar” can be sufficient; “a promise the promisor never requested and the promisee never had to perform” is not.

Do not confuse adequacy with existence. A court usually will not compare value for value, but it will determine whether there was a legally recognized exchange at all. Nor does consideration require identical obligations or equal economic risk. It requires a genuine exchange.

This chapter is closed-book: you must be able to state the bargain, past-consideration, preexisting-duty, and forbearance rules from memory.

The Time-and-Duty Problem: Past Benefits and Existing Obligations

Past consideration is not consideration at all in the ordinary bargain sense. If A performs an act, and B later promises to pay A because of that completed act, A’s performance was not sought as the price of B’s later promise. The later promise is therefore generally unenforceable for lack of consideration.

The controlling timing question is: Was the alleged return performance complete before the promise being enforced was made? If yes, the performance is ordinarily past consideration.

Timing alone does not defeat an earlier contract. Suppose a homeowner asks a contractor to repair a roof for an agreed price. The contractor performs first, and the homeowner promises to pay afterward. The repair is chronologically past when payment is promised, but the parties already made a bargain. The contractor’s performance was requested in advance as the price of payment. The later payment promise confirms the existing bargain; it does not create a new one based only on past consideration.

The usual moral statement-“I ought to pay because you helped me”-does not create consideration. A moral obligation is not itself a substitute for a bargain. The promise must be connected to a recognized exception or to an earlier exchange.

The narrow material-benefit rule, Restatement (Second) of Contracts § 86, may make a later promise binding when:

1. The promisor received a benefit from the promisee.
2. The later promise was made in recognition of that previously received benefit.
3. Enforcement is necessary to prevent injustice.
4. The benefit was not conferred as a gift or under circumstances making nonreimbursement just.
5. The promised amount is not disproportionate to the benefit received.

This is not a general rule that every kind act creates a debt. A person who voluntarily gives a gift cannot ordinarily transform it into consideration by obtaining a later promise. Likewise, a promise to pay an amount wildly out of proportion to the benefit may not be enforced beyond what is necessary to prevent injustice.

The fact that separates ordinary past consideration from the material-benefit rule is the promisor’s receipt of a non-gift benefit and the need to prevent injustice. “I feel morally guilty” is insufficient. “You conferred a substantial benefit on me, not as a gift, and I later promised a reasonable amount in recognition of it” presents the narrow § 86 issue.

A related near miss is an act performed after a request but before a price is fixed. If the circumstances show that the request carried an implied understanding that payment would be made, the parties may have formed a bargain even though the exact price was determined later. If the act was completed gratuitously and payment was proposed only afterward, it remains past consideration.

The preexisting-duty rule asks a different question: what legal duty did the promisee already owe to the promisor when the new promise was made? Under Restatement (Second) of Contracts § 73, performance of a legal duty already owed to the promisor is not consideration when that duty is neither doubtful nor subject to honest dispute.

Thus, an employee who is already contractually required to perform specified work cannot ordinarily supply consideration for a promised bonus merely by doing that same work. Likewise, a contractor who already promised to build a house cannot support the owner’s promise of additional payment merely by promising to complete the original scope of work.

The rule does not apply when the promisee undertakes new or different performance. Extra work, an additional service, earlier delivery, or a different legal obligation can be consideration if it was genuinely requested in exchange for the new promise. The added value need not be economically large; it must be legally different from the existing duty.

Performance of a duty owed to a third person is also consideration. If C promises to pay A if A performs an obligation A already owes to B, A’s performance can support C’s promise because A has undertaken a legal detriment in relation to C’s promise, even though A was already bound to B.

A genuinely doubtful or honestly disputed duty is another near miss. If the parties dispute in good faith whether a duty exists or what it requires, a promise to resolve that dispute may be supported by consideration. The fact that separates this situation from the ordinary preexisting-duty case is a real legal dispute, not merely a desire for more money for doing exactly what was already promised.

For a sale of goods, Article 2 does not impose the common-law consideration requirement in the same way; in particular, UCC § 2-209(1) permits a goods-contract modification without consideration, subject to good faith, so the common-law preexisting-duty rule should not automatically decide that issue.

The Right to Sue: Forbearance as Legal Value

Forbearance means refraining from exercising a legal right. A promise to refrain from filing suit, enforcing a claim, asserting a lien, or exercising another legal privilege can be consideration if the forbearance is bargained for.

The analysis has three parts:

1. Identify the legal right. The promisee must give up, or promise to give up, something the promisee has a legal right to do. A promise not to commit a crime or tort is not consideration because the promisor has no legal right to engage in that conduct.

2. Identify the bargain. The promisor must seek the forbearance in exchange for the promise. “I will pay you if you do not sue me” is potentially a bargain. “I will pay you because I feel sorry that you considered suing me” is not necessarily one.

3. Evaluate the claim. Forbearance to assert a claim supplies consideration if the claim is valid, if it is doubtful because of uncertainty as to facts or law, or if the claimant honestly believes that the claim may be well founded, provided that the forbearance was bargained for.

The actual filing of suit is unnecessary when the promise of forbearance itself was the bargained-for return. A promise to refrain from suing is a return promise. If the promisee later files suit in violation of that promise, the issue is ordinarily breach of the formed agreement, not failure of consideration at formation.

This rule explains why a settlement can be supported by consideration even when the legal merits are uncertain. The defendant receives peace from the promisee’s forbearance, and the promisee receives payment or another promised performance. The court does not need to decide that the claim would have prevailed. It asks whether the claim was honestly and reasonably held when the bargain was made.

Do not confuse a weak claim with a knowingly false claim. A claimant may have consideration even if later precedent or evidence defeats the claim, provided the claimant’s belief was honest and reasonable. Conversely, a claimant cannot create consideration by threatening to abandon a claim the claimant knows is legally impossible.

For the common-law analysis, use the following sequence for the particular promise being enforced:

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If the alleged return performance is forbearance, apply the forbearance overlay before concluding that consideration exists: identify the legal right, determine whether the claim was honestly and reasonably held, and confirm that the forbearance was sought in exchange. If those requirements are met, the smallness of the payment or the possibility that the claim would have failed does not defeat consideration.

One Disputed Claim: A Worked Select-One Item

Omar’s antique vase was damaged when Nora’s delivery truck struck his porch. Omar honestly and reasonably believed that Nora was legally responsible and that he had an $8,000 claim, although a court later determined that Nora was not liable. Omar told Nora, “If you pay me $5,000 by Friday, I will not file suit.” Nora promised to pay and made the payment.

Three Contractual Promises: Separate the Near-Misses

High-Yield Points - ⚡ Biggest Takeaways

Consideration asks whether the return performance was sought as the price, not whether the exchange was economically equal. A completed act is past consideration unless an earlier bargain or the narrow material-benefit rule applies. Existing duty to the promisor supplies no consideration unless the duty is changed, disputed, or owed to a third person. Forbearance is consideration when a legal claim is honestly and reasonably held and abandoned in a bargain.