Lecture 9

CONTRACTS:
CONSIDERATION
BUSINESS LAW
LECTURE 9
AYESHA RAZA FAROOQ
ELEMENTS OF CONSIDERATION
 NEEDS to be a “Legally Sufficient Value” and a
“Bargained-for-Exchange.”
1. “legal value” may consist of:
 Promise to do something that one has no prior legal
duty to do
 Performance of an action that one is otherwise not
obligated to undertake, or
 Forbearance; Refraining from an action that one has a
legal right to undertake.
QUESTION
 What if, in return for a promise to pay, a
person refrains from pursuing harmful
habits (a forbearance), such as the use of
tobacco and alcohol? Does such forbearance
constitute legally sufficient consideration?
Case for assignment to discuss this further
ELEMENTS OF CONSIDERATION
2. Bargained-for Exchange
 Must provide basis for the bargain.
 Something of legal value (a promise, or a performance) must

be exchanged between the parties to distinguish contracts
from gifts
 For example, Roberto says to his son, “In consideration of the

fact that you are not as wealthy as your brothers, I will pay
you $5,000.” The fact that the word consideration is used
does not, by itself, mean that consideration has been given.
Indeed, this is not an enforceable promise because the son
does not have to do anything in order to receive the promised
$5,000. Because the son does not need to give Roberto
something of legal value in return for his promise, there is no
bargained-for exchange. Rather, Roberto has simply stated his
motive for giving his son a gift
ADEQUACY OF CONSIDERATION
◆ General Rule:
 Courts Typically Will Not Consider Adequacy of Consideration.

Law does not protect a person from entering into an unwise
contract.
When Consent May Be Lacking.
 Courts may look at the contract, if there is a large

“shockingly inadequate” disparity in the amount of
consideration exchanged. e.g Ali spends 5,000 on an i-phone
that he later discovers to be fake. Ali can claim that there
was no valid contract because of inadequate consideration &
fraud
AGREEMENTS THAT LACK
CONSIFDERATION
 Preexisting Duty: Promise to do what one already has a
legal duty to do does not constitute legally sufficient
consideration.
 Unforeseen difficulties, Recission and New Contract
 Past Consideration: These promises lack consideration in

that the element of bargained-for exchange is missing.
 Illusory Promises: Promisor has not definitely promised

to do anything (no promise at all)
PREEXISTING DUTY: EXAMPLE
 Hammad Construction, begins construction on a seven-
story office building and after three months demands an
extra PKR 750,000 on its contract. If the extra
PKR750,000 is not paid, the contractor will stop
working. The owner of the land, finding no one else to
complete the construction, agrees to pay the extra
PKR750,000.
 Q: Is the agreement enforceable?

UNFORESEEN
DIFFICULTIES:EXAMPLE
IF Hammad Construction has asked for the extra
PKR750,000 because it encountered a rock formation that
no one knew existed. If the landowner agrees to pay the
extra PKR750,000 to excavate the rock and the court finds
that i is fair to do, Hammad Construction can enforce the
agreement.
If rock formations are common in that area, however, the

court may determine that the contractor should have
known of the risk. In that case, the court may choose to
apply the preexisting duty rule and prevent Hammad
Construction from obtaining the extra PKR750,000
CONSIDERATION
 Past Consideration: Promises made in return for actions or
events that have already taken place are unenforceable.
There is no consideration because the bargained-for exchange
element is missing.
 Illusory Promises: Promisor has not definitely promised to do

anything (no promise at all).
 Q: Is a bonus due here?
The president of Tuscan Corporation says to her employees, “All

of you have worked hard, and if profits continue to remain high,
a 10 percent bonus at the end of the year will be given—if
management thinks it is warranted.” The employees continue to
work hard, and profits remain high, but no bonus is given.
ILLUSORY PROMISES
 The case of Tuscan Corportion is a case of an
illusory promise, or no promise at all, because
performance depends solely on the discretion of
the president (the management). There is no
bargained- for consideration. The statement
indicates only that management may or may not do
something in the future. The president is not
obligated now or later
 An illusory promise fails to bind the promissor as in

Tuscan’s case
CONSIDERATION
 Option-to-Cancel Clauses.
When the promisor has the option to cancel the contract

before performance has begun, then the promise is
illusory. For example, ALI contracts to hire AHMED for one
year at PKR50,000 per month, reserving the right to
cancel the contract at any time. On close examination of
these words, you can see that ALI has not actually agreed
to hire AHMED, as ALI could cancel without liability
 Requirements and Output Contracts: Problem with

consideration
SETTLEMENT OF CLAIMS
Businesses often enter into contracts to settle legal claims
 Accord and Satisfaction: Debtor offers to pay a lesser

amount than the creditor purports to be owed
 Release: Bars any further recovery beyond the terms

stated in the release
 Covenant Not to Sue: Substitute contractual obligation

for some other type of legal action based on a valid
claim
SETTLEMENT OF CLAIMS:RELEASE
 EXAMPLE:
Lucy’s car is damaged in an automobile accident caused

by Donovan’s negligence. Donovan offers to give her
$3,000 if she will release him from further liability
resulting from the accident. Lucy believes that this
amount will cover her damage, so she agrees and signs the
release. Later, Lucy discovers that it will cost $4,200 to
repair her car. Can Lucy collect the balance from
Donovan?
EXCEPTIONS TO THE
CONSIDERATION REQUIREMENT
 Promissory Estoppel (detrimental reliance): recovery if
reliance on promise of another.
Requirements to State a Claim:
✓ Must be definite promise.
✓ Promisee must justifiably rely on the promise.
✓ Reliance is substantial.
✓ Justice will be served by enforcing promise.
✓ Courts began to apply estoppel to hardship or inequitable

cases.
PROMISSORY ESTOPPEL:EXAMPLE
 CASE IN POINT The U.S. Air Force solicited bids for
construction of a new building in Anchorage, Alaska. A general
contractor, Vern Hickel, contacted eight different
subcontractors to find the lowest price on electrical work.
Alaska Bussell Electric Company, an electrical subcontractor,
told Hickel that it would do the work for $477,498. Hickel
reasonably relied on this amount when he submitted his
primary bid for the entire project to the Air Force and won
the contract. Subsquently, Alaska Bussell realized that it had
made a mistake and refused to perform the work for Hickel
for $477,498. Hickel had to hire another subcontractor at a
substantially higher cost. Under the doctrine of promissory
estoppel, Hickel can sue Alaska Bussell for the cost difference
because he had detrimentally relied on Alaska Bussell’s bid,
even though there was no consideration for Alaska Bussell’s
promise to do the work for $477,498.10
EXCEPTIONS TO THE
CONSIDERATION REQUIREMENT
 Promises to Pay Debts Barred by Statute of Limitations.
 A promise by a debtor to pay a previous debt barred by

the statute of limitations is enforceable – no additional
consideration is necessary
 Charitable Subscriptions.
 Generally, enforceable, but courts now rely on

promissory estoppel if reliance
CHARITABLE SUBSCRIPTIONS
 For example, a church solicits and receives pledges
(commitments to contribute funds) from church
members to erect a new church building. On the basis
of these pledges, the church purchases land, hires
architects, and makes other contracts that change its
position. Because of the church’s detrimental reliance,
a court may enforce the pledges under the theory of
promissory estoppel. Alternatively, a court may find
consideration in the fact that each promise was made in
reliance on the other promises of support or that the
trustees, by accepting the subscriptions, impliedly
promised to complete the proposed undertaking.

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Lecture 9

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CONTRACTS:

 Must provide basis for the bargain.

 Something of legal value (a promise, or a performance) must

 For example, Roberto says to his son, “In consideration of the

 Courts Typically Will Not Consider Adequacy of Consideration.

When Consent May Be Lacking.

 Courts may look at the contract, if there is a large

 Past Consideration: These promises lack consideration in

 Illusory Promises: Promisor has not definitely promised

 Q: Is the agreement enforceable?

If rock formations are common in that area, however, the

 Illusory Promises: Promisor has not definitely promised to do

 Q: Is a bonus due here?

The president of Tuscan Corporation says to her employees, “All

 An illusory promise fails to bind the promissor as in

When the promisor has the option to cancel the contract

 Requirements and Output Contracts: Problem with

 Accord and Satisfaction: Debtor offers to pay a lesser

 Release: Bars any further recovery beyond the terms

 Covenant Not to Sue: Substitute contractual obligation

Lucy’s car is damaged in an automobile accident caused

Requirements to State a Claim:

✓ Must be definite promise.

✓ Promisee must justifiably rely on the promise.

✓ Justice will be served by enforcing promise.

✓ Courts began to apply estoppel to hardship or inequitable

 A promise by a debtor to pay a previous debt barred by

 Generally, enforceable, but courts now rely on

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