Farnsworth on Contracts: Consideration And Substitutes

Definition of Consideration

Consideration is defined as a benefit or detriment that each party to a contract must provide to support their promises. It can take the form of a right, interest, profit, or the forbearance of a detriment. In essence, consideration differentiates between legally enforceable contracts and mere gratuitous promises.

• Consideration must be present in bilateral contracts to create binding obligations.
• For consideration to be valid, it must be bargained for and involve both parties.

Types of Consideration

Consideration can be classified into two main types: legal detriment and legal benefit. A legal detriment occurs when a party agrees to do something they are not legally obligated to do, while a legal benefit is when a party receives something of value as a result of the contract. The existence of either type can establish a valid consideration.

• Legal detriment must be measurable and should not be something the party was previously obligated to do.
• Adequacy of consideration is generally not reviewed by courts if the consideration is legally sufficient.

Substitutes for Consideration

In some circumstances, courts recognize substitutes for consideration, which can include reliance, moral obligations, and promissory estoppel. These doctrines allow for the enforcement of promises even when traditional consideration is lacking, provided that one party relied to their detriment on the promise of another.

• Promissory estoppel can enable recovery when a promisee reasonably relied on a promisor's pledge, leading to actionable loss.
• Moral obligations can sometimes serve as consideration if they arise from a pre-existing relationship or understanding.

Modification of Contracts and Consideration

The rules regarding consideration extend into the modification of existing contracts. Under the common law, modifications generally require fresh consideration, while the UCC allows for enforceable modifications without new consideration, provided they are made in good faith and agreed upon by both parties.

• A valid modification under the UCC does not require new consideration unless it is explicitly stated.
• In contrast, common law typically mandates that any modification must be substantiated by new consideration to be enforceable.

Consideration

A benefit or detriment that each party must provide to make a contract enforceable.

Promissory Estoppel

Legal principle that enforces a promise in the absence of consideration when one party has relied on that promise to their detriment.

Legal Detriment

An action taken or a promise made which signifies a surrender of a legal right.