Introduction to Contracts and Consideration

Terms:

Common Law:
The system of laws originated and developed in England and based on court decisions, on the doctrines implicit in those decisions, and on customs and usages rather than on codified written laws.

Uniform Commercial Code:
Body of laws developed by a national commission and the American Law Institute to help regularize the law of sales. It has been adopted in part by every state. The code governs sales and leasing, bank deposits and collections, commercial paper and letters of credit, bulk transfers and warehouse receipts, investment securities and secured transactions, and various other commercial transactions.

Statute of Frauds:
Basis of most modern laws requiring that certain promises must be in writing in order to be enforceable; it was passed by the English Parliament in 1677. In the United States, although state laws vary, most require written agreements in four types of contracts: contracts to assume the obligation of another; contracts that cannot be performed within one year; contracts for the sale of land; and contracts for the sale of goods.

Consideration:
Something of value (either a promise, an act or an object) that a promisor receives from a promisee in return for his promise.

Bilateral Contract:
A contract where the parties exchange a promise for a promise.

Unilateral Contract:
A contract where one party gives a promise and the other party performs an act.

Introduction:

Contracts, along with torts, criminal law and property law, is one of the great common law subjects.

However, today, the law of contracts is largely based on case law that has been established over the last century and a half. Along with common law and case law, this course will incorporate two other cannons of contract law into the discussion; the uniform commercial code and the statute of frauds.

The uniform commercial code, or UCC, represents somewhat of a departure from the common law of contracts. Article II of the UCC, which was written in order to make commercial law uniform among the fifty states, is a statutory code that covers the sale of goods. However, the common law plays an important role in determining the applicable law here as well. Article II of the UCC does not cover every contract issue that may arise and, where Article II does not cover a contract issue, the common law governs.

The other doctrine of contract law that is not born of the common law is the statute of frauds. The statute of frauds, which has been adopted by each of the fifty states, is a body of law that determines when a contract must be in writing in order to be enforceable.

As we will see later, there are five different situations where a contract will be considered in violation of the statute of frauds, and thus void, if not written.

Consideration:

A contract in its most basic definition is nothing more than a legally enforceable promise.

A contract where the parties exchange a promise for a promise is known as a Bilateral Contract, whereas a contract where one party gives a promise and the other party performs an act is known as a Unilateral Contract.

These legally enforceable promises may be in writing or oral. Either way, the formation of a legally binding contract requires two basic elements, consideration and mutual assent. This chapter will cover the issues and problems involved with consideration. We will cover mutual assent in the next chapter.

Essentially, consideration is simply what you give up in the deal for what you get out of the deal.

The idea of consideration is vital to contract law because, in order for a contract to be enforceable, there must be “mutuality of obligation.” In other words, in order for a contract to be valid, both parties to the contract must be required to perform under the contract. Consideration, which represents the commitment that the parties to the contract make to each other, is at the heart of the “mutuality of obligation” rule and, therefore, without consideration, a contract will not be enforceable. For Example:

Ben promises to wash Jerry’s car in exchange for Jerry’s promise to pay him $500. Ben and Jerry have each bargained for the other’s promise. Ben considers his promise to wash Jerry’s car as the price he needs to pay to get Jerry’s $500 and Jerry considers his promise to pay $500 as the price he has to pay for Ben’s promise to wash his car. This exchange of promises is consideration.

Further, trading a promise for an act is also considered valid consideration. For Example:

Jerry offers to pay Ben $500 if Ben washes Jerry’s car. Ben agrees and washes the car. The exchange of Jerry’s promise for Ben’s act is valid consideration which makes the contract enforceable.

Please note that Jerry is not exchanging his promise to pay $500 for Ben’s promise to wash the car. Rather, Jerry is exchanging his promise to pay $500 for Ben actually washing the car.

Finally, bargained for promises may include not only promises and acts but also promises to forbear (refrain) and actual forbearance from performing acts that one is legally entitled to perform. For example:

Jerry is driving his freshly cleaned car down the street when he loses control and crashes into Edy’s front porch. Jerry promises to pay Edy $1000 if Edy promises not to sue Jerry for the damage to her porch. Because Edy is legally entitled to sue Jerry for damages, her promise to forbear from suing Jerry in exchange for Jerry’s promise to pay her $1000 is valid consideration.

Under the Common Law, the words “consideration” and “bargain” are basically used interchangeably, and the concept that equates consideration and bargain is called the “bargain theory” of consideration.

The concept of consideration has been expanded from the original Common Law because the common law theory that consideration equals a bargain was somewhat limited for the following reasons:

First, not all bargain promises are enforceable. Second, some promises are enforceable even though they do not have consideration.

Factors other than a bargain that make a promise enforceable include reliance on the promise by the promisee, certain promises given in exchange for past or moral consideration, waiver of non-material conditions of a bargain, and promises made in special legally recognized forms, such as promises under seal.

Therefore, many authorities treat consideration as equivalent to any factor that will make a contract or promise enforceable. This concept that equates consideration with any factor that will make a contract enforceable is called the “enforceable factor” theory of consideration. For example:

Ben promises to give Jerry $10,000 to buy a new car. Relying on Ben to keep his word, Jerry goes and buys a new car. Subsequently, Ben refuses to give Jerry the $10,000. In this situation, Jerry will succeed in an action against Ben for the money. Although this was not a bargain promise, because Jerry made no promise and did no act in return for Ben’s promise, Jerry did rely on Ben’s promise and Jerry's reliance on Ben’s promise constitutes consideration under the enforceable factor approach.

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