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9. Contracts: Consideration - YouTube
Channel: Center for Innovation in Legal Education
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>> This module focuses
on consideration.
[3]
As we discussed
on module 2,
[5]
Restatement section 17
says that in order
[8]
for there to be an
enforceable contract,
[10]
there must be a bargain in
which there is a manifestation
[13]
of mutual assent to the
exchange and a consideration.
[18]
In this unit, we are going
to look at the concept
[20]
of consideration.
[22]
Section 71,
subsections 1 and 2,
[25]
give us the definition
of consideration.
[34]
In other words,
consideration for a promise
[36]
is the thing or action
that the promisor wants
[39]
in exchange for his willingness
to make a promise.
[42]
The Latin phrase for
this is "quid pro quo,"
[44]
which translates
as "this for that."
[48]
Understand that in almost
all commercial contracts,
[51]
consideration is
not an issue.
[53]
Almost all commercial contracts
involve a promise to pay money
[57]
in exchange for a promise to
provide goods or services,
[59]
or both.
[61]
So if I promise to sell
you my bike for $300,
[64]
the consideration for my
promise to sell my bike to you
[67]
is your return promise
to give me $300.
[71]
And the consideration for
your promise to pay me $300
[74]
is my return promise
to sell you the bike.
[77]
Money for goods.
[79]
Similarly, I can promise
to pay you $30,000
[82]
if you design
my house.
[84]
The consideration for my
promise to pay you $30,000
[88]
is your return promise
to design my house.
[91]
And the consideration for your
promise to design my house
[94]
is my return promise
to pay you $30,000.
[97]
Money for
services.
[100]
As we saw in module 7
on unilateral contracts,
[103]
less frequently
we see contracts
[105]
where one side
promises to pay money
[108]
in exchange for the other
side performing some act.
[111]
So for example, in the
classic unilateral contract
[114]
involving a reward,
[115]
I promise to pay $500 to the
person who finds my lost dog.
[119]
The consideration for
my promise to pay $500
[122]
is the act or performance
of finding my dog.
[125]
I'm not interested in your
promise to find my dog.
[128]
If you do
find my dog,
[129]
that both serves as your
acceptance of my offer
[132]
and functions as the
consideration for my promise.
[135]
At that point, we have
an enforceable contract.
[139]
So why do we need
consideration?
[141]
What is the function of the
requirement for consideration?
[145]
Basically, the requirement
of consideration
[147]
functions to
distinguish contract--
[150]
meaning a legally
enforceable promise--
[152]
from a promise
to make a gift,
[154]
sometimes called
a "donative promise."
[156]
And why do we need
to distinguish
[158]
between these two
kinds of promises?
[160]
Under classical
contract doctrine,
[162]
a promise to
make a gift
[163]
is not a legally
enforceable promise.
[166]
The person promising
to make a gift is free
[168]
to change her mind at any time
up until the gift is completed.
[172]
Although, later
in the course,
[173]
we will find that some gift
promises become enforceable
[176]
under the doctrine of
promissory estoppel,
[178]
or reliance.
[180]
So the requirement
of consideration
[181]
is how classical contract
doctrine distinguishes
[184]
between promises that
are legally enforceable
[186]
and promises
that are not.
[189]
In the context of
intra-familial promises--
[192]
that is, promises
between family members
[194]
such as parents and children
or uncles and nephews--
[197]
it can sometimes be
difficult to distinguish
[199]
unenforceable gift
promises from contracts.
[202]
Family members can and do
contract with one another.
[205]
A brother may sell
his house to his sister
[207]
or a mother may hire her
son to landscape her yard.
[210]
But family members also
often promise to do things
[213]
for one another just
because they're family.
[215]
Or even more
problematic,
[217]
family members may make
reciprocal gifts to one another.
[220]
And in such cases, it can
be tricky to distinguish
[223]
a bargain for contract from
a promise to make a gift.
[227]
In older cases from
the 19th century,
[229]
often involving
family members,
[231]
you will see another
definition of "consideration."
[234]
A promise has consideration
when the transaction
[236]
involves a benefit
to the promisor
[239]
or a detriment
to the promisee.
[241]
This definition, however,
proved to be unsatisfactory
[245]
because courts got distracted
by deciding what was a benefit
[248]
and what was
a detriment.
[250]
So for example,
if a father promises
[252]
to give his son a new car
if his son finishes college,
[256]
is there consideration
under this older definition?
[259]
Is there a benefit
to the father?
[261]
Well, there's certainly no
chance of a pecuniary benefit.
[264]
Quite the opposite.
[265]
Does the pride or
relief he will get
[268]
from his son being a
college graduate count?
[270]
Probably not.
[272]
Well, then, is there
a detriment to the son?
[275]
Consideration requires
benefit to the promisor
[277]
or detriment
to the promisee.
[279]
Not both.
[280]
One or the other
is sufficient.
[282]
Some would argue that there
is no detriment to the son
[285]
in having a
college degree.
[286]
Rather, that's
a benefit.
[288]
Others would say in the context
of the law of contracts,
[291]
a detriment is
doing something
[293]
you were not already
legally required to do
[296]
or refraining from
doing something
[297]
you have a legal
right to do.
[299]
The son is not legally required
to get a college degree,
[302]
so his getting one at
his father's behest
[304]
is a legal
detriment.
[307]
Moreover, having concluded
that getting a college degree
[309]
constitutes a
legal detriment,
[311]
we are not done
with our analysis.
[313]
That is because a
promise to make a gift
[315]
can come with
a condition.
[317]
And a condition can
be a legal detriment.
[320]
So we could think
of the father saying,
[322]
"I promise to make you
a gift of a new car
[324]
"provided that you
finish your degree."
[327]
Finishing his degree
is something the son
[329]
is not legally required to do,
and so, it's a detriment.
[332]
But that detriment
is not a consideration,
[334]
rather it's a
condition to a gift.
[337]
Williston, the drafter
of the First Restatement,
[340]
used what has become to be
a famous hypothetical
[343]
to illustrate
this difference.
[345]
The hypothetical has become to
be called "Williston's Tramp."
[348]
And this, roughly paraphrased,
is what he said--
[351]
suppose a rich man
says to a tramp,
[353]
"If you walk around to the
corner, to the clothing store,
[356]
"I will buy
you a coat."
[358]
Is walking around the
corner a detriment?
[360]
Yes, because it's something
the tramp, the promisee,
[363]
is not legally
required to do.
[366]
Is that detriment
consideration, though,
[368]
or is it a condition
to a gift?
[370]
Most agree that the tramp's
walking around the corner
[372]
is the condition
to a gift.
[374]
The reasons people come to
this conclusion vary, however.
[378]
Some would argue that
walking around the corner
[380]
is a condition
to a gift
[381]
because in order for the
coat to fit the tramp,
[384]
he had to go to the
store and try it on.
[386]
By this line
of argument,
[387]
we can distinguish
between detriments
[389]
that are consideration
[391]
and detriments that are
condition to gifts
[393]
by asking whether the
thing-- the detriment--
[395]
is something that is a
necessary pre-condition
[398]
to receiving
the gift.
[399]
Analogous to
someone saying,
[401]
"Put out your hand, so I
can give you this money."
[403]
Putting out the hand
is a detriment--
[405]
you're not legally
required to do it--
[407]
but it is what
one has to do
[408]
in order for someone else
to hand you the money.
[411]
Others would argue that this
is an inadequate distinction.
[415]
They would point out that
when the father promises
[417]
to give his son
the gift of a car,
[419]
provided that
son graduates,
[420]
graduating isn't a
necessary precondition.
[423]
The father could give
the gift of a car
[425]
without the son
graduating.
[427]
Others would agree that
walking around the corner
[429]
is a condition
to a gift.
[431]
But the reason would be
because of the context.
[433]
There is no benefit
to the rich man
[435]
other than feeling good for
having done a good deed,
[437]
sometimes called
"warm fuzzies"
[439]
and generally understood
not to be consideration.
[442]
So we are left with
the rich man conveying
[444]
something of value
to a homeless beggar.
[447]
And our contextual
understanding of that situation
[450]
is that the rich man
is being charitable
[452]
in giving a gift
to the poor man.
[454]
These folks would conclude
that, in this situation,
[457]
there's no bargaining
behavior occurring.
[459]
They would say there's no
bargain for consideration.
[463]
And remember from
the second module
[464]
that bargaining is not
the same as dickering.
[468]
By the way, a student
once proposed a variation
[471]
on Williston's Tramp
that would suggest
[473]
the walking around the corner
was a bargain for consideration.
[477]
Professor Threedy swears
she's not making this up.
[480]
The student said, "What if
the tramp walked with a limp
[483]
"and what if the rich man got
some sort of perverted thrill
[487]
"from watching people
with limps walk?
[489]
"Then would the walking
around the corner
[491]
"be the consideration
for the promise
[493]
"to buy him
a new coat?"
[495]
The response?
[497]
Probably yes.
[499]
Here, there's
a benefit,
[500]
albeit an idiosyncratic
one, to the rich man.
[504]
This would be no different
than paying an entrance fee
[506]
as the consideration for being
able to watch exotic dancers.
[511]
So to return to our
hypothetical with the father,
[514]
the car, and the
maybe-graduating son.
[517]
If a court were to
focus on the context,
[519]
family, father with
a ne'er-do-well son,
[522]
it would tend to
suggest no bargaining
[525]
but rather a
conditional gift.
[527]
This, despite
the fact
[528]
that there is a legal
detriment to the son.
[531]
A court could, however,
focus on the fact
[534]
of reciprocal
inducement.
[535]
That is, the father
makes the promise
[538]
to induce the
son to graduate,
[539]
and the son, apparently
unlikely to do so on his own,
[543]
graduates in order
to get the car.
[546]
And decide that
this is bargaining,
[548]
albeit in a
non-economic context.
[551]
With these close cases,
you can't say for sure.
[554]
So let's review this distinction
between gift promises
[557]
and contracts with an
example from real life.
[560]
When Professor Threedy
was eight years old,
[562]
her family moved and,
for the first time,
[564]
she had to share a room
with her younger sister.
[566]
She soon decided
she didn't like this.
[569]
The sister was always
getting into her stuff.
[571]
So she asked her father
for her own room.
[574]
Repeatedly.
[576]
Eventually, he said, "If
you don't ask me again,
[578]
"I promise you'll get your
own room when you are 12."
[582]
So for four years, she
didn't bring up the subject.
[585]
On the morning of
her 12th birthday,
[586]
she marched up to
her father and asked,
[588]
"When do I
get my room?"
[590]
And then, and this obviously
scarred her for life,
[593]
probably led her to
becoming a lawyer,
[596]
her father claimed to not know
what she was talking about.
[600]
So could she have sued her
father for breach of promise?
[603]
Let's ignore the fact
that she was a minor.
[606]
We could approach
that question
[607]
from a sociological
perspective
[609]
and say that it's not a good
idea to establish the precedent
[612]
that kids can sue
their parents
[613]
for reneging on their promises
concerning family governance.
[617]
But classical contract
would take this approach.
[619]
It would ask, "Was
there consideration
[622]
"for the father's
promise?
[624]
"Or was it a
gift promise?"
[626]
There was certainly
a detriment.
[628]
She was not legally required
to keep her mouth shut.
[632]
Arguably, there was even
a benefit to the father--
[634]
four years of not
being pestered.
[636]
The daughter would argue
that there was consideration--
[639]
a promise in exchange
for performance.
[642]
The father would
no doubt respond
[644]
that the "not asking" was
a condition to a gift.
[647]
As it was a
gift promised,
[648]
he was free to change
his mind at any time
[650]
before actually
tendering the gift.
[653]
And that's
what he did.
[655]
Was there
bargaining?
[656]
That is, were they exchanging
four years' silence
[658]
for the cost of
building a new room?
[660]
Or in context, are we
looking at something
[662]
that we should understand
as not about bargaining?
[665]
Professor Threedy
thinks that a court
[667]
would be unlikely to
find consideration.
[669]
Professor Kogan,
a father himself,
[672]
thinks a court would
find the argument
[673]
that her father was bargaining
for silence to be compelling.
[676]
What do you think?
[679]
Factually, issues regarding
whether something
[681]
is bargained for
consideration
[683]
or a condition to a gift
most often arise
[686]
in the context of
family transactions.
[688]
But not always.
[689]
Here's an example of the
problem in a commercial context.
[693]
It's the 1930s and there's
a depression going on.
[696]
A movie theater
holds a drawing
[698]
and promises a
gift certificate
[699]
to the person whose name
is drawn from a bowl
[702]
at the start of
the 8 PM movie,
[704]
provided that the person
claims the gift
[705]
within 60 seconds of
their name being called.
[708]
A woman and her husband
have entered their names
[710]
in the drawing, and are
standing in the lobby
[712]
when the drawing
occurs.
[714]
The husband's
name is drawn
[715]
but the movie theater refuses
to give him the prize.
[718]
Now, there was
a factual question
[720]
of whether or not he
responded within 60 seconds
[723]
and a jury found
that he had.
[725]
The legal question
on appeal
[727]
was whether the promise
of the gift certificate
[730]
was a promise
to make a gift
[731]
conditioned on claiming it
within the time frame,
[734]
in which case, the movie theater
was free to change its mind
[737]
before the gift
was completed.
[739]
Or was there
consideration
[741]
for the promise of
the certificate?
[743]
How would you decide
the question?
[746]
The court concluded
there was consideration.
[749]
It considered
two factors.
[751]
First, the court found
that there was a benefit
[754]
to the promisor,
the movie theater,
[756]
in the publicity
generated by the drawing
[758]
and the buzz created by
large crowds at the theaters.
[761]
Second, the fact that the
promisor was a commercial actor
[765]
suggested that this was
a bargaining context.
[768]
To summarize,
in situations
[770]
where there is an economic
benefit to the promisor,
[773]
whether it be getting
$300 cash in hand,
[775]
the return of lost
property, or publicity,
[778]
it is likely a court
will find consideration
[780]
for the promise.
[781]
Let me repeat a point I
made at the beginning--
[784]
in almost all
commercial transactions,
[786]
consideration
is not an issue.
[789]
There is always
consideration
[791]
where there is a
promise to pay money
[793]
in exchange for a promise to
provide goods or services,
[796]
or both, and almost all
commercial transactions
[798]
can be characterized
in one of those ways.
[802]
However, where any benefit to
the promisor is non-economic,
[806]
which is sometimes called
"idiosyncratic value,"
[809]
a court will scrutinize the
transaction more closely,
[812]
taking into account the
relationship between the parties
[815]
and the context in which
the promise was made.
[817]
A court may still determine
there is consideration,
[820]
but the question
will be a close one.
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