Consideration is a central concept in the common law of contracts. Under classical contract theory, consideration is required for a contract to be enforceable. (Modern contract theory has also permitted remedies on alternate theories such as promissory estoppel).
There are two common theories for consideration. The first is the “benefit-detriment theory”, in which a contract must be either to the benefit of the promisor or to the detriment of the promisee to constitute consideration. The second is the “bargain theory”, in which the parties subjectively view the contract to be the product of an exchange or bargain. The bargain theory has largely replaced the benefit-detriment theory in modern contract theory, instance, a deal i which the promisee feels subjectively relieved, but hasn’t actually gained any legal rights, might satisfy the bargain theory but not the benefit-detriment theory. Alternately, a deal in which an actor takes detrimental actions possibly in reaction to an offer, without having viewed the deal as a bargain, wouldn’t be viewed as a contract under the law.
The main purpose of the shift from benefit-detriment to bargain theory is to reconcile consideration theory with other aspects of contract theory. For instance, courts will not inquire as to the adequacy of consideration. If someone honestly dislikes their car and wants to sell it for fifty dollars, the law will not consider this an invalid deal. However, the court will reject “consideration” that was not truly bargained for. Occasionally the court may refer to “adequate” or “valuable” consideration, but in reality the court is not examining the adequacy of consideration, but whether or not it was bargained for. Another term for this sort of non-bargained-for payment is nominal consideration. The traditional notion that courts won’t look into the adequacy of consideration, an ancient notion in the English common law, doesn’t square with the benefit-detriment theory (in which courts are implicitly analyzing if the parties are receiving a sufficient benefit) but does square with the bargain theory (in which only the subjective intentions of the parties are considered).
For example, in Fischer v. Union Trust Co., 101 N.W. 852, the court held that $1.00 paid in exchange for the sale of real property within the city of Detroit in 1902 was not “bargained for” by the seller, and thus the transaction was void. The point was NOT that the amount of money involved was too small to be adequate consideration, but that the seller did not convey the property in exchange for the buyer’s promise to pay $1.00. There was no consideration, not because $1.00 was too small an amount to “count”, but because the $1.00 offered the seller by the buyer did not induce the seller to part with the property.
There are three main purposes cited for the consideration requirement. The first is the cautionary requirement – parties are more likely to look before they leap when making a bargain than when making an off-the-cuff promise of a gift. The second is the evidentiary requirement – parties are more likely to commemorate, or at least remember, a promise made due to a bargaining process. The third is the channeling requirement – parties are more likely to coherently stipulate their specific desires when they are forced to bargain for them. Each of these rationales ensure that contracts are made by serious parties and are not made in error.
Certain other stipulations regarding consideration include the following:
* Past consideration is not valid. Something that is already done is done, and it does not change the legal position of the promisor. Any goods or services to be exchanged must be exchanged at or after the time of contract formation. However, a promise to pay a pre-existing debt or obligation IS enforceable.
* Preexisting duty does not count as consideration.
* An illusory promise, or one which the promisor actually has no obligation to keep, does not count as consideration. The promise must be real and unconditional. This doctrine rarely invalidates contracts; it is a fundamental doctrine in contract law that courts should try to enforce contracts whenever possible. Accordingly, courts will often read implied-in-fact or implied-in-law terms into the contract, placing duties on the promisor. For instance, if a promisor promises to give away a third of his earnings for the year, he has no actual obligation to do anything; if he earns nothing, a third of zero is zero. However, courts will generally read in an implied term that he will use reasonable efforts to try to gain income. Another, more modern approach to illusory promises is to treat them as “bargaining for a chance”. Even though the promisor has no actual duties, the promisee may still benefit by the possibility that the contract may lead to the promisor fulfilling certain duties, and that possibility itself is beneficial.
* Liquidated debt, or a payment which is fixed and undisputed, cannot be negotiated for consideration. Unliquidated debt, or a payment which is disputed, can be used for consideration.
While the concept of consideration is not generally accepted in civil law systems, some recognize the similarity between consideration and cause, as some civil codes recognize that all contracts must have a cause, though this is not generally accepted.