It’s all about the chain of relation one party initiates and the other party responds.

All their
intentions sum up to a contract using in all the elements of a valid contract, explain how the
above statement in relation to all the element of a valid contract.
To define a contract, is to explain what a contract is. Contracts are the foundational elements not
just of every business, but human cooperation and society. A contract is an agreement (oral or
written) that enable parties (individuals or businesses), businesses, and society to come together
and collaborate towards their specific desires and needs. They are official agreements that are
enforceable by law. In other words, a contract is a legal obligation. Keep in mind that some
contracts are unenforceable or void under certain circumstances, such as contracts that are illegal
or against public policy.

Businesses rely on contracts to establish the foundation of their professional relationships while
also supplying the agreed-upon procedures that govern those relationships. With a contract, the
parties involved establish how they will work together and how each party’s duties and
responsibilities will be enforced.

A contract is an agreement, either written or spoken, between two or more parties that creates a
legal obligation.

The terms of a contract are enforceable by law, with clearly defined penalties and remedies
should the contract be breached. A breach of contract is a failure, without legal excuse, to
perform any parts of the contract. In some cases, a party may have a legal excuse for not
performing obligations under a contract, such as impossibility or frustration of purpose.

A contract is created when there is an offer, consideration, and acceptance between two or more
parties

Different Types of Contracts

Contracts are everywhere. You are probably using one or more contracts in your everyday life
and do not even realize it. Following are some types of contracts used in our everyday lives.

 Your lease agreement or mortgage

 Terms and conditions of your credit card
 Employment contracts
 Rental car company contracts
 Service contract when you sign up for a service
Cellphone contract

Contracts are at the heart of every service that you perform or receive. Contracts govern so many
facets of life, from individual actions to the actions of a multinational company. Yet though their
impact is profound, contracts often operate “under the radar” quietly managing all manner of
business and personal relationships. As an individual, there are contracts associated with a
variety of day-to-day activities and responsibilities.

In business, the three most common types of contracts are:

Sales Contract. Facilitate sales transactions and customer engagement.

Nondisclosure Agreement (NDA). Protect organizations key assets, reputation and business
data.

Services Agreement. Optimize and manage business relationships with consultants, contractors
and other third-party actors.

Listed below are examples of contracts.

Bill of Sale. A bill of sale clearly outlines the basics of a sales agreement, such as the involved
parties, the agreed upon price, and the terms of the deal. This type of contract will also prove the
legal owner’s identity.

Promissory Note. A promissory note is the legal version of an IOU and allows someone to
borrow money from another person or business entity. The promissory note exists to keep a
record of the loan and all its requirements, including penalties, interest, and terms of repayment.

Employment Agreement. An employment agreement sets the terms of employment, with

details such as termination causes, bonus structure, and compensation.

Licensing Agreement. A licensing agreement allows an inventor to make money on their

creation or idea by allowing another person or business to use the idea. The licensing agreement
will include details about any restrictions on reproducing the product, which is especially useful
if you hold legal protection on your intellectual property, but you need help from someone else
to produce the item and make money. The agreement may include details about exclusivity and
payment terms as well.

Contract is an official agreement. It could be written or even be in oral. Contracts can be written
by using formal or informal terms, or entirely verbal or spoken. It is a promise made between
two or more parties that which allow the courts to make judgement. A contract has six important
elements so that it will be valid which is offer, acceptance, consideration, intention to create legal
relation, certainty and capacity. If the main elements are not in contract, it would be an invalid
contract.
Offer

The first element in a valid contract would be offer. An offer or a promise or an agreement needs
to be in contract because if there is no offer than there will be no contract. In the Contracts Act,
1950, the first elements in a contract would be offer. It is one of the elements to make sure that
the contract is legally valid or acceptable. In a contract, it is very important that a party would
make an offer. There is a difference of offer between an advertisement and an option. To make
an offer, there should be at least two parties or even more so that it would be legally capable of
entering into a contract. If the offer is accepted than it would constitutes to a legally valid
contract. When an offer is being made, the other party or person would know what is being offer
and what the person or party who made the offer expect to have in return. It is the same when
anybody goes on a holiday, stays at a hotel and so on. For example, a family has made an
arrangement with a tour agency to have a holiday at Hong Kong for a few days. The tour agency
would make a contract by making forms to the family which would have to be filling up. The
family member who fills up the form would have to be clear with the rules and regulations given
by the tour agency company. Once it is fills up, the contract has been made between the family
and the tour agency.

Contracts always start with an offer. An offer is an expression of a willingness to enter into a
contract on certain terms. It is important to establish what is and is not an offer. Offers must be
firm, not ambiguous, or vague. A person who is making the offer is called the offeror.

Invitation to Treat: Offers are different than an invitation to treat. An invitation to treat is not
an offer. When you list your home for sale, you are not making an offer; you are making an offer
to treat. You are inviting potential buyers to make an offer to you to buy your home. The same is
true with most advertising. The stores are making an offer to treat. They are expressing their
willingness to sell you something if you offer them their asking price. However, they are not
bound to accept your offer. For example, you place an ad online to sell your automobile for a
certain price. Someone makes an offer to buy the automobile from you at full price. Do you have
to accept their offer? No. You are making an offer to treat, and you are not bound to accept their
actual offer to buy your automobile.
Puffery: Advertisers often use puffery to promote their products. So, was the advertising slogan
“Red Bull Gives You Wings” meant to be a true statement or puffery? In a class action lawsuit
filed on Jan. 16, 2013, in the U.S. District Court of the Southern District of New York by
Benjamin Careathers, Mr. Careathers claimed he had been drinking Red Bull since 2002. His
lawsuit argued that Red Bull mislead consumers about the superiority of its products starting
with its slogan “Red Bull gives you wings” and its claims of increased performance,
concentration, and reaction speed. Red Bull eventually settled the lawsuit for 13 million dollars.
Red Bull maintains that its marketing and labeling have always been truthful and accurate, and
denies any and all wrongdoing or liability.”

Courts will determine whether a statement in advertising is false versus puffery by using the
“reasonable person” standard. In other words, would a reasonable person believe the exaggerated
statement in an advertisement is meant to be true? It is hard to imagine a jury would find that the
Red Bull advertisement that by drinking their product one would grow wings was anything but
puffery.

Counter-Offers: A counter-offer negates the original offer. It alters the original offer, and by
doing, so releases the person making the original offer from any obligation. For example, A
makes an offer to treat regarding the sale of A’s automobile for $10,000.00. B offers A
$9,000.00. If A accepts this offer, B is bound to purchase the vehicle for that price. A does not
have to accept B’s offer and is not bound to. However, A then makes a counter-offer to B that A
will sell the vehicle for $9,500.00. B is not bound to buy the vehicle for that price, but A is now
bound to sell the vehicle to B for that price if B accepts the counter-offer.

Acceptance

After having an offer in the contract, there should be acceptance. For a contract to be made there
should be acceptance from the other party or person. When the other party is clear with the offer,
there would make an acceptance once they are clear with the rules and regulations being offer in
the contract. There will be no contract if the parties are still negotiating or discussing and have
not made accept the offer. The person or party can accept the offer being made in writing or
orally which is made verbally or being spoken out. For example, a tourist writes to hotel K
requesting information about the cost and availability of accommodation for the week
commencing on the 15th April 2011. The staff at hotel K answers the inquiry states that the
accommodation available for that week would cost RM 600 and if the tourist responds with the
deposit of RM 100 within a week, then the room will be allocated to him. If the tourist accepts
the offer, then the contract has been made for the tourist and hotel K.

Acceptance by the offeree (the person accepting an offer) is the unconditional agreement to all
the terms of the offer. There must be what is called a “meeting of the minds” between the parties
of the contract. This means both parties to the contract understand what offer is being accepted.
The acceptance must be absolute without any deviation, in other words, an acceptance in the
“mirror image” of the offer. The acceptance must be communicated to the person making the
offer. Silence does not equal acceptance.

Consideration

Consideration is also a very important element in the contract. Consideration in a contract would
mean the other person would be giving back something in return. It would be consider as an
exchange which would be made between the promisee and promissor. There should be
consideration in a contract so that it would be legally valid. For example, a customer in a fast
food restaurant like McDonalds orders a set lunch which costs RM7.95. By ordering the set
lunch, the customer is agreeing to pay RM7.95 as consideration. However, consideration does
not give any threats to on ‘ line holiday contracts. Holiday services which are being provided by
the on ‘ line holiday providers and also the consideration by giving something back in return
which would be the payment money or even the payment made by the holiday makers would
eventually follow the requirements for consideration of a contract.

Consideration is the act of each party exchanging something of value to their detriment. A sells
A’s automobile to B. A is exchanging and giving up A’s automobile while B is exchanging and
giving up B’s cash. Both parties must provide consideration.

Past Consideration: Voluntarily doing something for someone is not consideration. A sees B’s
lawn needs to be cut so A voluntarily does so. B comes home from work and is so pleased that B
gives A $30 for cutting the lawn. The following week A cuts B’s lawn again without B asking A
to do so. A now asks B for $30 for cutting the lawn and B refuses to do so. A claims they have a
contract since A has provided consideration by mowing B’s lawn, even though it was voluntary.
A is incorrect. B is not obligated to provide consideration to A. There is no contract. However, if
B had asked A to mow the lawn, but did not set the price, A would probably be able to enforce
the contract after mowing the lawn because B requested he does so.

Performance of an Existing Duty: If a person has a duty to do something, such as a public

servant, the performance of the duty is not consideration.

Promissory Estoppel: In some instances, one party is not providing consideration but is relying
on a reasonable promise made by another. A party that is induced to action based on a reasonable
promise may be able to enforce the promise under the legal theory of promissory estoppel.

For example, A works for B who has promised to provide A retirement benefits if A works for B
for 25 years. After A is employed with B for 15 years, B tells A that the retirement benefits will
now be half the amount originally promised. A can enforce the original promise under the theory
of promissory estoppel even though A has provided no consideration. A can make the case that
A was induced and acted on this promise.

Legality:

The fourth required element of a valid contract is legality. The basic rule is that courts will not
enforce an illegal bargain. Contracts are only enforceable when they are made with the intention
that they are legal and that the parties intend to legally bind themselves to their agreement. An
agreement between family members to go out to dinner with one member covering the check is
legal but is not likely made with the intent to be a legally binding agreement. Just as a contract to
buy illegal drugs from a drug dealer is made with all the parties knowing that what they are
doing is against the law and therefore not a contract that is enforceable in court.

Lack of Mental Capacity: The capacity to enter into a contract may be compromised by mental
illness or intellectual deficiency. Issues of dementia and Alzheimer’s can blur the lines of
competency to sign a contract. Competency to enter into a contract requires more than a transient
surge of lucidity. It requires the ability to understand not only the nature and quality of the
transaction but an understanding of its significance and consequences. If a person is found to
lack the mental capacity to enter into a contract, then the contract is not automatically void but it
is voidable.
Minors and Contracts: Minors under the age of 18 years old are allowed to sign contracts, but
they are voidable at the minor’s election. The exception to this rule is that contracts for
necessities are not voidable. Necessities are general goods or services necessary for subsistence,
health, comfort, or education. The burden to prove a contract is for necessities for a minor is on
the plaintiff. Minors can affirm their contract made while a minor formally or by actions upon
reaching the age of 18.

Contracts That Must Be In Writing: As already mentioned above, not all contracts have to be
in a written format. However, some absolutely do, or they are voidable. Under the common law
doctrine of the “Statute of Frauds,” which has been codified in the General Obligations Law
(GOB), contracts for the purchase of real property (GOB § 5-703), contracts that cannot be
performed in less than 1 year, and contracts that guarantee the debt of another (co-signers) (GOB
§ 5-701) must all be in writing. It is important to understand that just about any form of writing is
acceptable. A handwritten contract to purchase real property on a napkin is acceptable if all the
elements of a contract are met. The use of email and text messages may also be acceptable under
GOB § 5-701(4).

Unilateral Versus Bilateral Contracts: Most contracts are bilateral, meaning both parties are in
agreement and the four basic elements of a contract exist. For example, B offers to buy A’s
automobile for a specific price and A accepts the offer and agrees to give B the automobile upon
receipt of those specific funds. Both parties are agreeing to the contractual arrangement. It is
bilateral. In a unilateral contract, one party is making an offer and promise if someone does
something in return. There is no agreement necessarily between two individuals as there is in a
bilateral contract. However, an offer is made and if another individual accepts the offer and
performs, an enforceable contract exists. An example would be if A offers a reward of $100 to
the person who finds and returns A’s missing cat. If B finds and returns the cat to A, A would be
bound to pay B the $100 reward. This is a unilateral contract.

Intention to Create Legal Relations

It is essential to have this element in a contract. It is a necessity of the intention to create legal
relations although the Contracts Act 1950 is silent on the intention to create legal relations as one
of the requirements of a valid contract. This element would have an agreement which is not a
contract in the strict sense unless it is the common intention of the parties that it should be legally
enforceable. If there is no intention to create legal relations in a contract, the contract could be
subject to a lawsuit. For example, when there is a contract or an agreement made between the
parent and the children. If the parent passes away, the children would have whatever property or
possession which is left by the parent.

Certainty

Another main element in a contract would be certainty. The terms and regulations being made in
a contract should be stated clearly and understood by the parties of the contract. If the agreement
is not certain, it would be no longer valid. For example, if the guest wants to stay in a hotel, , the
guest needs to inform how many days he or she is staying at the hotel, the type of room, and also
the date when he or she are going stay and the number of days he or she is staying.

Capacity

Capacity in a contract is the parties to the contract must have the legal capacity to do so. 18 years
old is stated as the age of a major. Minors who are people below the age of eighteen have no
capacity to enter into contracts. Therefore, insane people or people with unsound minds also
cannot enter into any valid contracts. For example, a person who is at the age of sixteen years old
could not stay at a hotel. The hotel staff would not allow having the person who is sixteen years
old to stay at the hotel since that person is not eighteen years old or above. For the person to stay
at the hotel, he or she must have a guardian who is above eighteen years old or a parent to
accompany him or her to stay in the hotel.

Conclusion of the elements in a valid contract

Therefore it is important to have the main elements in a contract. Only if there are all the main
elements in a contract then it would be legally valid to make a contract. People should take
precaution in making a contract to make sure that the parties would be in agreement with the
terms made in a contract.

With close reference to S.20 of the Contracts act, 2010 and relevant case law, discuss the rules
governing consideration.
The Contracts Act of Uganda. Section 1 of the Contract Act defines ‘consideration’ to mean a
right, interest, profit or benefit accruing to one party or forbearance, detriment, loss or
responsibility given, suffered or undertaken by the other party.

The same section defines ‘consideration for a promise’ means where, at the desire of a promisor,
a promisee or any other person does or abstains from doing or promises to do or to abstain from
doing something;

LUSH J. in Currie v Misa (1875) LR 10 Exch 153 referred to consideration as consisting of a

detriment to the promisee or a benefit to the promisor:"... some right, interest, 15profit or benefit
accruing to one party, or some forbearance, detriment, loss or responsibility given, suffered or
undertaken by the other."

Black law dictionary 8th edition defines consideration as something (such as an act, a
forbearance, or a return promise) bargained for and received by a promisor from a promisee;
that which motivates a person to do something, especially to engage in a legal act.

Section 20 of the contracts act provides for effect of lack of or failure of consideration.

(1) An agreement made without consideration is void except where the agreement—

(a) is expressed in writing and registered under the Registration of Documents Act and is made
on account of natural love and affection between parties standing in a near relation to each
other;

(b) is a promise to compensate, wholly or in part, a person who has already voluntarily done
something for the promisor or something which the promisor was legally compellable to do; or

(c) is a promise, made in writing and signed by the person responsible for it or by the agent of
that person, to pay wholly or in part a debt for which a creditor may have enforced payment but
is restricted by the Limitation Act.

(2) Nothing in this section shall affect the validity of any gift given by a donor to a donee.

(3) An agreement to which the consent of a promisor is freely given is not void merely because
the consideration is inadequate.
(4) Notwithstanding sub section (3), the inadequacy of consideration may be taken into account
by the court in determining whether the consent of a promisor was freely given.

Consideration must not be past.

If one party voluntarily performs an act, and the other party then makes a promise after the act
done, such subsequent act is said to be past consideration. The rule is that past consideration is
no consideration and the same cannot be used to enforce the contract. For example, A gives B a
lift from Kampala to Gulu in his car. On arrival, B promises to give A Ug. Shs. 200,000/=
towards the fuel. A cannot enforce this promise as his consideration, giving B a lift, is past. In
the case of Re McArdle (1951) Ch 669 Majorie Mc Ardle carried out certain improvements and
repairs on a house for the defendant. After the work had been carried out the defendant promised
that in consideration of you carrying out the repairs would pay extra £480 after selling the house
which he did not fulfil and the plaintiff sued for breach of contract. It was held that the promise
to make payment came after the consideration had been performed therefore the promise to make
payment was not binding. Past consideration is not valid and the claim failed.

Consideration must be sufficient but need not be adequate.

Provided consideration has some value, the courts will not investigate its adequacy. Where
consideration is recognised by the law as having some value, it is described as "real" or
"sufficient “consideration. The courts will not investigate contracts to see if the parties have got
equal value. Example, when X offers to sale to Y his Lexus motor vehicle 2013 model at the
price of Ug. Shs. 30,000,000/= Y pays the said purchase price. After paying for the vehicle, X
realises that he has sold his vehicle cheaply below market price. Shs. 300,000,000/=. X cannot
come back to Y and asks to refund 30m and have the vehicle back on the ground that Y had
bought it cheaply. Refer and read the case of Chappel v Nestle [1960] AC 87, Thomas v Thomas.

The plaintiff’s deceased husband had decreed that upon his death, she should occupy the
matrimonial home as long as she paid for it one pound a year. It was held that the husband’s
wishes and the love underlying those wishes wouldn’t amount to consideration at law and
therefore the one pound to be paid by the woman rendered the contract enforceable.
Hassanali Isa v Jeraj Produce Store the defendant took his motorbike to the plaintiff’s garage for
repair and he abandoned it for two years. When he finally came to collect it, he was presented
with a bill for repairs and storage which was almost equivalent to the value of the bike and the
repairer refused to release that bike unless that amount was paid. The repairer was given a
cheque, the owner was given the bike after which he countermanded the cheque and the plaintiff
sued. In deciding that the defendant was bound to pay the value of the cheque, it was pointed out
that it wasn’t for the court to reconsider whether the sum paid in the cheque was fair payment for
the services rendered. It should be noted however that the inadequacy of considerationmay be
evidence of fraud, duress, undue influence or mistake which may therefore nullify this
consideration. See section 20(4) of the Contracts Act, 2010.

Consideration must move from the promisee.

The person who wishes to enforce the contract must show that they provided consideration. The
promisee must show that consideration "moved from" (i.e., was provided by) him. The law of
contract only deals with the parties to the contract and does not entertain a stranger to the
contract. A stranger to the contract, who has not finished consideration cannot enforce the
contract. In the case of Tweddle v Atkinson [1861] EWHC QB J57, a couple were getting
married. The father of the bride entered an agreement with the father of the groom that they
would each pay the couple a sum of money. Both parents died before making good of their
promise. The groom made a claim against the executor of the will which claim failed: The groom
was not party to the agreement and the consideration did not move from him.

Therefore, he was not entitled to enforce the contract. In order to enforce a contract, one must
prove that he or she has furnished consideration.

Performance of the existing public duty is not sufficient consideration.

If someone is under a public duty to do a particular task, then agreeing to do that task is not
sufficient consideration for a contract. A good example is when one promises a reward of Ug.
Shs. 5,000,000/ to anyone who arrests the thief and recovered the stolen items. When the police
officer on duty arrests the said thief and recovers the stolen items, he or she cannot claim the said
reward because it was his or her duty to arrest the thief and recover the stolen items. Equally
whenever, someone promises to do something they are already bound to do under a contract, that
is not valid consideration. In the case of Stilk v Myrick [1809] EWHC KB J58, the claimant was
a seaman on a voyage from London to the Baltic and back. He was to be paid £5 per month.
During the voyage, two of the 12 crew deserted. The captain promised the remaining crew
members that if they worked the ship undermanned as it was back to London, he would divide
the wages due to the deserters between them. The claimant agreed. The captain never made the
extra payment promised. It was held that the claimant was under an existing duty to work the
ship back to London and undertook to submit to all the emergencies that entailed. Therefore, he
had not provided any consideration for the promise for extra money. Consequently, he was
entitled tonothing. However, when someone exceeds their public duty, then this may be valid
consideration. In the case of Glasbrook Bros v Glamorgan County Council [1925] AC 270, the
defendant owners of a colliery asked the police to provide protection during a miner's strike. The
police provided the protection as requested and provided the man power as directed by the
defendants although they disputed the level of protection required to keep the peace. At the end
of the strike, the police submitted an invoice to cover the extra costs of providing the protection.
The defendants refused to pay arguing that the police were under an existing public duty to
provide protection and keep the peace. It was held that in providing additional officers to that
required, the police had gone beyond their existing duty. They were therefore entitled to
payment.

Part payment of a debt is not sufficient consideration.

The general rule is that when someone owes a sum of money to another and agrees to pay part of
the debt settlement, such part payment is not sufficient consideration. This is a common law rule
propounded in Pinnels Case (1602) 5 CoRep 117a) where it was observed that part-payment of a
debt is not good consideration for a promise to forgo the balance. Thus, if A owes B Ug.Shs.
10,000,000/= and B accepts Ug. Shs. 1,000,000/= in full satisfaction on the due date, there is
nothing to prevent B from claiming the balance at a later date, since there is no consideration
proceeding from A to enforce the promise of B to accept part-payment. This is because he is
already bound to pay the full amount. In Pinnels Case (1602), Cole owed Pinnel £8-10s-0d
(£8.50) which was due on 11 November. At Pinnels request, Cole payed £5-2s-2d (£5.11) on 1
October, which Pinnel accepted in full settlement of the debt. Pinnel sued Cole for the amount
owed. It was held that part-payment in itself was not consideration.
Although part payment of a debt is not valid consideration for a promise to forebear the balance,
sometimes it may be when at the promisor's request part payment is made; before the due date,
with a chattel, to a different destination, is paid by a third party.

Forbearance to sue is sufficient consideration.

If one person has a valid claim against another (in contract or tort) but promises to forbear from
enforcing it, that will constitute valid consideration if made in return for a promise by the other
to settle the claim. See Alliance Bank v Broom (1864) 2 Dr&Sm 289

Consideration must be legal.

Consideration cannot be something or some act which is illegal, immoral or contrary to public
morals. See e.g. Wyatt Vs. Kreglinger and Fernau (1933). Consideration must be requested.
There must be express or implied request by promisor to promise for consideration. If
consideration is not requested for, then it will be a mere gift.

The Purpose of Consideration

This chapter continues our inquiry into whether the parties created a valid contract. "The
Agreement", we saw that the first requisite of a valid contract is an agreement: offer and
acceptance. In this chapter, we assume that agreement has been reached and concentrate on one
of its crucial aspects: the existence of consideration. Which of the following, if any, is a
contract?

Betty offers to give a book to Lou. Lou accepts.

Betty offers Lou the book in exchange for Lou’s promise to pay twenty-five dollars. Lou accepts.

Betty offers to give Lou the book if Lou promises to pick it up at Betty’s house. Lou agrees.

In American law, only the second situation is a binding contract, because only that contract
contains consideration, a set of mutual promises in which each party agrees to give up something
to the benefit of the other. This chapter will explore the meaning and rationale of that statement.
The question of what constitutes a binding contract has been answered differently throughout
history and in other cultures. For example, under Roman law, a contract without consideration
was binding if certain formal requirements were met. And in the Anglo-American tradition, the
presence of a seal—the wax impression affixed to a document—was once sufficient to make a
contract binding without any other consideration. The seal is no longer a substitute for
consideration, although in some states it creates a presumption of consideration; in forty-nine
states, the Uniform Commercial Code (UCC) has abolished the seal on contracts for the sale of
goods. (Louisiana has not adopted UCC Article 2.)

Whatever its original historical purposes, and however apparently arcane, the doctrine of
consideration serves some still-useful purposes. It provides objective evidence for asserting that
a contract exists; it distinguishes between enforceable and unenforceable bargains; and it is a
check against rash, unconsidered action, against thoughtless promise making. Lon L. Fuller,
“Consideration and Form,” Columbia Law Review 41 (1941): 799.

A Definition of Consideration

Consideration is said to exist when the promisor receives some benefit for his promise and the
promisee gives up something in return; it is the bargained-for price you pay for what you get.
That may seem simple enough. But as with much in the law, the complicating situations are
never very far away. The “something” that is promised or delivered cannot be just anything, such
as a feeling of pride, warmth, amusement, or friendship; it must be something known as a legal
detriment—an act, forbearance, or a promise of such from the promisee. The detriment need not
be an actual detriment; it may in fact be a benefit to the promisee, or at least not a loss. The
detriment to one side is usually a legal benefit to the other, but the detriment to the promisee
need not confer a tangible benefit on the promisor; the promisee can agree to forego something
without that something being given to the promisor. Whether consideration is legally sufficient
has nothing to do with whether it is morally or economically adequate to make the bargain a fair
one. Moreover, legal consideration need not even be certain; it can be a promise contingent on an
event that may never happen. Consideration is a legal concept, and it centers on the giving up of
a legal right or benefit.
Consideration has two elements. The first, as just outlined, is whether the promisee has incurred
a legal detriment given up something, paid some “price,” though it may be, for example, the
promise to do something, like paint a house. (Some courts although a minority take the view that
a bargained-for legal benefit to the promisor is sufficient consideration.) The second element is
whether the legal detriment was bargained for: did the promisor specifically intend the act,
forbearance, or promise in return for his promise? Applying this two-pronged test to the three
examples given at the outset of the chapter, we can easily see why only in the second is there
legally sufficient consideration. In the first, Lou incurred no legal detriment; he made no pledge
to act or to forbear from acting, nor did he in fact act or forbear from acting. In the third
example, what might appear to be such a promise is not really so. Betty made a promise on a
condition that Lou comes to her house; the intent clearly is to make a gift.

The Concept of Legal Sufficiency

As suggested in Section 11.1 "General Perspectives on Consideration", what is required in

contract is the exchange of a legal detriment and a legal benefit; if that happens, the
consideration is said to have legal sufficiency.

Actual versus Legal Detriment

Suppose Phil offers George $500 if George will quit smoking for one year. Is Phil’s promise
binding? Because George is presumably benefiting by making and sticking to the agreement—
surely his health will improve if he gives up smoking—how can his act be considered a legal
detriment? The answer is that there is forbearance on George’s part: George is legally entitled to
smoke, and by contracting not to, he suffers a loss of his legal right to do so. This is a legal
detriment; consideration does not require an actual detriment.

Adequacy of Consideration

Scrooge offers to buy Caspar’s motorcycle, worth $700, for $10 and a shiny new fountain pen
(worth $5). Caspar agrees. Is this agreement supported by adequate consideration? Yes, because
both have agreed to give up something that is theirs: Scrooge, the cash and the pen; Caspar, the
motorcycle. Courts are not generally concerned with the economic adequacy of the consideration
but instead with whether it is present. As Judge Richard A. Posner puts it, “To ask whether there
is consideration is simply to inquire whether the situation is one of exchange and a bargain has
been struck. To go further and ask whether the consideration is adequate would require the court
to do what…it is less well equipped to do than the parties—decide whether the price (and other
essential terms) specified in the contract are reasonable.”Richard A. Posner, Economic Analysis
of Law (New York: Aspen, 1973), 46. In short, “courts do not inquire into the adequacy of
consideration.”

Of course, normally, parties to contracts will not make such a one-sided deal as Scrooge and
Caspar’s. But there is a common class of contracts in which nominal consideration—usually one
dollar—is recited in printed forms. Usually these are option contracts, in which “in consideration
of one dollar in hand paid and receipt of which is hereby acknowledged” one party agrees to hold
open the right of the other to make a purchase on agreed terms. The courts will enforce these
contracts if the dollar is intended “to support a short-time option proposing an exchange on fair
terms.”Restatement (Second) of Contracts, Section 87(b). If, however, the option is for an
unreasonably long period of time and the underlying bargain is unfair (the Restatement gives as
an example a ten-year option permitting the optionee to take phosphate rock from a widow’s
land at a per-ton payment of only one-fourth the prevailing rate), then the courts are unlikely to
hold that the nominal consideration makes the option irrevocable.

Because the consideration on such option contracts is nominal, its recital in the written
instrument is usually a mere formality, and it is frequently never paid; in effect, the recital of
nominal consideration is false. Nevertheless, the courts will enforce the contract—precisely
because the recital has become a formality and nobody objects to the charade. Moreover, it
would be easy enough to upset an option based on nominal consideration by falsifying oral
testimony that the dollar was never paid or received. In a contest between oral testimonies where
the incentive to lie is strong and there is a written document clearly incorporating the parties’
agreement, the courts prefer the latter. However, as Section 11.4.1 "Consideration for an
Option", Board of Control of Eastern Michigan University v. Burgess, demonstrates, the state
courts are not uniform on this point, and it is a safe practice always to deliver the consideration,
no matter how nominal.

Applications of the Legal Sufficiency Doctrine

This section discusses several common circumstances where the issue of whether the
consideration proffered (offered up) is adequate.

Threat of Litigation: Covenant Not to Sue

Because every person has the legal right to file suit if he or she feels aggrieved, a promise to
refrain from going to court is sufficient consideration to support a promise of payment or
performance. In Dedeaux v. Young, Dedeaux purchased property and promised to make certain
payments to Young, the broker.Dedeaux v. Young, 170 So.2d 561 (1965). But Dedeaux
thereafter failed to make these payments, and Young threatened suit; had he filed papers in court,
the transfer of title could have been blocked. To keep Young from suing, Dedeaux promised to
pay a 5 percent commission if Young would stay out of court. Dedeaux later resisted paying on
the ground that he had never made such a promise and that even if he had, it did not amount to a
contract because there was no consideration from Young. The court disagreed, holding that the
evidence supported Young’s contention that Dedeaux had indeed made such a promise and
upholding Young’s claim for the commission because “a request to forbear to exercise a legal
right has been generally accepted as sufficient consideration to support a contract.” If Young had
had no grounds to sue—for example, if he had threatened to sue a stranger, or if it could be
shown that Dedeaux had no obligation to him originally—then there would have been no
consideration because Young would not have been giving up a legal right. A promise to forebear
suing in return for settlement of a dispute is called a covenant not to sue (covenant is another
word for agreement).

Accord and Satisfaction Generally

Frequently, the parties to a contract will dispute the meaning of its terms and conditions,
especially the amount of money actually due. When the dispute is genuine (and not the
unjustified attempt of one party to avoid paying a sum clearly due), it can be settled by the
parties’ agreement on a fixed sum as the amount due. This second agreement, which substitutes
for the disputed first agreement, is called an accord, and when the payment or other term is
discharged, the completed second contract is known as an accord and satisfaction. A suit brought
for an alleged breach of the original contract could be defended by citing the later accord and
satisfaction.
An accord is a contract and must therefore be supported by consideration. Suppose Jan owes
Andy $7,000, due November 1. On November 1, Jan pays only $3,500 in exchange for Andy’s
promise to release Jan from the remainder of the debt. Has Andy (the promisor) made a binding
promise? He has not, because there is no consideration for the accord. Jan has incurred no
detriment; she has received something (release of the obligation to pay the remaining $3,500),
but she has given up nothing. But if Jan and Andy had agreed that Jan would pay the $3,500 on
October 25, then there would be consideration; Jan would have incurred a legal detriment by
obligating herself to make a payment earlier than the original contract required her to. If Jan had
paid the $3,500 on November 11 and had given Andy something else agreed to—a pen, a keg of
beer, a peppercorn—the required detriment would also be present.

Let’s take a look at some examples of the accord and satisfaction principle. The dispute that
gives rise to the parties’ agreement to settle by an accord and satisfaction may come up in several
typical ways: where there is an unliquidated debt; a disputed debt; an “in-full-payment check”
for less than what the creditor claims is due; unforeseen difficulties that give rise to a contract
modification, or a novation; or a composition among creditors. But no obligation ever arises—
and no real legal dispute can arise—where a person promises a benefit if someone will do that
which he has a preexisting obligation to, or where a person promises a benefit to someone not to
do that which the promisee is already disallowed from doing, or where one makes an illusory
promise.

Settling an Unliquidated Debt

An unliquidated debt is one that is uncertain in amount. Such debts frequently occur when people
consult professionals in whose offices precise fees are rarely discussed, or where one party
agrees, expressly or by implication, to pay the customary or reasonable fees of the other without
fixing the exact amount. It is certain that a debt is owed, but it is not certain how much.
(A liquidated debt, on the other hand, is one that is fixed in amount, certain. A debt can be
liquidated by being written down in unambiguous terms—“IOU $100”—or by being
mathematically ascertainable—$1 per pound of ice ordered and 60 pounds delivered; hence the
liquidated debt is $60.)
Here is how the matter plays out: Assume a patient goes to the hospital for a gallbladder
operation. The cost of the operation has not been discussed beforehand in detail, although the
cost in the metropolitan area is normally around $8,000. After the operation, the patient and the
surgeon agree on a bill of $6,000. The patient pays the bill; a month later the surgeon sues for
another $2,000. Who wins? The patient: he has forgone his right to challenge the reasonableness
of the fee by agreeing to a fixed amount payable at a certain time. The agreement liquidating the
debt is an accord and is enforceable. If, however, the patient and the surgeon had agreed on an
$8,000 fee before the operation, and if the patient arbitrarily refused to pay this liquidated debt
unless the surgeon agreed to cut her fee in half, then the surgeon would be entitled to recover the
other half in a lawsuit, because the patient would have given no consideration—given up
nothing, “suffered no detriment”—for the surgeon’s subsequent agreement to cut the fee.

Settling a Disputed Debt

A disputed debt arises where the parties did agree on (liquidated) the price or fee but
subsequently get into a dispute about its fairness, and then settle. When this dispute is settled, the
parties have given consideration to an agreement to accept a fixed sum as payment for the
amount due. Assume that in the gallbladder case the patient agrees in advance to pay $8,000.
Eight months after the operation and as a result of nausea and vomiting spells, the patient
undergoes a second operation; the surgeons discover a surgical sponge embedded in the patient’s
intestine. The patient refuses to pay the full sum of the original surgeon’s bill; they settle on
$6,000, which the patient pays. This is a binding agreement because subsequent facts arose to
make legitimate the patient’s quarrel over his obligation to pay the full bill. As long as the
dispute is based in fact and is not trumped up, as long as the promisee is acting in good faith,
then consideration is present when a disputed debt is settled.

The “In-Full-Payment” Check Situation

To discharge his liquidated debt for $8,000 to the surgeon, the patient sends a check for $6,000
marked “payment in full.” The surgeon cashes it. There is no dispute. May the surgeon sue for
the remaining $2,000? This may appear to be an accord: by cashing the check, the surgeon seems
to be agreeing with the patient to accept the $6,000 in full payment. But consideration is lacking.
Because the surgeon is owed more than the face amount of the check, she causes the patient no
legal detriment by accepting the check. If the rule were otherwise, debtors could easily tempt
hard-pressed creditors to accept less than the amount owed by presenting immediate cash. The
key to the enforceability of a “payment in full” legend is the character of the debt. If
unliquidated, or if there is a dispute, then “payment in full” can serve as accord and satisfaction
when written on a check that is accepted for payment by a creditor. But if the debt is liquidated
and undisputed, there is no consideration when the check is for a lesser amount. (However, it is
arguable that if the check is considered to be an agreement modifying a sales contract, no
consideration is necessary under Uniform Commercial Code (UCC) Section 2-209.)

Unforeseen Difficulties

An unforeseen difficulty arising after a contract is made may be resolved by an accord and
satisfaction, too. Difficulties that no one could foresee can sometimes serve as catalyst for a
further promise that may appear to be without consideration but that the courts will enforce
nevertheless. Suppose Peter contracts to build Jerry a house for $390,000. While excavating,
Peter unexpectedly discovers quicksand, the removal of which will cost an additional $10,000.
To ensure that Peter does not delay, Jerry promises to pay Peter $10,000 more than originally
agreed. But when the house is completed, Jerry reneges on his promise. Is Jerry liable? Logically
perhaps not: Peter has incurred no legal detriment in exchange for the $10,000; he had already
contracted to build the house. But most courts would allow Peter to recover on the theory that the
original contract was terminated, or modified, either by mutual agreement or by an implied
condition that the original contract would be discharged if unforeseen difficulties developed. In
short, the courts will enforce the parties’ own mutual recognition that the unforeseen conditions
had made the old contract unfair. The parties either have modified their original contract (which
requires consideration at common law) or have given up their original contract and made a new
one (called a novation).

It is a question of fact whether the new circumstance is new and difficult enough to make a
preexisting obligation into an unforeseen difficulty. Obviously, if Peter encounters only a small
pocket of quicksand—say two gallons’ worth—he would have to deal with it as part of his
already-agreed-to job. If he encounters as much quicksand as would fill an Olympic-sized
swimming pool, that’s clearly unforeseen, and he should get extra to deal with it. Someplace
between the two quantities of quicksand there is enough of the stuff so that Peter’s duty to
remove it is outside the original agreement and new consideration would be needed in exchange
for its removal.

Creditors’ Composition

A creditors’ composition may give rise to debt settlement by an accord and satisfaction. It is an
agreement whereby two or more creditors of a debtor consent to the debtor’s paying them pro
rata shares of the debt due in full satisfaction of their claims. A composition agreement can be
critically important to a business in trouble; through it, the business might manage to stave off
bankruptcy. Even though the share accepted is less than the full amount due and is payable after
the due date so that consideration appears to be lacking, courts routinely enforce these
agreements. The promise of each creditor to accept a lesser share than that owed in return for
getting something is taken as consideration to support the promises of the others. A debtor has
$3,000 on hand. He owes $3,000 each to A, B, and C. A, B, and C agree to accept $1,000 each
and discharge the debtor. Each creditor has given up $2,000 but in return has at least received
something, the $1,000. Without the composition, one might have received the entire amount
owed her, but the others would have received nothing.

Preexisting Duty

Not amenable to settlement by an accord and satisfaction is the situation where a party has
a preexisting duty and he or she is offered a benefit to discharge it. When the only consideration
offered the promisor is an act or promise to act to carry out a preexisting duty, there is no valid
contract. As Denney v. Reppert (Section 11.4.2 "Consideration: Preexisting Obligation") makes
clear, the promisee suffers no legal detriment in promising to undertake that which he is already
obligated to do. Where a person is promised a benefit not to do that which he is already
disallowed from doing, there is no consideration. David is sixteen years old; his uncle promises
him $50 if he will refrain from smoking. The promise is not enforceable: legally, David already
must refrain from smoking, so he has promised to give up nothing to which he had a legal right.
As noted previously, the difficulty arises where it is unclear whether a person has a preexisting
obligation or whether such unforeseen difficulties have arisen as to warrant the recognition that
the parties have modified the contract or entered into a novation. What if Peter insists on
additional payment for him to remove one wheelbarrow full of quicksand from the excavation?
Surely that’s not enough “unforeseen difficulty.” How much quicksand is enough?

Illusory Promises

Not every promise is a pledge to do something. Sometimes it is an illusory promise, where the
terms of the contract really bind the promisor to give up nothing, to suffer no detriment. For
example, Lydia offers to pay Juliette $10 for mowing Lydia’s lawn. Juliette promises to mow the
lawn if she feels like it. May Juliette enforce the contract? No, because Juliette has incurred no
legal detriment; her promise is illusory, since by doing nothing she still falls within the literal
wording of her promise. The doctrine that such bargains are unenforceable is sometimes referred
to as the rule of mutuality of obligation: if one party to a contract has not made a binding
obligation, neither is the other party bound. Thus if A contracts to hire B for a year at $6,000 a
month, reserving the right to dismiss B at any time (an “option to cancel” clause), and B agrees
to work for a year, A has not really promised anything; A is not bound to the agreement, and
neither is B.

The illusory promise presents a special problem in agreements for exclusive dealing, outputs,
and needs contracts.

Exclusive Dealing Agreement

In an exclusive dealing agreement, one party (the franchisor) promises to deal solely with the
other party (the franchisee)—for example, a franchisor-designer agrees to sell all of her specially
designed clothes to a particular department store (the franchisee). In return, the store promises to
pay a certain percentage of the sales price to the designer. On closer inspection, it may appear
that the store’s promise is illusory: it pays the designer only if it manages to sell dresses, but it
may sell none. The franchisor-designer may therefore attempt to back out of the deal by arguing
that because the franchisee is not obligated to do anything, there was no consideration for her
promise to deal exclusively with the store.

Courts, however, have upheld exclusive dealing contracts on the theory that the franchisee has an
obligation to use reasonable efforts to promote and sell the product or services. This obligation
may be spelled out in the contract or implied by its terms. In the classic statement of this concept,
Judge Benjamin N. Cardozo, then on the New York Court of Appeals, in upholding such a
contract, declared:

It is true that [the franchisee] does not promise in so many words that he will use reasonable
efforts to place the defendant’s endorsements and market her designs. We think, however, that
such a promise is fairly to be implied. The law has outgrown its primitive stage of formalism
when the precise word was the sovereign talisman, and every slip was fatal. It takes a broader
view today. A promise may be lacking, and yet the whole writing may be “instinct with an
obligation,” imperfectly expressed.…His promise to pay the defendant one-half of the profits and
revenues resulting from the exclusive agency and to render accounts monthly was a promise to
use reasonable efforts to bring profits and revenues into existence. Otis F. Wood v. Lucy, Lady
Duff-Gordon, 118 N.E. 214 (1917).

The UCC follows the same rule. In the absence of language specifically delineating the seller’s
or buyer’s duties, an exclusive dealing contract under Section 2-306(2) imposes “an obligation
by the seller to use best efforts to supply the goods and by the buyer to use best efforts to
promote their sale.”

Outputs Contracts and Needs Contracts

A similar issue arises with outputs contracts and needs contracts. In an outputs contract, the
seller say a coal company agrees to sell its entire yearly output of coal to an electric utility. Has it
really agreed to produce and sell any coal at all? What if the coal-mine owner decides to shut
down production to take a year’s vacation is that a violation of the agreement? Yes. The law
imposes upon the seller here a duty to produce and sell a reasonable amount. Similarly, if the
electric utility contracted to buy all its requirements of coal from the coal company a needs
contract could it decide to stop operation entirely and take no coal? No, it is required to take a
reasonable amount.
Reference

Alchian, A. A., & Demsetz, H. (1972). Production, information costs, and economic
organization. American Economic Review, 62, 777–795.

American Bar Association. (2004). Corporate director’s guidebook (4th ed.). Committee on
Corporate Laws, ABA Section of Business Law. Chicago: American Bar Association.

American Law Institute. (1994). Principles of corporate governance: Analysis and

recommendations. Philadelphia: Author.

Bainbridge, S. M. (1993). In defense of the shareholder wealth maximization norm: A reply to

Professor Green. Washington and Lee Law Review, 50, 1423.