487: Listen and Learn -- Consideration (Contract Law)

Episode Transcript
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Lee Burgess (00:02):
Welcome back to the Law School Toolbox podcast.
Today, we have another episode ofour “Listen and Learn” series – this
one discussing consideration.
Your Law School Toolbox hosts are AlisonMonahan and Lee Burgess, that's me.
We are here to demystify the lawschool and early legal career
experience, so you'll be the bestlaw student and lawyer you can be.
We're the co-creators of the Law SchoolToolbox, the Bar Exam Toolbox, and the

(00:25):
career-related website CareerDicta.
Alison also runs TheGirl's Guide to Law School.
If you enjoy the show, pleaseleave a review or rating on
your favorite listening app.
And if you have any questions,don't hesitate to reach out to us.
You can reach us via the contactform on LawSchoolToolbox.com,
and we'd love to hear from you.
And with that, let's get started.

(00:53):
Hello, and welcome back tothe “Listen and Learn” series.
Today we will be discussing consideration- a subtopic of contract law.
Consideration is one of the mostimportant concepts in contracts,
because it is one of the threerequirements of contract formation.
A contract is validly formed when thereis offer, acceptance, and consideration.

(01:16):
Today’s episode will just focus onconsideration, but for a discussion
on offer and acceptance be sure tocheck out previous podcast episodes
we have linked to in the show notes.
With that, let’s start with the basics.
What is consideration?
At its core, considerationdeals with the committment to

(01:37):
perform a promise in the future.
There can be a valid offer, and avalid acceptance of that offer, but the
contract will not be enforceable unlessthe promisor receives consideration
from the promisee and the promiseereceives consideration from the promisor.
This means both parties mustgive consideration for there

(01:59):
to be a valid contract.
So how does a party provide consideration?

There are two tests (02:04):
bargained-for exchange and the benefit/detriment theory.
You do not need to satisfy both to havevalid consideration, you only need to
satisfy one of the tests for each party.
You can satisfy both for a singleparty, but it is not necessary.
I’ll explain each of these one by one.

(02:27):
First, bargained-for exchange is when oneparty’s promise or performance induces
the other party’s promise or performance.
This can also be known as mutualinducement, where one party induces
the other party to do something.
For example, let’s say that Stan andFiona enter into an agreement where

(02:48):
Stan promises to give Fiona a car if shegives him $10,000 There would be valid
consideration here under bargained-forexchange because Stan’s promise of a
car induced, or caused, Fiona to givehim $10,000 and Fiona giving Stan
$10,000 induced him to give Fiona a car.

(03:10):
Fiona would not give Stan $10,000 dollarswithout this agreement, she was induced
to do so because of the promise of a car.
Likewise, Stan is not giving Fiona the carout of the goodness of his heart, he is
doing it because Fiona gave him $10,000The second way to satisfy consideration

(03:32):
is through the benefit/detriment theory.
This is where there is valid considerationif there is a benefit to the promisor
or a detriment to the promisee.
In other words, there has to bea benefit to the person making
the promise or a detriment tothe person accepting the promise.
The key word here is or.

(03:52):
You do not have to have both a benefitto the promisor and a detriment to the
promisee, you only need one or the other.
Under this theory, a ‘detriment’is any relinquishment of a legal
right or an action taken that thepromisee would not otherwise take.
Try not to get confused by this.

(04:14):
It is normal to think that ‘detriment’means harm, loss, or injury.
However, a detriment can besomething beneficial to the promisee.
For example, a detrimentcould be to stop smoking.
This, although would be beneficialto the promisee, is considered a
detriment because the promisee wouldbe giving up his legal right to smoke.

(04:35):
What is the purpose of consideration?
The purpose of consideration isto separate enforceable promises
from unenforceable promises.
If there is valid consideration,then the promise is enforceable.
If there is not valid consideration,then the promise is not enforceable.
An example of a promise withoutconsideration is a gift.

(04:57):
A purely gratuitous promise isnot enforceable as a contract.
To show how gifts are not supported byconsideration, let’s look at an example.
Imagine your birthday is coming up.
I promised to give you a new laptop.
However, the day before your birthdaywe got into a big fight and I
decided to not get you the laptop.

(05:19):
You would likely be very upset about this,but would have no recourse because this is
not a promise supported by consideration.
First, there is no bargained-forexchange, or mutual inducement.
There is nothing you are doing for methat is causing me to give you the laptop.
Rather, I am doing it out ofthe goodness of my own heart.

(05:40):
Second, the benefit/detrimenttheory is not satisfied.
I, the promisor, am not gaininga benefit, and you, the promisee,
would not be incurring a detriment.
Let's see how well you understandconsideration by looking at
a couple California bar hypos.
This one is adapted from theJuly 2008 California bar:

(06:03):
"On May 1, Owner asked Builder to giveher an estimate for the cost of building
a wooden fence around her back yard.
Builder gave Owner signed writtenestimates for $4,000 for a cedar
fence, and $7,000 for a redwood fence.
Owner said she liked the idea of aredwood fence but wanted to think

(06:23):
about it before making a decision.
In any case, she wanted thefence completed by June 1.
By May 14, Builder hadstill not heard from Owner.
He was concerned he would notfinish by June 1 if he did
not start work immediately.
Thus, he bought the redwood and completedconstruction of the fence on May 24.

(06:44):
When Owner saw the completed fence,she sent Builder a letter saying, 'You
did a great job, but I never agreedto go ahead with the fence, and I
certainly hadn’t decided on redwood.'
May builder recover all or anypart of $7,000 from Owner?"
You might be thinking there is nota valid contract here because of the

(07:06):
lack of acceptance on the owner’s part.
Although that might be true, let's assumethere is a valid offer and acceptance
and focus just on consideration.
First, there would bebargained-for exchange here.
The reason builder is building the fenceis induced by Owner’s promise of money.

(07:26):
Likewise, the reason Owner is goingto give money to Builder is induced
by Builder constructing the fence.
This means there is mutual inducement,and under the bargained-for exchange
theory there is valid consideration.
Second, there is also valid considerationusing the benefit/detriment theory.
Builder is the promisor and hereceived a benefit of money from Owner.

(07:48):
In addition, Owner, the promisee,incurred a detriment because she took
an action she would not otherwisehave taken- she paid Builder money.
Remember, we do not need tosatisfy both tests to have valid
consideration, but in many instancesyou will be able to satisfy both.
Let’s look at one more.

(08:09):
This one is adapted from theJuly 2006 California bar exam:
"On Monday, Resi-Clean advertisedits house cleaning services
by hanging paper handbills ondoorknobs in residential areas.
The handbills listed the servicesavailable, gave Resi-Clean’s address
and phone number, and contained acoupon that stated, 'This coupon is

(08:32):
worth $20 off the price if you callwithin 24 hours and order a top to
bottom house cleaning for $500.'
Maria, a homeowner responding tothe handbill, phoned Resi-Clean on
the same day and said she wanteda top to bottom house cleaning.
Maria said, 'I assume that meansit would be 480 because of

(08:55):
the $20-off coupon, right?' Theemployee responded, 'That’s right.'
When Resi-Clean finished cleaningthe house, Resi-Clean billed Maria
$480 Is there valid considerationto support this agreement?"
Remember, for a contract to beenforceable, both parties must provide

(09:15):
consideration through either bargained-forexchange or the benefit/detriment theory.
In this example, both Resi-Cleanand Maria gave valid consideration
through bargained-for exchange.
The reason Resi-Clean cleaned Maria’shouse was because of her promise to pay,
and the reason Maria paid Resi-Cleanwas because they cleaned her house.

(09:36):
Now that we have a good foundation ofconsideration, let’s go a little deeper.
Not every situation where aconsideration test is satisfied will
result in enforceable consideration.
There are five situations wherethere is never valid consideration:
conditional gifts, past consideration,pre-existing legal duties, large

(09:58):
disparities, and illusory promises.
I’ll explain these one by one.
First is a conditional gift.
A conditional gift is where thepromisee incurs something that
seems like a detriment, butin reality it is just a gift.
For example, let’s look at a hypo adaptedfrom the July 2002 California bar exam:

(10:21):
"Travelco ran a promotional advertisementwhich included a contest, promising
to fly the contest winner toScotland for a one-week vacation.

The advertisement stated (10:31):
'The winner’s name will be picked at
random from the telephone bookfor this trip to Golfer’s Heaven.
If you’re in the book, you will beeligible for this dream vacation.'
Polly called the telephone company andhad her number changed from an unlisted
telephone number to a listed one.
Luckily for Polly, her name waspicked and Travelco notified her.

(10:55):
That night, Polly celebrated hergood fortune by buying and drinking
an expensive bottle of champagne.
The next day she purchased new luggage andcostly new golfing clothes for the trip.
A week later, Travelco advised Pollythat it was no longer financially able to
award the free trip that it had promised.
Can Polly sue for a breach of contract?"

(11:19):
Let’s think about this one, againjust focusing on consideration.
First we can start with Polly.
You might be thinking that thereis valid consideration under
the benefit/detriment theory.
You could make an argument that Pollyincurred a detriment of having to call the
telephone company up to change her numberto a listed one, which is an action she

(11:41):
would not have taken but for the promise.
Although this could be true, thereis still not valid consideration
because this is a conditional gift.
The reason is because Travelcodid not give any consideration.
Travelco, as the promisor,did not gain a benefit.
In addition, there is no bargained-forexchange because that detriment

(12:03):
is not the reason Travelcois giving away the free trip.
In other words, Travelco is not beinginduced by the fact that Polly put
her number as listed in the phonebook.
To have valid mutual inducement, andnot a conditional gift, there has to
be a relationship between the promisesor performances inducing each other.

(12:26):
You could be thinking there isanother route of recovery for
Polly- promissory estoppel.
Promissory estoppel can be used asa substitution for consideration.
For a further discussion on promissoryestoppel, check out one of our earlier
episodes listed in the show notes.
The next situation that invalidatesseemingly valid consideration

(12:48):
is past consideration.
Past consideration is where thepromisee’s detriment was suffered
before the promisor made the promise.
In these situations, the detrimentcould not have been induced by
the promise and as a result cannotconstitute valid consideration.
This is true unless the considerationhas substantially changed.

(13:09):
Try this example.
Sally is an independentcontractor for Publishing Co.
Her boss asked her to writea story about growing up in
the city in exchange for $500.
Sally immediately thought ofa paper she wrote in college
about that very same topic.
She quickly pulled up the story,changed a few names, and submitted it.
Did Sally give proper consideration?

(13:32):
This is a classic exampleof past consideration.
Whenever you see facts indicating thatsomething done in the past is being
used as consideration, you shoulddo a past consideration analysis.
You could be thinking that Sally suffereda detriment by writing the story.
However, the entire story was alreadywritten, meaning the detriment Sally

(13:54):
suffered was not induced by the promise.
In addition, the considerationdid not change substantially.
All Sally did was change a few names,which cannot be seen as substantial enough
to make this not past consideration.
The next situation where there isnever consideration is when there
is a pre-existing legal duty.

(14:15):
The pre-existing legal duty rule is whenthe "detriment" suffered is really just
a promise to act in the same way as thepromisee’s then existing legal obligation.
Imagine this, Joel was 22 and in college.
His uncle, Uncle Tom, wasconcerned about Joel’s grades
due to his excessive drinking.

(14:36):
Uncle Tom promised Joel if he refrainedfrom drinking alcohol for the rest
of the year he would give him $1,000.
At the end of the year Joel informedUncle Tom he refrained from drinking.
Did Joel provide valid consideration?
In this example, Joel didprovide valid consideration.

(14:57):
Joel, the promisee, suffered a detrimentby forgoing drinking alcohol for
the remainder of the year, which isa relinquishment of a legal right.
Let’s change the factsslightly to illustrate the
pre-existing legal duty rule.
This time instead of being 22 Joel is 19.
The rest of the facts stay the same.

(15:18):
If Joel was 19 there would nolonger be valid consideration
because the “detriment” he sufferedis not any more than what he was
already legally obligated to do.
In America the legal drinking age is 21.
If Joel is only 19 he is already legallyobligated to refrain from drinking,
meaning there is no valid considerationbecause it is a pre-existing legal duty.

(15:43):
The fourth situation where there isnever consideration is when there is
a large disparity in the exchange.
For example, Josie is a carfanatic and has been eyeing
Tyrone’s car for a few months now.
She finally worked up the courageand offered Tyrone a broken
record player for his mustang.
Tyrone initially agreed, but whenthe time came for the exchange

(16:06):
Tyrone backed out of the deal.
Was there proper consideration towarrant this agreement enforceable?
This example is pretty obvious.
There is not valid consideration,because the disparity between
the exchange is too large.
A broken record player isnot equal to a mustang.
The situations you see, though,will likely not be this obvious.

(16:28):
There is not a set number for whenthe disparity is too large, so it
will be a very fact-specific analysisand will depend on the arguments you
make in support of your position.
The final situation in which thereis never consideration is when
there is an illusory promise.
An illusory promise is where, afterthe agreement has been made, the terms

(16:50):
are so indefinite that the promisorhas the choice to perform or not.
Imagine this example:
Aaron’s boss sent a staff-wide emailsaying, “You will get a holiday
bonus of $5,000 if the company doeswell.” Is there valid consideration?"
There would not be valid consideration,because the statement is too indefinite.

(17:12):
What does “does well” mean?
That phrase is too vague andit leaves discretion completely
in the hands of the boss.
The boss can, then, ultimatelychoose whether they want
to give the bonuses or not.
This would be different if the emailsaid, “You will get a holiday bonus of
$5,000 if the company raises its profitmargins by 10% by the end of the year.”

(17:36):
This is no longer indefinite and theboss no longer has a choice to decide
whether to give the bonuses or not.
If the profit margins increase by10% the boss has to give the bonuses.
We are running out of time, solet’s recap what we’ve learned.
We started this episodewith what consideration is.

(17:57):
Consideration is an elementof an enforceable contract.
This means that to be enforceable, bothparties must give valid consideration.
Consideration can besatisfied in one of two ways.
First is bargained-for exchange,where the promise or performance of
one party is what induces the promiseor performance of the other party.

(18:17):
Second is the benefit/detriment theory.
This is when either thepromisor gains a benefit, or the
promisee induces a detriment.
We also talked about the five situationswhere there would never be consideration,
even if it seems like there is.
The first is a conditional gift,where you need to ask yourself
if that specific detriment isreally what induced the promisor.

(18:41):
The second is past consideration,where actions taken in the past cannot
constitute valid consideration, unlessthey have substantially changed.
The third is the pre-existing legal dutywhere it is not consideration to act
in a way you are already required to.
The fourth is when there is too largeof a disparity in the exchanges.

(19:04):
The fifth is an illusory promise, which iswhere the terms are so indefinite that the
promisor retains the choice to perform.
Alright, that’s a wrap for today.
Glad you could join me aswe discussed consideration!
If you enjoyed this episode of theLaw School Toolbox podcast, please
take a second to leave a review andrating on your favorite listening app.

(19:26):
We'd really appreciate it.
And be sure to subscribeso you don't miss anything.
If you have any questions orcomments, please don't hesitate
to reach out to myself or Alisonat lee@lawschooltoolbox.com or
alison@lawschooltoolbox.com.
Or you can always contactus via our website contact
form at LawSchoolToolbox.com.
Thanks for listening, and we'll talk soon!

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.css-14f5ked{margin:0;word-break:break-word;display:-webkit-box;-webkit-box-orient:vertical;box-orient:vertical;-webkit-line-clamp:2;overflow:hidden;}487: Listen and Learn -- Consideration (Contract Law)