Adi Said

You incurred huge expenses as a charity manager due to a false promise of a million-dollar cheque. Can you do something about it? Let’s find out. A valid contract has five essential elements: i. Valid agreement ii. Consideration iii. Occasionally, in writing iv. Capacity v. Legality In this post, we will learn about consideration. It is fundamental to forming a valid contract. We will also see if Nicole has any solutions to this problem. DEFINITION OF CONSIDERATION It means both parties must bring some value to the contract. For example, say you sign a contract with Lip to paint a house for $5000. The consideration on your part is that you bring value to Lip by painting his house, while on the part of Lip, he adds value by paying you $5000. It is necessary to form a valid contract. Consideration is bargained for in exchange; it is easy to remember this way. ACTIONS THAT DO NOT CONSTITUTE CONSIDERATION i. Gratuitous promise It does not constitute consideration because only one party to the contract brings value to it while the other party does not contribute anything in exchange. For example, gifts. Lip says to his son, “when you turn 18 years old, I will give you $5000.” It does not constitute a consideration because a son does not bring value to this contract. ii. Pre-existing duty You cannot enter into a contract if you already have a pre-existing duty to do or not do something. For instance, you cannot enter into a contract with someone not to kill the president because you already have a duty not to kill him. iii. Past consideration You cannot use past promises to form a valid new contract; it should add a new value. In other words, if someone asks you to swim in cold water for 10 minutes in exchange for $5000, you cannot say you are entitled to $5000 because you already did that yesterday. iv. Illusory Promise These are the promises over which any party to the contract has some discretion. We use our last example to understand it. If Nicole asks you to swim in cold water her way, and she alone has the discretion to decide whether you do it correctly, it is an illusory promise. It is not a valid consideration because she can deny it, even though you swim correctly. It could only be a valid consideration if she involves the third party. If Nicole asks you to swim in cold water as per American Swimming Association rules, it is not an invalid contract now that she involves the third party. So it is a little tricky to understand what is not a consideration compared to what a consideration is. We have established that a contract is not enforceable if it lacks consideration. It is a general rule, but it has certain exceptions. A court of law can enforce it in exceptional circumstances, even if it lacks the consideration to avoid injustice. EXCEPTIONAL SITUATIONS ARE BELOW. a. Promissory estoppel It is another fancy legal term. It means when one party does something based on the reliance of another party, and that particular action causes some financial detriment or loss to that party. For example, a homeowner discusses hiring a painter to paint his house. However, neither party enters into a contract. But the painter, relying on their discussion, buys some tools and new paint. The next day, the homeowner tells the painter that he no longer needs any painters. The homeowner cannot do that as per the principle of promissory estoppel. The court of law will still enforce this contract to avoid injustice. b. Charitable donations We already learned that the gifts lack consideration, due to which they are not valid contracts. But if you promise to make a gift to a charity, educational institution, etc., the court of law would generally treat it as a contract and enforce it against you because of some public policy matter. To enforce these types of contracts, a court of law may see whether the charitable institution incurred expenses due to a donation promise (promissory estoppel). So Nicole can enforce a million-dollar cheque contract against Lip. c. Debt barred by the statute of limitations. It means there is a reasonable time to obtain a remedy under the law. If someone owes you a debt and refuses to pay, you must apply for relief within a time limit. If you do not ask for a remedy within an appropriate time, your claim will become time-barred, and the court of law will not be able to provide relief. The reasonable time differs from state to state. So, if the statute of limitation renders any debt time-barred, but the person who owes it makes a good faith promise to pay it, the court will enforce it and provide you with relief even if the statute of limitation renders it time-barred. It does not matter that it lacks consideration. CONCLUSION Consideration is a prerequisite for a valid contract. A contract does not have value in the eyes of the law if it lacks the consideration requirement. For this reason, it becomes unenforceable. But in some cases, the court of law enforces contracts that do not have the consideration to avoid injustice. So the bottom line is that a contract must have consideration. Next time you enter into a contract for your business, do not forget to include a valid consideration; otherwise, it can cost your business millions of dollars.