Consideration and estoppel

     Except in some special cases, the formation of a contract requires both mutual assent by two or more persons to an exchange of promises (bilateral contract) or an exchange of a promise for performance (unilateral contract) and a consideration.  R.2d Contracts 17, 3.  Here we explore the requirement of consideration.  We explore the requirement of mutual assent in Commentary.Mutual assent.  We also explore here some special cases in which promises are enforced without mutual assent to an exchange or a consideration, the most significant of which are cases involving promissory estoppel.    

     Consideration:  R.2d Contracts 71 articulates the requirement of consideration and R.2d Contracts 72-81 flesh out the concept.  Here are some introductory illustrations and an introduction to specific issues and terminology. 

     1.  Gratuitous promise:  A promises her friend B that A will split A's lottery winnings 50/50 with B,  i.e. A promises to make a gift.  A is a "promisor" and B is a "promissee."  But there is no contract because in making the promise A did not bargain for either a performance by B or a return promise from B, i.e. A's promise was not supported by consideration.  If A wins the lottery but declines to split the lottery winnings with B, the friendship may end but B has no legal claim against A.

     Sometimes the conclusion that there is no consideration for a promise is expressed by saying that "there is not sufficient consideration to support the promise."  This expression should not be confused with a similar sounding expression "adequacy of consideration," which refers to the value of the consideration given.  A court will inquire into the sufficiency of consideration, that is, it will determine whether there was any consideration to support a promise. But, except where a party seeks to invoke equitable remedies (e.g. specific performance), if a court determines that there is any consideration (i.e. sufficient consideration), it will not inquire into the adequacy of consideration, that is, it will not ask whether the consideration has a value commensurate with or equivalent to the value of the promise that it supports, although it may inquire whether a recited nominal consideration was actually given (as in First National Bancshares of Beloit, Inc. v. Geisel).  Note, however, that a court may find part or all of a contract unconscionable in part because it perceives the contract to be substantively unfair, thus in part questioning adequacy of consideration under another guise.  See Commentary.Unconscionability.

     2.  Conditional gratuitous promise:   A promises her friend B that A will split lottery winnings 50/50 with B if B will come to A's house to pick up the money.  A wins the lottery but declines to split the lottery winnings with B when B shows up at A's house.   There is no contract because in making the promise A did not bargain for either a performance by B or a return promise from B, i.e. A's promise was not supported by consideration.  A's statement that B should show up at A's house to collect the money is simply a condition to the promised gift, not a bargained for performance.  This is a variation of a famous hypothetical posed by Professor Williston:  "If a benevolent man says to a tramp: 'If you go around the corner to the clothing shop there, you may purchase an overcoat on my credit,' no reasonable person would understand that the short walk was requested as the consideration for the promise, but that in the event of the tramp going to the shop the promisor would make him a gift. . . . [I]t must be held that the walk . . . was merely a condition of a gratuitous promise."

     3.  Executed gift:  A promises her friend B that A will split A's lottery winnings 50/50 with B.  A wins the lottery and splits the lottery winnings with B, but later demands return of the money from B.  B declines to return the money.  Under property law, A, a "donor," may not recover the money from B, a "donee," because one may not revoke an "executed (i.e. completed) gift." 

     4.  Bargained for exchange of promise for performance:  A promises her friend B that A will split A's lottery winnings 50/50 with B if B arranges a job interview for A with B's boss.  B arranges the interview.  A wins the lottery but declines to split the earnings with B.   There is a "unilateral contract" (a promise made in exchange for a performance) because A bargained for B's performance in exchange for A's promise and B performed in exchange for A's promise.  B has a claim against A for breach of contract.  The result would be the same in the following case:  A promises a 50/50 split of lottery winnings in exchange for B placing A's resume on the boss's desk. B places the resume on the boss's desk but the boss never calls A.  A wins the lottery but declines to share winnings as promised.  Even though B's act in placing the resume on the boss's desk may have been a trivial act, B would have a claim for breach of contract because the court will not inquire into the adequacy of consideration.  Note that A would have no claim against B for breach of contract had B not undertaken the requested act.  A did not request that B promise anything.  Instead, A requested B to perform an act (arranging an interview, or placing a resume on a desk).  A's offer could only be accepted by performance of the act and the failure of B to so act would simply be a failure to accept an offer. 

     In many jurisdictions, the result above would not be the same if A's promise were made out of gratitude for B's having previously arranged an interview with B's boss or previously placed a resume on the boss's desk.  In such a case there is no bargain, but rather an afterthought in the form of a promise of a gift to express gratitude for past favors.  If A renegs on the promise, most courts will not recognize B's claim for breach of contract.  The cases frequently describe the result by saying that "past consideration," even if grounded in moral obligation, does not support a promise.  In Passante v. McWilliam, application of this principle deprives a lawyer of $33 million for his good deed.  

    5.  Bargained for exchange of promise for promise:   A promises her friend B that A will split lottery winnings 50/50 with B if B promises to check the announcement of lottery winners while A is out of the country and promises to notify A if A has won.  B makes those promises. There is a "bilateral contract" (a promise or promises made in exchange for a promise or promises) in which A and B are each a promisor and a promisee.  A is a promisor and B is a promissee with respect to A's promise to split lottery winnings.  B is a promisor and A is a promissee with respect to B's promise to check the announcement of lottery winners and notify A.  Both Wood v. Lucy, Lady Duff-Gordon and Allegheny College v. The National Chautauqua County Bank of Jamestown demonstrate the lengths to which a court may go to find that one party's promise has been exchanged for the promise of another. 

     With respect to bilateral contracts one often hears the expression that "the contract is supported by consideration."   That expression is imprecise.  The issue of consideration (like the issue of mutual assent) will arise, if at all, where one party seeks to escape liability for breach of contract after failing to perform a promise.  Accordingly, to frame the issue and resulting conclusion precisely, one should ask:  "Who is seeking to avoid liability for breach of contract?"  Suppose that A declines to split the lottery winnings after B has performed B's promises, and A is seeking to avoid liability for breach of contract.  In such a case we say that A's promise was supported by consideration (the return promises from B) and therefore, absent some other defense, B has a claim for breach of contract against A.  Suppose instead that B fails to perform her promises and is seeking to avoid liability for breach of contract.  In such a case we say that B's promises were supported by consideration (the promise made by A) and therefore, absent some other defense, A has a claim for breach of contract against B. 

     In Hamer v. Sidway, a classic case seemingly involving a bilateral contract, the opinion describes consideration as a "benefit to the promisor" or a "detriment to the promisee."  While R.2d Contracts and some jurisdictions have abandoned this vocabulary (see R.2d Contracts 71 and 79), it remains in vogue elsewhere, whether in unilateral or bilateral contracts.  

     6.  Bargained for exchange of promise for illusory promise:  A promises her friend B that A will split lottery winnings 50/50 with B if B promises to check the announcement of lottery winners while A is out of the country and promises to notify A if A has won.  B replies:   "I promise that I'll do that if I get around to it."  B's promise is an illusion, although stated in the language of promise, because B really has made no commitment to A whatsoever.  See R.2d Contracts 2(1), Cmt. e and Illus. 3.  Illusory promises are not sufficient consideration.  Thus, B would have no claim for breach of contract against A if A reneged on the promise to share lottery winnings because A's promise was not supported by consideration.  A would have no claim for breach of contract against B if B failed to check the announcement of lottery winners and notify A, not because B's promise is unsupported by consideration but because B has not made a promise.  Strong v. Sheffield considers whether a wife's promise to make good on her husband's debt, for which she was not otherwise liable, is supported by consideration where the creditor promises not to collect "until such time as I want my money." 

     Note, however, that under contemporary case and statutory law, a promise may be qualified or conditioned to a significant extent before courts will find a promise illusory.  See UCC 2-306, which covers contracts in which a seller and buyer of goods agree that the seller shall purchase and the buyer shall sell all of the buyer's output during a stated period of time ("output contract") or agree that a seller shall purchase and the buyer shall supply all of the seller's requirements during a stated period of time ("requirements contract").  Indiana-Amercian Water Co., Inc. v. Town of Seelyville applies UCC 2-306 to a town's contract to purchase its requirements for water from a water company.  Mattei v. Hopper considers a contract in which the developer of a shopping center conditions his obligation to purchase a parcel of land for the shopping center upon his obtaining "satisfactory leases." 

     Special cases:  Courts have come to enforce some promises in the absence of consideration.  Most prominent among the types of cases in which they have done so are those in which there is said to be a promissory estoppel (literally meaning that a person who has made a promise is estopped, i.e. prevented, from denying the making and enforcement of the promise under stated circumstances). R.2d Contracts 90 articulates the principle in what is perhaps one of the most important and influential sections of the Restatement of Contracts (originally appearing as section 90, in slightly different form, in the first Restatement of Contracts).  As suggested by Kirksey v. Kirksey and Ricketts v. Scothorn, many of the early promissory estoppel cases involved promised gifts within the family, often later resisted by executors of the deceased promisor who were concerned about fiduciary duties owed to the promisor's heirs.  The use of promissory estoppel mushroomed in the 20th century, so much so as to contribute to Professor Grant Gilmore's thesis that contract was being swallowed by a theory of obligation, reliance on a promise, sounding in tort.  G.Gilmore, Death of Contract.  Courts applied the doctrine even in commercial cases where both parties anticipated that a contract would be formed by mutual promises (compare Drennan v. Star Paving Co. with James Baird Co. v. Gimbel Bros., Inc.).  Pop's Cones, Inc. v. Resorts International Hotel, Inc. and the dissent in Garcia v. Von Micsky suggest the enormous range of its potential application.  

     Some special rules have also evolved to address three common types of transactions: option contracts, modifications of executory contracts, and settlement of claims.  We introduce these transactions and the issues they pose in Commentary.Option Contracts, Commentary.Pre-existing duty, and Commentary.Settlement of claims, respectively, and explore them further in several problems and cases. 

     Supplementary reading:  Farnsworth, 2.2 - 2.10.