The Role of Consideration in Contracts

IMoney Exchangen contractual disputes, a basic question that often arises is whether or not a contract was even formed among the disputing parties. To show that a contract was indeed entered, a person must show that the contract’s formation met certain conditions. The three elements of a contract are:

  1. offer,
  2. acceptance, and
  3. consideration

What is Consideration?

Consideration must be provided by each party to a contract, and it is a thing, action, or promise that has value to the person receiving said thing, action, or promise.

Examples of consideration include:

  • money,
  • property,
  • employment,
  • a promise to undertake an action, or
  • a promise to abstain from an action in which a person had a right to engage (also known as forbearance).

Thus, certain promises or actions cannot qualify as consideration, and they cannot be relied upon to complete the formation of a contract. In such cases, the agreement reached was usually a gift, illusory, and/or an agreement that’s unenforceable for illegality (such as blackmail).

How Does Consideration Affect an Agreement?

Gifts (in contrast to contracts) occur when the promisor tells another they will give that person something of value without expecting any consideration in return. An easy-to-understand example would be a grandmother telling an adult grandson that she will give him $100.00 for his birthday. If the grandmother does not do so, however, the grandson cannot claim a contract was breached, because the grandmother asked for nothing in return or any kind of performance.

Such promises can become contracts, however, if the promisor stipulates a condition the recipient must meet, such as, “If you are accepted to college this year, I will give you $5,000 cash towards your freshman college expenses.” Given the terms of the promise, the recipient would need to meet the conditions of applying to and being accepted to a college, meaning the promisor expects the recipient to accomplish certain actions before receiving the $5,000.

Illusory promises are unenforceable as contracts, often because there is no mutual or additional consideration that makes a particular promise legally binding. This failure of consideration sometimes arises in the employment context. One common example is when an employer wishes to modify an existing employee’s terms of employment and asks the employee to sign an additional “contract” agreeing to the new terms designed by the employer.

However, the “contract” will include provisions that are to the benefit of the employer, while stating something like, “In consideration of your continued employment….,” while offering the employee no additional benefits, specialized training, access to confidential information or processes, or compensation for signing the “contract.”

“Continued employment,” alone, is not consideration received by the employee from the employer, because the employee was already employed and is receiving nothing additional. Such one-sided contractual modifications, devoid of additional terms, are usually found unenforceable for want of consideration.

Relatedly, material modifications to contracts, or amendments, almost always require new consideration, since the continuing obligation of performing a promise a party was already bound to perform is not sufficient consideration. Arthur J. Gallagher & Co. v. Dieterich, 270 S.W.3d 695, 702 (Tex. App.—Dallas 2008, no pet.). However, contracts operating under the Uniform Commercial Code can be exempt from this requirement in some instances when the modification was “performed in good faith.” Allied Chem. Corp. v. De Haven, 752 S.W.2d 155, 159 (Tex. App.—Houston [14th Dist.] no pet., 1988) (citing Tex. Bus. & Com. Code § 2.209(a)).

Legal Counsel Will Help Ensure Your Contract Is Legally Enforceable

Contract formation, modification, and interpretation are tricky, which is why it’s strongly advised that you retain qualified legal counsel in drafting and reviewing any contracts to which you’re considering becoming a party.

 


Athena Ponce and the attorneys at De Leon & Washburn, P.C. are available to assist clients with business litigation issues. For more information regarding the firm’s practice areas, please visit our Practice Areas page, and please feel free to contact the attorneys at any time.

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