Sunday, September 20, 2009

Initial Consideration Considerations

Consideration has always seemed to me a mountain in the law schools that is a mole hill in the practice. What is undeniable is what our Casebook states: "Whatever may be the moral obligations that arise from the making of a promise, in the Anglo-American legal system the making of a promise is insufficient by itself to result in the formation of a contract. An additional requirement is necessary—the presence of ‘consideration.'’’Casebook at 71.

In addition, what a retired Columbia Law School Professor wrote in 1958 could be written without any loss in accuracy today -- the requirement of consideration is something real and isn't going away: "The doctrine of consideration still rules us, and not from its grave. Vigorous attacks upon it began in the latter part of the nineteenth century, and continued until well toward the middle of the twentieth century. . . .If there has been any tendency of American courts to abandon, repudiate, or reform consideration, the present writer was unable to discover it. [T]he doctrine of consideration seems likely to be with us for a long time to come, and we shall therefore need to make the best of it." Edwin W. Patterson, An Apology for Consdieration, 58 Colum. L. Rev. 929 1958).

As our Casebook also mentions, supplemented by half a page of citations, is that consideration as a "feature of Anglo-American law has not been without its vigorous critics." Casebook at 71. Moreover, consideration is not a requirement of an enforceable contract outside of Anglo-American legal systems.

In other words, if we were forming the legal system from scratch, we might do away with consideration as a necessary element of a legally enforceable promise. But we're not.

So, what should we focus on?

-- Identifying when consideration is present, and when it isn't.

-- Recognizing that an imbalance in consideration is not grounds for finding a contract does not exist. An imbalance, however, may well be an indication that there's something else -- other than anything regarding consideration -- wrong with the alleged contract.

-- Recognizing the few real-world situations in which an absence of consideration genuinely is a problem.

-- Recognizing where promises or other reliance-inducing actions are grounds for legal recovery and the ways in which such legal remedies are different than, and perhaps substantially inferior to, contractual remedies.

                                                                                                                                                                                                              

3 comments:

  1. Anjela Freeman9/25/09, 2:12 PM

    I find it amazing that in eight years in real estate sales, first as a sales agent, and later as a broker that no one ever explained to me the requirement for consideration. The example you gave in class about the builder agreeing to add a hot tub and deck without consideration from the buyer has me questioning some contracts I’ve worked on in the past.

    During the incredible Florida real estate boom in the early 2000’s, virtually all residential real estate, regardless of condition, was selling like hotcakes. It was the era of “Flip That House,” so everyone became a real estate investor, and houses needing rehab work often became hot commodities. Typically, older homes, or homes needing significant repairs were sold in “as is condition,” meaning that the seller was not agreeing to (up front) make any repairs or modifications. The buyer would get a specified number of days (usually 5-10) to have the property inspected after both parties has signed a contract/purchase agreement. Buyer was then allowed to cancel the contract by giving notice to the seller before the expiration of the inspection period if he/she felt the overall condition of the property was unacceptable.
    And so, this ‘right to cancel’ gave the buyer some leverage after inspections that he/she did not have during initial contract negotiations. In instances of large defects, the Buyer would then typically go back to the Seller and say, “Mrs. Seller, I know there are a lot of other buyers who might like your house, but you have a termite infestation, and no one is going to want to buy a house with termites. I will exercise my right to cancel this contract un less you treat the termites and issue me a termite bond.” (This position was conveyed through the Realtors, of course.)

    Renegotiations would commence. Sometimes the Buyer prevailed, and other times the Seller prevailed. It typically depended on the severity of the property’s defect or the motivation of the parties. If the Seller still refused to make repairs, the house would just go back on the market.

    I tie this into class discussions and postings on your blog based on what would usually happen if the Buyer prevailed in post-inspection negotiations. An addendum to the contract would be drawn up indicating whatever repairs were agreed to. A typical addendum would read, “Due to termite infestation, Seller agrees to have house treated for termites and provide Buyer with a valid, renewable termite bond.” So my question is this, were these contracts (specifically the addendums) even enforceable? Would it have mattered if a waiver of right to cancel was spelled out in the addendum?
    I began to include a “waiver of right to cancel” on all repair addendums after learning an important lesson my first year as a Realtor. This lesson, ironically, had really nothing to do with consideration, but I’ll share it anyway to explain what I mean by “waiver of right to cancel.”

    I had a situation where I was representing a Seller who agreed to make requested repairs after a Buyer had inspected his property. After the repairs had been made, but prior to closing, I was notified that the Buyer wanted to exercise his right to cancel the contract under the terms of the “right to cancel due to inspection” clause. His agent (rightfully, I might add) pointed out to me that the 10 day “time for inspections” had not yet expired, so although the repairs had been made, his Buyer never waived his right to cancel. And so, from that day forward, my addendums read: “Buyer hereby waives his right to cancel this contract under the terms of the inspection clause. Due to termite infestation, Seller agrees to provide Buyer with a valid, renewable termite bond. ”

    I would think that the addendum language above includes appropriate consideration, and is therefore, enforceable. I wonder what my fellow classmates think. And what about the addendums that only indicated what repairs were to be made without a waiver of right to cancel?”

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  2. Prof. Friedman9/25/09, 2:13 PM

    Anjela – that’s very interesting. I would say that the agreement to make repairs in exchange for the buyer agreeing not to cancel is supported by consideration – the buyer is giving up his right to cancel. In the situation you described where the seller relied on his own understanding that the buyer had given up the right to cancel but no writing reflected that agreement, I think you might have had a couple of arguments: (1) the buyer in fact had (tacitly, perhaps, but you can express X without saying X, right? – “implied-in-fact contract”) made that promise and (2) even if, since the agreement concerned the sale of real estate, it wouldn’t be enforceable unless it had been set forth in a writing signed by the buyer (under the statute of frauds, which may or may not be applicable to the agreement on this particular point), the seller had reasonably relied on the buyer’s implicit promise not to cancel and therefore could enforce that promise under the doctrine of promissory estoppel (which we haven’t yet gotten to, but which is set forth in Section 90 of the Restatement and under which a court promise that otherwise isn’t enforceable – because it lacks consideration, because it isn’t enforceable under the statute of frauds, because there are open terms that would be material to a contract, etc.) if the promisee has relied on the promise, the reliance is reasonable, the promisor should have foreseen the reliance, and “if injustice can be avoided only by enforcement of the promise.”

    Note a couple of things that are crucial: first, it is not enough that the promisee reasonably rely and the promisor should foresee that reliance – the promise, which is not enforceable as a contractual promise for one reason or another, is not enforced unless injustice can be avoided only by enforcement of the promise. Since the mere fact a promise isn’t enforceable where there’s no consideration or where there’s no signed writing and the law requires one is not alone injustice (else why would we have those rules), section 90 does not merely make reliance a “substitute” for consideration (or the absence of some other essential element of an enforceable (that is, contractual) promise), as you will often see it (inaccurately, but sometimes usefully) described. The situations in which reliance is grounds to enforce an otherwise unenforceable promise have to be situations in which there is genuine injustice. How bad the situation has to be is pretty wide open, but we will, of course, study cases that do and do not meet that standard and will thereby begin to get a sense of the types and degrees of injustice necessary.

    Second, Section 90 also provides that where a promise is enforced based on reliance, “[the remedy granted for breach may be limited as justice requires.” What this means is that courts far more readily will enforce a “reliance” rather than an “expectancy” remedy where the recovery is for breach of a non-contractual promise enforced under the doctrine of promissory estoppels. In the case of your house, the reliance remedy is the amount the promisee expended in reliance on the promise (the cost of repairs), not the contract price minus the amount the promisee eventually got for the house and minus the amount that promisee spent (in maintenance, insurance, etc.) as a result of the time that passed between the breached promise (the buyer exercising the right to cancel and not buying after the seller made the repairs).

    But, yes, if you get the waiver of the right to cancel in writing (consideration for making the repairs), you don’t have to be left to trying to enforce a promise expressed implicitly or a promissory estoppels claim.

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