Consideration and Mutuality
Saturday October 02, 2010
Since the word “mutuality” doesn’t advance our understanding of the issues, we may need to come up with other words to describe the problem before we can look at some of the solutions.
As always with the doctrine of consideration, it is best to start with first principles. The doctrine of consideration informs us that courts should enforce promises that are made in the context of bargained for exchange. We know that the courts decide that there is bargained for exchange when they can identify some legal detriment being undertaken by each part in exchange for the promise or act of the other person. Thus there is legal detriment on both sides of the transaction and each legal detriment is designed to motivate the other side to engage in the transaction.
All well and good - but what if the promise of one party is made subject to a condition? What if the promise of one party can not easily be quantified? What if the promise of one party contains the right to withdraw their promise? What if the promise of one party is a promise to do no more than they are already obligated to do by some prior promise they have made?
In each of these cases, you could apply the definition of consideration in a manner that would deny the enforceability of the contract. But in at least some of these cases, there is little doubt that the parties were serious in their intentions to form a contract and that they saw value to them in the transaction.
A study of these cases, and a review of the language of the Restatement of Contracts and, to a lesser degree, of the language of Article 2 of the UCC, reveals both the logical difficulties the law confronts in these cases and an increasing tendency to ignore the difficulties absent some other, non-consideration related reason, exists for refusing enforcement.
Condition - in Scott we saw the court willing to find an enforceable contract even though the promise of one party was conditioned upon an act on their part which was completely under their control.
Quantity - although some courts have refused to enforce a contract when the quantity of one party’s performance was not specifically stated in the agreement, the UCC in section 2-306 embraces, with some limitations, contracts where the quantity is based on the “output” of the seller or the “requirements” of the buyer. In the Lady Duff Gordon case, we saw a court willing to imply a duty in a way which would allow the court to determine whether there was or was not full performance despite the silence of the agreement about hours of effort or other objective measure of performance.
Right of Termination - even if one party has the right to cancel a contract, the courts have been willing to enforce the contract if they can identify at least some minimum of time during which neither party can cancel the contract. This can be accomplished by the parties by including, in the right to cancel, a notice period during which the canceling party would be obligated to perform. In an at-will employment case, where both sides can terminate without notice, the court, unable to find consideration as the basis for enforcing a promise and granting a remedy for breach, concluded that the principles of §90, promissory estoppel, apply and that a reliance remedy can be granted to an at-will employee who, relying on a promise of new employment, left his former employment and turned down another job opportunity. That decision leaves untouched the doctrine of consideration - it simply does an “end run” around it.
We have only begun discussing the problem raised by a promise to do that which the promisor is already obligated to do, but we have seen that (a) Article 2 of the UCC, in 2-209, has abandoned the rule that modification of contracts requires consideration in sale of goods cases and (b) the courts are frequently at least as troubled by other policy aspects of the transaction as they are about the problem in consideration raised by the fact that there was a preexisting duty. In the case of public officers, permitting their enforcement of rewards offers by citizens has the risk that public officers will be influenced in the performance of their public duties by offers of money. In cases of mid-contract performance modification of contracts, the courts are concerned that one party will take unfair advantage of the elevation of its bargaining power as a result of the existence of the contract they are insisting be modified, sweetening the deal for them with no gain to the other party. We will continue our review of these cases next week. It is particularly instructive to read the Official Comments to 2-209(1) and see both how aware the drafters were of the true reason for judicial objection to mid-contract performance modification and what protection they seek to provide once they remove the doctrine of consideration as a barrier to such mid-performance modifications in sales of goods contracts.
To go back to the beginning of this note, the law of contracts seems increasingly to be responsive to issues of the setting and substance of contract transactions and less responsive to technical analysis of consideration. However, from a practicing lawyers point of view, it remains necessary to safeguard the enforceability of a contract you are drafting and avoid provisions or the absence of provisions which might be a basis for the other party to argue that the classical definition of consideration has not been satisfied. When you are representing a party who wishes to avoid enforcement of a contract, you must know how to make the arguments that the doctrine of consideration has not been satisfied. Given the direction of the law, however, it might be wise to consider other arguments against enforcement as well. We have touched upon two of those arguments - duress and unconscionability. The scope of these doctrines in contract law is by no means fixed and unchanging, a point I make in my blog on unconscionability.
As always with the doctrine of consideration, it is best to start with first principles. The doctrine of consideration informs us that courts should enforce promises that are made in the context of bargained for exchange. We know that the courts decide that there is bargained for exchange when they can identify some legal detriment being undertaken by each part in exchange for the promise or act of the other person. Thus there is legal detriment on both sides of the transaction and each legal detriment is designed to motivate the other side to engage in the transaction.
All well and good - but what if the promise of one party is made subject to a condition? What if the promise of one party can not easily be quantified? What if the promise of one party contains the right to withdraw their promise? What if the promise of one party is a promise to do no more than they are already obligated to do by some prior promise they have made?
In each of these cases, you could apply the definition of consideration in a manner that would deny the enforceability of the contract. But in at least some of these cases, there is little doubt that the parties were serious in their intentions to form a contract and that they saw value to them in the transaction.
A study of these cases, and a review of the language of the Restatement of Contracts and, to a lesser degree, of the language of Article 2 of the UCC, reveals both the logical difficulties the law confronts in these cases and an increasing tendency to ignore the difficulties absent some other, non-consideration related reason, exists for refusing enforcement.
Condition - in Scott we saw the court willing to find an enforceable contract even though the promise of one party was conditioned upon an act on their part which was completely under their control.
Quantity - although some courts have refused to enforce a contract when the quantity of one party’s performance was not specifically stated in the agreement, the UCC in section 2-306 embraces, with some limitations, contracts where the quantity is based on the “output” of the seller or the “requirements” of the buyer. In the Lady Duff Gordon case, we saw a court willing to imply a duty in a way which would allow the court to determine whether there was or was not full performance despite the silence of the agreement about hours of effort or other objective measure of performance.
Right of Termination - even if one party has the right to cancel a contract, the courts have been willing to enforce the contract if they can identify at least some minimum of time during which neither party can cancel the contract. This can be accomplished by the parties by including, in the right to cancel, a notice period during which the canceling party would be obligated to perform. In an at-will employment case, where both sides can terminate without notice, the court, unable to find consideration as the basis for enforcing a promise and granting a remedy for breach, concluded that the principles of §90, promissory estoppel, apply and that a reliance remedy can be granted to an at-will employee who, relying on a promise of new employment, left his former employment and turned down another job opportunity. That decision leaves untouched the doctrine of consideration - it simply does an “end run” around it.
We have only begun discussing the problem raised by a promise to do that which the promisor is already obligated to do, but we have seen that (a) Article 2 of the UCC, in 2-209, has abandoned the rule that modification of contracts requires consideration in sale of goods cases and (b) the courts are frequently at least as troubled by other policy aspects of the transaction as they are about the problem in consideration raised by the fact that there was a preexisting duty. In the case of public officers, permitting their enforcement of rewards offers by citizens has the risk that public officers will be influenced in the performance of their public duties by offers of money. In cases of mid-contract performance modification of contracts, the courts are concerned that one party will take unfair advantage of the elevation of its bargaining power as a result of the existence of the contract they are insisting be modified, sweetening the deal for them with no gain to the other party. We will continue our review of these cases next week. It is particularly instructive to read the Official Comments to 2-209(1) and see both how aware the drafters were of the true reason for judicial objection to mid-contract performance modification and what protection they seek to provide once they remove the doctrine of consideration as a barrier to such mid-performance modifications in sales of goods contracts.
To go back to the beginning of this note, the law of contracts seems increasingly to be responsive to issues of the setting and substance of contract transactions and less responsive to technical analysis of consideration. However, from a practicing lawyers point of view, it remains necessary to safeguard the enforceability of a contract you are drafting and avoid provisions or the absence of provisions which might be a basis for the other party to argue that the classical definition of consideration has not been satisfied. When you are representing a party who wishes to avoid enforcement of a contract, you must know how to make the arguments that the doctrine of consideration has not been satisfied. Given the direction of the law, however, it might be wise to consider other arguments against enforcement as well. We have touched upon two of those arguments - duress and unconscionability. The scope of these doctrines in contract law is by no means fixed and unchanging, a point I make in my blog on unconscionability.