Draw the Law: Consideration is the Cornerstone of Contracts, Part II

So last week I started talking about consideration. Consideration is the basis of a contract and without it there is no contract. So today’s post focuses on what is good consideration, and then applies it to a complex agreement that many businesses face when dealing with litigation.

What is Good Consideration: Illusion, Value, and Obligation

One party cannot just have a unilateral escape from the agreement. Once the contract is formed both sides are obligated to perform, so long as conditions are met. However, one side can pay to be released from the contract.

One party may not hold an unqualified right to ditch out on their side of promise. This is similar to an idea of a gift, where one party is receiving the benefit for nothing; the promises exchanged cannot be illusory.   Without the agreement to promise to do something there would be no bargaining, and there would be no way to enforce the promise against the one who bailed out on the contract.  In addition, the illusion of paying at an underestimated value to avoid sales tax is illegal.  This brings me to my next point about the value of the consideration.

The value of consideration can be almost anything. Here the jewel seller can sell the jewel for any price to the buyers and it still will be good consideration at $750 or at $2000.

In terms of a set amount, remember in our free market economy everything has value, but not all value is equal.  Due to the fact, that one man’s junk is another man’s treasure it is hard to say that there is a “correct” amount for consideration.  What is presumed is that people will only make agreements for things they consider worthwhile.  Consumers generally have the safety of courts protecting them from deals that “shock the conscience of the court.”  In addition many consumer protection laws prevent contracts of adhesion.  However, for you business owners, in a B2B sale, you are on your own; if you paid too much for a service or product consider it an expensive lesson.

Lastly, good consideration has to be a new obligation.  If a contract is already made, one party cannot use the prior obligation as the basis of a new agreement with the same party.

Example: Value and Taxes – If you choose to sell hand-crafted chopsticks for $0.60 a piece, and sell a 1,000 of them to a restaurant supply store that is your choice.  You can negotiate and sell it for $0.10 or $1.00 apiece. There is no right or wrong price for consideration. However, what is wrong is if you keep making sales for $600 and report sales of $500 just to avoid paying taxes.

However, just because you can assign value to your goods and services to whatever you want you CANNOT underreport what the amount it sold for. Here if the chopstick seller sold his chopsticks for $600 to each buyer, but then "valued" it $500 per transaction to the IRS that would be illegal.

Final Word: Accord and Satisfaction, Paying to be Free From Obligation

I mentioned last week that consideration can be refraining from doing something. For example, refraining from exercising the right to sue the opposing party that did not perform their obligated duty. In a dispute, where one side has not received its promise there is a breach of contract and the nonbreaching side has the right to sue. The side that broke the contract has an outstanding debt or obligation to the nonbreaching side.

Here there is a contract valued for a $1,000. The red party breaches and the blue party sues for the value of the contract. The red party makes an offer for $750 to make the lawsuit and prior obligation go away. The blue party accepts (knowing they won't be able to recover the $1000 and the lawsuit will be too expensive). The accord is a the prior obligation goes away (including the suit trying to enforce it) and the satisfaction is the $750 paid.

This is where Accord and Satisfaction steps in; it is a concept of purchasing the release from a debt obligation.  The accord is the agreement to discharge the obligation and the satisfaction is the consideration.  Contractually, what happens is the side that broke the agreement agrees to pay money or settle the dispute, in exchange for the nonbreaching side to give-up its right to sue or drop the suit. This is done because the nonbreaching side does not want be sued and generally the debt-collecting side finds it less costly to collect a sum of money (albeit less than the actual value of the original contract) from the breaching side.

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

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3 thoughts on “Draw the Law: Consideration is the Cornerstone of Contracts, Part II

  1. Pingback: Draw the Law: Reliance, the Exception to Contract Consideration | The Blawg of Ryan K. Hew, Attorney At Law

  2. Pingback: Draw the Law: Contract Disputes, Breach Remedies – Let’s Talk! | The Blawg of Ryan K. Hew, Attorney At Law

  3. Pingback: Contract Disputes, Breach Remedies – Let’s Talk!: Draw the Law | Aloha StartUps

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