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Contracts • Contract Formation
K#041
Legal Definition
Sham or token consideration is not sufficient, however, courts generally do not look into the adequacy or fairness of the consideration.
Plain English Explanation
Though a court will objectively look to see whether or not consideration existed, they won't bother subjectively determining whether or not the consideration has value or is "fair." In other words, if someone wants to trade a rare coin for a Ferrari, the court will not spend resources to determine whether or not the rare coin's fair market value was worth or equal to the Ferrari.
However, the court will not support "sham or token" consideration, which means when people try to use something otherwise worthless to try to "check the box" that consideration existed in order to force a contract to exist. In other words, contracts are important and require specific elements. If parties try to "game the system" and fake consideration by inserting something that wasn't actually a "bargained-for exchange of legal value", they will treat it as if there were no consideration at all.
However, the court will not support "sham or token" consideration, which means when people try to use something otherwise worthless to try to "check the box" that consideration existed in order to force a contract to exist. In other words, contracts are important and require specific elements. If parties try to "game the system" and fake consideration by inserting something that wasn't actually a "bargained-for exchange of legal value", they will treat it as if there were no consideration at all.
Hypothetical
Hypo 1: Bob tells Sam he will sell him his house for 1 penny. Sam accepts. Later, Bob decides he wants to sell his house to Amy for $200,000. Result: Courts will likely find that the 1 penny offer to Sam was merely "token" or "sham" consideration, which means his offer was merely an offer of a gift that was freely revocable. So Bob can sell it to Amy without issue. However, if the specific penny is a super rare, priceless coin, a court may be willing to accept it as real consideration even if its value wasn't equal to $200,000 (after all, maybe Sam is an avid coin collector who values this unique penny more than a house).
Visual Aids
Related Concepts
Are offers assignable?
Are pre-existing duties valid consideration?
Can partial payment of a debt be consideration for release of that debt?
How can an offeree reject an offer?
How may an offer be revoked?
Though offers can generally be freely revoked, what are the 4 exceptions?
Under battle of the forms, what happens to additional or different terms in an acceptance when at least one of the parties is a non-merchant?
Under battle of the forms, what happens to additional terms in an acceptance between two merchants?
Under battle of the forms, what happens to different terms in an acceptance between two merchants?
What are consideration substitutes?
What are illusory promises and how do they affect a contract?
What are requirement and output contracts?
What are the methods of terminating an offer?
What are the requirements of an offer?
What are the UCC Gap Fillers?
What is acceptance?
What is a contract?
What is a merchant's firm offer?
What is an option contract?
What is consideration?
What is detrimental reliance?
What is promissory estoppel?
What is required to form a valid, binding contract?
What is the effect of a conditional acceptance on an offer?
What is the effect of a contract that contains vague or ambiguous terms?
What is the effect of a contract that is missing price terms?
What is the effect of a contract that is missing quantity terms?
What is the effect of a counteroffer on an offer?
What is the effect of a lapse of time on an offer?
What is the effect of an offeree beginning to perform in response to an offer?
What is the effect of a seller sending non-conforming goods?
What is the effect of including additional or different terms to an offer?
What is the effect of part performance of a unilateral contract?
What is the effect of the death of a party prior to acceptance of an offer?
What is the Mailbox Rule and when does it apply?
When are advertisements valid offers?
When are price quotes valid offers?
When is past or moral consideration valid?
Who controls the method of acceptance, and what are the typical ways that an offer is accepted?
