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Contracts • Contract Formation
K#046
Legal Definition
Generally, a legally binding contract cannot be formed without consideration. However, a promise is legally enforceable despite a lack of consideration if there is a consideration substitute, such as: (1) a written promise to satisfy an obligation for which there is a legal defense; or (2) promissory estoppel (detrimental reliance).
Plain English Explanation
In law school and on the Bar Exam, contract law is largely about identifying the required and essential parts of a contract so that you can argue whether a contract exists or not (and whether or not one or both of the parties are obligated to perform). This is why it is so important to be able to spot an offer, an acceptance, and consideration. On exams, it is common to encounter fact patterns where it appears as if one of the factors doesn't exist -- when, in fact, it does, you just need to be creative in arguing why it is present. Consideration substitutes are an example of such a scenario, where it may appear that no consideration is present, and thus no contract exists; however, a consideration substitute is present, which would satisfy the requirement.
One common substitute is a written promise to satisfy an obligation for which there is a legal defense. For example, where Bob owes Sam $1,000, and a legal action to collect the debt is barred by the Statute of Limitations, Bob may write Sam to say, "I know I owe you $1,000, but I will pay you $600." There is no new consideration, but Sam can enforce the promise to pay $600.
Another common example is promissory estoppel, which will be covered in other cards.
One common substitute is a written promise to satisfy an obligation for which there is a legal defense. For example, where Bob owes Sam $1,000, and a legal action to collect the debt is barred by the Statute of Limitations, Bob may write Sam to say, "I know I owe you $1,000, but I will pay you $600." There is no new consideration, but Sam can enforce the promise to pay $600.
Another common example is promissory estoppel, which will be covered in other cards.
Hypothetical
Hypo 1: Bob owes Sam $1,000. However, the statute of limitations has run, which means Sam is no longer able to pursue the debt in court. One day, Bob writes to Sam, "I know I owe you $1,000, but I will pay you $600 instead." Result: There is no new consideration offered here, since money was already owed. However, this can count as a consideration substitute which would allow Sam to enforce the new promise to pay $600, which would be enforceable through a lawsuit.
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 do courts assess the adequacy of consideration?
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 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?
