9.2: Legal Sufficiency

LEARNING OBJECTIVES

1. Know in general what “legal sufficiency” means when examining consideration.
2. Recognize how the concept operates in such common situations as threat of litigation, and accord and satisfaction.
3. Understand why illusory promises are unenforceable, and how courts deal with needs, outputs, and exclusive dealings contracts.

The Concept of Legal Sufficiency

As suggested in Section 9.1, what is required in contract is the exchange of a legal detriment and a legal benefit; if that happens, the consideration is said to have legal sufficiency.

Actual versus Legal Detriment

Suppose Phil offers George $500 if George will quit smoking for one year. Is Phil’s promise binding? Because George is presumably benefiting by making and sticking to the agreement—surely his health will improve if he gives up smoking—how can his act be considered a legal detriment? The answer is that there is forbearance on George’s part: George is legally entitled to smoke, and by contracting not to, he suffers a loss of his legal right to do so. This is a legal detriment; consideration does not require an actual detriment.

Adequacy of Consideration

Definition

The doctrine of adequacy of consideration concerns whether the value exchanged in a contract is fair or proportionate. Under traditional contract law, courts do not evaluate the adequacy of consideration—meaning they do not ask whether the parties made a “good deal” or a “bad deal.” As long as legal consideration exists (something of value, or a legal detriment exchanged), the courts generally enforce the contract, even if the bargain seems unfair or one-sided.

Rationale

The reasoning is rooted in the principle of freedom of contract. Courts assume that competent parties are best positioned to evaluate their own interests and to decide whether an exchange is beneficial. Thus, a contract will not be voided merely because one party pays too much or receives too little, provided the consideration is legally sufficient.

Illustrative Example

• Example 1: If A agrees to sell B a car worth $20,000 for $500, courts will not declare the contract void solely because the consideration seems inadequate. The fact that B provides some value ($500) is sufficient consideration.
• Example 2: A agrees to work for B for $1 per day. Even though this seems grossly inadequate, the law recognizes it as consideration, unless there is evidence of fraud, duress, or unconscionability.

Limitations

While adequacy itself is not usually a concern, courts may intervene when the exchange is so grossly inadequate that it suggests another legal issue, such as:

• Fraud or misrepresentation: one party was misled into agreeing.
• Duress or undue influence: one party lacked free will in bargaining.
• Unconscionability: the terms are so one-sided that enforcing them would be unjust.

Case Example: Batsakis v. Demotsis (1949)

During World War II, Demotsis promised to repay $2,000 plus interest in exchange for a loan of 500,000 drachmae (worth about $25). She later argued the consideration was inadequate. The court upheld the contract, reasoning that “mere inadequacy of consideration will not void a contract”—as long as some legal detriment was exchanged.

Settlement of Claims

This section discusses several common circumstances where the issue of whether the consideration proffered (offered up) is adequate.

Threat of Litigation: Covenant Not to Sue

A covenant not to sue is a contractual agreement in which one party agrees not to pursue a legal claim against another, typically in exchange for some form of consideration. Unlike a release, which immediately discharges a claim, a covenant not to sue suspends or substitutes the right to litigate with a promise not to exercise that right.

Nature of the Agreement

• Contractual Promise: A covenant not to sue is itself a contract and therefore requires consideration to be enforceable.
• Alternative to Litigation: It allows parties to resolve disputes without proceeding to court, substituting contractual remedies for litigation.
• Preservation of the Claim: Unlike a release that extinguishes the underlying claim, a covenant not to sue does not eliminate the cause of action but rather creates a contractual obligation not to bring it.

Examples

1. Settlement of a Dispute: A consumer claims a product caused injury. The manufacturer agrees to pay $10,000, and the consumer agrees not to sue. The covenant not to sue prevents the consumer from filing a lawsuit if the payment is made.
2. Business Agreements: Two companies in conflict over a trademark agree that one will pay licensing fees, and in return, the other agrees not to sue for infringement.
3. Employment Context: An employee settles a wrongful termination claim with the employer. In exchange for severance, the employee agrees not to sue.

Legal Effect

• If the party who covenanted not to sue later brings a lawsuit, the other party can raise the covenant as a defense and may also sue for breach of contract.
• Courts treat covenants not to sue as valid consideration, because the party agreeing to forbear from exercising a legal right suffers a legal detriment.

Case Example: Fiege v. Boehm (1956)

Boehm agreed not to bring a bastardy proceeding against Fiege if he agreed to support her child. Although it was later proven Fiege was not the father, the court held the covenant not to sue was valid consideration because Boehm had a reasonable, good-faith belief in her claim.

Accord and Satisfaction Generally

Accord and satisfaction is a legal method of discharging a contractual obligation through the substitution of a new agreement and its performance. The “accord” is the agreement in which one party agrees to accept something different, often less, than what was originally promised, while the “satisfaction” is the execution of that agreement. Together, these two elements resolve the original obligation. To be valid, there must be a genuine dispute over the amount or nature of the debt, an agreement to settle that dispute by accepting substitute performance, and performance of the accord. For example, if Alice claims Bob owes her $5,000 and Bob insists he only owes $3,000, they may agree that Alice will accept $3,500 as full payment. Once Bob pays, the original obligation is discharged. Similarly, if a business receives a check for less than the invoiced amount marked “Paid in Full,” cashing the check in the context of a genuine dispute may amount to accord and satisfaction. However, this doctrine does not apply to undisputed debts—payment of a lesser sum generally cannot discharge the whole without additional consideration. Courts also require that such agreements be made in good faith; a manufactured dispute will not suffice. A well-known case, Foakes v. Beer (1884), illustrates this limitation: the court held that part payment of an undisputed debt, without more, does not release the debtor from the entire obligation. Accord and satisfaction remains an important tool for resolving disputes efficiently, allowing parties to substitute negotiated settlement for litigation.

Examples

• Disputed Debt: Alice claims Bob owes her $5,000. Bob argues he only owes $3,000. They agree Alice will accept $3,500 as full payment. When Bob pays, the debt is discharged through accord and satisfaction.
• Check Marked “Paid in Full”: A business receives a check from a customer for less than the invoiced amount, with “Paid in Full” written on it. If the business knowingly cashes the check in the context of a genuine dispute, it may constitute accord and satisfaction.
• Service Contract: A painter agrees to paint a house for $10,000. The homeowner is dissatisfied with the work and disputes the amount owed. The parties agree that the homeowner will pay $7,500 instead, and the painter will accept that as full payment.

Limitations

• No Dispute, No Accord: If the obligation is liquidated (fixed and undisputed), payment of a lesser sum generally cannot discharge the full debt without additional consideration.
• Good Faith Required: The dispute and settlement must be genuine. Bad faith attempts to evade payment will not create a valid accord and satisfaction.

Settling an Unliquidated Debt

A liquidated debt is one whose amount is certain, fixed, and undisputed. Because the obligation is clear, partial payment of a liquidated debt—such as paying $800 on a $1,000 loan—does not generally discharge the entire obligation unless there is additional consideration, such as early payment or payment in a different form. By contrast, an unliquidated debt is one whose existence or amount is uncertain, often due to disagreement about the quality of services, the scope of work performed, or the value of goods delivered. In these situations, the parties may compromise by negotiating a new agreement, typically through accord and satisfaction, in which the creditor accepts a lesser or different amount and the debtor fulfills that promise, thereby discharging the claim. For example, if a contractor bills a homeowner $12,000 for remodeling work but the homeowner disputes the quality and believes the work is worth only $8,000, the parties may settle on $9,500 as full payment. Once that payment is made, the debt is extinguished. Courts encourage the settlement of unliquidated debts because the compromise itself provides consideration: each party gives up the right to contest the dispute further.

Settling a Disputed Debt

A disputed debt arises where the parties did agree on (liquidated) the price or fee but subsequently get into a dispute about its fairness, and then settle. When this dispute is settled, the parties have given consideration to an agreement to accept a fixed sum as payment for the amount due. Assume that in the gallbladder case the patient agrees in advance to pay $8,000. Eight months after the operation and as a result of nausea and vomiting spells, the patient undergoes a second operation; the surgeons discover a surgical sponge embedded in the patient’s intestine. The patient refuses to pay the full sum of the original surgeon’s bill; they settle on $6,000, which the patient pays. This is a binding agreement because subsequent facts arose to make legitimate the patient’s quarrel over his obligation to pay the full bill. As long as the dispute is based in fact and is not trumped up, as long as the promisee is acting in good faith, then consideration is present when a disputed debt is settled.

Release

A release is a contractual agreement in which one party surrenders the right to pursue a legal claim against another, usually in exchange for consideration such as money, services, or some other benefit. Unlike a covenant not to sue, which merely creates a promise not to bring a lawsuit, a release immediately extinguishes the underlying claim. Because it is a contract, a valid release requires the essential elements of contract formation, including consideration and voluntary consent. For example, an injured driver may sign a release in exchange for an insurance settlement payment, agreeing that the payment fully satisfies all claims arising from the accident. Once the release is executed, the injured party cannot later bring a lawsuit based on the same event. Courts generally enforce releases unless they were obtained through fraud, duress, or misrepresentation, or if the language of the release is overly broad and against public policy. In this way, a release serves as a powerful risk-management tool, allowing parties to achieve finality and avoid litigation by contractually resolving disputes.

Agreements That Lack Consideration

Preexisting Duty

The preexisting duty rule provides that a promise to do something one is already legally obligated to do does not constitute valid consideration for a new contract. Because consideration requires a legal detriment or a bargained-for exchange, performing (or promising to perform) an existing obligation does not create new value. For example, if a police officer promises to apprehend a suspect in exchange for a reward, the promise is unenforceable because the officer already has a legal duty to perform that task. Similarly, if a contractor agrees to build a house for $200,000 and later demands an additional $20,000 to finish the work, the promise to complete the house is not valid consideration because the contractor was already obligated under the original contract.

There are, however, several important exceptions to this rule:

1. Unforeseen Difficulties: If a party encounters extraordinary and unforeseeable difficulties that were not anticipated when the contract was made, a promise for additional compensation may be enforceable. For instance, if a contractor unexpectedly discovers hazardous materials that must be removed before construction can continue, the additional payment may be valid consideration.
2. Rescission and New Contract: If the parties mutually agree to cancel (rescind) the original contract and then enter into a new one, the obligations under the new agreement are supported by fresh consideration.
3. Modification under the UCC: In contracts for the sale of goods, the Uniform Commercial Code (UCC) provides that modifications do not require additional consideration, as long as the modification is made in good faith. This exception recognizes the dynamic nature of commercial transactions and allows flexibility in adjusting contract terms.

These exceptions balance the rigidity of the preexisting duty rule by ensuring fairness and practicality, while still protecting parties from being coerced into paying more for obligations already owed.

Past Consideration

Definition:
Past consideration refers to an act or benefit already performed or conferred before a promise is made. Because the performance did not occur as part of a bargained-for exchange, it does not qualify as valid consideration. In other words, consideration must be contemporaneous with the promise—both sides must exchange value at the time of contracting, not retroactively.

Rule:
The rule is often summed up as: “Past consideration is no consideration.”
A promise to compensate someone for a past act or service, no matter how beneficial, is unenforceable because the performance was not induced by the promise.

Examples:

1. A student helps a professor move offices voluntarily. Afterward, the professor promises to pay $100. The promise is unenforceable because the work occurred before the promise.
2. A neighbor repairs a broken fence without agreement. Later, the homeowner promises to pay for the repair. Since the act was completed before the promise, there is no enforceable contract.
3. A business partner says, “Because you worked so hard last year, I’ll give you a bonus this year.” Because the work was already completed, no valid consideration supports the promise.

Case Illustration – Mills v. Wyman (1825):
A man cared for an adult son who was seriously ill. After the son died, the father promised to pay the caretaker for his services. The court refused to enforce the promise, holding that caring for the son was a past action that could not support a contract. The father’s moral obligation was insufficient without bargained-for consideration.

Case Illustration – Roscorla v. Thomas (1842):
A buyer purchased a horse. After the sale, the seller promised that the horse was “sound and free from vice.” When the horse later turned out to be vicious, the court held the promise unenforceable: the sale had already occurred, so there was no new consideration for the later promise.

Rationale:
Courts require a present exchange of value to distinguish legally binding contracts from casual or moral promises. If past actions could serve as consideration, parties would constantly face unexpected obligations for benefits already conferred. The law instead enforces only those promises made in exchange for something of value.

Policy Consideration:
While past consideration cannot create an enforceable contract, some jurisdictions allow for exceptions when strong moral obligations exist, such as promises to repay debts barred by the statute of limitations (see next section: Promise Revised after Statute of Limitations has Passed) or debts discharged in bankruptcy. But these are recognized as special categories, not general rules.

Illusory Promises

An illusory promise is a statement that appears to be a promise but, upon closer examination, does not actually bind the promisor to any obligation. Because consideration requires a definite and enforceable commitment, an illusory promise fails as consideration and cannot form the basis of a valid contract. For instance, if an employer tells an employee, “You will receive a bonus if I feel like it,” the promise is illusory because the employer has complete discretion and no genuine obligation. Likewise, if a seller agrees to supply goods only “if I choose to,” the agreement lacks mutuality and is unenforceable. Another common example is when a landlord says, “I might rent you the apartment if I decide to,” which does not impose any real duty on the landlord.

There are, however, important exceptions. Courts and statutes recognize that certain contracts, although seemingly flexible, are enforceable because they carry an implied duty of good faith. Under the Uniform Commercial Code (UCC), both requirements contracts (where a buyer agrees to purchase all the goods they require from a seller) and output contracts (where a seller agrees to sell all of their production to a buyer) are valid. At first glance, these agreements might appear illusory—since a buyer could claim to “require nothing” or a seller might “produce nothing.” Yet, the law prevents abuse by imposing a duty of good faith. This means that in a requirements contract, the buyer must order goods consistent with actual business needs, and in an output contract, the seller must deliver production consistent with usual or expected output.

Thus, while illusory promises generally fail as consideration because they lack enforceability, requirements and output contracts serve as clear exceptions, showing how the law balances commercial flexibility with the principle of good faith.

Contrasting Illusory and Enforceable Promises

To better understand the concept, it is useful to contrast illusory promises, which fail for lack of consideration, with enforceable promises that satisfy contract requirements:

• Illusory Promises (Not Enforceable):

  • “I will buy your car if I feel like it.”
    Illusory because performance is left entirely to the promisor’s discretion.

  • “I promise to pay you $500 if I decide it’s worth it.”
    No true obligation exists; performance depends solely on whim.

  • “I’ll think about hiring you if I want to.”
    Fails as a promise because no enforceable duty is created.

• Enforceable Promises (Valid Consideration):

  • “I will buy your car for $10,000 if my mechanic confirms it passes inspection.”
    Valid because performance depends on an objective condition, not mere discretion.

  • “I will buy all the steel I need for my factory from your company this year.” (requirements contract)
    Valid under the UCC because the buyer’s needs must be determined in good faith.

  • “I will sell you all the widgets my factory produces this month.” (output contract)
    Valid under the UCC because the seller must deliver actual output in good faith.

KEY TAKEAWAY

Courts do not inquire into the adequacy of consideration, but (with some exceptions) do require the promisor to incur a legal detriment (the surrender of any legal right he or she possesses—to give up something) in order to receive the bargained-for benefit. The surrender of the right to sue is a legal detriment, and the issue arises in analyzing various kinds of dispute settlement agreements (accord and satisfaction): the obligation to pay the full amount claimed by a creditor on a liquidated debt, an unliquidated debt, and a disputed debt. Where unforeseen difficulties arise, an obligor will be entitled to additional compensation (consideration) to resolve them either because the contract is modified or because the parties have entered into a novation, but no additional consideration is owing to one who performs a preexisting obligation or forbears from performing that which he or she is under a legal duty not to perform. If a promisor gives an illusory promise, he or she gives no consideration and no contract is formed; but exclusive dealing agreements, needs contracts, and outputs contracts are not treated as illusory.

EXERCISES

1. What is meant by “legally sufficient” consideration?
2. Why do courts usually not “inquire into the adequacy of consideration”?
3. How can it be said there is consideration in the following instances: (a) settlement of an unliquidated debt? (b) settlement of a disputed debt? (c) a person agreeing to do more than originally contracted for because of unforeseen difficulties? (d) a creditor agreeing with other creditors for each of them to accept less than they are owed from the debtor?
4. Why is there no consideration where a person demands extra compensation for that which she is already obligated to do, or for forbearing to do that which she already is forbidden from doing?
5. What is the difference between a contract modification and a novation?
6. How do courts resolve the problem that a needs or outputs contract apparently imposes no detriment—no requirement to pass any consideration to the other side—on the promisor?