Consideration and Capacity
Episode #6 of the course Contract basics: Let’s make a deal! by James Wong
Welcome back!
The last two lessons covered offer and acceptance. Today, we’ll finish with the final two required elements of contracts: valid consideration and capacity to contract.
Consideration
In its simplest form, consideration is either an action or a promise. But not every action or promise is consideration. For example, Wally might offer you $25 to mow his lawn. But if you mowed his lawn first, you can’t demand $25 from Wally. The action cannot come before the promise.
For a promise to be binding, there needs to be an incentive. Money and forbearance, such as giving up a valuable right, are a good incentives. Let’s say you said okay, then paid $10 to rent a mower (you gave up $10); now Wally cannot withdraw the offer.
But a promise to do something if there is a pre-existing obligation to do it is no good. For instance, if Wally’s already paid you $25 to mow his lawn but you haven’t, that’s a pre-existing obligation on your part. If Wally then says that he’ll pay you another $10 and you say okay, that extra $10 is not enforceable because of the pre-existing obligation to mow the lawn. You only get $25. By the way, that additional $10 “agreement” is also called an illusory contract.
In that same vein, a promise to give something to someone else (“Hey, I’ve got a shipment of vapes coming in on Friday. You can have one for free …”) is not binding if there’s no bargained for consideration. So a “Gee, thanks!” is not binding. But, “Okay, you don’t have to pay me back for dinner,” IS binding because you’ve given up money so you could have that vape.
Similarly, a promise to keep an offer open for a certain time has to be supported by the offeree’s consideration—usually money. The amount of the consideration is not important: “Wally, here’s $1. Keep that $25 offer ready for me when I decide to mow your lawn next week.” There is an exception for merchants selling goods—they don’t need mutual consideration to keep an offer open.
Finally, the doctrine of promissory estoppel prevents Wally from cancelling the unilateral contract once you’ve started mowing his lawn. This doctrine says that the promisor cannot cancel a contract once the promisee has started doing the promised work.
Capacity to Contract
The fourth element asks if parties can be bound by a contract. An agreement supported by consideration is only enforceable if all the parties have legal capacity to enter the contract.
Generally, minors (persons under the age of 18) can enter contracts, but they can get out of it any time before 18 or for a reasonable time after turning 18. Adults might be able to get out of contracts if they were mentally impaired or intoxicated and so could not understand the nature and purpose of the contract.
If a contract requires committing a crime or tort (such as damaging property), then it is also void. No one has capacity to enter those deals. Similarly, contracts that monopolize, fix prices, or divide up markets are illegal and void. Sometimes it’s possible to come up with a valid business purpose for these contracts, but they need to be restricted in time and scope. For example, when there’s a drought, it may be valid to agree on a way to divide up the market for water delivery companies.
Parties may also void (that is, get out of) a contract if there is not mutual understanding of the essential terms and facts. This usually happens when there is fraud or a material misrepresentation.
Parties can rescind (cancel) contracts if there was a mutual mistake (e.g., “What, Wally? Your lawn is in Australia, and you want me to accept Australian dollars?!”).
Lastly, contracts may be voidable if there was duress (someone held a gun to your head) or undue influence in reaching agreement. These will depend on the facts of the case.
So, that’s it! We’ve covered the four required elements of a contract: offer, acceptance, consideration, and capacity.
Tomorrow, we’ll see how contracts hold parties to their deals.
See you then.
James
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