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Contracts: The Bargain Principle

Consideration is one of the necessary elements of the contract, and for a long time, the only form of consideration was the bargain. Restatement Second of Contracts § 71 says that a performance or a return promise must be bargained for, and a performance or a return promise is bargained for if it is sought by the promisor in exchange for his promise and is given by the promisee in exchange for that promise. A case that illustrates this is Hamer v. Sidway in which an uncle told his nephew that he’d give him $5,000 if the nephew didn’t smoke, drink, or gamble until he was 21. The nephew did this and requested the money. The uncle said that he’d give it to the nephew, but that he thought it would be better if he kept it until his nephew could use it responsibly. The nephew thought this was a good idea. When the uncle died, he sued to collect his money. The court said that consideration means not so much that one party is profiting as that the other abandons some legal right in the present, or limits his legal freedom of action in the future, as an inducement for the promise of the first. Here the uncle bargained for his nephew’s abstinence from cigarettes, alcohol, and gambling. The nephew, as promisor, received something of value, the $5,000, for his promise to his uncle, the promisee. This fulfilled the consideration requirement. It may seem as if the consideration involved here was a bit unbalanced. Hancock Bank v. Shell Oil Co. talks about this.

In Hancock Bank, a lessor lease property to Shell Oil for 15 years with an option to extend for another 15 years, and a clause that Shell could terminate the lease with 90 days notice. The bank bought the property at auction after the property was foreclosed. It sued Shell, claiming that Shell had such a good lease that the consideration paid for the lease was uneven. Courts have traditionally declined to relieve a party from the terms of a contract merely because he made what he regards as a bad or uneven bargain.

Thus, Shell kept the lease as it was. You can compare this to Schnell v. Nell when the court said 1¢ didn’t constitute consideration for $600 because the two cases both deal with uneven consideration. The difference is that in Schnell, there wasn’t really an exchange, only the form of one, whereas in Hancock Bank there was an exchange because both parties got something of value. Further, according to Restatement Second of Contract § 79, if the requirement of consideration is met, there is no additional requirement of a gain, advantage, or benefit to the promisor or a loss, disadvantage, or detriment to the promisee.

 The bargain principle does have limits, however. Sections 175 and 176 of the Restatement talk about using duress and threats to get the bargain. If a party’s manifestation of assent is induced by an improper threat by the other party that leaves the victim no reasonable alternative, the contract is voidable by the victim.

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January 11, 2007 - Posted by | Contracts

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