In today's lecture, we'll examine the concept of nominal consideration. A nominal consideration is a payment of a very small sum such as $1 to satisfy the contract's consideration requirement. As we will see, while many courts reject the idea that nominal consideration is sufficient for a contract, the issue remains very contentious. First, let's take a look at the basic argument for why nominal consideration should be sufficient for a contract. It's well-established that courts usually refrain from judging the fairness of the bargain that the parties have struck. In other words, courts don't inquire into the adequacy of consideration, whether the quid was roughly the same value as the quo in a quid pro quo arrangement. Under a strict reading of this rule, payment of a very small sum should be enough to satisfy the consideration requirement. This kind of approach was first advocated by the first restatement, reinstatement of contracts which set a promise to pay 1$ in exchange for a piece of land called Blackacre worth $5,000 was adequate consideration. However, it's not clear that the first restatements position on nominal consideration was supported by case law. When discussing nominal consideration, the example of a peppercorn is often used as a paradigmatic instance of the smallest thing that one could get in return for someone else's promise. Some contracts have used a literal peppercorn as the promise consideration. The masonic lodge of St. Georges in Bermuda rents a lodge from the governor of Bermuda using the annual sum of a single peppercorn. The more widely accepted approach today rejects nominal consideration as being sufficient consideration. Deeming it insufficient for creating a contract. Contemporary courts are likely to dismiss attempts to dress up a gift with false recitals of consideration or exchange of a nominal sum. While a peppercorn satisfies the older legal detriment definition of consideration, it doesn't satisfy the more modern bargained for or inducement conception of consideration. The second restatement states that courts should be suspicious of contracts where a large disparity in value exists. The disparity may indicate that the consideration was not in fact bargained for, but was a mere formality or pretense of a bargain. Under the widely accepted modern rule, sham or nominal consideration does not satisfy the requirement of a contract. So under the restatement, would the Blackacre example of $1 for a $5,000 piece of property be a valid contract? Recall the earlier Blackacre example where someone offered $5,000 peace of land in exchange for just $1. Following the second restatement principles, would this Blackacre contract be valid? Well, the answer is no. In fact, the second restatement clearly states that the Blackacre example is sham consideration resulting in no contract. One case which illustrates the widely accepted contemporary approach is Edwin Farnham Greene case or what's called In re Greene. This case involved a defendant named Greene, a married man who lived for several years with the plaintiff, a woman who was not his wife. When the two separated, they entered into a written agreement under seal. Requiring the defendant to A, pay plaintiff a thousand dollars per month for the rest of their joint lives. And B, maintain a hundred thousand dollar life insurance policy on his life with plaintiff as the beneficiary. In exchange, the plaintiff released defendant from all claims she had against him and paid him $1. The agreement specified that the consideration given was $1 quote and other good, and valuable consideration. The court made two important findings. First, it rejected the idea that $1 is sufficient consideration. Second, it held that it's not enough for parties to merely recite that there is good and valuable consideration. Consideration must be actually present for a contract to be valid. Let's take a look at the history of different approaches to nominal consideration. Nominal consideration can be viewed as a sort of formality. It's a sign of the party's intent to achieve a certain legal result. Contracting parties have historically used many different formalities to seal their deals, sometimes as matter of customs, and sometimes to comply with legal requirements. As we find in the Bible, Abraham established a covenant with God by the scorching of a three-year old heifer, a three-year old goat, and a three-year old ram, and a turtle dove and a pigeon. And of course, contracting parties today often end the deal with a handshake. All of these conventions reflect the traditional employment of formalities to signal seriousness or enforceability. An important example of legal formality was the Roman stipulatio, stipulate or stipulation. Under the Justinian Code, some agreements would be enforced only if one side requested performance preface by spondesnay and the other side responded using the word spondio. Meaning, respectively, do you promise and then I do promise. Without those recitations, the deal wouldn't be legally enforceable. Lon Fuller in a classic article called Consideration and Form suggested that legal formalities ser ve evidentiary, cautionary and channeling functions and that they could be good. Formalities, while they seem like they're arid and arbitrary, they can serve an evidentiary function. Because they provide others including courts with information about the party's intention. They provide a cautionary function like formal warnings. Do you really want to reformat your hard drive? By slowing down and inducing more deliberation by the potential contractors. And finally, formalities might channel parties toward different types of accountability. Friends might prefer nonlegal consequences, business partners might prefer legally enforceable contracts. At common law, the formality needed to establish a contract was the seal. In early days, the seal was a wax substance attached to the document. Later, a paper wafer was often used or simply written with the words under seal or LS which was Latin for locus sigilli. Meaning, in the place of the seal. The writ of covenant which was used to enforce certain agreements, condition enforcement on the existing of writing under seal. The legal effect did not derive from the substance of the agreement whether it was bargain for exchange, but from the formal mode in which the promise was cast. In the past at the Common Law, an agreement under seal was binding without consideration if it was in writing and sealed and the document containing the promise was delivered. And number three, that the promise and the promisee were named in the document. During the early 20th century, many US states passed statutes that radically reduced the legal effect of sealed writing, reducing their legal enforceability. Some states abolished the seal entirely. This approach is reflected in the UCC 2-203, which makes it clear that every effect of the seal which relates to sealed instruments as such is wiped out insofar as contracts for sale of goods are concerned. Other state legislatures retain the seal, but provided that lack of consideration could remain a defense to sealed instruments. This is what happened in the Green case we discussed earlier. Other states have adopted other modifications such as providing a longer statute of limitation for contracts under seal. For the practitioner, this means that it's crucial to know the effect of the seal in the jurisdiction in which you are working. The broad abolition of this seal or the enforceability of promises under seal has had its costs. Many regard the seal as a useful device. If for no other reason that it provided a convenient method of making legally binding gratuitous promises. It was inevitable that attention would be given to filling this vacuum and it was most natural to turn to the most common form of formality, which is the signed writing. In 1925, largely at the instigation of Williston, the National Conference of Commissioners on uniform state laws approve the draft of the Uniform Written Obligation Act. The recommended statute was a model brevity. It essentially stated that a written agreement shall not be invalidated for lack of consideration as long as the parties are explicit that they want to be illegally bound. I'm a big fan of this act, but the proposal has met with a singular lack of success. Only Pennsylvania has adopted and retained the act which means that in the Quaker State, consideration is not a mandatory requirement for enforcing promises. The decline of seal has not meant the complete abandonment of legal formalities. The uniform commercial code provides three examples in which signed writing can serve as a substitute for consideration. Section 1-306 covers Waiver or Renunciation of Claims of right after breach and it provides at any claim, or right arising out of an alleged breach can be discharged without consideration by a written waiver or a renunciation signed and delivered by the grieved party. Section 2-205 discusses a firm offer, which are offers that cannot be revoked before acceptance and it gives conditions under which a firm offer can be enforced even without consideration. And finally, Section 2-209 says that an agreement modifying a contract needs no consideration to be binding. Here are some tips for making sure that your contracts pass the consideration test. First, you can explicitly have your contracts say that the parties intend this contract to be legally enforceable and you might even try to say that it's going to be governed by the law of Pennsylvania which has adopted this written obligation act. Secondly, you can include in the contract a return promise that is hard to value. Instead of saying that $1 is the valuable consideration, have the promisee promise to in return, paint or sing something that is hard to value. And finally, as a tip, you might have increased the values of both sides. While 100 to 1 disparity in value might not be enforced, a ten to one disparity can be created by increasing the promises on both sides. So instead of promising an iPhone in exchange for a peppercorn, promise an iPhone plus a week of groceries in exchange for $200 and a personal portrait. In this module, we have examined the concept of nominal consideration. Nominal consideration can be viewed as a formality. Under Common Law, a contract was once binding as long as it has a seal on it. That's the old Common Law, regardless of whether there was consideration. Under the Legal Detriment Consideration, even a peppercorn would be sufficient consideration. One contemporary attempt at replicating the effect of the seal has been the Model Written Obligation Act, but it's been only passed in Pennsylvania. Most contemporary jurisdictions apply the rule that nominal consideration is insufficient for a contract, because it's not bargained for. It's just the pretense of a bargain.
