Formation Part Two:
Consideration, Promissory Estoppel, and Restitution

Wednesday should focus on the second pillar of contract formation: why the promise is enforceable.

Formation does not end with offer and acceptance. Even if parties appear to agree, contract law still asks whether there is a legally recognized reason to enforce the promise. The central doctrine is consideration. When consideration is absent, a student must ask whether a substitute theory, such as promissory estoppel, or an equitable recovery theory, such as restitution, may apply.

The key lesson for Wednesday is that enforceability requires more than a promise. The student must ask whether there was consideration, reliance, or unjust enrichment.

The central doctrine is consideration. Consideration is a bargained-for exchange involving legal value. The promise must induce the return promise or performance, and the return promise or performance must induce the original promise. In plain English, each side must give or promise something the law recognizes as value.

Students should learn that courts generally do not examine the adequacy of consideration. A bad bargain is still usually a bargain. If I sell a book worth $100 for $10, that may be poor business judgment, but it is still consideration. The law normally polices the existence of bargain, not the economic wisdom of the exchange.

Now let’s take a look at legal value. Legal value can include doing something one had no prior legal duty to do, promising to do something one is not already obligated to do, refraining from something one has a legal right to do, or promising such forbearance.

A classic example is giving up the legal right to smoke, drink, gamble, or sue in exchange for a promise of payment. Forbearance can be consideration if the claim is valid or honestly and reasonably believed to be valid.

The episode should then cover what is not consideration.

Next, students must learn the preexisting duty rule. Under the common law, promising to do what one is already legally obligated to do is not new consideration.

If a contractor agrees to build a house for $200,000 and later demands $240,000 to do the same work, the modification may fail for lack of consideration unless there is new consideration or an exception applies.

Under UCC Article 2, a contract modification for the sale of goods does not require consideration, but it must be made in good faith.

Now let’s shift to promissory estoppel. Promissory estoppel is a substitute for consideration. It may make a promise enforceable when the promisor should reasonably expect the promise to induce action or forbearance, the promise does induce such reliance, and injustice can be avoided only by enforcement.

Students should learn the elements: promise, foreseeable reliance, actual reliance, reasonable reliance, and injustice.

Promissory estoppel is especially important for charitable subscriptions, family promises, employment promises, subcontractor bids, and situations where one party reasonably changes position based on another party’s promise.

The remedy may be limited as justice requires, meaning the court might award reliance damages rather than full expectation damages.

The episode should also introduce restitution and quasi-contract. Restitution prevents unjust enrichment. Even when there is no contract, a person who confers a benefit on another may recover if the defendant knowingly accepted or retained the benefit under circumstances making it unjust to keep it without paying.

The law may imply a contract in law, often called quasi-contract, to avoid unjust enrichment. This is not a real contract based on mutual assent. It is an equitable remedy.

Students should learn the emergency services example. If a doctor provides emergency care to an unconscious patient, the patient did not assent in the ordinary contractual sense. But restitution may allow recovery for the reasonable value of services because the patient received a necessary benefit under circumstances where consent was impossible.

Formation Part Two focuses on why a promise is enforceable. Consideration is the central doctrine. It requires a bargained-for exchange involving legal value. Courts generally do not examine the adequacy of consideration, so a poor bargain may still be enforceable if a real bargain exists.

Legal value can include doing something one had no prior legal duty to do, promising to do something one is not already obligated to do, refraining from something one has a legal right to do, or promising such forbearance. Forbearance from suit can be consideration if the claim is valid or honestly and reasonably believed to be valid.

Not all promises contain consideration. Gift promises, past consideration, illusory promises, and promises to perform preexisting duties usually fail as consideration. Under the UCC, requirements contracts and output contracts are not illusory when governed by good faith, and Article 2 modifications do not require consideration if made in good faith.

Promissory estoppel may enforce a promise when there is no consideration but there is a promise, foreseeable reliance, actual reliance, reasonable reliance, and injustice that can be avoided only by enforcement. Restitution prevents unjust enrichment by allowing recovery for benefits knowingly accepted or retained under circumstances where it would be unjust not to pay. Restitution through quasi-contract is not a real contract based on mutual assent; it is an equitable remedy.