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Valparaiso Univ. Law School

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Sunday, October 30, 2005

A Matter for Consideration

Why do we enforce contractual promises only if they are supported by consideration?  That question has troubled contract theory from the very beginning.  David Scott Gamage (Texas) and judicial clerk Allon Kedem have come up with a new take on the question, in Resolving the Paradox of the Consideration Doctrine: The Implications of Inefficient Signaling and of Anti-Commodification Norms, now available on SSRN.  Here's the abstract:

This paper addresses one of the central problems of contract law, a puzzle that has troubled generations of contracts scholars: Why do we only enforce promises backed by consideration?  Or, how can we justify insisting on the bargain context, but not requiring that the bargains be adequate? The lack of a theoretical solution to this puzzle has plagued the application of the consideration doctrine in courts of law.

We resolve this paradox through two innovations. First, using a game theory model based on asymmetric information, we dispute the common wisdom that the law should honor parties' intentions as articulated at the time of contract formation. We show how parties' expressed intentions may not conform to their underlying desires. Crucially, the mere fact that parties take advantage of a legally binding option does not imply that they desire the existence of that option.  When courts create an option for the legal enforcement of promises, parties can essentially be forced into exercising that option.

How then can the law determine which promises to enforce? Our second innovation shows how social norms against commodification limit the availability of the consideration form. Where previous scholarship has assumed that anyone so wishing can invoke nominal consideration, we argue that anti-commodification norms make even nominal consideration unavailable within certain social contexts. Moreover, the contexts in which norms block the use of consideration are precisely the circumstances where creating a legally binding option would be most likely to harm both promisors and promisees.

Ultimately, what matters is not whether the parties actually do offer consideration, but rather whether they can voice consideration. Only when norms allow the use of consideration should we conclude that parties truly desire the option to have their promises legally enforced.

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