In America, our law is a constantly evolving mechanism. Along with the codes passed by legislative bodies and administrative agencies, we adhere to principles derived from our common law tradition. In our common law system, established principles have significant weight, but they are not necessarily binding because our society understands that old principles cannot adequately address every factual scenario. Sometimes a novel scenario requires that an established principle be modified – or a new principle be developed altogether – in order to produce an equitable outcome. Our whole body of common law is quite literally the sum of all the changes which have been made in response to new factual scenarios.
Our law of contracts has been shaped by this continually evolving system. Because an infinite number of factual scenarios are possible, it follows that our law of contracts will never be completely “set” or finished; but as more and more rulings are issued our general picture of our law of contracts will become clearer. The famous case of Hamer v. Sidway (1891) is an excellent example of a scenario which helped to clarify the concept of consideration. Because the facts of Hamer v. Sidway were unique, the court could not simply apply preexisting principles in a straightforward manner but instead had to innovate to create a just ruling.
The basis of the suit was a promise made between an uncle (William E. Story I) and his nephew (William E. Story II). The uncle promised his nephew a sum of $5,000 if he would avoid alcohol, tobacco, foul language and gambling until the age of 21. The nephew agreed to abstain from such things and fully complied until his 21st birthday. However, though the promise had concluded, the uncle convinced his nephew to postpone receiving the sum of money until a later period in his life. The uncle passed away before he could transfer the money to his nephew. Subsequently, a suit was brought to collect the sum because the executor of the uncle’s estate (Franklin Sidway) denied that a valid contract had been created.
Sidway argued that valid consideration did not exist because there was no bargaining process or anything of value exchanged between the parties. The counterargument was that consideration had been created because the nephew had voluntarily agreed to avoid certain activities even though he was legally permitted to partake in them.
At the time of Hamer v. Sidway, the so-called “benefit-detriment theory” of consideration was still viable. This particular theory of consideration held that valid consideration could be established through a detriment suffered or forbearing from an activity.
Though the nephew did not confer a benefit or transfer something of value to his uncle, valid consideration was created because the nephew voluntarily refrained from engaging in a number of activities he was otherwise permitted to engage in. The court (the New York Court of Appeals) overturned the decision of the intermediate appellate court and ruled in favor of Hamer.
Today, the benefit-detriment theory of consideration holds less weight than it did in the time of Hamer v. Sidway, but it is still relevant. Business owners need to be aware of the many theories which govern the law of contracts so that they can make informed decisions.
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As has been stated prior on this blog, a working knowledge of contract law is an invaluable tool for businesspeople. If you’re considering starting your own business, view the following video by our CPA Jessica Chisholm