Key Takeaways

  • Failure of consideration occurs when a promised exchange of value fails after contract formation, making the contract unenforceable.
  • It differs from lack of consideration, which refers to a contract missing consideration at the outset.
  • Courts may grant restitution, rescission, or partial enforcement depending on the circumstances.
  • Defenses to breach of contract claims may include proving a failure of consideration.
  • Practical examples and real-world applications help clarify how failure of consideration impacts contract disputes.

Failure of Consideration

A failure of consideration exists when one party does not follow-through on an agreement to bestow something upon another person or party. In and of itself, failure of consideration is not sufficient grounds for demanding restitution, but rather creates the basis for those situations in which one party may pursue restitution from another.

How Failure of Consideration Arises

Failure of consideration arises when one party’s promised performance fails after a contract has been formed, leaving the other party without the benefit they expected. Unlike lack of consideration, which questions whether any valid consideration existed from the beginning, failure of consideration focuses on a breakdown in the promised exchange after the contract was established. Examples include situations where goods were never delivered, services were never performed, or a key license or permit required for contract fulfillment was revoked.

Courts may examine whether the failure was total or partial. A total failure of consideration may justify contract rescission, while a partial failure might entitle the harmed party to a proportional remedy.

Failure of Consideration vs. Lack of Consideration

Despite the similarity in their names, there is a difference between failure of consideration and lack of consideration. Primarily:

  • A failure of consideration occurs when one party’s lack of follow-through results in the other party being unable to uphold their end of the agreement. For example, if you are a grant writer and you need someone to provide you with certain details before you can complete a grant proposal, and they do not do so, you, in turn cannot complete the grant proposal. Therefore, a failure of consideration has occurred.
  • A lack of consideration occurs when a contract does not place obligations on all involved parties. For example, let us assume the previously mentioned grant writer does not require information to be provided to them, but rather they just fail to complete the grant proposal by the required date. In this case, a lack of consideration has occurred.

Legal Significance of the Distinction

Understanding the difference between failure of consideration and lack of consideration is critical because they lead to different legal consequences.

  • A lack of consideration means a contract may never have been validly formed, making it void or unenforceable from the start.
  • A failure of consideration allows a party to claim rescission or restitution after a valid contract was created but could not be fulfilled.

In litigation, a defendant may use failure of consideration as an affirmative defense to avoid enforcement of an otherwise valid contract. Courts will look at whether the failure defeated the contract’s essential purpose, based on factors like materiality and the extent of performance completed.

Ways to Remedy Such Situations

Anytime there is a breach of contract, the knee jerk reaction of most people is to take legal action. This is not unreasonable, as either a failure or lack of consideration can easily result in the following issues:

  • Loss of income or earnings
  • Damaged reputation
  • Additional resources needing to be spent to complete the assigned job

The most common way by which people choose to address a breach of contract, or failure or lack of consideration, is through financial restitution. Simply put, the hurt party involved with the contract seeks monies lost. For example, a homeowner, who needs to hire a new house painter because the initial one did not complete the job, may seek restitution from the painter, to cover the costs of having to hire a new painter.

Apportionment is yet another way by which a party may choose to address a failure of consideration or lack of consideration. This is often pursued when only part of the contract was not fulfilled. Essentially, this method is used to divide the contract into different parts or areas, versus viewing it as the entire contract being invalidated or not upheld.

You may have heard the term, “gentlemen’s agreement.” In some situations, the involved parties may have the type of relationship that allows for them to not immediately take legal action. Instead, they may choose to enter into a gentlemen’s agreement, which is often a verbal agreement, established by all parties. While this is often the friendly route to take, it can create problems, down the road, as it is often difficult to prove or enforce, should legal recourse be needed.

Additional Remedies for Failure of Consideration

Beyond restitution and apportionment, other remedies may include:

  • Rescission of the contract: allowing the parties to be restored to their pre-contract positions.
  • Specific performance (in limited cases): compelling the breaching party to fulfill their obligation if the failure was only partial and capable of being remedied.
  • Setoff claims: allowing a party to reduce damages owed under the contract due to the other party’s failure of consideration.

It’s important to note that courts often weigh good faith efforts to perform and equitable considerations before granting rescission or other remedies.

Breach of Contract

So, is it a breach of contract when a failure of consideration or lack of consideration occurs? A breach of contract is quite easy to identify and define, as it exists when one of the parties who had entered into a contract does not uphold their end of the agreement, either in full or in part. As such, a failure of consideration may occur as the result of a breach of contract.

Additionally, the breach of contract must be considered material, meaning that the breach must result in the entire contact in the entire being rendered ineffectual, or vastly different from what had been initially conceived. For example, if Party A does not complete Project A, then they cannot move onto completing Project B, which in turn may mean that the entire contract can no longer be fulfilled.

Further factors in determining whether or not a breach was material, include:

  • Is there any good faith to complete the job in a revised timeframe, on the pat of the breaching party?
  • The hardship that resulted from the breaching party not upholding their end of the agreement. (This is generally considered to be financial hardship.)
  • What kinds of damages would need to be provided to the non-breaching party?
  • How much of the contract was completed, and can the remainder be completed in a reasonable amount of time?

Failure of Consideration as a Defense to Breach of Contract

In breach of contract disputes, failure of consideration can serve as a defense against enforcement of a contractual obligation. A party facing a claim for breach may argue they were not required to perform because the other party failed to provide the promised consideration.

Courts generally assess:

  • Whether the failure of consideration was material to the contract’s primary purpose.
  • Whether any partial consideration was provided that may warrant partial enforcement.
  • Whether the contract included clauses addressing remedies for a failure of consideration.

Defendants bear the burden of proving the failure of consideration occurred and that it justifies their nonperformance or excuses further obligations.

Frequently Asked Questions

  1. What is the difference between failure of consideration and lack of consideration?
    Failure of consideration happens after contract formation when a promised exchange fails; lack of consideration means no valid exchange existed at the outset.
  2. Can failure of consideration void a contract?
    Yes, a total failure of consideration may justify rescinding the contract, making it unenforceable.
  3. How can a party prove failure of consideration?
    Proof requires showing that a material promise or performance was not delivered as agreed, undermining the contract’s purpose.
  4. Is failure of consideration a valid defense in court?
    Yes, it can be raised as an affirmative defense to avoid enforcement or liability under a breached contract.
  5. What remedies are available for failure of consideration?
    Common remedies include restitution, rescission, setoff, or partial enforcement depending on the extent of the failure.

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