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Why Do Contracts in Law Require Consideration?

What is “consideration” and why is it important for legal contracts? Professor Seth Oranburg explains that the purpose of contracts is to maximize societal welfare. In order to do that, contracts need to be premised on parties exchanging goods for value, which is the element of consideration. https://youtube.com/watch?v=K9oJcPr4g5U


A legal contract is predicated on two parties freely entering into an exchange of something for value. There has to be an offer, and the offer will set the terms. The other party can agree to the offer and accept or make a counteroffer, which functions as a new offer that the first party can once again accept or reject and counteroffer. The offer itself, however, has to contain terms which contemplate an exchange of value, that’s called “bargain for exchange.” This element is often called consideration as well. Consideration simply means both parties expect to get something of value from this deal. The concept of consideration, or bargain for exchange is directly linked to our ideas about why contracts are beneficial for society in general. The opposite of consideration or bargain for exchange would be a gratuitous promise or promise to give a gift. And other than the good feeling you get from giving a gift to someone else, there’s nothing of value per se in that exchange. Rather, the law focuses on the types of promises that we may not be inclined to keep if it turns out that that value proposition changes. Let’s say that I promise to buy and you promised to sell me 100 pencils for $100. And when it comes time for shipment, there is a universal graphite and wood shortage such that your pencils become much more valuable. You'll be inclined not to follow through on your obligation because you're now not getting as much value as you might by breaking your promise. Contract law won't actually force you to sell me those pencils for $1 each. Rather contract law will force you to pay me the value I expected to receive. And you're then free to sell those pencils for $500 to someone else who values them more because this gets us to the result of having the most value in society. I received the value I would have gotten had I gotten the pencils, and you get to sell them at their highest price, giving you more value and increasing our overall social welfare to the maximum possible under this exchange. This is a solution called efficient breach. And the fact that we have an efficient breach concept in contract law indicates that contract law is about maximizing social value and social welfare in this way.

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