Business Transaction Newsletter – March 2021

WHAT IS ENOUGH CONSIDERATION TO SUPPORT A CONTRACT?

In the case of Lance vs. Alcoa Hotel Hospitality, LLC, the Tennessee Court of Appeals dealt with the issue of what constitutes sufficient consideration to support a contract. In the Lance case, Lance entered into a contract with Alcoa Hotel Hospitality, LLC (“Alcoa”), to sell his 5.47% interest in Alcoa to a third party purchaser for $50,000.00, plus “other good and valuable consideration.” The contract provided further that Alcoa would pay Lance a management fee in future years. Alcoa paid the management fees for approximately ten (10) years and then stopped making the payments. Lance sued Alcoa and sought judgment for $47,000.00 for the unpaid management fees. Alcoa defended alleging that the contract failed for lack of consideration. The Trial Court found that Lance had failed to demonstrate he provided any consideration to Alcoa for payment of the management fees.

The Court of Appeals reversed the Trial Court’s ruling and found that adequate consideration existed to support the obligation of Alcoa to pay the management fees. The Court of Appeals pointed out a number of important factors in determining when adequate consideration exists to enforce a contract. The Court of Appeals first cited Tennessee Code Annotated §47-50-103 that provides “all contracts and writings signed by the party to be bound, or the party’s agent and attorney, are prima facie evidence of a consideration.” The Court cited a Tennessee Supreme Court case from 1959 that wrote: “Consideration for a contract may be either a benefit to the promisor or a detriment to or an obligation upon the promisee. If a contract does not have valid, mutual consideration, it is invalid and unenforceable.” As a general rule, Tennessee courts have said consideration must be measured at the time the parties enter into the contract, and thus the diminished value of the economic benefit conferred, or even a complete lack of value after the parties enter into the contract, does not result in the failure of consideration. Any consideration, however small, will support a promise, and courts will not inquire into the adequacy or inadequacy of the consideration for a compromise fairly and deliberately made.

As a result of these findings, the Court of Appeals reversed the Trial Court and allowed Mr. Lance’s claim for management fees.

MY RECOMMENDATION: Rarely in written contracts do I find the issue of lack of consideration. When those type issues arise in written contracts, they usually relate to some aspect of future performance. More commonly, lack of consideration arises in oral contracts because the provisions of oral contracts frequently are not clear, and parties’ recollections of what was promised and committed to often vary. The components of a valid contract are learned by every law student in his or her first semester. A valid contract requires offer, acceptance, consideration, capacity of the parties, and lack of fraud.

Yours very truly,

William C. Bell, Jr., Attorney at Law

bell@raineykizer.com

731.423.2414 Ext. 2213

RAINEY, KIZER, REVIERE & BELL, P.L.C.