Also known as: inadequate consideration · inadequacy consideration · adequacy of consideration
Written by attorneys · grounded in primary & secondary sources — see below
2 senses
A disparity between the values exchanged in a bargain. Gross disparity alone does not invalidate the agreement but may support a finding of unconscionability or provide grounds to deny specific performance.
A board determination that property or benefits received for shares meet a minimum threshold of value. Once made, the determination conclusively establishes that the shares are validly issued, fully paid, and nonassessable.
Each sense below has its own examples, sources, and questions.
A disparity between the values exchanged in a bargain. Gross disparity alone does not invalidate the agreement but may support a finding of unconscionability or provide grounds to deny specific performance.
After National Metal Crafters began performance on a parts contract, Wisconsin Knife Works demanded a price reduction and threatened to cancel if refused. National Metal Crafters agreed to the lower price without receiving any additional promise or benefit in return. The modification failed for lack of consideration even though the original bargain remained enforceable.
Interactive Data presented Foley with a new noncompetition agreement after he had already begun at-will employment. Foley signed without receiving any raise, bonus, or other tangible benefit beyond continuation of the same job. The court held that the continued at-will employment supplied sufficient consideration to support the agreement.
No. Inadequacy of consideration does not of itself invalidate a bargain. Only when the disparity is so gross as to shock the conscience or combine with other factors indicating unconscionability or fraud will a court refuse enforcement or deny specific performance.
When the inadequacy is accompanied by other inequitable circumstances, such as weakness in the bargaining process or a vulnerable party, courts may view the disparity as corroborating fraud or constructive fraud and may rescind the contract.
A board determination that property or benefits received for shares meet a minimum threshold of value. Once made, the determination conclusively establishes that the shares are validly issued, fully paid, and nonassessable.
PrairieTech's board approved issuance of shares to Red River Farmers Partnership for storage equipment, an exclusive five-year supply contract, and a promissory note. An outside investor challenged the issuance on the ground that future crop deliveries rendered the consideration inadequate. The board's prior determination that the package was adequate rendered the shares validly issued, fully paid, and nonassessable.
The board of directors must determine adequacy before shares are issued. Once the board makes that determination, it is conclusive on the questions of whether the shares are validly issued, fully paid, and nonassessable.
Yes. Permissible consideration includes contracts for services to be performed and promissory notes. The board's determination that such consideration is adequate renders the shares validly issued, and the shares become fully paid and nonassessable once the corporation receives the authorized consideration.
The statute requires the board to make the determination before issuance. Without it, the conclusive effect on validity, full payment, and nonassessability does not attach, leaving the shares open to challenge.
…or not there is fresh consideration, the latter because, since common law courts inquire only into the existence and not the adequacy of consideration, a requirement of fresh consideration has little bite. B might give A a peppercorn, a kitten, or a robe in exchange for A's agreeing to reduce the contract price, and then the modification…
…agreed-upon exchange. Rose v Lurvey , 40 Mich App 230, 234; 198 NW2d 839 (1972). Equity will, however, grant relief where the inadequacy of consideration
…by the employee. While we are not prepared to abandon our long-established precedent that courts may not inquire into the