The law is constantly evolving. 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. This is, in part, because society understands that old principles cannot adequately address every modern scenario. A novel scenario often modifies established principles. In some cases, we need to develop a new principle altogether in order to produce an equitable outcome. Novel scenarios are the backbone of common law.
This continually evolving system shapes our law of contracts. The case of Hamer v. Sidway (1891) famously clarified the concept of consideration. The court could not apply preexisting principles in the case of Hamer v. Sidway. Instead, the court innovated to create a just ruling.
Hamer v Sidway: The Case
An uncle (William E. Story I) promised his nephew (William E. Story II) $5,000 if the nephew avoided alcohol, tobacco, foul language and gambling until the age of 21. The nephew agreed to abstain until his 21st birthday.
On his 21st birthday however, the uncle convinced his nephew to postpone paying the sum of money until a later in his life. The uncle passed away before he could transfer the money to his nephew. Consequently, Franklin Sidway (the executor of the uncle’s estate), denied the nephew payment. Sidway claimed no official contract existed. As a result, the nephew filed suit against Sidway.
Sidway argued no valid consideration existed because there was no bargaining process or anything of value exchanged between the parties. The nephew counterargued consideration was at the forefront; he avoided activities he was entitled to participate in because of the agreement.
What’s the law say?
At the time of Hamer v Sidway, the so-called “benefit-detriment theory” of consideration was still viable. This theory establishes consideration if the person suffers a detriment or excluded from an activity.
Court rules in favor of Hamer
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.
Image by Gerd Altmann