Giving Consideration Due Consideration

Posted by William J. Piercy on

People enter into contracts with each other for self interested reasons; each hopes to gain something from the other.  Employees give their labor and time to employers in exchange for a salary.  Retailers give their products to customers in exchange for money.   Lenders give borrowers lump sums of money upfront in exchange for larger sums paid out over time.  Like a two-way street, there is something of value flowing in both directions.  In legal parlance, this bargained for mutual exchange is known as consideration.  Without mutual consideration, there is no enforceable contract.  In most instances, a unilateral promise is unenforceable, even if broken.

A 2013 decision of the Georgia Court of Appeals highlights the importance of documenting the mutual consideration that supports a contractual relationship with specificity. In Nash v. Township Invs., LLC, Metropolitan Land Development and Investments, LLC borrowed about $475,000.00 from Township Investments, LLC.  Norman Nash, Metropolitan’s CEO, signed the loan documents on behalf of Metropolitan and also personally guaranteed the repayment of the debt.  The debt and the guarantee were renewed several times with Metropolitan’s debt eventually growing to more than $670,000.00.

In September 2008, Norman Nash and Norris Nash signed a $478,800.00 promissory note in favor of Township.  That note made no mention of Metropolitan or any prior indebtedness.  When Norman and Norris defaulted on the note, Township sued them.

In their defense, the Nashes claimed that there was no consideration for the promise to pay Township $478,800.00; in other words, Township never gave the Nashes $478,800.00 or anything else in exchange for their promise to pay.  Norman and Norris argued that because consideration was lacking, the note was unenforceable.  For its part, Township argued that the consideration for the Nashes’ note was Township’s forgiveness of Metropolitan’s $670,000.00 debt. Yet, the Nashes’ note made no mention of Metropolitan or the forgiveness of $670,000.00.

Because the Nashes’ note did not specify on its face what consideration the Nashes were to receive, Township was unable to obtain a judgment against the Nashes in summary fashion.  Instead, a full trial would be necessary to determine what consideration, if any, Township gave to the Nashes in exchange for their promise to pay.  While it is unlikely that the Nashes signed a $475,000.00 promissory note in favor of Township “just because”, the omission from that note of a description of any consideration that the  Nashes did receive left the enforceability of the note in question and prevented Township from receiving a prompt resolution in its favor.

While it is not uncommon for a business relationship such as the one between Metropolitan, Township and the Nashes to morph over time, it is important to be fastidious in memorializing the evolving nature of the relationship.  Giving due consideration to these details (and spending some time with experienced counsel) on the front end can save a big (costly) headache and a trip to the courthouse down the road.