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Consideration appears to be a two-way street. It seems consideration typically follows the promises or obligations of the parties. For example, the contractor’s promise (obligation) to render supplies/services and, after acceptance, the government’s obligation to pay (return promise). Both parties receive consideration.

When a contracting officer modifies a contract, the government must receive consideration if the contractor breached its obligation. Here, the government’s forbearance is consideration to the contractor. In exchange, the contractor provides an equitable price reduction or other consideration. Both parties receive consideration.

Now, since a breach occurred, could adequate consideration be the contractor’s new promise to render the same supplies or services at a later date and at the same price? This doesn’t seem right to me under normal circumstances.

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A modification (supplemental agreement?) by the government to extend the delivery date without an exchange of consideration might seem to be a gift to the contractor.

But the question is so general, and all pertinent facts are withheld, that it might be difficult to have a meaningful conversation here.

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@ji20874

There is no particular scenario other than what’s provided. I was just recently having a discussion and reading about consideration. Restatement of the Law, Contracts, 2d ed. has given me a headache. And Administration of Government Contracts, 4th ed. didn’t provide much coverage.

I really just wanted to start a dialogue about concepts and principles. Perhaps pick up some nuggets or clarifying points.

Do you agree that during (1) contract formation; and (2) contract modification, all parties must generally receive consideration? For example, it’s not adequate for only one party to receive consideration.

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Think offeror (promisor) and offeree (promisee). Offeror makes a promise. Consideration flows from the offeree to the offeror.

So...

1. The offeror, a business firm, promises to act by a certain date for a price. The offeree, the Government, accepts it, and as consideration makes a return promise to pay the stipulated price. The contract is formed accordingly.

2. Contractor fails to perform, has no excuse, and asks for an extension to a new date.

3. Government offers to extend to the new date as requested for a price reduction of $X.

4. Contractor, the offeree, accepts the offer and as consideration makes a return promise to perform by the new date at the reduced price. The price reduction is necessary consideration, because the Contractor's promise to do what it is already obligated to do cannot, alone, serve as consideration.

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6 hours ago, Jamaal Valentine said:

@ji20874

There is no particular scenario other than what’s provided. I was just recently having a discussion and reading about consideration. Restatements of the Law, Contracts, 2d ed. has given me a headache. And Administration of Government Contracts, 4th ed. didn’t provide much coverage.

I really just wanted to start a dialogue about concepts and principles. Perhaps pick up some nuggets or clarifying points.

Do you agree that during (1) contract formation; and (2) contract modification, all parties must generally receive consideration? For example, it’s not adequate for only one party to receive consideration.

Jamaal,

There's series of courses on Wondrium (used to be The Great Courses) called "Law School for Everyone". The course on Contracts has a 30-minute lecture on consideration. It's the best explanation (and critique) of consideration that I know of.

https://www.wondrium.com/law-school-for-everyone-contracts 

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@Jamaal Valentine

In addition to the Wondrium course, see the lengthy entry on consideration in Black's Law Dictionary, 11th ed. The basic definition is as follows:

Quote

Something (such as an act, a forbearance, or a return promise) bargained for and received by a promisor from a promisee; that which motivates a person to do something, esp. to engage in a legal act. 

Another terrific resource is Google Scholar. Go there and search for "doctrine of consideration" in quotation marks and you'll get a long list of scholarly writings about consideration going back to the beginning of the 20th Century, including many that recount the history of its origin and development. But don't expect the articles to make everything clear. As you'll see, many legal scholars think the doctrine is almost impenetrable. Reading about it has made my head hurt from time to time.

But try this one: "The Principles of Consideration" by Eisenberg, Cornell Law Review (1982):

https://scholarship.law.cornell.edu/cgi/viewcontent.cgi?article=4281&context=clr

And this: https://verkerkecontractsone.lawbooks.cali.org/chapter/the-consideration-doctrine/#:~:text=(1) To constitute consideration%2C,in exchange for that promise.

Prof. Nash briefly discussed consideration in return for a contract modification in a short article in this month's (May 2022) issue of The Nash & Cibinic Report, entitled, "Revising A Fixed-Price Contract: Consideration Required." In it he discusses the source of the long-standing rule that a contracting officer cannot give away a Government right without getting something in return. He thinks it may be based on a 1941 Supreme Court decision, Royal Indeminity Company v. U.S., 313 U.S. 289, in which the court said:

Quote

Power to release or otherwise dispose of the rights and property of the United States is lodged in the Congress by the Constitution. Art. IV, § 3, Cl. 2. Subordinate officers of the United States are without that power, save only as it has been conferred upon them by Act of Congress or is to be implied from other powers so granted.

One thing—You said:

14 hours ago, Jamaal Valentine said:

Consideration appears to be a two-way street. It seems consideration typically follows the promises or obligations of the parties. For example, the contractor’s promise (obligation) to render supplies/services and, after acceptance, the government’s obligation to pay (return promise). Both parties receive consideration.

That's incorreect. Only one party gets consideration—the offeror (promissor). One party makes an offer, the other party receives it (the offeree or promisee). The party that receives and decides to accept the offer must provide consideration to the party that made the offer in order for the contract to be binding. Consideration flows from offeree to offeror.

When a Government contract is formed through an exchange of promises, from offeror to Government, consideration takes the form of a return promise by the Government. See the Restatement 2d, October 2021 Update, § 71:

Quote

 

(1) To constitute consideration, a performance or a return promise must be bargained for.

(2) A performance or return promise is bargained for if it is sought by the promisor in exchange for his promise and is given by the promisee in exchange for that promise.

(3) The performance may consist of

(a) an act other than a promise, or

(b) a forbearance, or

(c) the creation, modification, or destruction of a legal relation.

(4) The performance or return promise may be given to the promisor or to some other person. It may be given by the promisee or by some other person.

 

A purchase order is a Government promise. The consideration is performance by the offeree, which accepts the Government's offer by performing. Modification transactions may require analysis in order to identify offeror and offeree.

If you're reading the student edition of the Restatement you should know that the Restatement has been updated.

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@Don Mansfield, thank you. I don’t know why I’m having so much trouble with this. I feel like I know what consideration is, but I don’t really understand it. 
 

@Vern Edwards, thank you for the insights and correction. I am using the student edition of the Restatement. You and Don have graciously provided plenty to dig into. My goal is to better understand consideration to the point I can explain it to others (not just superficially).

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1 hour ago, Jamaal Valentine said:

I don’t know why I’m having so much trouble with this. I feel like I know what consideration is, but I don’t really understand it. 

Everybody has trouble with this.

The easy way to think of it is this: In order for there to be a contract there must be a bargain. In order for there to be a bargain there must be an exchange between the parties.

In government contracts other than those created by purchase order the parties exchange promises. The offeror makes a promise called an "offer" seeking a promise in return. The Government makes a promise in return, which constitutes what the law calls "consideration."

Imagine this conversation:

Offeror: I promise that I will do what your SOW requires if you will promise to pay me $1,000,000 for doing it.

Government: I accept your promise, in consideration for which I promise to pay you $1,000,000 for doing what our SOW requires.

Both parties: We have a bargain!

Easy-peasy. Works the same way for bilateral mods.

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6 hours ago, Vern Edwards said:

Modification transactions may require analysis in order to identify offeror and offeree.

In addition, no further consideration may be required for a modification because the modification may be supported by previous consideration.  Think exercise of an option or the issuance of a unilateral change order.

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7 hours ago, Vern Edwards said:

 

Modification transactions may require analysis in order to identify offeror and offeree.

Modifications are where the trail goes cold. I think I can pick back up on the scent now that I am not looking for consideration from each party.

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Setting aside change orders and equitable adjustments, many supplemental agreements are made because the parties want to make an out-of-scope change. Such changes are like new contracts. One party makes an offer and the other party accepts. The parties might not speak of it in those terms, but transaction analysis will usually show that's is happening.

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  • 2 months later...

So, in a practical application of consideration (or lack thereof) which happens frequently, a purchase order is awarded (signed by the contractor, even though it doesn't have to be), the contractor fails to deliver on time and the contracting officer believes that they must extend the contract delivery date to maintain an active contract. The contractor is unwilling to provide a discount or any other type of consideration to compensate for an agreed upon later delivery, so the CO just extends the delivery date without consideration. What is wrong with just leaving the contractor in a late delivery status on the PO?

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11 hours ago, Pappy said:

What is wrong with just leaving the contractor in a late delivery status on the PO?

One risk is that inaction by the Government could be interpreted as a waiver of the delivery schedule. In that case, the Government would likely lose its right to terminate for default. 

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3 hours ago, Don Mansfield said:

One risk is that inaction by the Government could be interpreted as a waiver of the delivery schedule. In that case, the Government would likely lose its right to terminate for default. 

See Administration of Government Contracts, 5th ed., pp. 843-57, Waiver of Right to Terminate:

Quote

If the government does not exercise its right to terminate for default within a reasonable time, and the contractor relies to its detriment on such forbearance by continuing with performance, the government will be held to have waived the right to terminate.

But the law of waiver is complicated and confusing, so read the enter section of the book.

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On 8/5/2022 at 6:12 AM, Pappy said:

The contractor is unwilling to provide a discount or any other type of consideration to compensate for an agreed upon later delivery, so the CO just extends the delivery date without consideration. What is wrong with just leaving the contractor in a late delivery status on the PO?

If the government plans on issuing a timely cure, show cause, or termination notice, it probably wants to leave the original delivery date. But see, FAR 12.403(c) for commercial acquisitions.

Generally, if the government is going to accept the late delivery or change the delivery date for the contractor’s benefit, the government must receive consideration (statutory exceptions may apply - e.g., extraordinary relief granted under public law). As stated in a previous post, consideration comes in many forms.

Maybe the contracting officer terminates and re-procures at the contractor’s expense. Maybe the contracting officer issues a claim against the contractor and makes a final decision on a discount that the contractor could appeal.

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Maybe I'm out of line here (if so, tell me) but, in private industry, an cost/benefit analysis is sometimes made before modifying an existing contract and asking for consideration in return. In the government procurement environment, typically there are many sellers and only one buyer (monopsony). In the private sector, there may be only one (or a very few sources)--and letting the bargain originally made run its course may not be in the buyer's best interests if it results in non-performance by the seller. It may be difficult (or impossible) to find a replacement supplier and, at a minimum, doing so would disrupt program schedules.

For example, in the global financial meltdown of 2008 - 2010, many Airbus suppliers were simply unable to perform to the terms of the original bargain. As a result, Airbus modified existing contracts (without consideration, as I recall) and did what it had to do in order to keep its qualified suppliers financially viable.

I did a quick search, looking for support for my memory of the situation, and found this 2011 report. I recall there were several such actions taken; more frequently Airbus modified existing contracts to accelerate supplier cash flow and to increase contract prices. The consideration, if you will, was that Airbus could keep its aircraft programs on schedule and did not have to find and qualify and train new suppliers to replace the ones that went bankrupt.

Just throwing this out here, because I think the different approaches are interesting to compare/contrast.

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1 hour ago, Don Mansfield said:

The Government can modify contracts without consideration, too.

A reference would be nice.

See FAR Part 50, Extraordinary Contractual Actions and the Safety Act;

     Subpart 50.1, Extraordinary Contractual Actions;

          Section 50.103, Contract adjustments;

               Subsection 50.103-2, Types of contract adjustment;

                    Paragraph (a), Amendments without consideration.

(Note the use of the word "amendment" instead of modification. Once upon a time contract modifications were referred to as amendments.)

Such adjustments were authorized by Public Law 85-804, 50 U.S.C. §§ 1431-35, which was enacted in 1958.

According to an article in the Public Contract Law Journal:

Quote

The most notable aspects of Public Law 85-804 are the president's virtual carte blanche authority to allow departures from government contract law under the stated purpose of facilitating the national defense. Congress designed Public Law 85-804 to allow the president a temporary wartime shortcut around the government procurement system. As originally passed, 85-804 authority was expressly limited to emergency wartime contracting. However, in 1978, when the state of national emergency was terminated, Congress exempted Public Law 85-804 from the provisions of the Act terminating the emergency. Effectively, until Congress or the president says otherwise, the “wartime” limitation has been read out of the statute (though the need to exercise these powers in support of the national defense remains).

See Tolan, Jr., Environmental Liability Under Public Law 85-804: Keeping the Ordinary out of Extraordinary Contractual Relief, 32 Pub. Cont. L.J. 215 (2003).

Keep in mind that a contractor may be relieved of liability for late performance in the face of an excusable delay. See, e.g., FAR 52.249-8, paragraph (c), and Administration of Government Contracts, 5th ed., pp. 487-521. 

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Here’s some information I was thinking about when I started this thread. The first quote is what lead me to believe consideration went both ways. It also states that requirement of consideration applies to modifications. The second quote and third quotes speak to potential exceptions for the consideration requirement.

“Inasmuch as gratuitous promises generally are not enforceable, the existence of a valuable consideration on the part of both the offeror and offeree is an essential element of a contract. Where there is lack of consideration and mutuality, there is no contract. The requirement of consideration is equally applicable to supplemental agreements or contract amendments. The general rule is that in the absence of a statute specifically so providing no agent or officer of Government has the power to give away or surrender a vested contractual right of the Government. 22 Comp. Gen. 260 (1942); cf., 41 id. 134 (1961).” (Italics added)

“Normally Government contracts entail numerous promises and obligations by each party. However, consideration to support the agreement may also be furnished by the waiver or forbearance to exercise a legal right. 41 Comp. Gen. 7.30 (1962). In this regard, the parties to a Government contract may by mutual agreement release each other from executory obligations. Savage Arms Co. V. United States, 266 U.S. 217 (1924).”

“The requirement of consideration does not apply to extraordinary relief granted under Public Law 85-804, 50 U.S.C. 1431. The Comptroller General also has ruled that new consideration is unnecessary to renew a debt barred by the statute of limitations. B-162293, September 29, 1967.”

https://www.gao.gov/assets/088867.pdf

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@Jamaal ValentineThere is a wealth of scholarly literature about consideration available through Google Scholar that goes back more than a century. Don't try to learn about legal concepts by reading Comptroller General decisions. They are often carelessly written and confusing. They are not written by scholars.

Access Google Scholar and search for <doctrine of consideration contract law>. Be persistent. Ask yourself questions. 

And Jamaal, you won't learn by reading just one article. You must read many, and sort things out.

Enjoy the journey.

 

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20 minutes ago, Vern Edwards said:

Don't try to learn about legal concepts by reading Comptroller General decisions. They are often carelessly written and confusing. They are not written by scholars.

 

Thank you. The information you and Don provided in May was extremely helpful. I’ll keep this additional pro-tip in mind as well.

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