A Note on Sham Recitals of Consideration Under Texas Law

1464-Eight, Ltd. v. Joppich, 154 S.W.3d 101 (Tex. 2004) (PDF copy here), involved a dispute over an option contract to purchase real estate. The contract included the following recital of consideration:

In consideration of the sum of Ten and No/100 ($10.00) Dollars (“Option Fee”) paid in cash by Developer, the receipt and sufficiency of which is hereby acknowledged and confessed, Purchaser hereby grants to Developer the exclusive right and option to purchase [the Property].

Joppich subsequently claimed that because the developer hadn’t paid the $10, the option contract wasn’t supported by consideration. The trial court held in favor of the developer; the court of appeals held in favor of Joppich.

In reversing the court of appeals, the Supreme Court of Texas endorsed the approach of section 87(1)(a) of the Restatement (Second) of Contracts, which takes the position that a false recital of nominal consideration is sufficient to make an offer irrevocable so long as the underlying exchange is fair and the offer is to be accepted within a reasonable time.

This court acknowledged that this was “admittedly the minority position among the limited number of state supreme courts that have addressed the question.” Furthermore, it endorses a sham—never a good thing.

But as I’ve said many times, I’m not in the business of making a stand on principle at the expense of expediency. It’s Texas law that fake consideration is sufficient to support option contracts for the purchase of real estate, and drafters should act accordingly.

But it might be appropriate to inform contract parties of that sham, to disabuse anyone inclined to follow in Joppich’s footsteps and argue about it. That could be accomplished by something along the following lines:

The parties acknowledge that although the recital of consideration contained in this agreement is false, under Texas law a false recital of consideration is sufficient to support an option contract for the purchase of real estate.

Any thoughts on that, Texas lawyers?

Posted in Front of the Contract | 19 Comments

  • Mark Anderson

    I can’t claim to be a Texan lawyer, but aren’t there several issues here that need to be unpicked?

    (1) is a nominal financial amount, such as $10, valuable consideration? English law says yes.
    (2) does the amount of the consideration have to pass a test of adequacy or sufficiency? English law generally says no, so nominal amounts are usually fine.
    (3) does the failure to pay financial consideration make the contract invalid? English law generally says no, as consideration is a PROMISE to perform, not the performance itself. As is mentioned in some of the cases cited in the Texas case, the obligee can sue for the amount owed. However other cases cited in the Texan case seem to be suggesting that the payment is the consideration, which as an English lawyer I find confusing.

    (4) does the failure to pay the financial consideration affect the payer’s ability to obtain specific performance of the other party’s obligations? Specific performance is an equitable remedy and there is some English case authority to suggest that non-performance of an obligation by the plaintiff may cause the court not to grant specific performance against the other party. And if this is so, does reciting that the payment has been received improve the chances of the plaintiff getting specific performance? I believe this is thought to be a reason for including an acknowledgement of receipt.
    (5) these issues shouldn’t be confused with generic recitals of consideration as in “in consideration of the premises and for other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged”

    So, from my non-Texan, non-US, English law perspective, the sham is stating that the consideration has been paid, and not the inclusion of a clause that provides for a nominal amount of consideration.

    • http://www.adamsdrafting.com/ Ken Adams

      I see no distinction between “in consideration of $10″ and a generic recital of consideration. In both cases, the statement of consideration is a perfunctory sham. It’s never the case that the parties agree on $10 as appropriate consideration but oops, by mistake it never gets paid.

      • Mark Anderson

        Ken, I guess the question for me is whether the perfunctory sham achieves a legal result, ie turning an unenforceable contract into an enforceable one. Perhaps I am influenced by the widespread use of nominal consideration in certain types of English contracts, but I see a point in stating nominal consideration but I don’t see a point in reciting “good and valuable consideration”.

    • Westmorlandia

      Mark – If there is no provision in the agreement that says “Developer shall pay X $10″, perhaps the consideration was (supposed to be) the payment itself after all, as there was no promise? I agree that, where a party makes a promise, the promise (rather than the performance of it) is the consideration. However, I think an action can also be consideration – famously in Carbolic Smoke Ball Co., where the contract was formed, and the promise of the vendor made binding, by the use of the Carbolic Smoke Ball as per the advert.

      On that reading, if the $10 was not in fact paid, the whole consideration is indeed a sham.

      An alternative is that the court infers a promise regardless, on the basis that if the payment wasn’t made at the time then the most sensible interpretation of the recital is that there must therefore be an obligation to pay $10. Although, as the contract says that receipt is acknowledged, that interpretation would seem contrary to the face of the contract.

      Either would make some sense, in their own way. However, I think the consideration would certainly work, under English law, if the recital had been replaced by an obligation in the body of the contract to pay $10 – even if the $10 was never paid. That would have been a much better way of doing it.

      • Mark Anderson

        Looking further at Chitty on Contracts, I think you are right that the act of payment could be the consideration. A further benefit of the receipt wording (rather than merely promising to pay) may be that, irrespective of whether the money is actually paid, the receipt is binding as against third parties. This may be relevant, for example, when considering the legal effect of IP assignments that include such wording.

  • aggielawcpa

    I thought the point of the language is to prevent people from knowing exactly how much consideration was paid for a piece of real estate when a deed is recorded in public records. But what do I know . . . I’m just a dumb Texas lawyer.

    • Bradley B. Clark

      That is correct for a deed but the example here is an option contract and the $10 here is consideration for the option, not the purchase price of the property. To your other point, you are correct, in Texas, we don’t want appraisal districts using the value the parties used in the purchase transaction to set the taxable value of the property.

  • Chris Lemens

    Ken:

    If we are looking for something to be adequate nominal consideration that is provably not a sham, could we not come up with something that always happens in the contract process?

    – “In consideration of having negotiated and agreed with [other party]…”

    – “In consideration of the courtesties extended surrounding this contract…”
    – “In consideration of being mailed a counter-signed copy of this contract …”
    Thanks,
    Chris

    • http://www.adamsdrafting.com/ Ken Adams

      Agreeing to enter into a contract doesn’t address lack of consideration. And neither would your two other suggestions.

      Reliance can be a substitute for consideration. In other words, if you get no consideration for your promise but I reasonably rely on your performing, a court might well hold that your promise is enforceable. That scenario might arise if you, the opera singer, offer to perform for free for me and I lease a concert hall, hire an orchestra, and so forth. But I don’t know whether that would be relevant in the case of an option contract.

  • AWrightBurkeMPhil

    1/ Not a Texas lawyer yet.

    2/ Amazing how much cloudiness attends even the most basic of legal concepts.

    3/ Doesn’t every contract involve at least two considerations, since it involves an exchange of value, tit for tat, each being the “consideration” from one party’s point of view?

    4/ The valuable things exchanged must be present value; a promise is one kind of present value. Promised performance is never consideration, but the promise itself can be, as has been noted. Failure to perform is breach, not failure of consideration.

    5/ So consideration can be an exchange of money for promise, land for promise, promise for promise, etc.

    6/ It seems ironic that a contract could stand or fall on the effectiveness of a false recital of $10 consideration delivered when the nonpaying party could simply have promised to pay $10 and removed the problem.

    7/ When a contract involves an exchange of promised (necessarily future) performances, the traditional peppercorn is unneeded: “in consideration of the mutual promises in this agreement” should suffice as a truthful recital.

    8/ My real question is whether in Texas a sentence like this would make the contract binding: “The parties intend this contact to be as binding as if it contained a false recitation of consideration.”

  • Alan Adamson

    I don’t have a lot of time to elaborate at the moment, but I thought I would throw the case of Stein v Thexton from a couple of years ago into the discussion mix (here is an article on the case–http://www.gibsondunn.com/publications/pages/CaliforniaSupremeCtRealPropertyAgreements.aspx. It is a CA real estate option case that caused a tremendous amount of hand-wringing in the commercial real estate world by seemingly undermining the common practice of a due diligence period with an unconditional termination right. The case touches on several relevant concepts being discussed here–the question of whether there was actually consideration for an option and using detrimental reliance in lieu of actual consideration.

    And as a two-for-one special, I think it is also instructive on Ken’s post regarding the Three and Half Minute Transaction. This is an example of a case that changed the way people practice–virtually all sophisticated CA commercial real estate contracts today now require the payment of independent consideration for the option. Typically the amount paid is around $250 and it is actually paid and is non-refundable even if the transaction is terminated. Personally, I think we sometimes get lazy in the commercial contracting world (using the well-worn adage “two commercial parties can agree to anything”) and fail to consider (pun intended) the underlying legal principles implicated. Taking the issue of consideration or detrimental reliance too lightly (or not even really requiring any real consideration) affects the other side of the coin as well doesn’t it? Do we want, as a policy matter, to have pledges of donations to a charity be enforceable unless there is a specific binding negotiated agreement put in place? If I make a general pledge of $2000 to my local charity, I am doing so with the belief that if catastrophe strikes, I am not obligated to fulfill that pledge. I don’t want boilerplate sham consideration recitals in the fine print to make my pledge a binding obligation, nor would I want a court to say that the charity reasonably relied on my unilateral promise because it was a construction fund drive.

    • http://www.adamsdrafting.com/ Ken Adams

      Thanks–I’ll have a look at that California case.

    • http://rickcolosimo.com Rick Colosimo

      Actually, promises to donate *are* enforceable in many situations. They’re not uniformly treated as bilateral contracts that require consideration from the nonprofit. As a matter of practice, few nonprofits ever try to enforce these because of the PR problems. Here’s a link to a recent law review article: http://www.law.tulane.edu/uploadedFiles/Institutes_and_Centers/Eason_Weinmann/v02i01-Lemann-final.pdf

  • SChalmers

    Ken, I (as a Texas based, but not Texas qualified, except as foreign legal consultant) don’t understand why you would consider the consideration to be a ‘sham’. The black letter lawyer in me sees that one party paid good consideration of $10, and the other expressly acknowledged receipt of it. Surely there’s an estoppel argument, how can one party sign a document saying they’ve received the money, and then claim they hadn’t? I disagree with your assertion that the $10 was never paid – the Purchaser agreed it had been.
    Sounds suspiciously like the Purchaser just didn’t want to honor its bargain, and tried to weasel out of it however it could. Finally, it seems absurd to me that if the Developer had actually handed over the nominal $10 sum, the outcome should be different. (That said, however, I’ve had more than one client write and send checks for $1 or some nominal sum, _and_ ask for legal advice when the check was never cashed.)

    • http://www.adamsdrafting.com/ Ken Adams

      My analysis is based on the fact that, as I noted in the post, Joppich claimed that because the developer hadn’t paid the $10, the option contract wasn’t supported by consideration. If I’m mistaken, please point me to the relevant part of the opinion.

      • SChalmers

        “In consideration of the sum of…$10.00…paid in cash by Developer, the receipt… of which is hereby acknowledged.”
        There it is, to me, in the recitals. I didn’t get into the opinion.

        • http://www.adamsdrafting.com/ Ken Adams

          Well, Joppich claimed that it was a sham, just like innumerable other such recitals.

          • SChalmers

            Mental note to self/clients. Next time insist on paying it (and make it $1, what the heck).

          • http://www.adamsdrafting.com/ Ken Adams

            Or make it some amount that passes the laugh test. Or use my nifty proposed language!