When parties enter into a contract, they trade between each other something of value each has to offer to the other. The term “failure of consideration” refers to a situation when value that was to be exchanged under a contract fails, making said contract worthless.
“An illustration will help indicate how the term [failure of consideration] is used. If C promises to build a structure for O and O promises to make payment when the work is completed, it is clear that there is consideration on both sides of this contract and that therefore a contract was formed upon the exchange of promises. If C fails to perform, the result is sometimes described as a ‘failure of consideration.’ Failure of consideration simply means a failure to perform and as used covers both a material breach of constructive conditions and a failure to perform an express condition. The use of the term ‘failure of consideration’ in this sense appears to be an unnecessary invitation to confusion because the work consideration is being used in two different senses. Fortunately the use of this phrase has gradually fallen into disuse. It is, however, still sufficiently widespread to be mentioned here. This volume nowhere utilizes ‘failure of consideration’ as an operative concept.”
Source: John D. Calamari & Joseph M. Perillo, The Law of Contracts, § 11-21, at 474-75 (3d ed. 1987).
An action based upon failure of consideration for the recovery of money paid on a contract is, in effect, an action for rescission.
Source: Azer v. Myers, 793 P.2d 1189, 1218 (Haw. App. 1990), reversed on other grounds.
Failure of consideration is ground for rescission of a contract.
Source: Krause v. Mariotto, 406 P.2d 16, 17 (Wash. 1965).
In order for a contract to exist it must be supported by sufficient cause or consideration. This concept remains true from formation through the existence of the contract. Professor Lord explains:
Where no consideration exists, and is required, the lack of consideration results in no contract being formed in the absence of a substitute for consideration such as a writing under seal (where the seal retains vitality) or an estoppel. By contrast, when there is a failure of consideration, there is originally a contract when the agreement is made, but because of some supervening cause, the promised performance fails.
The burden of showing a want of consideration sufficient to support [a contract] lies with the party seeking to invalidate or avoid it. Failure of consideration arises when a valid contract has been formed, but the performance bargained for has not been rendered.
A failure of consideration may be either partial or total. Distinguishing between a partial or a total failure of consideration is important because it dictates the remedy.
The remedy for a total failure of consideration is to excuse the non-breaching party from performance of its obligations under the agreement, whereas where a partial failure of consideration has occurred the proper remedy is to grant appropriate damages to the non-breaching party.
A total failure of consideration will occur where a party has failed to perform a substantial part of its obligation, so as to defeat the very object of the agreement. On the other hand, a partial failure of consideration occurs when there has been an insubstantial breach that leaves sufficient consideration for sustaining the contract.
Generally, determination of whether there has been a failure of consideration is a question of fact. Only when the evidence is such that reasoning minds could draw but one conclusion does the fact question become a question of law for which summary judgment may be appropriate.
Source: Irish Oil and Gas, Inc. v. Riemer, 794 N.W. 2d 715 (N.D. 2011).