Legal Definitions - failure of consideration

In contract law, failure of consideration occurs when a contract was initially valid because both parties agreed to exchange something of value (known as "consideration"), but that promised exchange either never materializes, becomes worthless, or significantly loses its value after the contract has been formed. This situation can make the contract unenforceable or allow one party to cancel it.

It's important to distinguish failure of consideration from a "lack of consideration." A lack of consideration means a contract was never valid to begin with because no proper exchange of value was ever agreed upon. In contrast, failure of consideration applies to a contract that was perfectly valid at its inception, but something went wrong with the promised exchange later on.

Here are some examples illustrating failure of consideration:

• Example 1: Consideration Becomes Worthless

  Imagine a small tech startup contracts with a software development firm to purchase exclusive rights to a groundbreaking new algorithm for processing medical data, paying a substantial fee. Shortly after the contract is signed and the payment is made, a major university research team publishes an open-source algorithm that performs the same function even more efficiently and is freely available to everyone. The exclusive rights the startup purchased suddenly become commercially worthless.

  How it illustrates the term: At the time of the contract, the exclusive rights to the algorithm were valuable consideration. However, due to an unforeseen external event (the release of a superior, free alternative), the consideration the startup received became worthless, demonstrating a failure of consideration.

• Example 2: Consideration Is Not Delivered

  A homeowner hires a custom furniture maker to design and build a unique dining room set, paying a 50% deposit upfront to cover the cost of rare imported wood and specialized craftsmanship. The furniture maker accepts the deposit and promises delivery in three months. However, before any work begins or materials are ordered, the furniture maker unexpectedly declares bankruptcy and closes their business, never delivering the promised dining set.

  How it illustrates the term: The homeowner's deposit was valid consideration, and the furniture maker's promise to deliver the custom dining set was their consideration. Since the furniture maker failed to deliver the promised goods, there is a clear failure of consideration, even though the contract was initially valid.

• Example 3: Consideration Becomes Impossible to Provide

  A concert promoter contracts with a famous international musician to perform at a large outdoor festival, paying a significant booking fee in advance. The contract includes specific clauses about the musician's travel and performance. A week before the festival, the musician's home country experiences a sudden, severe travel ban due to a natural disaster, making it legally impossible for the musician to leave the country and perform as agreed.

  How it illustrates the term: The musician's performance was the consideration for the promoter's booking fee. While the contract was valid when made, an unforeseen and unavoidable event (the travel ban) made it impossible for the musician to provide their promised consideration, leading to a failure of consideration.