Steiner v. Thexton - 48 Cal. 4th 411, 106 Cal. Rptr. 3d 252, 226 P.3d 359 (2010)

Rule:

Under Civ. Code, § 1605, there are two requirements in order to find consideration. The promisee must confer (or agree to confer) a benefit or must suffer (or agree to suffer) prejudice. Either alone is sufficient to constitute consideration; it is not necessary to the existence of a good consideration that a benefit should be conferred upon the promisor. It is enough that a prejudice be suffered or agreed to be suffered by the promisee. It is not enough, however, to confer a benefit or suffer prejudice for there to be consideration. The second requirement is that the benefit or prejudice must actually be bargained for as the exchange for the promise. Put another way, the benefit or prejudice must have induced the promisor's promise. The fact that the promisee relies on the promise to his injury, or the promisor gains some advantage therefrom, does not establish consideration without the element of bargain or agreed exchange.

Facts:

 In 2003, Steiner, a real estate developer, was interested in purchasing and developing several residences on a 10-acre portion of Thexton’s 12.29-acre parcel of land. County approvals for a parcel split and development permits were required. Thexton had previously rejected an offer from a different party for $ 750,000 because that party wanted Thexton to obtain the required approval and permits. The written agreement between Steiner and Thexton, prepared by Steiner, provided for Thexton to sell the 10-acre parcel for $ 500,000 by September 2006 if Steiner decided to purchase the property after pursuing, at his own expense, the county approvals and permits. Paragraph 7 of the “Contingencies” section of the agreement provided Steiner was not obliged to do anything and could cancel the transaction at any time at his “absolute and sole discretion … .” After Steiner and Thexton signed the agreement on September 4, 2003, Steiner began pursuing the necessary county approvals and, together with his partial assignee Siddiqui, ultimately spent thousands of dollars.

In May and August 2004, Thexton cooperated with Steiner’s efforts by signing, among other things, an application to the county planning department for a tentative parcel map. In October 2004, however, Thexton asked the title company to cancel escrow and told Steiner he no longer wanted to sell the property. Steiner nevertheless proceeded with the final hearing of the parcel review committee and apparently obtained approval for a tentative map. Steiner opposed cancelling escrow and filed suit seeking specific performance of the agreement. In his answer, Thexton asserted various defenses, including that the agreement constituted an option unsupported by consideration. Following a bench trial, the trial court entered judgment in favor of Thexton. It concluded the agreement was unenforceable against Thexton “because it is, in effect, an option that is not supported by any consideration.” The Court of Appeal affirmed.

Issue:

Is the agreement an irrevocable option for being supported by sufficient consideration?

Answer:

Yes.

Conclusion:

 It was not enough to confer a benefit or suffer prejudice for there to be consideration. As held in Bard v. Kent, supra, 19 Cal.2d at page 452, the second requirement is that the benefit or prejudice “must actually be bargained for as the exchange for the promise.” Put another way, the benefit or prejudice must have induced the promisor’s promise. In sum, in determining here whether sufficient consideration rendered the option to purchase the 10-acre parcel irrevocable, the court considered whether Steiner conferred or agreed to confer a benefit, or suffered or agreed to suffer prejudice that was bargained for in exchange for the option. The lower courts concluded no such consideration supported the option. They reasoned no money was paid for the grant of the option nor did the work performed and expenses incurred by plaintiffs in pursuit of a parcel split benefit Thexton. The lower courts explained that the “adequacy of consideration” must be measured at the time an agreement is entered into. The lower courts concluded that, at the time Steiner and Thexton struck their bargain, the promise to seek the parcel split was unenforceable because the escape clause gave plaintiffs the power to terminate the transaction at any time for any reason. Thus, the lower courts held, Steiner’s promise was illusory and did not constitute valid consideration. The courts found it immaterial that plaintiffs had begun to perform, because plaintiffs were under no actual obligation to do so. To the contrary, as a matter of law plaintiffs’ part performance of the bargained-for promise to seek a parcel split created sufficient consideration to render the option irrevocable.

It was true that Steiner’s promise to undertake the burden and expense of seeking a parcel split may have been illusory at the time the agreement was entered into, given the language of the escape clause. However, there can be no dispute that plaintiffs subsequently undertook substantial steps toward obtaining the parcel split and incurred significant expenses doing so. Among other things, plaintiffs paid for the required civil engineering and surveying for the parcel and spent a number of months applying to the county planning department for a tentative parcel map, proceeding with the final hearing of the parcel review committee, and obtaining approval of the tentative map. On this record, the only possible conclusion was that Steiner both conferred a bargained-for benefit on Thexton and suffered bargained-for prejudice unaffected by his power to cancel, making up for the initially illusory nature of his promise. It was undisputed that a parcel split of the 12.29 acres was necessary for Thexton to be able to sell a portion of his land to anyone while still retaining a two-acre parcel for himself to live on. There was also no dispute that Thexton did not want to have to go through the process of obtaining the parcel split himself. Indeed, he had previously rejected an offer of $ 750,000 for the 10 acres ($ 250,000 more than Steiner was to pay for the parcel) because that buyer wanted Thexton to obtain the required approval. It is clear then that a critical part of Thexton’s willingness to sell was that Steiner would bear the expense, risk, and burden of seeking the parcel split. Indeed, there is evidence that Thexton told Steiner it was important to him that any interested buyer undertake the process of obtaining the parcel split. Thus, both elements of consideration were present. First, the effort to obtain the parcel split clearly conferred a benefit on Thexton and constituted prejudice suffered by plaintiffs. Second, the promise to pursue the split was plainly bargained for and induced Thexton to grant the option. Accordingly, plaintiffs’ part performance cured the illusory nature of their promise.