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The Role of Consideration in Contracts

The Role of Consideration in Contracts

Written contracts are important when conducting any business—even among family members. While family rivalries often involve personality conflicts and hurt feelings, a well-drafted contract can minimize litigation and protect important business interests. A recent example from Manhattan federal court helps illustrate this point.

Genger v. Genger

This case involves a wealthy family consisting of a mother, father, son and daughter. The mother and father divorced in 2004. As part of the divorce settlement, the mother entered into an agreement with her two children. The deal was that the mother would transfer approximately 800 shares of a company called TRI to her children, and in exchange, the children would provide her with ongoing financial support.

Specifically, the mother transferred the shares, in equal installments, to two trusts, each controlled by one of the children. Under a second agreement, a letter signed in October 2004 by the mother and the son, the son agreed to pay his mother “up to an amount equal to all dividends, distributions, proceeds or other payments attributable to the” TRI shares. The daughter was not present when this letter was signed, but the brother later testified his sister orally agreed to honor the terms of the agreement. A month later, the brother and sister signed a third agreement, where she formally agreed to indemnify her brother for one-half of the financial support payments to their mother.

But in 2014, when the mother demanded $200,000 in income under the 2004 agreements, the sister refused to pay for her one-half. The brother then sued his sister for breach of contract.

In a decision issued on January 5th of this year, U.S. District Judge Katherine B. Forrest of Manhattan granted summary judgment to the brother. There were two basic issues the judge had to resolve. First, did the second and third agreements form an “integrated” contract? In other words, did the mother's agreement with the brother, and the brother's subsequent indemnity agreement with his sister, form a single enforceable contract? Judge Forrest said they did. He found the two documents were “sufficiently unambiguous” in their wording and “even though they were executed on different dates and were not all between the same parties,” no reasonable person could dispute they were part of a single contract. “Indeed,” the judge observed, “neither agreement makes any sense without the promises expressed in the other.”

The second issue was whether the sister received proper “consideration” under the contract. She claims she did not because her trust never actually received the TRI shares. But as the judge found, she still received consideration. What happened was the brother sold all of the shares—those belonging to both siblings under the agreement with their mother—to a third-party buyer. This ultimately led to additional litigation, which was settled in 2013. Under that agreement, the buyer paid the sister's trust $32.3 million in exchange for releasing her claim to ownership of the TRI shares.

Accordingly, the sister argued that since the shares were not actually in her trust, she was under no obligation to provide her mother with financial support under the 2004 agreement. Judge Forrest did not see it that way. He agreed with the brother that the $32.3 million constituted a benefit—and thus “consideration”—received by the sister as a direct result of the contract.

Contracts Should Be a Simple Matter

Despite the amount of money and family animosity involved, Judge Forrest observed this was a “simple breach of contract action.” A well-drafted contract is the best defense against individuals, even family members, who might try to renege on a commitment. If you need advice from a qualified New York business attorney on drafting (or enforcing) a contract matter, contact our office today.

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