Consideration is one of three key elements required to make a contract valid and binding. The three essential components which must be present to make a contract enforceable are:
- that an agreement has been reached between all parties;
- that there is an intention by all parties to be legally bound by the agreement, and
- that all parties have provided valuable consideration.
Consideration covers the ‘bargain’ element of a contract and is based on an exchange of promises. Both parties should provide something of value in return for something else, becoming both a promisor and a promisee. Effectively, each party must receive a benefit and suffer a detriment.
Currie v Misa (1875) is the key case that defined consideration as “… some right, interest, profit or benefit accruing to one party, or some forebearance, detriment, loss or responsibility given, suffered or undertaken by the other”.
It’s also important for consideration to be something of value in the eyes of the law (Thomas v Thomas ) – promises of love and gifts are excluded.
For example, Andrea (the promisor) promises to walk Nik’s (the promisee) dog every Tuesday. Andrea’s promise will only be enforceable by Nik as a contract if he has provided consideration. Consideration would usually take the form of a payment of money, but could consist of some other service, such as Nik feeding her chickens once a week.
What amounts to consideration?
There are two types of consideration: executed and executory.
Executed consideration is where consideration has already been carried out.
For example, Louise promises to donate £50 to charity if Angharad runs a marathon. When Angharad completes the marathon, the consideration is executed.
The other type of consideration, executory, occurs where there is an exchange of promises to perform acts in the future.
For example, Pete promises to deliver a mattress to Amy at a future date, and Amy promises to pay for the mattress on delivery. If Pete fails to deliver the mattress in the future, there is a breach of contract and Amy can sue. If Pete delivers the mattress, his consideration then becomes executed.
A number of the rules govern consideration:
- Consideration must not be past
Consideration cannot be something that has happened in the past.
The case of Roscorla v Thomas (1842) illustrates that past conduct is not sufficient. An agreement to purchase a horse had been completed between a buyer and a seller. Upon completion of the contract, the seller promised that the horse was “free from vice”. But, the buyer soon discovered that the horse was vicious and so the buyer sued for breach of promise.
The court held that the buyer’s claim must fail because the promise was made after the sale and was unsupported by consideration.
- Consideration must be sufficient, but need not be adequate
While some value must be given to a promise for it have contractual force, the consideration doesn’t need to be adequate.
Usually, a court will not look into whether adequate value has been given as the courts do not normally interfere with the bargain struck between the parties.
For example, Pat agrees to give James an antique lamp worth £400 in exchange for a picture painted by James (which has little value). While the painting may be worth much less than the lamp, there has been sufficient consideration even if it’s not adequate.
Sufficient also means that the promise must not be illusory, i.e. have no substance.
For example, Carol cannot promise to buy Elliot’s car in return for ‘whatever Carol feels like paying’. This type of consideration is discretionary and illusory.
- Consideration must move from the promisee
You’ll need to show that you’ve provided consideration if you want to enforce the contract. A third party providing consideration is not enough.
For example, If Rachel promises to pay Kirsty £100 if Andrew will clean the oven and Andrew does so, Kirsty won’t be able to enforce Rachel’s promise (unless Kirsty had procured Andrew to clean the oven).
In some cases, a third party may be able to enforce rights created in her favour by a contract which she was not a party to, where the conditions of the Contracts (Rights of Third Parties) Act 1999 are met.
It’s important to note that while consideration must move from the promisee, it doesn’t have to move to the promisor.
For example, Ashley promises to pay Marc for the wedding cake provided by Marc’s wife.
4. Forbearance to sue
Promising not to sue can also be good consideration. This can occur where one person has a valid claim against another but promises to forbear from enforcing it.
For example, Aislinn destroys Aaron’s bike in an accident. Aaron contracts with Aislinn that he will not sue for property damage, in exchange for Aislinn giving Aaron her bike.
5. Existing duties
Legal or contractual duties that you are already required to perform can’t be used as consideration for a new contract.
For example, if someone is under a public duty to undertake a particular task, this is not sufficient consideration for a contract.
In Collins v Godefroy (1831), Godefroy promised to pay Collins for providing evidence. However, the court held that Collins couldn’t enforce the promise as he was under a statutory duty to give evidence.
But, if the promisee provides more than what his public duty imposes on him, this is good consideration.
In Glasbrook v Glamorgan (1925), Glasbrook asked the police to help at a mining site because of fears of a conflict between protestors and miners.
The local authority of Glamorgan then presented Glasbrook with a bill for their services. Glasbrook refused to pay for their services because, according to Glasbrook, it was the duty of the police to carry out these services.
But the court held that Glasbrook had to pay for the services because he had requested them, and these services were seen as not within the duty of the police.
Is consideration required for all contracts?
Consideration is one of the three vital elements needed to create a valid contract, so the only way to avoid the requirement is by using a formal contract such as a deed.
A deed must be used if you want to transfer property or land and it sets out the rights promised by the contract. Because it is a complex document, the deed will need to be produced by a solicitor.
Traditionally, deeds had to be ‘signed, sealed and delivered’. But now, this means that the document must be signed and attested by independent witnesses.
What is promissory estoppel?
In some circumstances, the long-standing equitable doctrine of promissory estoppel can come into play, preventing someone from undertaking an act that they would usually be entitled to do under the contract.
This can occur where someone says something or does something which induces another person to act to their detriment.
The person who has acted to their detriment can make a claim of promissory estoppel at the court. To be successful, they must show that an assurance was made and the assurance was relied upon to their detriment. Essentially, they must show that it would be unconscionable or unfair for the promisor to go back on their promise.
The court will take into account the degree of detriment suffered by the person making the claim and it has discretion in what relief to offer to the claimant.
Why take legal advice?
If you are looking to draft or negotiate a contract, or are facing a contract dispute, it’s vitally important that you seek out the advice of an experienced solicitor who can identify issues relating to contract fundamentals such as consideration, and will ensure that your rights are protected under the contract. A solicitor will also make sure that the contract is valid and enforceable and avoid any issues relating to estoppel.