Contract law governs the exchange of goods, services, and promises between parties in commercial transactions. The concept of consideration, central to contract law, is what makes the difference between enforceable agreements and simple promises. Consideration ensures that parties receive something of value in return for their commitments, making contracts binding and legally enforceable. Without valid consideration, agreements risk being deemed unenforceable or illegal, leading to costly disputes, financial losses, and reputational damage.
Here’s what we’ll cover in this article:
Definition of consideration
Types of consideration
Essential characteristics of consideration
Exceptions to consideration
Common misconceptions about consideration
Legal cases and precedents
What is Consideration in Contract Law?
Consideration is a fundamental concept in contract law that refers to the exchange of something of value between parties to a contract. It involves a promise, act, or forbearance (giving up a right) that is exchanged for a return promise, act, or forbearance. Consideration is the "price" paid for a promise or performance.
The role of legal consideration in contracts can't be overemphasised as it serves several purposes. Consideration ensures that both parties agree to a mutual exchange, creating a bargained-for promise. This mutual exchange is the foundation of a contract, and consideration is the key element that makes it enforceable.
Consideration also ensures that both parties are bound to perform their obligations, creating a mutual obligation. Furthermore, consideration ensures that something of value is exchanged, making the contract a genuine agreement between the parties.
In addition, consideration distinguishes contracts from gifts. A gift is a one-way transfer of value, whereas a contract involves a reciprocal exchange. Consideration helps prevent undue influence or coercion, as both parties must agree to the exchange. Finally, consideration provides a basis for remedies in case of breach, as it establishes the parties' obligations and the value exchanged.
Legal Requirements for Valid Consideration
For consideration to be valid, it must meet the following requirements:
Something of value: Consideration must involve something of value, such as a promise, act, or forbearance.
Exchange: Consideration must be exchanged for a return promise, act, or forbearance.
Legal benefit or detriment: Consideration must confer a legal benefit or detriment on the parties.
Not past: Consideration can't be something already done (past consideration).
Sufficient but not adequate: Consideration must be sufficient (enough to support a contract) but not necessarily adequate (of equal value).
Types of Consideration
Consideration can be classified into three main categories: executed, executory, and past consideration.
Executed Consideration
Executed consideration occurs when a promise has already been fulfilled. when a customer pays for a coffee, and the barista hands it over, the customer's payment is the executed consideration, and the delivery of the coffee is the executed consideration from the seller’s side.
Executory Consideration
Executory consideration involves promises made for future actions. For example, if someone promises to pay you £100 if you agree to paint their house in the future, the consideration is executory. The promise has not yet been performed, but it will be in the future.
Past Consideration
Past consideration involves something given or promised in return for a benefit received previously, where no promise was made at that earlier time. In legal terms, past consideration is not valid consideration under UK contract law because it does not involve a current exchange. For instance, in the case of Roscorla v Thomas (1842), the claimant purchased a horse from the defendant. Later, the defendant falsely assured the claimant that the horse was "free from vice."
When the claimant sued for breach of promise, the defendant argued that the assurance was not a term of any contract because the claimant had not provided any consideration for it. The Court ruled in favour of the defendant, stating that the claimant's existing obligation to buy the horse could not serve as consideration for the defendant's subsequent promise because the consideration was past.
Adequacy and Sufficiency of Consideration
The law differentiates between the adequacy and sufficiency of consideration. While adequacy refers to the fairness of the consideration, the law is not concerned with whether the consideration is adequate as long as it is legally sufficient. While consideration does not need to be accurate, it must be sufficient. In other words, the consideration must have some value, no matter how small. In the case of Thomas v Thomas (1842), the deceased, John Thomas, made provision in his will for his wife, Eleanor, to have a life interest in one of his properties. Following John's wishes, his brother, Samuel Thomas, who inherited the properties, entered into a formal agreement with Eleanor, granting her a life tenancy in the property at a nominal annual rent of £1.
However, upon Samuel's passing, his executors sought to evict Eleanor, claiming that the agreement was invalid due to a lack of consideration from Eleanor. Eleanor brought an action against the executors to enforce the contract. The court ultimately held that the £1 annual rent and Eleanor's obligation to maintain the property constituted sufficient consideration, rendering the contract enforceable.
Essential Characteristics of Consideration in Contract Law
For consideration to validate a contract in UK law, it must meet specific essential characteristics to ensure that the agreements are enforceable and equitable for all parties involved.
Fresh Consideration
Fresh consideration requires that the consideration must be new and not previously obligated. This means that a party can't rely on a pre-existing obligation or a promise already made as consideration for a new contract. For example, if John already owes Jane £100, he can't promise to pay her that amount as consideration for a new contract.
Legal Value
The consideration must be something of value in the eyes of the law. This means that personal preferences or sentimental values are not enough to constitute legal value. Legal values can take various forms, such as:
Monetary value
Services
Rights (For example., granting permission to use a property, assigning intellectual property rights)
Intangible benefits
Mutual Exchange
The mutual exchange requirement ensures that contracts are fair and reciprocal, with both parties contributing something of value. This prevents one-sided contracts, where only one party provides consideration. This means that both parties must provide consideration for the contract to be valid. For example, in a contract for the sale of goods, the buyer provides monetary consideration, while the seller provides the goods.
Exceptions to Consideration in Contract Law
While consideration is a fundamental requirement in contract law, there are exceptions where contracts can be binding without consideration. Two key exceptions are:
Contracts Under Seal (Deeds)
A contract under seal, also known as a deed, can be binding without consideration. A deed is a special type of contract that is signed, sealed, and delivered. Because of its formal nature, a deed is considered binding even if no consideration is provided. This is because the act of sealing the document indicates a clear intention to be bound by its terms. This exception applies to deeds only, not to simple contracts.
Promissory Estoppel
Promissory estoppel is a legal principle that prevents a party from going back on a promise, even if no consideration was provided. This doctrine applies when:
One party makes a clear and unequivocal promise
The other party relies on that promise to their detriment
It would be unjust to allow the first party to go back on their promise
This principle prevents a party from arguing the absence of consideration as a defence when it would be unfair to do so because of the promise made. Promissory estoppel is particularly relevant in cases where adjustments to contracts are made without new consideration but have been relied upon, such as extending credit terms or modifying delivery schedules.
Common Misconceptions About Consideration in Contract Law
Two prevalent misunderstandings are the distinctions between a gift and a contract, and the belief that all promises are enforceable.
Gift vs. Contract
A gift is a voluntary transfer of property or funds from one person to another without expecting anything in return, and it does not require consideration to be legally effective. However, for a gift to be enforceable when made through a deed, it must be executed with the formalities required for a deed, such as being in writing, signed, sealed, and delivered.
On the other hand, a contract is an agreement between two or more parties that is intended to be enforceable by law. Contracts must involve consideration, which means there must be a bargaining process that results in an exchange of value between the parties.
All Promises Are Enforceable
Not all promises are enforceable contracts. A promise without consideration is not binding. Only promises supported by consideration can be enforced.
Past Consideration Is Enough
Past consideration in law is not enough to support a new contract. A party can't rely on something they've already done as consideration for a new promise.
Moral Obligations Are Consideration
Moral obligations or feelings of gratitude are not consideration. Only tangible, measurable benefits or detriments can serve as consideration.
Illusory Promises Are Consideration
Illusory promises, or promises that are essentially meaningless, are not consideration. For example, promising to do something that you're already obligated to do is not consideration. Similarly, a promise to perform an impossible task is illusory and not consideration.
Pre-Existing Duties Are Consideration
Pre-existing duties, or obligations that already exist, are not consideration. For example, a promise to perform a duty you're already required to do by law is not consideration. Additionally, a promise to perform a duty you're already contractually obligated to do is not consideration.
Legal Cases and Precedents
The doctrine of consideration has been shaped by several key legal cases, which have established important principles and precedents. The following are three of the significant of such cases:
Foakes v Beer (1884)
In Foakes v Beer (1884), the House of Lords held that a promise to pay a lesser amount or the same amount over a greater period is not good consideration. Beer had obtained a judgment against Foakes for £2090, and they agreed that Foakes would pay £500 and six-monthly payments of £250. Foakes fulfilled these obligations but didn't pay interest on the judgment debt.
The court ruled that Foakes' promise lacked good consideration since he only performed his existing contractual obligations. This decision reaffirmed the principle that part payment of a debt can't satisfy the whole, and existing obligations can't be relied on as consideration.
Williams v Roffey Bros. (1991)
Williams v Roffey Bros. (1990) provided a modern interpretation of consideration. In this case, Roffey Bros contracted with Shepherds Bush Housing Association to refurbish 27 flats by February 28, 1987, with a penalty clause of £500 per week for late completion. They subcontracted carpentry work to Williams for £20,000 on July 25, 1985. However, by April 9, 1986, Williams had only received £16,200 and was facing financial difficulties due to the initial low price. To avoid the penalty clause, Roffey Bros promised Williams an additional £575 per flat for timely completion.
Williams completed eight flats and stopped working after receiving only £1,500. Roffey Bros then hired new carpenters, prompting Williams to claim payment. The court ultimately ruled in Williams' favor, finding that Roffey Bros' promise of additional payments was enforceable since they gained a practical benefit by avoiding penalties and the promise was not made under duress or fraud.
3. Collins v Godefroy (1831)
Collins v Godefroy (1831) is another important case that examined the sufficiency of consideration. In this case, the defendant, Godefroy, sued an attorney for negligence and subpoenaed the plaintiff, Collins, to testify. To ensure Collins' attendance, Godefroy promised to pay him one guinea per day for lost time. Collins attended court for six days but was not called to testify. He then demanded six guineas from Godefroy, who refused to pay.
Collins sued Godefroy for the amount owed. However, the court ruled against Collins, finding that the agreement lacked consideration. Since Collins was already legally obligated to attend court due to the subpoena, he could not claim compensation for performing a public duty. The court held that one can't recover expenses for fulfilling a legal obligation.
How These Cases Illustrate the Principles of Consideration in Action
In Williams v Roffey Bros the court held that a promise to make bonus payments to complete work on time was enforceable because Roffey Bros obtained a practical benefit by avoiding a penalty clause. This demonstrates that consideration can be found in the promisor's obtaining a benefit, even if it's not a traditional bargain.
Meanwhile, Collins v Godefroy shows that consideration can't be found in the performance of a public duty or a legal obligation. Collins was already subpoenaed to attend court, so his attendance did not constitute consideration for Godefroy's promise of payment.
Foakes v Beer further highlights the importance of consideration in contract modification. In this case, Mrs. Beer promised to accept a lesser sum from Dr. Foakes in full settlement of his debt. However, the court ruled that this promise was not enforceable because Foakes provided no consideration for the reduced payment. This demonstrates that consideration is required for contracts, and that a promise to accept less than what's owed is not binding without something in return.
Together, these cases demonstrate that consideration requires a tangible benefit or detriment, and that it can't be found in the performance of existing obligations or duties. They also illustrate the courts' willingness to find consideration in practical benefits, even if they're not part of a traditional bargain.
Frequently Asked Questions
What happens if there is no consideration in a contract?
If there's no consideration, the contract may not be enforceable, as consideration is a crucial element of a binding agreement.
2. Can love and affection be considered valid consideration?
No, love and affection aren't enough to constitute consideration, as they don't provide a tangible benefit or detriment.
3. Is a contract without consideration enforceable if it's written as a deed?
In some cases, a contract written as a deed might be enforceable without consideration, but this depends on the specific laws of the jurisdiction.
4. What is the difference between a gift and consideration in contract law?
A gift is a voluntary transfer without expectation of payment or compensation, whereas consideration involves a mutual exchange of benefits or detriments.
5. Can past actions ever count as valid consideration?
No, past actions can't be used as consideration for a new agreement, as consideration requires a promise or action in exchange for something new.
Conclusion
Consideration is a critical component of enforceable contracts, and its absence can lead to disputes and unenforceable agreements. The cases of Williams v Roffey Bros, Collins v Godefroy, and Foakes v Beer demonstrate the significance of consideration in contract law. Without consideration, a contract may be deemed void or unenforceable.
To avoid potential disputes and ensure the validity of contracts, it is important to seek legal advice when drafting agreements. LawHive can provide valuable assistance, connecting you with experienced lawyers who can review and draft comprehensive contracts that properly address consideration and all other essential elements. Contact us today to get started on ensuring that your contracts are not just drafted, but crafted with precision and expertise.