Gavin Howe
Money promised or exchanged is a key consideration in contract law. Consideration is the benefit that each party gets or expects to get from the contract, and it can take various forms, including money. It is the price that the promisor asks for in exchange for their promise, and it is required to form a legally binding contract. While the common law requires consideration for a binding agreement, some jurisdictions do not consider it an essential element. The concept of consideration in contract law is complex and subject to various theories, such as the benefit-detriment theory and the bargain theory, which judges may use in their decisions.
| Characteristics | Values |
|---|---|
| Definition | "A valuable consideration in the sense of the law may consist either in some right, interest, profit or benefit accruing to the one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other." |
| Binding nature | A contract is not binding without consideration. |
| Substitutes | Promissory estoppel, detrimental reliance, or good faith modification may substitute for consideration. |
| Types | Executed, executory, past, and fresh. |
| Nature | Consideration can be a promise, performance, forbearance, or property with legal value. |
| Economic benefit | Not required. |
| Gratuitous promises | Not enforceable. |
| Past performance | Not enforceable. |
| Bargaining | Consideration is the "price" of a promise. |
| Freshness | A promise to do something that has already been contracted cannot be "fresh" consideration. |
| Adequacy | Courts rarely invalidate contracts on these grounds. |
| Unilateral vs. bilateral contracts | Unilateral contracts have no promise as consideration, while bilateral contracts have mutual promises. |
| Cautionary requirement | Parties are more cautious when making a bargain than when making an off-the-cuff promise. |
| Evidentiary requirement | Parties are more likely to remember a promise made due to bargaining. |
| Channeling requirement | Parties are more likely to stipulate their specific desires when forced to bargain. |
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What You'll Learn
- Consideration is required to form a legally binding contract
- Consideration must be real, with economic value
- Courts will enforce promises without consideration to avoid injustice
- Gratuitous promises are generally not enforceable
- Consideration can be a promise, performance, forbearance or property with legal value
Consideration is required to form a legally binding contract
Consideration is a fundamental aspect of contract law, and it is required for a contract to be legally binding. It is essentially the "price" or "benefit" that each party receives from the deal. This can be in the form of a promise, performance, forbearance, or property with legal value. For instance, if a person buys an apple, the apple is the buyer's consideration, and the money paid is the merchant's consideration.
Consideration must be provided by both parties, and it must be something that is bargained for. A gift or gratuitous promise, therefore, does not constitute consideration as there is no bargaining involved. Similarly, past performance cannot be considered as there is no exchange. The consideration must be “fresh”, meaning it is provided at the time of the contract's formation. For example, a promise to do something that a party is already legally obligated to do is not considered "fresh" consideration.
The consideration can be minimal, such as a nominal sum of money, as courts focus on the presence of consideration rather than the commercial merits of the contract. However, the consideration must be real and unconditional, with economic value. This means that illusory promises, where the promisor has no actual obligation to act, do not count as consideration.
There are certain situations where a contract without consideration may still be enforceable. This includes the doctrine of promissory estoppel, where a promise is treated as a contract if it was reasonably relied upon. Another situation is detrimental reliance, where non-performance of a promise would cause injustice.
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Consideration must be real, with economic value
Consideration is pivotal in contract law. It is the foundation that ensures both parties in a contract have something valuable at stake. Without this, no contract can be enforceable.
Consideration must be legally sufficient, carrying real value. This value can be economic, but it does not have to be. It can also be something with legal value, such as a promise not to do something. The law only requires that the consideration has some value, no matter how small. For example, in Chappell v Nestle, it was observed that a 'peppercorn' could constitute valuable consideration, even if the promisor was not fond of peppers and would discard it.
The economic benefit of a contract is what each party expects to get from the deal. For example, Volvo gets your money, and your business gets an excavator. The consideration is the money paid and the excavator provided. The consideration does not have to be equal in value to the goods or services being provided, but it must be sufficient and must be agreed upon by both parties.
Consideration can take many forms, including money, services, property, or a promise to refrain from doing something. It can also be a benefit to one party or a detriment to the other. For example, if you promise to paint a house for $200, both you and the homeowner have obligations to fulfil. This mutual obligation is what differentiates a contract from a gift.
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Courts will enforce promises without consideration to avoid injustice
In contract law, the doctrine of consideration states that there must be an exchange of consideration for a contract to be enforced. This means that there must be a benefit to the promisor or a detriment to the promisee—often in the form of an economic benefit. Gratuitous promises, for instance, are generally not enforceable.
However, in attempting to ensure justice or fairness, a court may enforce a promise even in the absence of any consideration. This is known as promissory estoppel, which is the legal principle that a promise is enforceable by law, even if made without formal consideration, when a promisor has made a promise to a promisee who then relies on that promise to their subsequent detriment. Promissory estoppel is intended to stop the promisor from arguing that an underlying promise should not be legally upheld or enforced.
Promissory estoppel has different applications in different jurisdictions, so it is important to consult a lawyer before considering a case. Generally, there are common legally required elements for a person to make a claim for promissory estoppel: a promisor, a promisee, and a detriment that the promisee has suffered. An additional requirement is that the person making the claim—the promisee—must have reasonably relied on the promise. In other words, the promise was one that a reasonable person would ordinarily rely on.
Another requirement further qualifies the detriment component; the promisee must have suffered an actual substantial detriment in the form of an economic loss that results from the promisor failing to deliver on their promise. Finally, promissory estoppel is usually only granted if a court determines that enforcing the promise is the only means by which injustice to the promisee can be avoided. For example, if a debtor renews a promise to pay or acknowledges a debt after the statute of limitations has lapsed, then under the common law the promise is binding, although there is no consideration in the usual sense.
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Gratuitous promises are generally not enforceable
Gratuitous promises, or nonreciprocal promises, are generally not enforceable by law. This is because, by definition, they are one-sided and lack consideration—that is, there is no "price" or "quid pro quo" involved in the transaction. Consideration is the price asked by the promisor in exchange for their promise and is the main element of a contract. It is the benefit that each party gets or expects to get from the deal, and it can take many forms, including a promise, performance, forbearance, or property with legal value.
In the case of gratuitous promises, there is no bargaining involved as there is no exchange. For example, if a rich uncle promises to give their nephew money to start a business with no strings attached, that is a gratuitous promise. If the uncle changes his mind, the nephew cannot force him to provide the money because he did not receive anything in return for his initial promise.
However, there are exceptions to this rule. Promissory estoppel, for instance, is a legal theory that treats a promise as a contract if it was reasonably relied upon. In other words, if one party takes action based on the promise, the law may recognise the need to hold the other party to their promise to avoid injustice. For example, if Huey, the nephew, found the perfect location to open his restaurant and made a down payment on a building in reliance on his uncle's promise, a court might enforce the uncle's original promise.
Another exception is good faith modification, which is enforceable under the UCC even without consideration. A modified contract is a new agreement that changes the parties' obligations and requires new consideration. However, if the modification is made in good faith, it can be enforceable without consideration.
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Consideration can be a promise, performance, forbearance or property with legal value
In contract law, consideration is the benefit that each party gets or expects to get from the deal. It is the price that is asked by the promisor in exchange for their promise. In other words, it is the answer to the question, "Why are you entering this contract?" or "What are you receiving for being a party to this contract?"
Consideration can take many forms, including a promise, performance, forbearance, or property with legal value. A promise to do something that one is not legally obligated to do can be considered, as can a promise to perform a moral obligation, provided that the promisee was harmed in conferring a benefit on the promisor and that the promise is not disproportionate to the benefit. A promise to pay part of a debt is generally not considered adequate consideration, as there is no fresh consideration for the payment of a smaller sum. However, there are exceptions; for example, receiving the lesser sum earlier may be considered good consideration.
Consideration must be real and unconditional, and it must be bargained for. Past performance or a gift does not constitute consideration as there is no exchange or bargaining involved. However, a contract without consideration may still be enforceable if it has a substitute, such as promissory estoppel or detrimental reliance, or if non-performance of the promisor will cause injustice.
Courts will generally look for consideration for a promise rather than examining the commercial merits of the contract, and small considerations, such as a token payment of £1, are usually enforceable.
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Frequently asked questions
Consideration is the benefit that each party gets or expects to get from the contract. It is the price that is asked by the promisor in exchange for their promise. It can be a promise, performance, forbearance, or property with legal value, but the economic benefit is not required.
Consideration is important as it is required to form a legally binding contract. Without consideration by both parties, a contract cannot be enforceable.
There are four types of consideration: executed, executory, past, and fresh.
