Anaya Nolan
In contract law, consideration is a fundamental element that transforms a promise into a legally enforceable contract. It refers to the value or benefit that parties agree to exchange as part of their contractual agreement. This exchange can take various forms, including tangible goods, services, or even forbearance, where a party agrees not to perform a specific action. For a contract to be enforceable, there must be a flow of consideration, meaning that both parties must receive some form of consideration from the exchange. While the value exchanged need not be equal, it must be something that is recognised as having value under the law.
| Characteristics | Values |
|---|---|
| Definition | Consideration is a promise, performance, or forbearance bargained by a promisor in exchange for their promise. |
| Importance | Consideration is the main element of a contract. Without consideration by both parties, a contract cannot be enforceable. |
| Types | There are three types of consideration: past, present, and future. |
| Past Consideration | Past consideration is not considered as per English law but is a consideration as per Indian law. |
| Present Consideration | When consideration is given simultaneously with a promise, it is said to be present consideration. |
| Future Consideration | When consideration to one party is to pass subsequently to the maker of the contract, it is said to be future consideration. |
| Validity | For consideration to be valid, it must not be illusory and must have some value in the eyes of the law. |
| Enforceability | A contract without consideration could be enforceable if it has a substitute, such as promissory estoppel or detrimental reliance. |
| Substitutes | Promissory estoppel and detrimental reliance can make a contract without consideration enforceable by preventing injustice to the promisee. |
| Failure of Consideration | If the consideration is deemed inadequate, lost, or compromised before the contract is executed, it may invalidate the contract. |
| Compensation | Determining compensation for the parties involved in the contract can be complicated and may lead to litigation. |
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What You'll Learn
What is consideration in contract law?
In contract law, "consideration" refers to the value or benefit that parties agree to exchange as part of their contractual agreement. It is a fundamental element that transforms a promise into a legally enforceable contract, motivating the parties to engage in the transaction.
Consideration can be a promise, performance, forbearance, or property with legal value, but it does not need to be of economic benefit. For example, a person's consideration in purchasing an apple is the apple itself, while the merchant's consideration is the money they receive. A contract without consideration may be enforceable if it has a substitute, such as promissory estoppel or detrimental reliance.
In most cases, consideration involves a promisor's assurance to do something or not do something. For instance, a promisor may agree to build a shed in the promisee's backyard, or they may agree not to sell a plot of vacant land to a particular real estate developer. When the contract revolves around one party agreeing not to do something in exchange for consideration, this is called forbearance.
Consideration must be something that the promisor is not already bound to do. A promise to do something that one is already legally obligated to do does not constitute valid consideration, as it adds nothing to the existing legal consideration. For example, a contract where a policeman promises to prevent crime would not be valid, as this is part of their job.
Consideration can be past, present, or future. Present consideration occurs when the parties perform their part of the promise at or around the time of entering the contract, such as paying in advance for a delivery. Future consideration involves an agreement to act on a future date, with the contract already executed. Past consideration is typically not enforceable, although it is recognised as valid in Indian law.
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What are the types of consideration?
In contract law, there are three types of consideration: past, present, and future. Each party to the contract must do at least one of the following: make a promise, perform an act, or refrain from doing something.
Past Consideration
Past consideration is typically not enforceable. An example of this is when a person performs their pre-existing legal duty, such as a policeman entering into a contract to prevent crime. This would not be a valid contract because the policeman is already under a legal obligation to do that as part of his job.
Present or Executed Consideration
Present or executed consideration is when a party to a contract has performed their part of the promise at or around the time of entering the contract. For example, paying in advance for the delivery of a consignment.
Future or Executory Consideration
Future or executory consideration is when either party decides to act on a future date. The contract has been executed, but the consideration to perform the obligation is in the future and has not yet been performed. For example, a contract to deliver goods in the future, with corresponding payment upon delivery, falls under the category of executory consideration.
Failure of Consideration
Failure of consideration occurs when a party fails or refuses to perform a substantial part of their contractual obligation, which can lead to the contract being terminated. In such cases, the party that has performed its part of the obligation can claim restitution of benefits.
Substitutes for Consideration
A contract without consideration can still be enforceable if it has a substitute, such as promissory estoppel or detrimental reliance. For example, a modified contract made in good faith under the UCC is enforceable even without consideration.
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What constitutes a failure of consideration?
Failure of consideration is a highly technical area of law. It occurs when a valid contract with a valid consideration becomes unenforceable due to the consideration no longer being valuable. In other words, it is when a party fails to perform a substantial part of their contractual obligation.
For example, in the case of D O Ferguson and Associates v M Sohl, a building project was left incomplete. The contractor argued that much of the work had been done before they left the project, so there was not a "total failure of contract". However, the Appeal Court held that there had been "a failure of consideration" regarding the overpaid amount. The contractor had been paid more than the value of the work completed.
Failure of consideration differs from a lack of consideration, which refers to a contract missing consideration from the outset. A contract without consideration is enforceable if the non-performance of the promisor will cause injustice.
When there is a partial or complete failure of consideration, the contract may be terminated by the parties. The party whose consideration has failed can be ordered to pay equitable monetary damages, such as restitution of benefits.
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How is consideration different in common and civil law?
In contract law, consideration is a key concept that refers to the value or benefit exchanged between parties in a contract. It is what each party agrees to give or perform in return for the other party's promise. Consideration is an essential element for a contract to be valid and enforceable in both common law and civil law systems, but there are some differences in how consideration is treated in these two legal traditions.
In common law jurisdictions, consideration is typically defined as something of value (such as money, goods, services, or a promise to do something) that is bargained for and exchanged between the parties. It is generally required that consideration must be present at the time the contract is formed and that it must move from the promisee (the party to whom the promise is made) to the promisor (the party making the promise). The consideration must also be sufficient, in the sense that it represents a real value in the eyes of the law, and it cannot be past consideration (something that has already been given in the past) or a pre-existing duty (something that one party is already legally obligated to do).
In civil law jurisdictions, the concept of consideration is not always explicitly recognized as a separate element of a contract. Instead, civil law systems tend to focus on the consent of the parties and the existence of a valid agreement as the primary requirements for a binding contract. However, this does not mean that consideration is completely absent in civil law. In some civil law jurisdictions, there may be a requirement for a "cause" or "causa" in a contract, which serves a similar purpose to consideration in common law. The "cause" refers to the reason or purpose for entering into the contract and must be present for the contract to be valid.
One of the key differences between common law and civil law in terms of consideration is the treatment of "past consideration." In common law, past consideration is generally not sufficient to make a promise enforceable. For example, if someone helps a neighbor with a project and the neighbor promises to pay them afterwards, the help already provided would not be considered valid consideration. In civil law, however, past consideration may be treated differently and could be sufficient to create a binding obligation, depending on the specific jurisdiction and circumstances.
Another difference lies in the enforcement of promises made without explicit consideration. In common law, there is generally a stricter requirement for consideration, and a promise made without any apparent benefit or detriment to the parties may not be enforceable. In civil law, the emphasis on the parties' consent and agreement may allow for more flexibility in enforcing promises, even if no explicit consideration is present.
In summary, while both common law and civil law recognize the importance of an exchange of value in a contract, they differ in their approach to consideration. Common law has a more explicit and defined concept of consideration, with specific requirements for validity, while civil law may focus more on the consent of the parties and the existence of a valid agreement, with the concept of "cause" serving a similar function to consideration. Understanding these differences is important for anyone operating in an international business context or dealing with contracts across different legal jurisdictions.
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What are the requirements for valid consideration?
In contract law, consideration is a vital component that makes a contract enforceable. It refers to the exchange of something valuable between the contracting parties. This "something" can take various forms, such as a promise, performance, forbearance, or property with legal value. While economic benefit is not necessary, the consideration must be something that is recognised as valuable in the eyes of the law.
For a contract to be valid, it must meet certain requirements regarding consideration. Firstly, there must be a flow of consideration, meaning that both parties receive some form of consideration from the exchange. This can include making a promise, performing an act (such as providing a service), or agreeing to refrain from doing something. For example, one party may promise to pay a certain amount of money in exchange for the other party's promise to deliver goods at a future date.
The consideration must also be "bargained for", meaning that there is a negotiation process where each party agrees to provide something of value to the other. This could involve money, an act of service, or a forbearance (refraining from engaging in a particular activity). It is important to note that the value exchanged does not have to be equal, and it is not necessary for both parties to receive a direct benefit, as long as there is no fraud involved.
Additionally, the consideration must not be illusory or based on past performance. An illusory consideration is one that has no value in the eyes of the law, such as agreeing to bring someone back from the dead. Past performance as a consideration is also not valid, as there is no exchange involved. For example, a contract with a policeman to prevent crime would not be valid, as it is already their legal duty to do so.
Furthermore, valid consideration cannot be a gift, as gifts involve only one party providing consideration. Similarly, consideration cannot be based on a gratuitous promise or an illusory promise, as these lack bargaining power. Finally, consideration cannot be given when one party is already legally required to perform the action, as in the case of Oscar v. Simeonidis, where the court ruled that a contract must involve a flow of consideration, with both parties receiving something of value in the exchange.
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Frequently asked questions
Consideration is a promise, performance, or forbearance bargained by a promisor in exchange for their promise. It is the main element of a contract.
There are three types of consideration: past, present, and future. A past consideration is typically not enforceable, a present consideration is when a party has performed their part of the promise at the time of entering the contract, and a future consideration is when either party decides to act on a future date.
If A signs a contract with B to paint B's house for $500, A's consideration is the service of painting, and B's consideration is the $500 paid to A.
Common law jurisdictions treat consideration differently from civil law jurisdictions. For example, in common law, past consideration is not valid, whereas in Indian law, it is valid.
A failure of consideration occurs when a party fails or refuses to perform a substantial part of their contractual obligation. In this case, the contract may be terminated, and the performing party may claim restitution of benefits or other equitable monetary damages.
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