Business, Legal & Accounting Glossary
The basis of a contract. Consideration is a benefit or right for which the parties to a contract must bargain; the contract is founded on an exchange of one form of consideration for another. Consideration may be a promise to perform a certain act — for example, a promise to fix a leaky roof — or a promise not to do something, such as build a second story on a house that will block the neighbor’s view. Whatever its particulars, consideration must be something of value to the people who are making the contract.
n. 1) payment or money. 2) a vital element in the law of contracts, consideration is a benefit which must be bargained for between the parties, and is the essential reason for a party entering into a contract. Consideration must be of value (at least to the parties), and is exchanged for the performance or promise of performance by the other party (such performance itself is consideration). In a contract, one consideration (thing given) is exchanged for another consideration. Not doing an act (forbearance) can be consideration, such as “I will pay you $1,000 not to build a road next to my fence.” Sometimes consideration is “nominal,” meaning it is stated for form only, such as “$10 as consideration for conveyance of title,” which is used to hide the true amount being paid. Contracts may become unenforceable or rescindable (undone by rescission) for “failure of consideration” when the intended consideration is found to be worth less than expected, is damaged or destroyed, or performance is not made properly (as when the mechanic does not make the car run properly). Acts which are illegal or so immoral that they are against established public policy cannot serve as consideration for enforceable contracts. Examples: prostitution, gambling where outlawed, hiring someone to break a skater’s knee or inducing someone to breach an agreement (talk someone into backing out of a promise).
Under English law, for a simple contract (see: Contract) to be valid (whether express or implied, written or oral), there must be ‘consideration’ from the party accepting the offer (see: Acceptance of offer). This requirement is contested by many authorities, and not all jurisdictions require it. Increasingly judges are being encouraged to ‘find’ consideration is cases; this is so that contractual claims can be assessed on the basis of the real intentions of the contracting parties to one another, rather than a strict, narrow interpretation of case law.
Consideration is only at issue in a Simple contract; courts often have to ‘find’ consideration to be able to infer that a contract exists. In a Contract by deed consideration is unnecessary, as it clear what is due to whom. In addition, where the traditional narrow view of consideration may lead to harsh results, courts may accept a request for equitable Estoppel.
The legal meaning of ‘consideration’ is not very different from the everyday use of the term. For example, if I say for a small consideration I will… I am probably offering to do something for money. However, in English law consideration need not be monetary. It need not even be a benefit. For example, if my next-door neighbours offer me money to desist from practising playing the saxophone in the evenings, the consideration is my desisting, it is not the offer of money.
Valid consideration has the following features:
If no consideration is present, then the contact may not be enforceable, even if it contains a clause to the effect that it should be enforceable. For example, in Tweddle v Atkinson (1861) the absence of consideration prevented Tweddle implying a contract between himself and Atkinson (see: Tweddle v Atkinson (1861)). That case also demonstrates how consideration need not be a benefit given by the person seeking to enforce the contract, but could be a detriment taking upon himself.
It is very clear in law that consideration may be meagre or even negligible, it just has to exist. For example, in Chappell and Co v Nestle (1960) the consideration was held to be chocolate bar wrappers. However, in this extreme case, the consideration was so negligible that it could almost be regarded as non-existent; hence it required the House of lords to settle the matter.
Inadequate consideration Certain things are not considered adequate consideration, although they may appear at first sight to comply with the above. For example:
There are, as might be expected, many ‘borderline’ cases.
Legal obligations fulfilled above and beyond the call of duty As described above, the performance of statutory duty, however onerous, does not constitute consideration. The standard case is Collins v Godefroy (1831). However, if one offers to carry out a duty of the law to a degree beyond strictly required, this may be a consideration. In the case of Glasbrook Bros v Glamorgan CC (1925) a police authority provided protection in excess of what their statutory duty was felt to require; it was held that the police were entitled to claim payment for this (see: Glasbrook Bros ltd v Glamorgan CC (1925)). Similarly, in Ward v Byham (1956), courts held that a mother’s duty to care for her child was not a consideration for an agreement, but to do so in a particular way was (see: Ward v Byham (1956)).
There have been repeated calls for this principle to be overturned because it can lead to unfairness. It is important to understand that an agreement means exactly that: a coincidence of views of both sides. If I offer you £100 to fill in your Income Tax returns on time, and you accept, why should we not have a binding agreement? The traditional answer is that to allow this sort of thing is contrary to public policy, that is, it sets a bad example to the community.
Performance of an existing contract is not consideration — or is it? As described above, the traditional view is that it is not sufficient merely to agree to carry out some action for which there is already a contractual obligation. This is highly contentious, and there are conflicting case reports.
First, there is the matter of ‘gratuitous promise’. In Stilk v Myrick (1809) sailors negotiated to work in more difficult conditions (two crew desertions) for extra pay. When the captain refused to pay them, the court upheld his decision on the grounds that Stilk et al. had not offered adequate consideration. The fact that their work had been made more difficult did not mean that they were no longer contractually bound. It did not discharge their agreement (see: Stilk v Myrick (1809)) In effect, Stilk had made a ‘gratuitous’ promise: an offer to do something he already had to do. (In contrast, in Hartly v Ponsonby (1857) the facts seem superficially similar but the number of desertions — 31 out of 36 — made a fundamental change to the contractual situation; thus the captain’s offer of extra money was construed as a new agreement, and Stilk v Myrick (1809) was immaterial (see: Hartley v Ponsonby (1857)).
Second, there is the matter of ‘practical benefit’, and its action to negate a charge of ‘gratuitous promise’. In Williams v Roffey Bros (1991), the Court of Appeal ruled that although Williams were only agreeing to do something already part of a contract, Roffey was nevertheless getting a ‘practical benefit’ from Williams, and this was enough to support the contract (see: Williams v Roffey Bros (1991)). The Court of Appeal claimed that the ‘practical benefit’ in this claim meant that Williams’s promise was not gratuitous, and the decision in Stilk should stand. Indeed, it was claimed that the facts of this case were materially different from Stilk, which could be considered as a re-negotiation of contract owing to economic distress. As a matter of public policy, it is said, it should not be admissible to force a person to re-negotiate a contract by forcing that person into economic duress, which is what the sailors were doing. In Williams v Roffey it was the claimant, not the defendants that were suffering the greater economic duress. This ruling on practical benefit has not always been accepted subsequently, and the courts have generally followed Stilk and the related case of Foakes v Beer(1884), discussed below.
Third, and this is even more contentious, it has sometimes been ruled that a benefit to a person not a party to the contract (a ‘third party’) could be taken as consideration. For example, in The Eurymedon (1975) it was held that a firm of stevedores who had a contractual duty to a marine carrier could use the performance of that duty as the consideration in an implied contract with the owner of the goods being transported (see: The Eurymedon (1975).
Fourth, it has been held that work done in excess of a contractual obligation may represent consideration.
Part-payment of a debt is not consideration — or is it? If I owe you £1000 and say I can’t pay, but offer you £500, and you accept, can you revoke your acceptance and sue for the full amount? The conventional answer is ‘yes’. If I am legally bound to pay the original amount, then there is no consideration on my part that would support a new agreement. In effect, I am asking you to give me something for nothing. The archetypal cases are Pinnels case (1602) and Foakes v Beer (1884). However, it could be argued that when I offer you £500 rather that £1000, I am offering you an opportunity to avoid litigation, which is a valuable consideration.
Past consideration is not consideration — or is it? In general, an act carried out in the past cannot be taken as consideration on a new agreement, however valuable that act. For example, in Re mc ardle the occupants of a house carried out certain improvements during their tenancy and were offered payment. They were unable to claim, however, because the consideration was past (see: Re Mc Ardle (1951)). However, the principle of Implicit assumpsit may be invoked if the claimants can show that consideration, although past, arose at the request of the plaintiff. In effect, this principle ‘assumes’ the past consideration into the new agreement (see: Lampleigh v Braithwaite (1615)).
Forbearance from litigation is a consideration — or is it? Suppose one of my neighbours persistently parks his car in the parking space if front of my house — which is annoying but hardly illegal — and one day, in a fit of pique, I kick his car and dent it. Foolishly, I do this in front of 20 witnesses of excellent character. Clearly, the neighbour has a case against me and could sue for Damages. I may also be criminally liable, but that’s a different matter.
The neighbour, being a forgiving fellow, offers not to sue if I make good the damage myself. Do we have a contract? The orthodox view is that we do, if the neighbour’s legal case is a valid one. Clearly, in this case, it is. However, if an agreement is made on the basis of an invalid case, then it is void. Where do things stand if we make an agreement on the basis of forbearance from prosecution of an invalid case which we think is valid?
If one party reneges on an agreement and claims that there was no consideration that would allow the other party to claim that the agreement was a contract, then the injured party may ask a court to support the contract on the grounds that Promissory estoppel has occurred. The landmark case of this sort was High Trees House, in which a landowner agreed to reduce the cost of leasing a block of flats, and then attempting to back out of the agreement on the basis of insufficient consideration. However, courts have been at pains to stress that this case does not give the warrant to force a party to renegotiate a contract on less favourable terms and then prevent that party making a claim for damages. The phrase often used is a shield, not a sword (see: Central London Property Trust Ltd v High Trees Ltd (1947)). For example, in Combe v Combe a woman tried to use the High Trees House judgement to enforce an agreement made by her ex-husband to pay maintenance after their divorce. The attempt failed, because the Court of Appeal ruled that the High Trees case does not create new causes of action where none existed before (see: Combe v Combe (1951)).
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This glossary post was last updated: 27th April, 2020 | 11 Views.