Contracts 101 – Part 8: Consideration
Disclaimer: I’m not a lawyer and I have no claim that this advice should be taken as legal advice in replacement of seeking out professional help. What I hope to do is educate you over a series of small posts about what constitutes a contract and you should be able to figure out when you might need to see a real lawyer. Although this series is in the Australian context many of the principles apply in other countries.
The first element of the contract discussed in this series was the agreement which consisted of an offer, as distinguised from an invitation to treat, and an acceptance. Then the discussion briefly moved in Part 7 to the Battle of the Forms. Moving past the agreement, this part of the Contracts 101 series progresses to the second element of the contract – consideration.
In short, consideration is the price of something of value that the person promised has themselves promised in return. Thus, a contract requires a promise for a promise. However, this price can be in a range of ways and not just monetary – it could be a right, interest, profit, benefit, forebearance, detriment, loss or responsibility given or suffered. In other words, the other party must contribute to the bargain for there to be a contract. The four rules of consideration are:
- May be executed or executory but cannot be past… Roscorla v Thomas (1842)
- It does not need to be adequate, provided it has some value… Chappell & Co Ltd v Nestle Co Ltd (1960)
- It must be sufficient and reflect the value… Stilk v Myrick (1809); Hartley v Ponsonby (1857); Collins v Godfrey (1831); Glasbrook Bros Ltd v Glamorgan City Council (1925)
- Must move from the promise… Tweddle v Atkinson (1861)
Consideration… Currie v Misa (1875), is a promise for a promise and requires that the exchange of promises is intended to legally bind. Whereas a gratuitous gift, which is a one way promise without a return promise, will not be enforceable in the court (unless it was made under seal, such as a deed).
Consideration also must be definite (not vague)… Placer Development Ltd v Commonwealth (1969), legal and possible to perform, it should be executed or executory… Guthridge v Coco (2002); Shiels v Drysdale (1880), it must move from the promisee… Coulls v Gatot’s Executor and Trustee Co Ltd (1967), although it need not move to the promisor… Pico Holdings Inc v Wave Vistas Pty Ltd (2005), and it may be a promise not to pursue court action, or the compromise of a dispute… Wigan v Edwards (1973).
Consideration is an essential element of every simple contract and, provided it is of some value (nominal or trivial), there is no question to its adequacy. However, the consideration must not be unlawful or breach public policy and it must be capable of performance. The consideration must also be sufficient (as opposed to being insufficient). When the rule says it must move from the promisee that means the person enforcing the contract must show they have furnished the consideration.
Insufficient consideration occurs when there is the performance of a public duty imposed by law… Collins v Godfrey (1831); Glasbrook Bros Ltd v Glamorgan City Council (1925); when under a public duty the person does no more than their obligation; when performance of a duty is already imposed by contract… Stilk v Myrick (1809); Hartley v Ponsonby (1857); when there is acceptance by a creditor of part payment (no consideration by the owing party except under the original contract); when there is a moral obligation, and when there is an illusory or uncertain promise.
Therefore, when entering contracts it is important to realise the necessity of the promise for a promise. Also, that the courts will not enforce the gratuitous gift however it was promised to you. Further, past acts cannot be consideration in a promise of the present – but that may be overlooked if the past act or forebearance was at the request of the person who happens to be making the present promise.
In Contracts 101 Part 9 the third element of a contract – capacity – will be discussed.
Note: Resources used for this series are identified in the first installment – Contracts 101 – Part 1: Outline.
Installments in Contracts 101
- Contracts 101 – Part 1: Outline
- Contracts 101 – Part 2: Which Contract?
- Contracts 101 – Part 3: The Six Elements
- Contracts 101 – Part 4: The Agreement
- Contracts 101 – Part 5: The Offer
- Contracts 101 – Part 6: The Acceptance
- Contracts 101 – Part 7: Battle of the Forms
- Contracts 101 – Part 8: Consideration
- Contracts 101 – Part 9: Capacity
- Contracts 101 – Part 10: Legality of Object
- Contracts 101 – Part 11: Possibility of Performance
- Contracts 101 – Part 12: Genuine Consent
- Contracts 101 – Part 13: Promissory Estoppel
- Contracts 101 – Part 14: Ending the Contract
- Contracts 101 – Conclusion: Protect your Business
