Consideration

Requirement for Consideration

“Consideration” is usually a requirement for a legally binding contract. Each party to the contract must give consideration.  It is given at the request of one to the other (in the offer) and agreed to or accepted by the other in exchange. Consideration refers to the exchange or bargain which is essential for a binding contract.  It is the “thing” given by each party to the contract, to the other.

Consideration makes promises enforceable.  Gratuitous promises are not enforceable. A common misapprehension is that promises in writing are necessarily binding.   It is not enough that an agreement is in writing and even signed unless there is mutual consideration. An agreement may be binding if it is executed formally, as a deed, regardless of consideration.

Without consideration, a promise that is not in a deed is not usually binding and cannot be legally enforced. For example, if I promise to give my car to you, even in writing, you cannot enforce my promise. If I actually transfer and deliver the car to you, making clear that I give it to you as a gift, then this is a legally binding transfer of property. However, the validity of this transfer depends on property law, not on contract law.


Deed In Writing

An agreement or promise without “consideration” is enforceable only if it is signed as a deed. A deed is a formal written document which is signed or “executed” as a deed. Formerly, a seal was required. A deed did not, in fact, require a seal if it is could be shown that is was be intended to be signed under seal.

The words “Signed sealed and delivered” were formerly used in the execution (signing) clause. Following statutory changes in 2009 a seal, actual or notional, is no longer required. The words “executed” or “delivered” as a deed, are usually used.  A witness is required, who must sign to prove or attest the signature of the person “executing” the deed. The witness inserts his description and address.

A deed takes effect on delivery. Delivery is the intent to give effect to the document. It is usually, although not necessarily, effected by physical delivery. Delivery can be conditional. This is referred to as delivery in escrow. When the condition is satisfied, the delivery is complete and the deed is effective, retrospective to the date of the delivery in escrow. This can be significant, where, for example, the person who has delivered the deed, has died in the meantime.


Nature of Consideration

Consideration may be a promise to do or omit to do something. Each party must either confer or agree to confer a benefit on the other or alternatively suffer or agree to suffer a detriment in return. Consideration is the “thing” that is exchanged by each.

Consideration is sufficient if a benefit is provided or detriment incurred at the request of the other party. Consideration may be the foregoing or forbearing from exercising a legal right or a change of legal position.

In this context, the detriment need not be an adverse or negative matter for the promisee.  It is enough if he changes his legal position, or if he does something which he is not otherwise obliged to do.  It does not necessarily matter that he would have done that thing anyway if it is in fact done at the request of the promisor.

Where a promise is made to a number of persons jointly, and each is intended to benefit, consideration from one of the joint promisees will usually suffice.

The courts have been liberal in seeking to find consideration where it appears that the parties intended to be bound by an agreement.


Examples of Consideration

Consideration may be the immediate exchange of goods for money. Equally, it could be the exchange of the present promise to pay money in the future for a present promise to deliver goods in the future. It could be a promise to pay in return for immediate delivery or immediate payment for a promise of future delivery.

An agreement to do something or refrain from doing something one is legally entitled to do will generally constitute sufficient consideration. In a famous case, an uncle promised his nephew a sum of money if he refrained from drinking and using tobacco until the age of 21. This was valid consideration. The nephew was legally entitled to do these things and having agreed to forbear from doing so at his uncle’s request, there was valid consideration and there was a legally binding contract.

A promise to do something upon a particular condition is not generally a contract. The condition is not consideration. If I say, I will make a gift to you on your reaching a particular age, there is no consideration. You must do or agree to do something at my request in return so that there is consideration from your side, in order to make the promise part of a binding legal contract.


Must Come from Person Promised

The consideration must move from the person to whom the promise is made. The person promised must provide the benefit or incur the detriment. Expressed another way, a party who does not give consideration is not a party to the contract.  The party to the contract must provide the consideration.

The agreement to perform a duty already owed to a third party may be good consideration.  It is not necessary that the benefit is conferred on the other party to the contract, i.e. the person who makes the counter-promise.  The consideration must move from the promisee but it need not go to the promisor, in order to be sufficient.

A benefit to another party (whether the promisor or another) is not necessary if there is a detriment to the promisee. A detriment suffered by the promisee at the promisor’s request is sufficient.

A party may contract validly with another to do that which he is obliged to do, under the terms of a contract with a third party.


Forbearance as Consideration

Forbearance may constitute consideration. This may arise where a person agrees not to enforce his rights. An agreement to forebear in doing something at the request of another is good consideration.  The forbearance must be in respect of something which the person is legally entitled to do.

The request may be express or implied.  Forbearance to sue another may be sufficient consideration to support a guarantee. Where a third party enters a guarantee, the courts may infer that this is done in consideration of the forbearance of the lender from enforcing the principal debt.

Where one party agrees not to bring a claim in return for a payment, this will constitute a valid consideration. The settlement of litigation usually involves an agreement to forebear taking legal action in return for payment. The compromise of a bona fide legal claim is sufficient consideration, even if the claim is not in fact valid. If the promisee was aware that the cause of action was invalid, then the consideration would not be sufficient.


Need Not be Proportionate

An important feature of the law of contract is that it does not usually look at how proportionate the exchange or mutual consideration is.  A landowner could agree to sell a valuable property for a penny and this will be binding. This is provided there is no other factor such as duress undue influence fraud or an improvident contract   See the chapters in in relation to these invalidating issues.

Agreements are usually enforced irrespective of the fact that the price or value of the thing exchanged is totally disproportionate. The fact that one party is in a stronger bargaining position is generally irrelevant.

Modern consumer protection laws protect people in vulnerable situations, Nonetheless, the general position remains that if a contract is entered, no matter how one-sided or disproportionate the consideration, it will be enforced by a court order.

Even under the Unfair Terms in Consumer Contract Regulations, the inadequacy of consideration or imbalance in price is not, of itself, an unfair term.  Contracts are enforceable notwithstanding that the consideration may be wholly inadequate.  A contract for the “sale” of a valuable item for a penny, a cent or something else of trivial value, is enforceable.  There may be external negating factors such as duress and undue influence in exceptional cases.  However, in the absence of such factors, the contract is enforceable.


Insufficient Consideration

There are some types of promises which do not qualify as consideration. They are not “sufficient” to found a contract. Some categories of consideration are said to be legally “insufficient” because they lack a tangible substantial benefit.

An illusory promise is not good consideration.  If a person promises to do something at his discretion or if he so decides, then there is unlikely to be sufficient consideration. There is no effective promise in substance.

Love, affection and prayers are not regarded as legally sufficient, because they are not substantial enough. A moral or personal obligation is not sufficient of itself.

Natural love and affection are sometimes described as the consideration or reason for a gift by deed.  Although this is sometimes described as such, it is not “sufficient” consideration, for the purpose of legal enforceability.

Cases suggest that the saying of prayers is insufficient consideration. This approach has been criticised on the basis that prayers involve a detriment to the promisor and a benefit to the promise.


Insufficiency; Existing Contractual Obligation

An agreement to perform something which one is obliged to do in any event is not valid consideration. The obligation already exists and the further promise is illusory and of no effect. However, some additional promise in terms of the time or manner of performance will usually be sufficient.

Where there is already a contract between the parties, the extraction of further benefits in return for not breaching the contract, is not valid consideration.

The courts do not look favourably at parties to existing contracts, who seek additional consideration for obligations which are already the subject of an existing contract. The possibility of a party to a contract being held to ransom; mid-contract is obvious. Issues of economic duress may arise.

If any new element is introduced, then there is good consideration.  The new element may be trivial.  Early payment may be sufficient.  If any new undertaking is made or if the undertaking is varied, then this may be sufficient, in the absence of duress or another negating factor.

An agreement to accept less than the whole of a debt or definite sum due is not of itself, sufficient consideration.  There may be valid consideration if there is some other term, such as payment before the due date. However, absent this the payment of part of a debt is not good consideration. The rule is regarded as anomalous but is well established.


Insufficiency; Existing Legal Duty

The promise to do that which the person is already legally obliged to do by statute is not valid consideration. The principle of existing duties applies in respect of public servants. A promise by a public servant to perform his duty is not sufficient consideration, because the obligation already exists.

The agreement by a public servant to do that which is part of his ordinary public duties is insufficient consideration. If something further is done (where legally possible), such as where the police provide additional services for a public event, the consideration is sufficient.

Where there is a doubt as whether one party will be able to perform or complete his existing contractual obligation and the other party promises additional payment in return for the performance of his obligation on time, some cases have allowed that this may be valid consideration. This is based on the view that the person who promises has obtained a benefit. The cases have held that the promise is valid consideration, provided that it is not the result of duress or fraud. These cases have been criticized.


Past consideration

Past consideration is not sufficient. Therefore, if somebody does something gratuitously and later promises to pay for it, there is no valid consideration. The consideration on the other side has been already performed and is said to be “past”. In order for a gift to be effective, it must be completed. An uncompleted gift is generally not enforceable against the person who makes it.

In some cases, it may not be immediately apparent, that the consideration is “past”.  Where a person makes a promise after a contract has been entered, such as an additional warranty or assurance, it may not be contractually effective if a contract is already found to have been in existence and no new consideration is given.


Past Consideration Exceptions

The past consideration rule does not apply to a bill of exchange.  The consideration for a bill of exchange is permitted by legislation, to include a past debt or liability. Furthermore, the holder of a bill of exchange is deemed holder for value, where value has been given at any time for the bill of exchange. Cheques and promissory notes are deemed to be given for value, where value has been provided at any time.

An exception applies where an act is done at the promisor’s request, on the understanding that it will be remunerated either by payment or the conferral of a benefit. The payment or benefit must be such as would have been legally enforceable if it had been paid or promised in advance.

There is a similar exception to the principle of past consideration where a service is provided in circumstances in which this there is an implication it will be paid for. An act done before the making of a promise can be good consideration if it is done at the promisor’s request and it is understood it would be remunerated in some way.


References and Sources

Irish Textbooks and Casebooks

Clark, R. Contract Law in Ireland 8th Ed. (2016) Ch.2

Friel, R. The Law of Contract 2nd Ed, (2000)

McDermott, P.  Contract Law (2001) 2nd Ed (2017) Ch.2

Enright, M. Principles of Irish Contract Law (2007)

Clark and Clarke Contract Cases and Materials 4th Ed (2008)

English Textbooks and Casebooks

Poole, J. Casebook on contract law. (2014) 12th edition

Stone and Devenney, The Modern Law of Contract 10th Ed (2015)

McKendrick, Contract Law 10th Ed (2013)

Chen-Wishart, Contract Law 5th Ed (2015)

Anson, Reynell, Beatson, J., Burrows, Cartwright, Anson’s law of contract. 29th Ed (2010)

Atiyah and Smith, Atiyah’s introduction to the law of contract. 6th Ed.

Chen-Wishart, M. (2015) Contract law. 5th Ed.

Cheshire, Fifoot and Furmstons, Furmstons and Fifoot Cheshire, Fifoot and Furmston’s law of contract. OUP.

Duxbury, Robert (2011) Contract law. 2nd Ed.

Halson, Roger (2012) Contract law. 2nd Ed.

Koffman & Macdonald’s Law of Contract. 8th Ed. (2014)

O’Sullivan, Hilliard, The law of contract. 6th Ed. (2014)

Peel, and Treitel, The law of contract. 13th Ed. (2011).

Poole, J.Casebook on contract law. 12th Ed. (2014).

Poole, J.  Textbook on contract law. 12th Ed. (2014)

Richards, P Law of contract. 10th Ed. (2011)

Stone, R.  The Modern law of Contract. 10th Ed. (2013)

Treitel, G. H.  An outline of the law of contract. 6th Ed (2014).

Turner, C Unlocking contract law. 4th Ed. (2014).

Upex, R. V., Bennett, G Chuah, J, Davies, F. R. Davies on contract. 10th Ed. (2008).

UK Casebooks

Stone,Devenney, Text, Cases and Materials on Contract Law 3rd Ed (2014)

McKendrick, Contract Law Text, Cases and Materials 6th Ed (2014)

Stone, R, Devenney, J Cunnington, R Text, cases and materials on contract law. 3rd Ed (2014)

Burrows, A. S.  A Casebook on Contract. 4th Ed.

Beale, H. G., Bishop, W. D. and Furmston, M. P. Contract: cases and materials. 5th ed. (2008)

Blackstone’s Statutes on Contract, Tort & Restitution 2017 (Blackstone’s Statute Series)

UK Practitioners Texts

Chitty on Contracts 32nd Edition, 2 Volumes & Supplement (2016)

The above are not necessarily the latest edition.