The question of the presence of consideration rarely causes a problem at the formation stage of a commercial relationship because one party has agreed to sell goods or services to another. As a matter of fact, there will be mutual consideration present because the goods or services are being exchanged for money.

Where problems may arise in commercial arrangements is if the parties subsequently wish to change the arrangement. This can be done by the parties making a new contract (this will need new consideration to support it) or by a contract variation. clause.  Variations refer to any changes made to the original terms and conditions of a contract but don’t fundamentally change the contract. They are often changes that are unforeseen at the time the initial contract is entered into, such as modifications in project scope, budget constraints, higher demand then expected for goods or services, or supply problems. Some contracts will have a variation clause written into them and they don’t have to be complicated, for example, ‘no variation of this Agreement shall be effective unless it is in writing and signed by both parties or their authorised representatives.’ In this case, an oral variation would not be legally effective.  

Variations can be initiated by either party orally, in writing or by conduct, and they usually must be agreed upon by both parties in order to be legally binding (you can have a unilateral variation if the parties agreed to that in the underlying contract).  To be valid there must be agreement between the parties, consideration, compliance with the terms of the original contract, and be in accordance with the requirements of the original contract. 

General rules for consideration 

What is present (or executed) consideration? 

Consideration is an essential element in every simple contract and can be present or future but cannot be past (this occurs where the promise is made after the act). 

Present consideration is where an act is done in return for a promise. For example, in a ‘reward’ situation where you lose your wallet or purse and offer a reward and someone finds the lost item and returns it for the reward, liability—that is, the payment of the reward—is outstanding on your part only. This would also be an example of a unilateral contract. 

What is future (or executory) consideration? 

In the case of future consideration, the parties exchange promises, each promise being consideration for the other. In this type of situation, consideration is intended to be performed in the future. For example, a sale of goods by you with payment on delivery would be an example of a bilateral contract. Here performance of the agreement remains in the future, yet a contract has been made. 

What is past consideration? 

In the case of past consideration, the promise is given after an act has been performed. This is generally not enforceable. For example, you purchased a horse from Amanda for K5,000 and, after the sale was completed, you asked her about the temperament of the horse. Amanda promised you that the horse was in good condition and not vicious, which was not true.  

To be enforceable, the act (or request in this case) must be done in reliance on the promise. In Amanda’s case above, as the contract was completed before your request, Amanda’s promise is not enforceable (see the English case of Roscola Thomas [1842] 3 QB 234). 

The rule that past consideration is not valid consideration frequently means that a promise, apparently made seriously, generally cannot be enforced by the promisee if it relates to past acts. Of course, if the promise also relates to the future, then that part of the promise will be enforceable. For example, if you were promised higher wages, not only for the future but also for a past period when you were being paid at an agreed lower rate. Your employer later refused to honour their promise and, while they didn’t have to pay you for the work already done (as that was past consideration), the promise of future wages was enforceable because you could provide consideration (as in, your labour).  

Where the performance of a service and the subsequent promise to make payment for that service become part of the one transaction, this can be viewed as good consideration. For example, if you seek help from a friend and they incur K1,200 expenses in helping you and you then promise to pay them for their trouble but subsequently go back on your word, can you be sued on your promise? Were your friend’s services originally performed at your request?  

As a general rule in the type of situation above, the court will find that a contract existed. The request for your friend’s services by you and the performance of those services, coupled with a subsequent promise to pay, were all part of the same transaction. When you made the request, there was an implied promise to pay something to at least cover your friend’s expenses and this would suggest to the court that that you intended to create a legal relationship. The subsequent promise of the amount quantified what would be paid. This is sensible, as business is often conducted in what could be best described as an informal way. 

Is a gratuitous promise enforceable? 

If you promise to give a friend K100, your friend cannot enforce the contract as there is no act or promise in return. This is known as a gratuitous promise and is unenforceable unless under seal. 

Must consideration move from the promisee? 

While consideration must move from the promisee, it need not move to the promisor (although in most contracts consideration will move between the two parties to the contract).  

The person who wants to enforce a promise (the promisee) must pay for the promise or there is no contract to sue on. However, there is no need to pay for it in person; for example, payment could be through an agent appointed expressly for the purpose of making the payment or whatever other form of payment the parties agreed to.  

Where a promise is made to two or more people jointly (joint promisees), and only one of those persons provides consideration, the party who has not provided the consideration can still enforce the promise because consideration is only necessary from one of the joint promisees, not from each of them. 

Does consideration have to have some economic value or just be adequate? 

While consideration must be valuable, it is left to the parties to decide at the time of making the agreement what is adequate. Consideration does not need to be at commercial rates, but it must have some legal or economic value even if it is a ‘peppercorn’ or ‘token’ value.  

In Chappell & Co Ltd v Nestlé Co Ltd [1960] AC 87, an English case, Nestlé offered a music record for one shilling and sixpence plus three wrappers from its sixpenny bars of chocolate. The court had to consider whether used chocolate wrappers, which had no value, should be included as part of the consideration required for the purchase of the record for the purpose of determining what royalty Nestlé should have to pay Chappell & Co (the copyright owners). The court considered that the wrappers formed part of the consideration because without them a person could not obtain the music record. The case illustrates the court’s reluctance to become involved in the question of the adequacy of value. As long as there is something of value, the court will be satisfied. 

The question of adequacy does not concern the courts except in cases of duress. This would involve them in the task of examining every contract and trying to determine whether the price was reasonable—an impossible task. The parties may have a very good reason for establishing a particular contract price. For instance, one party may owe the other a favour, or they may be hoping to get further business as Chappel v Nestle above illustrates through a marketing promotion.

Must consideration be sufficient? 

Sufficiency and adequacy are not the same thing. The issue of what is ‘sufficient’, or of a value recognised by the law as amounting to good consideration, is not always clear-cut, particularly where the plaintiff is already under an existing legal duty to the defendant. But as long as some legal value the courts can recognise, they will not be concerned about its adequacy. 

Can compliance with an existing duty imposed by the law be good consideration? 

The general rule is that a person cannot recover money that they have been promised in return for performance of, or a promise to perform, a duty imposed by law because there would be no legal detriment. For example, a promise of payment to attend court when you have been subpoenaed would be a promise without consideration as you have a legal duty to attend.  

An exception to this rule is where performance is beyond that which a person is legally required to do, then that would amount to good consideration.

Can repeating an existing duty owed to the promisor be good consideration? 

Repeating an existing duty owed to the promisor is insufficient consideration because there is no detriment. If you are already contractually bound to the promisor to complete a task, the general rule is that in performing that task you are doing no more than you contractually agreed to do. However, acts in excess of your duty would amount to good consideration to support a new contract. 

What happens if you promise to pay a lesser amount in discharge of a debt? 

For example, if you owe a friend K1000, the correct way of discharging the debt is to pay the entire K1000 to your friend on the due date. However, if you come up to friend on the date and offer to pay only K750, and they accept the amount your friend can later claim the remaining K250. The implied promise is unsupported by consideration. 

Can you avoid the difficulty of part-payment of a debt? 

The debtor can avoid the difficulty of part-payment of a debt if they can show that the creditor requested payment of a lesser sum: 

• at an earlier date than originally promised
• at a different place (for example, Melbourne instead of Sydney)
• in a different currency (for example, gold rather than legal tender) -payment by cash is not sufficiently different from that which the debtor was already obliged to do to amount to good consideration
• where they performed some other act that they were not bound by the contract to perform
• by the signing of a deed of release
• by part-payment by a third party, or
• in reliance on the defence of promissory estoppel.

In each of these situations, if a creditor accepts payment of a lesser sum in full and final settlement of their debt, they will be bound by their promise not to sue for the balance. 

Can part-payment by a third-party amount to good consideration?

Where there is part-payment by a third party, the creditor (the second party) cannot claim the balance from the debtor (the first party). For example, if you (the debtor) owe your friend K1000 and a third party offers to pay your friend K500 in full settlement of your debt, your friend cannot claim the balance from you.  

If your friend subsequently brings an action against you for the balance of the debt, they would fail as this would be viewed as a fraud on the third party because they had been led to believe that their part-payment of the debt would extinguish the debt. 

Can forbearance to sue amount to good consideration? 

Forbearance to sue can amount to good consideration. A promise not to enforce a valid claim and/or a promise to give up a claim entirely can be good consideration for a promise given in return. It is good consideration even if the promise is to forbear only for a limited period or to dispense with a doubtful, but reasonable, legal claim.  The claim that is promised to be relinquished must be: 

• honestly held (there must be a genuine dispute); and  
• one in which the claimant has a bona fide belief that the liability is real at the time of agreement.

It does not matter that the plaintiff may not actually have had an enforceable claim. 

Are moral promises good consideration? 

Moral obligations, as well as natural love and affection, will not convert a promise into good consideration. Promises are only binding if they are part of a process of exchange. A moral obligation, or natural love and affection, is not enough. Hence the requirement of an additional factor that the courts could place a value on, however artificial that value may be. 

Does consideration have to be possible of performance? 

If the promise of one of the parties is a physical impossibility – for example, to walk from Port Moresby to Rabaul in a day – no real consideration would be present. 

Does consideration have to be real and identifiable? 

The consideration must be real and identifiable, and capable of expression in economic terms. If it is indefinite in nature or too vague to be of any value, then it will not amount to real consideration. For example, if you owed your father money and he promised you that he would waive the debt if you stopped complaining, the court would hold that the promise was too vague to be of any value and was therefore unenforceable. 

Does consideration have to be legal? 

Where the consideration is illegal, or a breach of public policy or the civil law, there will be no consideration. 

Does consideration have to be referable to the other party’s promise? 

If consideration is not referable to the other party’s promise, the courts will not be prepared to enforce it.  

Promissory estoppel 

Promissory estoppel is an equitable remedy in contract law and it only applies where the parties were already in an existing contractual relationship and it operates when it would be inequitable for the promisor not to be held to their promise. The doctrine developed from the judgment of Denning LJ in Central London Property Trust v High Trees House Ltd [1947] 1 KB 130. It operated where it would be inequitable, or unconscionable, for the promisor not to be held to their promise where they have made some representation about the future in relation to their conduct. The defendant had to be able to show that they relied on the plaintiff’s promise and changed their positions accordingly, so that they would now suffer serious loss if the plaintiff was allowed to return to their original contractual position. But did you note that it was a defence for a defendant?  

In Australia, the High Court in Walton Stores (Interstate) Ltd v Maher [1988] HCA 7 decided that held that promissory estoppel could also be used to commence an action.  

When is promissory estoppel important? 

The rule that there must be consideration present in every simple contract if it is to be valid has sometimes allowed a person to break an agreement and leave the injured party with no remedy. The principle of promissory estoppel may provide relief to an innocent party by preventing a party from going back on their word where they have made some representation about the future in relation to their conduct. It is essentially an estoppel about future conduct. 

The aim of the innocent party is to avoid the detriment generated by the person who has gone back on their promise or denied the truth of a representation. In this case, the only way to achieve an equitable outcome was to enforce the assumed contract, despite the absence of a concluded agreement. 

Key points

An understanding of the following points will help you to better revise material in this Chapter relating to consideration.