7 Consideration
Learning objectives
On completion of this Chapter, you should be able to:
- Define consideration.
- Identify when consideration must be present.
- Explain the rules for consideration.
- Explain the distinction between past, present and future consideration.
- Explain what is promissory estoppel.
Key terms
You will notice these key terms, which are listed throughout the chapter to help you understand and remember the material:
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- Consideration: the ‘price’ paid to buy the other person’s promise; it must be in every simple contract.
- Formal contract or deed: a contract that has been signed, sealed and delivered, and does not require consideration to be valid.
- Gratuitous promise: a promise undertaken voluntarily and lacking consideration, so is not enforceable in court.
- Joint promises: where two or more persons jointly agree to provide consideration jointly and both can be sued, that is, A and B promise to pay C K100.
- Joint and several liability: where two or more persons agree together, as well as having made separate agreements to repay the loan individually. You then have one joint and several separate obligations, which can mean performance by one person can discharge all the others of their obligations or they can be sued separately. For example, A and B jointly promise to pay K100 to C and separately you promise to pay K100 to C and B also separately promises to pay C K100.
- Promisee: the person who is receiving, or the recipient of, the promise
- Promisor: the person giving the promise
- Several liability: where two or more persons agree to provide consideration but each promises separately, that is, A promises to pay K50 to C and B promises to pay K50 to C.
- Simple contract: a contract that is made orally or in writing (or both) involving an agreement between parties with the intention of creating legally enforceable obligations and which requires consideration to be valid.
- Variation clause: often a clause within a contract (but can be oral) where both parties agree to change part of a contract from the way they originally agreed to while the remainder of the contract remains unchanged.
Introduction
In this chapter we begin by considering what is consideration and then look at the rules for consideration and we finish by looking the principle of promissory estoppel (an equitable remedy that provides an exception to the rule that in a simple contract there must be consideration).
In the last two chapters we looked at agreement or the offer and acceptance components of agreement (Chapter 5) and intention to create legal relations (Chapter 6). In this chapter we look at the third element needed for the creation of a simple contract: consideration.
Consideration is the last element that we need to consider for the creation of a simple contract. Remember that we need three elements to be present: agreement, intention and consideration. Also remember that at this stage, we are not considering whether what we created is a valid contract or not. We are just focusing on the creation of the contract. We deal with the question of validity in Chapters 8(capacity), 9 (consent) and 10 (legality and form).
Step 3: Consideration
The final step in determining whether a simple contract exists or not is whether there is consideration. Remember that in a simple contract, no consideration (or the ‘price’ you are paying for the other party’s promise) means no contract. Note ‘price’ does not have to be money.
You will sometimes find consideration referred to ‘executed’ or ‘executory’ consideration. The former refers to the performance of an act rather than a promise of performance. Executory consideration, which is found in most contracts, consists of a promise to do something – for example, to buy and sell something.
Does consideration have to be present in a deed?
In the case of formal contracts such as deeds, there is no need for consideration because the contract is valid because of its form – that is, the way it is made. In the case of all other contracts, called ‘simple’ contracts, valuable consideration is required if the ‘agreement’ is to become a contract.
Does consideration have to be present in a simple contract?
The answer is ‘Yes’. Simple contracts must contain a bargain – only bargain promises or promises that are given because they are paid for, are enforceable.
The aim in defining consideration is to enable a distinction to be drawn between promises which are gratuitous – that is, which are freely given (such as gifts where nothing is given in return) – and those which are onerous, or ‘paid for’ by the incurring of some obligation (such as buying a video game for money, where you get the game and the seller gets the money).
What is ‘Consideration’?
Consideration is the price you pay to buy the other person’s promise or, as Lord Dunedin said in the English case of Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] AC 847:
‘An act or forbearance of one party, or the promise thereof, is the price for which the promise of the other is bought, and the promise thus given for value is enforceable’.
While this is often money, don’t assume that this always must be the case. It may involve a ‘detriment’ by the promisee. (The promisor is the person undertaking the promise, while the promisee is the person who is receiving – or the recipient of – the promise.)
Consideration is an integral part of the bargain that forms the basis of most contracts and it may be:
- money or involve a benefit given or detriment suffered as the price for the promise
- something the promisee gives to the promisor
- the carrying out of some act, or
- not doing something that the promisee had a legal right to do.
Once this condition is met, a bargain will exist.
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.
Business tip
Should I have a variation clause in my contract?
You can have an oral variation but be careful if it involves a large contract variation because problems can arise about the terms of the variation and there can be unforeseen consequences that were not anticipated by either party as well as documentation issues. To avoid these problems, would it be better to make a new contract? It is a good reason why you should include a termination clause in the contract to reduce the chance of being sued for breach.
General rules for consideration
In brief
Rules for consideration
Consideration must be present in every simple contract. Consideration:
- should be present or future, but not past
- can be anything stipulated by the promisor (even a chocolate wrapper – see the UK case of Chappell & Co Ltd v Nestles Co Ltd [1960] AC 87)
- must move from the promisee. In the case of joint promisees, it is sufficient consideration if it moves from one of the parties.
- must have some value, although the court is not concerned with its adequacy
- must be something more than the promise of an existing obligation (see the UK case of Stilk v Myrick [1809] 2 Camp 317)
- must be more than part payment of a debt (see the UK case of Foakes v Beer (1884) 9 App Cas 605)
- must be possible of performance
- must be definite
- must be legal but may take any form and need not be of comparable value to the promise, and
- must be referable to the other party’s promise.
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.
Reflection questions
You are nearly at the end of ‘consideration’. Again, while you are taking a break think about the following questions on consideration.
- Should consideration still be an essential element in a contract today? What does it achieve?
- Explain the distinction between executed, executory and past consideration.
- Why don’t formal contracts, such as deeds, require consideration?
- Why is past consideration no consideration?
- Why is repeating an existing duty not good consideration?
Consider the following fact situation
FACTS: Schubert purchased a new car from Hercules Motors, and after a short time found the paintwork faulty. Hercules Motors acknowledged that something would have to be done, and it was agreed that Hercules Motors would repaint the car and restore it to ‘as new’ condition. It was also agreed that the work would be supervised by a paint company representative, who would determine if the work was satisfactory. His report was unfavourable.
ISSUE: Was the promise to restore the car to ‘as new’ condition to avoid being sued by Schubert capable of amounting to good consideration?
DECISION: Well, what do you think?
HINT: Do you think that the defendant’s belief as to the validity of the claim in these types of cases is irrelevant? Does it matter that the plaintiff’s claim is in fact bad in law?
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.
In brief
A promissory estoppel:
- operates as both a defence or shield for a promisee.
- can apply even in the absence of pre-contractual obligations.
- does away with the requirement that consideration is required in simple contracts and that it must move from the party suing to the party being sued.
Business tip
Avoiding the operation of the doctrine of promissory estoppel.
Application of the doctrine is really limited to only a suspension of the promisor’s rights, not a termination of them. The promisor can withdraw the promise if reasonable notice is given to that effect to the promisee, and it is possible for a return to the position that the promisee occupied before the suspension of the promisor’s rights.
Key points
An understanding of the following points will help you to better revise material in this Chapter relating to consideration.
- What is meant by ‘consideration’? Consideration is the price you pay to buy the other person’s promise. It is what the promisor gives in exchange for the return promise.
- When does consideration have to be present in a contract? Consideration must be present in every simple contract. It must not be past and must move from the promisor.
- What are the rules for consideration? Consideration must be present in every simple contract. It must:
- be present or future, but not past
- be anything stipulated by the promisor
- move from the promisee. In the case of joint promisees, it is sufficient consideration if it moves from one of the parties.
- have some value, although the court is not concerned with its adequacy
- be something more than the promise of an existing obligation
- be more than part payment of a debt
- be possible of performance
- be definite
- be legal but may take any form and need not be of comparable value to the promise, and
- be referable to the other party’s promise.
- What is the distinction between past, present and future consideration?
- Present (executed) consideration involves an act being done in return for a promise.
- Future (executory) consideration involves the parties’ exchanging promises, each promise being consideration for the other. In this type of situation, consideration is intended to be performed in the future.
- Past consideration involves the giving of a promise after an act has been performed and is generally not enforceable. The act must be done in reliance on the promise.
- What does variation of a contract mean? If a party, or both parties, wish to change their contract 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 and are changes that are unforeseen at the time the initial contract is entered into. They can be oral changes but are better to be in writing to limit or avoid potential problems arising.
- What is ‘promissory estoppel’? Promissory estoppel will allow a promise to be enforced even though the promisee has not provided consideration for that promise. It operates where it would be inequitable, or unconscionable, for the promisor not to be held to their promise. It may be used as a defence or to initiate a cause of action if the promisee’s position has been altered in reliance of the promise.