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Consideration in United Kingdom

Definition of Consideration

Some right, interest or benefit accruing to one party, or some forbearance, detriment,loss or responsibility given, suffered by the other.

In accordance with the work A Dictionary of Law, this is a description of Consideration :

An act, forbearance, or promise by one party to a contract that constitutes the price for which he buys the promise of the other. Consideration is essential to the validity of any contract other than one made by deed. Without consideration an agreement not made by deed is not binding: it is a nudum pactum (naked agreement), governed by the maxim ex nudo pacto non oritur actio (a right of action does not arise out of a naked agreement).

The doctrine of consideration is governed by four major principles:

  • A valuable consideration is required, i.e. the act, forbearance, or promise must have some economic value. Good consideration (natural love and affection or a moral duty) is not enough to render a promise enforceable.
  • Consideration need not be adequate but it must be sufficient. Not to be adequate in this context means that it need not constitute a realistic price for the promise it buys, as long as it has some economic value. If X promises to sell his £50,000 house to Y for £5000, Y is giving valuable consideration despite its inadequacy. £1 is often the consideration in commercial contracts. That it must be sufficient means sufficient in law. A person’s performance of, or promise to perform, an existing duty usually cannot in law constitute consideration.
  • Consideration must move from the promisee. Thus if X promises to give Y £1000 in return for Y’s promise to give employment to Z, Z cannot enforce Y’s promise, for he has not supplied the consideration for it.
  • Consideration may be executory or executed but must not be past. A promise in return for a promise (as in a contract of sale) is executory consideration; an act or forbearance in return for a promise (as in giving information to obtain a reward) is executed consideratio However, a completed act or forbearance is past consideration in relation to any subsequent promise. For example, if X gives information to Y gratuitously and Y then promises to reward him this is past consideration, which does not constitute consideration.

Consideration and Estoppel in Contract Law

The doctrine is fundamental to the classical model, which expects every contract to involve an exchange which comes about as a result of striking a bargain. It is the mechanism through which the judiciary have sought to distinguish between gifts and legally enforceable exchanges. A lot of what has been written about the doctrine of consideration makes it seem as though it is a very complex notion. In fact the key concept behind it is very simple. If you want to enforce a contract, you must give something to the other party and receive something in return.

It is important to understand from the start that evidence of consideration may be needed more than once in the life of a commercial relationship. Whenever the parties need to vary the terms of the original agreement, they will need to provide fresh consideration as, in the eyes of traditionalists, this is a fresh deal. It will be seen that it is this condition which has caused the most tension between the requirements of doctrine and the needs and practices of the business community. We learnt when looking at the work of Macaulay and others in Chapter 4 that business people are not as concerned with formalities as lawyers. The commercial pressures or tight deadlines which they work with on a daily basis mean that they are often prepared to accept changes to contractual arrangements without even considering what they need to do to make the variation legally binding.

Attempts have been made to circumvent the rigour of the consideration doctrine by the development of the equitable doctrine of promissory estoppel. One of the most significant characteristics of the doctrine is the fact that it shifts the conceptual focus away from the notion of exchange to that of reliance. Where the latter is concerned, the emphasis is on whether a party has acted reasonably when relying on an undertaking relating to variation of the contractual terms rather than looking for a fresh exchange. The notion of reliance has been much discussed in academic circles as an alternative to understanding contractual obligations as exchanges. Estoppel is one of the areas in which this thinking has found its way into doctrine. As a result the comparison of these two models is a major focus of this chapter and a theme which we carry over to the next, when we look at the problems of misrepresentation in pre-contractual negotiations.

CONTRACT AS BARGAIN AND EXCHANGE

We shall start with an exploration of the fact that traditionally the common law concept of contract has been founded on the concept of exchange and bargain. What this means is that, for a contract to be enforceable, each of the parties to it must give something and receive something. Every time you buy a newspaper you give money in exchange for it but the thing you exchange does not have to be a material object. I get paid a monthly salary in exchange for the services I provide as a lecturer. Those of you who have taken out student loans have been given money in exchange for a promise to pay it back. It might also be the case that a person promises not to do something (forbearance) by way of providing consideration. This would be the case, for instance, if I agreed not to bring a lawsuit to recover a sum of money owed to me if the debtor agreed to pay by instalments over a 12-month period together with interest. The principle underlying all the examples given so far is that both the parties to a contract have to achieve something as a result of the exchange. Lack of exchange renders informal, gratuitous promises or gifts unenforceable at law because they lack the required reciprocity.

A promise to do something in the future can also amount to consideration. The ability to enforce a contract which relies on an exchange of promises about things yet to be performed marked an important stepping stone in the law of contract. Critically, it allows for forward planning in the commercial sector. Consider the example of the building of Wembley stadium. The contracts between Wembley National Stadium Limited and the construction company Multiplex were legally enforceable before construction actually started. The contract was formed on the basis that Multiplex promised to construct the stadium and Wembley National Stadium Limited promised to pay them for the work. At this stage the contract is said to be executory. Actual performance of the act (or the forbearance) embodied in such a promise amounts to executed consideration. In other words the contract is executed when the promise is performed. In the case of a unilateral contract, it is executed when a promise is exchanged for a completed act.

Contract law textbooks reveal centuries of ‘leading’ cases on consideration, which deal with a variety of legal propositions and exceptions regarding the nature of this contractual requirement. However, for an introductory study of the law as it operates today, it is doubtful if full attention needs be given to the extensive and complicated accumulation of ‘old’ case law on consideration. Points from such cases do still arise but more often than not, modern cases tend to demonstrate moves in judicial thinking away from strict theories. Lord Denning (1979) expressed the view that the effect of the doctrine of promissory estoppel since 1947:

has been to do away with the doctrine of consideration in all but a handful of cases. During the 16 years while I have been Master of the Rolls I do not recall any case in which it has arisen or been discussed.

Taking these statements as our cue, we will confine ourselves to an examination of consideration’s main features and then proceed to a closer look at promissory estoppel and other moves away from traditional models.

ECONOMIC VALUE

The consideration supplied by the parties must be something of value in the eyes of the law to make it binding. Generally speaking, value has been taken by the courts to mean economic value. The economic value of consideration is usually obvious and this is probably the main reason why few consideration disputes reach the courts. Services and goods are generally exchanged for the going market rate. However, it is important to recognise that the courts are willing to acknowledge nominal economic consideration such as peppercorn rent. This is because the notion of freedom of contract which dominates the classical model of contract is based on the principle that it is not the job of the courts to police whether a contract is a good bargain. They are only there to ensure that there is some bargain. In other words, party autonomy trumps judicial meddling. It has been long argued that the parties should be free to set their own price or promise in accordance with the value they personally attach to the exchange. This position demonstrates a clear logic. If contract reflects a bargain which has been struck, then it is for the parties to do the bargaining and determine what suits them best. It is for this reason that the agreement between Angie, Georgie and Polly to pay the latter double the market rate in wages would be enforceable in the courts. According to judicial authority, the adequacy of the consideration is for the parties to consider at the time of making the agreement, not for the court when it is sought to be enforced.

Whilst this general approach to bargains continues to frame the case law, now a days, the courts are more sensitive to the ways in which imbalances of bargaining strength and the use of excessive commercial pressure or undue influence can undermine the notion of free exchange. The result is that, in some cases, a grossly inadequate consideration may militate against a court’s sense of fair bargain. In Lloyd’s Bank Ltd v Bundy (1975), although Lord Denning stated that ‘no bargain will be upset which is the result of the ordinary interplay of forces’, the court struck down a contract of guarantee by which the defendant, an elderly farmer not well versed in business affairs, mortgaged his house as security for the debts of his son’s business. This was done at a time when the company was already in dire financial straits, and not long before its eventual collapse. It was felt that, in the circumstances, the consideration moving from the bank was grossly inadequate and, at the late stage at which the guarantee was given, all that the company gained was a short respite from impending doom. The legislature has also played an increasingly active role in the regulation of exchange in certain contexts, such as carriage of goods by sea, rents and interest rates.

BARGAIN AND THE TIMING OF CONSIDERATION

The classical view of contract expects consideration to be exchanged as part of a bargaining process. Thus it is said that something wholly performed before an agreement is reached cannot amount to consideration. Instead, it is known as past consideration. The idea rests on the idea that, if something has been voluntarily given before the bargaining begins, then this should be treated as a voluntary gift or service. For example, if I give you some legal advice in connection with problems you are having with your landlord and two weeks later you agree to pay me for it, this does not amount to an exchange which would be recognised as a contract. My voluntary contribution occurred before the subject of money was discussed. Put simply its bargaining value was used up or spent in advance. The service was offered at a time when we had no expectation of exchange or bargain.

However, in a business context, it may be argued that, if the service was requested, it might have been understood by the parties that payment would be forthcoming. In these circumstances the courts have been prepared to allow that a later express promise to pay merely confirms and quantifies an earlier implied promise on your part: see Re Casey’s Patents (1892). However, this alternative reading of such situations has proved controversial and is seen by some as undermining the whole notion of contemporaneous bargain on which traditional reasoning is based.

The sort of problems which might arise in connection with this rule in the commercial sector are illustrated in Pao On v Lau Yiu Long (1980). In this case, the defendants made a contract with the claimants. They sold shares to the claimant who in exchange promised not to put them on the market for at least 12 months. The defendants, who retained a large block of shares in the same company, had required this, as they did not wish to see the value of their holding depressed by a sudden sale of the claimant’s shares. The defendants later promised to indemnify the claimant against any loss he might incur if the shares fell in value during the year. The Privy Council was willing to marry together the claimant’s promise not to sell, albeit given as part of the original contract of sale, and the defendants’ subsequent promise to indemnify. It has been said that the claimant was ‘only getting what he was really, morally and commercially, entitled to’. The case also supports the growing idea that, in appropriate circumstances, the court should have regard to a continuing commercial relationship between parties rather than concentrating on ‘discrete’ transactions or arrangements within that relationship, a proposition which sits comfortably with the arguments of relational contract theorists.

CONSIDERATION AND EXISTING CONTRACTUAL DUTIES

It follows from what has been said about past consideration that a party can not offer up as consideration something that they have a pre-existing duty to do. If a duty already exists, then this ‘consideration’, like past consideration, has already been used and spent. The position can be outlined by using an example from the case study in Chapter 2. Chelsea agreed to carry out certain obligations as a shop assistant for Angie and Georgie at a fixed weekly wage for a five-year period. As a result of severe financial pressures on their business, Angie and Georgie find they are unable to pay Chelsea at the agreed rate. Rather than terminating her employment, they agree to pay Chelsea a lower wage for the same work. Because she enjoys her work and would find it difficult to find another job locally, Chelsea agrees to the change. Is the variation of the contract binding in law? The traditional viewpoint would be that it is not. Each new or varied contract requires fresh consideration, and Chelsea has already agreed to offer up her services in exchange for an agreed wage and for a fixed term. It might be useful to think of the issue in two stages. There is an original contractual agreement followed by a variation of it. According to traditional reasoning, the variation can only stand if Chelsea agrees to do more for Angie and Georgie in exchange for their new promise. This would be a new agreement with additional consideration for the second contract.

The problem the courts are faced with is that the parties to a contract often change the terms of performance without any reference to the formal requirements of this doctrine. In the majority of cases this happens because of a change in circumstances or market conditions. These cases serve to remind us that it is extremely difficult for the parties to an ongoing commercial relationship to predict what will happen in the future at the time of making their contract. Many have claimed that the English law of contract with its emphasis on exchange and the ‘moment of responsibility’ has paid insufficient attention to the need for flexibility in ongoing commercial relationships. Despite these concerns a strict line on this issue has been taken in much of the case law. So for instance, in Stilk v Myrick (1809), a crew had been engaged to sail a vessel from London to the Baltic and back at the rate of £5 a month. Following the desertion of two of the 11 crew members, the captain promised to share the deserters’ wages among the remaining crew if they would work the ship back to London. But when the ship returned its owners refused to honour the captain’s promise. It was held that the seamen’s claim for the extra pay failed for lack of consideration. The crew were already bound by their contract to meet the normal emergencies of the voyage and were doing no more than their duty in sailing the ship back. Similar facts arose in Hartley v Ponsonby.

Source: Linda Mulcahy, Contract law in perspective, 5th edition, Taylor &​ Francis, New York, 2008.

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  • Article Name: Consideration
  • Author: Ian Brown
  • Description: Definition of Consideration In accordance with the work A Dictionary of Law, this is a description of Consideration : An [...]

This entry was last updated: November 28, 2017

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