Under commercial law and contract law, a critical question that people ask is ‘what is consideration in a contract?’ In this article we aim to answer the question of what is consideration in a contract.
Essentially, in a valid contract, there are 5 aspects that need to be present.
Sufficient consideration in a contract is one of these 5 elements. The other elements include offer, acceptance, intention to create legal relations, and certainty. So, what constitute consideration in a contract? Let’s explore more below.
Contract Law: What Is Consideration in a Contract?
Consideration is a legal term that is used to refer to the benefit that two parties to a legal agreement or a contract receive by entering into the contract. For instance, through a contract one party may promise something of value in exchange for some kind of action or non-action.
For consideration to be valid in contracts, there are certain requirements. Each party to the contract typically:
- Performs an act such as proving a service or product
- Agrees not to do something
- Makes a promise to the other party
What is consideration in a contract? It can be in many forms such as money for example. In fact, the law recognises the most common form of consideration is the promise to pay monetary sum. There are other types of consideration that the law recognises, such as:
- Providing a Service
- Giving up an existing benefit
- Refraining from engaging in a particular activity or behaviour
In other words, anything of value can be consideration. It need not always be money. It can also be an object or any other service that carries value. When is consideration not needed? It is not required in the following circumstances:
- The promise amounts to a gift, and not a contract;
- One of the parties was already legally obliged to perform the existing duty, for example, by public duty or an exisiting contract in which the promisee is already bound;
- The exchange is for past consideration exchanged (see case study example below);
- The promise that is bargained for exchange is contrary to law.
What are Principles of Consideration in a Contract?
Given below is the list of principles of consideration in a contract as law recognises. The principles state that:
- Consideration is essentially the price that one party makes in exchange for the promisor’s promise i.e. price bargained for promise,
- The person responsible for payment is the one who wishes the promisor to enforce his/her promise.
- The party need to pay consideration to the promisor if the promisor allows them to pay it to a third party
- It does not have to be in the form of a benefit accruing to the promisor, whereas, it can also be in the form of detriment suffered by the promisee as an effect of reliance on the promise,
- Consideration cannot be something that has occurred in the past. In other words, it cannot predate the promise.
- The law must view the consideration as valuable. It is not however necessary for the value to be equal in worth to the promise itself.
- Refraining from doing something can be valid consideration.
Example of Consideration in a Contract and Case Study
What is consideration in a contract? You can think of examples in the simple real-life scenarios.
For example, when a seller of property exchanges contracts with the home buyer, the buyer promises to pay a specific amount of money to the seller. This is an example of consideration.
The case study example of McArdle (1951) reflects the principle of consideration that states that it cannot be given before the promise is made. In this case, a wife lived with her three grown-up children.
One of the wives of the three children did some decorating in the house. After she decorated, the children promised to pay her a certain amount of money. Since the promise was made after the wife did the work, it was past consideration as all the work was done before the other parties made any kind of monetary promise.
What is Promissory Estoppel?
When you are reading up on what is consideration in a contract, it is important to understand what is promissory estoppel. This is the doctrine that prevents a party from going back on their promise where it would not be conscionable to do so.
There are some points to consider for making a successful claim of promissory estoppel. These include:
- A promise, undertaking or assurance has been made;
- There is a prior legal relationship between the relevant parties;
- One party has suffered detriment due to relying on the promise, undertaking or assurance
- One party shows reliance on that promise, undertaking or assurance
- The party who seeks to withdraw from their promise, undertaking or assurance has acted unconscionably
Seek Legal Advice from Lawyers
Whether you are looking to prepare a legally binding contract for any purpose, or you wish to review your contract, it is important to seek legal counsel for your matter.
At JB Solicitors, we offer marketing-leading advice to help you with your contractual obligations, and to make each document legally enforceable.
If you wish to learn more about what is in a contract or what is legal consideration, do not hesitate to get in touch with our team of lawyers today.
Contact us in case of any enquiries.