What is consideration?

Date: Sep 14, 2014
Document Type: Article

Consideration is one of the key elements of creating a contract, along with having a settled agreement between two or more parties and an intention to enter into legal relations. Basically, consideration means ‘value’.  The provision of consideration in the creation of a contract involves the passing of value between the contracting parties. This is the essential nature of a contract, namely a bargain involving quid pro quo. Consideration is of particular importance, as it distinguishes between those contracts that should be enforced by the courts and those that are merely gratuitous, such as a promise to make a gift.

The most obvious form of consideration would be payment for a good or service. A has given value (money) to B in exchange for B’s goods or services. However, the concept of consideration is much wider than that, including detriment as well as benefit. Therefore, while consideration may consist either in some right, interest, profit, or benefit accruing to the one party, it may also refer to some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other. Hence, A forgiving B’s debts (detriment suffered) in exchange for the same goods would also amount to good consideration.

What are the requirements of consideration?

Consideration must be referable to the promise sought to be enforced. There needs to be a connection between what A proposes to give to B in exchange for the goods.  For example, A promising to paint C’s walls has nothing to do with the contract of sale between A and B and is not good consideration.  

In addition, consideration must move from the person making the promise, although not necessarily to the other contracting party. For example, A could promise to pay B’s wife for the goods provided by B, even though B’s wife is not a party to the sale contract.

Lastly, consideration must be sufficient, but need not be adequate. Thus, consideration needs to pass a minimum threshold to be legally sufficient, but doesn’t have to be commercially adequate. For example, A promising B $200 for a painting worth $500 is not a fair price, but will probably be regarded as sufficient consideration. Any consideration can potentially be sufficient as long as it is legal.

What will not amount to good consideration?

You cannot point to things you did in the past as consideration for promises in the present. This is known as ‘past consideration’. For example, A could not point to the fact he painted B’s house last year as consideration for the goods to be provided now.

Promises with no substance, or that are ‘illusory’, are not good consideration. For example, A cannot promise to buy B’s goods in return for ‘whatever A feels like paying’. This type of consideration is discretionary and without substance and is therefore not good consideration.

Existing duties you are already required to perform (whether legal or contractual) cannot be used as consideration for a new contract. Therefore, a police officer can’t offer protection from criminals as consideration, since he is already legally bound to carry out this duty. It may, however, amount to good consideration if he offers to go beyond his existing duties, for example by being a security guard on his nights off. 

It is, however, possible to provide consideration by giving up a claim against someone, provided that your claim is bona fide. For example, if B destroyed A’s car, A might contract with B that she will not sue for property damage, in exchange for B giving A his car. 

Is there a way to get around the requirement for consideration?

Since consideration is such an important element of creating contracts, the only way to avoid the requirement is by the use of formal contracts such as deeds. Deeds are solemn contracts which traditionally had to be ‘signed, sealed and delivered’. Nowadays, this generally means the document must be signed and attested by independent witnesses.

If you require any assistance with contracts, please don’t hesitate to contact us.

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