Consideration in contract law

What is consideration in contract law?

‘Consideration’ is the price given in exchange for goods or services under a contract, or a promise to do (or not to do) something in return. The price is usually money – but can be anything that has value.

Consideration of value is required to make the contract legally binding and must be given by the contractual party – it cannot be given by a third party.

What is the legal definition of consideration?

The key case that defined ‘consideration’ is Currie v Misa (1875), which states that consideration can consist of a right, interest, profit, benefit, detriment or forbearance. There are two types of consideration: executed and executory.

Where consideration has been given (executed), consideration has already been carried out. However, it cannot be something that happened in the past.

In the case of executory consideration, one party is bound by the contract by promising to do something or not to do something

Sometimes, there is a dispute as to whether or not a contract is legally binding because of an alleged lack of consideration. The courts have developed important rules on the meaning of consideration over the last 150 years or so.

What amounts to consideration?

Consideration must be ‘sufficient’ and adequate; however, this does not mean it has to be of market value. For example, in the case of Thomas v Thomas (1842), an agreement was made that a woman was allowed to reside in a property for £1 a year. This was sufficient consideration – it was not a mere gift.

Consideration must be given at the time of the agreement, but it does not include previous acts. For example, in the case of Re McArdle (1951), previous work was not treated as consideration for the contract for a future arrangement. However, if there is an agreement between the parties that previous work is to be included, then that consideration may be valid (Lampleigh v Braithwaite (1615) and Re Casey’s Patents (1892)).

Consideration in a contract must not be illegal. In the case of Foster v Driscoll (1929), goods were smuggled into the USA, and therefore the consideration was illegal. So, for instance, if you enter into a contract to supply goods in return for smuggling counterfeit goods or drugs, the contract will be unenforceable because the consideration is illegal.

Consideration cannot be a duty which currently exists. For instance, in the case of Collins v Godefroy (1831), a lawyer who attended court as a witness could not also contract to appear in court. Another case is Stilk v Myrick (1809) where sailors had a duty to sail the ship short-handed. When they promised the captain they would do this, this was not a consideration because it was their duty to do this anyway.

What is the relevance of promissory estoppel?

Promissory estoppel is where someone is prevented from relying on certain facts or rights which are different to earlier ones to the detriment of the claimant. In the context of contract law, if someone releases another from their obligations under a contract – but then later disagrees or changes their mind – they may be estopped from doing so. Read more on promissory estoppel here.

Duties owed under the law, and duties owned under a contract

There are instances when doing something ‘more’ than required by law or under a contract may be sufficient consideration for a legally binding contract.

In the case of Glasbrook v Glamorgan (1925), Glasbrook asked the police to provide assistance at a mining site because of fears of a conflict between miners and protesters. When the local authority of Glamorgan presented Glasbrook with a bill, Glasbrook refused to pay for the services of the police. Glasbrook argued that it was the duty of the police to carry out these services. The court said Glasbrook had to pay for the costs because Glasbrook had requested the services of police – these services were seen as ‘special’ and not within the duty of the police.

In the case of Hartly v Ponsonby (1857), the crew of a ship were sailing short of hands. The master of the ship agreed to pay them in addition to their wages. Following a legal challenge by a crew member against the master for the sum agreed, it was decided that the crew were not contractually obliged to continue with the reduced number of hands, therefore, the consideration for the promise of payment was seen as good in law.

In Williams v Roffey (1990), it was ruled that consideration may be possible if it was a result of an existing duty that enabled another party to advantage or prevent disadvantage.

What is the law regarding debt repayment and consideration?

If part of a debt is repaid with the creditor’s agreement, this does not mean the end of a debt. However, in Pinnell’s Case, the creditor agreed that if something in addition is given to the part payment, this may release the complete debt. Finally, if a third party pays some or all of a debt in return for the discharge of the debt, this has been held as sufficient consideration to enforce the contract (Hirachand Punamchand v Temple (1911)).