For a valid contract to exist, there must be consideration on the part of each party that enters the contract.
What is Consideration?
In simple terms, where a promiser has made a promise to a promisee, the latter must in return give the promisor something in order to make the promise binding. That is, consideration is the mutual exchange of promises [see Eastwood v Kenyon [1840] 113 ER 482]. For example, if Hugh promises to do renovations on Neil’s house, Neil might give Hugh $10,000.00 as consideration to make the promise binding on Hugh.
What does Consideration do?
It makes a promise enforceable.
What constitutes Consideration?
The Australian Courts have applied the following elements when determining whether there has been consideration.
- Benefit/Detriment Requirement
Consideration may consist either in some right, profit or benefit accruing to one party or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other [see Currie v Misa [1875] LR 10 Ex 153]. In Harmer v Sidway [1891] 124 NY 538, the Court considered whether an uncle’s promise to pay his nephew $5,000.00 for refraining from drinking liquor, using tobacco, swearing and playing cards or billiards for money until the nephew turned 21 was consideration. The Court held that this was not consideration because the uncle received no benefit from the nephew’s performance [and arguably the nephew received no detriment]. - Bargain Requirement
The promisee’s undertaking to incur a detriment or confer a benefit must correspond to the promise made by the promisor. In Australian Woollen Mills Pty Ltd v Commonwealth [1954] 92 CLR 424, the Court held that the plaintiff could not enforce statements of policy as a promise. This case demonstrates that there is a crucial difference between an act performed by a promisee as part of the bargain for the promisor’s promise and an act that is merely done in reliance of some vague promise. - Movement from Promisee
Consideration must move from the promisee. This requirement is still satisfied if the promisee confers a benefit upon a third party at the behest of the promisor [see Coulls v Bagot’s Executors and Trustee Co Ltd [1967] 119 CLR 460].
What if the
Consideration is disproportionate?
Generally, the law does not intervene with respect to the value of the consideration exchanged unless the two promises are so disproportionate in value as to demonstrate unconscionability in the bargaining process. While consideration need not be adequate, it must be legally sufficient [see Woolworths Ltd v Kelly [1991] 22 NSWLR 189].
When is Consideration not required?
Consideration is not required when:
- One of the parties was already legally obliged to perform, for example by public duty or an existing contract in which the promisee is already bound;
- The promise amounts to a gift, not a contract;
- The exchange is for “past consideration”; or
- The bargained-for promise is illusory [or contrary to law].
What if the contract does not have Consideration?
The contract may be unenforceable. However, this relies on the unique circumstances of the situation. Whenever there is uncertainty of whether a contract has sufficient consideration, it is crucial that you obtain proper legal advice.
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In order to create a legally valid contract, the parties will need to exchange something of value. This value is referred to as “consideration.” Consideration is one of the three main requirements of forming a contract. Consideration can generally be provided with either money or assets. The other two primary requirements needed to form a contract include a valid offer and an acceptance of that offer.
For example, suppose you entered into a sales contract with a farmer for green apples. The farmer will give you the green apples in exchange for something of value, which in this case, would be money. The money is what was traded to demonstrate that the contract was supported by consideration.
The most common type of consideration used in contracts will involve some sort of monetary payment. While a person may also exchange services or products to demonstrate consideration, the form of consideration does not really matter. So as long as the parties can show they exchanged something of value, the contract will be deemed valid if all the other elements of a legally binding contract are met as well.
In addition, a promise may also qualify as consideration under a business contract. For instance, if a painter promises to come over and paint your house, but then never does so, you would be able to sue that painter for damages since their promise served as consideration. Of course, this is assuming that all other elements of a valid contract were met at the time the painter promised to paint your house.
To learn more about the requirements to form a valid contract or if you need assistance with drafting a legally binding contract, you should speak to a local contract lawyer as soon as possible. It is important that you do not sign a contract without having a lawyer to review it first. Otherwise, you may be signing away significant legal rights and/or you may be ordered to pay a substantial amount of money in the event that you breach the terms of a contract.
How Is Consideration Measured?
In the majority of contract cases, the court will require the parties to prove that there was adequate consideration at the time the parties formed and signed the contract at issue. Consideration will be deemed adequate when it corresponds as closely as possible to the value of the services or goods provided in the contract.
The value of goods and/or services are typically measured by using the fair market value of those goods and/or services at the time that the contract was created. It is important to note, however, that consideration in a contract does not have to equally match the value of the goods or services. Instead, it just needs to approximately equate to their values.
A court will normally evaluate the adequacy of consideration by determining what would be considered a reasonable value in the eyes of an average consumer. For example, imagine that one party promised to offer the other party a TV that is worth $200. If the other party agrees to only pay them $180 for the TV, then a court may find this amount to be adequate consideration for the TV.
On the other hand, if the party only paid them $30 for the TV, then the court might not rule that this amount qualifies as adequate consideration. However, the outcome of a case will mostly depend on the facts surrounding a particular issue and may be subject to the discretion of a court.
Lastly, it should be noted that past actions or services will not qualify as consideration for a new contract. In addition, promises that are fake [i.e., illusory promises] or that are impossible to perform will also not constitute valid consideration and thus will render the terms of a contract as invalid.
What If Consideration Is Not Offered in a Contract?
In the event that a court finds that a contract was not formed with consideration, then it will most likely rule that the contract is invalid and unenforceable under the law. In which case, neither party will be able to sue one another if there is a dispute over the terms of a contract since no actual contract exists. In other words, a contract will not be seen as valid if no consideration was exchanged at the time the contract was formed.
Accordingly, it is very important that all parties to a contract be aware of the requirement of adequate consideration. This is especially true at the beginning of the contract, such as during the negotiation and drafting stages of forming a contract. In addition, depending on the facts of a particular case, a court may find that an exchange was an implied gift if there was no consideration, but the parties exchanged services.
For instance, if a friend offers to repair another friend’s roof as a favor and does not ask for payment or anything else in return for repairing their roof, then this transaction will not establish a contract since no consideration has been exchanged between the two friends. A court would most likely deem this to be a gift or a kind act.
One other situation that will not qualify as providing consideration under the terms of a contract is if a party is offering something of value that is already required by law. For example, if a mechanic promised not to further damage a car that already needed to be repaired, this would count as providing consideration under a contract.
Basically, the customer is paying the mechanic to have their car repaired, not to ensure that the mechanic does not do further damage to it.
Do I Need a Lawyer for Help with Contract Issues?
Contract consideration is one of the most important features to make sure that you include when forming a contract. If the provisions in a contract do not contain consideration [i.e., an exchange for something of value], then a court will generally not enforce the contract as it is written. Therefore, it may be in your best interest to hire a contract lawyer who practices law in your county if you need further legal guidance on contract drafting or on a contract dispute.
An experienced contract lawyer will be able to assist you in forming a contract. For instance, your lawyer will be able to help you negotiate the terms of a contract as well as can draft, edit, or modify the terms of a new or an already existing contract agreement. Your lawyer will also be able to aid you in enforcing the terms of a contract by providing legal representation on your behalf in civil court.
In addition, your lawyer can either draft a new contract or review the terms of an existing contract to ensure that it contains adequate consideration. If your contract does not contain adequate consideration, then your lawyer can communicate with the opposing party’s counsel and request that the contract be amended to include it.
Finally, if there is an issue with a contract or if you are involved in a dispute over a contract, your lawyer will be able to assist you in resolving a contract-related issue or can make sure that your rights are protected during a contract dispute in court. Your lawyer can also help you to sue or countersue a party whom you believe has violated the terms of your contract. If you win the case, your lawyer can aid you in recovering some form of legal remedies as well.