Promises, promises - Contractual Consideration
In contract law, a person cannot enforce a promise unless they have been given or promised something in return. The thing given or promised in return is called consideration.
The notion of reciprocity is the core of contract law and this is the main feature that
distinguishes a contract from a deed or a gift. Consider a situation where a person loans a sum of money to a friend, colleague or family member. The parties may informally agree on a repayment plan. If the arrangement is not documented or witnessed there is risk the recipient may later claim that the money was a gift and therefore not repayable. In this situation, proving consideration i.e. that the recipient agreed to repay the loan is critical. A deed does not require consideration for it to be enforced (although consideration may still be present) however deeds have to be in writing and comply with certain statutory formalities. If a deed does not meet these legal requirements, it would not be enforceable as a deed but if consideration exists, it could still be enforced as a contract.
The key concepts of consideration
Consideration does not have to be adequate. What does that mean?
The parties can decide what consideration they want and generally the law does not interfere, even if one of the parties ends up with a bad bargain, especially in business to business transactions. Consideration must however be of "some" value. It doesn't have to monetary, it can be a promise to do or not do something, such as providing a service. When a company (usually in debt) is bought for £1, there is little or no doubt that £1 is of "some" value.
Consideration must move from the promisee
This relates to the doctrine of privity of contract. This is the general principle that only the parties to a contract may enforce the terms. The principle can be modified by the parties but the starting point is that the person who provided the consideration is the only person who can enforce the promise.
It need not be intentional
Must the parties be aware that consideration has been given? No. It is not necessary for there to be conscious thought about what has been given as consideration. In other words, the parties may not be aware that something has been given or promised in return and this would nonetheless amount to good consideration, provided it was of value and moved from the promisee.
Past consideration does not usually count
If a person performs a pre-existing obligation, that does not constitute consideration for a new obligation. This principle was first established in the old case of Stilk v Myrick (1809) 2 Camp 317, where the captain of a ship promised to divide the wages of the deserting crew amongst the crew who remained. The Court rejected a claim by one of the crew to enforce that promise because they were simply doing what they were already bound to do.
A note on promissory estoppel
As a final note, which is matter for another post, the equitable doctrine of promissory estoppel was introduced to combat the lack of consideration in certain but very limited circumstances. The law of equity concerns conscience and estoppel is to estop someone going back on their word. Promissory estoppel has been applied in circumstances where there is no consideration provided but the Court considers it unjust not to enforce the promise. Promissory estoppel occurs where one party promises not to enforce their legal rights against another party with the intention that the other party will rely on that promise. There must be actual reliance on that promise by the other party. It will be appreciated that the law of promissory estoppel is narrow reflecting the reluctance of the Courts to interfere with the agreements reached between the parties.