1.1.2 Consideration - Formation

Question 1

What is meant by ‘consideration’?

Answer 1

An act or promise of value IN EXCHANGE for an act or promise of value

Question 2

When is consideration required?

Answer 2

Consideration is required for all contracts, except for those made by deed.

It is one of the four ingredients needed to make a legally binding contract:

Offer + Acceptance + Consideration + Intention to Create Legal Relations

Question 3

How do we analyse if consideration is present?

Answer 3

Analyse whether each party is getting consideration in exchange for his promise.

It is this consideration that makes the promise binding.

Question 4

What are the key features of consideration?

Answer 4

Consideration must be sufficient but it does not need to be adequate.

Consideration must not be past.

Question 5

Does consideration need to be adequate?

Answer 5

No.

Consideration does not need to be adequate. There is no requirement for consideration to reflect the economic or monetary value of what is provided in exchange.

Question 6

Does consideration need to be sufficient?

Answer 6

Yes.

Consideration does not need to be adequate but should be sufficient.

Consideration is sufficient provided it is what the promisor requested in exchange for this promise.

If what is provided is what the promisee asked for (or agreed to accept), then it is sufficient and is consideration to make the promise binding.

Check: Is the price paid what the other party requested? If yes, it will be consideration because it will be sufficient.

Question 7

Why is past consideration not good consideration?

Answer 7

An act that is FOLLOWED by a promise lacks the vital element of exchange and is not consideration. This does not make a promise binding.

Crucially, past consideration is not effective to make the promise legally binding as there is a lack of exchange between the parties.

Question 8

What is the exception to the past consideration rule?

Answer 8

The previous request device

The past consideration rule does not apply when there is an understanding between the parties that the actions of one party will be paid for, and the exact amount will be fixed at a later date: ‘previous request’ device.

Question 9

Performance of existing contractual duties - no consideration

What is the general rule behind the performance of existing duties and consideration?

Answer 9

If a person does what he is already bound to do by contract or law, this is not consideration because there is no element of exchange.

When a contract is amended, new consideration must be provided to make the promisor’s agreement legally binding unless the contract is a deed and consideration is not required.

Question 10

What is the rule behind the performance of a duty imposed by law?

Answer 10

The performance of a duty imposed by law is NOT consideration.

If a person does what he is required to do by law, then this is not consideration. However, if he does more than he is required to do by law, then the promise / act / omission that exceeds the legal requirement can be consideration.

Question 11

What is the rule behind the performance of an existing contractual duty owed by a third party?

Answer 11

If a person performs a duty that he is already obliged to perform to a third party, this act is consideration for a separate contract.

E.g Another bank agrees to make a loan to you provided you repay your loan to Big Bank. English law recognises the repayment of the loan to Big Bank as consideration for the other bank.

Question 12

Promises to pay more

What promises, acts, or omissions can be consideration for a contractual amendment to pay more (exceptions to the general rule?)

Answer 12

The following counts as consideration for a contractual amendment when there is a promise to pay more:

1) An amendment to a contract in which a promisor promises more money for something additional - the additional value is consideration

2) A promise to pay more under an existing contract and practical benefit - this practical benefit is consideration

Question 13

Promises to pay more

What is the general rule for promises to pay more than was initially agreed under an existing contract?

Answer 13

General rule: Promises to pay more by agreement amendments are not enforceable due to lack of consideration.

Exceptions apply:

• The promisee provides consideration by doing more than was initially agreed; or
• The promisor obtains a practical benefit as a result of making the promise

Question 14

Promises to pay less

What is the general rule with promises to pay less than was initially agreed under an existing contract?

Answer 14

Promises to pay less are treated differently from promises to pay more.

If a creditor agrees to accept less than he is owed under an existing contract, the payment by a debtor of this lesser amount is not consideration. This is ALWAYS the rule even if the creditor obtains a practical benefit as a result of the debtor paying the lesser amount (e.g not needing to sue for money)

Question 15

Promises to pay less

What are the exceptions to the rule that a promise to pay less under an existing contract is not consideration?

Answer 15

1) Payment before it is due or in a different place from what was originally agreed is consideration, provided it is made at the creditor’s request.

2) If agreed payment rate is made to all creditors due to person not being able to pay all their debts

3) Payment is made to creditor by a third party

The creditor’s agreement to accept in these situations would bind him and he would not be able to claim the shortfall.

Question 16

When do we need to explore the issue of promissory estoppel?

Answer 16

For contract amendments where no consideration can be identified.

Promissory estoppel provides a defence for a promisee against a claim from a promisor who has agreed to accept a lesser amount than was originally agreed.

Question 17

Define what is meant by promissory estoppel

Answer 17

Promissory estoppel is a doctrine that provides a defence to a debtor to stop a creditor from going back on his promise to accept a smaller amount than is owed under the original agreement.

Question 18

What is the criteria that need to be satisfied in order for promissory estoppel to apply? (P.A.R.I)

Answer 18

1. [Clear and unambiguous promise] There must be a clear and unambiguous promise from the promisor that they will not enforce their rights under the contract.
2. [Amendment to a contract] Promissory estoppel applies to amendments to contracts, not formation contracts.
3. [Reliance] The promisee must have relied on the promise.
4. [Inequitable to go back on promise] It must be inequitable (unfair) for the promisor to go back on his promise.

Question 19

Why is promissory estoppel often described as a shield (for defence) but not a sword (for attack)?

Answer 19

Promissory estoppel simply prevents the promisor from going back on their promise not to enforce their rights under the contract.

Where a scenario concerns an amendment agreement that is not legally binding due to lack of consideration, always consider whether promissory estoppel can provide the promisee with a defence.