Consideration Flashcards
Define Consideration.
Academic Frederick Pollock gives us a concise definition of consideration:
‘an act or forbearance of one party, or the promise thereof, is the price for which the promise of the other is bought, and the promise thus given for value is enforceable.’
Why is consideration important?
In order for there to be a binding contract, these three elements must be present: offer and acceptance; intention to create legal relations; and consideration.
Consideration can be…
… executory consideration or executed consideration
What is executory consideration?
Where contracting parties make promises to each other to perform something in the future after the contract has been formed.
The classic example is a contract for the sale of goods where the seller promises to deliver the goods at some time in the future, and the buyer promises to pay for them either on delivery or by some other credit arrangement. At the time of the agreement, neither side has done anything towards the performance of the promises made but the agreement still has contractual force, and a party who fails to carry out their promise can be sued. A bilateral contract usually involves executory consideration.
What is executed consideration?
Executed consideration is where, at the time of the formation of the contract, the consideration has already been performed
The classic example is a unilateral contract where the promise of a reward is made and the ‘price paid’ in exchange for that promise is performance of the act stipulated in the offer: Carlill v Carbolic Smoke Ball Co Ltd [1893] 1 QB 256. The required act is both the acceptance of the offer (and thus the time when the contract is formed) and the executed consideration.
So it flows from the above that valuable consideration may be something promised or something done.
What are the four important rules in regards to consideration?
- Consideration must not be past
- Consideration must move from the promisee
- Consideration need not be adequate
- Consideration must be sufficient
APPS
Explain Consideration must not be past?
It is not generally possible to use as consideration some act or forbearance which has taken place prior to the promise to pay. Ie. Past consideration is no consideration.
Consideration must be given in exchange for the promise of the other party. If the act / forbearance has taken place prior to the promise, then it cannot be in exchange for that promise.
In Eastwood v Kenyon (1840) 11 A & E 438 a father died leaving his daughter, Sarah, in the care of a guardian, Eastwood. Eastwood borrowed £140 to help pay for Sarah’s upbringing. When she came of age, Sarah married Kenyon, who then promised Eastwood that he would pay off the debt to repay Eastwood for having brought up Sarah. However, Kenyon failed to honour his promise. It was held that the consideration provided by Eastwood (by bringing up Sarah) was not good consideration to support Kenyon’s subsequent promise to discharge the debt because it was in the past. It was held that the moral obligation to fulfil such a promise was insufficient to create a legally binding contract.
What is the exception to the past consideration rule?
An exception to the past consideration rule exists where some prior act or service was provided by the promisee at the promisor’s request and it was always understood that payment would be made for that act or service.
The leading case on the exception was heard by the Privy Council in Pao On v Lau Yiu Long [1980] AC 614. Lord Scarman outlined the necessary three conditions for the exception to apply:
a) The act must have been done at the promisor’s request.
b) The parties must have understood that the act was to be rewarded either by a payment or the conferment of some other benefit. These could be because it was expressly agreed that there would be a reward / benefit, or because such an understanding can be implied. The latter is more likely in a commercial context.
c) The payment, or conferment of other benefits, must have been legally enforceable had it been promised in advance.
Explain Consideration must move from the promisee.
The rule that consideration must move from the promisee effectively means that a party who has not provided consideration may not bring an action to enforce a contract. This rule is related to, but must be distinguished from, the doctrine of privity of contract which states that only a person who is party to a contract may sue or be sued on that contract (the rules on privity are not addressed in this element).
Tweddle v Atkinson (1861) 1 B & S 393 illustrates the rule that consideration must move from the promisee. The two fathers of a couple who were about to get married reach an agreement that the father of the bride was to pay £200 and the father of the groom £100, to the bridegroom, William Tweddle, the claimant. The groom sought to enforce his father-in-law’s promise, but it was held that he could not as he had provided no consideration for the promise – the consideration had been provided by the fathers.
Explain Consideration need not be adequate.
According to the doctrine of freedom of contract, the courts will not interfere with a bargain freely reached by the parties. It is not the court’s duty to assess the relative value of each party’s contribution to the bargain. There is no reason, for example, why a party should not be bound by a promise to sell a new Rolls Royce car for one penny. If the agreement is freely reached, the inadequacy of the price is immaterial.
In Chappell & Co v Nestle Co Ltd [1960] AC 87. The Nestle company offered gramophone records of a particular tune to the public for 1s 6d, together with three chocolate bar wrappers. The wrappers were thrown away on receipt by the company. In relation to a claim for royalties, the question arose as to whether the wrappers were part of the consideration given for each record. The House of Lords held that the wrappers were part of the consideration even though they were of no further value once received by the company.
