Formation: Consideration Flashcards
what is the definition of consideration to form a valid contract?
Consideration is an act or promise of one party in exchange for another party’s act or promise
each party must give consideration for a contract to be binding
there must be this mutual exchange of consideration for a contract to be binding
what are the 3 general principles in relation to consideration?
(1) consideration must not be past
(2) consideration must move from the promisee
(3) consideration must be sufficient (not adequate)
what is the rule that consideration must not be past?
it is not possible to use as consideration some act which has taken place prior to the promise to pay
what is the exception to the rule that consideration must not be past?
where a prior act was provided by the promisee at the promisor’s request and it was always understood that payment would be made for that act
conditions:
1) the act must have been done at the promisor’s request
2) the parties must have understood that the act was to be rewarded by a payment or other benefit (either expressly agreed or implied)
3) the payment / benefit is legally enforceable and was promised in advance
Example: accepted commercial practices where no reasonable person could realistically believe that payment could not be enforced because service was rendered prior to any explicit promise to pay – e.g., taking a car to a garage for repairs and leaving the ultimate price to be decided after completion of repairs.
what is the requirement that consideration must move from the promisee?
a party who has not provided consideration may not bring an action to enforce a promise
if you want to claim you must have provided consideration and not point to someone else who has provided it (privity of contract)
does consideration have to be adequate or sufficient? what do either mean?
consideration does not have to be adequate (no need to be fair or market value)
consideration must be sufficient (must have some value)
if a contract is completed by way of deed, what is the consideration requirement for the deed to be valid?
if the agreement is contained in a deed, it is enforceable without consideration
A and B have a contract for A to do x and B to do y.
A and B later contract for A to do x and B to do z. Is the second contract valid?
No - because there is no element of consideration or exchange in the second contract as you cannot give as good consideration something you are already bound to do
BUT there are 3 exceptions
is the performance of an existing obligation imposed by law good consideration?
no - if a person agrees to do something he is already required to do by law then this is not good consideration
but if they promise to do more than they are required to by law then the promise that exceeds the legal requirement can be good consideration
is the performance of an existing contractual obligation owed to a third party good consideration?
yes
example: A is contractually bound to repay a loan to B. C agrees to give A a loan in exchange for A repaying their loan to B. A can use the existing contractual obligation to B as good consideration to C.
If parties want to vary the terms of an existing contract, what must be done in terms of consideration?
when a contract is amended, new consideration must be provided to make a promisor’s agreement legally binding
If a contract is amended so that one party promises to pay more for the same existing obligation and the other party promises nothing new, will this promise to pay more be valid and binding?
NO
If a party promises to pay more than was agreed under the original contract, the promise to pay more is not binding as there is no consideration for this additional promise
If the other party makes an additional promise then the promise to pay more will be binding as the element of exchange and consideration is present
If a contract is amended so that one party promises to pay and the other party promises to go beyond their existing obligations, will this promise to pay more be valid and binding?
Yes - consideration is present so valid contract
If a contract is amended so that one party promises to pay more and they receive a practical benefit for paying more, is this promise binding?
If the promisor obtains a practical benefit as a result of promising to pay more, this practical benefit is FACTUAL CONSIDERATION and makes the promise binding
but the promisor’s promise to pay more must not have been given as a result of economic duress or fraud
example: A agreed to pay B in exchange for remodelling A’s hotel bathrooms by a specified date. B then tells A that B will not be able to complete performance in time due to shortage of labour. A has contracts with hotel guests after the specified date. A agrees to pay B more to perform the existing obligation - and this is binding as A obtains factual consideration by the practical benefit of not defaulting on A’s other contracts.
If a party promises to accept less payment than what was agreed in the original contract in exchange for the same existing obligation, is this promise binding?
NO - a promise to accept less under an existing contract without fresh consideration is not binding as the promisee does not provide fresh consideration
this is even if the promisor obtains a practical benefit by accepting less money
the promisor is therefore liable for the full amount under the original contract
