Doctrine of Consideration

8 August 2016

For a contract promise to be enforceable, that promise must normally be supported by consideration. Any contractual promise must be supported by consideration unless an exception applies. A promise will be supported by consideration if it’s given as part of a bargain or exchange rather than a gift. Second, the promiser or 3rd party should receive some act forbearance or return promise. If the promise is doing something or promising to do something different from what he was already obligated to do and that something is being given in exchange for the promisor’s promise then, the promisors promise is >supported by consideration”.

Where consideration matters. Modification of existing contract to one party’s sole benefit, settlement of claim, partial payment of debt. Where rwo parties are strangers who meet for the first time and “make a deal” (exchange promises), there’s probably no problem of lack-of-consideration. “Discount Price” yes Where a transaction is a mixtures or bargain and gift, consideration repuirement is met.

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Unsupported – unenforceable, supported – enforceable Promises to make gifts are not supported by consideration and therefore non-binding.

Therefore, if a person backs out of a gift propsiton, the promise is not supported by consideration. Consideration is an essential ingredient for the excitence of a contract. L Wilberforce, The Euromedon. Professor Treitel – English law recognizes consideration. He agrees that courts invents consideration in certain circumstances. Professor Atiyah states consideration is any good reason for enforcing a promice. Consideratin is merely evidence that both parties take the agreement seriously.

The doctrine of consideration can therefore be seen as a set of rules, which play the principal role in the decision by the courts as to which agreements or promises are found to be legally binding. For a promise set out in an agreement to amount to a breach of contract if it is not carried out, the promise must be supported by consideration. If no consideration is given for the promise there is no contract, but rather a promise of a gift. For consideration to exist the promisee must promise or do something that is of value in the eyes of the law

Definitions of consideration fall into two groups. The first defines consideration in terms of benefit and detriment. The second defines it as an element of a bargain: Under the bargain definition of consideration, before a promisee’s promise or act can be regarded as consideration, it must be established that the promise or act is given at the request of the promisor and in reliance upon the promisor’s promise: Contracts can be categorised as being either simple or formal. A simple contract can be entered into orally and/or in writing.

A formal contract is one where the agreement is entered into in a particular written form known as a deed. Historically deeds were referred to as documents under seal or specialties. This nomenclature reflected the fact that such documents were sealed by the party to be bound. In deeds it is common to refer to the promisor as the covenantor and the promisee as the covenantee. In simple contracts consideration is always necessary. With agreements set out in a deed consideration is not necessary.

The procedure for execution and delivery of a deed is now largely governed by statute. The essence of the doctrine of consideration is that a promisor’s promise can only be enforced by a promisee if he or she has provided consideration for the promise. There are two parts to this rule: (i) consideration must move from the promisee; and (ii) it need not move to the promisor. An important qualification to this rule relates to joint promises So-called ‘past consideration’ is not consideration.

In Attorney-General for England and Wales v R, at 106, Tipping J said that ‘[a]n act already done without reference to a promise does not satisfy the concept of an exchange which underpins the law of consideration’. The use of the expression ‘illusory consideration’ here relates to circumstances in which it is claimed that there is consideration by the promise of performance of some act, but where there is also a discretion as to whether to perform that act. The conditional nature of the obligation to perform precludes the promise from being consideration:

For the promisee’s promise or act to be consideration, it must be of value in the eyes of the law. ‘[C]onsideration does not have to be commercially adequate to be sufficient in law/ In contract law, consideration refers to any bargained-for exchange. Basically, for a contract to be valid, there must be an exchange of goods and/or services. Because the vast majority of contracts are for sales of some type, consideration usually takes the form of an exchange of money for goods or services.

For consideration to be valid (thus making the contract valid, if all the other requirements for the validity of a contract are met), the things exchanged must be of some legal value. However, a court will generally not inquire into whether or not a particular form of consideration is sufficient. So, if you decide to sell your house for $50, and after the deal is done, realize you’ve made a horrible mistake, you can’t go to court and argue that the sale is invalid, because there was no consideration.

The fact that $50 is an absurdly low price for any house is irrelevant, as long as you agreed to the sale freely. However, if there an agreement truly lacks consideration, the agreement is not a valid contract, and can therefore not be enforced. For example, if you promise to give your house to a friend, for free, with no strings attached, and put the agreement in writing, accompanied by every possible formality, you can change your mind at any time.

Your friend cannot sue you for breach of contract, because no contract existed in the first place, as it was unsupported by consideration (your friend did not give or promise you anything in return for your house). However, once you actually transfer ownership of your house, you can’t back out (as with any gift, it becomes the property of the recipient once the transfer is complete), but you could do so any time before the gift occurs. An example of the requirement for consideration is why you will sometimes hear of very expensive items being sold for very small amounts of money, such as a house or car being sold for $1.

For example, I at the beginning of this year, I was given the opportunityThese transactions are essentially gifts, but the token consideration is there to ensure that the agreement is legally binding, in case the donor tries to back out. By making the agreement legally binding, the donor shows good faith. Consideration is considered to be an essential element of a valid contract largely for historical reasons. Because contract law was created to protect the rights and interests of parties to commercial transactions (essentially, its purpose is to ensure that people keep their promises).

Commercial transactions always involve some exchange, so it just became an underlying assumption that all contracts would involve an exchange. Also, when an agreement which is completely unsupported by consideration is breached, the victim of the breach hasn’t really lost anything, since they didn’t give anything up in the first place, so it is not very important for such an agreement to be enforced by a court. However, if there is a breach of a promise supported by consideration, the victim of the breach has suffered a loss, especially if they have already performed their end of the agreement, and are now getting nothing in return.

Some right, interest, profit or benefit accruing to the one party of a contract, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other. Under common law, there can be no binding contract without consideration, which was defined in an 1875 English decision as “some right, interest, profit or benefit accruing to the one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other”. As stated recently in Terrafund Financial Inc.

v 569244 BC Ltd. : “It is a fundamental principle of contract law that in order to create a binding contract which the law will recognize and enforce, there must be an exchange of consideration between the parties. “Consideration is simply something of value received by a promisor from a promisee. It can take the form of a right, interest or benefit accruing to one party, or some forbearance, detriment, loss, or responsibility, given, suffered or undertaken by the other .

“If there is no consideration there is no contract; and if there is no contract, there is nothing upon or from which to found or create liability. … “The act or promise of one party is, as it were, ‘bought’ or ‘bargained for’ by the act or promise of the other; each party exchanges something of value. To create an enforceable contract there must be … ‘reciprocal undertakings’. So, if one party is neither giving anything, nor is promising to do or give anything, there is no consideration for the other party’s act or promise.

” Historically, when all contracts were verbal (parol), the common law did not want to enforce gratuitous offers, those made without anything offered in exchange (such as gifts), to be given the protection of contract law. So they added the criteria of consideration. But since consideration, as Judge Wilmot said in a judicially radical case in 1765, Pillans v Mierop, came from an era when contracts were verbal – not in writing. Something was then required by the law to formalize agreements; to allow the Court to determine where there had been deliberate action to obligate oneself: “… to put people upon attention and reflection, and to prevent obscurity and uncertainty. ” Writing, widely available by 1765, surmised judge Wilmot, gave contract-making formality enough and consideration ought not to be needed. This opinion was rejected by subsequent English courts and debtors of contracts where consideration was elusive, based on strict common law, were finding ways to abscond on their obligations and pre-empt a court from enforcing an otherwise valid contract against them.

Later, other judges said that a moral obligation was good enough consideration. Again, this too, was eventually rejected as the common law continues today to struggle with the necessity of consideration as a requirement for a valid and enforceable contract, especially in regards to promissory notes and cheques, where consideration is not apparent. Soon, a simple moral obligation was back in vogue as sufficient consideration and in regards to contracts reduced to writing, the Courts went to great length to prevent any defence to it based on a lack of consideration.

Even today, consideration is a sensitive subject to most common law lawyers who might explain that it is a requirement at law but struggle with what the requirement might be. This is an example of the failing of a common law system. Nobody knows what the law is but like the fable of the emperor having no clothes, there is no brave common law leader to yell loud enough that “the emperor has no clothes”. Consideration is not required in contracts made in civil law systems and many common law states have adopted laws which remove consideration as a prerequisite of a valid contract.

A contract void of consideration is said to be nudum pactum. Laws of contract around the world stipulate that for a contract to be legally enforceable, must include a consideration in return for an obligation specified for one or more party to the contract. This means each party must agree to give or do something in return for what they receive as per the terms of contract. This provision is designed to exclude from the scope of law of contract, the promises the promises made by people to others out of love, compassion, or others relationships of personal nature. This if I promise a friend that I will accompany him to a movies in the evening, but due to some unexpected developments later decide not to do so then my friend cannot sue me for breach of contract, as there was no consideration promised to me in return for my obligation. The phrase “consideration need not be adequate” refers to the fact that lay only requires that there should be a consideration. It does not require that this consideration should be adequate compensation for the what is given or foregone by the other party. At times this absence of requirement of adequacy of compensation, is misused to circumvent the provision of consideration.

For example, a person may donate a property worth millions of dollars by selling it at a nominal price of just 1 dollar. In common law it is a prerequisite that both parties offer consideration before a contract can be thought of as binding. The doctrine of consideration is irrelevant in many jurisdictions, although contemporary commercial litigant relations have held the relationship between a promise and a deed is a reflection of the nature of contractual considerations. If there is no element of consideration found, there is thus no contract formed.

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