In contract law, a court will only recognise an agreement as a contract if there is consideration from both parties or an accepted substitute for consideration. Consideration is "an act, forbearance, or the promise thereof by one party".
Typically, this involves one party paying or promising to pay money in return for the other party's performance of a task or delivery of an item or the promise thereof. A common form of consideration is an agreement not to sue, a forbearance from acting.
In essence, consideration is the value exchanged for the promise or action of the other party. It can manifest as either a positive action or a refraining from action (negative obligation).
DISTINCTION BETWEEN EXECUTED AND EXECUTORY CONSIDERATION
In contract law, the nature of consideration is classified as executed or executory. Executory consideration refers to a promise of an act or forbearance in the future. When this act or forbearance is performed, the consideration becomes executed.
Particularly in unilateral contracts—where the offeror promises a reward upon the offeree's completion of a specific task, like finding a lost item—the performance of the task can simultaneously serve as the acceptance of the offer and the performance of consideration.
A homeowner, Lisa, promises to pay £500 to a gardener, John if he can landscape her garden within two weeks. John agrees and starts the work. Until John finishes the landscaping, the consideration remains executive on both sides: John's performance of the landscaping service and Lisa's promise to pay upon completion. Once John completes the landscaping within the agreed time, the consideration becomes executed – John has performed his part of the deal, and Lisa is now bound to pay the £500.
THE NECESSITY OF CONSIDERATION FROM THE PROMISEE
In contract law, a crucial tenet is that consideration, the value exchanged in a contract, must originate from the promisee — the individual to whom the promise is made. This means the party seeking to enforce the contract must be the one who has provided the consideration. A notable exception exists for contracts executed as deeds, where consideration is not a prerequisite for enforceability.
The Contracts (Rights of Third Parties) Act 1999 modifies this rule by allowing third parties to enforce specific contract terms. For a third party to exercise this right, they must be named explicitly in the contract, and the contract term they seek to enforce should be intended for their benefit.
For example, Ellen agrees to purchase a car from a dealer for £10,000. Without Ellen's request, Ellen’s mother offers to pay the dealer £5,000 towards the car’s price. Despite her mother's payment, the consideration must come from Ellen, the promisee, to form a valid contract between Ellen and the car dealer. The dealer cannot enforce the contract against Ellen's mother, as she is not the promisee in the agreement. Ellen remains responsible for providing the £10,000 consideration as agreed in the contract.
This scenario underscores the principle that the promisee must be the source of consideration in a contract.
LEGAL SUFFICIENCY VERSUS ADEQUACY OF CONSIDERATION
In contract law, for consideration to be legally valid, it must possess some degree of value, however minimal. The essence of consideration is to confirm that the contracting parties have mutually agreed to exchange promises or values. The legal system does not delve into assessing the fairness or equity of the deal — it does not judge whether the consideration is adequate or of comparable value to what is being provided by the other party.
However, it's important to note that a significant disparity in the value of consideration may indicate the presence of a vitiating factor. Such a factor could make the contract void or voidable due to elements like mistake or duress.
For instance, if Alice agrees to sell her vintage car, valued at £20,000, to Bob for a nominal sum of £100, the law regards the £100 as sufficient consideration despite its inadequacy compared to the car's value. The courts will not invalidate the contract based on this disparity in value alone.
However, if Alice was coerced into agreeing to this price under duress, or if there was a mistake about the car's value, this inadequacy might be considered evidence of a vitiating factor affecting the contract's validity.
3.1 The Concept of Illusory Consideration
In contract law, while there is considerable leeway in determining the sufficiency of consideration, the courts maintain that consideration must possess genuine legal value and not be entirely imaginary.
This means the consideration must be concrete and not based on an ambiguous or unfulfillable promise. The legal system refrains from intervening in 'bad bargains' or unequal exchanges, focusing instead on ensuring that the consideration is real and has some legal standing, however minimal it may be. The essence here is to differentiate between actual, enforceable promises and vague or purely speculative promises.
Imagine a scenario where Rachel agrees to sell her bicycle to Joey for £50. In return, Joey promises to pay the £50 "if and when he feels like it." In this case, Joey's promise is considered illusory.
The phrase "if and when he feels like it" is too vague and subjective, giving Joey complete discretion over whether or not to pay. This lack of a definitive commitment means that Rachel receives no concrete, enforceable promise in exchange for the bicycle.
Therefore, the contract lacks valid consideration because Joey’s promise is not binding or legally enforceable, rendering it illusory.
CONSIDERATION AND THE PERFORMANCE OF AN EXISTING DUTY
4.1 Fulfilling an Existing Contractual Obligation to the Promisor
In contract law, fulfilling an obligation that one already owes under a contract to the person making a new promise (the promisor) typically does not constitute valid consideration. The action or performance is already a duty bound by the existing contract.
However, if the promise is in exchange for actions that exceed the scope of the initial obligation, then this arrangement can be viewed as forming a new contract. Here, the additional work is the consideration for the other compensation or benefit offered by the promisor.
This principle distinguishes between merely fulfilling an existing duty, which does not provide new consideration, and undertaking extra duties or actions, which can form the basis of a new contractual agreement.
Suppose a construction company, BuildCo, has a contract with a client, Alex, to construct a building for £500,000. Midway through the project, Alex requests an additional feature that was not included in the original contract — a rooftop garden. BuildCo agrees to this other feature and asks for an extra £50,000, to which Alex agrees.
In this scenario, BuildCo's original agreement to construct the building is not a valid consideration for the extra £50,000, as they are already contractually obligated to build it. However, agreeing to add the rooftop garden, which was not part of the original contract, constitutes a new consideration.
This further consideration (the rooftop garden) justifies the additional payment of £50,000 from Alex, effectively creating a new contractual agreement for the extra work.
The Practical Benefit Exception
A notable exception concerns the practical benefits of performing an existing contractual duty. When the performance of a current duty provides a tangible, valuable benefit to the party offering additional consideration, this can be deemed a reasonable consideration. For instance, in a construction contract, if completing the work ahead of schedule helps the contractor avoid a penalty for late completion, this accelerated completion may constitute a practical benefit to the client.
However, it's crucial to differentiate between a genuine practical benefit and a situation where the additional consideration is extracted under pressure or duress. If the latter is the case, further consideration may not be recognised as valid since duress undermines the voluntariness of the agreement, an essential aspect of proper contractual consideration.
Consider a scenario where a contractor, Sarah, is building a hotel for a client, David. The contract includes a penalty clause stating that Sarah will incur a significant financial penalty if the construction is not completed by a specific date. As the deadline approaches, unforeseen circumstances delay the project. Sarah informs David that she can still meet the deadline, but only if additional workers are hired, which would increase the cost. David agrees to pay an extra £20,000 to cover these costs.
In this situation, Sarah's original contract obligates her to complete the construction by the deadline. Completing the work she has already been contracted for would be a familiar consideration.
However, her offer to meet the original deadline under the new, more challenging circumstances presents a practical benefit to David — it saves him from the disruptions and potential financial losses of a delayed hotel opening.
David's agreement to pay extra in this context is a valid consideration, as it's for a practical benefit (avoidance of the penalty and timely completion of the hotel) that goes beyond Sarah's initial contractual duty.
4.2 Consideration Involving Performance of a Duty Owed to a Third Party
In contract law, there is a contrasting principle when performing duties owed to a third party. Suppose a party promises to perform or act on an existing contractual duty owed to a third party.
In that case, this can serve as sufficient consideration for a new promise made by the promisor (the person making the new promise). This scenario differs from fulfilling a duty owed directly to the promisor, as it involves obligations to an external party, which can be leveraged as a valid consideration in a separate agreement with the promisor.
This principle recognises that fulfilling an obligation to a third party can create value or benefit in a different contractual relationship and, hence, can constitute valid consideration for a new promise or agreement.
Imagine a scenario where an electrician, Emily, has a contract with a school to perform maintenance work. Separately, Emily enters into a discussion with a construction company, BuildCo, which is renovating a nearby library. BuildCo is running behind schedule and needs additional electrical work done quickly. They approach Emily, and she agrees to prioritise and complete the electrical work at the library, which is outside her existing contract with the school.
In exchange for Emily’s commitment to prioritise the library project, BuildCo agrees to pay her an additional fee. Here, Emily's promise to perform her existing duty (electrical work) owed to a third party (the school) is considered sufficient consideration for the new promise from BuildCo (the additional payment). Even though Emily is already contractually obligated to perform electrical work, her commitment to prioritise the library for BuildCo, affecting her arrangement with the school, creates a new value and forms the basis for a valid contractual agreement with BuildCo.
4.3 Consideration and Statutory Duties
In contractual agreements, fulfilling a duty imposed by statute does not qualify as a valid consideration. This is because statutory duties are obligations that one is already legally required to perform, and thus, offering to perform such duties cannot be considered a new or additional exchange of value in the context of a contract.
For instance, consider a situation where a public house owner offers to pay a police officer £50 per night to maintain law and order around the premises while the officer is on duty. Since preserving law and order is already a statutory duty of the police, this does not constitute valid consideration for the public house owner's promise to pay. The officer is merely performing their existing legal obligation.
However, there are instances where services provided by statutory bodies, such as the police, go beyond their ordinary duties. In such cases, they can legitimately charge for these additional services. Examples include providing extra policing at football matches or during a strike, where the requirements exceed the routine duties of maintaining public order.
PAST CONSIDERATION
In contract law, acts or promises that occurred before the formation of a contract are not considered valid considerations. Consideration must be contemporary with the contract; it should be a part of the mutual exchange that forms the basis of the contract. Suppose an action or promise was made before the contract was agreed upon.
In that case, it cannot be used as a basis for enforcing the contractual obligations, as it does not represent a present value exchange between the parties.
5.1 The Exception of Implied Understanding for Past Consideration
While past consideration typically does not suffice in contract law, there is an exception when there's an implied understanding of future payment for an act or promise made at the promisor's request.
In such cases, the subsequent promise to pay is viewed not as a new obligation but as determining the amount for the service or action already performed. This understanding retroactively validates the past consideration, making the promise to pay enforceable.
For this exception to apply, three critical conditions must be met:
Act Performed at Promisor's Request: The initial action or service must have been undertaken following a request from the promisor.
Mutual Understanding of Remuneration
Both parties must have understood when the act was performed that it would be compensated through payment or some other form of benefit.
Enforceability of the Expected Compensation
The agreed-upon payment or benefit, if it had been promised before the act was performed, should have been something that could be legally enforced.
This exception acknowledges situations where both parties implied and understood the promise of payment or benefit, even if it's not formalised until after the act has been completed.
THE PRINCIPLE OF PARTIAL DEBT SETTLEMENT
Under English law, an agreement to accept a partial payment as a complete debt settlement is typically not legally binding.
For instance, if Alfred owes Beatrice £500 and offers £450 as a full settlement, which Beatrice accepts, she is still legally entitled to claim the remaining £50. This is because Alfred's partial payment does not constitute fresh consideration under the law, which is necessary to enforce Beatrice’s promise of accepting a reduced amount. For such an agreement to be legally binding, Beatrice would need to receive an additional benefit or consideration apart from the reduced payment.
6.1 Recognised Exceptions
There are, however, certain exceptions to this general rule where part payment can be considered sufficient:
Disputed Debt Settlements
If the debt amount is under bona fide dispute, an agreement to accept a lesser amount can be valid. Here, the consideration is the settlement of an uncertain debt value.
Unliquidated Claims
This applies when the precise amount of debt needs to be fixed or clarified.
Altered Payment Terms
This includes scenarios where the creditor gains an advantage, such as receiving a smaller amount earlier than due or at a different location from the one initially agreed upon.
Third-Party Payments
If a third party settles a debt under an agreement that the payment will fully discharge the original debtor, the creditor cannot then claim the balance from the original debtor.
Varied Forms of Payment
If the creditor agrees to accept a different form of payment (like goods or services) at their request, this can constitute a valid consideration.
Agreements with Creditors
A composition agreement is when a debtor negotiates with all their creditors to pay a mutually agreed amount in complete satisfaction of all outstanding debts, usually when facing financial hardship.
These exceptions allow for flexibility and practicality in debt settlements, acknowledging circumstances where the strict application of the part payment rule may not be just or equitable.
THE DOCTRINE OF PROMISSORY ESTOPPEL
Promissory estoppel is a principle in equity that gives legal force to promises unsupported by consideration. It prevents a party from reneging on their promise under specific conditions based on the notion that they are 'estopped' (legally barred) from doing so.
Importantly, promissory estoppel is a defensive legal tool; it can be used to defend against a claim but cannot be the primary basis for initiating one.
Promissory estoppel criteria
Clear Promise
There must be a distinct and unambiguous promise (whether stated outright or implied) by the promisor to set aside their existing legal rights. An example of this might be agreeing to accept a reduced payment than what was stipulated in the original contract.
Altered Position Based on Promise
The promisee must have reasonably relied on the promise and changed their position or acted in a way they wouldn't have had the promise been made.
Inequity in Revoking the Promise
It should be demonstrably unfair or unjust for the promisor to retract their promise under the circumstances.
It's important to note that in situations involving ongoing obligations (like rent payments), the effect of promissory estoppel is merely suspensive.
This means that the original rights or obligations are reinstated once the specific circumstances that led to the estoppel cease to exist or after a reasonable notification period. Promissory estoppel, thus, temporarily modifies the terms of the original agreement but doesn't permanently alter them.