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.
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