Consideration: Legal Definition, Types, Requirements and Exceptions

What is Consideration?

Consideration in contract law is the exchange of something of value between parties, which is a necessary element for the formation of a legally binding contract.

Consideration Legal Definition

At the core of contract law lies an elemental concept: consideration. This term, often shrouded in legal complexity, is essential for the creation and enforcement of contracts.

In legal terms, consideration refers to the value exchanged between parties in a contract. It is a fundamental element that differentiates a contract from a mere agreement or promise.

Consideration - contract law - value - goods - promissory estoppel

Consideration is the inducement to a contract; it’s what each party brings to the table, making the contract worthwhile. It can be anything of value – money, goods, services – see Thomas v Thomas (1842).

Legal Requirements

For consideration to be legally valid, it must meet certain criteria:

  • Something of Value: The consideration must have some value, although the law does not stipulate how much value.
  • Bargain for Exchange: It must be given in exchange for a return promise or performance.
  • Present or Future Exchange: The consideration must be either immediate (executed) or promised in the future (executory).

Can Consideration Be A Non-Action, Like Not Pursuing A Legal Claim?

Consideration can be a non-action, such as not pursuing a legal claim. In contract law, this is known as forbearance, where one party agrees to refrain from exercising a legal right as their part of the bargain.

Forbearance to sue, or the promise to not engage in legal action over a valid claim, can serve as valid consideration, provided the claim is legitimate and the forbearing party genuinely believes in its validity.

This type of consideration is common in settlement agreements and contracts involving dispute resolution.

Forms of Consideration

  • Executed Consideration: This occurs when the action is performed immediately, like paying for an item upon receipt.
  • Executory Consideration: Here, the consideration is a future promise, like agreeing to pay upon completion of a service.

Can Future Goods Or Services Be Considered Valid Consideration?

Future goods or services can be considered valid consideration in a contract. This is known as executory consideration, where the promise to provide goods or perform services at a future date constitutes the consideration.

For the contract to be enforceable, the promise must be binding and the future performance must be something that the promisor is not already obligated to do.

Executory consideration is a common feature in various types of contracts, such as service agreements, pre-order sales, and employment contracts, where obligations are fulfilled over time.

The Role of Consideration in Contract Formation

Consideration is a cornerstone of a binding contract. It’s what legally distinguishes a contract from a simple promise.

Under the bargain theory, consideration is seen as the price for the promise of the other party. This perspective underscores the reciprocity inherent in contractual agreements – see Stilk v Myrick.

In most cases, the law does not concern itself with the adequacy of consideration. As long as something of legal value is exchanged, the courts typically do not evaluate its fairness.

Over time, the concept of consideration has evolved, adapting to the complexities of modern contracts and business practices.

The courts’ interpretation of what constitutes consideration has expanded over the years, accommodating various forms of non-monetary and intangible exchanges.

How Does Consideration Apply To Online Or Digital Contracts?

Consideration applies to online or digital contracts similarly to traditional contracts, as the fundamental principles of contract law remain consistent across mediums.

In digital contracts, consideration can take various forms, such as digital goods, services, money, or even data.

For instance, in a subscription-based service, the user’s payment or commitment to pay is the consideration, while the service provided is the consideration from the provider.

Likewise, in terms of user agreements for social media or software, the user’s agreement to adhere to terms of service, often including providing personal data or viewing advertisements, can constitute consideration in exchange for access to the platform or software.

The key is that there is a clear exchange of value, meeting the requirements of consideration in a digital context.

Consideration vs Gift

A significant aspect of consideration is its distinction from a gift. A gift is a voluntary and gratuitous transfer of property without anything of value promised in return. In contrast, a contract requires a reciprocal exchange of value.

Past Consideration

Past consideration, or actions taken before the promise is made, is generally not recognised as valid consideration. For a promise to be enforceable, the consideration must be concurrent or future – see Central London Property Trust Ltd v High Trees House Ltd.

Exceptions and Special Cases

  • Promissory Estoppel: This doctrine of promissory estoppel can enforce a promise made without consideration if it would prevent injustice due to the promisee’s reliance on the promise.
  • Moral Obligation: In rare cases, a moral obligation may suffice as consideration, especially if it results from a prior material benefit.

Practical Implications

For businesses, understanding consideration helps in drafting enforceable contracts and avoiding disputes over contractual obligations.

Proving the existence of valid consideration can sometimes be challenging, especially in verbal agreements or when the value exchanged is not clear-cut.

Many contractual disputes revolve around whether valid consideration was present. Courts often have to interpret the nature of the exchange and whether it meets the legal criteria for consideration.

Is A Nominal Consideration, Like £1, Legally Valid In A Contract?

A nominal consideration, such as £1, is legally valid in a contract. In contract law, the focus is on the existence of consideration rather than its value. Therefore, even a symbolic amount like £1 can fulfil the requirement for consideration, making the contract legally binding.

This nominal consideration is often used in contracts to demonstrate that a formal agreement has been made, even when the real value of the exchange is not equivalent or is more symbolic in nature – see Foakes v Beer.

Why Is Consideration Essential For A Contract To Be Valid?

Consideration is essential for a contract’s validity as it signifies that something of value is being exchanged between the parties, establishing a mutual commitment to the agreement.

This exchange of value is what differentiates a legally enforceable contract from a mere promise or gift.

Consideration ensures that each party has a vested interest in fulfilling their part of the agreement, thus creating a binding obligation.

It acts as a proof of the parties’ intention to enter into a contract and their understanding of its terms. Without consideration, there is no incentive or obligation for either party to honour the agreement, rendering the contract legally ineffective.

Conclusion

Consideration is a fundamental aspect of contract law, imbuing agreements with legal enforceability. Its presence differentiates a contract from a mere promise and ensures that each party is bound by a mutual exchange of value.

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