Consideration is an essential element for the formation of a contract –explain and illustrate

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Consideration is an essential element for the formation of a contract –explain and illustrate.

INTRODUCTION

Consideration is the concept of legal value in connection with contracts. It is anything of value promised to another when making a contract. It can take the form of money, physical objects, services, promised actions, abstinence from a future action, and much more. Under the notion of “pre-existing duties”, if either the promisor or the promisee already had a legal obligation to render such payment, it cannot be seen as consideration in the legal sense.

In common law it is a prerequisite that both parties offer some consideration before a contract can be thought of as binding.

However, even if a court decides there is no contract, there might be a possible recovery under quantum meruit (sometimes referred to as a quasi-contract) or <href=”#Promissory_estoppel” title=”Estoppel”>promissory estoppel. An agreement made without consideration is void unless it is expressed in writing and registered under the law for the time being in force for the registration of documents and is made on account if natural love and affection between the parties standing in near relation to each other. Agreement must be in writing and registered. If you have an oral arrangement or unregistered agreement although it is in writing, it will not be valid even though it proceeds from natural love and affection and even if the parties to it are near relations to each other. It must be both in writing and registered.

CONSIDERATION

Consideration for a particular promise exists where some right, interest, profit or benefit accrues (or will accrue) to the promisor as a direct result of some forbearance, detriment, loss or responsibility that has been given, suffered or undertaken by the promisee. The consideration must be executory or executed, but not past. Consideration is executory Consideration can be anything of value (such as an item or service), which each party to a legally-binding contract must agree to exchange if the contract is to be valid. If only one party offers consideration, the agreement is not legally a binding contract. In its traditional form, consideration is expressed as the requirement that in order for parties to be able to enforce a promise, they must have given something for it (quid pro quo): something must be given or promised in exchange or return for the promise.

1. en.wikipedia.org/wiki/Consideration

Consideration and formation of a contract

Consideration as defined is the interest, profit, and benefit accruing to one party involved as a payment for the consideration.

Consideration move at the desire of the promisor: In order to constitute consideration the act or abstinence forming the consideration for the promise must be done at the desire or request of the promise. Thus an act does or services rendered voluntarily, or at the desire of the third partly, will not amount to valid consideration so as to support a contract. The logic for this may be found in the worry and expense to which every one might be subjected, if he were obliged to pay for services which he did not request.
Consideration move from promisee or any other person: Consideration need not move from the promisee alone but may proceed from third person. Thus as long as there is a consideration for a promise, it is immaterial who has furnished it. It may move from the promise or from any other person. This means that even a stranger to the consideration can construct a contract, provided he is a party to the contract. This is sometimes called as doctrine of constructive consideration.
Consideration cannot be past: The words, has done or abstained from doing or does or has abstained from doing or promises to do or to abstained from doing or promises to do or to abstain from doing.
Consideration need to be adequate: It means that consideration is that it must be something to which the law attaches a value. The consideration need not to be adequate to the promise for the validity of an agreement. The law only consists on the presence of consideration and not on the adequacy of it. It leaves the people free to make their own bargains.

If A signs a contract to buy a car from B for $5,000, A’s consideration is the $5,000, and B’s consideration is the car.

Additionally, if A signs a contract with B such that A will paint B’s house for $500, A’s consideration is the service of painting B’s house, and B’s consideration is $500 paid to A.

Further, if A signs a contract with B such that A will not repaint his own house in any other color than white, and B will pay A $500 per year to keep this deal up, there is also consideration. Although A did not promise to affirmatively do anything, A did promise not to do something that he was allowed to do, and so A did pass consideration. A’s consideration to B is the forbearance in painting his own house in a color other than white, and B’s consideration to A is $500 per year. Conversely, if A signs a contract to buy a car from B for $0, B’s consideration is still the car, but A is giving no consideration, and so there is no valid contract. However, if B still gives the title to the car to A, then B cannot take the car back, since, while it may not be a valid contract, it is a valid gift.[2]

en.wikipedia.org/wiki/Consideration

Contract

A voluntary, deliberate, and legally binding agreement between two or more competent parties, Contracts are usually written but may be spoken or implied, and generally have to do with employment, sale or lease, or tenancy.

A contractual relationship is evidenced by (1) an offer, (2) acceptance of the offer, and a (3) valid (legal and valuable) consideration. Each party to a contract acquires rights and duties relative to the rights and duties of the other parties. However, while all parties may expect a fair benefit from the contract (otherwise courts may set it aside as inequitable) it does not follow that each party will benefit to an equal extent. Existence of contractual-relationship does not necessarily mean the contract is enforceable, or that it is not void (see void contract) or voidable (see voidable Contract). Contracts are normally enforceable whether or not in a written form, although a written contract protects all parties to it. Some contracts, (such as for sale of real property, installment plans, or insurance policies) must be in writing to be legally binding and enforceable. Other contracts (see implied in fact contract and implied in law contract) are assumed in, and enforced by, law whether or not the involved parties desired to enter into a contract[3]

<href=”#ixzz28spB6Q6z”>http://www.businessdictionary.com/definition/contract.html#ixzz28spB6Q6z

Essential Elements of a contract

Offer and acceptance

A contract is formed when an offer by one party is accepted by the other party.

An offer must be distinguished from mere willingness to deal or negotiate. For example, X offers to make and sell to Y calendars featuring Australian paintings. Before any agreement is reached on size, quality, style or price, Y decides not to continue. At this stage, there is no <href=”#id4590513″ title=”Able to be enforced by law.”>legally binding contract between X and Y because there is no definite offer for Y to accept until the essential terms of the bargain have been decided.

An offer need not be made to a specific person. It may be made to a person, a class of people, or to the whole world.

An offer is a definite promise to be bound, provided the terms of the offer are accepted. This means that there must be acceptance of precisely what has been offered. For example, a used car dealer offers to sell B a Holden panel van for $1,000, without a roadworthy certificate. If B decides to buy the Holden panel van, but insists on a roadworthy certificate being provided, then B is not accepting the used car dealer’s offer. Rather, B is making a counter offer. It is then up to the used car dealer to accept or reject the counter offer.

A person can withdraw the offer that has been proposed before that offer is accepted. For withdrawal to be effective, the person who has proposed the offer must communicate to the other party that the offer has been withdrawn. To continue the example above, the used car dealer may say to B that he’ll check with his supervisor and maybe a roadworthy certificate can be provided. If, while waiting for a reply, B decides he does not want to buy the Holden panel van and he tells the used car dealer of his change of mind, then there is no binding contract.

Intention to create legal relations

A contract does not exist simply because there is an agreement between people. The parties to the agreement must intend to enter into a <href=”#id4590513″ title=”Able to be enforced by law.”>legally binding agreement. This will rarely be stated explicitly but will usually be able to be inferred from the circumstances in which the agreement was made. For example, offering a friend a ride in your car is not usually intended to create a legally binding relation. You may, however, have agreed with your friend to share the costs of traveling to work on a regular basis and agree that each Friday your friend will pay you $20 for the running costs of the car. Here, the law is more likely to recognize that a contract was entered into.

Commercially based agreements will be seen as including a <href=”#id4592346″ title=”Capable of being proved wrong in court.”>rebuttable intention to create a legally binding agreement. However, the law presumes that domestic or social agreements are not intended to create legal relations. For example, an arrangement between siblings will not be presumed to be a legally binding contract. A person who wants to <href=”#id4589110″ title=”To make people obey (a law, the terms of an agreement, etc). Also: enforceability.”>enforce a domestic or social agreement will need to prove that the parties did intend to create a legally binding agreement.

Consideration

Consideration is the price paid for the promise of the other party. The price must be something of value, although it need not be money. Consideration may be some right, interest or benefit going to one party or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other party.

So long as consideration exists, the court will not question its adequacy, provided that it is of some value. For example, the promise to pay a peppercorn in return for the <href=”#id4590490″ title=”A document of agreement between a landlord and a tenant, for rental of premises.”>lease of a house would be good consideration. Of course, the consideration must not be illegal or impossible to perform.

There is an exception to the rule: documents under seal (deeds) do not require consideration for there to be a binding contract. However, since few contracts between people are made in this way, it is not discussed further in this chapter.

Legal capacity

Not all people are completely free to enter into a <href=”#id4594008″ title=”Legally binding (q.v.) or effective.”>valid contract. The contracts of the groups of people listed below involve problematic <href=”#id4371181″ title=”Agreement to an action or arrangement. See also: informed consent.”>consent, and are dealt with separately, as follows:

people who have a mental impairment;
young people (minors);
bankrupts;
corporations (people acting on behalf of a company); and
prisoners. [4]

www.lawhandbook.org.au › … › THE LAW OF CONTRACT

Monetary value of consideration

Generally, courts do not inquire whether the deal between two parties was monetarily fair—merely that each party passed some legal obligation or duty to the other party. The dispositive issue is presence of consideration, not adequacy of the consideration. The values between considerations passed by each party to a contract need not be comparable.

For instance, if A offers B $200 to buy B’s mansion, luxury sports car, and private jet, there is still consideration on both sides. A’s consideration is $200, and B’s consideration is the mansion, car, and jet. Courts in the United States generally leave parties to their own contracts, and do not intervene. The old English rule of consideration questioned whether a party gave the value of a peppercorn to the other party. As a result, contracts in the United States have sometimes have had one party pass nominal amounts of consideration, typically citing $1. Thus, licensing contracts that do not involve any money at all will often cite as consideration, “for the sum of $1 and other good and valuable consideration”.

However, some courts in the United States may take issue with nominal consideration, or consideration with virtually no value. Some courts have since thought this was a sham. Since contract disputes are typically resolved in state court, some state courts have found that merely providing $1 to another is not a sufficiently legal duty, and therefore no legal consideration passes in these kinds of deals, and consequently, no contract is formed. However, this is a minority position.[5]

en.wikipedia.org/wiki/Consideration

Exceptions to the rule are

The general rule of law is “no consideration, no contract”, i.e., in the absence of consideration there will be no contract. However, the law recognizes the following exceptions to the rule of consideration. The exceptions have been given in Sec. 25 of the Indian Contract Act. In these cases, agreements are enforceable even if these have been made without consideration.

1. A promise made out of material love and affection. An agreement expressed in writing and registered under the law for the time being in force for the registration of documents and is made on account of natural love and affection, between parties standing in a near relation to each other, is enforceable without consideration.

Example: A agreed to pay Rs. 5000 to his younger brother out of natural love. This promise is in writing and registered. If A refuses to pay Rs. 5,000 to his younger brother, the latter can enforce the promise in the Court and A cannot refuse payment on the ground of absence of consideration. It should be noted that all the four conditions must be satisfied only then it will be valid without consideration, otherwise not.

Example: An agreement was made between a husband and his wife after referring to quarrels to pay maintenance allowance. The court held that the agreement was not enforceable as it Was not made out of natural love and affection and hence it was void being without consideration. It should be noted that nearness of relation does not necessarily mean that the agreement has been made out of natural love.

2. A promise made to compensate for voluntary services

A promise to compensate, wholly or in part, a person who has voluntarily done something for the promisor, or something which the promisor was legally compellable to do, is enforceable without consideration.This rule, in fact, recognizes past consideration which was given without request or desire of the promisor.

Example: A found B’s purse and gave it to him. B promised to pay a reward of Rs. 50 to A. Later on, B cannot refuse payment on the ground that there was no consideration.

3. Written promise to pay a time-barred debt

A promise made in writing to pay a debt barred by the Law of Limitation is enforceable even without consideration.

Example: A owes B Rs. 1,000 but the debt is barred by the Limitation Act, A signs written promises to pay B the sum of Rs. 1,000. This is a valid contract.

4. Gift, etc. actually made: Explanation I to Section. 25 provide that any gift actually made is valid.

Example: A gave a watch as a gift to B on his birthday. Later on, A cannot demand his watch (gift) back on the ground that there was no consideration.

5. To create agency:

Under Sec. 185, no consideration is necessary to create an agency. Actually speaking, consideration is there even in an agency in the sense that the principal has agreed to be bound by the acts of the agent. Thus he undertakes the responsibility of the agent. We have seen earlier in Currie v. Misa’s case that suffering responsibility is a good consideration.[6]

www.preservearticles.com/…/exceptions-to-consideration–no–conside…

CONCLUSION

Consideration is an essential element for the formation of a contract. It may consist of a promise to perform a desired act or a promise to refrain from doing an act that one is legally entitled to do. In a bilateral contract—an agreement by which both parties exchange mutual promises—each promise is regarded as sufficient consideration for the other. In a unilateral contract, an agreement by which one party makes a promise in exchange for the other’s performance, the performance is consideration for the promise, while the promise is consideration for the performance.

Therefore, we can see that the existence of consideration for a promise or promises is required for a promise to become an agreement. Thus, there cannot be an agreement if there is no consideration. of the act says the valid contract: An agreement without consideration is void unless, it is in writing and registered and the promise has been made due to natural love and affection between the parties standing in near relation to each other. it is a promise to compensate, wholly or in part, a person who has voluntarily done something for the promisor or something that the promisor was legally bound to do. It is a promise to pay for a time barred debt.

BIBLIOGRAPHY:

Education.