“ Essential element of all enforceable commercial-contracts, it does not have to be ‘adequate’ or equal in value to the exchanged item but must be legal (not in violation of any law)”Explain.

Introduction: 

 Something with monetary value, voluntarily exchanged for an act, benefit, forbearance, interest, promise, right, or goods or services. In banking the loan-amount is a consideration, in exchange for the borrower’s promise to repay the principle and to pay interest and other charges. In insurance, the insurance company’s offer to make a loss good is a consideration in exchange for payment of premium. Essential element of all enforceable commercial-contracts, it does not have to be ‘adequate’ or equal in value to the exchanged item but must be legal (not in violation of any law). Any commercial contract without a valid (valuable and legal) consideration is invalid and is called ‘nudum pactum’ (Latin for, naked contract) governed by the legal maxim ‘ex nudo pecto non oritur actio’ (Latin for, a right of action does not arise from a naked contract).

 Definition:

 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.

 Consideration must have a value that can be objectively determined. A promise, for example, to make a gift or a promise of love or affection is not enforceable because of the subjective nature of the promise.

 Traditionally, courts have distinguished between unilateral and bilateral contracts by determining whether one or both parties provided consideration and at what point they provided the consideration. Bilateral contracts were said to bind both parties the minute the parties exchanged promises, as each promise was deemed sufficient consideration in itself. Unilateral contracts were said to bind only the promisor and did not bind the promisee unless the promisee accepted by performing the obligations specified in the promisor’s offer. Until the promisee performed, he or she had provided no consideration under the law.

 For example, if someone offered to drive you to work on Mondays and Tuesdays in exchange for your promise to return the favour on Wednesdays and Thursdays, a Bilateral Contract would be formed binding both of you once you provided consideration by accepting those terms. But if that same person offered to pay you $10 each day you drove him to work, a unilateral contract would be formed, binding only upon the promisor until you provided consideration by driving him to work on a particular day.

 Modern courts have de-emphasized the distinction between unilateral and bilateral contracts. These courts have found that an offer may be accepted either by a promise to perform or by actual performance. An increasing number of courts have concluded that the traditional distinction between unilateral and bilateral contracts fails to significantly advance legal analysis in a growing number of cases where performance is provided over an extended period of time.

 Suppose you promise to pay someone $500.00 to paint your house. The promise sounds like an offer to enter a unilateral contract that binds only you until the promisee accept by painting your house. But what constitutes lawful performance under these circumstances? The act of beginning to paint your house or completely finishing the job to your satisfaction?

 Most courts would rule that the act of beginning performance under these circumstances converts a unilateral contract into a bilateral contract, requiring both parties to fulfil the obligations contemplated by the contract. However, other courts would analyze the facts of each case so as not to frustrate the reasonable expectations of the parties. In neither of these cases are the legal rights of the parties ultimately determined by courts by applying the concepts of unilateral and bilateral contracts.

 In still other jurisdictions, courts have simply expressed a preference for interpreting contracts as creating bilateral obligations in all cases where no clear evidence suggests that a unilateral contract was intended. The rule has been stated that in case of doubt an offer will be presumed to invite the formation of a bilateral contract by a promise to perform what the offer requests, rather than the formation of a unilateral contract commencing at the time of actual performance. The bottom line across most jurisdictions is that as courts have been confronted by a growing variety of fact patterns involving complicated contract disputes, courts have turned away from rigidly applying the concepts of unilateral and bilateral contracts and moved towards a more ad hoc approach.

 Rules of consideration:

 There are various rules governing the law of consideration:

  • The consideration must not be past.
  • The consideration must be sufficient but need not be adequate.
  • The consideration must move from the promisee.
  • An existing public duty will not amount to valid consideration.
  • An existing contractual duty will not amount to valid consideration.
  • Part payment of a debt is not valid consideration for a promise to forego the balance.

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 promise or any other person: Consideration need not move from the promise 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 may be past, present or future: 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 may consist of either something done or not done in the past or done or not done in the present, or promised to be done or not done in the future.
  • 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.

 There are a number of common issues as to whether consideration exists in a contract.

 Pre-existing legal duties:

 A party which already has a legal duty to provide money, an object, a service, or forbearance, does not provide consideration when promising merely to uphold that duty. That legal duty can arise from law, or obligation under a previous contract.

 The prime example of this sub-issue is where an uncle gives his seven year old nephew (a resident of the US) the following offer: “if you do not smoke cigarettes or marijuana until your 18th birthday, then I will pay you $500” (assuming it is a criminal offense in the US for people under the age of 18 to smoke cigarettes, and for people of any age to smoke marijuana). On the nephew’s 18th birthday, he tells the uncle to pay up, and the uncle says no. In the subsequent lawsuit, the uncle will win, because the nephew, by U.S. law, already had a duty to refrain from smoking cigarettes or marijuana.

 The same applies if the consideration is a performance for which the parties had previously contracted. For example, A agrees to paint B’s house for $500, but halfway through the job A tells B that he will not finish unless B increases the payment to $750. If B agrees, and A then finishes the job, B still only needs to pay A the $500 originally agreed to, because A was already contractually obligated to paint the house for that amount.

 An exception to this rule holds for settlements, such as an accord and satisfaction. If a creditor has a credit against a debtor for $10,000, and offers to settle it for $5,000, it is still binding, if accepted, even though the debtor had a legal duty to repay the entire $10,000.

 Pre-existing duties relating to at-will employment depend largely on state law. Generally, at-will employment allows the employer to terminate the employee for good or even no reason, and allows the employee to resign for any reason. There are no duties of continued employment in the future. Therefore, when an employee demands a raise, there is no issue with consideration because the employee has no legal duty to continue working. Similarly, when an employer demands a pay-cut, there is also no contractual issue with consideration, because the employer has no legal duty to continue employing the worker. However, certain states require additional consideration other than the prospect of continued employment, to enforce terms demanded later by the employer, in particular, non-competition clauses.

 Relevant legal facts:

 Its means a reasonable equivalent and the other valuable benefit passed on by the promisor to the promise. Its application mainly located some three points of view. There are,

 Present situation is, the act of consideration has been performed in return for the promise in the present.

  When consideration gone along with the promise, this is called present consideration. This is also called the executed consideration.

 This time contract is making now and result is show in present.

 Past situation is, it is of no effect to consideration at all. It is defined as an act done before a contract is made. Consideration may be executed or executor but it may not be past. It is consideration that is already given or some act that is already performed and therefore can’t be induced by the other party’s thing, act or promise in exchange. Ex: X finished a work in January month for Y but Y said, he gives 500 Taka in February. This time X provides money for January month activates.

 Future situation is, the act of consideration is yet to occur, a promise to do something in the future. When a consideration moves at a future data is future consideration. This is also called executor consideration. This time contract made now but result is coming in future.

 Relevant and irrelevant fact:

 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

 However, courts in the United States may take issue with nominal consideration, or consideration with virtually no value. 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. 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. 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”.

 Consideration must be real. Consideration must have some value in the eye of law. It can’t be false, uncertain, impossible or fictitious. Court gives high value for contract and consideration.

 Consideration must be legal and not immoral or opposed to public policy. If the object or consideration of an agreement is illegal, it can’t be enforceable by law. If the considerations illegal, immoral or opposed to public policy, in that case no contract based on that will be enforceable by law. Ex: A contract to pay money to a witness who has received an order from the count to appear at a trial.

 It needn’t be adequate. If consent was freely given to the agreement, “an agreement to which the consent of the party is freely given is not void merely because the consideration is inadequate, but inadequacy of the consideration may be taken into by the court in determining the questions whether the consent of the promise was freely given”. Ex: X agrees to, he buy 100 plats at 200 Taka. X’s consent to the agreement was freely given. This agreement is the inadequacy of the consideration.

Conclusion:

 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.

BIBLIOGRAPHY…

 Website:

 Books:

  • Business law,CIMA.
  • Handbook of Commercial Law, A.K. Sen.
  • “Business Law”, Writer is “Mohammad Khalakurjaman”, Published by National University.
  • “Principles of Mercantile Law”, Writer is “Dr. Avtar Singh”. Easteran Book Company.

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