The significance of consideration in a contract is of prime importance

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“The significance of consideration in a contract is of prime importance”. Discus in regard to the law relating to consideration.

Introduction

What Is Consideration?

Consideration is the benefit that each party gets or expects to get from the contractual deal. In order for consideration to provide a valid basis for a contract and remember that every valid contract must have consideration. Each party must make a change in their “position.” Consideration is usually either the result of:

  • a promise to do something you’re not legally obligated to do :or
  • a promise not to do something you have the right to do

(often, this means a promise not to file a lawsuit).

An agreement is not enforceable unless each party to the agreement will get something, this something is called consideration.

How does consideration work in the real world? Let’s say you backed into your neighbor’s golf cart and damaged it. Your neighbor is legally permitted to sue you for the damage but instead agrees not to sue you if you pay him $1,000. This agreement provides adequate consideration for the contract, because each party is giving up something in the exchange — you’re giving up some of your money while your neighbor is giving up the right to sue you.

Elements

At common law, the elements of a contract are offer, acceptance, intention to create legal relations, and consideration.

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Restatement (Second) of Contracts § 32 (1981) (emphasis added)

Sufficiency

Consideration must be sufficient, but courts will not weight the adequacy of consideration. For instance, agreeing to sell a car for a penny may constitute a binding contract. All that must be shown is that the seller actually wanted the penny. This is known as the peppercorn rule. Otherwise, the penny would constitute nominal consideration, which is insufficient. Parties may do this for tax purposes, attempting to disguise gift transactions as contracts.

Transfer of money is typically recognized as an example of sufficient consideration, but in some cases it will not suffice, for example, when one party agrees to make partial payment of a debt in exchange for being released from the full amount.

Consideration must move from the promise. For instance, it is good consideration for person Sakib to pay person Ovi in return for services rendered by person Ismet. If there are joint promises, then consideration needs only to move from one of the promises.

Value

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 promise. The consideration must be executory or executed. Consideration is executory when a promise to do something in the future is given in exchange for another promise to be done in the future. Consideration is executed when a promise is actually executed, in exchange for another promise to be executed in the future.

Consideration is past when a promise has been given or executed before and independently of the other promise. 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.

Lord Steyn, ‘Contract Law: Fulfilling the Reasonable Expectations of Honest Men’ (1997) 113 LQR 433; c.f. § 133 BGB in Germany, where “the actual will of the contracting party, not the literal sense of words, is to be determined”

[1893] 1 QB 256

(1953) 92 CLR 424

Wilmot et al, 2009, Contract Law, Third Edition, Oxford University Press

law.com Law Dictionary

Chappell & Co Ltd v. Nestle Co Ltd [1959] 2 All ER 701 in which the wrappers from three chocolate bars was held to be part of the consideration for the sale and purchase of a musical recording.

When a Contract Lacks Consideration

In some situations, courts will step in and declare that a contract is unenforceable because it lacks consideration. Let’s look at some of these scenarios.

One of the parties was already legally obligated to perform. For example, a police officer cannot claim the reward for capturing a wanted suspect, because the officer is already legally obligated to capture and arrest people who break the law.

The promise amounts to a gift, not a contract. If your rich uncle promises to give you money to buy a house, without any strings attached, that is a promise to make a gift. If he changes his mind, you can’t force him to come up with the cash because his promise was one-sided; you have not done or promised to do anything in exchange.

On the other hand, if you make a down payment on a house in reliance on his promise, and your uncle knows about it, a court may enforce his original promise. Although it still isn’t a true contract, the law recognizes that it’s necessary to hold people to their promises once others take action on the assumption that the promise will be kept. This legal theory called “promissory estoppels”– treats promises as contracts if the promise was reasonably relied upon.

The exchange is for “past consideration.” When someone promises to give you something in return for something you’ve already done “I’m going to pay you $500 because you quit smoking last year” — a court will not enforce the promise to make the payment because the performance (quitting smoking) wasn’t bargained for. You did it without knowing that someone would come along later and offer to pay for it.

The bargained-for promise is illusory. For example, the laws in Maria’s state prohibit firing an employee for refusing to sign a uncompleted agreement. Maria signs one anyway, under threat of losing her job. The agreement is unenforceable because Maria’s employer cannot do what it promised (or threatened) to do. A better approach would have been to provide Maria with some benefit or compensation if she signed the agreement, rather than threatening to fire her if she didn’t.

The rule in Pinnel’s Case – Foakes v Beer (1884) 9 App Cas 605

Eastwood v. Kenyon (1840) 11 Ad&E 438

(1809) 2 Camp. 317.

Collins v. Godefroy (1831) 1 B. & Ad. 950.

Shadwell v. Shadwell (1860) 9 C.B.N.S. 159.

“Consideration” in a Contract:

Many contracts provide a recital (a statement at the beginning of the contract) that the contract is being entered into “for good and valuable consideration, the sufficiency of which is acknowledged or something to that effect. The writers of these contracts mistakenly believe that simply stating that consideration exists actually fulfills the requirement of contractual consideration. In a majority of states, however, this is not the case; such recitals don’t prove anything. In other words, saying there is consideration doesn’t necessarily mean there is consideration.

Legal scholars agree that generally, a contract doesn’t need to include anything other than a statement that “the parties agree.” The exception is for contracts that only one party signs, such as assignments, option agreements, or promissory notes. In these contracts, a recital that the consideration is sufficient should be included, because it’s not self-evident that a bargained-for exchange has taken place.

Lawful consideration:

An agreement must be supported by a consideration of something in return. That is, the agreement must be supported by some type of service or goods in return of money or goods. However, it is not necessary the price should be always in terms of money. It could be a service or other goods. Suppose Nazib agrees to buy books from Asif for $50. Here the consideration of Nazib is books and the consideration of Asif is $50. It can be a promise to act (doing something) or forbearance (not doing something). The consideration may be present, future or can be past. But the consideration must be real.

For example If Nazib agrees to sell his car of $ 50000 to Zihad for $20000. This is a valid contract if Nazib agrees to sell his car not under any influence or force. It can be valid only if the consideration of Nazib is free. An agreement is valid only when the acts are legal. Illegal works like killing another for money, or immoral works or illegal acts are cannot be treated as a valid agreement. So the illegal act can not come under the valid contract.

Consideration means that a promise made to you will not necessarily be enforceable in the courts unless you can establish that you have given something for it. Suppose I promise to deliver a ton of gravel to you next week – you get your shovel and barrow ready, and I don’t turn up. I probably would not be liable to you in damages, because you haven’t given anything in return, and merely getting your barrow ready would not be sufficient reliance to make it enforceable. However, if at the time of making the arrangement, you said that you would pay me $10 per ton for the gravel that would be sufficient consideration. A promise to pay is sufficient to count as giving something, even though the promise is not to be put into effect for some time yet.

Thomas v Thomas (1842) 2 QB 851

Currie v Misa (1875) LR 10 Ex 153, 162

Benefit and \ or detriment

Consideration is often spoken of as a benefit to the promisor or a detriment to the promisee. Some will make the point that a mere promise from one party is neither a detriment to that party, nor is it a benefit to the other. Atiyah also argues that real benefit and detriment is not sought, because of the adequacy point – that the courts will not concern themselves with the adequacy of consideration – a point we will look at in a moment. Is it really a benefit to someone to get $1 for a car? Maybe not, but it may well be good consideration.

Importance of Contract to a Business

Written contracts provide individuals and businesses with a legal document stating the expectations of both parties and how negative situations will be resolved.The business environment is full of agreements between businesses and individuals & the consideration is must in the business contract. While oral agreements can be used, most businesses use formal written contracts when engaging in operations. Contracts also are legally enforceable in a court of law. Contracts often represent a tool that companies use to safeguard their resources.

Facts

Fix Resource Costs

Limit Obligations

Non-Compete Agreements

Expert Insight

Without consideration no business contract will be valid. Because each party will have something in return, which is called consideration?

Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] AC 847, 855,

Adequacy

For consideration to be good consideration, it must be of some value, even if it is minimal value. There is no requirement that the consideration be commensurate in economic terms to the original promise. Nominal consideration will suffice as good consideration for a contract, Courts will not measure the adequacy of the consideration as it is up to the parties to decide the subjective worth of each promise.

Consideration is the exchange of values under the contract.

For example: A person gives a part of their apartment to a childcare provider who, in turn, pays a part of their fees to the owner of the space. The consideration that is provided by either of the parties should be of value.

Also, both the parties that are getting into the contract should be mentally competent. In other words none of them should be a minor. The agreement should have a lawful purpose. As in the above example, the lawful purpose of the contract is that a person is paying an amount of money for a certain space.

Chappell & Co Ltd v. Nestle Co Ltd [1960] AC 87, Lord Somervell,

Recommendation

In contract law, consideration refers to any bargained-for exchange.

Basically, for a contract to be valid there must be an exchange of goods and/or services. Because the vast majority of contracts are for sales of some type, consideration usually takes the form of an exchange of money for goods or services. For consideration to be valid things exchanged must be of some legal value.

So, each and every contract should have a legal consideration. I can say that, consideration is an integral part of the contract. Without that, an agreement can not valid.

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 contract would involve an exchang, which is called consideration.

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

Nolo’s article Unenforceable Contracts: What to Watch Out For.

Hans Wehberg, Pacta Sunt Servanda, The American Journal of International Law, Vol. 53, No. 4 (Oct., 1959), p.775.; Trans-Lex.org Principle of Sanctity of contracts

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Lord Steyn, ‘Contract Law: Fulfilling the Reasonable Expectations of Honest Men’ (1997) 113 LQR 433; c.f. § 133 BGB in Germany, where “the actual will of the contracting party, not the literal sense of words, is to be determined”

[1893] 1 QB 256

(1953) 92 CLR 424

Wilmot et al, 2009, Contract Law, Third Edition, Oxford University Press, page 34

Restatement (Second) of Contracts § 32 (1981) (emphasis added)

Law.com Law Dictionary

Chappell & Co Ltd v. Nestle Co Ltd [1959] 2 All ER 701 in which the wrappers from three chocolate bars was held to be part of the consideration for the sale and purchase of a musical recording.

The rule in Pinnel’s Case – Foakes v Beer (1884) 9 App Cas 605

Eastwood v. Kenyon (1840) 11 Ad&E 438

(1809) 2 Camp. 317.

Collins v. Godefroy (1831) 1 B. & Ad. 950.

Shadwell v. Shadwell (1860) 9 C.B.N.S. 159.

ex nudo pacto actio non oritur

Dyer’s case (1414) 2 Hen. 5, 5 Pl. 26

Thomas v Thomas (1842) 2 QB 851

Currie v Misa (1875) LR 10 Ex 153, 162

Bolton v Madden (1873) LR 9 QB 55, 56, Blackburn J,

Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] AC 847, 855,

Chappell & Co Ltd v. Nestle Co Ltd [1960] AC 87, Lord Somervell,