Consideration in Contract Law
You can ask our online solicitors for advice on consideration contract law using the question box on the front of our website or the following free legal advice guide may answer your questions.
Consideration in contract law, is a term used to describe an exchange of one item of value for another. Typically, this is the payment of money in exchange for a product or service. During consideration, an agreement is formed that establishes an arrangement to pay for goods or services.
If they are paid for upon receipt the contract becomes binding at that time and is referred to as being executory. If the goods have been exchanged for money, the process is deemed to have been executed. That being said, it is important to recognised that a contract may not always involve exchange for money.
Consideration in contract law falls into two main types of consideration; executed and executory. If considerations are executed, the consideration has been carried out. For consideration to be valid in contract law, it must be acknowledged in some way. This is recognised by a legal term ‘sufficient’. There is also another legal term ‘adequate’ often applied at the same time which states that the item must be a fair price. Consideration does not necessarily have to be adequate, but it should be sufficient in order to create a contract.
Limits to Consideration in Contract Law
The Courts may sometimes decide that something would not amount to consideration in contract law. This would occur for example when there was performance of an existing duty and there are three instances when this would occur.
The first is the performance of legal duty but a contract is not in place. As an example, the performance of a legal obligation such as employment in public service does not provide adequate consideration for any type of agreement. There is an exception to this rule which occurs when an obligation extends beyond the remit of usual duties.
The second would be performance of a duty which has already been promised under an alternative contract.
The third is the performance of a duty which is owed to a third party.
You should also be aware of promissory estoppel which refers to a scenario when someone releases another party from fulfilling their contractual obligations but then later disagrees with this. There are several things that you could do to determine whether promissory estoppel could be applied in a given situation.
The key requirements include:
- There must have been in place at some point a legal relationship between the parties. A promissory estoppel will only function when there is a pre-existing relationship between parties.
- There must have been at some stage a reliance on a promise. The individual who was promised must rely on the promise that they have been given to make a decision. There must have been some reliance on the promise which is a crucial element in this area of law.
- A defence can use promissory estoppel. It must be inequitable for a promisor to renege on their promise.
Rights will be suspended and not extinguished
Without the presence of consideration in contract law, it can be either difficult to enforce or voidable. Exchange of value in consideration cases doesn’t just relate to monetary value, it can refer to a promise that is made, property or even taking or not taking some form of action. If someone agrees to do something that they were not legally obliged to follow through, it could be said that they have given consideration to a certain degree. However, agreeing to do something that would be legally required in a contract is not consideration.
There are three elements for consideration to be valid;
- A bargain in relation to an exchange
- Something that is mutually agreed between two parties to gain something from entering into the contract
- Whatever is exchanged under the terms of the contract must be something of value
Consideration in contract law cannot be given if one party was not in a good position to bargain, perhaps due to inadequate, inaccurate or missing information that would make bargaining impossible.
Consideration in Business
In business, consideration in contract law is important. One business needs to individually change the specific terms of relationships with another party such as a client, employee or contractor. If your business makes a change to a contract, whether this is in writing or in practice, but you continue to operate as normal with the other party, problems can arise if the other party fails to uphold their part of the agreement such as failing to pay for something or the relationship breaks down.
Without proper consideration in place when the unilateral change was made, the business may find it very difficult to actually enforce the change that had been put in place.
When creating contracts, consideration should always be factored in. If you don’t incorporate it properly into your legal agreements you could find that it is very difficult to enforce later down the line, resulting in problems for you or your business if it’s in a corporate context.