Introduction
In the realm of contract law, consideration is a fundamental concept that underpins the enforceability of agreements. It represents the exchange of value between parties, ensuring that a contract is not merely a gratuitous promise but a mutual bargain with legal consequences. Without valid consideration, a contract lacks the essential element required for it to be binding under English law. This essay explores the pivotal role of consideration in the law of contract, focusing on its two primary types—executory and executed consideration—and the eight established rules that govern its application. By examining these aspects, the essay seeks to provide a comprehensive understanding of how consideration operates to ensure fairness and enforceability in contractual relationships. The discussion will proceed under distinct subheadings to address each component systematically, drawing on relevant legal principles, case law, and academic commentary to support the analysis. Ultimately, this essay aims to highlight the significance of consideration as a cornerstone of contract law and its practical implications for legal practice.
Types of Consideration
Executory Consideration
Executory consideration refers to a promise to perform an act or refrain from doing something at a future date as part of a contractual agreement. This type of consideration is based on mutual promises where neither party has yet fulfilled their obligation at the time the contract is formed. For instance, in a typical sale of goods contract, one party may promise to deliver goods at a specified later date, while the other party promises to make payment upon delivery. If either party fails to uphold their promise—such as the seller not delivering the goods—this constitutes a breach of contract, entitling the aggrieved party to seek legal remedies (Adams and Brownsword, 2007). Executory consideration is crucial in many commercial contracts, as it allows parties to plan and rely on future performance, thereby facilitating business dealings. Its enforceability hinges on the mutual understanding that both parties are bound by their promises, even though the actions are yet to be executed.
Executed Consideration
In contrast, executed consideration occurs when an act or performance promised under a contract has already been completed at the time the promise is made by the other party. This type of consideration often arises in unilateral contracts, where one party makes a promise in exchange for a specific act by the other. A classic example is a reward contract, such as offering a sum of money for the return of a lost item. Once the act—such as returning the lost item—is performed, the consideration is deemed executed, and the promisor is obliged to fulfil their promise, typically by paying the reward (Elliot and Quinn, 2011). Executed consideration thus provides immediacy and certainty in certain contractual arrangements, ensuring that a party who has completed their part of the bargain can enforce the other party’s promise. Both types of consideration underscore the principle of reciprocity, which is central to the formation of binding contracts.
The Eight Rules Governing Consideration
Rule 1: Consideration Must Be Sufficient but Need Not Be Adequate
One of the foundational rules of consideration is that it must be sufficient in the eyes of the law, though it does not need to be adequate in terms of fair market value. This means that the courts are primarily concerned with whether something of value has been exchanged, rather than whether the exchange is equitable. For instance, in the case of Chappell & Co Ltd v Nestle Co Ltd (1960), it was held that even wrappers from chocolate bars could constitute valid consideration, despite their negligible economic value, as they formed part of the bargain (Beatson et al., 2010). This rule reflects the court’s reluctance to interfere in the parties’ freedom to contract, provided there is some element of value in the agreement. While this approach ensures flexibility, it can occasionally lead to perceived imbalances in contractual dealings, though the courts generally prioritise the presence of a bargain over its fairness.
Rule 2: Consideration Must Be Something of Value
Closely related to sufficiency, consideration must possess some recognisable value, whether it is in the form of a promise, an act, a forbearance, or a return promise. This value need not necessarily be monetary; it can include intangible benefits such as refraining from legal action, as seen in cases involving compromise agreements. The key is that the consideration must represent a detriment to the promisee or a benefit to the promisor, thereby creating a mutual exchange. However, nominal consideration, such as a payment of £1 for a valuable asset, is often scrutinised to ensure it genuinely reflects a bargain and is not merely a disguise for a gift (Peel, 2015). This rule reinforces the requirement that contracts are based on a genuine exchange, distinguishing them from gratuitous promises.
Rule 3: Consideration Must Move Between the Parties
Under English law, consideration must move between the parties to the contract, meaning that it must be provided by the promisee in exchange for the promisor’s promise. This principle, often encapsulated in the phrase “consideration must move from the promisee,” ensures that only those directly involved in the bargain can enforce the contract. A third party who has not provided consideration typically cannot claim rights under the agreement, although exceptions exist under the Contracts (Rights of Third Parties) Act 1999 (McKendrick, 2014). This rule upholds the privity of contract doctrine, ensuring that obligations and benefits remain confined to the contracting parties unless otherwise legislated.
Rule 4: Consideration Must Be Real and Not Illusory
Consideration must have a real, objective value and cannot be based on an illusory or vague promise. An illusory promise, such as agreeing to perform “if I feel like it,” does not constitute valid consideration because it lacks certainty and enforceability. The courts require that consideration be tangible and capable of being upheld as part of a binding agreement. For example, in White v Bluett (1853), a son’s promise to stop complaining was deemed insufficient as consideration, lacking any real value (Beatson et al., 2010). This rule ensures that contracts are grounded in substantive commitments rather than empty or unenforceable promises.
Rule 5: Consideration Cannot Be Past
A significant principle in contract law is that consideration must be provided at the time of the agreement or in anticipation of it; past consideration is generally not valid. This means that a promise made in return for an act already performed, without prior agreement, does not constitute enforceable consideration. For instance, in Re McArdle (1951), a promise to pay for past renovations was unenforceable because the work had been completed before the promise was made (Elliot and Quinn, 2011). However, exceptions exist, such as where past consideration is implied under a prior request or understanding. Nevertheless, this rule generally prevents retrospective obligations from being binding, maintaining the forward-looking nature of contractual bargains.
Rule 6: Consideration Must Not Be Illegal or Against Public Policy
Consideration must be lawful and not contrary to public policy for a contract to be enforceable. If the consideration involves illegal activities, such as a contract to supply prohibited substances, or contravenes public morals, the agreement will be void. Courts have consistently refused to uphold contracts that undermine societal values or legal standards, as this would compromise the integrity of the legal system (McKendrick, 2014). This rule serves as a safeguard, ensuring that contracts align with broader ethical and legal principles, thereby protecting public interest.
Rule 7: Consideration Must Not Be Part of an Existing Duty (Implied)
Although not explicitly mentioned in the initial prompt, a widely recognised rule is that consideration must not consist of performing an existing legal or contractual duty, as this does not constitute a fresh exchange of value. For example, in Collins v Godefroy (1831), a witness who was already legally obligated to attend court could not claim additional payment as consideration for doing so (Peel, 2015). However, exceptions apply if the performance goes beyond the existing duty or provides additional benefit. This principle prevents parties from exploiting pre-existing obligations to extract further benefits.
Rule 8: Consideration in Relation to Part-Payment of Debt (Implied)
Another important rule often discussed is that part-payment of a debt does not generally constitute valid consideration for discharging the full debt, unless accompanied by some additional benefit or agreed under specific circumstances, as established in Foakes v Beer (1884) (Adams and Brownsword, 2007). This rule, though nuanced by exceptions such as promissory estoppel, reinforces the need for a genuine exchange to alter existing obligations. It ensures that creditors are not unduly prejudiced by accepting lesser payments without additional consideration.
Conclusion
In conclusion, consideration remains a bedrock principle in the law of contract, ensuring that agreements are based on mutual exchange and are legally enforceable. The two types of consideration—executory and executed—illustrate the diverse ways in which value can be exchanged, whether through future promises or completed acts. The eight rules governing consideration, ranging from the requirement of sufficiency to the prohibition of illegal or past consideration, provide a structured framework to assess the validity of contracts. While these rules offer clarity and fairness, they also allow for flexibility in commercial dealings, though their application can sometimes lead to complex legal disputes, particularly concerning adequacy and privity. Ultimately, understanding consideration and its governing principles is essential for legal practitioners and students alike, as it not only shapes the enforceability of contracts but also reflects broader notions of justice and reciprocity in contractual relationships. The continued relevance of these rules in modern contract law underscores their importance in maintaining trust and certainty in legal agreements.
References
- Adams, J.N. and Brownsword, R. (2007) Understanding Contract Law. 5th edn. London: Sweet & Maxwell.
- Beatson, J., Burrows, A. and Cartwright, J. (2010) Anson’s Law of Contract. 29th edn. Oxford: Oxford University Press.
- Elliot, C. and Quinn, F. (2011) Contract Law. 8th edn. Harlow: Pearson Education.
- McKendrick, E. (2014) Contract Law: Text, Cases, and Materials. 6th edn. Oxford: Oxford University Press.
- Peel, E. (2015) Treitel on The Law of Contract. 14th edn. London: Sweet & Maxwell.
