Consideration is a concept of
English
English usually refers to:
* English language
* English people
English may also refer to:
Peoples, culture, and language
* ''English'', an adjective for something of, from, or related to England
** English national ide ...
common law
In law, common law (also known as judicial precedent, judge-made law, or case law) is the body of law created by judges and similar quasi-judicial tribunals by virtue of being stated in written opinions."The common law is not a brooding omnipresen ...
and is a necessity for
simple contract
In contract law, a ''simple contract'' is a contract made orally or in writing or both of them rather than a contract made under seal. Simple contracts require consideration to be valid, but simple contracts may be implied from the conduct of parti ...
s but not for special contracts (contracts by
deed
In common law, a deed is any legal instrument in writing which passes, affirms or confirms an interest, right, or property and that is signed, attested, delivered, and in some jurisdictions, sealed. It is commonly associated with transferring ...
). The concept has been adopted by other common law jurisdictions.
The court in ''
Currie v Misa
''Currie v Misa'' (1875) LR 10 Ex 153; (1875–76) LR 1 App Cas 554, is an English contract law case, which in the Exchequer Chamber contains a famous statement by Lush J giving the definition of consideration in English law. Lush J said,
Fact ...
'' declared consideration to be a “Right, Interest, Profit, Benefit, or Forbearance, Detriment, Loss, Responsibility”. Thus, consideration is a promise of something of value given by a promissor in exchange for something of value given by a promisee; and typically the thing of value is goods, money, or an act. Forbearance to act, such as an adult promising to refrain from smoking, is
enforceable
An unenforceable contract or transaction is one that is valid but one the court will not enforce. Unenforceable is usually used in contradiction to void (or ''void ab initio'') and voidable. If the parties perform the agreement, it will be valid, ...
if one is thereby surrendering a legal right.
Consideration may be thought of as the concept of value offered and accepted by people or organisations entering into
contract
A contract is a legally enforceable agreement between two or more parties that creates, defines, and governs mutual rights and obligations between them. A contract typically involves the transfer of goods, services, money, or a promise to tran ...
s. Anything of value promised by one party to the other when making a contract can be treated as "consideration": for example, if A contracts to buy a car from B for $5,000, A's consideration is the promise of $5,000, and B's consideration is the promise of 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 colour than white, and B will pay A $500 per year to keep this deal up, there is also a 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 colour 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
A gift or a present is an item given to someone without the expectation of payment or anything in return. An item is not a gift if that item is already owned by the one to whom it is given. Although gift-giving might involve an expectation ...
.
In
common law
In law, common law (also known as judicial precedent, judge-made law, or case law) is the body of law created by judges and similar quasi-judicial tribunals by virtue of being stated in written opinions."The common law is not a brooding omnipresen ...
it is a prerequisite that both parties offer consideration before a contract can be thought of as binding. The doctrine of consideration is irrelevant in many jurisdictions, although contemporary commercial litigant relations have held the relationship between a promise and a deed is a reflection of the nature of contractual considerations. If there is no element of consideration found, there is thus no contract formed.
However, even if a court decides there is no contract, there might be a possible recovery under the doctrines of ''
quantum meruit
''Quantum meruit'' is a Latin phrase meaning "what one has earned". In the context of contract law, it means something along the lines of "reasonable value of services".
In the United States, the elements of ''quantum meruit'' are determined by ...
'' (sometimes referred to as a
quasi-contract
A quasi-contract (or implied-in-law contract or constructive contract) is a fictional contract recognised by a court. The notion of a quasi-contract can be traced to Roman law and is still a concept used in some modern legal systems. Quasi Contra ...
) or
promissory estoppel
A promise is a commitment by someone to do or not do something. As a noun ''promise'' means a declaration assuring that one will or will not do something. As a verb it means to commit oneself by a promise to do or give. It can also mean a capacity ...
.
Legal rules regarding consideration
There are a number of common issues as to whether consideration exists in a contract. Under English law:
# Part payment is not good consideration.
# Consideration must move from the promisee but need not flow to the promisor.
# Consideration must be sufficient but need not be adequate.
# Consideration cannot be illusory.
# Consideration must not be past. Past consideration is not good consideration.
# Moral consideration is not sufficient (except for contracts by deed, where "love and affection" is often cited as the
nnecessaryconsideration).
# Performance of existing duties is not good consideration.
Meanwhile, the
Indian Contract Act, 1872
The Indian Contract Act, 1872 prescribes the law relating to contracts in India and is the key act regulating Indian contract law. The Act is based on the principles of English Common Law. It is applicable to all the states of India. It determi ...
which continues in force in Pakistan, Bangladesh, and India (the most populous common law jurisdiction) provides that valid consideration exists “when at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or abstain from doing something" or, in other words, when each party receives
something in return for entering into a contractual obligation. An agreement must be supported by a lawful consideration on both sides. Under the act, valid consideration must satisfy the following criteria:
*It must move at the desire of the promisor. An act constituting consideration must have been done at the desire or request of the promisor. If it is done at the instance of a third party or without the desire of the promisor, it will not be good consideration. For example, "A" saves "B"'s goods from fire without being ask him to do so. "A" cannot demand payment for his service.
*Consideration may move from the promisee or any other person. Under Indian law, consideration may be from the promisee of any other person i.e., even a stranger. This means that as long as there is consideration for the promisee, it is immaterial who has furnished it.
*Consideration must be an act, abstinence or forbearance or a returned promise.
*Consideration may be past, present or future. Past consideration is not consideration according to English law. However it is a consideration as per Indian law. Example of past consideration is, "A" renders some service to "B" at latter's desire. After a month "B" promises to compensate "A" for service rendered to him earlier. When consideration is given simultaneously with promise, it is said to be present consideration .. For example, "A" receives Rs.50/- in return for which he promises to deliver certain goods to "B". The money "A" receives is the present consideration. When consideration to one party to other is to pass subsequently to the maker of the contract, is said to be future consideration. For example. "A" promises to deliver certain goods to "B" after a week. "B" promises to pay the price after a fortnight, such consideration is future.
*Consideration must be real. Consideration must be real, competent and having some value in the eyes of law. For example, "A" promises to put life to "B"'s dead wife, if "B" pay him Rs.1000/-. "A"'s promise is physically impossible of performance hence there is no real consideration.
*Consideration must be something which the promisor is not already bound to do. A promise to do something what one is already bound to do, either by law, is not a good consideration., since it adds nothing to the previous existing legal consideration.
*Consideration need not be adequate. Consideration need
not necessarily be equal in value to something given. So long as consideration exists, the courts are not concerned as to adequacy, provided it is for some value.
Additionally, under the Indian Contract Act 1872, any consideration is invalid if it is:
#Forbidden by law
#It involves injury to a person or property of another
#Courts regards it as immoral
#It is of such nature that, if permitted, it would defeat the provisions of any law
#It is fraudulent, or involves or implies injury to the person or property of another, or
#It is opposed to public policy
#The consideration conveyed by at least one side seeks to restrain legal proceedings
#The consideration includes public offices or titles
#The consideration involves involuntary labour or otherwise infringes upon the personal liberty of a party to the contract
#The consideration includes a marriage or a pecuniary inducement to marry.
The most noticeable distinction between the English and Indian criteria for consideration is that English law prohibits past consideration while Indian law does not.
History and comparative law
Systems based on Roman law (including Germany and Scotland) do not require consideration, and some commentators consider it unnecessary and have suggested that the doctrine of consideration should be abandoned, and
estoppel
Estoppel is a judicial device in common law legal systems whereby a court may prevent or "estop" a person from making assertions or from going back on his or her word; the person being sanctioned is "estopped". Estoppel may prevent someone from ...
used to replace it as a basis for contracts. However,
legislation
Legislation is the process or result of enrolled bill, enrolling, enactment of a bill, enacting, or promulgation, promulgating laws by a legislature, parliament, or analogous Government, governing body. Before an item of legislation becomes law i ...
, rather than judicial development, has been touted as the only way to remove this entrenched common law doctrine.
Lord Justice Denning famously stated that "The doctrine of consideration is too firmly fixed to be overthrown by a side-wind".
The reason that both exist in common law jurisdictions is thought by leading scholars to be the result of the combining by 19th-century judges of two distinct threads: first the consideration requirement was at the heart of the action of
assumpsit
Assumpsit ("he has undertaken", from Latin, ''assumere''), or more fully, action in assumpsit, was a form of action at common law used to enforce what are now called obligations arising in tort and contract; and in some common law jurisdictions, u ...
, which had grown up in medieval times and remained the normal action for breach of a simple contract in England and Wales until 1884 when the old forms of action were abolished; secondly, the notion of agreement between two or more parties as being the essential legal and moral foundation of contract in all legal systems, was promoted by the 18th-century French writer Pothier in his ''Traite des Obligations'', much read (especially after translation into English in 1805) by English judges and jurists. The latter chimed well with the fashionable will theories of the time, especially
John Stuart Mill
John Stuart Mill (20 May 1806 – 7 May 1873) was an English philosopher, political economist, Member of Parliament (MP) and civil servant. One of the most influential thinkers in the history of classical liberalism, he contributed widely to ...
's influential ideas on free will, and got grafted on to the traditional common law requirement for consideration to ground an action in assumpsit.
Civil law systems take the approach that an exchange of promises, or a concurrence of wills alone, rather than an exchange in valuable rights is the correct basis. So if A promises to give B a book and B accepts the offer without giving anything in return, B would have a legal right to the book and A could not change her mind about giving it to B as a gift. However, in
common law system
In law, common law (also known as judicial precedent, judge-made law, or case law) is the body of law created by judges and similar quasi-judicial tribunals by virtue of being stated in written opinions."The common law is not a brooding omniprese ...
s the concept of ''
culpa in contrahendo'', a form of
estoppel
Estoppel is a judicial device in common law legal systems whereby a court may prevent or "estop" a person from making assertions or from going back on his or her word; the person being sanctioned is "estopped". Estoppel may prevent someone from ...
, is increasingly used to create obligations during pre-contractual
negotiation
Negotiation is a dialogue between two or more people or parties to reach the desired outcome regarding one or more issues of conflict. It is an interaction between entities who aspire to agree on matters of mutual interest. The agreement c ...
s.
[.] Estoppel is an
equitable doctrine that provides for the creation of legal obligations if a party has given another an
assurance and the other has relied on the assurance to his
detriment.
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 the presence of consideration, not the adequacy of the consideration. The values between consideration 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
Black pepper (''Piper nigrum'') is a flowering vine in the family Piperaceae, cultivated for its fruit, known as a peppercorn, which is usually dried and used as a spice and seasoning. The fruit is a drupe (stonefruit) which is about in diamet ...
'' 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 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.
Pre-existing legal duties
A party that ''already'' has a legal duty to provide money, an object, a service, or a 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 thirteen-year-old nephew (a resident of the state of New York) the following offer: "if you do not smoke cigarettes or drink alcohol until your 18th birthday, then I will pay you $5,000". On the nephew's 18th birthday, he tells the uncle to pay up, and the uncle does not pay. In the subsequent lawsuit, the uncle wins, because the nephew, by U.S. criminal law, already had a duty to refrain from smoking cigarettes while under 18 and from drinking alcohol while under age 21.
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 ]settlement
Settlement may refer to:
*Human settlement, a community where people live
*Settlement (structural), the distortion or disruption of parts of a building
* Closing (real estate), the final step in executing a real estate transaction
*Settlement (fin ...
s, such as an accord and satisfaction
Accord and satisfaction is a contract law concept about the purchase of the release from a debt obligation. It is one of the methods by which parties to a contract may terminate their agreement. The release is completed by the transfer of valuable ...
. 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
In United States labor law, at-will employment is an employer's ability to dismiss an employee for any reason (that is, without having to establish " just cause" for termination), and without warning, as long as the reason is not illegal (e.g. fi ...
depend largely on state law. Generally, at-will employment
In United States labor law, at-will employment is an employer's ability to dismiss an employee for any reason (that is, without having to establish " just cause" for termination), and without warning, as long as the reason is not illegal (e.g. fi ...
allows the employer to terminate the employee for good or even no reason (as long as the reason, if any, is not explicitly ''illegal''), 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.
Bundled terms
Contracts where a legally valueless term is bundled with a term that does have legal value are still generally enforceable.
Consider the uncle's situation above. If the same uncle had instead told his 13-year-old nephew the following offer: "if you do not smoke cigarettes, do not drink alcohol, swear or play cards for money (gamble) before your 21st birthday, then I will pay you $5,000". On the nephew's 21st birthday, he asks the uncle to pay up, and this time, in the subsequent lawsuit, the nephew may win. Although the promise of not drinking alcohol and gambling while under the age of 21 was not valuable consideration (it was already legally prohibited), most states allow smoking by age 18 and swearing is not illegal at any age. Even though smoking is legally restricted until age 18, it is legal for those above 18, and thus the promise to forbear from it entirely has legal value. However, the uncle would still be relieved from the liability if his nephew drank alcohol, even though ''that'' consideration is valueless, because it was paired with something of legal value; therefore, adherence to the entire, collective agreement is necessary.
Past consideration
Generally, past consideration is not a valid consideration and has no legal value. Past consideration is consideration that has already flowed from the promisee to the promisor. That is, the promisee's act or forbearance predates the promisor's promise. Past consideration therefore cannot be used as a basis when claiming damages.
An exception to this rule is where there is a duty owed to a third party. An act done before the giving of a promise to make a payment or to confer some other benefit can sometimes be consideration for the promise. For this to hold, three conditions must be satisfied (Pao On v Lau Yiu Long 980:
# The act must have been done at the promisor’s request
# The parties must have understood the act was to be remunerated either by a payment or the conferment of some other benefit
# Payment/conferment of the benefit must have been legally enforceable had it been promised in advance
Option contracts and conditional consideration
Generally, conditional consideration is valid consideration.
Suppose A is a movie script writer and B runs a movie production company. A says to B, "buy my script." B says "How about this – I will pay you $5,000 so that you do not let anyone else produce your movie until one year from now. If I do produce your movie in that year, then I will give you another $50,000, and no one else can produce it. If I do not produce your movie in that year, then you're free to go." If the two subsequently get into a dispute, the issue of whether a contract exists is answered. B had an option contract—he could decide to produce the script, or not. B's consideration passed was the $5,000 down, and the possibility of $50,000. A's consideration passed was the exclusive rights to the movie script for at least one year.
In settlements
Suppose B commits a tort
A tort is a civil wrong that causes a claimant to suffer loss or harm, resulting in legal liability for the person who commits the tortious act. Tort law can be contrasted with criminal law, which deals with criminal wrongs that are punishable ...
against A, causing $5,000 in compensatory damages
At common law, damages are a remedy in the form of a monetary award to be paid to a claimant as compensation for loss or injury. To warrant the award, the claimant must show that a breach of duty has caused foreseeable loss. To be recognised at ...
and $3,000 in punitive damages
Punitive damages, or exemplary damages, are damages assessed in order to punish the defendant for outrageous conduct and/or to reform or deter the defendant and others from engaging in conduct similar to that which formed the basis of the lawsuit. ...
. Since there is no guarantee that A would win against B if it went to court, A may agree to drop the case if B pays the $5,000 compensatory damages. This is sufficient consideration, since B's consideration is a guaranteed recovery, and A's consideration is that B only has to pay $5,000, instead of $8,000.
Criticism
The primary criticism of the doctrine of consideration is that, in its present form, it is purely a formality that merely serves to complicate commerce and create legal uncertainty by opening up otherwise simple contracts to scrutiny as to whether the consideration purportedly tendered satisfies the requirements of the law. While the purpose of the doctrine was ostensibly to protect parties seeking to void oppressive contracts, this is currently accomplished through the use of a sophisticated variety of defences available to the party seeking to void a contract. In practice, the doctrine of consideration has resulted in a phenomenon similar to that of Ḥiyal
''Ḥiyal'' (حيل, singular ''ḥīla'' حيلة "contortion, contrivance; device, subterfuge") is "legalistic trickery" in Islamic jurisprudence.
The main purpose of ''ḥiyal'' is to avoid straightforward observance of Islamic law in difficult ...
in Islamic contracts, whereby parties to a contract use technicalities to satisfy requirements while in actual fact circumventing them in practice. Typically, this is in the form of "peppercorn" consideration, i.e. consideration that is negligible but still satisfies the requirements of law.
The doctrine of consideration is expressly rejected by the UNIDROIT
UNIDROIT (formally, the International Institute for the Unification of Private Law; French: ''Institut international pour l'unification du droit privé'') is an intergovernmental organization whose objective is to harmonize international privat ...
Principles of International Commercial Contracts The Principles of International Commercial Contracts 2016 (most frequently referred to as UNIDROIT Principles and often also referred to as PICC) is a set of 211 rules for international contracts. They have been drawn up since 1984 by an internation ...
on the grounds that it yields uncertainty and unnecessary litigation, thereby hindering international trade. Similarly, the similarly does not require consideration for a contract to be valid, thereby excluding the doctrine with regard to contracts covered by the convention even in common law jurisdictions where it would otherwise apply. Consequently, the continued existence of the doctrine in common law jurisdictions is controversial. Scots lawyer Harvey McGregor's "Contract Code
Harvey McGregor CBE QC (25 February 1926 – 27 June 2015) was a British barrister and was Warden of New College, Oxford, from 1985 to 1996.
Early life
The son of William Guthrie Robertson McGregor and Agnes McGregor ( née Reid), McGregor was ...
", a Law Commission
A law commission, law reform commission, or law revision commission is an independent body set up by a government to conduct law reform; that is, to consider the state of laws in a jurisdiction and make recommendations or proposals for legal chang ...
-sponsored proposal to both unite and codify English and Scots Law, proposed the abolition of consideration. Some commentators have suggested that consideration be replaced by estoppel
Estoppel is a judicial device in common law legal systems whereby a court may prevent or "estop" a person from making assertions or from going back on his or her word; the person being sanctioned is "estopped". Estoppel may prevent someone from ...
as a basis for contracts.[e.g. P.S. Atiyah, 'Consideration: A Restatement' in ''Essays on Contract'' (1986) p.195, Oxford University Press] However, any change to the doctrine of consideration in the jurisdictions in which it exists would need to implemented by legislation
See also
*Consideration under English law
Consideration is an English common law concept within the law of contract, and is a necessity for simple contracts (but not for special contracts by deed). The concept of consideration has been adopted by other common law jurisdictions, includin ...
*Consideration under American law
Consideration is the central concept in the common law of contracts and is required, in most cases, for a contract to be enforceable. Consideration is the price one pays for another's promise. It can take a number of forms: money, property, a pr ...
* Consideration is not required for a contract under Scots contract law
Scots contract law governs the rules of contract in Scotland.
Contract is created by bilateral agreement and should be distinguished from a unilateral promise, the latter being recognised as a distinct and enforceable species of obligation in Scot ...
Notes
References
{{Authority control
Contract law
Legal doctrines and principles