Summary
- A valid contract requires offer, acceptance, consideration, and intention to create legal relations; without consideration, an agreement generally cannot be enforced in court.
- Consideration must be “sufficient but need not be adequate” – it must have some legal value, but courts would not intervene just because a deal is a bad bargain.
- Performing an existing duty is usually not valid consideration, though courts may recognise contract modifications where one party receives a “practical benefit.”
- This guide explains the legal concept of consideration and contract formation for small business owners entering commercial agreements in the United Kingdom.
- LegalVision’s contract lawyers specialise in advising clients on contract law and drafting enforceable commercial agreements.
Tips for Businesses
Before relying on any agreement, check it involves a genuine exchange of value, not just a one-sided promise. If varying an existing contract, document a new benefit for both sides. Put important agreements, especially those involving land, shares, or long-term obligations, in writing or by deed.
If you are a small business owner who frequently deals with contracts, you may come across the term ‘consideration’. Consideration is one aspect of forming a legally binding contract, and its absence can mean you do not have a valid contract. Without a valid contract, you will not have legal rights enforceable in court. This article will explain what consideration is, what makes valid consideration, and some other essential elements of forming a valid contract.
What is Consideration?
Put simply, consideration is something that has value in the eyes of the law. It is an essential element of forming a valid contract. In practice, this means there must be an exchange of valuable things for a legally binding contract. Consideration is one aspect of the contract-forming process and is necessary for every new agreement to be enforceable in law.
What are the Other Aspects of Contract Formation?
To form a valid contract, there are four primary requirements:
- you must offer something;
- the other party must accept your offer;
- there must be valid consideration; and
- both parties must intend to create legal relations.
Suppose you tell your housemate that you will make him a sandwich in exchange for him cleaning the kitchen. In that case, this is unlikely to be interpreted as creating a legally binding relationship due to the presumed lack of intention to create legal relations in this domestic context.
However, specific types of contracts do have to be made in writing. For example, an agreement that transfers a right in land usually has to be made within a deed. Further, contracts that transfer rights in shares usually have certain formalities that you have to follow.
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What Constitutes Valid Consideration?
Consideration, as mentioned, has to have legally sufficient value to constitute ‘valid consideration’. Consideration can include a practical benefit you give the other person or a detriment to yourself. For example, a benefit to the other person may be:
- money;
- a promise to do a service, such as creating a piece of artwork;
- a legal right, for example, a licence; or
- a legal right in property, for example, giving someone your car or house.
The English courts have taken a broad view as to what constitutes consideration. In one case, the court even went so far as to say that a peppercorn could be valid consideration. Because of this, the requirements of consideration, where you give a benefit to the other person, are easy to satisfy.
Does Consideration Have to Be Fair?
No. English law does not require consideration to be equal or commercially fair. The courts will not intervene simply because one party made a bad bargain. This is sometimes described as the rule that consideration must be “sufficient but need not be adequate”. Sufficient means it must have some legal value. Adequate means it must be a fair or equal exchange. The law only requires the former.
This rule gives businesses the freedom to negotiate their own terms without the courts second-guessing the commercial wisdom of their decisions. However, there are limits. If one party was pressured into accepting unfair terms through duress or undue influence, the courts may intervene on those grounds. This is a separate legal issue from consideration itself.
Detriment
A detriment to yourself can also constitute consideration. For example, promising not to do something can be a form of valid consideration, such as a promise not to:
- work with a certain employer;
- go to a certain place at a given time;
- exercise a legal right; or
- take ownership of certain types of shares;
It is important to understand that while the courts take a broad view of what constitutes consideration, there are still some limitations. For instance, performing an existing duty owed to the other party is generally not a reasonable consideration. This was established in the case of Stilk v Myrick [1809], where it was held that sailors could not claim extra pay for performing their existing duties, even when some of their crew had deserted them.
However, this will depend on the circumstances, as in Hartley v Ponsonby [1857], a lot of the crew members had deserted and the remaining sailors were being asked to perform duties significantly beyond their original contractual obligations. Because the change in circumstances was so substantial, the court held that the remaining crew had gone beyond their existing duty, making their continued performance valid consideration for the promise of extra pay.
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What if There is No Consideration?
In some cases, you may not have consideration. If you make your contract in a formal deed document, this is not an issue. However, if your agreement is made orally or is not in a formal deed document, you may have to rely on the common law.
English common law can protect you in this situation, especially if you relied on the promise given by the other person to your detriment. Following the last example, if you went out and bought equipment relying on the other person to pay you, you may be able to ask the court to give you a remedy.
This type of remedy, however, is discretionary. If you are in this situation, seeking professional legal advice from a lawyer specialising in contractual claims is a good idea.
Example
Another situation where consideration might be absent is in contract modifications. If parties agree to modify an existing contract, fresh consideration must be considered for the changes to be enforceable.
However, in commercial contexts, the courts have shown some flexibility in this area, as demonstrated in the case of Williams v Roffey Bros & Nicholls (Contractors) Ltd [1991]. In this case, the head contractor (Roffey Bros) promised its subcontractor (Williams) that they would pay Williams an additional sum to ensure the timely completion of the original scope of work.
Despite the traditional rule that performing an existing duty is not good consideration, the court determined that, in the circumstances, a valid amendment to the contract had been formed because the head contractor was obtaining a ‘practical benefit’ from their promise to pay more money to the subcontractor.
Can a Third Party Provide Consideration?
Generally, consideration must move from the promisee – meaning the person seeking to enforce the contract must themselves have provided consideration. A third party who was not part of the original exchange cannot typically enforce a contract, even if they stand to benefit from it. This is closely linked to the doctrine of privity of contract.
However, the Contracts (Rights of Third Parties) Act 1999 created an important exception. Under this Act, a third party can enforce a contractual term if the contract expressly states they may do so, or if the contract confers a benefit on them and the parties did not exclude third-party enforcement in the contract.
Key Takeaways
Consideration is an essential aspect of forming a valid contract. Without it, you will not have a legal right alongside your agreement. For an agreement to have sufficient consideration, you will need an exchange of practical benefits or detriments. This does not have to be a good commercial agreement, as the courts will almost always protect a bad bargain.
If you are unsure as to whether you have a valid contract and you are planning on taking another person to court, LegalVision provides ongoing legal support for businesses through our fixed-fee legal membership. Our experienced contract lawyers help businesses manage contracts, employment law, disputes, intellectual property, and more, with unlimited access to specialist lawyers for a fixed monthly fee. To learn more about LegalVision’s legal membership, call 0808 196 8584 or visit our membership page.
Frequently Asked Questions
Will the law always protect my promises and agreements?
Not always. Sometimes, you need to meet specific formality requirements when forming a contract, and there are further requirements for different types of agreements. For example, you usually need a formal deed document to transfer a land right.
Are there specific types of contracts that must be in writing?
Yes, some contracts must be in writing to be valid, such as those transferring rights in land or shares. These types of contracts often have specific formal requirements that must be met.
Can performing an existing duty count as valid consideration?
Generally, no. Courts established in Stilk v Myrick [1809] that performing an existing duty does not constitute valid consideration. However, courts have shown flexibility in commercial contexts where a practical benefit is obtained, as demonstrated in Williams v Roffey Bros [1991].
What happens if you modify a contract without fresh consideration?
Without fresh consideration, contract modifications may not be legally enforceable. However, in commercial contexts, courts may uphold modifications where one party obtains a practical benefit from the change, even if no new consideration is formally provided.
Can a third party enforce a contract they were not part of?
Generally no, due to the doctrine of privity of contract – but the Contracts (Rights of Third Parties) Act 1999 allows a third party to enforce a term where the contract expressly permits it or where the term was clearly intended to benefit them and the parties did not exclude third-party enforcement.
Is a verbal promise to give someone a gift legally enforceable?
Generally, no. A one-sided promise to make a gift is called a gratuitous promise. It usually lacks consideration because the recipient gives nothing in return. Unless the promise is made by deed, the recipient usually cannot enforce it.
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