Summary
- Consideration is a essential element of a valid contract under English law, requiring an exchange of something of value — whether a benefit to the other party or a detriment to yourself — for an agreement to be legally enforceable.
- A valid contract requires four elements: an offer, acceptance, valid consideration, and an intention to create legal relations; without all four, the agreement may not be enforceable in court.
- Where consideration is absent, a formal deed document can remedy this, and in some circumstances English common law may offer protection where a party has relied on a promise to their detriment.
- This article is a guide to consideration and contract formation for small business owners operating under English law, produced by LegalVision, a commercial law firm.
- LegalVision specialises in advising clients on contract law and commercial agreements.
Tips for Businesses
Ensure every contract includes a clear exchange of value to satisfy the consideration requirement. Where modifying an existing contract, document any fresh consideration to make the changes enforceable. If consideration may be absent, consider executing the agreement as a formal deed to preserve its legal validity.
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. A contract will not be formed if the agreement is not intended to be legal.
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.
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.
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; 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.
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.
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
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.
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.
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].
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.
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