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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 the absence of consideration 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, as well as some of the 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 things that have value for a legally binding contract. It is one aspect of the contract forming process and is necessary for every new contract 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 have an intention to create legal relations. This means that if the agreement is not intended to be a legal one, a contract will not be formed.
It is worth remembering that not all contracts have to be made in writing. You can have a perfectly valid contract made orally as long as you have fulfilled the above requirements.
However, specific types of contracts do have to be made in writing. For example, a contract 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 usually easy to satisfy.
A detriment to yourself can also constitute consideration. For example, promising not to do something can be 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;
Finally, you should remember that consideration will exist even in a bad bargain. This means that as long as you promised to do something in exchange for something else, the court will not consider how ‘good’ of a deal it was.
What if There is No Consideration?
In some cases, you may not have consideration. This is not an issue if you make your contract in a formal deed document. 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 from the last example, if you went out and bought equipment relying on the other person to pay you, then 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, it is a good idea to seek professional legal advice from a lawyer specialising in contractual claims.
Key Takeaways
Consideration is an important 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, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions on the differences between a deed and an agreement. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
Valid consideration is where you give a practical benefit to the other person or you suffer a detriment yourself.
Not always. Sometimes, you need to meet certain 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 for transferring a right in land.
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