Consideration

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This article is a topic within the subject Principles of Private Law.

Contents

Required Reading

Paterson, Robertson & Duke, Principles of Contract Law (Lawbook Co, 3rd ed, 2009), pp. 73-0- (chapter 4).

Introduction

The court examines consideration in order to decide which promises should be enforced.

The consideration requirement entails that “something must be given in return for a promise in order to make it binding[1]”. Namely, a person seeking to enforce a promise must show that he has given consideration for that promise.

  • Example: A has made a promise which B wishes to enforce (paint a house).
  • If B wants to enforce that promise, he must have shown that he has given ‘consideration’ for that promise, for example, $200.
  • Promisor – person making a promise
  • Promisee – person seeking to enforce a promise
  • Nudum Pactum – a naked agreement (no consideration on either side, unenforceable)

Essential Elements of Consideration

[2]Consideration must be regarded by the law as ‘valuable’, and as given in return for (or the agreed price of) the promise. The two tests for validating consideration are known as “the benefit/detriment’ requirement and the ‘bargain’ requirement.

Benefit/Detriment

Valuable consideration “must constitute of a detriment to the Promisee or a benefit to the Promisor[3]”. This was discussed in Currie v Misa[4]

  • Benefit – reception of property or services (e.g. getting a car, money or having your house painted)
  • Detriment – giving something up or undertaking an obligation (e.g. giving away your car, your money or painting someone’s house)
  • A Promise can also constitute consideration - receiving a ‘promise’ to receive such things in the future also constitutes a benefit/detriment respectively.
    • When a promise is given as consideration for a promise, it’s technically a paradox, as a promise is only enforceable after consideration – however this is only academic and promises do constitute consideration by law.
  • A promise not to do something is also consideration (e.g. not to trade in competition with A)
  • In most cases, consideration works both ways – both a benefit to the Promisor and detriment to the Promisee.

Bargain

[5]The Benefit/Detriment must be given specifically in return for the promise or as the agreed price for the promise. This is called the relationship of quid pro quo (this for that), which means there needs to be an exchange. This requirement was discussed in Australian Woollen Mills Pty Ltd v Commonwealth:

  • AWM bought wool and then said that was the consideration to enforce the Commonwealth’s promise to pay subsidies.
  • This satisfies Benefit/Detriment requirement, however did not satisfy Bargain requirement – AWM did not buy the wool either “at the request” of the Commonwealth, or “in return” for the promise.
  • “…the statements made by the Commonwealth were in the nature of policy announcements and no request to purchase wool could be implied[6]”.
  • Therefore, the act of buying wool was not in return for a request or promise, and therefore failed the bargain requirement and therefore could constitute consideration.

Bargains and conditional gifts

[7]Australian Woollen Mills Pty Ltd v Commonwealth demonstrated the concept of a conditional gift.

  • A conditional gift is a promise to give something if the Promisee performs a specific act.
  • This is to be distinguished for giving something in return for an act, which would constitute a contract.
  • Lacking the necessary relationship of quid pro quo, merely a declaration of intention to give a gift.

Bargains and reliance

[8]There is a difference between an act performed in reliance on a promise, rather than as the agreed price for a promise. An act performed in reliance will not constitute consideration (however, may give rise to an Estoppel). This was held in Beaton v McDivitt.

Consideration must move away from the Promisee

[9]Consideration does not have to reach the Promisor, but must leave or move away from the Promisee. This is especially relevant in joint-Promisee situations (a situation in which the party who receives the benefit from the Promisee, is not the one who performs the act).

Joint Promisees

[10]When there are joint Promisees, consideration may be given by one on behalf of both. However, a joint-Promisee must:

  • be a party to the contract
  • be regarded as ‘joint Promisee’ and not just a party to the contract.

This was discussed and established in Coulls v Bagot’s Executor and Trustee Co Ltd and Trident General Insurance Co Ltd v McNiece Bros Pty Ltd.

Sufficiency of Consideration

[11]Consideration must be sufficient, but not necessarily adequate. This means it must be something of value. However, consideration doesn’t need to be proportionate value to the promise. This is because:

  • The courts can’t ascertain the value each person places on each consideration/promise.
  • Requirements of adequacy would create difficulties and make enforceability uncertain.
  • This stance promotes economic freedom
    • Economic efficiency is promoted through voluntary exchanges.

Rather, the courts only ensure that a bargain has been made. This means that nominal consideration (i.e., $1 for a house) is legal, which means parties can avoid real consideration.

Sometimes, courts take into account inadequate consideration when reviewing whether a party has acted unfairly.

Discretion as to performance

[12]If a party is not specifically bound to perform, or retains an unfettered discretion as to performance, it will not constitute consideration and will be counted as illusory consideration.

In other words, if the one party has the option to choose the extent to which he carries out the promise, it is not consideration and there is no contract. This was established in Placer Development Ltd v Commonwealth.

Past consideration

[13]Past consideration is not sufficient. If something was given before the promise, it is therefore not a part of the promise (not in return for) and is not consideration.

  • Example: A gives B an Xbox. Afterwards B says he will pay him $200. A cannot enforce this promise on the basis that the Xbox was consideration and therefore there was a contract. The Xbox was past consideration and was given ‘gratuitously’ and not “in return” for the $200.

This is also demonstrated in Roscorla v Thomas[14]:

  • Thomas buys horse off Roscorla.
  • After the transaction, Roscorla promises that the horse will be well behaved.
  • The horse turns out to be ferocious.
  • Thomas cannot sue Roscorla for breach of contract, because the promise that the horse is well behaved had no consideration (was made after the contract), and therefore there was no a contract.

Executed Consideration

[15]This is a promise to pay for a service after the service has been performed

  • Example: a promise to pay $50 for whoever finds a dog. When the dog is found and returned, that is executed consideration, and now the promise to pay is executory.
  • The request to find the dog gave rise to a unilateral contract, where the Promisee returns the dog in return for $50.
  • Obviously, he can only receive his benefit after he performs the service; therefore it is a executed consideration.

Promise to pay for past services

[16]A promise to pay for past services is when services are performed at a request, with the implied understanding or even with a subsequent promise that they will be paid for later. In this case, the performance of the services is considered ‘executed consideration’, and will constitute good consideration for the promise to pay for them. The performance of the services and the promise to pay for them are treated as part of the same transaction.

This is seen as an exception to the past-consideration rule, and is often called the Lampleigh rule, after Lampleigh v Braithwait where it was established.

In the present, the rule only covers situations in which there was an understanding throughout the transaction that the services were to be paid for. This was decided in Re Casey’s Patents: Stewart v Casey[17].

The Existing Legal Duty Rule

The General Rule

[18]A promise to perform or the actual performance an already existing legal duty cannot constitute sufficient consideration. It is an illusory consideration. Every new promise must be accompanied by fresh consideration

  • Example: A undertakes to paint a house for B, for $1000. After the contract has been made, A wants additional benefit (more money, $5000) to finish the performance. B agrees. Despite the fact that B agreed, B is not obliged to give that extra benefit, as A did not undertake to do anything it did not already have an existing legal duty to do.
    • We label A the Beneficiary as it simply benefits from the new promise and does not undertake any extra obligations it was not already bound to perform.
    • We label B the Modifying Party as it has to modify its own consideration and incur further detriment.
  • The Beneficiary’s promise to perform the already undertaken obligation does not constitute consideration, and therefore the second contract does not exist.

This was decided in cases such as Wigan v Edwards[19] and Stilk v Myrick[20], and extends to public duties (e.g. giving evidence after being subpoenaed).

The Exiting Legal Duty Rule is often criticised because it doesn’t accommodate for common business situations.

Wigan v Edwards & Stilk v Myrick -

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Exceptions to the existing legal duty rule

The rule will not apply when:

  1. The Beneficiary supplies new (fresh) consideration (do something more than he undertook originally)[21].
    • This means rule can be circumvented by a nominal fresh consideration.
  2. The beneficiary’s promise to perform entails a practical benefit to the Modifying Party[22].
  3. Where the promise to perform the existing duty is made to a third party[25] .
    • Because the Promisor undertakes further obligations, and gives a new benefit to the new Promisee (the third party).
  4. A promise made by way of a bona fide compromise[26].
    • This means that the Promisor has a legal right not to consider themselves bound to perform their consideration, and that this claim was honestly made.
  5. The original contract is terminated and a new one is entered[27].
    • Only applies when agreement is terminated and replaced, not modified.
    • Promises are now seen as new promises

Williams v Roffey Bros & Nichols (contractors) Ltd & NSW - Musumeci v Winnadell Pty Ltd -

Sorry! This section is still incomplete. If you wish to help us, please click here.


Part-payment of a debt (Pinnel’s rule)

[28]A part-payment of the consideration does not constitute sufficient consideration.

  • Example: paying $50 of $100 debt, painting two rooms out of the whole house.
  • Once again, this becomes a beneficiary/Modifying Party relationship. Even if there was a subsequent agreement that part-payment is the new consideration for the promise, it is an existing legal duty and therefore an illusory consideration.
  • The Modifying Party is entitled to recover the remainder of the debt.

There is an absurd rule that while a lesser or partial sum of money cannot be accepted as sufficient consideration, a ‘gift’ could be.

  • Therefore $99 for a $100 debt could not be sufficient consideration, yet a paperclip could. This is consistent with the nominal consideration principal.

However, in practice, partial payment is accepted and regulated through the use of a deed or:

  • Through payment on an earlier due date or payment in a different form
  • Payment by a third party
  • ‘Forgoing’ of the debt.

Criticisms of Consideration

[29]Consideration is viewed by some as a useless thing these days.

  • Requirement that the parties have an intention to make a contract would serve the law better than consideration
  • Consideration is a redundant limitation on the liberty of promising.
  • A freely made promise that causes detriment to the Promisee should be deliberated by the courts.

Promises under Seal

[30]If a promise is made under seal, it does not need consideration to be enforced.

  • Known as a deed.
  • The solemnity of the process provides rationale for enforcing the promise.

References

Textbook refers to Paterson, Robertson & Duke, Principles of Contract Law (Lawbook Co, 3rd ed, 2009)

  1. Textbook, p. 73 [4.05]
  2. Textbook, p. 74 [4.15]
  3. Textbook, p. 74 [4.20]
  4. (1875) LR 10 Ex 153
  5. Textbook, p. 75 [4.25]
  6. Textbook, p. 75 [4.25]
  7. Textbook, p. 76 [4.30]
  8. Textbook, pp. 76-77 [4.35]
  9. Textbook, pp. 77-78 [4.40]
  10. Textbook, pp. 77-78 [4.40]
  11. Textbook, p. 79 [4.45]
  12. Textbook, pp. 79-80 [4.50]
  13. Textbook, p. 80 [4.55]
  14. (1842) 3 QB 234; 11 ER 496
  15. Textbook, p. 80 [4.55]
  16. Textbook, pp. 80-81 [4.60]
  17. [1892] 1 Ch 104
  18. Textbook, pp. 81-82 [4.65]
  19. (1973) 1 ALR 497
  20. (1809) 2 Camp 317; 170 ER 1168
  21. Textbook, p. 84 [4.80]
  22. Textbook, pp. 84-5 [4.85]
  23. [1991] 1 QB 1
  24. (1994) 34 NSWLR 723
  25. Textbook, pp. 86-7 [4.95]
  26. Textbook, p. 87 [4.100]
  27. Textbook, p. 88 [4.105]
  28. Textbook, pp. 82-83 [4.70]
  29. Textbook, p. 88 [4.110]
  30. Textbook, p. 90 [4.120]
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