Consideration is a concept of English common law where a promise of something of value is given in exchange for something of value. It is a necessity for simple contracts but not for special contracts (contracts by deed). The concept has been adopted by other common law jurisdictions. It is commonly referred to as one of the six or seven elements of a contract.
The House of Lords in Currie v MisaCurrie v Misa (1875) LR 10 Ex 893 declared consideration to be a "Right, Interest, Profit, Benefit, or Forbearance, Detriment, Loss, Responsibility". 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 if one is thereby surrendering a legal right.Wade v Simeon (1846) 2 CB 548White v Bluett (1853) 2 WR 75Bronaugh R. (1976). Agreement, Mistake, and Objectivity in the Bargain Theory of Conflict. William & Mary Law Review.
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. Consideration may be a good, service, or agreement to do or not do anything stipulated. It is essential that the consideration promised be worth something in value in order for a valid contract to be made.
As an element or a prerequisite In common law, consideration is a prerequisite that both parties offer before a contract can be regarded 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 no element of consideration is found, no contract has been formed.
However, even if a court decides there is no contract, recovery may be possible under the doctrines of quantum meruit (sometimes referred to as a quasi-contract) or promissory estoppel.
Legal rules regarding consideration A number of common issues arise in determining whether consideration exists in a contract. Under English law consideration: cannot be illusory. must move from the promisee but need not flow to the promisor.Tweddle v Atkinson, (1861) 1 B&S 393 must be sufficient but need not be adequate.De la Bere v Pearson 1 KB 280Chappell v Nestlés AC 87The Atlantic Baron QB 705 (aka North Ocean Shipping v Hyundai Construction) must be whole. Part payment is not good consideration.Pinnel's Case (1602) 5 Co Rep 117aJorden v Money (1854) 5 HLC 185 must not be past. Past consideration is not good consideration.Roscorla v Thomas (1842) 3 QB 234Re McArdle Ch 669Lampleigh v Braithwaite (1615) Hob 105Kennedy v Broun (1863) 13 CB (NS) 677Re Casey's Patents (aka Stewart v Casey) 1 Ch 104Pao On v Lau Yiu Long AC 614 (PC)
Moral consideration is not sufficient (except for contracts by deed, where "love and affection" is often cited as the [unnecessary] consideration). Nor is performance of existing duties.Stilk v Myrick (1809), 2 Camp 317Hartley v Ponsonby (1857) 7 E&B 872Glasbrook Bros v Glamorgan CC AC 270Williams v Roffey 2 WLR 1153
Indian Contract Act Under the Indian Contract Act, 1872, still in force in Pakistan, Bangladesh, and India, valid consideration must satisfy the following criteria to generate a contractual obligation: It must move at the desire of the promisor. Consideration may move from the promisee or any other person. Consideration must be an act, abstinence or forbearance or a returned promise. Consideration may be past, present or future. Consideration must be real. Consideration must be something which the promisor is not already bound to do. Consideration need not be adequate.
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 It is contrary 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 those of GermanyGerman Civil Code § 311, accessed 15 July 2017 and Scotland) do not require consideration, and some commentators consider it unnecessary and have suggested that the doctrine of consideration should be abandoned as a basis for contracts,See: Harvey McGregor's Contract Code and estoppel used to replace it.e.g. P.S. Atiyah, 'Consideration: A Restatement' in Essays on Contract (1986) p.195, Oxford University Press However, legislation, rather than judicial development, has been touted as the only way to remove this entrenched common law doctrine. According to Lord Justice Denning in 1947, "The doctrine of consideration is too firmly fixed to be overthrown by a side-wind".Central London Property Trust Ltd. v. High Trees House Ltd. KB 130
The reason that opposite holdings on the necessity of consideration exist in common law jurisdictions is thought to stem from 19th-century judges combining two distinct legal threads: first the consideration requirement was at the heart of the action of assumpsit,For a detailed and authoritative account of this process, see A. W. B. Simpson, A History of the Common Law of Contract: The Rise of the Action of Assumpsit, (Oxford University Press: Oxford, 1975). 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 theories of will of the time, especially John Stuart Mill's influential ideas on free will, and was 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. 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 their mind about giving it to B as a gift. However, in common law systems the concept of culpa in contrahendo, a form of estoppel – 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 –, is increasingly used to create obligations during pre-contractual negotiations.Austotel v Franklins (1989) 16 NSWLR 582.
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.Thomas v Thomas (1842). 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 $100 to buy B's mansion, there is still consideration on both sides. A's consideration is $100, and B's consideration is the mansion. Courts in the United States generally leave parties to their own contracts and do not intervene. A parallel in English common law is the value of a peppercorn being given by one party to the other, treated as sufficient consideration if it is agreed to by both. In the United States, contracts often stipulate a nominal amount of consideration passing between parties, typically $1. Thus, licensing contracts are often written, "for the sum of $1 and other good and valuable consideration."
However, some courts in the United States, typically at the state level, take issue with consideration holding virtually no value, regarding it as a sham. A promise of $1 to another in compensation is held to be an insufficient legal duty, and therefore an inadequate basis for forming a contract. This is, however, 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..Wigan v Edwards (1973) 1 ALR 497. That legal duty can arise from law, or obligation under a previous contract.
The prime example of this sub-issue is in Hamer v. Sidway (1891) 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 settlements, such as an accord and satisfaction. 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 depend largely on state law. Generally, at-will employment 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.