Consideration: Contract Law (meaning, types & purpose)

contract law to consider (meaning, types & purpose)

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What is Contract Law Consideration?

In contract law, the term “consideration” refers to anything that is valuable in the eyes of the law.


In order for a contract to be legally binding, it must have an essential ingredient.

“Consideration must travel from the promisee,” as the saying goes in contract law.

To emphasize the nuance of this statement:

There must be a promisor if there is a “promisee.”

The promisor has already made a promise to the promisee, which is enough to constitute a contract (although it hasn’t yet).

The promisee must repay the promisor by making a promise.

When the promisee agrees to perform something in exchange for payment (which does not have to be supplied to the promisor), a legally enforceable contract is established, if the other requirements are fulfilled.


Consideration Types

A pledge, or consideration, may be as follows:

a promise to do anything, such as: transfer property ownership, such as intellectual property, a vehicle, or a home

make a piece of art build software

award an intellectual property rights license

make a payment

a pledge not to do anything (sometimes called a restricted covenant):

not work for another employer of the same kind for a period of time after your current job ends.

property not to be built over a certain height

not purchase stock in another company

a pledge to pay the other contractual party or someone else money

One of two forms of consideration exists:

When a promise has been fulfilled within the scope of the contract, it is called executed; otherwise, it is called executory.


Consideration is sufficient

Consideration might be very little, such as £1.00.

Courts will search for compensation for a commitment rather than assess the contract’s business merits, hence contracts backed by little consideration are enforceable.

Courts are wary of interfering with contracts entered freely between contractual parties.
It is adequate whether the promises are to be fulfilled at a later period or at the moment the contract is created.

The law searches for some economic worth, no matter how little.

As a result, although consideration may be insufficient from a business standpoint, it is sufficient for legal purposes:

It’s “enough,” and it’s enough to constitute a legally enforceable contract.


What does contractual consideration serve?

The principle of reciprocity of consideration is fundamental to contract law.

For each party entering into a contract, the exchange of consideration produces a benefit and a burden.

The burden of the other party is the consideration, which is the advantage of the contract for one party (say, getting money) (say, paying money).

The contract cannot be legally binding unless each party to the deal gives it due attention.

As a result, gratuities are not legally enforceable.
This is an example of a gratuity:

Someone offers to pay you ten pounds.

In response, you make no offer to help.

It’s a pointless promise.
One person (you) pledges to do something, whereas the other (the other) does not.
The pledge to pay the £10 isn’t legally binding.

“The offer to pay the £10 is not backed by consideration,” or consider does not move from the promisee, to use legal terminology.

There is no contract since neither party has offered any consideration.

Deeds are an exception to the necessity for consideration.

The use of a Deed is an exception to this rule.


Written contracts must specify that they are a Deed and that both parties have “signed, sealed, and delivered” it.

Those terms have a technical meaning that we won’t go into here, and they don’t have to be backed up by money to be legally binding. They also have additional conditions that prevent them from being exploited.

Let’s set aside that exception to the general norm.

What is the minimum amount of consideration necessary to make a legally enforceable contract?


Consideration’s Most Important Characteristic

To construct a contract, there must be an important attribute of consideration.

There are three sorts of considerations described above:

a commitment to action

a vow to refrain from doing something and a promise to pay money

Another need exists.

Fresh thought must be taken into account.

What exactly is new consideration?

It’s the thought that hasn’t:

One party has already committed to offer, furnish, or deliver something, while the other side has already agreed to do so.

Allow me to explain.

When a contract is signed, the following options are available:

The term “executed consideration” refers to payment made by the person that promised it.

For example, executed consideration is money that has been promised to be paid under a contract that has been paid.

The term “executive consideration” refers to money that has been promised but not yet delivered to the other party.

It might be things or services that have yet to be delivered.
It might be money that was supposed to be paid but wasn’t.

So, when is this crucial trait of original thought missing?


Absence of a new perspective

1. Previous Consideration:

A commitment to perform something that the contractual parties have previously agreed to do cannot be considered “fresh” consideration when the contracting parties have already agreed to do it.

It is past consideration, not consideration granted at the time of the contract’s establishment.
For example, a previous customer of goods who paid £10.
It is insufficient compensation for the provision of new commodities in order to create a new contract.

2. Existing Obligation or Responsibility:
Similarly, if a party is already compelled to do anything by law, it cannot be considered again.
These are the most common types:
a contractual duty that already exists

A pledge to fulfill an existing contractual obligation is something that the person is already legally obligated to accomplish.

However, if a party agrees to do better than the criteria, that may be enough.

However, the new consideration must be voluntarily given and not threatened, and the receiving party benefits from a higher level of performance under the previous contract.
an obligation imposed by general law, such as the execution of a public duty or a statutory responsibility

Companies, for example, are obliged to submit tax filings.
Assume a corporation promises to submit its tax return in exchange for receiving items from a supplier.

Filing a tax return isn’t a solid basis for forming a contract.

However, if the given compensation surpasses the duty’s standards, it may be sufficient to constitute a contract.

Employment Contracts, for example.
Employers often request that workers sign an updated version of their employment contracts.
The amended contract is almost always on worse terms than the original.

Where has the new thought gone?
If the employer refuses to accept the new version, the modification (legally known as a “purported variation”) is unlikely to be legitimate or enforceable.
It may constitute a repudiatory breach of contract or constructive dismissal if an employer insists on performing under the new contract, which may include a wage cut or less favorable working circumstances.

Also, a clause in an employment contract may state that the contract may be changed without the employee’s agreement.
That is a separate legal issue.
The solution is dependent on a large number of moving elements, which we will not discuss here.

3. Economic value is lacking or absent:

Gratuitous pledges, benevolent contributions, or emotional or moral commitments are all examples of informal gratuitous promises.

In the sense that it has economic worth, consideration must be genuine or adequate.

4. Debt Repayment in Part:

A commitment to pay a portion of a debt is insufficient consideration for a bigger obligation to be discharged.
This is due to the fact that there is no new consideration for the payment of a lower quantity of money.

The idea is well-established, having been drawn from Foakes v Beer (1884).

The following is an explanation of the principle:

“It is a well-established principle that a promise to pay an amount to the promisee that the debtor is already legally obligated to pay does not provide any consideration to sustain the contract.”

St. Edmunds Properties Ltd v Vanbergen (1933)

D & C Builders Ltd v Rees: Foakes v Beer “established definitively the rule of law that payment of a smaller sum than the amount of a debt owed cannot constitute a settlement of the obligation unless there is some advantage to the creditor added so that there is an agreement and satisfaction” (1966)

As a result, a creditor has the right to sue the debtor for the rest of the obligation once the lower amount has been paid.

Debt repayment in part

However, there may be new consideration where:

The debt is dismissed once an early payment is made and the creditor provides new consideration.
Consider the case below.

Part payment was paid on the due day at a separate location, at the creditor’s request and for the creditor’s convenience.

The debtor gives ownership of an asset worth less than the amount owing to the creditor in exchange for the creditor’s assurance that the debt would be dismissed.

Because the debtor is bankrupt, the creditor agrees to take a lower payment to discharge the whole obligation.

In return for a guarantee to discharge the obligation, the creditor agrees to accept a lower amount from a third party.

When lesser payments are paired with mutual releases to relieve each other from legal claims that a debtor and creditor may have against each other, the mutual releases may:

Illegal Preference

Contracts cannot be enforced if the consideration provided by one of the parties is illegitimate.

Illegal Consideration Types

Unlawful considerations include: undertaking an illegal conduct, such as:

committing a crime, such as giving false testimony in court, manipulating stock market prices, or insider trading, setting or maintaining pricing levels – price fixing – in violation of competition law, rendering a service in exchange for a bribe (whether it’s termed a bribe or not)

a restrictive covenant that is essentially a legal limitation on commerce

A public official, such as a member of a local council, is compensated for something that is expected of them as part of their job.

On the other hand, the unlawful consideration might be a promise not to do anything that a party is legally required to do, such as pay taxes or follow a statutory regulatory requirement.

For instance:

One contracting party guarantees £10 if a witness gives false testimony in court.

By validating a witness statement with a statement of truth or in the witness box, the witness commits to deliver false evidence to the court.

Let’s ignore the fact that doing so would constitute perjury and would very certainly result in both parties being imprisoned.
It is (obviously) criminal to contemplate giving false evidence.

The agreement struck, whether written or not, is not backed up by contemplation.

For at least two reasons, there is no contract:

There is no (legal) consideration for the payment, hence the contract is illegitimate.

Do you have an issue with a business contract that you can’t seem to resolve?
Is a technical aspect of contract law preventing you from accomplishing your goals?

We’re business lawyers that specialize in the drafting and enforcement of commercial contracts.

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