Consideration


Consideration is a concept of English common law and is a necessity for simple contracts but not for special contracts. 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 court in Currie v Misa declared consideration to be a "Right, Interest, Profit, Benefit, or Forbearance, Detriment, Loss, Responsibility". Thus, consideration is a promise of something of value given by a promissor in exchange for something of value given by a promisee; and 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.
Consideration may be thought of as the concept of value offered and accepted by people or organisations entering into contracts. 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.
Additionally, if A signs a contract with B such that A will paint B's house for $500, A's consideration is the service of painting B's house, and B's consideration is $500 paid to A. Further if A signs a contract with B such that A will not repaint his own house in any other colour than white, and B will pay A $500 per year to keep this deal up, there is also a consideration. Although A did not promise to affirmatively do anything, A did promise not to do something that he was allowed to do, and so A did pass consideration. A's consideration to B is the forbearance in painting his own house in a colour other than white, and B's consideration to A is $500 per year. Conversely, if A signs a contract to buy a car from B for $0, B's consideration is still the car, but A is giving no consideration, and so there is no valid contract. However, if B still gives the title to the car to A, then B cannot take the car back, since, while it may not be a valid contract, it is a valid gift.

As an element or a prerequisite

In common law it is a prerequisite that both parties offer consideration before a contract can be thought of 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 there is no element of consideration found, there is thus no contract formed.
However, even if a court decides there is no contract, there might be a possible recovery under the doctrines of quantum meruit or promissory estoppel.
As an element of a contract, it often comes after an offer and an accept, and sometimes after bargaining.

Legal rules regarding consideration

There are a number of common issues as to whether consideration exists in a contract. Under English law:
  1. Part payment is not good consideration.
  2. Consideration must move from the promisee but need not flow to the promisor.
  3. Consideration must be sufficient but need not be adequate.
  4. Consideration cannot be illusory.
  5. Consideration must not be past. Past consideration is not good consideration.
  6. Moral consideration is not sufficient.
  7. Performance of existing duties is not good consideration.
Meanwhile, the Indian Contract Act, 1872 which continues in force in Pakistan, Bangladesh, and India provides that valid consideration exists "when at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or abstain from doing something" or, in other words, when each party receives something in return for entering into a contractual obligation. An agreement must be supported by a lawful consideration on both sides. Under the act, valid consideration must satisfy the following criteria:
  • It must move at the desire of the promisor. An act constituting consideration must have been done at the desire or request of the promisor. If it is done at the instance of a third party or without the desire of the promisor, it will not be good consideration. For example, A saves B's goods from a fire without B asking him to do so; A cannot demand payment for his service.
  • Consideration may move from the promisee or any other person. Under Indian law, consideration may be from the promisee of any other person i.e., even a stranger. This means that as long as there is consideration for the promisee, it is immaterial who has furnished it.
  • Consideration must be an act, abstinence or forbearance or a returned promise.
  • Consideration may be past, present or future. Past consideration is not consideration according to English law. However it is a consideration as per Indian law. Example of past consideration is, A renders some service to B at latter's desire. After a month B promises to compensate A for service rendered to him earlier. When consideration is given simultaneously with promise, it is said to be present consideration. For example, A receives Rs.50/- in return for which he promises to deliver certain goods to B. The money A receives is the present consideration. When consideration to one party to other is to pass subsequently to the maker of the contract, is said to be future consideration. For example. A promises to deliver certain goods to B after a week. B promises to pay the price after a fortnight, such consideration is future.
  • Consideration must be real. Consideration must be real, competent and having some value in the eyes of law. For example, A promises to restore life to B's dead wife, if B pays him Rs.1000/—. A's promise is physically impossible to perform, hence there is no real consideration.
  • Consideration must be something which the promisor is not already bound to do. A promise to do something what one is already bound to do, either by law, is not a good consideration, since it adds nothing to the previous existing legal consideration.
  • Consideration need not be adequate. Consideration need not necessarily be equal in value to something given. So long as consideration exists, the courts are not concerned as to adequacy, provided it is for some value.
Additionally, under the Indian Contract Act 1872, any consideration is invalid if it is:
  1. Forbidden by law
  2. It involves injury to a person or property of another
  3. Courts regards it as immoral
  4. It is of such nature that, if permitted, it would defeat the provisions of any law
  5. It is fraudulent, or involves or implies injury to the person or property of another
  6. It is contrary to public policy
  7. The consideration conveyed by at least one side seeks to restrain legal proceedings
  8. The consideration includes public offices or titles
  9. The consideration involves involuntary labour or otherwise infringes upon the personal liberty of a party to the contract
  10. 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 do not require consideration, and some commentators consider it unnecessary and have suggested that the doctrine of consideration should be abandoned, and estoppel used to replace it as a basis for contracts. However, legislation, rather than judicial development, has been touted as the only way to remove this entrenched common law doctrine. Lord Justice Denning famously stated that "The doctrine of consideration is too firmly fixed to be overthrown by a side-wind".
The reason that both exist in common law jurisdictions is thought by leading scholars to be the result of the combining by 19th-century judges of two distinct threads: first the consideration requirement was at the heart of the action of assumpsit, 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 by English judges and jurists. The latter chimed well with the fashionable will theories of the time, especially John Stuart Mill's influential ideas on free will, and got 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. So 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 her mind about giving it to B as a gift. However, in common law systems the concept of culpa in contrahendo, a form of estoppel, is increasingly used to create obligations during pre-contractual negotiations. Estoppel is 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.

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 party. 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 $200 to buy B's mansion, luxury sports car, and private jet, there is still consideration on both sides. A's consideration is $200, and B's consideration is the mansion, car, and jet. Courts in the United States generally leave parties to their own contracts and do not intervene. The old English rule of consideration questioned whether a party gave the value of a peppercorn to the other party. As a result, contracts in the United States have sometimes have had one party pass nominal amounts of consideration, typically citing $1. Thus, licensing contracts that do not involve any money at all often cite as consideration, "for the sum of $1 and other good and valuable consideration."
However, some courts in the United States may take issue with nominal consideration, or consideration with virtually no value. Some courts have since thought this was a sham. Since contract disputes are typically resolved in state court, some state courts have found that merely providing $1 to another is not a sufficiently legal duty, and therefore no legal consideration passes in these kinds of deals, and consequently, no contract is formed. However, this is a minority position.