LECTURE 4

Consideration: Part 1

1. What is the element of consideration?

2. What are the core elements of consideration?
a. Must be bargained for;
i. Reliance no exception.
3. Adequacy of Consideration.
4. Sufficiency of Consideration:
a. Past consideration;
b. The existing legal duty rule:
i. General rule;
ii. Part payment of a debt.

1. What is the element of consideration?

• The element of consideration is the requirement that a contract be a bargain. When we

say “bargain” we mean it in the sense that there is an exchange between the parties of
promises - or - an exchange of a promise to do an act. Either of these exchanges are
required for an agreement to be considered a contract at law.
• One way to describe it is in terms of benefit and detriment given “in exchange for the
promise.” Another way to describe it is as “the price for which the promise of the other
is bought”. Both descriptions connote an element of bargain, which lies at the core of
the element of consideration.
• For there to be consideration, the promisee must promise or do something that is of
value in the eyes of the law. For example, if X promises to pay Y $10,000 to murder
someone, and Y murders that person, the fact that this is an illegal act means it is of no
value in the eyes of the law.
• Consideration can be executory or executed:

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 o If X promises to sell a book to Y and Y promises to pay $100, the consideration
for each promise is the other party’s promise. Both X and Y are simultaneously
promisor and promisee. The contract is formed by the exchange of promises,
even though neither party has performed their promise. This is a bilateral
contract. In this case the consideration is executory.
o If the agreement is an exchange of a promise for an act (e.g. X promises to pay Y
$100 if Y finds X’s cat), the contract comes into existence when Y finds the cat.
X’s promise is only enforceable when Y finds the cat. This is a unilateral contract.
B’s consideration is executed.

2. What are the core elements of consideration?

a. Must be bargained for

Whilst a unilateral contract eg: ‘if you marry X, I will pay you an income’ is a form of bargain
it is often difficult to distinguish between an (enforceable) unilateral contract and an
(unenforceable) gratuitous promise subject to a condition.

The key distinction is that a unilateral contract contains a requested benefit or burden but
the condition to which a gratuitous promise is subject is not requested by the promisor.

Example

A father promises his son a round-the-world ticket if he passes his exams. On the one hand,
this could be interpreted as a unilateral contract because the father requests that his son
passes in return for the promise of a round-the-world ticket. On the other hand, it could be
interpreted as a gratuitous (i.e. free) promise to buy a round-the-world ticket subject to a
condition, i.e. if the son passes.

The first interpretation seems to be the most natural because the father has an interest in his
son’s success and it would be odd if he intended to give his son the option of passing or failing;
rather, he is requesting good results and he is willing to bargain and pay for them.

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Compare to the position if the father promises to buy his son a round-the-world ticket if he
fails his exams. Again, this could be construed as a unilateral contract (‘if you fail I promise to
buy you a round the world ticket’) or as a gratuitous promise to buy a round the world ticket
conditional on a fail. The more natural interpretation in this situation would be the latter as
the father does not want his son to fail (the round the world ticket is perhaps a consolation
prize); there is no bargain and no unilateral contract. An important factor is therefore
whether the father is benefited by the request/condition.

So, no right to a round-the-world ticket if the promise is gratuitous. This may look unfair, not
because the ticket was bargained for (it was not) but because the son may have relied on the
gratuitous promise in deciding to take the exam in the first place. However, pure reliance is
not consideration and the son must show that he suffered a detriment (perhaps if he had
deferred a while he would have had a better chance of getting a better mark).

Taking this line of thought further, if the son may or may not take the exam, it could be that
you can imply a request from the father, not that the son should fail, but that he should take
the exam: ‘In return for taking the exam (as requested) I promise you a ticket should you fail.’
This would be an enforceable unilateral contract—compare with Carlill Carbolic Smoke Ball
Co. (in return for you buying my product as requested, I promise you £100 if you use it as
directed and still catch flu)—where the promise was supported by consideration, not because
the company requested that its customers catch flu (that would be ridiculous), but because
the company requested its customers to buy the product (the consideration) and promised
to pay them if they caught flu.

The following 2 cases are examples of how a gratuitous promise is not enforceable and pure
reliance is not an exception:

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Australian Woollen Mills Pty Ltd v Commonwealth

Facts:
• Govt implemented wool subsidy scheme whereby it would pay a subsidy to
manufacturers of wool who purchased and used it for local manufacture.
• The Plaintiff purchased and used wool for local manufacture and received some
payments.
• The Government subsequently stopped its subsidy scheme and the Plaintiff sued the
Government for subsidies it claimed it was due.
• The issue was whether the Plaintiff’s purchase (act not promise) was consideration for
the Govt’s promise to pay the subsidy (thereby making the promise binding).

Held:
• Court found the govt’s announcement of the subsidy scheme to be nothing more than a
conditional promise which could not be legally enforced – er go - no contract.
• The Court stated that in cases such as this (where an act performed is the offeree’s
consideration):
“… it is necessary, … that it should be made to appear that the statement or
announcement which is relied on as a promise [here - the subsidy statement] was really
offered as consideration for the doing of the act, and that the act [buying and using
the wool as directed] was really done in consideration of a potential promise inherent
in the statement or announcement.”
• There must be a relationship of quid pro quo between the statement and the Act.
• Here there was no promise offered in consideration of doing an act.
• Entitlement to the subsidy was merely conditional on buying the wool. The govt. didn’t
intend that the buying of the wool would be consideration for a promise to pay the
subsidy. In this respect the Court also noted that there was no offer or request or
invitation to purchase wool or anything else suggesting that.

This is a similar situation to the example referred to on p103 of the casebook:

“A, in Sydney, says to B in Melbourne: “I will pay you £1 000 on your arrival in Sydney.”
The next day B goes to Sydney. If these facts alone are proved, it is perfectly clear that

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 no contract binding A to pay £1 000 to B is established. For all that appears there may
be no relation whatever between A's statements and B's act. It is quite consistent with
the facts proved that B intended to go to Sydney anyhow, and that A is merely
announcing that, if and when B arrives in Sydney, he will make a gift to him. The
necessary relation is not shown to exist between the announcement and the act. Proof
of further facts, however, might suffice to establish a contract. For example, it might
be proved that A, on the day before the £1 000 was mentioned, had told B that it was
a matter of vital importance to him (A) that B should come to Sydney forthwith, and
that B objected that to go to Sydney at the moment might involve him in financial loss.
These further facts throw a different light on the statement on which B relies as an
offer accepted by his going to Sydney. They are not necessarily conclusive but it is now
possible to infer:
1. that the statement that £1 000 would be paid to B on arrival in Sydney was
intended as an offer of a promise;
2. that the promise was offered as the consideration for the doing of an act by B;
and
3. that the doing of the act was at once the acceptance of an offer and the providing
of an executed consideration for a promise.
The necessary connection or relation between the announcement and the act is
provided if the inference is drawn that A has requested B to go to Sydney.”

• So here – the Court could not find any evidence that indicated that the subsidy was put
forward to induce the manufacturer to purchase wool, or that they were related.

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b. Reliance no exception if no implied request in the promise

Beaton v McDivitt

Facts:
 The Defednat (McDivitt) promised to transfer a portion of his land to the Plaintiff (Beaton)
when a proposed rezoning occurred if, in the meantime, the Plaintiff worked the land in
a specified way.
 Beaton moved onto the land and worked it as required (including building a road to
access his house). Seven years later a dispute arose and Beaton was ordered off the
land.
 Held at first instance that there was no consideration as there was no bargain, but that a
contract did in fact exist based on a line of cases which provided an exception where the
Plaintiff’s acts of reliance were sufficient to give rise to a contract. However, the trial
judge found that the contract had been frustrated as no rezoning ever took place.
 Plaintiff appealed and argued that he relied on the promise and suffered detriment by
spending money on the land and that the Defendant benefited by gaining an element of
congeniality and having a neighbour of like horticultural practices.
 Defendant argued that the sole benefactor was the Plaintiff as he lived on the land rent
free for 7 years and the work he conducted was for his own benefit – therefore there was
no consideration. He also argued that no obligation arose due to the fact that rezoning
never occurred.

Held:
 There was consideration and therefore there was a contract but that contract was
brought to an end by the fact that it was frustrated.
 Judgement in favour of the Defendant.

Reasoning:
Kirby P (Decending):

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 No contract as no consideration. In return for the promise of transfer of title, the
promisor didn’t receive some sort of bargain from the promisee by way of quid pro quo.
 The expenditures and actions of the promisee were categorised as entirely for his own
benefit – free rent for 7 years and working the land benefited him. And whilst the
promisor got the element of congeniality and of having a neighbor of like horticultural
practices - that was not valuable consideration.
 There was no exception based on the concept of “reliance” as that goes against AWM.

McHugh JA:
 Agreed with Kirby that there is no exception to the bargain rule in cases involving
promises to make a gift where the promisee has acted to his detriment in reliance on the
promise.
 However, he found a contract to exist in this case. He refers to 3 possible scenarios where
a person promises or offers to transfer property to another:
1. Where there is a promise to transfer property subject to the occurrence of an
event or condition – NOT ENFORCEABLE even if the event or condition occurs.
 Gives an example of a promise to pay X $100 if a certain team wins a
football match.
2. Where there is a promise to transfer property, and after the promise is made, the
promisor allows the promisee to act to his detriment in reliance on the promise.
 In this scenario (depending on the circumstances), equity may prevent the
promisor insisting on his strict rights and may enforce the promise.
3. Where the promise contains an express or implied request by the promisor to do
an act or fulfil a condition. The performance of the act or the fulfilling of the
condition by the promisee in reliance on the promise will usually constitute
consideration and create a binding contract.
 Held that in this case, there was an offer by the Defendant which was intended to give
rise to an obligation upon the Plaintiff coming and working on the land. The
Defendant was concerned that rezoning would see an increase in rates which he
would not be able to afford. So he subdivided the land to set it up to allow transfers

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 should rezoning occur such that he would have the benefit of reduced rates. This was
his reason to request that the Plaintiff move on the land and work it.
 Accordingly, once the Plaintiff went on to the land and commenced to work, the offer
could not be withdrawn.
 The Plaintiff had suffered sufficient detriment to constitute consideration even though
he was obliged to work the land until the time of subdivision.
 Ultimately found that the contract wasn’t contingent on rezoning and had therefore
not been frustrated, meaning the Plaintiff could have the block transferred to him
conditional upon council consenting to subdivision.

Mahoney JJA:
 Agreed with McHugh that the Plaintiff had provided consideration but decided that
due to the rezoning not having taken place, the contract had been frustrated.
 Tests his theory that the contract was frustrated by applying a factual scenario - had
a bystander said to the parties, “but what if the rezoning does not take place?” they
would both have said that that being the case, the land could not be transferred.

3. Adequacy of consideration

 Consideration must only be sufficient, it need not be adequate. Consideration must

be a tangible benefit.
 The courts will not consider the comparative value of the consideration and the
promise or act in return for which it is given. It does not matter whether the value is
equal or even proportionate because a mere peppercorn should be enough.
 Reasons - Woolworths v Kelly
o Different people put different values on the bargains they are getting. For
example, to me, my Seinfeld boxset is worth far more than a diamond ring.
o Judges (usually past lawyers) may not have the expertise necessary to give an
opinion about whether a bargain is any good.
o To entertain disputes about adequacy would be to open up the flood gates in
terms of evidence.

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 o It would turn a relatively certain area of law into an uncertain area of law.
o Equitable and statutory relief is available for situations involving the adequacy of
a bargain where there is some wrong or moral fault involved.
o It protects economic freedom and voluntary exchanges.

4. Sufficiency of consideration

a. Past Consideration

 Past consideration is NOT sufficient consideration.

 If X gifts a service to Y and Y later promises to pay X for that service, Y's promise is not
enforceable.
 The service performed by X is past and cannot provide consideration supporting Y's
later promise.
 There is an exception to this general principle where a promise has been made to pay
for past services which were performed on the basis that they would be to be paid for.

Roscorla v Thomas

Facts:
 The plaintiff bought a horse from the defendant. After the sale was made, the
defendant promised the plaintiff that the horse was sound and free from vice.
 The plaintiff sought damages for breach of warranty, claiming the horse was not free
from vice, but was “very vicious, restive, ungovernable, and ferocious.”

Held:
 There was no consideration for the promise that the horse was sound. The only
consideration provided related to the sale of the horse, which preceded the
defendant’s promise.
 The post-sale promise was not part of the bargain - therefore it was not good
consideration.

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b. The existing legal duty rule

i. General rule

 Generally, promising to perform an existing contractual duty already owed is not good
consideration for an additional benefit.
 This is because one party cannot vary the contract just to benefit themselves without
providing any consideration.

TA Sundell & Sons Pty Ltd v Emm Yannoulatos (Overseas) Pty Ltd

Facts:
 The Defendants agreed to supply iron to the plaintiffs at specific price.
 Subsequently the defendants refused to deliver the goods unless the price was
increased due to an increase in the price of zinc.
 The plaintiffs paid the additional sum and the iron was delivered.
 The plaintiffs sued to recover the additional amount.

Held:
 The defendants gave no consideration for any promise the plaintiffs might have had
to make to pay the additional price.
 The only consideration suggested as being given in exchange for the alleged promise
(to pay the extra money) was that defendants would do what was necessary to ensure
that the goods were delivered, and they were already bound to do this under the
original contract.
 So the plaintiff’s promise to pay was not binding and they could get their money back.

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 ii. Part payment of a debt

 A consequence of the rule that a promise to perform an existing contractual duty is

no consideration is the rule in Pinnel's Case.
 The rule in Pinnel's case states that part payment of a debt is not sufficient
consideration for a promise to discharge the whole debt.
 For example - If a debtor owes a creditor $100, and the creditor promises to accept
$70 in full satisfaction of the debt, the creditor's promise is not enforceable because
the debtor has not provided any consideration for the creditor's promise to forgo the
balance of $30. The consequence is that the creditor can sue the debtor to recover
the balance.
 This has been described as “a most extraordinary peculiarity of the English Common
Law.” Why? Because when it comes to business, creditors recognise and act on the
ground that prompt payment of a lesser sum may be more beneficial to them than to
enforce payment of the whole sum – for example, where the credit of the debtor is
doubtful.
 The rule in Pinnel's case will not apply where part payment of a debt is accompanied
by some additional consideration from the debtor, even if that consideration is
nominal.

Foakes v Beer -

Facts:
 Beer obtained judgment against Foakes for £2,090 plus interest on judgment.
 A year later Beer agreed that if Foakes paid £500 immediately and £150 twice a year
until the judgment debt was paid, she wouldn’t enforce the debt in court.
 Foakes paid the £2,090 in full, but Beer sued for the interest on the judgment.
 The issue was whether Beer should be prevented by the agreement from enforcing
the judgement (that the amount paid include interest).

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Held:
 The agreement could only be enforced if there was consideration.
 The only consideration expressed was the payment of £500 plus payment of the
instalments – both of which were part of a larger debt already due.
 Therefore, that money could not be consideration and the agreement was not
enforceable, allowing Beer to recover the interest.

1. What are the core elements of consideration?

• Consideration:
– Must bargained for.
– Must move from the promisee.
– Must confer a benefit on the promisor or incur a detriment to the promisee.
– Must be sufficient.
– Must not be past consideration.
– Must not be a promise to perform an already existing contractual duty.

2. What is the bargain requirement? How can you tell whether it is satisfied?

There has to be quid pro quo. There must be a benefit conferred on the promisor or a
detriment suffered by the promisee.

 Benefit – might be reception of property or services (e.g. getting a car, money or

having your hair cut).
 Detriment – might be giving something up or undertaking an obligation (e.g. giving
away your car, your money or cutting someone’s hair).

The requirement will not be satisfied if there is a conditional gift as opposed to a contract –
AWM. That is, a promise must be made – for example - to pay someone $100 in return for
performance of an act. To pay someone $100 if they perform an act, this is a conditional gift.

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The requirement will not be satisfied if there is performance of an act in reliance of a promise
as opposed to it being in return for the promise.

3. Can a promise to do something constitute consideration?

Yes – a promise can constitute consideration - receiving a promise to receive such things in
the future also constitutes a benefit/detriment respectively.
Note that 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
someone).

4. How do you distinguish between a contract and a conditional gift?

AWM. A promise to pay someone $100 to fly to Sydney is a conditional gift. A promise to
pay someone $100 in return for them flying to Sydney is a contract.

5. Must consideration be of benefit to the other party?

Yes - Beaton v McDivitt.

6. Do courts enquire into the adequacy of consideration? What is the rationale behind
this? Are there any exceptions to the general rule?

No – Woolworths v Kelly - 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

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  Economic efficiency is promoted through voluntary exchanges.

An exception to the general rule exists when the Courts are reviewing whether a party has
acted unfairly. Statute and Equity may provide relief.

7. Under contract law, can detrimental reliance constitute consideration?

NO – 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) - Beaton v McDivitt.

8. What is a deed, and how are deeds relevant to this topic?

It is an agreement recorded in a particular form, which traditionally involved sealing and

delivery, although the common law requirements have been modified by statute in most
Australian jurisdictions.

The solemnity of that form is recognised by the courts as a justification for enforcing a
promise in the absence of consideration.

Deeds are commonly used in Australia to ensure the enforceability of promises where there
is some doubt as to whether consideration is being provided by the promisee.

9. What is the existing legal duty rule?

A promise to perform (or the actual performance) of an already existing legal duty cannot
constitute sufficient consideration.

Every new promise must be accompanied by fresh consideration

For example: X undertakes to mow Y’s lawn, for $50. After the contract has been made, X
wants an additional benefit (more money, $70) to finish the performance. Y agrees. Despite

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this, he/she is not obliged to give that extra benefit, as X did not undertake to do anything
he/she did not already have an existing legal duty to do.

The Existing Legal Duty Rule is often criticised because it doesn’t accommodate for common
business situation – eg - Pinnel’s rule.

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