Introduction to Law 

Contract 5

Consideration

 Learning Objectives 
 Quick Review
 The requirement of consideration
 Definition of consideration
 Types of consideration
 Other rules for consideration
 Privity of Contract

 Quick Review 
 A contract is a legally binding agreement
 In order to create a valid contract which is legally enforceable, there must
be an offer and an acceptance

 Requirement of Consideration 
 In addition to an offer and acceptance, we also need consideration in
order to create a contract
 Only contracts made by deed do not require consideration

 Definition 
 Consideration was defined in Currie v. Misa (1875) as
 “Some right, interest, profit or benefit accruing to one party, or some
forbearance, detriment, loss or responsibility given, suffered or undertaken
by the other”

 Definition (cont.) 
 Basically, one party benefits in some way or the other party is responsible
for doing something (or both)
 Paying (or promising to pay) money in return for the goods or services is
the most common form of consideration

 Types of Consideration 
 Executory Consideration
 Executed Consideration
 Past Consideration
 Forbearance

 Executory Consideration 
 This is where parties exchange promises to do something in the future
 A farmer promises to deliver vegetables to a restaurant, and the
restaurant promises to pay for the vegetables
 Executed Consideration 
 This is where the offeror promises something once the offeree does
something
 The promise only becomes enforceable once the offeree has done the
action
 If Jane loses her dog and offers to pay a reward to the person who finds it,
she does not have to pay until someone finds her dog and returns it to her

 
 Executory v. Executed 
 Executory consideration consists of two promises
 Executed consideration consists of one promise followed by some action

 Past Consideration 
 Past consideration does not form a valid contract
 Normally, consideration is given at the time the contract is made or at a
later time
 Past consideration is where the action is performed before the promise is
made
 This is not good consideration because the consideration must be given in
return for a promise
 This cannot be the case if the action was performed before the promise
was made

 Example of Past Consideration 

 Re McArdle (1951)
 Some children would become owners of a house when their mother died
 While the mother was alive, she lived in the house with one of her sons
and his wife
 The wife made improvements to the house
 The other children later promised to pay the wife for the improvements

 
 Example (cont.) 
 When the children refused to pay, the wife could not force them to
because she did not do the work because of their promise
 She did the work before they made any kind of promise

 Forbearance 
 People tend to think of consideration as some kind of action which is done
 However, not doing something (ie forbearance) can also be consideration
 For example, Tim has the right to sue Bob over some matter.
 Bob promises to pay Tim some money if Tim gives up his right to sue

 Forbearance (cont.) 
  This would create a valid contract because Tim giving up his right to sue
is consideration
 His is not going to take action

 Other rules for consideration 

 Performance must be legal
o Eg our example of the hitman in an earlier class
 Performance must be possible
o A promise to perform an impossible act cannot create a contract

 Other rules for consideration (cont.) 

 The person to whom the promise is made must give consideration
o If Bill promises to pay John £1,000 if John gives his car to Fred,
Fred cannot enforce the contract against John because he did not
give the consideration

Other rules for consideration (cont.) 

 Consideration must be sufficient, but it does not need to be adequate

 In other words, there must be something which the court would regard as
consideration
 But the value of the consideration is decided by the parties
 The court will not decide if the value is enough

 
 Example: Consideration Sufficient 
 I agree to sell my 2006 BMW 525 to Alex for $5.00.
 The consideration is $5.00 in exchange for the BMW
 The court will not look at whether the value is enough; and the
consideration is sufficient

 
 

Privity of Contract 

 As we saw earlier, consideration must come from the promisee

 From this, we get the principle of privity of contract
 This means that a contract can only impose rights and obligations on
people who are parties to the contract

 Privity of Contract (cont.) 

 That also means that third parties (ie people who are not party to the
contract) cannot sue to make sure the contract is performed

 Exceptions to Privity of Contract 

  There are a number of exceptions to the rule of privity of contract
 The most important one is the Contracts (Rights of Third Parties) Act
1999
 This allows a third party to enforce a term of a contract if:
 The contract says he can, or
 Where the contract gives some benefit to him

 
 Summary 
 In addition to offer and acceptance, we also need consideration to create
a valid contract
 Basically, one party benefits in some way or the other party is responsible
for doing something (or both)
 Paying (or promising to pay) money in return for the goods or services is
the most common form of consideration

 Summary (cont.) 
 Consideration can be :
o Executory Consideration
o Executed Consideration
o Past Consideration
o Forbearance

 Summary (cont.) 

Other rules:

 Performance must be legal

 Performance must be possible
 The person to whom the promise is made must give consideration
 Consideration must be sufficient, but it does not need to be adequate

 Summary (cont.) 
 Privity of Contract
 In general, third parties cannot enforce contracts to which they are not a
party
 Main exception is the Contracts (Rights of Third Parties) Act 1999