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Consideration in Contract Law

For a valid contract to exist, five elements must be present. These elements are offer, acceptance, consideration, intention to create legal relations and certainty. This article outlines consideration.in contract law.

What is consideration?

Judges have provided definitions of consideration in contract law in various cases. In the 1875 English House of Lords decision of Currie v Misa, Lush J defined consideration as follows:

“some right, interest, profit or benefit accruing to one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other.”

In the 1915 House of Lords decision of Dunlop v Selfridge, Lord Dunedin wrote:

“an act or forbearance of one party, or the promise thereof.”

What these definitions make clear is that for a contract to be legally enforceable, there must be payment of some sort for what is being provided. This is what is meant by consideration in contract law. If someone promises to provide something to another person gratuitously, and then fails to do so, there can be no legal enforcement of that promise. This is because in this case, no consideration has given.

Principles of consideration

There are several principles applicable to consideration in contract law. These are:

  • That consideration is the price paid for promisor’s promise;
  • That the person who wants to enforce the promise must be the one who has paid for it – either the promisee or someone acting on their behalf;
  • That the consideration does not have to be paid to the promisor. The promisor may allow the consideration to be paid to a third party;
  • That consideration does not always have to be a benefit paid to the promisor. It can also be a detriment suffered by the promisee in reliance on the promise;
  • That consideration cannot be something that has occurred in the past and predates the promise;
  • That consideration must be something valuable in the eyes of the law. However, the value does not have to equal the promisor’s promise;
  • That reasons for the offeror making an offer or motive for making an offer is completely separate to consideration;
  • That forbearance or refraining from doing something can be valid consideration;

Where an act, promise or forbearance cannot constitute consideration

There are some situations where an act, promise or forbearance cannot be taken to be legal consideration in contract law. These situations are where there is some existing duty to do these things, and they are either done either:

  1.  in performance of an existing duty or
  2. in the discharge of an existing duty or ending contractual obligations.

Where the act, promise or forbearance is made in performing an existing duty, the existing duty can be to the public, the promisor or a third party, for it to not constitute proper consideration in contract law.

Where parties that are contracting seek to end an obligation under a contract, there must be some consideration for discharging that obligation. Otherwise, the original contractual obligations may still apply. The performance or forbearance that is the consideration for the discharge of the obligation or obligations must be something different to the obligation under the original agreement.

Promissory Estoppel

In some situations, even where there is found to be no consideration in contract law, a remedy may be available where one party has acted on a representation made by another party. The doctrine that governs this situation is called promissory estoppel. This doctrine stops a party from going back on a promise where it would be unconscionable to do so.

The elements for a successful claim of promissory estoppel are:

  1. There is a pre-existing legal relationship between the relevant parties;
  2. A promise, undertaking or assurance has been made;
  3. There has been reliance by one party on that promise, undertaking or assurance;
  4. Detriment has been suffered by one party due to acting on the promise, undertaking or assurance;
  5. The party who seeks to withdraw from their promise, undertaking or assurance, has acted unconscionably.

A court will consider the detriment suffered and seek to remove that detriment as relief for an aggrieved party which successfully brings a claim for promissory estoppel.

Promissory estoppel cannot be brought as a new cause of action. That is to say that the party pleading promissory estoppel must have a cause of action that is independent of promissory estoppel. Further, promissory estoppel does not override the requirement for consideration in contract law. It also does not make voluntary promises enforceable. The doctrine of promissory estoppel also does not terminate the rights of a promisor. It merely suspends them.

If you require legal advice or representation in any legal matter, please contact Armstrong Legal.

Kathryn Sampias

This article was written by Kathryn Sampias

Kathryn Sampias has a Bachelor of Laws, a Bachelor of Arts and a Graduate Diploma in Journalism. Kathryn was admitted to practice in 2005 and practised law for more than eight years, working both in private practice (mainly in defence litigation for professional indemnity disputes) and in the public service for the Australian Securities and Investments Commission (ASIC) in enforcement.

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