CONTRACTS: THE REQUIREMENT OF CONSIDERATION

(A) THE FORMATION OF A CONTRACT In order to form a binding contract under UK law, certain ‘elements’ must exist within the agreement between the parties. This is true whether the contract is written or oral. If these ‘elements of a contract’ exist, then a court will rule that the parties have entered into a legally binding agreement. However, if one or more of the elements are missing, the agreement will not be recognised as enforceable and the party wishing to prove that a contract exists will be disappointed by the refusal of a court to become involved.

These elements of a contract, which were set out in the common law in a precedent case, are: (i) offer; (ii) acceptance; (iii) consideration; and (iv) an intention ‘to create a legal relationship’. The court makes no attempt to try to read the minds of the parties in deciding the parties’ intentions. Instead, it relies on case law in which previous judges have decided on whether intention exists in a particular situation or not, often according to the relationship between the parties. Both parties must also have capacity to contract and the agreement has to be for a purpose that is lawful. If all of these requirements are met, a court will find that the agreement is binding and therefore enforceable against both parties. The question of proving the existence of these elements, especially in the case of an oral agreement, is a different matter. That is one of the reasons why lawyers are famous for advising people to ‘always get it in writing’, which quite often they do not bother to do. However, this is the ‘checklist’ referred to in the UK courts when there is a dispute as to whether a contract exists.

(B) WHAT IS CONSIDERATION? The idea of consideration can be confusing for lawyers from codified systems because it is known as ‘a common law concept’ and tends not to exist in quite the same way in contracts formed under a civil code. In very simple terms, UK law requires the parties to exchange something of value in order to form a valid contract and what each party provides under the contract is that party’s consideration. The exchange must be reciprocal and not one-sided. If one party gives something of value to the other party and receives nothing in return, it is very likely a UK court will decide that no contract was formed, and the ‘agreement’ will therefore be unenforceable. For example, in a situation where Person A buys a diamond necklace from Person B for £1 million, Person A’s consideration under the contract is the £1 million and Person B’s consideration is the necklace. The absolute requirement of an exchange of consideration is why written contracts drafted by lawyers in the UK or the USA have a clause including the words, “In consideration of (the goods/ services/promises to do something, etc.) described in this agreement the buyer agrees to pay the sum of (the price)”.

(C) THE DEFINITION OF CONSIDERATION An exchange of consideration is fairly straightforward to prove when it consists of goods or money or a service provided. However, there is a lot of UK case law in which parties in dispute as to whether or not they have formed a contract have asked a court to rule on whether what they have exchanged amounts to ‘good consideration’. For example, is a promise not to do something in the future good consideration under a contract? In making their decisions the courts have relied on a precedent case from 1875, the ratio of which provided the definition of what does and does not constitute good consideration and which continues to be cited by lawyers in legal disputes until the present day. The ratio of Currie v Misa (1875), states that consideration must:

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

Therefore, a contract cannot exist unless consideration has been exchanged. This must be in the form of each party having gained a benefit or suffered a detriment.