For a valid contract to exist, there must be consideration on the part of each party that enters the contract.
What is Consideration?
In simple terms, where a promiser has made a promise to a promisee, the latter must in return give the promisor something in order to make the promise binding. That is, consideration is the mutual exchange of promises (see Eastwood v Kenyon (1840) 113 ER 482). For example, if Hugh promises to do renovations on Neil’s house, Neil might give Hugh $10,000.00 as consideration to make the promise binding on Hugh.
What does Consideration do?
It makes a promise enforceable.
What constitutes Consideration?
The Australian Courts have applied the following elements when determining whether there has been consideration.
- Benefit/Detriment Requirement
Consideration may consist either in some right, profit or benefit accruing to one party or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other (see Currie v Misa (1875) LR 10 Ex 153). In Harmer v Sidway (1891) 124 NY 538, the Court considered whether an uncle’s promise to pay his nephew $5,000.00 for refraining from drinking liquor, using tobacco, swearing and playing cards or billiards for money until the nephew turned 21 was consideration. The Court held that this was not consideration because the uncle received no benefit from the nephew’s performance (and arguably the nephew received no detriment).
- Bargain Requirement
The promisee’s undertaking to incur a detriment or confer a benefit must correspond to the promise made by the promisor. In Australian Woollen Mills Pty Ltd v Commonwealth (1954) 92 CLR 424, the Court held that the plaintiff could not enforce statements of policy as a promise. This case demonstrates that there is a crucial difference between an act performed by a promisee as part of the bargain for the promisor’s promise and an act that is merely done in reliance of some vague promise.
- Movement from Promisee
Consideration must move from the promisee. This requirement is still satisfied if the promisee confers a benefit upon a third party at the behest of the promisor (see Coulls v Bagot’s Executors and Trustee Co Ltd (1967) 119 CLR 460).
What if the Consideration is disproportionate?
Generally, the law does not intervene with respect to the value of the consideration exchanged unless the two promises are so disproportionate in value as to demonstrate unconscionability in the bargaining process. While consideration need not be adequate, it must be legally sufficient (see Woolworths Ltd v Kelly (1991) 22 NSWLR 189).
When is Consideration not required?
Consideration is not required when:
- One of the parties was already legally obliged to perform, for example by public duty or an existing contract in which the promisee is already bound;
- The promise amounts to a gift, not a contract;
- The exchange is for “past consideration”; or
- The bargained-for promise is illusory (or contrary to law).
What if the contract does not have Consideration?
The contract may be unenforceable. However, this relies on the unique circumstances of the situation. Whenever there is uncertainty of whether a contract has sufficient consideration, it is crucial that you obtain proper legal advice.