If you’re about to enter into a new commercial contract or need to renew an existing arrangement, it’s extremely useful to understand the legal concept of ‘consideration’.
Understanding what this term means, its different forms, and legal requirements will ensure that your contracts are valid and enforceable.
What is consideration in contract law?
There are five requirements for a contract to exist: an offer, acceptance, consideration, intention to create legal relations, and certainty of terms.
The need for consideration is based on the idea that for a contract to exist, there must be something given in return.
Therefore, agreeing to make a gift (e.g. land, assets, or property) would not be a legally acceptable form of contract.
What are the legal rules for valid consideration?
The doctrine of consideration requires that every contract must be supported by some form of consideration.
In English law, there are several factors you should take into account when determining whether consideration is valid:
- Consideration must have some value (e.g. property, assets, monetary)
- There is no need for the consideration to be ‘adequate’ to meet this contractual requirement - this is a matter for the parties to a contract to decide
- The consideration must come from the promisee (the person to whom the promise is made)
- Consideration does not need to be intentional
- Consideration is not needed for a deed (this is one of the main differences between a simple contract and a deed)
What are the types of consideration?
There are two forms of consideration:
- Executed consideration - where promises made in a contract are delivered immediately (e.g. delivery of goods)
- Executory consideration - where promises made in a contract will be delivered in the future (e.g. a commercial property lease)
If you’re unsure of the implications of the type of consideration in your contract, speak to a commercial law solicitor who can advise you.
What is law past consideration?
The issue of past consideration often arises when one of the parties wants to vary the existing agreement. The general rule is that if a party to a contract performs a pre-existing obligation, their actions do not usually count as providing consideration.
To constitute consideration, the party wishing to vary the contract must go further than merely fulfilling an existing legal obligation. Examples include making extra payments or performing services above and beyond those called for under the contract.
What is nominal consideration?
Nominal consideration is the payment of a small amount that still fulfils legal requirements (though less than what the deal was worth), often because it was never supposed to be money-based at all.
It can come in different forms, such as £1 or $100, depending on where you are from. Still, these are usually standard amounts used when people want there to be an agreement without actually having any intention of exchanging anything other than obligations between them.
Does consideration have to be monetary?
Consideration must be something of value. It can be in the form of something other than money or even tangible, such as a promise to pay or not to pay something.
For example, suppose you are an employer and enter a Settlement Agreement with an employee. In that case, the contract will state that the employee will receive a sum of money (and possibly other benefits) in exchange for waiving their right to bring a future claim in the Employment Tribunal.
What happens if there is no consideration?
If there is no consideration, the contract is invalid, which means the Courts can refuse to enforce it. Sometimes, a party to the contract exchanges something of value when they’re only doing what they are legally obliged to do.
For example, a contractual party cannot claim that an undertaking to protect workers' health and safety is considered because they already have a legal duty to do this under the Health and Safety at Work Act 1974.
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‘Good’ consideration (that meets the above criteria) is just one of five elements that make up a valid contract. If you’re unsure if consideration exists in one of your contracts, you should speak to one of our commercial law solicitors.
The Courts are generally quick to find consideration in commercial agreements; however, this is only sometimes the case in non-commercial contracts.
Concerning the latter, you may acknowledge the existence of a token/nominal consideration in the written agreement or seek to execute the agreement as a deed rather than a simple contract.
Our lawyers can provide expert legal guidance, ensuring that whatever agreement you sign will protect you from costly litigation in the future. To find out how our expert lawyers can support you, book a free 15 minute consultation or call us on 020 3808 8314.