Categories: Law

What is the significance of consideration in a contract?

Question

Answer

In English law, a promisee must, in return, provide to the promisor consideration in order to turn an otherwise unenforceable promise into a legally binding contract. The definition of what constitutes consideration is to be found in case law. Lord Dunedin endorsed the following definition in Dunlop v Selfridge [1915] AC 847:

An act of forbearance of the promise thereof is the price for which the promise of the other is bought, and the promise thus given for value is enforceable.

There are a number of rules regarding the operation of consideration that can also be found in the case law:

Consideration must move from the promisee (and so not, for example, from a third party); Tweddle v Atkinson (1861) 121 ER 762.
Consideration must not be ‘past’ (and so not, for example, work done before any promise of payment is discussed); Re McArdle [1951] Ch 669.
Consideration must be sufficient, but need not be adequate (and so the consideration has at least some value); Thomas v Thomas (1842) 2 QB 851. This value may be more than simply pecuniary; worthless items (Chappell & Co v Nestle [1960] AC 87) and promises to care for someone (Ward v Byham [1956] 1 WLR 496) have been held to be sufficient. Generally, performance of an existing duty is not good consideration for a new promise (Collins v Godefroy (1831) 109 ER 1040), but there are exceptions to this rule.

Consideration may not be required under the doctrine of promissory estoppel (Central London Property Trust v High Trees House [1947] KB 130). Case law has shown that such a scenario shall only arise where:

There is a clear promise or representation;
Which is intended to affect the parties’ legal relationship;
To the effect that the promisor will not insist upon his strict legal rights against the promisee;
Which induces detrimental reliance from the promisee; and thus
It would be inequitable for the promisor to rescind his promise.