Consideration In Contract Law: Meaning And Requirements

The Requirement for Consideration

Question:

Discuss what the term ‘sufficient’ means in this context and whether the statement is accurate in regards to Australian contract law.

Consideration can be described as the price that the promisor asks for a return of its promise and in this way, it is the price that is paid in return of the promise. Under the common law, it is required that in order to create a legally binding agreement, the promisee is required to provide consideration in return of the promise received by them. In this way, generally the gratuitous promises are not enforceable, although there are certain exceptions. Therefore, in most of the cases, a gratuitous promise is not enforceable and the promisee should provide some kind of consideration.

As mentioned above, consideration is the price that has been stipulated by the promisor in return of the promise made by him or her. However it needs to be noted in this regard that the term price has been used in the wider sense. Therefore it is not necessary that it should be monitory or even it is not necessary that it should have some monetary value. It is only required that it should have some detriment for the promisee. This document can be in the form of losing a freedom that is otherwise enjoyed by the promisee, for example a promise to study every Saturday night or to quit smoking. Therefore it is not necessary that the promisor should receive some tangible benefit. For example in Carlill v Carbolic Smoke Ball Company, it was stated by the court that it is sufficient that the plaintiff Mrs. Carlill has suffered a detriment by using the Smoke Ball according to the directions of the company even if Carbolic Smoke Ball Co has not received any benefit as a result, (although the court concluded that in fact the company had received a benefit).

At the same time, there is the requirement that the consideration is required to move from the promisee but it is not necessary that the consideration should move to the promisor. An example in this regard can be given of the situation in which the promisor (A) requires that the promisee (B) should give us some of money to (C) as a consideration for the promise made by A to B. in such a case, it will be good consideration. On the other hand if the promisor requires that (C) should provide the consideration for the promise made by A to B, it will not constitute a good consideration because in such a case, there is no detriment to B. in the same way, in case of joint promisees, it can be considered a sufficient if the consideration has moved from only one of the promisees. 

In this regard, the law also provides that consideration can be anything that has been stipulated by the promisor. In this way, the promisor has to stipulate the consideration for the promise made by him or her and her promisee cannot offer something and term it as the consideration for the promise. However, if the consideration stipulated by the promise is legal, it can be in any form. At the same time, it also needs to be noted that it is not require that the consideration should be of comparing the value to the promise for which the consideration is being provided. A very important case in this regard is that of Chappell & Co Ltd v Nestle Co Ltd in which it was stated by Lord Somervell that even a ‘peppercorn’ can be considered as a valuable consideration if the same has been stipulated by the promisor, even if it comes to attention that the promisor was not very fond of peppers and discarded the corn. However, at the same time it also needs to be noted that the adequacy of consideration can be an important issue in some other aspects, particularly where evidence is present regarding unconscionable conduct or duress due to which the contract is liable to be rendered voidable.

What Constitutes as Consideration?

The facts of this case are that in order to promote the sale of chocolate, it was advertised by Nestlé that it will supply a record to the persons who will send the company money as well as three wrappers of chocolate. Among the issues that needed to be decided in this case was the issue if the wrappers can be considered as a part of the consideration for the contract for sale of record. In this regard, Lord Somervell of Harrow stated that the provision of wrappers was not merely a condition precedent and the wrappers formed a part of the consideration. This fact was made clear by the offer according to which it was stated that the wrappers of chocolate will help the persons in getting smash hit recordings. On the other hand, it was claimed by Nestlé that the wrappers are of no value however Lord Somervell stated in this regard that it was not relevant. The result was the famous statement in which it was stated that “a contracting party can stipulate for any consideration. Therefore a peppercorn can be a good consideration even if it has been proved that pepper was not liked by the promisee and he threw away the corn. Therefore, a consideration can be anything that has been stipulated by the promisor. 

As mentioned above, it is not necessary that the consideration should be adequate as long as the consideration is not illusionary. Therefore, a consideration can be nothing that has been stipulated by the promisor and the only requirement in this regard is that the consideration should not be illegal. However, it is also necessary that consideration should be something that can be considered by the law as having has certain ‘value’, or the consideration should exist. As a result, any illusionary undertaking cannot be considered as a good consideration for the promise. At the same time, it is also require that the consideration should come into existence with the promise or soon after the promise has been made. On the other hand where the stipulated consideration has been present before the promise itself, it cannot be considered as a good consideration. For example, A makes a promise to transfer the ownership of a car to B in lieu of the assistance that has been provided by B to A during the last month. This is not valid consideration as it is a past consideration. This issue was discussed in detail by the court in the case titled ‘Roscorla v Thomas where it was decided by the court that the promise cannot be treated as binding due to the reason that the only consideration that has been provided in lieu of the promise regarding the soundness of horse was to enter the original contract which had taken place before making the promise. In this case, a horse was purchased by P from D. Then a promise was made by D that the horse was sound. However the horse was not sound and as a result P sued D for breach of contract. But the court stated in this case that no consideration was present for the promise which stated that the horse was sound. The contract for the sale of horse has been alleged as the consideration for this promise but it had preceded the promise made by the defendant. Therefore it cannot be considered as a part of the bargain and it was not given in exchange of the promise. As a result, the court stated that the promise was not good consideration.

Legality of Consideration

However there is an exception to the rule that passed consideration cannot be good consideration. According to this rule, it can be good consideration if such consideration has been provided on request made by the promisor and if it was understood by the parties that such act will be remunerated and the promise had taken place before the act. In such a case, it can be enforced. In the same way, performing existing duty is also not considered as good consideration.

In this way, it can be said that the meaning of the statement that consideration should be sufficient but need not be adequate is that the consideration should be sufficient in the eyes of law however it is not necessary that it should also be adequate. It is required that there should be the possibility of certain value that can be expressed in economic terms for the original promise but it is not necessary that it should be adequate also. Therefore, under the law of contract, a gratuitous promise or agreement is not considered as enforceable. In the same way, it is considered that natural love and affection are also not sufficient consideration as other sentimental motives. As a result, the courts do not investigate regarding the adequacy of the consideration and do not try to see if the parties have received equal value under the contract.  At the same time, it also needs to be stated that the limitation on this doctrine is that merely doing something to entitle a person tollgate will not be considered as sufficient consideration. For example if A makes an offer to sell his house for one dollar, it is a valid consideration. On the other hand if A makes an offer to sell the house for nothing, the consideration is not present in this case and as a result the agreement is not considered as enforceable. In the case titled Thomas v Thomas a promise was made to pay 1 pound per annum rent which was considered as irrelevant to the fact of sufficient. However the issue of adequacy was not considered by the court. As mentioned above, the case titled Chappell v Nestlé Co Ltd also establishes this rule. It was also stated by the court in this case that it is a test if consideration can be considered as sufficient or not. Therefore it was justified that the courts dealt with the issue of the adequacy of consideration by referring to the freedom of contract. It is free for the parties to the contract to stipulate the consideration for the contract. No interference shall be made by the courts in the choice of the parties to the contract only due to the reason that it appears that a bad bargain has been made by one party. The reasoning on which the decision of the court in Chappell was based was perhaps that the requirement which provided that worthless wrappers of chocolate should be sent by people would have encouraged a number of people to buy the chocolate of that particular company.

Conclusion: differ in the end it can be said that this position also summarizes the points of law as well as the arguments that are in favor of the statement that consideration should be sufficient but it is not necessary that consideration should also be adequate. In the same way, while considering the ‘value’ of the consideration, the courts do not go into the question of the ‘adequacy’ of consideration ought to see if the price paid by the party is fair or not. The courts are simply concerned with the fact if the consideration that has been paid by the party according to the contract can be expressed according to the terms of economic value. Therefore, intangibles like emotions, lack of boredom are not considered as valuable consideration. The only thing that is required is that the consideration should have some economic value for the party.

References

Paterson, Robertson & Duke, Principles of Contract Law (Lawbook Co, 3rd ed, 2009.

Carlill v Carbolic Smoke Ball Company [1892] EWCA Civ 1.

Chappell & Co Ltd v Nestle Co Ltd [1990] AC 87.

Chappell & Co Ltd v Nestle Co Ltd [1990] AC 87.

Roscorla v Thomas (1842) 3 QB 234.

Stilk v Myrick [1809] EWHC KB J58.

Thomas v Thomas, 1842 2 QB 851.

White v Bluett (1853) 23 LJ Ex 36.

Paterson, Robertson & Duke, Principles of Contract Law (Lawbook Co, 3rd ed, 2009).

Carlill v Carbolic Smoke Ball Company [1892] EWCA Civ 1.

Chappell & Co Ltd v Nestle Co Ltd [1990] AC 87.

Roscorla v Thomas (1842) 3 QB 234.

Thomas v Thomas, 1842 2 QB 851.

Chappell & Co Ltd v Nestle Co Ltd [1990] AC 87.

Stilk v Myrick [1809] EWHC KB J58.

White v Bluett (1853) 23 LJ Ex 36.