In Part 1 and 2, I discussed an offer and acceptance in connection with the 4 key elements of the formation of a contract. In this part, I shall look the third element, namely consideration.
In our everyday lives, we enter into contracts and sometimes we end up in a dispute with another party who either you considered as a wrongdoer within an agreement or in fact they consider you to have been in breach of a contract that you yourself have argued to have never agreed. A large number of enquiries that we receive of this nature are usually wishing to (rightly or wrongly) wriggle out of a contract and use the reason that they never even knew they had entered into this agreement in the first place and had not promised anything. Before considering whether the parties had the intention to enter legal relations which is the 4th part in this note, the first questions we will ask is whether there was any ‘consideration’.
Consideration is at its core the exchange of something for something or a promise to do something for something in return. An example would be the promise to provide services in return for payment. It is not necessary for this consideration to be adequate within the scope of the agreement which has been reached, but it must have some value. What I mean by this is that it does not have to be proportionate in the circumstances. Usually, consideration would be the exchange of money but not always. In days gone by it could be the exchange of rocks or corn if that is the agreement between the parties.
It is key however to ensure that the consideration itself has ‘moved’ from the person agreeing to the promise. This sounds obvious but there can only be consideration given from the contracting parties and it must be the person who wishes to enforce the contract that can be the one who has provided the consideration. Note there are some scenarios where a conscious decision is not necessary for the consideration to have been apparent. Finally, the only way in which a contract can be enforced without there being any consideration would be by the use of a deed and is beyond the scope of this note.
There are two types of consideration to be aware of when you are entering into a contractual agreement. Firstly, there is ‘executed’ consideration which is where the consideration is given at the time between both parties and has immediate effect. The second is ‘executory’ consideration which is where one will promise something in the future in exchange for the other party to in turn give its consideration in the future as well, such as delivering something next month and the other party agreeing to pay no later than one month after that. Lastly, consideration which may have been given in the past is considered as having no consideration at all. If you require further understanding on this, we can schedule a call to discuss your matter further. If you are unsure if there has been any consideration given, it is important to note that the courts are quick to find consideration somewhere within the contract, especially in commercial contracts. Any concerns that you may have for future agreements you wish to make can alleviated by having the promise and consideration in written form and signed by both parties.
The last key element to consider and will be explored in Part 4, is the intention to create legal relations and an important part of the formation of a contract. Most disputes arise because of an argument from one party that they had no intention to enter legal relations with the other party. If you have any questions on the above, do not hesitate to contact us and one of the team will be able to discuss this further at no charge for initial advice, however long it takes.