Consideration And Benefit Fact In Law: Analysis And Legal Implications

Historical Development of Consideration

Discuss about the Consideration and Benefit Fact and in Law.

Contracts are the lifeblood of modern commercial transactions and an essential while exchanging promises by two given parties. This is because through legally enforceable contract, it is possible to ensure that the concerned parties tend to comply with their respective promise. For the formation of a legal contract, there are a host of conditions that need to be satisfied. One of the primary conditions in this regard is that there would a valid agreement. Any lawful agreement would arise on the basis of a valid offer by the offeror and valid acceptance by the respective offeree. Yet another condition for the formation of a legally binding contract is the presence of consideration of both the parties involved. Besides, it is also essential that the concerned parties must have intention to be bound in a legal relationship on account of their respective promises. Finally, mutual consent has to be present on part of both parties (i.e. offeree and offeror) and additionally these must have the legal capacity to enact an enforceable contract. This typically involves that the parties must be over 18 years in age, be of sound mind and should not be insolvent.

One of the key pre-requisites of contract which draws significant attention is the presence of consideration. Consideration has been defined in Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd[3] by Lord Dunedin as any promise, action or forbearance on behalf of one party which tends to act as the price at which the other’s promise is purchased and therefore such a promise extended for value would be enforceable. While the common law theory tends to highlight the presence of mutual consideration in an enforceable contract as a pre-condition, there is issue with regards to the position in relation to the equivalence of that consideration for both parties. As a result, it becomes critical to access whether mere presence of consideration is sufficient for contract formation or the consideration for both parties needs to be adequate and proportional to their respective contractual obligations. In the wake of the above background, the given essay aims to critically analyse the historical development of consideration with the key issue being the quantum of consideration required for the contracting parties so as to enact a legal contract. In this regard, various relevant cases would be highlighted which would offer insight into the pertinent arguments and thereby enable us to reach a well-researched conclusion.

As per Sir Edward Jenks, the Roman jurists were not aware of the doctrine of consideration. Even in English law, the advent of this doctrine was purely on account of accident as it was introduced as a special proof or incidental consequence. Only when the importance of consideration was understood in this regard, did it gain a prominent position in the substantive law which happened only at the beginning of the 19th century. However, John Wilson Twyford opines that ever since 1809, there has been a provision in the common law as per which any action which a given party is already legally obliged to do would not be considered as good consideration. This has also been observed in the relevant arguments related to the Wigan v Edwards[7] (1974) 1 ALR 497 case. Therefore, any resultant promise which might be received on exchange would not be considered enforceable. Also, over time it has become significant to segregate what is expected to be gained and what is actually gained in return of a given promise as consideration. Besides, the question of sufficiency of consideration has come into prominence only in the 20^th century. The doctrine of consideration is an integral part of common law which is the driving force in Commonwealth nations including Australia. Further, it is noteworthy that this doctrine does not find mention in the civil law.

Rules of Consideration

One of the theories that offer explanation for the presence of consideration is the bargain theory. This is based on the belief that all contracts are essentially bargains and hence consideration is considered a necessary element. However, the current notion of consideration in the Australian context is not explained using this theory as every contract is essentially not a bargain. Additionally, the bargain theory is at loggerheads with the principle of sufficient consideration which is well accepted in Australian contract law. Besides, there is an alternative viewpoint which tends to view consideration as a mere formality. In this regard, it is noteworthy that besides the US, the courts elsewhere do not tend to distinguish between real and nominal consideration, hence the essential of consideration is merely to indicate the intention to fulfil the promise. However, if consideration was indeed a formality, it would have been more worthwhile to consider it as an additional evidence to be bound in a contractual relation. But the fact, that consideration is a pre-requisite for legal contract highlights the fact that consideration reflects the reason for entering into the contract. As a result, it needs to be deliberated on what would constitute as a valid and sufficient reason for a contract.

There are various rules of consideration. One of the key rules in this regard is Pinnel rule as per which the debt repayment in part as the final settlement is not a good consideration to obtain promise regarding balance forgoing. However, there are certain exceptions when this rule does not apply. One of such exceptions exists when the part payment of debt is being done by a third party so as to ensure final settlement as evident in the Hirachand Punamchand v Temple case. Another exception occurs in the case of composite agreement such as the agreement between a particular debtor and outstanding creditors in relation to debt part payment. Additionally, exception is also provided in case of a promissory estoppel which makes the discussion on consideration quite irrelevant. Also, another rule regarding consideration specifies that past consideration is not taken as good consideration and does not lead to enforceable contracts. Besides, in the absence of consideration, the promises are known as gratuitous promises and do not result in enforceable contracts.

Another key aspect in relation to consideration is that the consideration needs to be merely sufficient and not adequate. Thus, it implies that the underlying consideration for both parties should have some value but it is not necessary that it should be necessarily equal or comparable. Hence, the promise should have some economic value to be assumed as a valid consideration. This is apparent from the argument in the White v Bluett case. The son Bluett sued the will of his father for the outstanding debt which his father had promised to pay back on his behalf. But the father had demanded that the son should stop complaining. The court highlighted that since to stop complaining does not amount to any real consideration, hence there was no contract between Bluett and his father. However, a contradictory stance was taken in the Dunton v Dunton case where there was a promise by Mr Dunton in relation to extending allowance payments to his former wife provided she behaved in a reasonable manner i.e. with sobriety. The judge ruled that the consideration was good as the former wife had to give up the liberty of unrespectable behaviour.

Sufficiency of Consideration

Further, in case of commercial contracts, the golden rule is caveat emptor. This is primarily because of the buyer’s position to accurately judge the incentive obtained by consumption of a particular good or service. As a result, the court refrains from commenting on whether the buyer got a nice deal or not in such transactions as the underlying consideration from such decisions are not objective and usually driven by the consumer needs, preferences and circumstances[18]. This is apparent from the observations made by the honourable court in the Woolworths Ltd v Kelly case. The court opined that while a particular thing may not be considered worthwhile by the court but the promisor on account of sentimental reasons or otherwise may consider it valuable. Hence, if there is no evidence so as to indicate that there is an unfair advantage, then the consideration adequacy is not a concern for the court. However, in cases where unconscionable conduct is present on part of one of parties, then there would be exemption for the buyer and such a contract would be voidable at the behest of the plaintiff as indicated in the Commercial Bank of Australia Ltd v Amadio case.

Additionally, it is significant to note that only motive is not considered sufficient consideration and therefore the consideration should have some value in legal terms. This was highlighted Thomas v Thomas where the widow could reside in the house of the deceased provided she continue to remain a widow, pay £1 as the rent and assume responsibility into the repairs required by the house. The appellant highlighted that there was a lack of consideration but the judges ruled that consideration was indeed present as the widow was paying the rent of £1. However, it was also indicated that merely the motive of retaining wife as widow did not amount to sufficient consideration.

Also, in relation to what constitutes as a valid consideration, it could be anything stipulated by the promisor. In this regard, Carlill v Carbolic Smoke Ball Co is of significance where the honourable judges held that the contract was enforceable since the inconvenience caused to the plaintiff (Mrs. Carlill) was a sufficient enough consideration. As a result, the defendant has to honour the contract. Another relevant case in this regard is Chappell & Co Ltd v Nestle Co Ltd[ As per the judgment in this case, even the chocolate wrappers could serve as a valid consideration if the same is stipulated by the promisor. Hence, it is evident that the purview of what constitutes consideration is basically dependent on the promisor and court merely ascertains that a particular party does not have any unfair advantage.

However, the acceptance of promissory estoppel in the Waltons Stores (Interstate) Ltd v Maher has initiated debate with regards to the need and relevance of consideration in contracts. In the given case, the judge opined that for promissory estoppel to be applicable, there needs to a promise made by the promisor and the conduct of the promisor leads to the assumption that the contract would be executed in the future. The promisee tends to rely on this leading to his/her detriment. Thus, in a situation not keeping the promise would amount to unconscionable conduct even though there is not contract that has already been enacted and also consideration is absent. Even though this decision leads to enhancement of the overall purview of estoppel from a defence mechanism to one of attack, but still it does not make presence of consideration in a contract redundant. This is primarily because the promissory estoppel is only valid when the above mentioned conditions are fulfilled and otherwise in executed contracts, consideration is still significant. Further, rather than being a mere formality, the cases discussed clearly highlight that consideration is more of the reason for execution of contract and is essentially subjective in nature given the emphasis of the court on only the sufficiency of consideration while ignoring the adequacy.

From the above discussion, it would be fair to conclude that indeed consideration is a complex issue and has undergone tremendous evolution since the origin as a special proof. However, the process is still on and with case judgements and arguments, consideration is still evolving which raises perplexing questions regarding the need and position of consideration in contract law. However, consideration remains to be a critical pre-requisite in the common law. While there are certain theories which do make brave attempt to account for consideration but with the altering scope, it is wise to view consideration as a reason to execute the contract rather than a mere proof of underlying intention to be contractually bound. Also, there are certain rules which define legal consideration which need to be adhered to. On the question of consideration in commercial contracts, it is imperative that the onus lies on the buyer. The courts on their part would ascertain for any unconscionable conduct and presence of some consideration since adequacy is not considered significant. Further, past rulings indicate that while identifying the value of consideration, the viewpoint of promisor is given precedence over that of the court.

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