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What is the Significance of Doctrine of Consideration in the law of contract?
What make consideration is so important? In every simple contract which does not necessary formally written, any agreement between two or more parties must sufficiently provide the consideration in return for something of value. So that if promisor promises to give something of value but the promisee does not give consideration in return, the promisor is not legally liable. The significance of consideration forms the most fundamental issue in contract other than deeds. Simple contract can be unenforceable nor valid if the parties involve in the contract does not meet the requirement of the doctrine of consideration. (1)
However, some negotiable instruments, such as bills of exchange and , contain evidence of consideration based on its form. (2) Those instruments (contracts under seal) do not need consideration to enforce as every term is explicitly expressed and carries obligation that should be obeyed.
This essay will discuss the doctrine of consideration in the law of contract. The Doctrine of Consideration is so significance in the law of contract. This essay also seeks the answer of whether the doctrine of consideration can form the fundamental legal bases in many contracts. It also tries to find the relationship of the doctrine of consideration that is basically from the common law system with equity principle.
It is important to understand the basic concept of consideration before the further discussion. The definition from Lectlaw as below:
“Consideration is the inducement, price or motive that causes a party to enter into an agreement or contract. Something of value that is given in exchange for getting something from another person. For example, rent payments paid to receive the right to rent an apartment. A compensation which is paid, or all inconvenience suffered by the party from whom it proceeds. Or it is the reason which moves the contracting party to enter into the contract. A cause or occasion meritorious requiring a mutual recompense in deed or in law.“ (2)
The most clear definition were given by Lush J and then by Sir Frederick Pollock That definitions make us feel easy to understand the consideration concept.. Firstly the most perfect definition is from Lush J. in Currie v Misa (1875) LR 10 Exch 153 who referred consideration in a way that promisee bears detriment and the benefit to the promisor: “… some right, interest, profit or benefit accruing to one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other.”
Later on, Sir Frederick Pollock defined consideration, approved by Lord Dunedin in Dunlop v Selfridge Ltd  AC 847, is as follows: “An act or forebearance of one party, or the promise thereof, is the price for which the promise of the other is bought, and the promise thus given for value is enforceable.”(3)
Latimer put consideration in the third essential condition for the creation of a valid contract after offer and acceptance, the following conditions are Legal Intent, Capacity. Legal Object and Genuine Consent. Later, Latimer set five rules for the doctrine of consideration to be operationalised, it is required for legally binding promise, can be executed or executory but not past, need not be adequate, must be sufficient, and must move from the promisee but need not move to the promisor.(4)
Relevance of two cases
Here the writer present two cases that seem to be relevant in giving the detail meaning of consideration. First is Stilk v Myrick (1809) 2 camp 317; 170 ER 1168 and second is Williams v Roffey Bros & Nicholls (Contractor)Ltd (1991) 1 QB1; (1990) 1 ALL ER 512. (5)
In the first case “A team of eleven sailors agreed to crew a ship from London to the Baltic and back. Two sailors deserted in the Baltic. The remaining nine refused to work, and pressed the captain for higher wages. He agreed at the time but ultimately refused to pay. The sailors sued the captain, but lost.” (6)
While in the second case “Roffey were a contractor who had job to renovate a block of flats. As the contract include the penalty for late completion, Roffey then sub-contracted to Williams part of this work. As work progressed, Williams fell behind schedule because, they claimed, they had not set an adequate price for the work. They negotiated a new deal with Roffey, that an additional sum was to be paid on the completion of each building. When the next building was complete, Roffey refused to pay.“ (6)
The first case in unenforceable because the sailors was regarded to not having consideration (their action was merely action upon their obligation). This is why they failed to enforce for the payment and the court furthermore decided determined that the contract is made under economic distress. In the second case yes there is consideration because Williams have performed additional requirement and Roffey benefited from avoiding the penalty.
Doctrine of consideration and the relevant underlying theory
The doctrine of consideration carries the mutual right and obligation between parties who made the contract. The mutual right and obligation here ideally brings the idea of equity as the basis of consent to form a contract. Neither party agreed to form a contract which bring loss on one party and benefit to other party. If it is so then the contract is kind of zero sum game.
It seems that the notion of equity, which is fairness in nature, is somewhat difficult to define. In my opinion, its combination with the doctrine of consideration serves the legal framework in achieving natural justice and fairness. The substance of the contract is tested by weighing the value performance of the parties. This indeed requires practical structure test. It also bring consequences in relation to consider broader consideration and consistency such as stated by Barron “…broader considerations beyond rigid formalism ought to be taken into account, but there will be occasions where consistency should be maintained so that like cases are decided alike.” (7)
The rigidness of common law application is seen sometimes undermine this principle of equity aspect. In the conceptual thinking, Common Law should not contradict the principle of equity. The operation of law of doctrine of consideration is the process and the equity principle is to be included in the process. My position is that equity principle can be intermingled in doctrine of consideration in the process to achieve the justice decision.
In the further discussion, Posner observed that the terms ‘fairness’ and ‘justice’ as used by judges involve considerations of consequence. One could apply the same reasoning to terms such as ‘legitimate expectations’, and perhaps even ‘good faith’. Giving effect to such generalised principles may well involve a consideration of the consequence to the parties, as well as a broader or general consideration. (8)
Dealing with the basis of court decision, to be fairness there should be any reasonable expectation in contract. It is just a mere simple fairness to say that this idea is interpreted by honest man. This is sound concept, indeed to avoid the contract to be used as a means of “deceive”. In the process of making contract both parties understand their own consideration, that is knowing his right and obligation. Barron stated that: “… ‘a judge is entitled to take into account that simple fairness ought to be the basis of every legal rule’, this being the framework within which contract law should give effect to the reasonable expectations of honest men.“(9)
Following statement is the further clarification of reasonable expectation by Barron: “…the expectations that ought to be protected are those that are, in an objective sense, common to both parties. Thus, a one-sided expectation, no matter how reasonable, is unenforceable if there is no corresponding expectation resting with the other party to the contract.” (10)
The are two relevant concept which can be connected to consideration; promissory estoppel and unjust enrichment. Promissory estoppel is a means of protection for promisee for the consistency of contract where promisor is stopped going back to previously void promise. Unjust enrichment is also introduced to protect legal right of the parties involved in the contract to be as a settlement to uphold the equity principle. (11) This way of thinking is emerged to consolidate the equity principle and consideration in the formal contract environment.
Promissory estoppel which is clearly explained by Heffey et al, is mechanism to hinder the party suffer the detriment if one party depart from the latest agreement. (12) Yes it is the fact that the amendment of agreement between parties brings new condition. It is binding though there is not adequate consideration given, as one party is facing a certain extraordinary condition where he unable to fulfill obligation, otherwise it moves to the frustration. This legal reasoning is attempted to avoid rigidness of doctrine of consideration implementation to seek the fairness and justice. So that it does not exempt the doctrine of consideration, but to add legal bases in retaining it.
The unjust enrichment forms another view. In the situation where the windfall profit is made on the other party’s loss is not eligible and should be returned. In the writer’s view, the windfall profit should not go to the counter party, as the circumstances on the contract presumed to be in a normal condition. Therefore any extraordinary situation which bring the excessive loss is not acceptable so that extraordinary benefit and extraordinary detriment should not flow between parties.
Principally, in order to be enforceable, the bargain theory has been widely used as the ground theory . It has become the fundamental ground in court decision and is relevant to quantify the value of exchange of consideration. Craig said that:
“Consideration, which on the bargain theory rationale is the price paid for the other party’s promise, will normally be either the conferment of a benefit on the other party or the suffering of a detriment. To be sufficient in law it must be of some economic value and be something not already done.” (13)
Bargain theory as conceptual base after evaluating the contract under motive and reliance. According to Heffey et al “ in the modern contract law, reliance on promise is not , on its own, a sufficient basis for enforcing that promise.” (12) This in turn follow the equity principle, where contract has to be fair to avoid certain party burden unfair detriment in the wellbeing of other party.
In the form of the characteristic of contract under seal that does not necessary bring consideration, both parties are assumed to understand their own consideration before commencing the contract. It is enforceable and legally binding as the right and obligation are stated clearly in written form. The clause in such contract it self brings necessary consideration. It is unlikely that this contract is a nudum pactum (contract made without consideration) , where it can not be binding. However it is that true? (14)
Taking a view of consideration in the form of “literal view”, there shouldn’t any written contract that is made without “literal consideration”. This concept is of actual and literal idea of consideration which include the reasonable expectation by honest men. Now that the trend in the society toward the higher growing literacy. More people now aware to state the contract in written form. Thereby the more knowledgeable people in law will benefit by putting all clauses in their favor at the expense of the party to whom the contract is made.
The court decision that is based only on stated clause in the contract without considering the substance over form of contract will violate equity principle. This framework of thinking also violates the bargain theory where fairness of the consideration is not merely on its written form but the value intrinsic of the consideration. Again the incoming disputes over contract is sometimes dealing with the different interpretation of the contract clauses.
Contract under seal
Contract under seal has to be seen in substance over form. In this preposition, the contract should be invalid in its nature if the substance of the contract is unfair and injustice. Yet it is true that the contract under seal comes as the answer to avoid uncertainty of the variation of contract which is made verbally. Therefore this serves as a means of gaining the certainty that the parties are bound by clauses expressed in contract. Craig stated that “contract can create scope for opportunism, with the contract itself becoming the tool for extortion.”(13)
The writer perceive that the clause in the contract under seal should also carry the consideration as the basis to make the contract enforceable. If not then it violates the equity principle. This is in line with the view of Ryan who said that:
“… even in the province of the law of contract, equity refuses to follow the law in the sense that it denies remedies where the promise sought to be enforced is under seal but otherwise lacks the element of consideration, and also that it seems to enforce in certain cases informal promises made without common law consideration.” (1)
Although this issue is debatable, however the court has to consider the equity principle as alternative legal framework of the common law based decision. In situation where it seems that equity principle contradict with the doctrine of consideration, the writer believes that its better to choose the equity principle. For example, loan agreement, where the interest suddenly rise because the rate is determined on variable rate. Of course the debtor will suffer more substantial losses having to pay more interest than it should be. Unjust enrichment there is not enough to settle the case, because it
In resolving cases which the doctrine of consideration is insufficient enough to be used as legal ground, Craig offered some reformation such as:
“ to abondon consideration and enforce all agreed modifications subject only to the operation of the doctrine of economic duress, either in its current or a revised form; to allow enforcement of some variations trough estoppel; and to apply some economic test enforcing only efficient variations.”(13)
Another challenge was such as in Anton Trawling Co Ltd v Smith (2002) NZLR, where the agreement to vary a contract is enforceable without consideration. In this case reliance based test is introduced to replace the doctrine of consideration in the limited sphere of contractual variation.(15)
In the discussion of Williams v Roffey case, Carter et al stated that “in the real world of commercial transactions, the law of consideration seems to play a relatively minor role in comparison with the law on matters such as damages and rights of termination.” (16) This indicates that consideration has been challenged by other legal theory.
Again, still in the William v Roffey case, the question arose whether the bargain theory can satisfy the doctrine of consideration. It is about value of consideration that is adequately fair in law.
“ Nevertheless, in the recognition of nominal consideration, and in its refusal to inquire into the ’adequacy’ of consideration, the common law rejected an entirely objective approach to the concept. To this extent consideration, like beauty, may lie in the eye of the beholder. From this perspective, the essential issue which Williams v Roffey raises is whether the bargain theory can accommodate a conception of consideration which relies principally on the receipt of factual benefit, or the avoidance of factual detriment to the promisor. By relying on factual matters, the decision lies ill with the emphasis of the conventional approach on things valuable ’in the eye of the law.”(16)
Adding meaning on doctrine of consideration
So far we have dealt with the existence of doctrine of consideration which is supported by bargain theory in the legal cases. Although there are many challenges ahead, this doctrine is still powerful as the legal fundamental framework in any contract disputes. As to there shouldn’t any contract that are backed up by sufficient consideration. Such as stated here:
“Thus, one reason for retaining consideration lies in the fact that it is not a mere legal construct. It serves the function it was designed to serve —marking off those promises which count as contractual promises from those which do not — because it does reflect commercial reality. In commerce, to be entitled to enforce a promise you have to purchase it.”(16)
In William v Roffey case, Heffey et al. put more concern that the legal base of this case should be followed in Australia, existing obligation should be enforce because:
“ first, to protect promisor from extortion, such as may result from threatening to breach a contract in order to exact a concession… second … why the promise should not be enforced, is that the promisee suffered no legal detriment in performing what was already due from him. Nor did the promisor receive any legal benefit in receiving what was already due to him…” (12)
I think that back to the nature of transaction in the contract, the element of protection and the inexistence of further benefit and detriment have made the contract become unenforceable. It is really a good way of thinking.
Another aspect that is open for further discussion the way of determining the substantive consideration. It involves the valuation of party’s performance whether sufficient or not and whether it can satisfy the intrinsic value “by in case” the lapse of time, interest accruing for the debt for example. Here the more advanced of technology and complexity of transaction is causing the more difficulties in application of doctrine of consideration.
The way to put the meaning of the doctrine of consideration in contract is to resolve the value of benefit and detriment of the parties. This value, if can be determined easily without further complexity process must be sufficient enough to answer the question of value in practical and substantive benefit in law. This in turn alleviate the situation of gratuitous benefit which is not enforceable. Again, the equity principle is put in the mechanical process of doctrine of consideration in the objective of attaining fair and justice decision.
The additional theories intermingled with the doctrine of consideration in such a mechanical way. The process sits in contract modification in a changing situation, where the court is resolving eligibility of consideration question. The promissory estoppel and unjust enrichment are truly enrich the doctrine of consideration. This is because the application of consideration in itself can not stand alone. It must added with these two more theories to empower it.
Word count exclude bibliography: 3076
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