Construction Contracts Law And Management – Analysis Of Consideration In Contract Law

Essential Elements of a Valid Contract

Discuss about the Construction Contracts Law and Management.

Contract is an agreement enforceable by law. Agreements which confers legal obligation on the parties, only those agreements are contracts. Validity of contract is determined on the basis of the fact that, whether essential conditions of for formation of contract have been satisfied or not. Essentials of a valid contract constitute an agreement, intention to enter into contractual relationship and consideration. An agreement includes offer and acceptance of the terms of the offer in strict sense. In order to constitute a legally binding relationship between parties there should be meeting of minds, in other words the parties must agree upon the terms of the contract in the same sense.

At common law a promise to be enforceable by law as a contract must either be incorporated in a deed or supported by valuable consideration. In Dunlop Pneumatic Tyre Co. vs. Selfridge and Co. Ltd. consideration was defined as “An act or forbearance 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.” It can rightly be asserted that consideration is an important aspect of contract so as to be legally binding upon the parties to contract. In other words, consideration is the price paid for enabling the promise to be enforceable.

The rule that consideration must not be adequate or commercially realistic, rather it should be sufficient, mandates that the consideration need not be equal to that promised, but must have some value. In other words in a contractual arrangement some value must be given by promisee in lieu of promise made by the promisor. This is in line with the pronouncement in the case of Thomas vs. Thomas wherein it was laid that consideration must hold some value in the eyes of law.

The research paper would analyze problem related to the nature of consideration so as to enable the contract to be enforceable by law. Whether the consideration should be adequate or commercially realistic or the consideration would be a valid consideration under law if it is a sufficient consideration.  The present paper would determine with reference to case laws, development of the concept of consideration in contract law and explain the role of consideration in formation of contract.

Concept of consideration requires it as an essential element in the formation of contract. The term consideration was for the first time in contractual context used by judiciary in 1557, with regard to a marriage agreement in the case of Joscelin vs. Shelton. It has been argued that concept of consideration occurred around 16^th century when the common law judges were in a dilemma, as to enforcement of a contract not under seal, and the answer to the problem lied in development of the concept of consideration, so as to identify and enforce bargains.

History on the Origins of Concept of Consideration

Theorists are of the view that the concept of consideration might be a species of evolution of the concept of assumpsit, but it can be argued that during this process there existed a strong influence of the 14^th century doctrine of Quid pro quo. With the decision in Pickering vs. Thoroughgood in 1533 the concept of assumpsit had developed to an extent that it could be regarded as a remedy in cases of breach of promises. In the said case a successful action was brought by a brewer against a person who assumed and promised to deliver malt, which was supposed to be used in brewing trade.

The position laid in Slade’s case led a way to enforcement of simple agreements. The said case adjudged that every contract carries in itself an assumpsit, as where one party agrees to make payment or deliver goods to another, he thereby assumes the position of a promisor and for the said reason when the former delivers goods to the latter, the latter in consideration of the delivery agrees to pay money at such a date. The court after observing the above mentioned position concluded that wherein a similar situation arise both the parties have an action of debt or an action of assumpsit, hence whenever the parties have two remedies available, the option to opt between the two lies with the parties.

During the 18^th century consideration was presumed in case of existence of moral obligation. The definition of consideration lay in the case of Dunlop vs. Selfridge was accepted during 20^th century, and the same still prevails.

The academic theories related to consideration are imperative in the formation of a valid contract that enforceable by law. The contract law deals with the conception of exchange and it predicates the economy of a country. In countries like Australia most of the goods and services are distributed through markets and contract forms an integral part of the market. Consideration under the law of contract is an essential element that validates a contract and makes it enforceable by law. It is a well-established concept that enforceability of contracts is imperative in ensuring fairness and legal certainty for all the parties to the contract. The principal academic theories related to consideration are consideration is not required to be adequate, it must be sufficient; past consideration is not a good consideration; part-payment of a debt is not a good consideration and performance of a legal duty is not a good consideration.

Academic Theories of Consideration

A consideration is valid if it is sufficient to bind the parties to the contract legally. A consideration that has some monetary value is considered as a valid consideration before the court of law. The consideration made must be recognizable in the eyes of law. The promises made by the parties at the time of entering into a contract must not be merely verbal promises. The promises made by one party in exchange of the promise made by the other party must be of some value that is recognized by the law. The value of the consideration may not be equal value but it must be something that amounts to a sufficient consideration to make the contract and valid and enforceable by law. In White v. Bluett (1853), Bluett brought a legal action against his father’s consent for an arrear amount and claimed that his father promised to make payments of the outstanding bill in exchange for Bluett himself provided Bluett stops complaining about it. It was held by the court that the consideration made by his father does not amount to a valid consideration as a promise to stop complaining does not possess any monetary value. Therefore, Bluett was still entitled to be paid by his father. It is established that consideration made in exchange of the promise must be tangible and must possess some pecuniary value. However, there are instances that are not considered as sufficient consideration in the legal parlance. These include moral duty, natural affection, love, and prayers. Promises made out of natural love and affection are not considered good consideration as these promises are regarded as general promises that are made within a family and there is no pecuniary value attached to the promises. 

The terms sufficiency and adequacy have similar meanings but from the legal point of view, they differ in their meanings and application. A consideration is considered adequate when a price or value received by any person is not proportionate to the price paid by the person. However, the courts are of the opinion that it depends on the parties to the contract as to what value is to be attached to the goods or services they intend to sell. Therefore, if the consideration in a contract is inadequate it does not invalidate the legal efficacy of the contract. This contention has been established in the case of Grogan v. Cooke where it has been observed that if the consideration is adequate and is not malafide in nature the court shall not intervene into the matter. It is an acceptable rule of common law that as long as the terms of a contract are not ambiguous and comprehensible the terms shall not be considered as unfair or inadequate. The rule is subject to the condition that the value attached to the services and the goods that forms the subject matter of the contract is nominal the goods and services are exempted from regulations as was expressed in Irish Steel Ltd case.

Consideration Must be Sufficient

If either of the parties to the contract executes an act willingly and the other party makes an undertaking after such performance, the consideration thus made is termed as past consideration. The Law of Contract stipulates that any consideration that is not made either with or after the promise becomes a past consideration and is not regarded as a valid consideration. Past consideration is not valid and cannot make the contract enforceable. This rule has been established in the case of Roscola v. Thomas (1842) 3 QB 234. The facts of the case were such that the plaintiff purchased a horse from the defendant and subsequent to the sale, the defendant assured him that the horse was sound by nature. However, later it was found that the horse was unsound and the plaintiff brought a legal action against the defendant for committing violation of the contract. The court held that the soundness of the horse did not amount to a valid consideration for the promise. The only consideration that was made was the contract to sell the horse. However, the sale of the horse took place before the defendant had promised and hence it amounts to past consideration, which is not considered as a good and valid consideration.

The rule established in the Pinnel’s case that fraction payment of a debt does not constitute a good consideration. If a party owes a certain amount of money to another party and assents to make fraction payment it is considered as part payment of a debt. The underlying reason behind the rule is that the proposal of making payment of a lesser amount cannot satisfy the outstanding greater amount and the law must decline to enforce the contract that includes such terms. This rule though was introduced in the Pinner’s case but was applied in the Foakes V Beer. In the latter case, Mrs. Beer asked Mr. Foakes to pay the debt for which Mr. Foakes asked for time subject to the condition that Mrs. Beer shall not take legal action against him. Mrs. Beer agreed to him but later she sued him for the remaining balance. It was held that Mrs. Beer was entitled to the payment of debt and that the promise made by her in exchange had no pecuniary value. Hence, it was not a good consideration.  The most important exception applicable to this rule is the doctrine of Promissory Estoppel. The doctrine binds a promise in the absence of a consideration. The doctrine states that if a party makes an undertaking relying upon which the other party acts on the promise, then the party making such undertaking is estopped or prohibited from turning in the promise made despite the party acting on such promise has not provided a good consideration. This doctrine has been established in the cases of Hughes Case (1877) and the High Trees (1947). The other exceptions applicable to the Pinnel’s case are that if the lesser sum proposed to be paid is accepted by the creditor; the amount is paid as an object that is acceptable by the creditor.

The Difference between Adequacy and Sufficiency of Consideration

When the plaintiff promises the defendant to fulfill a previous promise this amounts to insufficient consideration. Any public duty that is imposed by the law does not amount to a good consideration as the person is under statutory obligation to perform the legal duty.

From the above discussions, it can be concluded that a consideration to be valid must be sufficient and adequate. As discussed above, for a consideration to be adequate it must be unambiguous and must not include any unfair terms. Again, a consideration is considered as sufficient in the eyes of law only when the promise made has economical value attached to it. Besides, having pecuniary value attached to the promise it must also be recognizable by the law. The intervention of the courts is unwanted, as the parties to the contract must decide the value to be attached to the goods and services. In case the terms are not fair and incomprehensible, the parties may seek the courts in the matter. A consideration acts as a fundamental element in the formation of a valid contract as it makes a contract legally binding and effective. For a contract to be enforceable by law, it is mandatory that the consideration is a good consideration. However, there remain difficulties in reconciling the sufficiency and the adequacy argument. The main problem is that if practical advantage is to be considered to be the basis of a sufficient or adequate consideration, there are contrasting decisions that still do not make a clear statement as to whether a consideration must be sufficient or adequate for it to be valid. However, if the reasoning stated by the Court of Appeal in the Williams v. Roffey Bros is followed then the doctrine of consideration requires to be refined and restricted and recognition must be given to the practical benefit approach instead of the legal approach.

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