Essay Paper on the Doctrine of Consideration

What Is the Significance of the Doctrine of Consideration in the Law of Contracts

Generally, a contract is considered to be an exchange of promises or an agreement between parties which legally binds these parties and that can be enforced by the law. Usually, contract law is based on the phrase pacta sunt servanda that means ‘promises must be kept’. It is clear that all people make contracts nowadays and do not even consider for a moment that they make contracts. The contracts can be formal or informal, oral or written, or just plain understood. ‘The mere fact of agreement alone does not make a contract. Both parties to the contract must provide consideration if they wish to sue on the contract. This means that each side must promise to give or do something for the other.’ Thus, consideration is a necessary element for making a contract. ‘It may consist of a promise to perform a desired act or a promise to refrain from doing an act that one is legally entitled to do.’ But simple words ‘I promise’ are not enough to make a contract. As well, any formal promise is not essential to make a debt valid. The promises are of no obligation in law if they are naked. On the other hand, if one party receives a value from another party, and it is clear that it is not a gift, or if the equivalent is supposed to be paid for the value, then the obligation to deliver the equivalent of the value is binding.

Anyway, no one pays the consideration for the promise itself. ‘He simply pays for the thing promised… And then, the promise to deliver, or pay it, (the thing promised) is made solely as evidence that it (the thing promised) has been sold and now belongs to the promisee as a matter of property.’

Traditionally, consideration is the requirement of the ability of both parties that participate in the contract to enforce a promise. And of course, something must be given in exchange for the promise. Consequently, to be enforceable, the contracts are supposed to be supported by the consideration. ‘Consideration for a particular promise exists where some right, interest, profit or benefit accrues (or will accrue) to the promisor as a direct result of some forbearance, detriment, loss or responsibility that has been given, suffered or undertaken by the promise.’

There exist some kinds of consideration – it can be executory or executed but by no means past. Eecutory consideration appears when there is a promise to do something in the future in return for another promise to be done in the future. And consideration is called executed if the promise is already executed in exchange for another promise to be executed in the future. And the consideration is past when the promise has already been given or executed independently from another promise.

There exist rules that govern consideration. They are going to be discussed hereinafter.

First, consideration can not be past. The consideration happens to be past when one party of the contract performs an act, and the other party then makes some promise. Thus, past consideration is not a consideration so it cannot be valid, and the first party does not have the right to sue on the contract. Contrariwise, there exist some exceptions for this rule. If there exists a previous request that is, if the promisor previously asks the other party to provide some service or good, then the promise that is made after the service or good is provided is still treated as binding. Beside that, the past consideration can be binding if it is made in the context of business and these sides understand that the service or the good will be paid for according to the contract. Also, according to the Bill of Exchange Act 1882, ‘any antecedent debt or liability is valid consideration for a bill of exchange.’

Second, consideration is supposed to be sufficient but it need not be adequate. It stands to reason that consideration has some kind of a value. Thus, the court that may consider it will not investigate its adequacy. And on the other hand, if the consideration is acknowledged by the law it is considered to be sufficient.

Third, the consideration must move from the promisee. The person that is going to enforce the contract has to prove that one has secured consideration. The promisee thus shows that the consideration ‘moved from’ that is ‘was provided’ by one.

Fourth, there may be the forbearance to sue. If one party has got a valid pretension against the other party under conditions of the contract but promises to forbear from enforcing it there happens valid consideration if the other party promises to settle the pretension.

Fifth, if the person is supposed to perform some kind of a public duty then the promise to accomplish the task under this public duty is not considered to be a valid consideration.

Sixth, there is the rule of the existing contractual duty. According to it, consideration can not be valid if one party promises to perform some task that is already implied by the contract.

Seventh, there is the rule of the existing contractual duty owed to a third party. By reference to this rule, the consideration is valid if one party promises to perform some duty to the second party while the first party is already obliged to perform the same duty to the third party.

And finally, eighth, there is the question of the part-payment of debts. ‘If one person owes a sum of money to another and agrees to pay part of this in full settlement, the rule at common law (the rule in Pinnel’s Case (1602) 5 CoRep 117a) is that part-payment of a debt is not good consideration for a promise to forgo the balance’. For instance, if there exists a debt and only the part has been paid it is not considered to be the real consideration. On the other hand, part-payment is valid if some kind of the new consideration is created. It can be part of the debt paid on the earlier date and then another part paid on the due date, or it can be chattel given to the creditor instead of money, or it can be part-payment in some place other than one specified in the previous agreement. Outside of these exceptions from the rule there are some more. First and foremost, the debt may be part-paid by the third party. Under these conditions the creditor accepts the offer to receive the part of the debt payment from the third party. And thus, the debtor gets free from the necessity to bay the full sum of the debt. In the second place, if there is a composition agreement this rule has no affects on it.

Composition agreement is an agreement between a debtor and the group of creditors, and according to this agreement the creditors allow the debtor to pay the percentage of the debt that is going to be accepted for the full settlement. The debtor cannot be sued to pay the full amount of the debt as this case will be considered a fraud on the creditors that agreed to receive a percentage of the debt. In the third place, there is the rule of promissory estoppel that is also called the equitable doctrine. ‘The doctrine provides a means of making a promise binding, in certain circumstances, in the absence of consideration. The principle is that if someone (the promisor) makes a promise, which another person acts on, the promisor is stopped (or estopped) from going back on the promise, even though the other person did not provide consideration (in so far as is it is inequitable to do so).’ There exist some requirements that have to be satisfied before the doctrine is implied. They are legal relationship (it has existed before the contractual relationship appeared and it may cause liabilities or penalties if it is necessary), promise (there is supposed to be the statement made by the promisor that his legal rights are not going to be enforced), reliance (the promisee acts in reliance on the promise), impossibility to revert the promise (‘It must be inequitable for the promisor to go back on his promise and revert to his strict legal rights. If the promisor’s promise has been extracted by improper pressure it will not be inequitable for the promisor to go back on his promise.’ ), the doctrine can only be used as a ‘shield’ but not a ‘sword’ (it can be used as a defense from a claim but not as the reason for the lawsuit), and the question if the doctrine is extinctive or suspensive of rights (here the nature of the promise has to be viewed: if the promise is temporary and protects strict legal rights of the promisor its effect will be suspensive; while if the promise is permanent then the promise is given full effect to extinguish the promisor’s rights)…

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