Consideration

Introduction
Whether or not a promise that is part of an agreement can be enforced depends on,
among other things, whether the promisee has given consideration for the promise.
Consideration is perhaps best understood as an act or promise of an act which is the
price paid for the other's promise (Dunlop Pneumatic Tyre Co v Selfridge & Co). The
common law will only enforce a promise for which a price is paid.
Nature of Consideration
Consideration in Bilateral Contracts
A bilateral contract is formed where the parties exchange promises. At the time
agreement is reached, each party makes a promise. The price paid for that promise
the consideration is the other partys promise. Each party promises to do an act or
refrain from doing an act.
Unilateral Contracts
Unlike bilateral contracts, a unilateral contract does not constitute an exchange of
promises. The only promise is the one made by the promisor to do or refrain from
doing and act if the other party does or refrains from doing an act. Thus, the act itself
constitutes the consideration.
Executed and executory consideration
In bilateral contracts, the consideration is considered executory. In bilateral contracts
each party exchange promises with the other to do or refrain from doing an act. This
means that the obligation to perform has not yet fallen due. In unilateral contracts the
parties do not exchange promises. Only one party will make the promise and an
obligation will only arise if the other party carries out the specified acts.
Consideration for the promise is not executory because the act has not been promised
by the promisee. If the promisee chooses to and does perform the specified acts,
consideration is said to be executed.
Rules governing consideration
For there to be a contract formed between the promisor and the promisee,
consideration must move from the promisee. Failure of a litigant to provide
consideration to the promisor was one of the reasons that the plaintiff was
unsuccessful in Dunlop Pneumatic Tyre Co v Selfridge & Co.
In Dunlop Pneumatic Tyre Co v Selfridge & Co Dunlop sold some products to a third
party at a discount price. In consideration for the discount price, the third party
agreed that if it onsold for a discount price it would require an undertaking by that
purchaser not to sell at less than the list price. The third party sold to Selfridge and
obtained the required undertaking, Slefridge did not honour this undertakeing and was
sued by Dunlop.
The court found that even if it could be considered that an agreement was entered into
between Dunlop (the third party acting as an agent for Dunlop) and Selfridge, Dunlop
could not be regarded as having provided consideration for Selfridges promise not to
sell at less than the list price. Consideration for this promise moved only from the
third party.
Consideration must move from the promisee

a) Benefit need not move to promisor

It will generally be the case that consideration moves from the promisee to the
promisor, whether the promisee promises to pay money, or do or forbear from doing
an act. However, it is sufficient if consideration moves from the promisee to a third
party at the direction of the promisor.
b) Joint promisees
B and C agree with A that A may quarry and remove stone from land owned by B in
exchange for A paying royalties to B and C. These facts disclose a valid agreement.
In consideration of As promise to pay B and C royalties for the quarried stone, B
allows A access to the land to remove the stone. In this case, B and C are joint
promisees. If a contract is formed with joint promisees, consideration need only flow
from one of the promisees for the contract to be enforceable (Coulls v Bagot).
c) Overlap with doctrine of privity
The doctrine of privity provides that only a person who is a party to a contract can sue
on it. A promisee is only able to sue on a promise if the promisee has given
consideration for the promise. The following example demonstrates the overlap
between principles.
Example
A and B agree that if B does specified work for A, A will pay C $500. B does the work but A
refuses to pay the $500.

Applying common law principles, C will not be successful in an action against A to

enforce As promise for two reasons. First, C is not a party to the contract so is unable
to sue upon it. This is because of the doctrine of privity. Alternatively, it could be
argued that C has not provided consideration for As promise and therefore, cannot sue
upon it (Tweddle v Atkinson). If in the example, A, B and C signed the contract, C
will be a party to the contract, and the doctrine of privity will not discount legal action
on his/her part. However, C will still be unable to sue because C has not provided
consideration for As promise.
In Tweddle v Atkinson the plaintiff and a woman were engaged to be married. The
plaintiffs father and the deceased (womans father) agreed for each to pay specified
amounts to the plaintiff upon the marriage. The deceased died without paying the
agreed sum and the plaintiff sued. The court found that the plaintiff could not succeed
because the plaintiff is a stranger to the consideration.
Consideration must be bargained for
An act of forbearance (or promise to forbear) can only constitute valid consideration
if it is bargained for. The notion of bargain involves both the promisor and the
promisee. The action or forbearance from action of the promisee must be in reliance
on the promisors promise, and done at the request of the promisor (Combe v Combe).
In Combe v Combe a married couple separated and the husband promised to pay the
wife 100 per year. Because of this promise, the wife did not apply to the divorce
court for maintenance. The husband failed to pay the money as promised and the wife
brought an action to recover the money.
The court held that the parties had no entered a contract as the wife had provided no
consideration. The wifes forbearance from bringing an action for maintenance did
not constitute consideration because it was not done at the express or implied request
of the husband.

Similarly in Australian Woollen Mill v The Commonwealth the Commonwealth

entered a subsidy scheme to lower the purchase price of wool for local manufactures.
Upon discontinuation of the scheme a local manufacturer sued the Commonwealth for
breach of contract to recover the outstanding subsidy claiming that a contract was in
existence to provide the subsidy. The court held that there was no indication that the
Commonwealths promise was made to induce the manufacturer to purchase wool,
nor the manufacturer purchased the wool because of the Commonwealths promise.
Consideration must be sufficient
a) General principle
To be valid, consideration must be sufficient in that it is something which is of value
in the eyes of the law (Thomas v Thomas). The decisions, in turn, provide guidance
concerning the kinds of acts, forbearance or promises that can be regarded as
something of value for this purpose. Consideration may be valid although it cannot
be given monetary equivalent.
In Chappell v Nestle Nestle, manufacturer of chocolates, promised to gtive a record to
any member of the public who sent in 1s 6d plus three wrappers. The issue before the
court was whether the three chocolate wrappers as well as the money could properly
be regarded as part of the sale price of the record. The court held that the chocoloate
wrappers did form part of the sale price. Consideration for the record was both the
money paid and the three chocolate wrappers . The sending in of the wrappers was of
value to Nestle given the large number of records sold, there would be a large number
of wrappers sent in. This would be of commercial value to Nestle.
Even if the item lacks intrinsic value, requiring it to be provided can constitute good
consideration (Chappell & Co v Nestle Co Ltd).
b) Consideration need not be adequate
Consideration must be sufficient but need not be adequate. When used in reference to
consideration, adequacy is a reference to the commercial value of the consideration.
By saying that consideration need not be adequate, it means that a court is not
interested in ensuring that a promisee provides value for the promisors promise.
c) Consideration can be nominal
Consideration will be regarded as valid even if it is nominal only (Thomas v Thomas).
Consideration must not be past
a) General Principle
Consideration moving from the promisee will not be valid to support a promisors
promise if that consideration is past. The consideration will be regarded as being past
if it has already flowed from the promisee to the promisor (Roscorla v Thomas).
In Roscorla v Thomas a buyer bought a horse from a seller. After the sale the seller
promised tat the horse was free from vice. The horse was vicious and the buyer sued
the seller for breach for his promise. The court held that the buyer provided no
consideration as the agreement to buy the horse could not be regarded as
consideration because the sale had already taken place.
b) Past consideration distinguished from executed consideration
If the act, forbearance or promise that is claimed to be consideration has already
occurred or been given before the agreement is entered into, the consideration is past
not executed.

Consideration and formal agreements

Deeds
Formal agreements are signed under seal, and are more commonly referred to as
deeds. Because of the solemnity or seriousness of the manner of execution of such
documents, the common law has recognized these agreements as valid even if
consideration has not been provided. Simple agreements are agreements other than
formal agreements which are oral or written and require consideration to be valid.
Consideration: specific examples
Moral Consideration
A promise made because of a sense of moral obligation to the promisee will not be
sufficient consideration to support that promise.
In Eastwook v Kenyon upon the death of a girls father, the fathers executor looked
after the girls interests and investments, and spent his own money in the process.
When the girl attained majority, she under took to repay the plaintiff. This promise
was adopted by the girls husband, the defendant when she married. The plaintiff
brought an action against the defendant to recover the amount promised.
The court held that the plaintiff had not provided consideration for the husbands
promise. Any moral obligation that the defendant may have felt on the basis of the
care taken of his wife and money expended by the plaintiff on her over the years did
not constitute valid consideration.
A promise made because of the love and affection that the promisor and promisee
have for each other, or that the promisor has for the promisee is not legally recognized
(White v Bluett).
In Thomas v Thomas the testator, on his death bed, that he wanted his wife to receive
his house which was conveyed to her in consideration of such desire. In the same
agreement, the wife was required to pay the executors 1.1.0 yearly towards the rent
payable in respect of the house, and to keep the house in repair. The executors
refused to transfer the property.
The English court held that the executors were required to transfer the house to the
wife as her promise to pay 1.1.0 and to keep the premises in repair was consideration
for the promise to transfer the property, however, the court held that fulfilling that
testators desire could not form part of the legal consideration for the agreement.
Performance of existing duties
a) Performance of existing contractual duties
Generally a promise by one party (the promisee) to perform an existing contractual
duty owed to another party (the promisor) does not constitute good consideration for
the promisors promise (Wigan v Edwards). Where the plaintiff is bound by an
existing contractual duty to the defendant, performance of that duty will not amount to
sufficient consideration to support a further promise made by the promisor, unless the
duty is exceeded.

In Stilk v Myrick two sea men deserted in the course of a voyage and the captain was
unable to replace them so he entered into an agreement with the rest of the crew to
distribute the wages of the two deserters equally among them if they continued to
work the ship. The crew did so and the captain refused to pay. The court held that the
agreement to share the wages was void for want of consideration. As part of the
original agreement, the crew had undertaken to do all that they could under all the
emergencies of the voyage. The desertion of part of the crew was such an emergency
and the crew members were merely performing what they originally agreed to do
under the existing contract.
A court may be prepared to find that the parties have agreed to abandon their original
agreement and enter a new one. In Hartley v Ponsonby the facts were similar to those
of Stilk v Myrick however the ship was in the harbour instead of at sea. The court
held that after the desertion, it was dangerous to life for the ship to go to sea. This
operated to release the original crew from their contracts therefore, the plaintiff
agreeing to remain on the ship for the rest of the voyage was consideration for the
captains promise to pay additional money.
The court may be willing to accept performance of an existing contractual duty as
good consideration where it provides a benefit to the promisor. In Williams v Roffey
Bros, a subcontractor who had underquoted and found itself in financial difficulties
advised the head contractor that unless it was paid an additional amount, it would be
unable to complete its work under the contract. This would have meant the work
under the head contract would not have been completed on time and under that
contract, the head contractor would have incurred a penalty for late completion. The
court held that despite the fact the subcontractor was only doing what it was already
contract to do, it had provided good consideration for the head contractors promise to
pay the extra amount by conferring a benefit in the form of enabling the head
contractor to avoid incurring the penalty.
b) Performance of a public duty
Performance of a public duty does not constitute good consideration for a promise.
The rationale for the rule is that if a person is obliged by law to do a particular act,
then in undertaking to perform that act in exchange for a promise, he/she is providing
no consideration. That act would have been performed in any event. Thus, if the
promisee promises to do something over and above what the public duty requires,
there would be consideration for the promise (Glasbrook Bros v Glamorgan County
Council). In Glasbrook Bros v Glamorgan Country Council police who were under a
public duty to provide mobile patrols in an area but who also provided special on site
guards were held to be acting in excess of their public duty and thus there was good
consideration to support the defendants promise to pay for those services.
c) Where promise is made to a third party
A promise to perform an existing contractual duty owed to another party can be good
consideration for a promise. There are a number of possible rational for this. First, it
may be of benefit for the promisor to ensure that the original agreement is carried out.
Second, although the promisee may be contractually bound to perform the original
agreement, by entering into the subsequent agreement, he or she incurs further
liability to the promisor if the first agreement is not performed (Pao On v Lau Yiu
Long).
In NZ Shipping v Satterthwaite a bill of lading which exempted the carrier of drilling
equipment from liability for any loss or damage or delay of whatsoever kind. All

person working for the carrier were deemed to be parties to the contract which
consisted of the bill of lading. The equipment was damaged whilst being unloaded by
a stevedoring company employed by the carriers. The stevedoring company pleaded
the exclusion clause in defence to an action by the plaintiffs.
The court held that the stevedores were able to take advantage of the exclusion clause
as the contract had been made by the carriers as agents for the stevedores. The
stevedores had provided consideration for the contract by unloading the goods on
arrival.
Part Payment of Debt
a) Rule in Pinnels Case
The principle that the promise to pay part of a debt cannot constitute consideration for
a creditors promise to forgo the balance is commonly referred to as the rule in
Pinnels case.
If an amount of money is owing by a debtor to a creditor, and those parties enter into a
subsequent agreement that the creditor will accept a lesser amount in full satisfaction
of the amount, the later amount agreement will generally not be binding because the
debtor has not provided consideration for the creditors promise to forgo the balance
due. Therefore, even if the debtor acts on this agreement by paying the lesser sum
agreed and the sum is accepted by the creditor the creditor will generally be able
to sue the debtor for the balance due (Foakes v Beer).
b) Circumstances in which the rule will not operate
Parties Enter into a deed
Consideration is not required, however, for specialty agreements (formal agreement
under seal). If the parties enter into a deed under which the creditor forgoes part of
the amount owing, that arrangement will be enforceable despite the absence of
consideration.
Accommodation to benefit the creditor
If a debtor provides consideration for the creditors promise, the rule will not apply.
For example, if the circumstances surrounding a payment altered to accommodate the
wishes of the creditor so that the creditor received some benefit from the new
arrangement, consideration may have been provided for the creditors promise (Van
Burgen v St Edmonds Properties). Examples of how the arrangement could be altered
by the creditor:
Payment on an earlier than scheduled date
Payment at a location more convenient to the creditor
Payment in a currency more desirable to the creditor
Payment made at a different place for the debtor's convenience does not evade the
rule.
Amount owing is disputed
The rule in Pinnels case will only operate when there is no dispute between the
parties as to the amount owed. If the parties cannot agree on an amount owing, they
may wish to enter into a compromise agreement. In the case of a compromise,
although the creditor promises to accept an amount less than what the creditor
contends is the account of the debt in full settlement of the debt, the debtor has

provided consideration for the creditors promise. The debtor has agreed to pay an
amount more than the debtor believes to be due. This is good consideration even if
the creditor is in fact correct and the amount claimed by the creditor is actually due
(H B F Dalgety LTd v Moreton).
Payment by a third party
If a debtor is unable to meet his debt to the creditor and obtains assistance from a third
party to do so, the third party to placate the creditor may offer a lesser some than the
full amount owed to bring the matter to an end. As the third party is not indebted to
the creditor, his/her promise to pay an amount should be good consideration for the
creditors promise to forgo the balance of the debt. The fact that payment is by a third
party and not the debtor takes the case outside the operation of the rule in Pinnels
case (Hirachand Punamchand v).
Composition with creditors
Under a composition with creditors agreement, the creditors all agree to accept
payment of something less than the full amount owing by the debtor, in exchange for
giving the debtor a full release. Creditors may agree to such an arrangement if it
appears that this is the most likely avenue to recover any amount from the debtor (In
the Estate of Whitehead).
Forbearance to sue
To promote settlement of potential legal claims, the court is prepared to recognize the
validity of agreements to compromise claims or agreements to forbear from suing
even if the claim by the party is one that may not have succeeded. A promise not to
sue may be good consideration for the other partys promise even if in fact that claim
would have been unsuccessful.
Bargain for conduct already performed
The exception to the rule that past consideration will be ineffective to support a
promise is that if the services would only have been provided on the basis of payment
(Lampleigh v Braithwaite). Services are frequently provided without discussion of
payment, but it is presumed by all parties that there will be payment for those services
for example obtaining the services of a medical specialist for a particular complaint or
an accountant for the preparation of a tax return.
In all cases where a promisee seeks to enforce a promise made after theprovision of
the services, or other conduct relied upon, the promisee must be able to demonstrate
that
1. the act must have been done at the promisors request:
2. the parties must have understood that the act was to be remunerated either by
payment or the conferment of some other benefit
3. payment, or the conferring of the benefit, must have been legally enforceable
had it been promised in advance