CONSIDERATION: DEFINITION, KINDS, ESSENTIALS AND PRIVITY OF CONTRACT

This article is written by Anshu Gupta of 1^st Semester of BALLB of Banaras Hindu University, Varanasi, an intern under Legal Vidhiya

ABSTRACT

Consideration is a fundamental concept in contract law that is essential for creating a legally binding agreement. This article takes a deep dive into the idea of consideration, starting with its definition and tracing its development over time. It looks at the different types of consideration—such as executed (consideration that has been performed), executory (consideration that is yet to be performed), and past consideration (an act done before the promise is made)—each of which carries unique legal consequences. The article then discusses in detail what makes consideration valid and enforceable in a contract. It also examines the doctrine of privity of contract, which determines the rights and obligations of third parties who are not directly involved in the contract. By exploring these aspects, the article provides a thorough overview of consideration, emphasizing its importance and the crucial role it plays in the law of contracts.

Keywords

Consideration, Contract Law, Privity of Contract, Legal Obligation, Doctrine of Privity, Valid Contract, Enforceability, Legal Relationship, Contractual Agreement

INTRODUCTION

Contract law is one of the most fundamental aspects of the legal system, governing the agreements that individuals and businesses enter into every day. At the heart of contract law lies the concept of consideration, a necessary element for the formation of a valid contract. Consideration is what differentiates a legally binding contract from a mere promise or agreement without legal significance. In essence, it is the price that one party pays for the other party’s promise, creating a reciprocal relationship that the law recognizes and enforces.

Over the centuries, the concept of consideration has evolved, influenced by various judicial interpretations and legal reforms. What was once a simple notion has become a complex and multifaceted principle, integral to the understanding of contract law. This article will explore the definition of consideration, its various forms, and the essential characteristics that make it valid. Furthermore, the doctrine of privity of contract, which governs the rights and obligations of parties involved in a contract, will be examined.

The discussion will begin with a detailed analysis of the definition and historical development of consideration, followed by an exploration of its different types, such as executed, executory, and past consideration. The article will then outline the essential elements that must be present for consideration to be legally recognized. Finally, the doctrine of privity of contract will be discussed, along with its exceptions and the implications for third-party rights.

DEFINITION OF CONSIDERATION

Conceptual Understanding of Consideration

Consideration is defined as something of value that is exchanged between parties in a contract. It is the price that one party pays for the other party’s promise, creating mutual obligations that are enforceable by law. The concept of consideration is rooted in the idea that contracts should not be legally binding unless both parties provide something of value in return for the promise made by the other party. This exchange of value is what gives the contract its legal force.[1]

The value provided as consideration can take many forms, including money, goods, services, or even a promise to refrain from doing something. For example, in a contract for the sale of goods, the consideration provided by the buyer is the money paid, while the consideration provided by the seller is the goods delivered. Similarly, in a contract for services, the consideration provided by the service provider is the performance of the service, while the consideration provided by the recipient is the payment for that service.

Executed consideration refers to a situation where the act or forbearance is completed at the time the contract is formed. In other words, one party has already fulfilled their obligation, and the contract recognizes this completed action as valid consideration. Executed consideration is common in contracts where one party performs their obligation immediately upon entering into the agreement.

For example, in a contract for the sale of goods, the buyer pays the purchase price at the time of the sale, and the seller delivers the goods immediately. In this case, the consideration provided by both parties is executed, as both the payment and the delivery of goods occur simultaneously. The law recognizes this exchange as valid consideration, making the contract enforceable.

Executed consideration is also seen in contracts where one party performs a service in exchange for immediate payment. For instance, a carpenter who agrees to repair a door for a homeowner in exchange for immediate payment upon completion of the work is providing executed consideration. The carpenter’s performance of the work and the homeowner’s payment are both examples of executed consideration.

Executory Consideration

Executory consideration involves a promise to perform an act or forbearance in the future. This type of consideration is common in contracts where the obligations of the parties will be fulfilled at a later date. In executory contracts, both parties exchange promises, with the actual performance of the obligations occurring at a future time.

For example, in a contract for the construction of a building, the builder agrees to complete the construction by a specified date, and the owner agrees to pay the builder upon completion. In this case, both the builder’s promise to complete the construction and the owner’s promise to pay are examples of executory consideration. The consideration is not immediate but is contingent on future performance.

Executory consideration is also present in contracts for the provision of services over a period of time. For instance, in a contract for the supply of electricity, the utility company promises to provide electricity to the customer for a specified period, and the customer promises to pay for the electricity consumed during that period. The consideration provided by both parties is executory, as the obligations will be fulfilled over time.

Past Consideration

Past consideration occurs when the act or forbearance took place before the contract was made. Generally, past consideration is not considered valid in contract law because it is not bargained for at the time of the contract’s formation. In other words, if one party performs an act without expecting any return or promise from the other party, and the other party later promises to provide something in return, the consideration is deemed past and is typically not enforceable.

For example, if a person voluntarily helps a neighbour repair their car without any prior agreement or expectation of payment, and the neighbour later promises to pay for the help, the promise to pay is based on past consideration. Since the consideration was not bargained for at the time of the repair, it is considered past consideration and is generally not enforceable.

However, there are exceptions to the rule against past consideration. In some cases, past consideration can be recognized as valid if it was provided at the request of the promisor or if there was an implied understanding that payment would be made. For instance, in the case of Lampleigh v. Braithwaite (1615)[2], the court held that past consideration could be valid if it was provided at the request of the promisor and if there was an implied promise to pay.

Another exception to the rule against past consideration is found in cases where the past act or forbearance was done in a legal or moral obligation context. For example, if a person rescues someone from danger, and the rescued person later promises to reward the rescuer, the consideration may be recognized as valid despite being past consideration, especially if the act was done in a situation where the rescued person had a moral or legal duty to compensate the rescuer.

ESSENTIAL OF VALID CONSIDERATION

For consideration to be legally recognized, it must meet certain essential requirements. These requirements ensure that the consideration is valid and that the contract is enforceable. The key essentials of valid consideration are as follows:[3][4]

It Must Be of Some Value

The first essential requirement is that consideration must be something of value in the eyes of the law. This means that the consideration must provide a benefit to the promisor or a detriment to the promisee. The value does not have to be significant, but it must be real and tangible. Even a nominal consideration, such as a token amount, can be sufficient if it is recognized as valuable by the parties involved.

For example, in the case of Chappell & Co Ltd v. Nestle Co Ltd (1960)[5], the court held that even the wrappers of chocolate bars could constitute valid consideration if they were part of the bargain made by the parties. The key point is that the consideration must be something that the parties have agreed upon as valuable, even if it is not of substantial economic value.

It Must Be Sufficient but Need Not Be Adequate

Consideration must be sufficient, meaning it must be capable of being recognized as valid by the law. However, it does not need to be adequate, meaning that the value of the consideration does not have to be equal to the value of the promise. The law does not require that the consideration be fair or reasonable, as long as it is something of value.

For example, in the case of Thomas v. Thomas (1842)[6], the court held that a nominal payment of £1 per year was sufficient consideration for the lease of a house, even though the payment was far below the market value. The adequacy of the consideration was not relevant; what mattered was that the parties had agreed to the payment as valid consideration.

It Must Be Real and Not Illusory

Consideration must be real and not illusory, meaning that it must involve a genuine exchange of value. A promise to do something that is already legally required or a promise that is vague and uncertain does not constitute valid consideration. For example, a promise to perform an existing contractual duty is not valid consideration, as the party is already obligated to perform that duty.

This principle was illustrated in the case of Stilk v. Myrick (1809)[7], where the court held that a promise by a ship captain to pay extra wages to sailors for completing a voyage was not valid consideration because the sailors were already contractually obligated to complete the voyage. The promise to pay extra wages was illusory because it was based on a duty that the sailors were already required to perform.

It Must Not Be Illegal or Against Public Policy

Consideration must not be illegal or against public policy. If the consideration involves an illegal act or something that is contrary to public policy, the contract will be void. For example, a contract to commit a crime or to defraud someone is not enforceable because the consideration involves illegal activity.

This principle was demonstrated in the case of Everet v. Williams (1725)[8], where the court refused to enforce a contract between two highwaymen to share the proceeds of their robberies. The consideration involved illegal activity, making the contract void and unenforceable.

It Must Be Given at the Request of the Promisor

Consideration must be given at the request of the promisor, meaning that the consideration must be provided in response to the promisor’s request or promise. If the consideration is provided voluntarily or without the promisor’s request, it is not valid consideration.

For example, in the case of Re McArdle (1951)[9], a promise to pay for improvements made to a property was held to be unenforceable because the improvements were made voluntarily and not at the request of the promisor. The consideration was not provided in response to a promise, making it invalid.

It Must Be Certain and Definite

Consideration must be certain and definite, meaning that the terms of the consideration must be clear and specific. If the consideration is vague or uncertain, the contract may be void for lack of certainty. The parties must have a clear understanding of what is being exchanged as consideration, and the terms must be sufficiently defined to be enforceable.

For example, a promise to pay a “reasonable” amount of money for services rendered is not valid consideration because the term “reasonable” is too vague and uncertain. The consideration must be specific enough to allow the parties to know what they are agreeing to.

PRIVITY OF CONTRACT

The doctrine of privity of contract is a fundamental principle of contract law that governs the rights and obligations of parties involved in a contract. The doctrine states that only parties to a contract can enforce or be bound by its terms. This means that third parties who are not part of the contract cannot claim any rights or obligations under the contract, even if they benefit from it.[10]

Historical Background of Privity of Contract

The doctrine of privity of contract has its roots in English common law, where it was initially a strict and rigid principle. The courts consistently held that only the parties to a contract could enforce its terms, and third parties had no rights or obligations under the contract. This strict interpretation of privity was based on the idea that a contract is a private agreement between the parties involved, and third parties should not interfere.

One of the earliest cases that established the doctrine of privity was Tweddle v. Atkinson (1861), where the court held that a son could not enforce a promise made by his father-in-law to pay him a sum of money because he was not a party to the contract. The court emphasized that only parties to the contract could enforce its terms, and third parties had no legal standing to do so.

The doctrine of privity was further reinforced in the case of Dunlop Pneumatic Tyre Co Ltd v. Selfridge & Co Ltd (1915)[11], where the House of Lords held that a third party could not enforce a contract to which they were not a party, even if they benefited from the contract. The court emphasized the principle that only parties to the contract could enforce its terms, and third parties had no rights or obligations under the contract.

Modern Developments and Exceptions

While the doctrine of privity remains a fundamental principle of contract law, modern developments have introduced several exceptions to the rule. These exceptions allow third parties to enforce certain contracts or claim rights under certain circumstances, even if they are not parties to the contract.

One of the most significant exceptions to the doctrine of privity is found in the Contracts (Rights of Third Parties) Act 1999 in the United Kingdom. This Act allows third parties to enforce contract terms if the contract expressly provides for it or if the contract confers a benefit on the third party. The Act represents a significant departure from the strict common law doctrine of privity and reflects the changing nature of contractual relationships in modern society.

Another exception to the doctrine of privity is the concept of “agency,” where an agent acts on behalf of a principal in entering into a contract. In such cases, the principal, even though not a party to the contract, can enforce the contract terms and claim rights under the contract. This exception recognizes the role of agents in modern commerce and allows principals to benefit from contracts entered into by their agents.

A third exception is the concept of “trust,” where a trustee enters into a contract for the benefit of a beneficiary. In such cases, the beneficiary, even though not a party to the contract, can enforce the contract terms and claim rights under the contract. This exception recognizes the role of trustees in managing assets and allows beneficiaries to benefit from contracts entered into by trustees.

Other exceptions to the doctrine of privity include cases where the contract involves a “collateral contract,” where a third party is involved in a separate but related contract, and cases where the contract involves “restrictive covenants,” where third parties are bound by the terms of the contract because of their relationship to the property involved.

Judicial Interpretations and Case Law

Judicial interpretations of the doctrine of privity have played a significant role in shaping its modern application. Courts have consistently upheld the principle that only parties to a contract can enforce its terms, but they have also recognized the need for flexibility in certain cases.

For example, in the case of Beswick v. Beswick (1968)[12], the House of Lords allowed a widow to enforce a contract made between her husband and his nephew, even though she was not a party to the contract. The court held that the widow could enforce the contract in her capacity as the administratrix of her husband’s estate, recognizing the need to provide justice in cases where strict adherence to the doctrine of privity would result in unfairness.

In the case of Jackson v. Horizon Holidays Ltd (1975)[13], the Court of Appeal allowed a father to claim damages on behalf of his family for a holiday that failed to

 meet expectations, even though the contract was only between the father and the holiday company. The court recognized the need to provide redress to the entire family, even though they were not parties to the contract, reflecting the changing nature of contractual relationships in modern society.

Impact on Contractual Relationships

The doctrine of privity of contract has a significant impact on contractual relationships, particularly in complex commercial transactions involving multiple parties. The principle ensures that only parties to a contract are bound by its terms and can enforce its provisions, providing certainty and clarity in contractual relationships.

However, the strict application of the doctrine can also result in unfairness and injustice, particularly in cases where third parties are affected by the contract or have a legitimate interest in its enforcement. Modern developments and exceptions to the doctrine have sought to address these concerns, providing greater flexibility and allowing third parties to enforce contracts in certain circumstances.

Overall, the doctrine of privity of contract remains a fundamental principle of contract law, but its modern application reflects the need for balance between the rights of parties to a contract and the interests of third parties affected by the contract.

CONSIDERATION IN E-CONTRACTS AND ONLINE TRANSACTION

The advent of the digital age has transformed the way contracts are formed and executed, leading to the emergence of electronic contracts (e-contracts) and online transactions. The concept of consideration in e-contracts is similar to that in traditional contracts, but the digital environment presents unique challenges and considerations.

Formation of E-Contracts

E-contracts are formed through the exchange of electronic communications, such as emails, online forms, and digital signatures. The basic principles of contract law, including offer, acceptance, and consideration, apply to e-contracts just as they do to traditional contracts. However, the digital environment introduces new complexities, such as the need for authentication, security, and the prevention of fraud.

Consideration in e-contracts can take various forms, including the payment of money, the provision of services, or the exchange of digital goods. The consideration must be valid, just as it would be in a traditional contract, and it must meet the essential requirements of consideration, such as being of value, real, and not illusory.

Legal Recognition of E-Contracts

E-contracts are legally recognized in many jurisdictions, provided that they meet the necessary legal requirements. The Electronic Transactions Act (ETA) and similar legislation in various countries provide the legal framework for the recognition and enforcement of e-contracts. These laws ensure that e-contracts are treated the same as traditional contracts, with the same legal rights and obligations.

Consideration in e-contracts is subject to the same legal scrutiny as in traditional contracts, and courts have upheld the validity of consideration in various online transactions. For example, the payment of money for the purchase of digital goods, such as software or online subscriptions, constitutes valid consideration in an e-contract.

Challenges and Issues in E-Contracts

While e-contracts offer convenience and efficiency, they also present challenges and issues related to consideration. One of the main challenges is the issue of “click-wrap” and “browse-wrap” agreements, where users agree to the terms of a contract by clicking a button or by simply using a website. The consideration in such agreements may be unclear or hidden, leading to disputes over the validity of the contract.

Another challenge is the issue of electronic signatures and authentication. In e-contracts, consideration may be provided through digital signatures, which must be properly authenticated and secured to prevent fraud. The use of electronic signatures must comply with legal requirements, and any issues related to the authenticity or validity of the signature can affect the validity of the consideration.

The issue of jurisdiction and applicable law is also a significant challenge in e-contracts. Online transactions often involve parties from different jurisdictions, leading to disputes over which laws apply to the contract and the consideration. Courts must determine the applicable law and jurisdiction based on the terms of the contract and the nature of the consideration.

Case Law and Judicial Interpretations

Courts have addressed various issues related to consideration in e-contracts through judicial interpretations and case law. For example, in the case of Specht v. Netscape Communications Corp (2002)[14], the court addressed the issue of consideration in a “click-wrap” agreement, holding that users were not bound by the terms of the agreement because the consideration was not clearly communicated to them.

In another case, ProCD, Inc. v. Zeidenberg (1996)[15], the court upheld the validity of a “shrink-wrap” agreement, where the consideration was provided through the purchase of software. The court held that the user was bound by the terms of the agreement, including the consideration, because the terms were clearly communicated and accepted by the user.

These cases highlight the importance of clear and unambiguous consideration in e-contracts and the need for proper communication and authentication of the terms of the contract.

CONCLUSION

Consideration is a fundamental element of contract law, providing the basis for the exchange of value between parties and ensuring that contracts are legally enforceable. The concept of consideration has evolved over time, with courts and legal scholars refining its definition and application to meet the needs of modern commerce and society.

The traditional principles of consideration, such as the requirement for it to be of value, sufficient but not adequate, real and not illusory, and not illegal or against public policy, remain essential in determining the validity of contracts. However, modern developments, such as the doctrine of privity of contract and the emergence of e-contracts, have introduced new complexities and challenges to the concept of consideration.

As the digital age continues to transform the way contracts are formed and executed, the principles of consideration will continue to evolve, adapting to the changing nature of commerce and the legal landscape. Courts will play a crucial role in interpreting and applying these principles, ensuring that consideration remains a vital and enforceable element of contract law.

The importance of consideration cannot be overstated, as it serves as the foundation for contractual relationships and the enforcement of agreements. Whether in traditional contracts, e-contracts, or other forms of agreements, consideration remains a key factor in determining the legality and enforceability of contracts, providing certainty, clarity, and fairness in the exchange of value between parties.

REFERENCES

1. Anson, W. R. (n.d.). Principles of the Law of Contract. Oxford University.
2. Fifoot, C. G. (n.d.). C.H.S & Furmston, M.P. Oxford University Press.
3. G.H, T. (n.d.). The Law of Contract. Sweet & Maxwell.
4. Pollock, F. (n.d.). Principle of Contract at Law and in Equity. Stevens & Sons
5. Lampleigh v. Braithwaite, 80 Eng. Rep. 255 (K.B. 1615).
6. Chappell & Co. Ltd v. Nestle Co. Ltd, [1960] AC 87 (HL
7. Thomas v. Thomas, 2 QB 851 (1842)
8. Stilk v. Myrick, 170 Eng. Rep. 1168 (KB 1809), 2 Camp. 317
9. Everet v. Williams, 93 Eng. Rep. 596 (KB 1725), 2 Stra. 868.
10. In re McArdle, [1951] 1 Ch. 669 (C.A.).
11. Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd., [1915] AC 847 (HL)
12. Beswick v. Beswick, [1968] AC 58 (HL)
13. Jackson v. Horizon Holidays Ltd, [1975] 1 W.L.R. 1468 (C.A.)
14. Specht v. Netscape Communications Corp., 306 F.3d 17 (2d Cir. 2002).
15. ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996)

---

[1] Anson, W. R. (n.d.). Principles of the Law of Contract. Oxford University.

[2] Lampleigh v. Braithwaite, 80 Eng. Rep. 255 (K.B. 1615).

[3] Fifoot, C. G. (n.d.). C.H.S & Furmston, M.P. Oxford University Press

[4] G.H, T. (n.d.). The Law of Contract. Sweet & Maxwell

[5] Chappell & Co. Ltd v. Nestle Co. Ltd, [1960] AC 87 (HL

[6] Thomas v. Thomas, 2 QB 851 (1842)

[7] Stilk v. Myrick, 170 Eng. Rep. 1168 (KB 1809), 2 Camp. 317

[8] Everet v. Williams, 93 Eng. Rep. 596 (KB 1725), 2 Stra. 868.

[9] In re McArdle, [1951] 1 Ch. 669 (C.A.).

[10] Pollock, F. (n.d.). Principle of Contract at Law and in Equity. Stevens & Sons

[11] Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd., [1915] AC 847 (HL)

[12] Beswick v. Beswick, [1968] AC 58 (HL)

[13] Jackson v. Horizon Holidays Ltd, [1975] 1 W.L.R. 1468 (C.A.)

[14] Specht v. Netscape Communications Corp., 306 F.3d 17 (2d Cir. 2002).

[15] ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996)

Disclaimer: The materials provided herein are intended solely for informational purposes. Accessing or using the site or the materials does not establish an attorney-client relationship. The information presented on this site is not to be construed as legal or professional advice, and it should not be relied upon for such purposes or used as a substitute for advice from a licensed attorney in your state. Additionally, the viewpoint presented by the author is personal.