MBA 600: Legal and Ethical Environment for Business


Meaning of Consideration

Consideration  is  something  of  value,  and  need  not  be  commercially  adequate  to  the  promise,  that  is  

given or promised by the party seeking to enforce the contract and it is usually an essential element in

the  formation  of  a  valid  contract.  Consequently,  the  parties  are  free  to  make  their  own  bargains  and  

the  court  will  not  intervene  or  inquire  into  the  commercial  viability  of  adequacy  of  the  consideration  

that was given as was seen in Thomas v Thomas (1842) 2 QB 851. Consideration is essential in most all

agreements with exception in respect to formal contract (deeds), and in its simplest meaning is ‘something

of value that is given by the parties to each other under their agreement. Similarly, consideration must not

be too vague or indefinite as is illustrated by the case of White v Bluett (1853) 23 LJ Ex 36 and must be

sufficient as was seen in Eastwood v Kenyon (1840) 11 AD & E1 348 and Wigan v Edwards (1973) ALR

497. Essentially consideration is the price or value of the promise for which the common law requires

that a price is to be paid for every person’s promise before the promise will be enforced at law.

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Part I170


Consideration therefore is regarded as something that is done or promised to be done by one party in

exchange for something to be done or promised to be done by the other party. In this context mutual

promises are the fundamental basis of consideration, which is generally described as an exchange for value

for value. Traditionally, the law required that the parties to an agreement must supply, bring or provide

something that has some real value to each of the parties. Hence this approach to requiring some form

or  valuable  consideration  gave  rise  to  the  notion  of  their  existing  a  bargain  between  the  parties  based  

on mutual promises. When both parties give or provide such promises at the time that the agreement

is  being  entered  into  that  leads  to  the  contract  then  the  promises  have  some  value  and  are  deemed  to  

constitute the third essential element, consideration that supports the simple contract.

Accordingly, these respective promises made between the parties to the consideration actually support

the agreement and in turn create or give rise to a legal and binding contract that is enforceable at law. In

respect to consideration it is essential that there is valuable consideration to support the promises made by

both parties and depending on the form or nature of the consideration and the types or classifications of

consideration and hence the promises made and the types or classifications of consideration will depend

on  the  nature  of  the  remedies  available  to  an  innocent  party  in  the  event  of  a  breach  of  the  promise  

made and where no valuable consideration has been given or provided as promised during the course

of  the  pre-contractual  negotiation.  

2.1 Importance of Consideration

The  classic  definition  of  consideration  is:  ‘A  valuable  consideration  in  the  eyes  of  the  law  may  consist  

either in some right, interest, profit or benefit accruing to one party, or some forbearance, detriment, loss

or  responsibility  given,  suffered  or  undertaken  by  the  other’.  Simply  put,  the  element  of  consideration  

is  about  exchange  of  promises.  It  is  the  price  paid  for  the  promise  and  it  can  be  either  in  for  form  of  

some benefit that is conferred on the promisor by the promise or some detriment or loss suffered by the

promisee. Such an example of how consideration is applied and works in the commercial world is that of

a bilateral contract. In some instances consideration may consist of a promise to settle a disputed legal

action and avoid legal proceedings. In respect to the situation where a claim has been settled the courts

have held that a promise to withhold legal action may be consideration where there is a reasonable claim,

a genuine dispute or there a reasonable prospects for successful legal action.

Consideration is the price you pay to buy the other person’s promise and it is this concept of ‘price paid’

or an “act or forbearance of one party, or the promise thereof, is the price for which the promise is bought;

and the promise thus given for value is enforceable”. In simple terms, consideration is something of value

that is given by both parties to one another under the agreement that they have negotiated and agreed

upon by forming the contract that makes their agreement legally binding and enforceable. Consideration

which is the third essential element in an apparent simple contract can take a number of forms including,

an act for an act; an act for a promise; a promise for a promise; and a promise for an act.

Most  simple  contracts  which  form  the  majority  of  the  contracts  entered  into  a  daily  and  regular  basis  

require some form of valuable consideration in order for the promise to be enforceable in the courts but

it is not necessary in all contracts such as formal contracts. Formal contracts do not require consideration

because these types of contracts such as deeds and courts of records that take their validity from the way

that they are specifically formed or constructed.

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Part I181

Operation of Consideration

12.2 Aspects of Consideration

Consideration  is  something  of  value  given  or  promised  by  the  party  seeking  to  enforce  the  contract.  

Consideration may consist of a material item or the doing of some task, or a promise to do something

or it may be a negative act, such as to refrain from doing something under the promise. Consideration

is  essential  for  the  enforceability  of  contracts  that  are  not  under  seal  (formal  contracts)  and  it  is  the  

bargain element in a contract.

The protection of the law is not afforded or provided to gratuitous promises (gifts) as they are generally

not supported by any form of valuable consideration and generally are based on promises that the courts

will not interfere with or involve itself such as a father promising to pay his son $1,000 if he passes his

final examinations in business law and then he does not pay will not be enforced in a court as it is only

a moral obligation and has no legal obligation attached to that promise

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