Contract Law - An Introduction
By Aaron Larson
Law Offices of Aaron Larson
October, 2003; Last Reviewed Dec., 2010.
Ads by Google
LLM in Intl Business Law
Advance Your Career w/ a Masters in International Business Law. Online.
EducationDegreeSource.com/Free_Info
Online Tenders Kenya
Latest Tenders and Business Leads in Kenya, Uganda and Tanzania
www.OnlineTenders.co.ke
Contents


The Elements of a Contract
Oral Contracts
A contract intends to formalize an agreement between two or more parties, in relation to a
particular subject. Contracts can cover an extremely broad range of matters, including the sale of
goods or real property, the terms of employment or of an independent contractor relationship, the
settlement of a dispute, and ownership of intellectual property developed as part of a work for
hire.
The Elements of a Contract
Typically, in order to be enforceable, a contract must involve the following elements:
A "Meeting of the Minds" (Mutual Consent)
The parties to the contract have a mutual understanding of what the contract covers. For
example, in a contract for the sale of a "mustang", the buyer thinks he will obtain a car and the
seller believes he is contracting to sell a horse, there is no meeting of the minds and the contract
will likely be held unenforceable.
Offer and Acceptance
The contract involves an offer (or more than one offer) to another party, who accepts the offer.
For example, in a contract for the sale of a piano, the seller may offer the piano to the buyer for
$1,000.00. The buyer's acceptance of that offer is a necessary part of creating a binding contract
for the sale of the piano.
Please note that a counter-offer is not an acceptance, and will typically be treated as a
rejection of the offer. For example, if the buyer counter-offers to purchase the piano for
$800.00, that typically counts as a rejection of the original offer for sale. If the seller accepts the
counter-offer, a contract may be completed. However, if the seller rejects the counter-offer, the
buyer will not ordinarily be entitled to enforce the prior $1,000.00 price if the seller decides
either to raise the price or to sell the piano to somebody else.
Mutual Consideration (The mutual exchange of something of value)
In order to be valid, the parties to a contract must exchange something of value. In the case of the
sale of a piano, the buyer receives something of value in the form of the piano, and the seller
receives money.
While the validity of consideration may be subject to attack on the basis that it is illusory (e.g.,
one party receives only what the other party was already obligated to provide), or that there is a
failure of consideration (e.g., the consideration received by one party is essentially worthless),
these defenses will not let a party to a contract escape the consequences of bad negotiation. For
example, if a seller enters into a contract to sell a piano for $100, and later gets an offer from
somebody else for $1,000, the seller can't revoke the contract on the basis that the piano was
worth a lot more than he bargained to receive.
Performance or Delivery
In order to be enforceable, the action contemplated by the contract must be completed. For
example, if the purchaser of a piano pays the $1,000 purchase price, he can enforce the contract
to require the delivery of the piano. However, unless the contract provides that delivery will
occur before payment, the buyer may not be able to enforce the contract if he does not "perform"
by paying the $1,000. Similarly, again depending upon the contract terms, the seller may not be
able to enforce the contract without first delivering the piano.
In a typical "breach of contract" action, the party alleging the breach will recite that it performed
all of its duties under the contract, whereas the other party failed to perform its duties or
obligations.
Additionally, the following elements may factor into the enforceability of any contract:
Good Faith
It is implicit within all contracts that the parties are acting in good faith. For example, if the seller
of a "mustang" knows that the buyer thinks he is purchasing a car, but secretly intends to sell the
buyer a horse, the seller is not acting in good faith and the contract will not be enforceable.
No Violation of Public Policy
In order to be enforceable, a contract cannot violate "public policy". For example, if the subject
matter of a contract is illegal, you cannot enforce the contract. A contract for the sale of illegal
drugs, for example, violates public policy and is not enforceable.
Please note that public policy can shift. Traditionally, many states refused to honor gambling
debts incurred in other jurisdictions on public policy grounds. However, as more and more states
have permitted gambling within their own borders, that policy has mostly been abandoned and
gambling debts from legal enterprises are now typically enforceable. (A "bookie" might not be
able to enforce a debt arising from an illegal gambling enterprise, but a legal casino will now
typically be able to enforce its debt.) Similarly, it used to be legal to sell "switchblade kits"
through the U.S. mail, but that practice is now illegal. Contracts for the interstate sale of such
kits were no longer enforceable following that change in the law.
Oral Contracts
There is an old joke that "an oral contract isn't worth the paper it's written on". That's a reference
to the fact that it can be very difficult to prove that an oral contract exists. Absent proof of the
terms of the contract, a party may be unable to enforce the contract or may be forced to settle for
less than the original bargain. Thus, even when there is not an opportunity to draft up a formal
contract, it is good practice to always make some sort of writing, signed by both parties, to
memorialize the key terms of an agreement.
At the same time, under most circumstances, if the terms of an oral contract can be proved or are
admitted by the other party, an oral contract is every bit as enforceable as one that is in writing.
There are, however, "statute of fraud" laws which hold that some contracts cannot be
enforced unless reduced to writing and signed by both parties. For more information on the
Statute of Frauds, please see this associated article.
Please note that, although sometimes an oral contract is referred to as a "verbal contract", the
term "oral" means "spoken" while the term "verbal" can also mean" in words". Under that
definition, all contracts are technically "verbal". If you mean to refer to a contract that is not
written, although most people will recognize what you mean by "verbal contract", for maximum
clarity it is helpful to refer to it as an "oral contract".
Offer and acceptance
Offer and acceptance analysis is a traditional approach in contract law used to determine
whether an agreement exists between two parties. Agreement consists of an offer by an
indication of one person (the "offeror") to another (the "offeree") of the offeror's willingness to
enter into a contract on certain terms without further negotiations. A contract is said to come into
existence when acceptance of an offer (agreement to the terms in it) has been communicated to
the offeror by the offeree and there has been consideration bargained-for induced by promises or
a promise and performance.
The offer and acceptance formula, developed in the 19th century, identifies a moment of
formation when the parties are of one mind. This classical approach to contract formation has
been weakened by developments in the law of estoppel, misleading conduct, misrepresentation
and unjust enrichment.
Offer
Treitel defines an offer as "an expression of willingness to contract on certain terms, made with
the intention that it shall become binding as soon as it is accepted by the person to whom it is
addressed", the "offeree".[1] An offer is a statement of the terms on which the offeror is willing to
be bound. It is the present contractual intent to be bound by a contract with definite and certain
terms communicated to the offeree.
The "expression" referred to in the definition may take different forms, such as a letter,
newspaper, fax, email and even conduct, as long as it communicates the basis on which the
offeror is prepared to contract.
Whether two parties have an agreement or a valid offer is an issue which is determined by the
court using the Objective test (Smith v. Hughes). Therefore the "intention" referred to in the
definition is objectively judged by the courts. In the English case of Smith v. Hughes [2] the court
emphasised that the important thing is not a party's real intentions but how a reasonable person
would view the situation. This is due mainly to common sense as each party would not wish to
breach his side of the contract if it would make him or her culpable to damages, it would
especially be contrary to the principle of certainty and clarity in commercial contract and the
topic of mistake and how it affects the contract. As a minimum requirement the conditions for an
offer should include at least the following 4 conditions: Delivery date, price, terms of payment
that includes the date of payment and detail description of the item on offer including a fair
description of the condition or type of service. Without one of the minimum requirements of
condition an offer of sale is not seen as a legal offer but rather seen as an advertisement.
Unilateral contract
The contract in Carlill v Carbolic Smoke Ball Co[3] was of a kind known as a unilateral contract,
one in which the offeree accepts the offer by performing an act which indicates their agreement
with the bargain. This can be something as simple as raising an eyebrow or wearing a certain
color t-shirt. It can be contrasted with a bilateral contract, where there is an exchange of promises
between two parties. In Australian Woollen Mills Pty Ltd v. The Commonwealth (1954), the High
Court of Australia held that, for a unilateral contract to arise, the promise must be made "in
return for" the doing of the act. The court distinguished between a unilateral contract and a
conditional gift. The case is generally seen to demonstrate the connection between the
requirements of offer and acceptance, consideration and intention to create legal relations.
Invitations to treat
An invitation to treat is not an offer, but an indication of a person's willingness to negotiate a
contract. It's a pre-offer communication. In Harvey v. Facey[4], an indication by the owner of
property that he or she might be interested in selling at a certain price, for example, has been
regarded as an invitation to treat. Similarly in Gibson v Manchester City Council[5] the words
"may be prepared to sell" were held to be a notification of price and therefore not a distinct offer,
though in another case concerning the same change of policy (Manchester City Council
underwent a change of political control and stopped the sale of council houses to their tenants)
Storer v. Manchester City Council[6], the court held that an agreement was completed by the
tenant's signing and returning the agreement to purchase, as the language of the agreement had
been sufficiently explicit and the signature on behalf of the council a mere formality to be
completed.
The courts have tended to take a consistent approach to the identification of invitations to treat,
as compared with offer and acceptance, in common transactions. The display of goods for sale,
whether in a shop window or on the shelves of a self-service store, is ordinarily treated as an
invitation to treat and not an offer.[7]
The holding of a public auction will also usually be regarded as an invitation to treat. Auctions
are, however, a special case generally. The rule is that the bidder is making an offer to buy and
the auctioneer accepts this in whatever manner is customary, usually the fall of the hammer.[8] A
bidder may withdraw his or her bid at any time before the fall of the hammer, but any bid in any
event lapses as an offer on the making of a higher bid, so that if a higher bid is made, then
withdrawn before the fall of the hammer, the auctioneer cannot then purport to accept the
previous highest bid. If an auction is without reserve then whilst there is no contract of sale
between the owner of the goods and the highest bidder (because the placing of goods in the
auction is an invitation to treat) there is a collateral contract between the auctioneer and the
highest bidder that the auction will be held without reserve (i.e., that the highest bid, however
low, will be accepted).[9] The U.S. Uniform Commercial Code provides that in an auction
without reserve the goods may not be withdrawn once they have been put up.[10]
Revocation of offer
An offeror may revoke an offer before it has been accepted, but the revocation must be
communicated to the offeree, although not necessarily by the offeror. If the offer was made to the
entire world, such as in Carlill's case, the revocation must take a form that is similar to the offer.
However, an offer may not be revoked if it has been encapsulated in an option (see also option
contract).
If the offer is one that leads to a unilateral contract, then unless there was an ancillary contract
entered into that guaranteed that the main contract would not be withdrawn, the contract may be
revoked at any time.
Acceptance
Test of acceptance
For the Acceptance, the essential requirement is that the parties had each from a subjective
perspective engaged in conduct manifesting their assent. Under this meeting of the minds theory
of contract, a party could resist a claim of breach by proving that he had not intended to be bound
by the agreement, only if it appeared subjectively that he had so intended. This is unsatisfactory,
as one party has no way to know another's undisclosed intentions. One party can only act upon
what the other party reveals objectively (Lucy V Zehmer, 196 Va 493 84 S.E. 2d 516) to be his
intent. Hence, an actual meeting of the minds is not required. Indeed, it has been argued that the
"meeting of the minds" idea is entirely a modern error: 19th century judges spoke of "consensus
ad idem" which modern teachers have wrongly translated as "meeting of minds" but actually
means "agreement to the [same] thing".[11]
The requirement of an objective perspective is important in cases where a party claims that an
offer was not accepted and seeks to take advantage of the performance of the other party. Here,
we can apply the test of whether a reasonable bystander (a "fly on the wall") would have
perceived that the party has impliedly accepted the offer by conduct.
Rules of acceptance
Communication of acceptance
There are several rules dealing with the communication of acceptance:






The acceptance must be communicated: see Powell v Lee (1908) 99 L.T. 284; Robophone
Facilities Ltd v. Blank [1966] 3 All E.R. 128. Prior to acceptance, an offer may be
withdrawn.
An exception exists in the case of unilateral contracts, in which the offeror makes an offer
to the world which can be accepted by some act. A classic instance of this is the case of
Carlill v. Carbolic Smoke Ball Co. [1892] 2 Q.B. 484 in which an offer was made to pay
£100 to anyone who having bought the offeror's product and used it in accordance with
the instructions nonetheless contracted influenza. The plaintiff did so and the court
ordered payment of the £100. Her actions accepted the offer - there was no need to
communicate acceptance. Typical cases of unilateral offers are advertisements of rewards
(e.g., for the return of a lost dog).
An offer can only be accepted by the offeree, that is, the person to whom the offer is
made.
An offeree is not usually bound if another person accepts the offer on his behalf without
his authorisation, the exceptions to which are found in the law of agency, where an agent
may have apparent or ostensible authority, or the usual authority of an agent in the
particular market, even if the principal did not realise what the extent of this authority
was, and someone on whose behalf an offer has been purportedly accepted it may also
ratify the contract within a reasonable time, binding both parties: see agent (law).
It may be implied from the construction of the contract that the offeror has dispensed
with the requirement of communication of acceptance (called waiver of communication which is generally implied in unilateral contracts): see also Re Selectmove Ltd [1994]
BCC 349.
If the offer specifies a method of acceptance (such as by post or fax), acceptance must be
by a method that is no less effective from the offeror's point of view than the method
specified. The exact method prescribed may have to be used in some cases but probably

only where the offeror has used very explicit words such as "by registered post, and by
that method only": see Yates Building Co. Ltd v. R.J. Pulleyn & Sons (York) Ltd (1975)
119 Sol. Jo. 370.
However, acceptance may be inferred from conduct, see, e.g.: Brogden v. Metropolitan
Railway Company (1877) 2 App. Cas. 666; Rust v. Abbey Life Assurance Co. Ltd [1979]
2 Lloyd's Rep. 334; Saint John Tugboat Co. v. Irving Refinery Ltd (1964) 46 DLR (2d) 1;
Wettern Electric Ltd v. Welsh Development Agency [1983] Q.B. 796.
``
Correspondence with offer
The "mirror image rule" states that if you are to accept an offer, you must accept an offer exactly,
without modifications; if you change the offer in any way, this is a counter-offer that kills the
original offer: Hyde v. Wrench (1840) 3 Beav 334. However, a mere request for information is
not a counter-offer: Stevenson v. McLean (1880) 5 Q.B.D. 346. It may be possible to draft an
enquiry such that it adds to the terms of the contract while keeping the original offer alive.
An offeror may revoke an offer before it has been accepted, but the revocation must be
communicated to the offeree, although not necessarily by the offeror: Dickinson v. Dodds (1876)
2 Ch.D. 463. If the offer was made to the entire world, such as in Carlill's case, the revocation
must take a form that is similar to the offer. However, an offer may not be revoked if it has been
encapsulated in an option (see also option contract).
Battle of the forms
Often when two companies deal with each other in the course of business, they will use standard
form contracts. Often these terms conflict (e.g. both parties include a liability waiver in their
form) and yet offer and acceptance are achieved forming a binding contract. The battle of the
forms refers to the resulting legal dispute of these circumstances, wherein both parties recognize
that an enforceable contract exists, however they are divided as to whose terms govern that
contract.
Under English law, the question was raised in Butler Machine Tool Co Ltd v. Ex-Cell-O
Corporation (England) Ltd [1979] WLR 401, as to which of the standard form contracts
prevailed in the transaction. Lord Denning MR preferred the view that the documents were to be
considered as a whole, and the important factor was finding the decisive document; on the other
hand, Lawton and Bridge LJJ preferred traditional offer-acceptance analysis, and considered that
the last counter-offer prior to the beginning of performance voided all preceding offers. The
absence of any additional counter-offer or refusal by the other party is understood as an implied
acceptance. In U.S. law, this principle is referred to as the last shot rule.
Under the Uniform Commercial Code (UCC) Sec. 2-207(1), A definite expression of acceptance
or a written confirmation of an informal agreement may constitute a valid acceptance even if it
states terms additional to or different from the offer or informal agreement. The additional or
different terms are treated as proposals for addition into the contract under UCC Sec. 2-207(2).
Between merchants, such terms become part of the contract unless:



a) the offer expressly limits acceptance to the terms of the offer,
b) material alteration of the contract results,
c) notification of objection to the additional/different terms are given in a reasonable time
after notice of them is received.
Material is defined as anything that may cause undue hardship/surprise, or is a significant
element of the contract.
If there is no contract under 2-207(1), then under UCC Sec. 2-207(3), conduct by the parties that
recognize there is a contract may be sufficient to establish a contract. The terms for this contract
include only those that the parties agree on and the rest via gap fillers.
Postal acceptance rule
Main article: Mailbox rule
As a rule of convenience, if the offer is accepted by post, the contract comes into existence at the
moment that the acceptance was posted (Adams v. Lindsell (1818) 106 ER 250). This rule only
applies when, impliedly or explicitly, the parties have in contemplation post as a means of
acceptance. It excludes contracts involving land, letters incorrectly addressed and instantaneous
modes of communication. The relevance of this early 19th century rule to modern conditions,
when many quicker means of communication are available has been questioned, but the rule
remains for the time being.
Knowledge of the offer
In Australian law, there is a requirement that an acceptance is made in reliance or pursuance of
an offer: see R v. Clarke (1927) 40 C.L.R. 227.
Rejection, death or lapse of time
An offer can be terminated on the grounds of rejection on the part of the offeree, that is if the
offeree does not accept the terms of the offer. Also, upon making an offer, an offeror may
include as a condition to the contract the duration in which the offer will be available. If the
offeree fails to accept the offer within this specific period, then the offer will be deemed as
terminated.
Death of offeror
Generally death (or incapacity) of the offeror terminates the offer. This does not apply to option
contracts.
The offer cannot be accepted if the offeree knows of the death of the offeror. In cases where the
offeree accepts in ignorance of the death, the contract may still be valid, although this
proposition depends on the nature of the offer. If the contract involves some characteristic
personal to the offeror, the offer is destroyed by the death.
Death of offeree
An offer is rendered invalid upon the death of the offeree: see Re Irvine.
Counter Offers
If the offeree rejects the offer, the offer has been destroyed and cannot be accepted at a future
time. A case illustrative of this is Hyde v. Wrench (1840) 49 E.R. 132, where in response to an
offer to sell an estate at a certain price, the plaintiff made an offer to buy at a lower price. This
offer was refused and subsequently, the plaintiffs sought to accept the initial offer. It was held
that no contract was made as the initial offer did not exist at the time that the plaintiff tried to
accept it, the offer having been terminated by the counter offer.
It should be noted that a mere inquiry (about terms of an offer) is not a counter offer and leaves
the offer intact. The case Stevenson v. McLean (1880) 28 W.R. 916 is analogous to this situation.
Formation
A contract will be formed (assuming the other requirements are met) when the parties give
objective manifestation of an intent to form the contract. Of course, the assent must be given to
terms of the agreement. Usually this involves the making by one party of an offer to be bound
upon certain terms, and the other parties' acceptance of the offer on the same terms.
Because offer and acceptance are necessarily intertwined, in California, offer and acceptance are
analyzed together as subelements of a single element, known either as consent of the parties or
mutual assent.[12]
Notes and references
^ G.H. Treitel, The Law of Contract, 10th edn, p.8.
1.
2.
3.
4.
5.
6.
^ (1871) LR 6 QB 597
^ [1893] 1 Q.B. 256
^ [1893] A.C. 552
^ [1979] 1 W.L.R. 294
^ [1974] 3 All E.R. 824
^ See, e.g., Pharmaceutical Society of G.B. v. Boots Cash Chemists (Southern)
Ltd[1952] 2 Q.B. 795 (self-service displays); Fisher v. Bell [1961] 1 Q.B. 394 (shop
window display).
7.
^ See, e.g., British Car Auctions Ltd v. Wright [1972] 1 W.L.R. 1519; see also the
British Sale of Goods Act 1979 s.57(2).
8.
^ See Warlow v. Harrison (1859) 1 E. & E. 309.
9.
^ U.C.C., s2-328(3)
10.
^ R. Austen-Baker, "Gilmore and the Strange Case of the Failure of Contract to
Die After All" (2000) 18 Journal of Contract Law 1.
11.
^ Lopez v. Charles Schwab & Co., Inc., 118 Cal. App. 4th 1224 (2004).
Invitation to treat
Invitation to treat (or invitation to bargain in the United States) is a contract law term. It
comes from the Latin phrase invitatio ad offerendum and means "inviting an offer". Or as
Andrew Burrows writes, an invitation to treat is
"an expression of willingness to negotiate. A person making an invitation to treat does not intend
to be bound as soon as it is accepted by the person to whom the statement is addressed."[1]
Contract lawyers distinguish this from a binding offer, which can be accepted to form a contract
(subject to other conditions being met). The distinction between an offer and invitation to treat is
best understood through the categories that the courts create. Invitations to treat include the
display of goods; the advertisement of a price or an auction; and an invitation for tenders (or
competitive bids). There may however be statutory or complementary obligations, so consumer
protection laws prohibit misleading advertising and at auctions without reserve there is always a
duty to sell to the highest bona fide bidder.
The clearest example of an invitation to treat is a tender (or bidding in the U.S.) process. This
was illustrated in the case of Spencer v Harding (1870) LR 5 CP 561, where the defendants
offered to sell by tender their stock and the court held that they had not undertaken to sell to the
person who made the highest tender, but were inviting offers which they could then accept or
reject as they saw appropriate. In certain circumstances though, an invitation for tenders may be
an offer. The clearest example of this was seen in Harvela Investments Ltd v Royal Trust of
Canada (CI) Ltd [1986] AC 207, where the defendants had made it clear that they were going to
accept the highest tender; the court held that this was an offer which was accepted by the person
who made the highest tender and that the defendants were in breach of contract by not doing so.
An auction may be more ambiguous. Generally an auction may be seen as an invitation to treat,
with the property owner asking for offers of a certain amount and then selecting which to accept
as illustrated in Payne v Cave (1789) 3 TR 148. However, if it is stated by the owner that there is
no reserve price or that there is a reserve price beyond which offers will be accepted then the
auction is most likely a contractual offer which is accepted by the highest bidder; this was
affirmed in the Court of Appeal in Barry v Davies [2000] 1 WLR 1962.
A shop owner displaying their goods for sale is generally making an invitation to treat
(Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd [1953] 1 QB
401). They are not obliged to sell the goods to anyone who is willing to pay for them, even if
additional signage such as "special offer" accompanies the display of the goods. (But see bait and
switch.) This distinction was legally relevant in Fisher v Bell [1961] 1 QB 394, where it was held
that displaying a flick knife for sale in a shop did not contravene legislation which prohibited
offering for sale such a weapon. The distinction also means that if a shop mistakenly displays an
item for sale at a very low price it is not obliged to sell it for that amount.[2]
Generally, advertisements are invitations to treat, so the person advertising is not compelled to
sell to every customer. In Partridge v Crittenden [1968] 1 WLR 1204, it was held that where the
appellant advertised to sell wild birds, was not offering to sell them. Lord Parker CJ commented
that it did not make "business sense" for advertisements to be offers, as the person making the
advertisement may find himself in a situation where he would be contractually obliged to sell
more goods than he actually owned. In certain circumstances however, an advertisement can be
an offer, a well known example being the case of Carlill v Carbolic Smoke Ball Company [1893]
1 QB 256, where it was held that the defendants, who advertised that they would pay anyone
who used their product in the prescribed manner and caught influenza £100 and said that they
had deposited £1,000 in the bank to show their good faith, has made an offer to the whole world
and were contractually obliged to pay £100 to whoever accepted it by performing the requested
acts.
For an offer to be capable of becoming binding on acceptance, the offer must be definite, clear,
and final. If it is a mere preliminary move into negotiation which may lead to a contract, it is not
an offer but an invitation to treat. The offerer must have been initiating negotiations from which
an agreement may or may not in time result. The important point to note is that, since an
invitation to treat is not an offer, but rather a phenomenal preliminary to an offer, an invitation to
treat is not capable of an acceptance which will result in a contract.
Consideration
Consideration is the concept of legal value in connection with contracts. It is anything of value
promised to another when making a contract. It can take the form of money, physical objects,
services, promised actions, abstinence from a future action, and much more. Under the notion of
"pre-existing duties", if either the promisor or the promisee already had a legal obligation to
render such payment, it cannot be seen as consideration in the legal sense.
In common law it is a prerequisite that both parties offer some consideration before a contract
can be thought of as binding.
However, even if a court decides there is no contract, there might be a possible recovery under
quantum meruit (sometimes referred to as a quasi-contract) or promissory estoppel.

Consideration
and formation of a contract
Consideration as defined is the interest, profit, and benefit accruing to one party involved as a
payment for the consideration.
1. Consideration move at the desire of the promisor: In order to constitute consideration the
act or abstinence forming the consideration for the promise must be done at the desire or
request of the promise. Thus an act does or services rendered voluntarily, or at the desire
of the third partly, will not amount to valid consideration so as to support a contract. The
logic for this may be found in the worry and expense to which every one might be
subjected, if he were obliged to pay for services which he did not request.
2. Consideration move from promisee or any other person: Consideration need not move
from the promisee alone but may proceed from third person. Thus as long as there is a
consideration for a promise, it is immaterial who has furnished it. It may move from the
promise or from any other person. This means that even a stranger to the consideration
can construct a contract, provided he is a party to the contract. This is sometimes called
as doctrine of constructive consideration.
3. Consideration cannot be past: The words, has done or abstained from doing or does or
has abstained from doing or promises to do or to abstained from doing or promises to do
or to abstain from doing.
4. Consideration need to be adequate: It means that consideration is that it must be
something to which the law attaches a value. The consideration need not to be adequate
to the promise for the validity of an agreement. The law only consists on the presence of
consideration and not on the adequacy of it. It leaves the people free to make their own
bargains.
If A signs a contract to buy a car from B for $5,000, A's consideration is the $5,000, and B's
consideration is the car.
Additionally, if A signs a contract with B such that A will paint B's house for $500, A's
consideration is the service of painting B's house, and B's consideration is $500 paid to A.
Further, if A signs a contract with B such that A will not repaint his own house in any other color
than white, and B will pay A $500 per year to keep this deal up, there is also consideration.
Although A did not promise to affirmatively do anything, A did promise not to do something that
he was allowed to do, and so A did pass consideration. A's consideration to B is the forbearance
in painting his own house in a color other than white, and B's consideration to A is $500 per
year.
Conversely, if A signs a contract to buy a car from B for $0, B's consideration is still the car, but
A is giving no consideration, and so there is no valid contract. However, if B still gives the title
to the car to A, then B cannot take the car back, since, while it may not be a valid contract, it is a
valid gift.
There are a number of common issues as to whether consideration exists in a contract.
Monetary value of consideration
Generally, courts do not inquire whether the deal between two parties was monetarily fair—
merely that each party passed some legal obligation or duty to the other party. The dispositive
issue is presence of consideration, not adequacy of the consideration. The values between
consideration passed by each party to a contract need not be comparable.
For instance, if A offers B $200 to buy B's mansion, luxury sports car, and private jet, there is
still consideration on both sides. A's consideration is $200, and B's consideration is the mansion,
car, and jet. Courts in the United States generally leave parties to their own contracts, and do not
intervene
However, courts in the United States may take issue with nominal consideration, or
consideration with virtually no value. The old English rule of consideration questioned whether a
party gave the value of a peppercorn to the other party. As a result, contracts in the United States
have sometimes have had one party pass nominal amounts of consideration, typically citing $1.
Some courts have since thought this was a sham. Since contract disputes are typically resolved in
state court, some state courts have found that merely providing $1 to another is not a sufficiently
legal duty, and therefore no legal consideration passes in these kinds of deals, and consequently,
no contract is formed. Thus, licensing contracts that do not involve any money at all will often
cite as consideration, "for the sum of $1 and other good and valuable consideration".
Pre-existing legal duties
Main article: Pre-existing duty rule
A party which already has a legal duty to provide money, an object, a service, or a forbearance,
does not provide consideration when promising merely to uphold that duty. That legal duty can
arise from law, or obligation under a previous contract.
The prime example of this sub-issue is where an uncle gives his seven year old nephew (a
resident of the US) the following offer: "if you do not smoke cigarettes or marijuana until your
18th birthday, then I will pay you $500" (assuming it is a criminal offense in the US for people
under the age of 18 to smoke cigarettes, and for people of any age to smoke marijuana). On the
nephew's 18th birthday, he tells the uncle to pay up, and the uncle says no. In the subsequent
lawsuit, the uncle will win, because the nephew, by U.S. law, already had a duty to refrain from
smoking cigarettes or marijuana.
The same applies if the consideration is a performance for which the parties had previously
contracted. For example, A agrees to paint B's house for $500, but halfway through the job A
tells B that he will not finish unless B increases the payment to $750. If B agrees, and A then
finishes the job, B still only needs to pay A the $500 originally agreed to, because A was already
contractually obligated to paint the house for that amount.
An exception to this rule holds for settlements, such as an accord and satisfaction. If a creditor
has a credit against a debtor for $10,000, and offers to settle it for $5,000, it is still binding, if
accepted, even though the debtor had a legal duty to repay the entire $10,000.
Pre-existing duties relating to at-will employment depend largely on state law. Generally, at-will
employment allows the employer to terminate the employee for good or even no reason, and
allows the employee to resign for any reason. There are no duties of continued employment in
the future. Therefore, when an employee demands a raise, there is no issue with consideration
because the employee has no legal duty to continue working. Similarly, when an employer
demands a pay-cut, there is also no contractual issue with consideration, because the employer
has no legal duty to continue employing the worker. However, certain states require additional
consideration other than the prospect of continued employment, to enforce terms demanded later
by the employer, in particular, non-competition clauses.
Bundled terms
Contracts where a legally valueless term is bundled with a term that does have legal value are
still generally enforceable.
Consider the uncle's situation above. If the same uncle had instead told his 17 year old nephew
the following offer: "if you do not smoke cigarettes and do not engage females before your 18th
birthday, then I will pay you $500". On the nephew's 18th birthday, he asks the uncle to pay up,
and this time, in the subsequent lawsuit, the nephew may win.[citation needed] Although the promise
of not smoking was not valuable consideration (it was already legally prohibited), virtually all
states allow some sort of engagement by minors. Even though the engagement by minors is
legally restricted, there are circumstances where it is legal, and thus the promise to forbear from
it entirely has legal value. However, the uncle would still be relieved from the liability if his
nephew smoked a cigarette, even though that consideration is valueless, because it was paired
with something of legal value; therefore, adherence to the entire, collective agreement is
necessary.
Past consideration
Generally, past consideration is not a valid consideration and has no legal value. Past
consideration therefore cannot be used as a basis when claiming damages. Roscorla v Thomas.
there are two exceptions to this rule they include;
1. Where it was paid at the request of the offeror.
2. where both parties had earlier on contemplated payment.
Option contracts and conditional consideration
Generally, conditional consideration is valid consideration.
Suppose A is a movie script writer and B runs a movie production company. A says to B, "buy
my script." Instead, B says "How about this – I will pay you $5,000 so that you do not let anyone
else produce your movie until one year from now. If I do produce your movie in that year, then I
will give you another $50,000, and no one else can produce it. If I do not produce your movie in
that year, then you're free to go." If the two subsequently get into a dispute, the issue of whether
a contract exists is answered. B had an option contract—he could decide to produce the script, or
not. B's consideration passed was the $5,000 down, and the possibility of $50,000. A's
consideration passed was the exclusive rights to the movie script for at least one year.
In settlements
B committed a tort against A, causing $5,000 in compensatory damages and $3,000 in punitive
damages. Since there is no guarantee that A would win against B if it went to court, A will agree
to drop the case if B pays the $5,000 compensatory damages. This is sufficient consideration,
since B's consideration is a guaranteed recovery, and A's consideration is that B only has to pay
$5,000, instead of $8,000.
NATURAL LOVE & AFFECTION AS CONSIDERATION
The principle in the case of Brett v JS & Wife [1600] 79 ER 9 & 7 illustrates that natural love and
affection are not recognized as valid consideration under English law
What is defined as 'natural love and affection'?
Re Tan Soh Sim & Ors v Tan Saw Keow [1951] MLJ 21 is a Malaysian case which judicially construed the
meaning of 'natural love and affection'.
In this case, a woman on her deathbed expressed her intention to leave all her properties to her four
adopted children. The court held that the claims of the adopted children were not effective as it was
contrary to Section 26(a) - that it was not in writing, and there was no natural love and affection
between parties standing in near relation to each other, since the four children were adopted and did
not have natural relations (blood ties) to that woman.
Promissory estoppel
The doctrine of promissory estoppel prevents one party from withdrawing a promise made to a
second party if the latter has reasonably relied on that promise.
In English law, a promise made without consideration is generally not enforceable. It is known
as a bare or gratuitous promise. Thus, if a car salesman promises not to sell a car over the
weekend, but does so, the promise cannot be enforced. But should the car salesman accept even
one penny in consideration for the promise, the promise will be binding and enforceable in court.
Estoppel is not an exception to this rule.
The doctrine of promissory estoppel was first developed in Hughes v. Metropolitan Railway Co
[1877] but was lost for some time until it was resurrected by Lord Denning in the controversial
case of Central London Property Trust Ltd v. High Trees House Ltd [1947] K.B. 130.
Promissory estoppel requires:
1. an unequivocal promise by words or conduct
2. evidence that there is a change in position of the promisee as a result of the promise (reliance
but not necessarily to their detriment)
3. inequity if the promisor were to go back on the promise
In general, estoppel is 'a shield not a sword' — it cannot be used as the basis of an action on its
own.[21] It also does not extinguish rights. In High Trees the plaintiff company was able to restore
payment of full rent from early 1945, and could have restored the full rent at any time after the
initial promise was made provided a suitable period of notice had been given. In this case, the
estoppel was applied to a 'negative promise', that is, one where a party promises not to enforce
full rights.
Estoppel is an equitable (as opposed to common law) construct and its application is therefore
discretionary. In the case of D & C Builders v. Rees the courts refused to recognise a promise to
accept a part payment of £300 on a debt of £482 on the basis that it was extracted by duress. In
Combe v. Combe Denning elaborated on the equitable nature of estoppel by refusing to allow its
use as a "sword" by an ex-wife to extract funds from the destitute husband.
The general rule is that when one party agrees to accept a lesser sum in full payment of a debt,
the debtor has given no consideration, and so the creditor is still entitled to claim the debt in its
entirety. This is not the case if the debtor offers payment at an earlier date than was previously
agreed, because the benefit to the creditor of receiving payment early can be thought of as
consideration for the promise to waive the rest of the debt. This is the rule formulated in Pinnel's
Case (1602) 5 Co Rep 117a, and affirmed in Foakes v. Beer (1884) 9 App Cas 605.
The decision of the Court of Appeal in Collier v P & MJ Wright (Holdings) Ltd 2008 1 WLR
643 suggests that the doctrine of promissory estoppel can now operate to mitigate the harshness
of this common law rule. Moreover, Arden LJ held that allowing a creditor to renege on his
promise to forebear seeking the balance of a debt in return for part payment would be, in and of
itself, inequitable. Therefore, the only reliance that the promisee must demonstrate is the actual
making of the part payment. This approach has been criticised as doing violence to the principle
set down in Hughes and the extent to which the other members of the Court, namely Longmore
LJ, agreed with it is uncertain.