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What is Consideration in Australian Contract Law?

An Overview on Consideration in Australia

Consideration is an essential element in the formation of a contract. The theory of consideration has been broadly characterised as “about what makes a promise legally enforceable” (Seddon & Bigwood, 2023, para 4.1). Others describe consideration as “the most basic proposition of the common law of contract” (Chen-Wishart, 2016, p. 77). Notwithstanding the theories forwarded, for a promise to be enforceable in Australia, consideration is viewed as essential as it creates the enforceability aspect of a promise.

This article explores the frequently asked questions about the legal concept of consideration, and its relevance to contemporary contract law in Australia:

What is the History of Consideration?

Since Roman law, aspects of consideration can be traced to the starting position with the principle, ex nudo pacto non oritur actio (“no right of action arises out of a naked promise”). Common and civil law both share the view that a bare agreement without consideration is not enforceable.

Early principles of consideration in English law can be dated to the action of assumpsit during the 14th century. Assumpsit involved an action for the enforcement of undertakings and promises. In the context of Assumpsit, the historical meaning of consideration was viewed as a “matter of inducement” that preceded a promise (Kiefel, 2016, p. 64). The consideration was characterised as “the factual background to, and explanation of, the reasons for the promise” (Kiefel, 2016, p. 64). Others describe consideration as the “motivating reason” that required “an examination of the reason why the promise was made” (Seddon & Bigwood, 2023, para 27.10).

Therefore, the action of assumpsit was based on motivations and reasons for making a promise. Consideration was “any good reason” for making a promise, and the reasons for that promise determined the enforceability of a promise (Kiefel, 2016, p. 65).

By the 19th century, whether consideration carried a moral duty or obligation was firmly rejected in the English decision of Eastwood v Kenyon (1840) 11 Ad & El 438. This set the modern doctrine of consideration that is applied in contemporary contract law.

How does Consideration form part of Contract?

In classical contract theory, consideration is an essential and core element of a contract. Consideration provides a distinguishing feature between a gratuitous promise and a promise that can be enforced, such as a contract.

In summary, a contract comprises the following six legal elements: Offer and Acceptance, Consideration, An Intention to Create Legal Relations, Capacity, Certainty, and Formalities.

Legal ElementsSummary
Offer and AcceptanceThere should be communication of offer and acceptance. An offer should be made by the offeror, and the acceptance of the offer should be communicated by the offeree.
ConsiderationConsideration is an exchange of something that has legal value in return for a promise.
An Intention to Create Legal RelationsParties must have an intention to create legal relations for there to be a contract.
CapacityParties must have contractual or legal capacity to enter into a contract.
CertaintyThe terms to a contract must be sufficiently certain and complete as to its essential terms.
FormalitiesCertain kind of contracts may be required to comply with legal requirements as to formality.

Read More: What is Contract Law?” provides a broad overview on contemporary legal theories that explain the nature of contract law.

Why is Consideration relevant to Contract Law?

While the principles of consideration have evolved, it is of ancient origin and forms an essential part of contemporary contract law. The importance of consideration has been likened to transactions – agreements represent the form of a transaction, while consideration represents its substance (Shatwell, 1954). There are several justifications for the function of consideration:

FunctionsSummary
ComparisonConsideration provides the means to distinguish between gratuitous promises and promises that have been exchanged for something of legal value.
EnforcementEnforcement of gratuitous promises can undermine the enforcement of promises that have been exchanged in return for something of legal value.
IntentionConsideration may assist to determine whether parties intended to create legal obligations as part of an agreement.
State InterventionConsideration limits the involvement of the state to the enforcement of promises between parties that have exchanged legal value. This also protects persons that have made gratuitous promises that may not have intended for those promises to be legally binding.

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What is Consideration?

In contemporary contract law, consideration is something that has legal value and is given for a promise as the agreed price. The classical definition of consideration is captured in the English decision of Currie v Misa (1875) LR 10 Ex 153, that:

“A valuable consideration, in the sense of the law, may consist either in some right, interest, profit, or benefit accruing to the one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other….”

In Australia, the modern definition of consideration has two legal elements: the benefit or detriment requirement, and the bargain requirement. The bargain requirement was adopted in the High Court decision of Australian Woollen Mills Pty Ltd v The Commonwealth (1954) 92 CLR 424, in the Court’s application of quid pro quo. Otherwise, the two legal elements are summarised in the table.

Legal ElementsSummary
Benefit or Detriment RequirementA promisee must incur a legal detriment or confer a benefit on the promisor.
Bargain RequirementThe benefit or legal detriment must be given in return for a promise.

The terms, promisor and promisee are defined. A promisor is the person making a promise, and the promisee is the person receiving that promise.

What is the Benefit or Detriment Requirement?

Consideration is frequently characterised by the benefit or detriment requirement. This principle requires that a legal detriment be incurred by the promisee, or a benefit conferred to the promisor. It is not a requirement that both should occur – though they often do. Either a benefit or legal detriment should be sufficient.

What is the Bargain Requirement?

In contemporary contract law, the bargain requirement represents the exchange for a promise. It is the benefit conferred on a promisor, or the legal detriment incurred by a promisee, that is given in return for a promise (Robertson & Paterson, 2020). A bargain may also be described as “no more than a transaction by which the parties agree to exchange things or acts or promises with one another” (Shatwell, 1954, p. 317). Therefore, the bargain requirement views consideration as the price paid for a promise (Seddon & Bigwood, 2023). Emphasising the commercial dimension of contract law, the House of Lords in the English decision of Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] AC 847 described consideration in the language of price:

“An act of forbearance of one party, or the promise thereof, is the price for which the promise of the other is bought, and the promise thus given for value is enforceable.”

Does Consideration have to move to the promisor?

It is not essential that consideration should move to the promisor. However, the consideration should move from the promisee. The enforceability of a promise is not based on the promisor’s conduct, but rather the promisee’s conduct in response to a promise. Therefore, consideration does not require that the promisor must receive the consideration. 

When is Consideration sufficient?

The principle that consideration should be legally sufficient is reached when consideration is legally recognised as valuable. However, after reaching that threshold, it is not necessary that consideration should be adequate. This principle can be historically traced to 1586, in an English decision of Sturlyn v Albyn (1586) 78 ER 327. The Court of King Bench’s stated:

“For when a thing is to be done by the Plaintiff, be it never so small, this is a sufficient consideration to ground an action.” (Sturlyn v Albyn (1586) 78 ER 327, 328)

Importantly, it is trite that consideration should be sufficient but need not be adequate. The difference between the terms, adequate, and sufficient, is that while consideration may be commercially inadequate, it can still be legally sufficient. Equivalent value between the benefit conferred or detriment incurred for a promise’s performance is not necessary (Carter, 2018, p.120).

When assessing consideration, the Court will not examine the adequacy of consideration. Rather, in classical contract law, the Court’s role to limited to ensuring “a bargain has been struck and an exchange made.” (Robertson & Paterson, 2020, p.103). Reflecting the commercial nature of contract-making and exchange of bargain between private parties, consideration that is sufficient is “in substance, a detriment incurred by the promisee, or a benefit received by the promisor” in support of a promise (Williamson, 1979, pp. 375-6).

Bibliography

  • Carter, J. (2018). Contract Law in Australia (7th ed). LexisNexis.
  • Chen-Wishart, M. (2016). Reforming Consideration: No Greener Pastures. In Degeling, S., Edelman, J., Goudkamp, J. (Eds.), Contract in Commercial Law. (pp.77-104). Thomson Reuters.
  • Kiefel, S. (2016). The Doctrine of Consideration in Contract: Some Historical and Comparative Perspectives. In Degeling, S., Edelman, J., Goudkamp, J. (Eds.), Contract in Commercial Law. (pp. 61-76). Thomson Reuters.
  • Robertson, A., & Paterson, J. (2020). Principles of Contract Law (6th ed). Thomson Reuters.
  • Seddon, N. & Bigwood, A. (2023). Cheshire & Fifoot Law of Contract. LexisNexis.
  • Shatwell, K. (1954). The doctrine of consideration in the modern law. Sydney Law Review, 1(3), 289-331.
  • Williston, S. (1979). Williston on Contracts (3rd ed., Vol. 1). Lawyers Co-operative.

Implied Terms | Enforceable Contract | Frustration | Legally Binding Agreement | Termination | Express Terms | Intention To Create Legal Relations | Offer and Acceptance | Certainty | Repudiation | Privity | Classification of Terms | Contract Law (Theories) | Causation | Remoteness | Damages |

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Authored by:
Ben Franklin, Managing Partner (LIV Accredited Specialist – Property Law), &
Matthew Tran, Lawyer.

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