Understanding Consideration in the Law of Contract

The layman on the streets knows that he doesn’t owe anyone an obligation if there is no payment. He knows that if he promises to  do or give something to someone, the only thing binding him to the promise is his honour.

However, when the other person pays him for this promise, he has to fulfil it. In the law of contract, this payment is known as consideration. It doesn’t necessarily have to be a payment, it could even be an act. All that matters is that the person who was promised (promisee) gave or did something in return for the promise.

What is Consideration?

Consideration is a very key element to the formation of a contract. In order to fully understand it, it would be best to give definitions of the term.  Consideration has been defined in numerous places. The most popular is the definition given in Currie vs Misa by Lush J. He said:

” 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 …”

The business dictionary defines consideration as:

“Something with monetary value, voluntarily  exchanged for an act,benefit, forbearance, interest, promise, right or goods or services.”

According to Black’s law dictionary 8th edition, consideration is:

” Something (such as an act, a forbearance, or a return promise) bargained for and received by a promisor from a promisee; that which motivates a person to do something, esp. to engage in a legal act. “

The Supreme court, per Fabiyi JSC, in the case of Chabasaya vs Awasi (2010) NWLR Pt 1201, defined it as “the inducement to a contract, a basic, necessary element for the existence of a valid contract that is legally binding on the parties”.

Consideration Must Move From The Promisee

Consideration is one of three main building blocks of a contract. it could be something of value such as an item or service which each party to a legally binding contract must agree to exchange before the contract can be said to be valid. Note that consideration should be of value and has to be adequate.

For instance, Tolu promises to deliver some goods to John. However, it isn’t John that pays for it, Kunle pays for it. This  means that John can’t bring an action to enforce the promise because he wasn’t the one that furnished consideration.

This means that even though John  is the promisee (the person a promise was made to), he has no right to enforce the contract because consideration  didn’t come from him.

 

Instances that don’t count as consideration

The statement that consideration must move from the promisee is an alternative way of saying that only a person who has furnished consideration in a contract can bring an action to enforce the promise. Absence of consideration could be in one of the following forms:

  1. Gratuitous promise by the defendant.
  2. Non performance by the plaintiff.
  3. Where consideration is furnished by a third party.
  4. Claim in excess of benefits provided for in an agreement.

Gratuitous Promise by the defendant

A person makes a promise to another person and he may go further to fulfils his promise, all with no corresponding act or consideration from person that benefits.

Where the promissor’s act does not constitute a single act, like an out and out gift, but involves a continuing commitment, like paying for the promisee’s university education. The promisor can withdraw his promise at any time without liability. This is due to the fact that the promisee has furnished no consideration for the promise of the promisor.

In the case of L.A Cardoso vs the executors of the late J.A Doherty, the plaintiff was promised by J.A Doherty that he would be allowed to live in a house for as long as possible. However, upon his death, the executors of his estate rescinded this promise. He filed for an injunction restraining them from evicting him.

The court held that he furnished no consideration for the promise.

Non performance by the Plaintiff

There may be an apparent contract between two parties which on close examination is no contract at all. This is because one of the parties has not performed his obligation or fulfilled his part of the agreement. In such a situation, any action the plaintiff brings to enforce the contract will fail because of lack of consideration.

In Miles vs New Zealand Alford estate Co, a company had bought land and was dissatisfied with the purchase. The  vendor promised to compensate the company for this.

It was alleged that the company’s consideration was its act in not instituting proceedings to rescind the contract. A judgement by the majority of judges at the court of appeal held that there was no consideration because there was no proof of the intention to institute a suit. So, if the intention can’t be proved, there is nothing to perform.

According to Cotton LJ

“… in my opinion, a simple expectation even though realized would not be a consideration for the promise which he gave. In order to make good consideration for the promise, there must be something moving from the other party towards the person giving the promise.”

Where a third party furnishes the consideration 

Only a party to a contract can bring an action to enforce it. This underlies the whole doctrine of privity of contract. A party that has not furnished consideration in a contract cannot be strictly regarded as a party to that contract.

Therefore, any action based on consideration furnished by a third party will necessarily fail. If the plaintiff belongs to an organisation, then he must sue in his representative capacity and not in his own personal capacity.

In Gbadamosi vs Mbadiwe, the plaintiff sued the defendant in his own (plaintiff’s) name on a debt that the defendant owed the party of the former. It was decided by the court that the plaintiff had furnished no consideration for the transaction. It was his party that had furnished the consideration, not him.

Claims in excess of benefit provided for in an agreement

A contract always states the extent of the benefit or consideration attributable to each party. What is the effect of a party who promises to accord extra benefit on the other party after the conclusion of the contract?

At best, the promise is not actionable because there is no extra consideration for the new promise. In the case of Egware vs Shell BP Petrol Development Company of Nigeria, the plaintiff, after selling his land to the defendant, struck a deal that all minor contracts that had to do with that land will be awarded to him.

The defendant did not keep to this promise. He sued for breach of contract. It was decided that since he had already sold the land to the defendant, his second request was a new one and he furnished no consideration for it.

Executory And Executed Consideration

There are two types of consideration known to the  law. They are executed consideration and executed consideration.

Executed Consideration

Executed consideration connotes that an act is exchanged for a promise. Consideration is executed when the plaintiff is able to show that he has performed his own part of the contract. A classical example is an offer of reward for finding a lost article or an offer of reward for volunteering some information of some sort.

Thus, the case of Carlill vs Carbolic smokeball Co is very relevant in this regard. In this case, an offer of reward was made to anyone who used a drug made by the company and still contracts the influenza. The offer of the company was held to be binding on them as a unilateral contract. The  company was asked to pay the reward to the plaintiff because it was proved that she had performed her part of the transaction. The above case is an example of a executed consideration. This is because there is a promise and which is exchanged for an act.

Thus,  if the agreement is for a party to do an act, once he does that act, he shall be entitled to the promise of reward of the other party. he consideration of the first party is what is referred to as executed consideration.

Executory Consideration

Executory consideration occurs when the contract is an exchange of promises. In other words, it depicts the dictum “exchange of promises”. Consideration is termed executory when the offer and acceptance is made of promises – the offeree making a promise in return for the offeror’s promise.

This kind of consideration is common in contract for the sale of goods, where the whole transaction is in the future. In sales of goods, the executory consideration is termed ‘agreement to sell’.

For example Morakinyo promises to sell a television set to Afolabi who promises to buy it at a later date. In this case, both parties become bound by the contract before performance. If there is breach by any party, remedy is guaranteed.

In this situation, Afolabi cannot claim that he can withdraw from the agreement because he has not taken custody of television set. The exchange of promises make it a valid contract but the whole transaction remain in the future.

In conclusion, it should be noted that in executed consideration, liability lies only on the side of the offeror, wile in an executory consideration, both parties are liable

Must Consideration be Sufficient?

While consideration must not be adequate, it must be sufficient. It must have some value in the eyes of the law. It must contain an element which can be regarded as the price paid by the of the defendant’s promise. If consideration is too vague, useless or meaningless, then it has no value in the eyes of the law.

Legal scholars have given this issue much thought. On one side of the divide, it has been argued that any act or promise accepted by a party to a contract as the price for his own act or promise constitutes valid consideration.

This means consideration doesn’t necessarily have to be of economic benefit. Also, J.C Smith in support of this argument said that the belief that consideration has to be of economic benefit was erroneous. He argued that once it is what the defendant wanted at the time, it is valuable consideration.  It may be quite useless to both parties, however, it must be something owned by the person giving it out or he must be entitled to it.

G.H Treitel, in contrast to JC Smith’s idea said that an act will only amount to consideration if the law sees it as having some economic value. This view was upheld in Faloughi vs Faloughi where the court held that love and affection cannot consist consideration because it is not of economic value. However, in the recent case of Johnson wax Nigeria ltd vs Sanni (2010) NWLR Pt 1181, the court said

“Once consideration is of some value in the eyes of the law (however infinitesimal it may be) and flows from the promisee to the promisor to their mutual equilibrium, it is enforceable in law”

What this means is that anything of value in the eyes of the law, it doesn’t necessarily have to be monetary value, will constitute valid consideration.

                 

Author: Olanrewaju Olamide

Olamide is an avid reader who believes that no knowledge is wasted. If he is not surfing the internet, he would be doing something else to get more information, whatever that is.

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11 thoughts on “Understanding Consideration in the Law of Contract

  1. Pls what I am asked to write on consideration under Nigeria law of contract and am confused Pls I need your help thanks

  2. Thank you so much for this educating site. However, I’ve read over and over again the example given about John, Tolu and Tunji and it seems I’m not getting it all. I can’t see how the example can fit for an instance. Maybe I just don’t get it.
    The site has been of great help! Kudos and God bless.

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