The last AKT blog post discussed the general framework for contract conclusion and three out of four conditions for a contract to exist https://www.akt.rs/en/publication/formation-of-contracts-in-english-law—the-general-framework. This one will address the remaining condition – the peculiar doctrine of consideration that can be problematic to understand from a continental perspective. What is so peculiar or problematic about this doctrine? Simply put, even if the parties fully agree on the contractual content, have clear intention to create legal relations, and comply with all formalities, this still might not be enough in the eyes of English law.

For a start, what is consideration? A well-known definition by the then supreme court of UK, House of Lords (Dunlop v. Selfridge [1915] AC 847, speech by Lord Dunedin) supported a view that consideration is ‘[a]n act or 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.’ In somewhat simpler terms – consideration is something given in exchange for something else; each party must either promise to or actually act in some way/suffer some detriment in order for an enforceable contract to exist.

This means that transactions solely involving gifts are not generally enforceable as contracts (unless created by a deed, to which we will turn shortly). Although in a commercial setting consideration might be thought to be universally present – mutual exchange is, after all, the heart of commerce – the matter might be more complex in some situations. Promises of free samples or other gratuitous givings by one commercial entity to another might be held to be legally unenforceable, although English courts tend to be sensitive to the need of commerce and strive to sometimes ‘invent’ an act/detriment from the other (receiving) party.

As might be expected, what constitutes ‘something’ given in exchange for has been further clarified through extensive case-law. Firstly, English courts do not seek to check if there is ‘adequate’ exchange. Whatever of value is given – provided that there is not something like illegality or duress involved – will suffice. A 100,000£ car can be sold for 1,000£ or even 1£ if the parties truly wish so, and the law will not stand in their way. In general, English law does not recognize the idea present, among others, in Article 139 of the Serbian Law on Obligations concerning an ‘obvious misbalance of mutual performances’. Unless there is some form of vitiating factors or foul play, balance of performances is solely a matter for the parties.

This is why it is also possible to include a token or nominal giving from the other/receiving party (i.e. 1 cent) just to make sure that the requirement of consideration is fulfilled. As famously stated in Chappell & Co Ltd v. Nestle Co Ltd ([1960] AC 87) by Lord Somervell, a mere peppercorn is still good consideration even ‘if it is established that the promisee does not like pepper and will throw away the corn’.

Secondly, past consideration (where one party makes a promise to the other in return for something that the other party has already done) is not good consideration. This means that if a party performed something already (perhaps out of good will) and the other party wants to contractually bind itself to pay for this, it is generally not possible to do so as nothing ‘new’ is received. It is thus recommended to make sure that there is at least some consideration flowing from the other party, even if the ‘true’ performance was rendered in the past.

Thirdly, and somewhat relatedly, even if one party already has an obligation towards the other due to, for example, general law provisions or due to a contract with a third party, that obligations can still be good consideration for a new contract. As to why, the idea is that the party is receiving something ‘new’ – the possibility to legally enforce the obligations itself, and not to have to rely on a third party to do so.

Finally, in the requirement of consideration can be avoided if the contract is made in the form of a deed. Briefly put, it is a special legal instrument made, signed, delivered and/or sealed in a specific way. It is mostly used for conveying property, and is not necessarily a common occurrence in commercial transactions, as it requires additional legal efforts and costs. It can still occur in some complex transactions involving numerous contractors and sub-contractors, as to establish a link between the parties which would probably not exist otherwise due to a lack of clearly identifiable consideration.

The next AKT blog post will examine another controversial area that involves consideration and that can be of particular relevance in these uncertain times – variation (amendment) of existing contracts. In the meantime, as always, feel free to contact AKT for any further assistance in these matters.

Velimir Zivkovic