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WHAT IS CONSIDERED A CONTRACT: Consideration

Known as “the price of a promise” and a controversial requirement for contracts under common law, consideration  is required under most common-law and civil law systems, while some commentators consider it unnecessary. In their opinion, the requirement of intent by both parties to create legal relations by both parties does so under contract, regardless if consideration is present or not. Why both exist in common law jurisdictions is thought by leading scholars to be as a result of the combination by 19th century judges of two distinct traditions: Firstly, the consideration requirement was at the heart of the action of assumpsit, which had grown up in the Middle Ages and remained the normal action for breach of a simple contract in England until 1884, when the old forms of action were abolished; and Secondly, the concept of agreement between two or more parties as being the essential legal and moral foundation of a contract in all legal systems was introduced by the French in the 18th century to be followed  by English judges and jurists thereafter. As the latter chimed well with the contemporary free will theories, notably John Stuart Mill’s influential ideas on free will, it was included with the common law requirement for consideration.

Both parties to a contract must bring something to the bargaining table, is apparently the idea behind consideration. A party seeking to enforce a contract has to show that it conferred some benefit or suffered some detriment that is recognized by law. Though money is usually recognized as consideration, in some instances money would not be regarded as adequate consideration, like when one party agrees to make partial payment of a debt in exchange for being released from the full amount. Among several rules governing consideration, a few of the principal rules are as follows:

  • Consideration has to be sufficient, that is, recognized by the law, but need not be adequate, meaning that the consideration need not be a fair and reasonable exchange for the benefit of the promise as per the terms of the entire agreement.  For example, agreeing to buy a horse for a cent may constitute a binding contract, as there could obviously be trivial benefits to the seller for not having to take care of the horse etc…;
  • Consideration must not be from the past, meaning that it should not be something provided for in the past;
  • The promise to do something that is already contractually obliged to do, is not generally regarded as good consideration. It means that if someone is doing what the person is contracted for, then that is not a good consideration to include in a new contract; and so on.

Estoppel

According to civil law systems an exchange of promises, or a concurrence of wills alone, rather than an exchange in valuable rights is the correct basis for a contract. Thus, if one promised to another to give a book, and the offer was accepted without giving anything in return, there would be a legal obligation to give the book and no change of mind about giving it as a gift would be legal. Anyway, in common law systems, the method of “culpa in contrahendo“, a form of  estoppel is frequently used to create obligations during pre-contractual negotiations.  Estoppel is regarded as an equitable doctrine providing for the creation of legal assurances and thus a contract, where the other party has relied on these assurances to his detriment. It has been the opinion of many that consideration be abandoned, and estoppel be used to replace it as a basis for contracts. Nevertheless, it has been recommended that legislation instead of judicial development is the only way to remove this entrenched common law doctrine of consideration.

Intention to be legally bound

In commercial agreements, it is assumed that parties intend to be legally bound, excepting when the parties unambiguously state that they do not want to be bound, like in the recitals of the agreement.  As opposed to this, many kinds of domestic and social agreements are unenforceable on the basis of public policy, like between children and parents.

Third parties

There is the doctrine of privity of contract meaning that only those involved in making a bargain have the right to enforce it. In general, this convention is still prevailing, allowing only parties to a contract to sue for any breach thereof. However, in recent years the rule of privity has eroded to some extent, and third party beneficiaries have been allowed to recover damages for breaches of contracts they were not a party to. In cases involving third party beneficiaries or debtors to the original contracting party, have been allowed to be considered parties for purposes of enforcement of the contract. There has been recent advances in the case law as well as statutory recognition to the dilution of the doctrine of privity of contract. The tests recently applied by courts are the test of benefit and the duty owed test. The duty owed test considers if the third party was agreeing to pay a debt for the original party, while the benefit test examines if circumstances indicate that the party intends to give the beneficiary the benefit of the promised performance. Defences allowed to parties of the original contract also extend to third party beneficiaries.

Though conventionally believed to be unenforceable, an exchange of promises can still be binding and legally as valid as a written contract. A spoken contract is known as an oral contract, or a subset of verbal contracts. Almost all contracts using spoken or written words are verbal contracts. In view of this, all oral contracts and written contracts are usually founded on verbal contracts. The contracts referred to earlier as implied in fact and implied in law are non-verbal, non-oral contracts, and are also known as a contract implied by the acts of the parties; hence the notion of persons having the right to create laws amongst themselves in the form of contracts.  Contact the lawyers at Levy Zavet PC to ensure your contracts are enforceable, or even to discuss if you have the right to enforce a contract.

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