In contract law, a legally binding contract is formed when both parties provide something of value to one another. This exchange, known as valuable consideration, is essential for the formation of the contract. For instance, agreeing to pay money for services or goods in exchange for their delivery demonstrates good consideration.
However, if one party makes a promise after the other party has already performed their obligation, this is called past consideration. According to the general rule, past consideration does not constitute past consideration that can form the basis of enforceable contractual obligations.
Types of Consideration in Contract Law
In understanding contract law, it is important to distinguish between different types of consideration:
Executed Consideration:
This occurs when one party performs their obligation as part of the agreed terms at the time of the contract’s formation. For example, delivering goods in exchange for immediate payment is an example of executed consideration. The promise and performance happen simultaneously.
Executory Consideration:
In this scenario, the parties agree to fulfill their obligations in the future. For example, a seller may promise to deliver goods next month in exchange for a promise to pay upon delivery. The obligations are reciprocal and will be executed at a later time.
Past Consideration:
As previously discussed, this involves an act or performance that has already been completed before a promise is made. For example, if someone repairs a car without prior agreement and later receives a promise of payment, the consideration is past and usually not enforceable.
Valid Consideration: Essential Elements
For consideration to be valid under contract law, it must meet certain criteria:
It Must Be Sufficient:
The law does not require consideration to be adequate but does require it to be sufficient. For instance, a promise to pay a nominal sum of money in exchange for an act can still constitute valid consideration.
It Must Be of Value:
Consideration must involve something of value, whether monetary, goods, services, or an undertaking to perform a task.
It Must Be a Bargain:
Both parties must agree to exchange their consideration as part of the contractual terms.
The Landmark Case of Roscorla v Thomas (1842)
The landmark case of Roscorla v Thomas (1842) illustrates why past consideration is typically invalid. In this case, a buyer purchased a horse. After the sale, the seller made a promise that the horse was sound and free from vice. However, the horse was later found to be unhealthy and poorly behaved.
When the buyer attempted to sue for a breach of contract, the court held that the seller’s promise was not legally binding. The promise was made after the contract had been completed, meaning no new adequate consideration was provided. This decision reinforced the principle that promises made after the formation of the contract cannot be enforced without fresh valuable consideration.
Breach of Contract and Past Consideration
A breach of contract occurs when one party fails to fulfill their obligations under the agreement. However, if the obligation in question is based on past consideration, it is unlikely to hold up in court.
For instance, imagine someone performs a service, such as fixing a car, without a prior agreement. Later, the other party makes a promise to pay for the work already completed. If they fail to pay, the promise may not be enforceable, as it was not promised in advance and lacks good consideration.
Exceptions to the Rule: Pao On v Lau (1980) AC 614
Although the general rule is that past consideration is not valid, there are exceptions. A notable example is the case of Pao On v Lau (1980) AC 614, which established that past consideration may be enforceable under certain circumstances.
For past consideration to be valid:
The act must have been performed at the request of the promisor.
Both parties must have understood that payment or some benefit would follow the act.
The promise must have been enforceable if made in advance.
This case demonstrates that while past consideration usually does not create a legal obligation, it may do so if specific conditions are met.
Pre-Existing Obligations and Public Duties
Another important consideration is how the law treats obligations that already exist:
Existing Obligations in Private Contracts:
If a party to a contract is already bound to perform a specific duty under an existing agreement, they cannot demand additional consideration for performing the same duty. For example, a contractor cannot demand extra payment for completing a task already covered under the original terms.
Public Duty:
Promises to perform a public duty, such as those required by law, are not valid consideration. For example, a police officer cannot claim a reward for doing their job, as they are already obligated to perform such duties.
The Role of Executory Consideration
Executory consideration is common in commercial contracts where obligations will be performed in the future. For example, an agreement to deliver goods next month in exchange for payment upon delivery is a valid and enforceable contract. Both parties are bound by their promises to perform.
Why Consideration Matters for Contracts
Understanding the principles of consideration is critical when drafting or disputing contracts. Individuals and businesses often rely on a law firm to ensure their agreements are enforceable. Failing to include proper valuable consideration can result in disputes or a lack of enforceable rights.
For example, if a business delivers goods without a prior agreement and later receives a promise to pay, this promise may not create a valid obligation. Ensuring that all terms and obligations are clearly established during the formation of the contract is essential to avoid disputes and ensure enforceability.
Summary: Past Consideration vs Legally Binding Contracts
In summary, the concept of past consideration plays a crucial role in determining whether a contract is enforceable. The landmark case of Roscorla v Thomas (1842) demonstrates that promises made after the fact, such as a promise that the horse was sound, do not constitute adequate consideration. However, cases like Pao On v Lau (1980) AC 614 highlight narrow exceptions where past consideration can create enforceable contractual obligations.
When forming agreements, parties should ensure that all promises and obligations are made upfront and supported by good consideration. Consulting a law firm can help clarify these principles, reduce the risk of disputes, and safeguard your rights under contract law.
