Consideration

Definition and legal nature of consideration

Definition and fundamentals

The concept Consideration is a central element of common law contract law, particularly in the Anglo-American legal system. Consideration refers to the counter-performance that each party to a legally binding contract provides or promises to provide. It is one of the key criteria for the validity of a contract under English and US law, and distinguishes simple, non-binding promises (so-called “gratuitous promises”) from enforceable contracts.

Consideration means any kind of benefit that a party receives, or any detriment that a party voluntarily takes on as the result of a contractual promise. It is, in effect, the counterpart to the ‘Gegenleistung’ (reciprocal performance) under German law, though the system and legal requirements for consideration differ substantially.

Legal function in contract law

The legal function of consideration is to create a binding obligation between the parties, thereby rendering a mere promise legally enforceable. According to the principle “no consideration, no contract”, a contract without consideration (subject to exceptions) lacks legal enforceability. It can therefore neither be enforced in court nor compelled in any other way.

Consideration thus serves both as proof of a serious intention to be legally bound and as an instrument of contractual fidelity.

Requirements for consideration

Requirement of counter-performance

According to common law doctrine, valid consideration must meet the following requirements:

• It must come from a party to the contract (“move from the promisee, but need not move to the promisor”).
• It must not be in the past (“past consideration is not good consideration”).
• It must arise out of a legal relationship (“must be sufficient but need not be adequate”).
• It must not merely fulfil an existing legal obligation.

Forms and structure

Consideration may take many different forms:

• Performance (payment, delivery of goods, rendering of services)
• Forbearance (forbearance, e.g. waiver of legal action)
• Promise, to perform or refrain from performing certain acts

The value of the consideration is generally irrelevant; a minor or nominal value is sufficient. The court examines only whether an actual counter-performance is given (e.g. a symbolic penny), not whether it is economically adequate.

Distinction between promised and already performed acts

In order to be valid consideration, performance must be contemporaneous with contract formation or provided for the promise. Acts already completed generally do not constitute consideration (“past consideration”).

Enforceability and exceptions

Situations where consideration is lacking

The absence of consideration generally renders a contract invalid. However, common law recognizes exceptions in which a promise can be enforced even without consideration, such as through the doctrine of promissory estoppel. This exception applies especially when a party has acted to its detriment in reliance on a promise.

Special features: Deeds and promissory estoppel

Certain acts, so-called deeds (formal, sealed documents), do not require consideration in order to be legally binding. Their form and signature alone render them effective.

The doctrine of promissory estoppel in turn prevents a party who has given another a promise that has been detrimentally relied upon from invoking the absence of consideration.

Systematic classification and significance in an international context

Distinction from German law

In civil law systems of German-speaking countries, especially Germany’s BGB, there is no direct equivalent to consideration. Contracts are generally concluded on the basis of consensus and without the requirement of an explicit counter-performance, so the doctrines of both legal systems differ significantly.

Significance in legal practice

Consideration is a fundamental concept in contract drafting in all common law countries, including England, Wales, Australia, Canada, and the USA. For international contracts and contract interpretation, correct consideration is highly significant for both contract formulation and enforceability in court.

Jurisprudence: Leading decisions

Numerous court decisions have clarified the significance and requirements of consideration, including Currie v Misa (1875) (definition of consideration), Chappell & Co Ltd v Nestlé Co Ltd (1960) (sufficiency of consideration) as well as decisions on promissory estoppel, in particular Central London Property Trust Ltd v High Trees House Ltd (1947).

Summary and outlook

Consideration is a central feature of Anglo-American contract law. It distinguishes legally effective and non-enforceable promises. Understanding and correct application of the rules of consideration are particularly important in international legal relations and in drafting cross-border contracts. The concept continues to evolve under common law, so future developments, especially regarding exceptions and valuation, should be closely observed.

Frequently asked questions

What role does consideration play in the formation of contracts under Anglo-American law?

In Anglo-American law, consideration is a central requirement for the validity of a contract. It essentially refers to the counter-performance that each contracting party must provide. Without such (mutual) consideration, a contract is generally unenforceable, unless an exception applies, such as a deed (a formally prescribed obligation, e.g. as a deed). Consideration may consist of a performance, a forbearance, or an abstention. Of particular importance is that the counter-performance must have a legally recognized value (“something of value”), but there is no requirement of equivalence – even a minimal or symbolic performance (“peppercorn”) may suffice. Mere acts of courtesy (without legally enforceable consideration) are insufficient. The theory of consideration thus differs significantly from continental European contract law systems, which generally observe the so-called ‘causa’ principle.

How is the adequacy of consideration assessed?

Under Anglo-American law, it is generally irrelevant whether the agreed consideration is adequate or equivalent. Courts examine the sufficiency of the counter-performance only in exceptional cases, particularly if there are indications of bad faith, duress, immorality, or excessive disadvantage to one party (“unconscionability”). The ‘peppercorn theory’ holds that even something minimal and virtually worthless may count as valid consideration, as long as the parties so agree. An exception arises when the counter-performance is entirely illusory or cited only pro forma to create the appearance of a contract—for such cases, there is no real consideration.

What is the difference between past consideration and present/future consideration?

Anglo-American contract law distinguishes past, present, and future consideration. Past consideration is not valid consideration unless it results from a prior express or implied obligation. This means an act or performance given voluntarily before the contract cannot later serve as consideration for a new contract. Present consideration is given at the time of contract formation; future consideration refers to a performance to be given in the future. Only present and future consideration are sufficient for the validity of a contract.

Are there exceptions to the requirement of consideration?

Yes, under Anglo-American law, there are certain exceptions to the requirement of consideration. One of the most important is the use of a deed—a formal document that allows a unilateral act to be binding even without counter-performance. In cases of promissory estoppel and under narrow circumstances, the requirement for consideration can also be set aside: if a party relies on a promise and suffers a detriment, the promisee may, under certain conditions, take action against the promisor even if no consideration exists. Further exceptions exist for contract modifications in certain US states (e.g. UCC contracts).

How does consideration relate to contract modifications?

As a rule, common law requires that any contract modification be supported by new (or additional) consideration from both parties. Without such new counter-performance, contract modifications are generally unenforceable. In contrast, the Uniform Commercial Code (UCC) in the United States allows contract modifications for sales of goods without new consideration, provided they are agreed in good faith. In individual cases, however, the requirement for consideration may resurface, such as when there is bad faith or duress.

What is the significance of consideration in gifts and gratuitous promises?

In Anglo-American law, promises of gifts or other gratuitous pledges are generally not actionable, precisely because consideration is lacking. A gift is considered a unilateral, gratuitous act that requires a deed to be enforceable. Without the formalization of a deed, there is no legal obligation to fulfil such a promise. This differs fundamentally from continental European systems, where gifts can generally be valid even without particular formalities.

How is consideration handled in multi-party or more complex contractual structures?

In multilaterally binding contracts (“multi-party contracts”) or where third parties are involved, the question of consideration is often particularly complex. According to common law theory, attention must be paid to who as ‘promisee’ actually receives or benefits from the counter-performance. In some cases, so-called ‘executory consideration’ (future obligation) may suffice, provided that a legal or economic value is created for all relevant parties. Consideration that obviously benefits only one party—without a performance from them or from a third party (mere courtesy)—will not suffice.

Is consideration closely examined by courts in legal disputes?

The courts typically examine the existence of consideration on the basis of the documents and arguments submitted by the parties. The economic or subjective value is rarely questioned—what matters is only whether a legally recognized counter-performance has been agreed. A more intensive examination takes place only when there are signs of fraud, mistake, immorality, or obvious unfairness. As a result, the evidentiary requirements for consideration are formally present, but substantively quite low in disputed cases.