Consideration - a Necessary Element of Australian Contract Law
CONSIDERATION - A NECESSARY ELEMENT OF AUSTRALIAN CONTRACT LAW
Introduction
Consideration is a key element of Australian contract law. Critics have argued that some of the requirements which consideration imposes on contracting parties can bring about injustice, and that reform is necessary. Examination of the role consideration plays in contract law, however, shows that reform is likely to be socially and economically detrimental, and that a more appropriate response is to address injustice through legislation.
What is consideration and what role does it play in Australian contract law?
Consideration requires that both parties to a contract to either do something or promise to do something with the intention of creating a legally binding contract.1
Confirmation of consideration is essential.2
There are two types of consideration. Executory consideration (or a bilateral contract) involves the exchanging of mutual promises.3 Executed consideration is a contract in which performance of an act constitutes acceptance (a unilateral contract.)4
Consideration must fulfil two main requirements. Firstly, a 'quid pro quo' exchange must take place.5 This ensures a clear distinction between a bargain and a conditional gift.6
Consideration must also involve a detriment to the promisee of a benefit to the promisor.7 There will be no bargain if an exemption clause excludes the promisor's liability.8
Courts focus on formal equivalency (sufficiency in law) and not actual equivalency (material equality).9 Parties are free to 'make bad bargains.'10
Restrictions on what can constitute good consideration include:
. Any act performed / not performed as consideration must be lawful.11
2. Performance of an existing legal duty is no consideration.12 (Exceptions are if there is an honest belief that one has a legal right to relinquish a legal claim, as long as the claim is not 'vexatious or frivolous',13 and if performance of existing legal duty has 'practical benefits'.)14
3. Past consideration is no consideration15 unless services were undertaken on the basis that later payment was expected.16
4. Consideration must not be illusory.17
If two parties wish to enter into an agreement which does not involve a bargain, a deed, rather than a contract, can be used to avoid the consideration requirement.18
What problems are presented by the requirement of consideration?
There have been various criticisms of the element of consideration in Australian contract law. Some critics believe a more equitable approach would be to require only intention to enter into a legally binding contract to be shown.19 Others suggest that it should be stipulated that consideration is fair and reasonable.20
One reason given for the laissez-faire approach of consideration is that it is essential to a modern free-market economy that contracts involve a bargain.21 Some object, saying that the competitiveness of bargaining means parties will 'cheat', and that the bargain theory interferes with personal relationships.22
Bargaining in a neo-liberal economic system inevitably involves competition. However, if it were not for the requirement of consideration, the ability for parties to 'cheat' each other would be arguably greater, since promises that caused a benefit or detriment to one party and not the other could be enforced.23
In some countries where Roman Dutch law is prevalent, consideration is not required: "just causa" - or intention to enter into a legally binding promise, is sufficient.24 Many of these countries, however, have incorporated requirements similar to consideration into law, particularly in commercial and business contracts.25 This ...
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Bargaining in a neo-liberal economic system inevitably involves competition. However, if it were not for the requirement of consideration, the ability for parties to 'cheat' each other would be arguably greater, since promises that caused a benefit or detriment to one party and not the other could be enforced.23
In some countries where Roman Dutch law is prevalent, consideration is not required: "just causa" - or intention to enter into a legally binding promise, is sufficient.24 Many of these countries, however, have incorporated requirements similar to consideration into law, particularly in commercial and business contracts.25 This has generally been achieved through statutory provisions.26 In Sri Lanka, for example, where a mixture of Roman Dutch and English laws apply, the bargain theory applies to business and commercial contracts, and not to those between private individuals.27 In individual cases, the "just causa" requirement suffices,28 and judges may consider moral obligations.29 Business and commercial contracts, meanwhile, require consideration.30
Such a system may resolve problems caused by the laissez-faire approach to contract law for individuals. Critics of these systems, however, say that the ability of a judge to consider moral obligations obscures laws governing contract formation and subjectifies what should be an objective principle.31 This opinion was upheld in Eastwood v Kenyon32, which rejected an attempt by Lord Mansfield in 1782 to allow judges to contemplate moral obligations.
Critics over the years have argued that the bargain requirement of consideration does not account for detrimental reliance on a promise. The doctrine of estoppel, however, has remedied this without changes to contract law being necessary.33
Since inadequate consideration is acceptable34, it has been suggested that consideration may obscure injustice where one party has superior bargaining power.35 For example, large corporations may take advantage of small businesses. There are, however, numerous statutory requirements governing contracts. Parties can seek remedies under breaches of the Trade Practices Act, the various Fair Trading Acts, employment regulations, and other areas. Bodies such as the Australian Securities and Investments Commission and the Australian Competition and Consumer Commission are able to regulate business activities and prevent unethical mergers or anti-competitive behaviour.36
Common law has also imposed many requirements on parties to a contract. Remedies can be sought if unconscionable conduct is involved.37 The requirements for what constitutes good consideration also help guard against unfair exchanges.
It is also suggested that only contracts of economic value are enforced. As courts do not inquire into the sufficiency of consideration, however, bargains that involve performance of acts that do not transpire into economic value can be good consideration. Furthermore, promises also can have economic benefits.38
Is consideration a necessary element of our law?
Consideration is vital in Australian contract law. It indicates an intention on the part of both parties to be legally bound.39 It means that business relations and planning are more straightforward.40 The rules determining what good consideration is ensure little ambiguity in what constitutes formal adequacy.41
It is important that material adequacy is not considered by courts. As discussed by Kirby J in Woolworths Ltd v Kelly,42 lawyers are not economists. Nor are they experts in the wide variety of fields which contracts concern. Particularly between private individuals, contracts may involve the exchange of object with particular personal or sentimental value, making judging adequacy impossible.
The current economic system in Australia is based on free competition. Without consideration as an element of contract law, businesses would be greatly hindered in their ability to freely compete. In a world where businesses are competing internationally, this could have significant effects on the Australian economy.43
Consideration prevents what Kirby J refers to as the 'floodgates' from opening.44 If the courts could enforce promises that involved no exchange, the vagueness that this would introduce to contract law would trigger a multitude of claims. Clearly this would translate into a significant amount of courts costs and time.
Is it necessary for Consideration to remain in its current form?
The necessity for consideration as an element of contract law in its present form was highlighted in a recent UK case, City and District Council ("St Albans") v ICL.45
This case involved a contract between Australian based IT company ICL and St Albans Council. ICL supplied St Albans with a computer system, to be used in administering its collection of a community charge, at a price of £500,000. The contract incorporated a clause limiting ICL's liability for breach to £100,000. A system error caused St Alban's to set its charge too low, which resulted in a £1 million loss (however £484,000 was recovered by raising the charge the following year). St Alban's sued ICL. The Unfair Contract Terms Act 1997, states that any limitation of liability must be reasonable. The Court held that the limitation clause was unreasonable and ICL was liable for £685,000 damages.
The application of the 'reasonableness' stipulation in this case was harmful to the IT industry, and particularly to UK businesses.46 Insurance premiums rose considerably due to the ambiguity the reasonable clause introduced.47 It became clear that the inclusion of such clauses in contract law causes litigation and insurance costs for all companies to rise, and hinders free competition, which ultimately was detrimental to the UK marketplace.48 "We won't trade with UK IT companies anymore."49
In the end, the real loss is borne by the consumer, since the increased costs raise the price of goods and services. While it is important to legislate against unscrupulous business deals, the provisions in the TPA and Fair Trading Acts do this without the ramifications of adding a 'reasonable' clause to consideration.50
Finally, the objectivity which consideration provides in important in ensuring the law is consistent. Moral obligations are rarely considered by courts, who are expected to be impartial and objective. To reform the law of contract by allowing courts to consider the fairness or adequacy of an exchange would cause it to be inconsistent with other Australian laws.
'If you were going to reform consideration requirements, you would have to re-write every law in Australia to be consistent.'51
Should the law be reformed?
There are situations where the element of consideration will not ensure justice. Reforming the law by inserting a 'reasonable' a 'fair' clause to regulate exchanges, however, is likely to have negative ramifications for both businesses and consumers.
Possible ideas for law reform could draw on the Sri Lanka model, treating individual contracts differently to business contracts. However, this introduces greater ambiguity into the law and is likely to trigger the 'floodgates'.
Lawyers and judges are not economists. To expect them to be able to judge whether an exchange is fair is unreasonable and will result in subjective decisions.
Exchanges between parties with unequal bargaining power will occur, however remedies for unfair exchanges exist under legislation and in common law. If any situations arise that are not covered by available remedies, it is more appropriate to rectify their injustice through legislation than through reforming contract law.
The element of consideration in Australian contract law does not need reform.
Campbell Walker, Student Companion: Contract. (Wellington: Butterworths, 1994.) 1-5
2 Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107
3 Campbell Walker, above n 1, 2-4
4 Ibid
5 Australian Woollen Mills (1955) 93 CLR 546; Beaton v McDivitt (1987) 13 NSWLR 162
6 Australian Woollen Mills (1955) 93 CLR 546
7 Beaton v McDivitt (1987) 13 NSWLR 162 (McHugh JA)
8MacRobertson Miller Airlines (1971) 20 FLR 142 (Barwick CJ)
9 Peter Heffey, Jeannie Patterson, Andrew Roberston, Principles of Contract Law, (NSW: Lawbook Co, 2002.) 88-89
0 Woolworths Ltd v Kelly (1991) 22 NSWLR 189 (Kirby J)
1 Heffey, Patterson, Roberston above n 8, 90-93
2 Wigan v Edwards (1973) 1 ALR 497
3 Ibid
4 Musumeci v Winadell [1994] 34 NSWLR 723 (NSW SC followed UK approach in Williams v Roffey Bros & Nicholls (Contractors) Ltd [1991] 1 QB 1)
5 Roscorla v Thomas (1842) 3 QB 234
6 Pau On v Lau Yiu Long [1980] AC 614.
7 Meehan v Jones (1982) 149 CLR 571.
8 Ballantyne v Phillott (1961) 105 CLR 379
9 Heffey, Patterson, Roberston above n 8, 99
20 J.F Wilson, Evolution or Revolution? Prospects for Contract Law Reform. (Southampton: University of Southampton, 1969.) 13-21
21 Robert Hillman, The Richness of Contract Law, (Dordrecht: Kluwer Academic Publishers, 1997.) 182-185
22 Charles Fried, Contract as promise: a theory of contractual obligation. (Cambridge: Harvard University Press, 1981.) 30-39
23 A. G Bischoff, Towards a Theory of Contract. (Great Britain: The Eastern Press, 1981.)7-9
24 Christopher Weeramantry, Law of Contracts, (New Delhi: Lawman, 1999) 219, 279-283.
25 Ibid
26 A. G Bischoff, above n 22, 9-12
27 Ibid
28 David Newman, "The doctrine of Causa or consideration in the Civil Law" (1952) 30 Canadian Bar Review, 662.
29 In fact, a moral obligation can constitute "causa". Jayawickrema v. Amarasuriya, (1918) 20 NLR 293, 294, (Privy Council.)
30 Indian Council of Arbitration and Federation of Indian Chamber of Commerce & Industry, Arbitration and Commercial Law Framework in SAARC Countries. < http://www.saarclawnet.com/saarclawnet/index.html> Accessed 20th September 2004.
31 Lord Wright, "Ought the Doctrine of Consideration to be Abolished from the Common Law" (1936) 49 Harvard Law Review 1225, 1235
32 Eastwood v Kenyon (1840) 113 ER 482
33 Mindy Chen-Wishart, Unconscionable Bargains. (Wellington: Butterworths, 1989) 17-19
34 Woolworths Ltd v Kelly (1991) 22 NSWLR 189 (Kirby J)
35 Mindy Chen-Wishart, above n 32, 16-18
36 Australian Securities and Investments Commission, "Laws we administer", <http://www.asic.gov.au/asic/ASIC_PUB.NSF/byheadline/Information+Sheets+Content+Page?openDocument> Accessed 19th September 2004; Australian Competition and Consumer Commission, "Business Rights and Obligations", www.accc.gov.au Accessed 19th September 2004.
37 Mindy Chen-Wishart, above n 32, 15-19
38 Heffey, Patterson, Roberston above n 8, 100
39 Campbell Walker, above n 2, 14-20
40 Heffey, Patterson, Roberston above n 8, 100-102
41 Campbell Walker, above n 2, 14-20
42 Woolworths Ltd v Kelly (1991) 22 NSWLR 189 (Kirby J)
43 David Barnes and Lynn Scott, The Economics of Contract Law (St Paul US: West Publishing, 1992.) 21-23, 30-34
44 Woolworths Ltd v Kelly (1991) 22 NSWLR 189 (Kirby J)
45 (1996) (Unreported.)
46 Kirilee Grimes, Exclusion and Liability Caps in Information Technology Contracts (Canberra: Betrusted Asia Pacific, 2004.) 1-3
47 Ibid
48 Ibid, 2
49 Ibid, 2-4
50 Ibid
51 Ibid, 1-3
