Contract Law – Consideration and Capacity

In this series of blog posts, we will be looking at how contracts are formed and the necessary elements for them to be valid. We have already looked at the initial invitation to treat and subsequent offer, as well as the acceptance and intent to create a contract. In this blog post, we will be continuing to examine this by looking at what is meant by consideration in contract law, ensuring both parties are getting something out of the deal. We will also look at why both parties need to have the capacity to consent to a contract and what this means. First of all, we will quickly review the earlier elements of contract law, before moving on to look at consideration and capacity rules.

The very first step in building a contract is an invitation to treat. This is not a necessity for a contract to exist, but it is common. Essentially, it is an invitation for another party to make an offer. Price tags in a shop are invitations to treat, as are most adverts. However, an offer is made with the intention of entering a contract and occurs when one party makes an offer to, for example, sell an item for a particular amount. In a shop, the offer occurs when the customer takes the goods the till and, by doing this, makes an offer to purchase them at the price on the label. The main difference between an invitation to treat and an offer is that an offer is legally binding while an invitation to treat is not.

Acceptance is the other party agreeing to the offer made by the first party. For acceptance to be valid, it must be communicated to the one making the offer, it must match the terms of the offer and it must be certain. In a shop, acceptance is made by the staff on the till on behalf of the shop owners. Intention to create legal relations means that both parties intend to be bound by the contract, i.e., it is not just a casual agreement between friends.

Consideration

Consideration is what each party to the contract gets from it, in the form of a promise that is made binding by the contract. All the parties must both gain a benefit from the contract and suffer a detriment. If there is not consideration on both sides of the agreement, then no contract exists and this is instead a gift, which cannot be enforced by law unless they are made by deed. The consideration also has to be something that is valuable in the eyes of the law. For example, promises of love or friendship would not count, as they are not something tangible that holds its value.

There are a number of rules about consideration that the courts will check hold true. Firstly, the consideration made must not be past, so a party cannot rely on something they did before the other party agreed to give them consideration for it. In the eyes of the law, this would be two separate gifts, neither of which are enforceable. Another rule is that although consideration should be sufficient, it doesn’t have to be adequate. Where an item has a known value, this doesn’t need to be matched by the other party to the contract – they could exchange it for something worth more or less. Provided something of value has been supplied as consideration, the law is not concerned with the exchange being equal.

Consideration must move from the promisee for them to be able to enforce it. If they are receiving something as a result of a contract between other parties, but are not actually providing consideration themselves, they cannot enforce it. A person can benefit from a contract without being one of the parties, but they have no legal standing.

In addition, part payment of a debt does not count as consideration for an agreement to take this as the whole payment, so the original debt would still stand. An exception could exist where the part payment is before the due date, it is with a chattel or it is to a different destination.

An act will not count as consideration where there is a public duty to do so anyway. However, it may count as consideration if the party goes beyond their normal public duty to the benefit of the other party. Similarly, fulfilling an existing contractual duty will not count as consideration unless the party goes beyond this duty.

Capacity

All the parties to the contract must have the capacity to consent to be bound by it. Firstly, they cannot be minors (under 18) as they are not considered to have full capacity. Contracts made with a minor can be cancelled if they are not beneficial to the minor. In addition, adults entering into contracts must have full mental capacity, to prevent anyone from taking advantage of vulnerable people.

Wrapping Up

I hope that this helps your understanding of contract law and how the courts enforce it. In my next blog post, we will be looking at the doctrine of promissory estoppel, so come back in two weeks for that!

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