All You Need To Know About Past Consideration In Contract Law

What Does Consideration Mean In Contract Law?

Consideration is a key principle underlying the formation of a legally enforceable contract. In exchange for the promise made by one party, the other party must provide some form of consideration. Consideration can take the form of money, services or the surrender of a legal right which the promisor has, and is generally some detriment to the receiving party – something that the receiving party would otherwise be entitled to. Without consideration from both parties, there is no legally binding agreement between them.
To satisfy the basic requirement of consideration, the consideration must be sufficient but need not be adequate.
It has been held that "sufficiency requires the consideration to have some value in the eyes of the law". However it must also be kept in mind that consideration need not be adequate. The court does not concern itself with the relative value of the consideration. It is not required that the parties have truly equal bargaining power or that the consideration exchanged must be considered to be of adequate value. As a result, the court will not normally inquire into the adequacy of an exchange of consideration . Provided the consideration is of true value (even if it is small), it will suffice.
The rationale for this rule is the policy of the law – it would be unconscionable for the court to interfere with the contractual rights of the parties voluntarily entered into, particularly for commercial contracts where the parties are in the same position and able to bargain freely. If one of the parties is an individual entering into an agreement with a company, however, the fact that the consideration is less than adequate may be relevant in interpreting the terms of the agreement. For example, a person who receives disproportionate gratification from a promise may be said to have overreached himself thereby allowing the court to intervene.
In reality, it can be difficult to distinguish between both the availability and adequacy of consideration. In some cases, what the court may see as the availability of consideration may actually be viewed as inadequate consideration. The case of Williams v Roffey Bros Ltd [1990] 1 WLR 1391 in which Williams was of the opinion that he had been paid inadequate consideration in exchange for getting more work for Roffrey is a case in point.

What is Past Consideration?

Past consideration, also sometimes referred to as pre-existing consideration, is defined as a benefit that has already been received and, therefore, cannot be given in exchange for a new contract. In other words, a person cannot legally issue a promise or offer to give something in exchange for a promise from the other party if he or she has already provided that item. Essentially, one party is receiving a benefit with nothing in return.
When it comes to contract law, past consideration does not count. Contract law requires consideration. Consideration is essentially the exchange of something of value for something else of value. Because past consideration is not currently in existence at the time of a contract’s formation, it cannot be exchanged.

The Reason Why Past Consideration Is Invalid?

Past consideration is generally not adequate consideration to support a new contract, such as a promise to give a gift. Consideration must move from the promisee to the promisor in the form of a detriment or forbearance that is bargained for by the promisor, and past consideration is no longer moving to the promisor if that person is making a promise to compensate or reward the promisee for what has already been done. Past consideration is simply consideration that has already co-occurred with the promise and has already created a material benefit for the newer promisor.
Whereas consideration must consist of some detriment that is incurred by the promisee, such as incurring a debt or some other liability, past consideration is a benefit for the promisor that has already occurred and for which there are no longer any antecedent duties. For instance, if John promises to pay his neighbor $5,000 if his neighbor does his taxes, it would be past consideration if John had already filed the returns before making this promise.

Exceptions to Past Consideration

Exceptions to the Past Consideration Rule
Some have argued that the rule against past consideration is an outdated anachronism and has led to harsh results in contracts amongst family and friends or in connection with informal promises where the legal effect of the promise was not important. Historically, the requirement that a legal promise be supported by "new" consideration has been strict and inflexible (see, e.g., Williams v Roffey Bros, [1990] 1 WLR 189). However, with the introduction of The Contracts Act 1963, the focus on new and past consideration has become less rigid. Section 63 of the Contracts Act 1963 provides for exceptions to the past consideration rule in the following three scenarios: 1. where a party derives a benefit in respect of a service rendered to another without consideration "at the request of the other party"; 2. where a party "voluntarily" renders a service to another without consideration; 3. where a party derives a benefit in respect of a service rendered to another without consideration due to "the passiveness" of that other party. Also, even those that fall outside of the exceptional categories will not be deemed invalid or unenforceable if it was a "gift or promise to give" or if the consideration for it has failed. Furthermore, there has been a move away from the rigid approach to consideration for the performance of an existing duty. In the United Kingdom, for example, the decision in Williams v Roffey Bros set a new standard of consideration that might apply to a variation in a contract for "modern" performance unrelated to the pre-existing duty under the agreement. In the case of American Express Corp v Alavi (2010), which reinforces the position of Williams v Roffey, the Scottish Outer House found that the defendant did not have to pay the balance of an insurance premium for cover which he had already received, on the basis that he had already been compensated for his risk. The Courts position appears very different and somewhat more permissive in relation to past consideration for a unilateral promise to give. In Kelley v Kellly (1955), it was held that even a promise to return property given as a gift in the first instance would be enforceable, despite the fact that past consideration was provided (the original gift). Even in cases where past consideration is found the Courts will sometimes nonetheless enforce a promise to give. Note, however, that whilst the law around past consideration is becoming more liberal, the position remains vague with the Courts willing to uphold an agreement where a party relies on the promise of another, even where consideration has failed, but with little certainty as to precisely what would constitute "reliance".

Effect of Past Consideration

One potential risk when using past consideration is that the other party may attempt to argue that the promise has not formed a new contract, but it comes within the rule that past consideration is really no consideration at all, i.e. the Spanish protocol which needed to be redone after the fire. Any such challenge will be evidence-based and fact-specific but it can be avoided by providing new consideration at the time of the promise or memorialized in a fresh deed.
For the sake of good practice, it is also important to obtain confirmation of the alleged past consideration, so that some black letter evidence can be produced to show what was expected at the time and to avoid later arguments of "there was nothing promised".
It is also a good idea for the recipient of the alleged past consideration to set out the basis of the consideration e.g. would it would allow the award of damages against the promisor in the event of subsequent default , or would such award be limited to refund of the past consideration. Investment in the documentation at the outset makes potential enforcement easier.
The courts have dealt with cases where promises have been made with an apparent lack of consideration quite strictly, although doing so while acknowledging that such rules are a matter of policy rather than principle. However, it appears that the trend is towards a more liberal approach, since this sort of "technicality" encourages fleeing parties (especially in the context of personal guarantees) to argue an absence of past consideration to try and create a windfall loss.
There are other areas where the issue of past consideration arises, but in terms of risk exposure, the past consideration doctrine is at its highest when looking at the law of trade debts. It is important to plan one’s contractual provisions properly, and deal with the possibility of past consideration.

Past Consideration Case Laws

A few significant cases have been instrumental in shaping the doctrine of past consideration. In 1867, the Supreme Court of Victoria decided Buckland v. Robins (1867) 3 Vic L R 46. The trial court had upheld the validity of a contract, but Justice Holroyd rejected the argument that past consideration of the "settlement of the account" was sufficient. "It is, however, admitted to be competent for a party to do that which he is already under a legal obligation to do, and, when done, such a performance may be a sufficient consideration." It is important to remember that the purpose of consideration is to make a contract enforceable, not to create a debt.
Moreover, in Re Moffat; ex parte Moffat v. Keighran [1927] VLR 151, it was held that past consideration only applies to previous promises. "Past consideration is provided for the fulfilment of a previously formed promise. If no promise is made, there can be no question of past consideration." Later, in Pao On v. Lau Yiu Long [1980] 2 All ER 456, the Privy Council held that past consideration does not always result in an unenforceable contract. In this case, the Court decided some previous acts can be the basis of a legally enforceable agreement. "Where parties have treated additional payment as consideration for an act done or to be done, even though it is not consideration in the strict sense or in law necessary for validity, then if subsequently in dispute, their behaviour will operate as an estoppal in their favour.

Conclusion- All About Past Consideration

Navigating the waters of past consideration can be a tricky task, and it is certainly an important concept to understand when drafting a legal contract. As we have seen, the rule of past consideration in English contract law determines whether or not a contract can be enforced when an act has already been completed. Common for many simple contracts, the rule states that the promise to give something in the future to someone who has already performed an action is not enforceable in a court of law .
It is easy to get lost in the depths of contract law, and there are many concepts that differ from nation to nation and even state to state. When it comes to this particular matter, there is one key takeaway that can be used in any scenario, regardless of jurisdiction: adequate consideration at the time of the writing of the contract is imperative.