Consideration in contract law (UK): what it is, the four elements and the two types

What is the legal definition of consideration, and what are the elements of a legally binding consideration? In short, consideration is something of value that each party gives in exchange for what the other provides, and without it there is no contract. This page is part three of my series on what makes a contract legally binding, following the offer and acceptance.

What is consideration in contract law?

Put simply, consideration is something of value. It is something given by one party to the other in exchange for something else. If I give you products or services and you give me money, my products and services are the consideration for your money, and your money is the consideration for my products and services.

This is why a bare promise to give someone something for nothing is generally not a contract. A contract is a bargain. Each side has to put something into it. When I review an arrangement for a client, one of the first things I check is what each party is actually giving. If the answer for one side is "nothing", the arrangement has a problem before we even get to the wording.

Elements of valid consideration

There are four main elements to look at when asking whether consideration is legally binding.

• Benefit and detriment. There must be a benefit to one party and a detriment to the other. If I am the one delivering a service to you, the benefit goes to you and there must be a detriment to me, for example that it takes me a lot of time to deliver it.
• Mutual promises. The exchange has to run both ways. I promise to deliver a service to you, and in return you promise to give me money. Each promise supports the other.
• Sufficiency. This is the test of whether, under the law, that consideration would be recognised as something of value. The question is simply: is this something of value? If the law would not regard what is being offered as having value at all, it is not sufficient consideration.
• Economic value. Related to sufficiency, the consideration should be something of economic value. Typically economic value is evidenced by the fact that someone has actually paid money in return for that service or product. If people pay for it, that is good evidence it has economic value.

In practice, for most business contracts these elements are obviously present: one side supplies goods or services and the other pays for them. Where it gets harder is with informal arrangements, favours, and promises to do something extra for nothing. If you want a promise to be enforceable, make sure something of value is flowing in return for it.

Types of consideration

There are two main types of consideration, and the difference is about timing.

• Executory consideration. The person providing the consideration will do so in the future. For example, if you pay me today, I promise that within seven days I will deliver a contract to you. My consideration is a promise to perform later.
• Executed consideration. The consideration is performed there and then. For example, if you buy a product at the supermarket, it immediately becomes yours. Payment and delivery happen at the same time.

Both are valid. Most commercial contracts involve executory consideration on at least one side, because one party is promising to do something in the future, and that is exactly why you want the terms written down. A promise to perform later is only as useful as your ability to prove what was promised and when it was due.

Consideration is not the last element

Offer, acceptance and consideration are the three elements most people have heard of, but they are not enough on their own. For there to be a legally binding contract there must also be intention: the parties must intend for there to be a legally binding contract. Even if you have an offer, an acceptance and consideration, if you do not have the intention of being legally bound, there is no legally binding contract. I cover that in the next part of the series on intention to create legal relations, followed by certainty of terms.

Next steps

When you set up any arrangement that you want to be enforceable, check that each side is giving something of value and that the exchange is recorded, ideally in writing. If you are promising something for nothing, or relying on a promise made to you for nothing, do not assume it is binding. For contracts that matter to your business, have a commercial solicitor check that consideration is properly dealt with.