First Principles of Business Law

Making a contract
3. The second essential element of formation: Formal execution or exchange of consideration

3.5. Consideration




In the previous section, we saw that an informal agreement becomes legally binding only if, at the time the agreement is made, each party gives something in exchange for what they are being promised. Whatever is given is referred to as 'consideration'.

Because consideration can be 'anything of value' it can be provided in different ways.The examples in the following pages in this section show how important it is to decide whether, in particular circumstances, an informal agreement is sufficiently supported by consideration. Depending on the facts of the case, this can be a difficult question to answer with certainty.

If you are dealing with an informal agreement, the best approach to deciding whether or not sufficient consideration exists is to be familiar with the cases discussed in this section. The cases will remind you of the various possibilities, and how they are dealt with. Always try to look for the similarities between decided cases and the case you are dealing with, and this will lead you to the relevant rules.

And remember that if, in particular circumstances, it is uncertain whether or not sufficient consideration exists, it is always open to the parties to execute their agreement formally in a deed.


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