Consideration is the most fundamental aspect of all contracts, including commercial contracts. I call it a reason for any party to enter a contract.
Consideration essentially refers to what each party gives or promises to give in exchange for the return promise or performance from the other party.
Here are some key aspects that should be kept in mind regarding consideration in commercial contracts:
Value. Consideration does not need to be complete equivalent or of a substantial value, but it must be something of legal value. It can be in the form of a service, money, an object, a promise, a right, or a forbearance (the promise to refrain from doing something).
Past, Present, or Future. Consideration must be provided either at the time of the contract, may be something that is promised to be provided in the future, or, quite less commonly, something that was provided before the contract was made.
Sufficiency / Adequacy. Consideration must be sufficient, meaning it must be something of value in the eyes of the law. However, the adequacy of the consideration, which refers to whether the consideration is fair or whether it is of equivalent value to what is being received, is generally not scrutinised by the courts. An economics reasoning could be that commercial transactions happen where demand or supply meet, so it is the prerogative of the parties to fix respective price / value.
Reality of Consent. The consideration must not be induced by pressure, duress, or undue influence. The parties should enter into the contract voluntarily for the consideration to be valid.
Legality of Consideration. The act or promise that forms the consideration must be legal. A promise to refrain from an illegal act, or consideration that involves the performance of an illegal act, is not lawful and therefore not valid consideration.
Possibility of Performance. The consideration must be possible to perform. A promise of something that is impossible does not satisfy the requirement for consideration.
Contract Must Be Intended to Create Legal Relations: For consideration to be recognised, the contracting parties must intend that the agreement creates legal obligations.
In drafting and reviewing commercial contracts, it is essential to ensure that the consideration is clearly outlined and meets the legal requirements. Absence of a valid consideration will render a contract unenforceable.
