The common law tradition includes many legal systems modeled on the English system. These common law systems are basically ex- or present-day English colonies, including the US, Australia, New Zealand, India, parts of Canada, etc.
The law of contract formation is generally similar across common law jurisdictions (there’s a lot of convergence with civil law jurisdictions as well).
1. Elements of a K
Looking at US & English law as examples, we find that a contract (K) is a legally enforceable agreement between two or more parties that is typically comprised of several elements.
What are these weird symbols and notations? Here’s a key:
As you can see, there are a lot of similarities between English & American contract formation rules. The terminology might be somewhat different, but both sets of rules are looking for the same thing: objective evidence of parties’ intent to create a contract.
In the US, the party that wants to prove the existence of a K must allege and prove the existence of what’s known as ‘mutual assent’ (MA). The same is true in England, except the English legal term used to describe MA is ‘agreement’ (that phrasing is confusing because it’s circular, since a K is a legally enforceable agreement, but c’est la vie).
If you’d like a deeper dive into this first element under US/English law, we have you covered:
Contract Formation Under US Law
The rules of contract (“K”) formation in the US are relatively straightforward. Here’s what you need to know:
How to Form a Contract Under English Law?
The UK Jurisdiction Taskforce just released a Legal Statement on Cryptoassets and Smart Contracts. It is an important…
After mutual assent, the party alleging a contract must also allege and prove what’s known as ‘consideration,’ the subject of this short guide.
2. Consideration Intro
Consideration is a tricky topic. It confounds both law students and experienced judges. But once we work through a few explanations and examples, you’ll see that it’s not as difficult as lawyers sometimes make it out to be.
Let’s start by asking a simple but important question: why does the common law have this requirement? What are the functions served by consideration?
At a very basic level, consideration is a legal tool used to show that parties had objective intent to enter into a contract.
Q: Consideration, what’s your function?
A: Hooking up promises, and making them function!
So, how does a legal rule accomplish this important objective?
3. Consideration Must Be Alleged & Proven
How does the legal rule for consideration accomplish the objective of linking up A’s & B’s promises? — is a bit of a trick question. That’s because the rule itself isn’t doing anything for anyone.
More precisely, the doctrine of consideration places a burden on the party (A) alleging a contract to use consideration rules against a party (B) that is denying the existence of a K.
This may seem like a distinction without a difference, but it matters a lot, as we’ll see shortly.
To get a third party (C) to find there was/is a contract between A & B, a party must allege and prove two general elements of contract — (1) mutual assent, and (2) consideration. See eg R2C § 17(1).
Allegation ≠ Proof
In a typical civil case, the allegations happen at the pleading stage (Complaint, Answer, etc.). The act of proving happens at a later potential trial.
Between the pleadings/allegations and trial is the process of discovery, which may be long and complex. Discovery is a formal process where parties try to find the facts they will then attempt to use as evidence at trial to prove the things they alleged much earlier.
So, just because A says there’s consideration does not mean there is consideration.
Moreover, even if A & B have some document that purports to be ‘the’ contract between A & B, and ¶ 17 of this hypothetical document claims ‘the contract is supported by consideration’ does NOT automatically mean there is consideration that supports the potential A-B contract. Under the common law, mere recital of consideration does not equal consideration.
4. Consideration May Be Denied
A party denying the existence of a contract can also use consideration rules to show the element of consideration has not been met, and therefore, there is no K.
To get a third party (C) to find there was/is NO contract between A & B, a party may allege and prove the absence of the elements of contract (aside from many other potential defenses).
This is helpful because it underscores that consideration isn’t something tangible that either exists or doesn’t. Consideration is something that parties may fight about when one party wants there to be a K, and another party wants to deny it.
Consideration is a legal fiction — a legal ghost — that must be alleged and proven.
Instead of thinking of consideration (or lack thereof) as an easy-to-answer question, it is better to think of it as a complex set of competing arguments that won’t necessarily be answered until a later stage in a formal dispute.
5. Who Decides if Consideration Was/Is Present?
In many types of contract formation disputes, consideration may be factually contested. This means whether or not there is consideration presents a question of fact for the trier of fact, such as jury or arbitrator. This means that parties may need to go to trial or some other fact-finding process like arbitration in order to answer this question.
In other types of cases, consideration may present what’s called a ‘question of law’ — which might entitle a judge or arbitrator to answer whether there was/is consideration without having to wait until trial to make new determinations of fact. Below we’ll cover some of the rules a hypothetical arbitrator could use when doing her analysis.
Whether the consideration issue in a given contract formation dispute presents a ‘question of fact’ or a ‘question of fact’ is a very difficult question, and almost impossible to answer in the abstract.
Moreover, the best lawyers know how to turn seemingly obvious ‘questions of fact’ into ‘questions of law’ (and vice versa). So we can just acknowledge that consideration questions can come up at different points of a formal contract dispute (long before trial, at trial, as well as on appeal), and move on.
For present purposes, we’ll consider a typical case where consideration is disputed as a question of fact.
6. What is Consideration?
We already know that consideration is one of the two elements of K (along with mutual assent). In England, it is the third element after ‘agreement’ and ‘intent to be legally bound’.
Now, let’s take stock, and dive deeper into what *is* consideration? How is a judge or a jury supposed to see this legal ghost?
Consideration is a common law doctrine comprised of numerous rules that help parties prove/disprove the existence of an alleged contract.¹ Parties may urge courts to use different standards to determine the (non-)existence of consideration, including the so-called ‘benefit/detriment test,’ the ‘change affecting legal status test,’ and/or other standards.
The US common law standard — restated in Restatement (Second) of Contracts § 71 — is the change affecting legal status test (CALS). Under the CALS standard, the party asserting the existence of a contract must show three things:
- Legal Rights (LR): parties’ had certain legal rights prior to making promises to one another;
- Change in Legal Rights (CH): parties changed their respective bundles of legal rights in #1 (above) when they made promises to one another;
- Bargain (BAR): the parties’ changes in legal rights in #2 (above) were bargained for, with party A’s promise(s) to change rights inducing party B’s promise to change legal rights, and vice versa.
Please note how we’ve moved the needle. Before, consideration was just some abstract ‘element’ of another legal ghost known as a ‘contract.’ Now we have some actual ‘standards’ for determining whether or not the ghost exists.
These standards are useful because they require parties to structure and organize their consideration arguments, instead of just letting them make random allegations like ‘consideration exists because B benefited from A’s promise, and will be proven at trial.’
To see how this structure is useful, let’s do a sample consideration analysis.
7. How to Argue Consideration?
Here’s a hypothetical exchange, modeled on a famous real-life consideration case:
Aunt Alice: “Dear Becky — you’re my favorite niece, so I want to make you an offer you can’t refuse. I will pay you $5,000 if you refrain from smoking, eating meat, and driving until age 18.”
Becky: “I’m only 15, so I don’t know if I can enter into contracts, but yeah, sounds like a great deal. I accept.”
Do Alice (A) & Becky (B) have a contract (or contracts) here?
We would start our analysis by asking whether A & B have mutual assent. This basically asks whether a reasonable third party (C) would conclude they had objective intent to have a contract. The link below illustrates mutual assent analysis:
Contract Formation Under US Law
The rules of contract (“K”) formation in the US are relatively straightforward. Here’s what you need to know:
Because C may be able to find mutual assent between A & B, we next ask whether the alleged contract is supported by consideration.
The party alleging the existence of a K would need to perform the following 3- to 6-part consideration analysis (from the perspectives of both A & B):
Under R2C § 71, the party that wants to prove there is consideration would need to prove each of the steps above.
On the other hand, if either party wants to argue there is no consideration, it could attack any of the elements above. For instance, did B really have a legal right to smoke as a 15 year old? It depends. Did B really have a right to drive? It depends. We’ll flesh out these arguments below.
Is this a 3-part analysis, or a 6-part analysis? That really depends on one’s point of view.
There are a few important things to note in this sample analysis:
- in identifying legal rights that A & B had prior to making their promises (steps #1 & #2), it is easier to think of legal rights in plural form (eg, at any given moment, B has multiple legal rights that she can ‘sell’ to D; A has multiple legal rights she can ‘sell’ to V; you have multiple legal rights you can ‘sell’ to F; etc).
- in steps #3 & #4, it is conceptually easier to show how A & B are changing their legal rights without connecting the changes to A & B, respectively (eg, A no longer has a legal right to spend the $5,000 because she arguably promised this $5,000 to someone — A’s balance sheet is $5,000 lower)
- consideration must be present from both sides (R2C § 71(1) aka “consideration must be bargained-for”) (see #5 & #6)
Under the common law, any bargained-for change in legal rights — no matter how slight — may satisfy the requirement of consideration. See eg, R2C §§ 71; 79. There is no requirement that the ‘bundles’ of consideration from A & B be ‘reciprocal,’ or somehow equivalent in ‘value.’ See eg, R2C § 79.
If B values her rights to smoke, eat meat, and drive at $5,000 that is between A & B. The role of contract law is to enforce this set of promises (if they meet the legal requirements we’ve been discussing). Contract law is not supposed to ask whether there is ‘adequate’ consideration, or ‘reasonable’ consideration, or ‘mutual’ consideration.
Is there MA + C? If so, there’s a K, and it should be enforced (subject to any number of other defenses like illegality, fraud, duress — outside of the scope here).
8. What Are Your Legal Rights?
So far, so good. To show consideration, a party may show that:
- A & B both had some bundles of legal rights prior to making their respective promises to one another.
- A changed A’s bundle of legal rights when A made its promise(s); B changed B’s bundle of legal rights when B made its promise(s).
- A & B’s respective changes in legal rights were a type of quid pro quo: A changed its bundle of legal rights because A wanted B to change its bundle of legal rights; and vice versa (B changed its bundle of legal rights because B wanted A to change its bundle of legal rights).
But what’s the full scope of A & B’s bundles of legal rights? Aha! This is where consideration gets realllllllly interesting. Because as we recall, any change affecting any legal status may be evidence of consideration, no matter how slight that legal change. See eg, R2C § 79(b).
Before continuing, a quick mind-bender:
Serious question, dear reader: How many legal rights do you have right now, as you’re reading this? Dozens? Hundreds? 3,492? Infinite legal rights? Your answer to this question goes to the heart of consideration analysis. See eg, R2C § 71(3)(c).
Remember that question of fact v. question of law distinction up above? Well, this is one of the places where this distinction really matters.
Legal Right(s) to Smoke
For some legal rights, a court (C) may be able to adjudicate that Becky never had a legal right to smoke as a 15 year old. Depending on the jurisdiction, a court may be able to make that determination as a question of law, without waiting for trial.
Legal Right(s) to Drive
So too with Becky’s legal right to drive. The party trying to deny the existence of a contract may argue B never had this legal right as a 15 year old. Because B never had a legal right to drive, she could not have changed it → no consideration → no contract. Additionally/alternatively, because B never had a legal right to drive, an attempt to ‘sell’ that legal right to A could not constitute a change in legal relations sufficient to evidence consideration.
On the other hand, A might have had a learner’s permit to drive, in which case she would have legal rights that she could bargain. Or maybe B was ‘selling’ a future legal right to drive that she might have obtained when she turned 16 in a given jurisdiction? The facts are not clear here. But we can see that our consideration analysis would hinge on the scope of B’s legal right to drive.
- If B had some legal rights to drive somewhere, then she can bargain those rights away (fully or partially).
- But if B did not have a legal right to drive, then she would not have this legal rights that she could essentially sell to B.
- Drive what? A car on public roads? A tractor in a field? A bumper car at an amusement park? It depends.
Legal Right(s) to Eat Meat
Ok, but B definitely had a legal right to eat meat, and she definitely can sell that right as a minor, so, clearly there’s consideration here — right? Especially since any change affecting any part of the legal bundle of rights may be evidence of consideration — right? Wrong.
First, we don’t know the factual scope of the alleged promise to “not eat meat.” What is ‘meat’ — ? Does that include vegan meat alternatives, like Beyond or Impossible Burgers? Does that include fish?
Instead of concluding that A & B absolutely have these or those right(s), it might be better to frame the issues as follows:
- it appears that Becky might NOT have a legal right to smoke;
- it appears that Becky might have a legal right to eat meat;
- it appears that Becky might NOT have a legal right to drive.
But even then, appearances can be deceiving. We don’t know if Becky had previously ‘sold’ her potential right to eat meat to another family member concerned with Becky’s health — Aunt Gina. Or, maybe this purported deal is happening in a jurisdiction that does not allow people to sell their rights to eat or not eat certain foods. We don’t know where this potential K is taking place; therefore, we don’t know the full scope of B’s rights.
The point here is to never assume that something is or isn’t a legal right just because it seems to ‘natural’ for that right to exist. Legal rights are complex creatures. They depend on many factors. Everyone’s bundle of legal rights is always a changing a bit.
That new law your legislature passed a few moments ago? Yep, it just potentially changed your bundle of rights that you thought you could have used as consideration in a potential contract.
That Supreme Court freedom of speech decision that just came down? Yes, it also just potentially changed your bundle of rights that you thought you could have used as consideration in a potential contract.
So too tomorrow, and the day after. The rights you thought you had at t1 might end up being invalidated at t2. That’s just the way it is. It’s the legal system’s way of keeping you on your toes and making itself an indispensable toe-protector.
9. Dammit! Is Consideration Present Here?
To show consideration, a party would need to show that A & B’s promises somehow changed any of the legal rights they might have had prior to making those promises.
In the crucial last step(s), the party would need to show that these alleged changes were bargained-for, objectively speaking: A’s combination of #1 + #3 somehow induced B’s combination of #2 + #4.
How do we prove that A & B actually made their promise(s) because they were trying to strike a legal bargain? That’s hard. We would need more evidence than what we have here; we would need to know where this alleged K was supposedly formed; we would need to know where the parties are thinking of arbitrating or adjudicating a particular dispute; and so on. Thankfully, that’s not our job, yet!
Our narrow task as contract formation analysts isn’t to prove there is or is not consideration. That is a question for a judge/arbitrator and/or a potential jury. Our job here is much more narrow. Our task is to analyze the arguments that A & B could make if they wanted to allege and prove consideration.
(Please note: in the process of making arguments in favor of consideration, we would, of course, explore arguments for why there is potentially no consideration as well.)
10. Consideration is Complicated
As deep as our analysis of the legal ghost of consideration has been, we have only been scratching the surface. The doctrine is comprised of dozens of important sub-rules, including many that define consideration by reference to what it is not.
In future installments, we’ll look at some of these famous not consideration examples.
¹ Consideration has many other uses beyond serving as evidence of parties’ objective intent to enter into a contract. For a classic argument about other functions served by consideration, please click here.