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Contract law on consideration

Some years ago I had a case in which the parties each acted without legal representation and never agreed on a specific fee for services provided. The services changed day by day. The hourly rates for fees payable varied.

After disagreement arose between the parties, the service provider became my client. My client had performed the services and its first series of invoices had been paid.

Subsequently the services required of my client had varied greatly. Documentation in the form of a contract with a price schedule had been prepared and discussed but the document remained unsettled, unsigned and under negotiation. The parties fell into dispute.

My client's predicament was that services had been performed, but its second series of invoices were unpaid.

My client did not understand why Australian commercial law does not empower a judge to step in and impose a fair price for the unpaid services. Put another way, my client wanted a court to require the other side to agree to a fair price for the unpaid services. My client noted that the work was all done and the first series of invoices had been paid.

Consider the contract law position. For simplification, I'm leaving aside quantum-related contract law concepts of quantum merit and unjust enrichment.

In Common Law systems such as in England and Australia, contract law has always been that price is up to the parties to agree on, not the law.

In simple terms, contract law avoids price, costing or valuation issues. The law is that if, for example, the supplier and customer for services agree on a price, then that's the end of it. They've agreed. Same if the deliverable is a product.

When the parties have not agreed to contract terms, contract law does not generally empower a judge to step in, exercise a discretion, and impose a price or permit testing in court of the fairness or otherwise of money sums agreed on by parties. If there's no agreement on price, the parties can settle their differences out of court in direct discussions or mediation.

For a contract to exist, contract law requires that there be some benefit, value or price provided. It is called "consideration".  For about 200 years it has been said by judges that the consideration need be no more than just a "peppercorn".

7 Contract Essentials

The lesson of the above case study is that in entering into a contract parties should ensure they cover seven essential elements below for a contract to be said to arise and be binding in Australia and generally in Common Law systems. Price provisions are part of essential 5 and sometimes also 4.

If any of the essentials are missing the contract may be void, avoidable, unenforceable or illegal. Often judges say the essentials are 1 to 5. In practical courses I've run on contract drafting I've always added 6 and 7 because without them too the result is in effect the same - no binding contract.

  1. Intention - an intention to create a legal relationship
  2. Offer - a proposal which may be accepted, or otherwise rejected or terminated
  3. Acceptance - acceptance of an offer and its terms and conditions
  4. Terms - terms and conditions. This is treated as a separate element because not all offers expressly state or clearly identify all the relevant terms and conditions.
  5. Consideration - something of value given in exchange for a promise; not required if the contract is signed as a deed
  6. Capacity - contracting parties which have legal capacity (eg they are not bankrupts, minors or subject to mental health law)
  7. No other ground for legal issues or invalidity - uncertainty, mistake, fraud, misrepresentation, misleading representation, duress, undue influence, unconscionability, illegality, good faith, penalty, unenforceable restraint of trade etc. Sometimes these grounds are grouped under the heading "genuine consent".

Photo credit to WikiCommons: Justice Edward McTiernan, 1954. He served on the High Court of Australia and famously often said "I concur" (ie I agree) with his fellow judges, rather than write a judgment or co-write one.


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