Consideration is the value each party gives in exchange for the other's promise. It is the "price" of a promise: the supplier promises to deliver because you promise to pay, and you promise to pay because they promise to deliver. It sounds technical, but the idea is simple, and it is one of the three things Australian courts look for before they will enforce an agreement, alongside offer and acceptance and an intention to create legal relations.
This guide covers:
- What consideration is: the exchange, or "quid pro quo", at the heart of a contract.
- When you need it: most contracts need it, but deeds do not.
- What counts as value: the forms consideration can take, and the limits.
- A worked example: a mid-project variation that nearly failed for want of consideration.
- The misconceptions: where small businesses most often get this wrong.
What consideration is: the quid pro quo
In Australian Woollen Mills Pty Ltd v The Commonwealth (1954) 92 CLR 424, the High Court explained that a promise is only enforceable if it was offered as consideration for the act or promise of the other party, and that act or promise was given in exchange for it. The Court described this as a relationship of quid pro quo: one thing given for another. If there is no connection between the promise and the value, there is no consideration.
That requirement shows up in everyday business. A promise to pay a supplier $1,000 "if they come to the office" is not enforceable unless the trip was made in response to the promise, rather than for reasons of their own. The value must be part of the same bargain.
Consideration can be structured in two ways. In a bilateral contract, both sides exchange promises: your promise to pay is consideration for the supplier's promise to deliver goods or services. In a unilateral contract, one party promises to pay if the other performs. The classic reward case is Carlill v Carbolic Smoke Ball Company, where a company promised £100 to anyone who used its product and still caught influenza; the act of using the product was both acceptance of the offer and the consideration for the promise. The High Court discussed that case approvingly in Australian Woollen Mills.
Consideration is also described as executed or executory. Executed consideration means one party has already performed, such as handing over goods now in return for a promise to pay later. Executory consideration means both sides have only promised to perform in the future, which is how most commercial contracts work. Both are valid.
When your agreement needs consideration
Most contracts need consideration to be enforceable. There is one significant exception: a deed. A deed is binding without consideration because it relies on formal execution rather than an exchange of value. That is why gifts are not enforceable as contracts: a bare promise to give something away, unsupported by consideration, only binds if it is made by deed.
The formalities matter. Under s 38 of the Conveyancing Act 1919 (NSW), a deed executed by an individual must be signed, sealed and attested by at least one witness who is not a party. A company executes a deed under s 127 of the Corporations Act 2001 (Cth), which allows execution by two directors, or a director and a company secretary, or the sole director of a proprietary company that has no secretary, provided the document is expressed to be a deed. Under s 127(3B), delivery is not necessary for a company. Other states have equivalent rules for individuals, so the signing block needs to be handled carefully.
This is also why variations need attention. Changing the price, scope or timing of an existing contract involves a new promise, and a new promise generally needs fresh consideration. If the change gives value to only one side, it may be unenforceable, unless the change is executed as a deed of variation.
What counts as consideration
Australian courts look for value in a legal sense, not a fair bargain. Consideration only needs to be "sufficient", not "adequate": the court will not re-run the commercial judgement of whether the deal was good value. A token "peppercorn" payment can support a contract if it is genuinely part of the bargain, rather than an afterthought added to fix a missing exchange.
Consideration that typically works
- Mutual promises: your promise to pay is consideration for a supplier's promise to deliver.
- Deliverables: goods, services, intellectual property licences or access to software provided in return for fees.
- Forbearance: promising not to do something you are legally entitled to do, such as not commencing proceedings, can be valid consideration.
- Nominal amounts: a small payment can be enough, provided it was genuinely bargained for as the price of the promise.
Consideration that usually fails
- Past consideration: something already done before the promise was made. In SNL Group Pty Ltd v CMA Corporation Ltd [2011] NSWSC 464, the court repeated the general rule that past performance cannot constitute valuable consideration. Gratitude is not a price.
- Pre-existing legal duties: promising to do what you are already bound to do under the same contract is not new consideration.
- Illusory promises: in Placer Development Ltd v The Commonwealth (1969) 121 CLR 353, the High Court held that a promise which leaves performance to the promisor's own discretion creates no enforceable obligation. Promissory expressions reserving an option as to the performance do not create a contract.
- Part payment of a debt: under the old rule from Pinnel's Case, applied in Foakes v Beer and in SNL Group, a creditor's promise to accept a smaller sum in full satisfaction of an undisputed debt is not binding without fresh consideration. The rule softens if the debtor gives something extra, such as paying earlier or in a different way, but the reliable path is a deed of release.
There is an important nuance to the pre-existing duty rule. In Musumeci v Winadell Pty Ltd (1994) 34 NSWLR 723, the NSW Supreme Court accepted that a "practical benefit" to the party making the concession can be good consideration for a variation, provided the benefit is worth more than the likely remedy against the defaulting party and the concession was not extracted by economic duress, fraud, undue influence or unconscionable conduct. That reasoning has been applied in later cases, including by the NSW Civil and Administrative Tribunal. Outside NSW, the traditional position may be applied more strictly, so it is risky to rely on practical benefit alone.
A worked example: the mid-project variation
Imagine a café owner signs a fit-out contract for $90,000 with progress payments. Mid-project the builder stops responding, and the owner still owes a $15,000 instalment that is due under the contract. The owner says: "I will not pay the instalment until you commit to a completion date." The builder agrees to a completion date and, going further, promises liquidated damages of $350 per week for every week the works run late.
At first glance the builder's promise looks unsupported. Paying the instalment is not new consideration, because the owner was already obliged to pay it. That is the pre-existing duty problem.
But a tribunal or court applying Musumeci may find the builder received a practical benefit: a binding completion date and the avoidance of further dispute and delay, which is worth more than the cost of the concession. In Chen v Mason [2016] NSWCATCD 4, a similar exchange was upheld on exactly that reasoning, with the tribunal noting that the concession was offered unilaterally and was not the product of duress.
The lesson is not that the promise will always be upheld. It is that enforceability turned on detailed facts about benefit, remedy and duress. The clean way to remove the argument entirely is to record the change as a deed of variation, which is binding without consideration, or to restructure the exchange so each side receives something genuinely new, such as extra scope in return for the higher price.
Common misconceptions about consideration
A handful of myths about consideration recur in small business practice. Here is why each one is wrong:
- "Consideration has to be money": Wrong. Mutual promises, goods, services, licences and forbearance all count as legal value.
- "The court will check whether the deal was fair": Wrong. Adequacy of consideration is not assessed, provided there is real value in a legal sense. Courts do police duress and unconscionable conduct, but that is a different inquiry.
- "A past favour can be the price of a new promise": Wrong. Past performance cannot be consideration, as SNL Group confirms. The value must be part of the same exchange.
- "A verbal promise to pay more for the same work is automatically binding": Wrong. Without fresh consideration, or a deed, the promise may be unenforceable.
- "Paying part of a debt settles the whole": Wrong. The rule from Pinnel's Case means a creditor can still claim the balance, unless there is fresh consideration or the compromise is recorded by deed.
- "A deed needs consideration too": Wrong in the other direction. The whole point of a deed is that it binds by formal execution, without any exchange of value.
When a contract lawyer is worth bringing in
Consideration disputes rarely start as consideration disputes. They start as handshake variations, verbal promises to pay more, or settlements agreed over email, and they surface only when one side later refuses to honour the promise. A lawyer's value is in making the exchange of value explicit before that happens.
A contract lawyer can review a proposed variation and tell you whether fresh consideration exists or whether a deed is needed; prepare and supervise the execution of deeds, including the signatory rules under s 127 of the Corporations Act 2001 (Cth) and the witness and sealing requirements for individuals under state legislation; draft option agreements, settlements and releases so that the consideration is stated clearly on the face of the document; and check whether a concession was extracted by duress or unconscionable conduct, which can make the whole variation void. That work is inexpensive compared with litigating whether a promise was supported by consideration.
The question to ask before you change any deal
The misstep that costs small businesses most is agreeing to a change on a handshake and discovering later that the promise is unenforceable. Before you sign any variation to price, scope or timing, ask one question: what new value does each side receive in exchange for this change?
If it's the case that one side of the arrangement receives nothing new, you have two options: restructure the change so value flows both ways, or execute it as a deed of variation. If you can point to the value flowing in each direction, the variation stands on more enforceable grounds if a dispute later arises. If you cannot, a deed might end up being the better vehicle for the change.