In Australian contract law, consideration is the value each side gives, or promises to give, in exchange for the other side's promise. It is the bargained-for price of a promise, and it is what separates a binding contract from a gift or a well-meaning assurance.
Most business owners know the basics of offer and acceptance, but consideration is the element that is easiest to get wrong and the most expensive to get wrong. A promise with no consideration attached is generally not enforceable as a contract, no matter how seriously both sides meant it. This article explains what consideration is, the rules that decide whether it counts, and how to make sure your agreements and variations actually hold up. It also covers when a deed is the safer structure and when professional advice is worth getting.
What consideration is: a bargain, not a kindness
Consideration is what makes an exchange a contract. Courts look for a bargain: each side must provide something of value, or agree to give something up, in exchange for the other side's promise. That something can be money, goods, services, a promise to do something in the future, or a promise to refrain from doing something you are otherwise free to do. It does not need to be delivered immediately, either. Payment on delivery is still good consideration because the promise to pay was part of the exchange.
The High Court made this point in Australian Woollen Mills Pty Ltd v The Commonwealth (1954) 92 CLR 424, where it held that a promise is only enforceable if it was made in exchange for the act or promise of the other party. A statement that looks like a promise but is not part of any exchange is not a contract. This is why a one-way assurance, such as "we will look after your account", is generally not binding on its own: nothing was given or promised in return.
For a small business, the practical test is simple. For every promise you rely on, ask what the other side received for it. If the answer is nothing, you are probably relying on a gift or an assurance, not a contract.
The rules that decide whether consideration counts
Not everything that looks like value counts as consideration. Australian courts apply a handful of well-established rules, and each one has a practical trap for business owners.
It does not need to be fair
Consideration must be real and sufficient in the eyes of the law, but it does not need to be adequate. Courts do not re-weigh a bargain to check whether the price was fair. A token amount, such as the proverbial peppercorn, can be good consideration if it was genuinely part of the exchange. Selling a machine worth $5,000 for $100 is still a binding contract if both sides intended that exchange.
If a deal is genuinely unfair, the law can intervene through other routes, such as unconscionable conduct or the statutory protections in the Australian Consumer Law. But the doctrine of consideration itself is not a fairness test, and a lopsided price does not make a contract unenforceable.
Past consideration does not count
A promise made after the act is done is not supported by consideration. If a supplier helps you out of a jam and you later say "thanks, I will pay you $300", that promise is not enforceable as a contract, because the help was not given in exchange for the promise. The classic phrase is that past consideration is no consideration.
For a promise to be enforceable, the value must have been part of the bargain when it was struck. If you want to make a binding promise to reward someone for work already done, a deed is the way to do it.
Doing what you are already obliged to do does not count
Performing an existing legal duty is not fresh consideration. The New South Wales Supreme Court confirmed the general rule in Slipper v Berry Buddle Wilkins Lawyers [2015] NSWSC 810: a promise to do what you are already contractually bound to do cannot support a new promise in return.
This matters whenever a contract is varied. If a contractor is already bound to complete a job for a fixed price, the client's promise of more money for the same work is generally not enforceable. The variation only works if something new is added to the bargain: extra deliverables, an earlier deadline, a different allocation of risk, or a genuine change in scope.
Part payment of a debt is a classic trap
At common law, a creditor's promise to accept a smaller amount in full satisfaction of a debt is not supported by consideration, because the debtor is only doing what they were already obliged to do. The rule traces back to Foakes v Beer (1884) 9 App Cas 605, and Australian courts continue to apply it.
If you are compromising a debt, add something new to the bargain, such as security, accelerated payment, or additional obligations, or record the compromise as a deed. There are limited exceptions, such as arrangements between a debtor and multiple creditors, but they are technical and worth checking with a lawyer before you rely on one.
Forbearance to sue can count
Promising not to pursue a claim can be valid consideration, provided the claim is honestly believed to be genuine and has a reasonable basis. The principle was established in Callisher v Bischoffsheim (1870) LR 5 QB 449 and applied in Australia, for example in Zhang v Cheng [2020] NSWDC 38, where the court examined whether a bona fide dispute supported an acknowledgement of debt.
This is why settlement agreements work. Each side gives something up, usually the right to sue, in exchange for the other side's promise of finality. If the underlying claim has no reasonable basis at all, the forbearance may not count as consideration.
A worked example: catering for the vineyard
Maria runs a Melbourne catering business and signs a twelve-month contract with a wedding venue. Under the contract, Maria supplies canapés and staff for each booked event, and the venue pays $8,000 per event within 14 days of the invoice. The consideration is easy to identify on both sides: Maria's promise to supply food and staff, and the venue's promise to pay $8,000. The promises were made in exchange for each other, so the contract is binding.
Six months in, the venue asks Maria to add a dessert table to every event. If they simply agree, Maria may struggle to charge extra later: her existing obligation to cater the events arguably covers the new request, so the variation may lack fresh consideration. But if the venue agrees to pay an additional $500 per event and Maria agrees to have setup finished by 9am instead of 10am, there is fresh consideration on both sides: extra money for extra scope, and an accelerated timeline. That variation is enforceable.
After a particularly successful event, the venue's manager promises Maria a $2,000 bonus "for how well last month went". That promise is not supported by consideration: the event was in the past, so the bonus is a gratuitous promise. Maria can accept it if the venue pays, but she cannot enforce it as a contract. If the venue wanted a binding promise, it would need a deed.
Misconceptions that cause real problems
The law of consideration is full of rules that feel counter-intuitive. Three misconceptions cause most of the trouble in practice.
- "We both agreed, so it must be binding": Intention is not enough. A contract needs offer, acceptance, consideration and an intention to create legal relations. A promise with no consideration, such as a goodwill gesture or a reward for past help, is generally unenforceable even if both sides meant it seriously.
- "Promissory estoppel will save us": Estoppel can stop a party from resiling from a promise where the other side reasonably relied on it to their detriment. The High Court recognised this in Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387. But it is a limited, discretionary safety net, not a substitute for consideration. It is invoked where enforcing the promise strictly would be unconscionable, and it is much harder to prove than a simple exchange of value. Relying on it as your main strategy is a risk.
- "A verbal agreement is automatically binding": An oral contract can be binding if the essential terms, including consideration, are clear and provable. The problem is evidence. Handshake deals and email threads can be contracts, but when a dispute arises, proving what was exchanged is much harder than pointing to a signed document. A written contract also makes the consideration explicit, so there is less room for argument.
When a lawyer should review your contracts
Consideration questions are common, but the answers are rarely simple, and getting them wrong can make a promise unenforceable at the worst possible moment. A lawyer can help in several specific situations.
- Deeds instead of contracts: If nothing of value is being exchanged, a deed makes the promise binding without consideration. Deeds are the standard mechanism for settlements, releases, confidentiality obligations, gratuitous assignments of intellectual property and compromises of debt. A lawyer can tell you whether a deed is the right structure and make sure it is executed properly.
- Company execution: A deed signed by a company must follow the formalities in s 127 of the Corporations Act 2001 (Cth). Generally, a company executes a document by having it signed by two directors, or a director and the company secretary, or, for a proprietary company with a sole director, by that director if they are also the sole secretary or the company has no secretary. Getting the execution wrong can leave the deed ineffective.
- Variations and compromises: When scope or price changes mid-contract, the variation needs fresh consideration to be enforceable. A lawyer can structure the variation so the new exchange is explicit, and can advise on debt compromises, where the part-payment trap is easy to fall into.
- Disputed or informal arrangements: If you are relying on emails, quotes or a handshake as your contract, a lawyer can assess whether there is a binding agreement, whether the consideration is clear, and what evidence you would need if it came to a dispute.
A short review of your standard terms, template contracts and variation process is usually inexpensive, and it is far cheaper than discovering after a falling-out that a key promise was never enforceable.
Before you rely on a promise, name the exchange
For every promise your business is currently relying on, ask a simple question: what did the other side receive in exchange? If you cannot name the value, you may be relying on a gift rather than a contract, and the promise may not survive a dispute.
The variation is where this question bites hardest. Most consideration problems in small business do not arise when the original contract is signed. They arise later, when extra work is promised, debts are compromised, or scope changes are agreed in emails. Before you sign the next variation, or accept the next promise of more money, check that something new is being exchanged. If nothing is, a deed, or a lawyer's help to restructure the arrangement, is the safer path.