The Core of Commercial Law

No binding legal agreement can be formed without the presence of at least one drop of consideration.

If a person makes a gratuitous promise it will not be binding unless something is exchanged or “buys” that promise.

That extra element given to acquire an undertaking – either to do something or not to do something – is consideration.

A legally binding deal will simply not exist if consideration is not present.

Consideration is a bit tricky to grasp at first because it can be so intangible.

It is an important legal concept however.

Although the forms consideration can take are almost infinitely varied, the absence of consideration is fatal to the existence of an agreement.

Hundreds of years of law have built up numerous rules concerning consideration, but a few simple rules will give you the general idea:

• while the consideration must be of some value (at least from a legal viewpoint) that does not mean that it needs to be valuable;
• consideration needs to flow from the one receiving the promise, but the benefit of that promise can be directed to anyone nominated to receive the promise; and
• the consideration must relate to some future undertaking to either do or not do something as it can’t relate to ‘past’ consideration which has already been given.

Importantly, an absence of consideration can be overcome by documenting the agreement as a deed rather than as an agreement. Deeds do not require the presence of consideration to be legally binding and enforceable.

The other primary difference between a deed and an agreement is the way the deed is signed (or ‘executed’ in legal speak). There are certain legal formalities that a lawyer can guide you thorough in the execution process to ensure the deed is validly signed. In most other respects a deed and an agreement are very similar documents.