Simon Mee discusses consideration and its role in ensuring effective contractual variations. Read on for the latest in KWM’s inhouse-centred series: From our inhouse to yours.
Consideration is a fundamental concept in contract law. It is key to distinguishing enforceable agreements from simple promises or social arrangements. It ensures that each party to a contract is offering something of value, creating the mutual exchange that forms the basis for legal obligations and underpins their enforceability and reliability in both personal and commercial contexts.
When two parties enter into commercial arrangements it is usual that these will be based on an agreement in which each offers something of value to the other (bargained-for exchange), but as the relationship progresses they may wish to adjust the agreement using the benefit of their experience in their course of dealings, for example to expand the agreement’s scope or adjust for previously unforeseen events. Contractual arrangements can be varied but to be effective the variation must comply with contractual principles, including consideration.
Where the parties have freely agreed a variation to their contractual relationship it is important it is not undermined by failure to make those changes binding and enforceable.
What is Consideration?
Consideration is the element in a contract that reflects a bargained-for exchange. Each party must provide something of value, whether a promise, act, or giving up a legal right. This consideration must move from each contracting party. If only one side is bound to perform, the promise is generally unenforceable as a mere gratuitous promise.
Courts rarely assess the comparative value of the parties’ acts or promises and whether the consideration is equal or fair (adequacy), it is up to the parties to understand their own interests, negotiate and strike a bargain they are comfortable with. However, the court will consider whether something of legal value has in fact been exchanged (sufficiency).
In this way, it is legally sufficient to contract to sell a valuable item in exchange for nominal consideration, such as a peppercorn. One exception to this “peppercorn principle” is that one sum of money is not good consideration for a different sum of money, so a promise to pay part of a debt is not sufficient consideration to bind the creditor in respect of the larger sum. Although, the addition of another element or benefit may be sufficient to alter the position, such as payment on an earlier date, or indeed, the payment of the lower amount together with a peppercorn.
Consideration and variation
Consideration in contract variations
A contract can only be varied by a further contract, it cannot be unilaterally varied. This means the usual contractual principles apply, including the requirement for consideration. This can be achieved by one party agreeing to carry out additional work under the agreement in exchange for the other’s promise to pay more, or a party accepting less in exchange for a preferred payment method or timing. Resolution of a bona fide dispute or giving up a right to sue can also amount to good consideration.
Traditionally, agreeing to perform a pre-existing contractual duty has not been considered good consideration, for example finishing agreed work at the agreed time, even where intervening circumstances have made this more challenging. However, the courts have recognised that a promise to pay more for the same performance can be binding if the promisor obtains a practical commercial benefit and the promise is not the result of economic duress or fraud.
Economic Duress
A variation to an agreement may involve a party seeking to improve their financial position, particularly in circumstances where market conditions have changed and supply costs have risen. A party may seek to vary the contract to reflect those cost pressures. The question of economic duress can arise where a party seeks to negotiate better terms and warns of the potential need to break the contract if terms are not improved. Where such renegotiation amounts to illegitimate pressure, effectively a threat, the variation risks being set aside.
Variation agreements and deeds
If the parties wish to vary a contract but are concerned that consideration may not be obviously apparent or is not legally sufficient, they should document the variation setting out the consideration so the consideration is clear, or if consideration is not sufficient the parties should vary the terms by deed, in which case consideration will not be required.
Common Issues
Past consideration
Something given or done before a promise is made is usually not enough to make the contract binding, although it can be, if given or done at the request of the other party and the parties understand there will be subsequent payment or reward.
Illusory promises
Consideration may be illusory if vague, uncertain or impossible to enforce. This might be where the promise is to do something illegal, is not intended to attract legal consequences or is a promise to carry out an existing contractual obligation owed to the other party. A contractual promise could also be illusory if the agreement includes an exemption clause excluding all liability for the breach of that promise.
Clauses restricting variation
It is important to note that whilst many contracts include a clause requiring variations to be in writing and signed, if the formalities for creation of a contract exist, an agreement between the parties with the authority and intention to do so can still vary the contract, despite that clause. Essentially, the parties can vary the terms of the original agreement that relate to the manner of variation. This does not apply where the law requires a contract (and therefore any variation) to be evidenced in writing.
The clause does retain value in providing evidence of the intention of the parties and providing a structure for any variations.
Interaction with promissory estoppel
In situations where consideration is absent, a promise may still be enforceable if the other party reasonably relies on it to their detriment and injustice can be avoided only by enforcement.
Avoiding the pitfalls
There are several steps the parties to a contract can take to ensure that variations to their contractual arrangement are effective, clear and do not fail or result in disputes:
- Put the variation in writing. Identify the original contract, the clauses varied, the change, the effective date, and whether it is a deed or simple agreement.
- If you can’t point to fresh consideration or only one party’s obligations are changing, use a deed and meet execution formalities.
- Consider who is authorised to vary the agreement.
- Add explicit consideration: “In consideration of X agreeing to [extra/earlier/different performance], Y agrees to [pay/change obligation].”
- If the variation reduces price or involves accepting less under the agreement, get something new: earlier payment, different performance, third‑party payment, security, expanded exclusivity, or removal of a right the other party could have exercised. Set this out clearly.
- Record practical commercial benefits. Consider setting out the real-world benefits (avoiding replacement costs, delay penalties, lost sales) and the promised change.
- Minimise potential for claims of duress. Give time for the parties to consider the effect of the variation, allow independent advice, and document that the variation is voluntary.
- Keep a record of the original agreement with variation(s).
Key questions
- Are the promises provided by both parties for the variation clear, certain, and not illusory?
- Any duress or estoppel risks addressed?
- Are authority and approvals documented?
- Is there fresh consideration, or will you use a deed?
Further information
If you need further guidance on effective variations to contractual relationships, please reach out to your KWM contact or Kirsten Bowe.
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