Introduction
In English law, legally binding agreements can be formed in two primary ways: as a simple contract or as a contract by deed. While both create enforceable obligations, they are distinguished by their formation requirements. The fundamental element that is necessary for a valid simple contract, but which is not required for a contract by deed, is consideration. This assignment will identify and define the element of consideration, before demonstrating its application through a simple contract example and contrasting this with a situation in the construction industry where a deed is used precisely because of the absence of consideration.
The Element of Consideration
For a simple contract to be legally enforceable, each party must provide consideration. Consideration is essentially the 'price' for which the promise of the other is bought (Pollock, 1950). The classic legal definition was provided in Currie v Misa (1875), where it was described as:
> ‘some right, interest, profit, or benefit accruing to the one party, or some forbearance, detriment, loss, or responsibility, given, suffered, or undertaken by the other.’
In essence, consideration requires a mutuality of exchange; something of value in the eyes of the law must be given by each party. This does not mean the value has to be adequate, merely that it must be sufficient. For example, a promise to perform an action, to provide goods or services, or to pay a sum of money all constitute valid consideration. A gratuitous promise, where one party gives nothing in return for the other’s promise, lacks consideration and is therefore not binding as a simple contract.
A clear example of consideration in a construction context would be a contract between a homeowner and a building contractor. If the homeowner promises to pay the contractor £30,000, and in return, the contractor promises to build a single-storey extension, a simple contract is formed. The homeowner's consideration is the promise to pay £30,000, which is a benefit to the contractor and a detriment to the homeowner. Conversely, the contractor's consideration is the promise to carry out the building works, which is a benefit to the homeowner and a detriment to the contractor in terms of labour and materials. This reciprocal exchange of value makes the agreement enforceable.
Contracts by Deed: The Formal Alternative
In contrast, a contract by deed (also known as a specialty contract or an agreement under seal) derives its binding force from its form alone, not from the presence of consideration. This formality serves to demonstrate the solemnity and intention of the parties to be bound. The legal requirements for a valid deed are set out in section 1 of the Law of Property (Miscellaneous Provisions) Act 1989. An instrument is a deed if it makes clear on its face that it is intended to be a deed, it is signed by the person making it in the presence of a witness who attests the signature, and it is delivered as a deed by that person or an authorised person.
Because of these strict formal requirements, the law recognises a deed as enforceable even without consideration. This makes it an invaluable tool in construction for creating binding obligations where consideration may be absent or questionable. A common example is a Parent Company Guarantee (PCG). An employer may enter into a building contract with a subsidiary company that has few assets. To secure the project, the employer asks the subsidiary’s financially stronger parent company to guarantee the subsidiary’s performance. The parent company’s promise to cover any losses is a gratuitous one, as the employer (the beneficiary of the promise) provides no direct consideration to the parent company in return. To ensure this guarantee is legally binding, it is invariably executed as a deed. The formality of the deed substitutes for the lack of consideration, making the parent company’s promise enforceable.
Conclusion
In summary, the essential element required for a simple contract but not for a contract by deed is consideration. A simple contract relies on the mutual exchange of value between the parties to be enforceable. A deed, however, is binding due to its formal execution in accordance with statutory requirements. This distinction is of significant practical importance in the construction industry, where deeds are frequently used to enforce commitments such as guarantees and collateral warranties, in which the element of consideration may be absent, thereby providing commercial certainty to the arrangement.
References
Currie v Misa (1875) LR 10 Ex 153.
Law of Property (Miscellaneous Provisions) Act 1989.
Pollock, F. (1950) Principles of Contract. 13th ed. London: Stevens & Sons.
Uff, J. (2017) Construction Law: Law and Practice Relating to the Construction Industry. 12th ed. London: Sweet & Maxwell.
