Consideration In Agreements: Australian Contract Law Essentials

If you’re putting a deal in writing, you’ll quickly run into the word “consideration”. It can sound technical, but the idea is simple: in most Australian contracts, each party must give something of value in exchange for what they’re getting.

Getting consideration right matters. It’s one of the core elements of a binding contract and a common place where agreements can fall over if not handled carefully.

In this guide, we’ll break down what consideration is, when you need it (and when you don’t), what “counts” as consideration, and the practical pitfalls to avoid when drafting or negotiating your agreements.

What Is Consideration In Australian Contract Law?

Consideration is the “price” each party pays for the other party’s promise. It doesn’t have to be money - it can be goods, services, a promise to do something in the future, or a promise not to do something.

To form a contract, you generally need three things: offer and acceptance, an intention to create legal relations, and consideration. If one of these is missing, you may not have an enforceable contract.

Importantly, courts look for value in a legal sense (called “sufficient” consideration), not whether you made a “good” bargain (adequacy usually doesn’t matter). A $1 “peppercorn” can be valid consideration if it was truly bargained for and not a sham.

Executed vs Executory Consideration

• Executed consideration: One party has already performed (for example, you hand over goods now in return for a promise to pay later).
• Executory consideration: Both sides promise to do something in the future (most commercial contracts work this way).

Unilateral vs Bilateral Agreements

• Unilateral: One party promises to pay or do something if another party performs (for example, a reward). The performance itself is the consideration.
• Bilateral: Each party makes a promise (for example, to supply services in exchange for a fee). Each promise is consideration for the other.

When Do You Need Consideration (And When Don’t You)?

Most contracts need consideration to be enforceable. However, there’s a key exception: deeds. A deed is a special type of legal instrument that can be binding without consideration if it meets formal execution requirements.

Outside of deeds, you’ll still need consideration - even where you’re confirming terms you’ve discussed verbally. While many verbal agreements can be legally binding, it’s safer to put important deals in a written contract so the consideration and key terms are crystal clear.

Common Situations

• New contracts: You’ll need something of value flowing both ways.
• Variations: Changing an existing contract typically requires fresh consideration, unless you execute the change as a deed.
• Settlements/releases: Often done by deed (to avoid consideration issues), but can also be supported by mutual promises (for example, agreeing to discontinue a dispute in exchange for payment).
• Gifts: A pure promise to make a gift usually isn’t enforceable as a contract because there’s no consideration (unless executed as a deed).

What Counts As Good Consideration?

In practice, almost anything of legal value can be consideration - but there are limits. Here’s how to think about it in day-to-day business.

Consideration That Typically Works

• Mutual promises: Your promise to pay is consideration for a supplier’s promise to deliver goods or services.
• Deliverables: Providing assets, IP licences, or access to software in return for fees.
• Forbearance: Agreeing not to do something you’re legally entitled to do (for example, not commencing proceedings) can be valid consideration.
• Nominal value: A small sum can be enough if the parties intended it as the price for the promise.

Things That Won’t (Usually) Work

• Past consideration: Something given or done before a new promise was made generally doesn’t count. If a supplier helped you last month, you can’t use that as consideration for a new promise this month.
• Pre-existing legal duty: Promising to do what you’re already legally bound to do under the same contract can be problematic without something extra.
• Illusory promises: If a promise is entirely at one party’s discretion (for example, “I’ll buy if I feel like it”), it may not be valid consideration.

Where you’re relying on “practical benefits” (for example, agreeing to pay slightly more so a contractor can finish on time), Australian courts may scrutinise whether there’s real value flowing. To avoid uncertainty, consider documenting the change by deed or ensure each party gains something tangible and new.

Common Consideration Pitfalls To Avoid

These are the traps we see most often in commercial contracts - and how to steer clear of them.

1) Varying a Contract Without Fresh Consideration

Mid-project changes are common. If you simply agree to pay more for the same work under the same contract, you may run into the “pre‑existing duty” issue. A safer approach is to vary a contract in a way that adds new value both ways (for example, extra scope or accelerated delivery) or document the change using a Deed of Variation.

2) Relying On Past Favour Or Past Performance

Gratitude isn’t consideration. If the “payment” is for something already done, it generally won’t support a new promise. Make sure the exchange is current or in the future, and clearly link the value to the promise in the document.

3) Part Payment Of Debts

Paying part of an undisputed debt on or before its due date usually isn’t good consideration for a promise to forgive the balance. It’s common to use a deed of release and settlement for compromises so the agreement is binding without debating consideration.

4) Illusory Or Vague Promises

If one party can choose whether to perform, the promise may be illusory. Tighten up obligations, timeframes and deliverables so there is real value on both sides.

5) “Sham” Peppercorns

Nominal consideration is fine if genuine. But if a token payment is never intended to be made, or is added after the fact to “fix” an issue, it risks being seen as a sham. If in doubt, use a deed or restructure the exchange so each party receives something meaningful.

How Consideration Works In Real Business Agreements

Let’s look at how consideration shows up in common contracts you might use, and how to document it clearly.

Supply And Services Agreements

In a supply or services contract, the consideration is typically the supplier’s deliverables in exchange for your fees, set out in the pricing and scope sections. Strong contracts will also include practical protections like limitation of liability and payment terms. If you’re preparing a customer-facing agreement, your Terms of Trade or Customer Contract should state the price, what’s included/excluded, milestones, and when invoices are due.

Confidentiality And NDAs

With confidentiality, consideration often takes the form of mutual promises not to disclose. If only one party is disclosing, the recipient’s promise to keep information confidential is typically consideration for being given access to that information. Where you want to remove doubt, execute the Non-Disclosure Agreement as a deed.

Option Agreements

In an option (for example, the right to buy shares or assets later), consideration is usually an option fee, even if nominal. Without consideration or a deed, the grant of an option may be unenforceable.

Promissory Notes And Finance Arrangements

In lending arrangements, the consideration is clear: the lender provides funds and the borrower promises to repay with interest. If you’re documenting a simple debt, a promissory note can record that exchange alongside payment terms.

Employment And Contractor Engagements

An employee’s work is consideration for wages and benefits. For contractors, services are exchanged for fees. To reduce risk, ensure your contractor agreement or Employment Contract spells out deliverables, fees or salary, IP ownership and confidentiality.

Settlements And Releases

In dispute resolution, the consideration is often mutual promises: payment in exchange for a release, confidentiality, and discontinuance of proceedings. Many businesses document this under a deed to bypass any argument about consideration and execution formalities.

Varying Or Settling Agreements: Do You Need Fresh Consideration?

Short answer: usually yes for variations, not necessarily for settlements if executed as a deed.

Contract Variations

If you change price, scope or timelines mid‑agreement, consider whether both parties are receiving something new of value in return. If not, the variation could be unenforceable. You can avoid that risk by using a formal variation clause that requires written agreement and by recording the change via a Deed of Variation when appropriate.

Settlements And Deeds

When closing out a dispute or negotiating a release, a deed is often the cleanest path. A deed doesn’t require consideration, as long as it is properly executed and delivered. If you’re resolving a dispute, a tailored Deed of Settlement records the payment, release, confidentiality and the “no admission of liability” position.

Execution Formalities

Because deeds rely on formality rather than consideration, make sure your signing block complies with the Corporations Act and any relevant execution rules (for example, board approvals or authorised signatories if executing under section 127). If you’re unsure, speaking with a contract lawyer early will save headaches later.

Key Takeaways

• Consideration is the value exchanged for a promise - it can be money, goods, services, or a promise to act or not act.
• Most contracts need consideration; a deed can be binding without it if properly executed.
• Past acts, pre‑existing duties and illusory promises are common reasons consideration fails - make sure value is current, real and mutual.
• Variations usually need fresh consideration; otherwise, document the change via a deed to avoid enforceability issues.
• In everyday agreements, spell out price, scope and deliverables so the exchange of value is clear and defensible.
• For settlements, options and confidentiality arrangements, consider using deeds to remove doubt about consideration.

If you’d like a consultation on consideration in your agreements (or help drafting or reviewing a contract), you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.