If Party A pays £1 to Party B who pays £1 to Party A, is there good consideration?

Question

The elements of a valid contract are agreement, intention, and consideration. Consideration must be something of value which passes from one party to the other, and it merely needs to be sufficient, but does not need to be adequate. Hence, it is common to provide token consideration e.g. a peppercorn or £1.

I've recently come across a contract which states along the following lines:

In consideration of £1 which Party A shall pay to Party B and £1 which Party B shall pay to Party A, the parties agree [...]

This has lead to a debate about what constitutes valid consideration. My instinct tells me that this is not sufficient consideration, as the reality is that nothing of value passes between the parties. Party A pays £1 to Party B who pays it right back, and neither party have gained anything. Indeed, the person who drafted this clause has advised the parties that they do not need to actually transfer any money since one offsets the other.

Is anyone aware of any precedent (preferably in E&W but other jurisdictions are fine) which deals specifically with the case where the purported consideration of the parties are identical and cancel each other out?

Answer 1

Why is the fact that the consideration from each party has the same value a problem?

If I offered you a back rub in return for a back rub, we would have a valid contract. So, why do you think £1 for £1 is any different?

Certainly, if you and I agreed that I would change your £1 and I take the money but don't give you 2 50p pieces you could sue me for breach of contract. That's £1 for £1, is it not? Neither of us has changed our financial position but you gave me something of value and I gave you something of value.

Consideration does not have to be adequate: it only has to be sufficient. Sufficiency of consideration simply means that it isn't something I was legally obliged to do already, either because I am under some duty to do it (like attending court in response to a subpoena) or by an obligation under another contract.

As for not actually paying it? Well, each of us is free to waive our rights under the contract and this is what usually happens with peppercorn contracts.

The reason for this is the obligations under the contract may flow to a third-party but consideration has to go between the parties.