Meaning
A foundational contract doctrine mandates that any value exchanged must be bargained for and provided in the present or future rather than in the past. Under the past consideration rule, a promise made in recognition of a benefit previously received is generally unenforceable. This prevents parties from transforming past voluntary acts into new legal obligations.
Enforceability Barrier
The doctrine presents a substantial hurdle when a founder wishes to reward early-stage supporters after a company is incorporated. If the services were performed before any agreement to pay was reached, the subsequent promise to issue shares or pay a bonus is considered past consideration and is not legally binding. This requires careful structuring to avoid creating unenforceable expectations.
The rule insists on a reciprocal exchange of value occurring at the time of the agreement, meaning that previous efforts do not count as valid support.
Commercial Alternative
The standard way to resolve this issue is through the use of a deed or by establishing a new, reciprocal obligation. A deed does not require consideration to be binding, making it an effective instrument for formalizing such promises. Alternatively, the parties can agree to a new contract where the supporter provides additional, future services in exchange for the reward.
Strict Doctrine
The historical development of this rule ensures that contracts remain mutual exchanges of value rather than one-sided gifts. It draws a clear boundary between moral obligations and legal liabilities. Without this rule, the legal system would be forced to enforce casual promises of gratitude, leading to commercial uncertainty.
