Law of Contract Consideration
Definition:
Consideration for a particular promise exist where some right, interest, profit or benefit occurs (or will occur) to the promisor as a direct result of some forbearance, detriment, loss of responsibility that has been given, suffered or undertaken by the promisee (Currie v Misa).
Key terms:
Promisor: the person who makes the offer or promise. (Benefits)
Promisee: the person carrying out the act to accept the promise/offer. (Forebears) Consideration can be:
1. A benefit to one party or detriment to another.
2. The price paid for a promise.
3. The element of exchange.
Kinds of Consideration
Executory: a promise to do something in the future.
Executed- an act wholly performed at the time the contract is entered into.
Past Consideration: something already completed before the promise is made cannot amount to consideration.
N.B The claimant is usually the promisee while the defendant is usually the promisor.
Past Consideration:
Roscorla v Thomas,
D sold a horse to P for £30. After sale he promises that the horse was free from vice, which turned out not to be true. Held, P could not be sued on promise as he had already agreed to pay for the horse when the promise was made.
Re McArdle, a promise was made to pay money in return for past services. Held, that this was past consideration and therefore not valid.
EXCEPTION
Where a service is rendered at the request of the promisor, on the understanding that payment will be made, a subsequent promise to pay a certain sum will be enforced provided that the payment would be legally enforceable if it had been promised in advance.
Exception to Past Consideration
(1. If something is done in a business context and it is clearly understood by both sides that it will be paid for, the past consideration will be valid. See Re Casey’s Patents. )
Lampleigh v Braithwait ,
After killing a man D asked C to do all he could for him to get pardon from the king. C did this at great trouble and expense, when he claimed the amount promised, D said his actions were past consideration. Held, C was entitled to his money, as he acted on his request and it as clear at the time D asked him for help that he would be paid for his trouble.
Pao On v Lau Yiu Long
The Privy Council laid down three conditions which must be satisfied to invoke the doctrine of Lampleigh v Braithwait:
1. The act must have been done at the request of the promisor.
2. It must have been understood that a payment was to be made for the services when it was requested.
3. The contract (had it been made in the normal way) must have been a legally enforceable one.
Rules Governing Consideration
1) Consideration must move from the promisee
A promise is enforceable if it is supported by consideration from the promisee.
Tweddle v Atkinson,(use facts from second mention of the case).
Tweddle promised William Guy that he would pay a sum of money to his child vice versa. Upon marriage of the two children of each other, however, Guy failed to pay the son of Tweddle, who sued his executor for the amount promised.
Held, the son could not enforce the promise made to his father, as he himself did not give consideration for it, it was his father who had done this instead.
Although consideration must move from the promisee, it does not necessary have to move to the promisor. The promisee may provide consideration to a third party, if it is agreed at the time the parties contracted (Bolton v Madden).
Dunlop v Selfridge,
An act or forbearance of one party, or the promise thereof, is the price of which the promise of the other is bought, and the promise thus given for value is enforceable.
2) Consideration need not be adequate
Adequacy is a question of fact. It need not equal in value the consideration provided by the other party. It is for the parties themselves to make their own bargain:
Chappel Co. V Nestle Co,
It was held that even the most worthless item can be good consideration. A contracting party can stipulate for what consideration he chooses.
Trifling consideration was held valid in De La Bere v Pearson.
3) Consideration must be sufficient
Sufficiency is a question of law. Consideration must have some value in the eyes of the law.
Traditionally, the following have no value in the eyes of the law:
1) A promise to perform an existing public duty:
C ollins v Godefroy,
Godefroy promised Collins a certain sum of money to come to court after he was subpoenaed to attend.
Held, Collins was bound to come to court anyways and that it was not good consideration to do so.
If he does more than his duty, then there is consideration (Glasbrook Bros v Glamorgan).
During a miner’s strike, James, manager, requested the police superintendent to provide extra forces to protect the working men against strikers. The superintendent thought the men were adequately protected, but on James insistence an additional 70 men were provided. The owners were sent a bill for additional police men, which they refused to pay on grounds that the police officers were only performing their legal duty to protect the public.
It was held that although police cannot accept extra money for doing their normal statutory duty, when special services are required beyond the normal call of their duty, they are entitled to be recompensed.
2) A promise to fulfil an existing duty owed to the same person:
In Stilk v Myrick [1809] performing an existing contracted duty was not good consideration for a promise on a ship owned by Myrick for a month, promising to do anything needed in the voyage regardless of emergencies, (therefore not withstanding the emergencies that arose, the men were under an existing duty as promised to do anything needed in the voyage). After the ship docked two men deserted, and after failing to find replacement, the captain promised the crew the wages of those two men divided between them if they fulfilled the duties of the missing crewmen as well as their own. After returning home the captain refused to pay the crew men the money he had promised them.
Their decision was argued on the basis of Harris v Watson, where it was decided that, “no action would lay at suit of a sailor on a promise of a captain
to pay him extra wages, in consideration of his doing more than the ordinary share of duty in navigating the ship; and his lordship said, that if such a promise could be enforced, sailors would in many cases suffer a ship to sink unless the captain would accede to any extravagant demand they might think proper to make.”
Hartley v Pensonby,
A ship left England for Bombay with a crew of 36. By the time it arrived, only 19 remained of whom only 5 were able seamen. The captain promised the remaining able seamen an extra £40 for completing the voyage. It was held that the seamen had provided good consideration as what they were now being asked to do was different to what they had agreed to do when there was a full crew.
Commentators
Modern commentators say that the decision by the judge not to award the money to the plaintiff was based at least partly on public policy; should he have done so it would have create a precedent that would risk crew members blackmailing captains into giving them more money. It is accepted that the decision would be likely to be different should it have been made in modern times; because of the doctrine of economic duress it would be difficult for such blackmail to be enforced in court. In Hartley v Personby, where it was ruled that although Stilk v Myrick, was still valid, they would be due the money if the situation created by the desertion of the crew changed their duties to an extent that they would not be bound to continue under the existing contract. Another (albeit controversial) exception is in Williams v Roffey Bros & Nicholls, in varying a contract, the court
will be quick to find consideration if “practical benefits” are given from one party to another.
Exception to the Rule in Stilk v Myrick
In Williams v Roffey Bros & Nicholls, Roffey Bros was contracted by Shepherds Bush Housing Association to refurbish 27 flats. They subcontracted carpentry to Williams for £20,000 payable in installments. Some work was done and £ 16,200 was paid. Then Williams ran into financial difficulty because the price was too low. Roffey Bros was going to be liable under the late penality clause for completion, so they promised an extra £575 per flat for on time completion.
Williams did eight flats and stop because he only got £1500. Williams claimed sum promised.
Held, Williams had provided good consideration even though he was merely performing a pre-existing duty. The concept of economic duress provided on answer to Stilk’s old problem. The test for understanding whether a contract would legitimately be varied was set out as follow:
i) If A has a contract with B for work.
ii) Before it is done, A has reason to believe B may not be able to complete iii) A promises B more to finish on time
iv) A ‘obtain is practice a benefit, or obviates a disbenefit’ from giving the promise.
v) There is no an economic duress or fraud… then practical benefit constitutes good consideration.
In commenting on the earlier case of Stilk v Myrick Glidewell LJ said, “It is not in my view surprising that the principle enunciated in relation to the rigours of seafaring life during the Napoleonic wars should be subjected during the succeeding 180 years to a process of refinement and limitation in its application to present day.
Russell LJ said, “The courts nowadays should be more prepared to find [considerations] existence so as to reflect the intention of the parties to the contract.
b) A request to avoid part-payment of a debt.
The basic rule is that payment of a smaller sum will not discharge the duty to pay the higher sum:
Pinnel’s case,
It was opined that a part payment of a debt could not extinguish the obligation to pay the whole. The rule is that payment of a lesser sum on the day in satisfaction of a greater cannot be any satisfaction for the whole; it appears to the judges that by no possibility, a lesser sum can be a satisfaction to the plaintiff for a greater sum.
The rule is obiter dicta.
Application
Foakes v Beer,
Is a controversial application of the pre-existing duty rule and a leading case from the House of Lords on the legal concept of consideration. It establishes the rule that prevents parties from discharging an obligation by part performance, affirming
Pinnel’s case. Beer agreed that she would not take any action against Foakes for the amount owed if he would sign an agreement promising to pay an initial sum of
£500 and pay £150 twice yearly until the whole agreement was paid back. Foakes was having financial difficulty, and so Beer waived any interest on the amount owed. Foakes made the payment as agreed without any interest.
The House of Lords held ruling in favour of Beer. The reasoning behind their judgement was that though the agreement did not contemplate the interest owed, it could still be implied in an enforceable agreement. However, the promise to pay a debt was deemed not to be sufficient consideration as there was no additional benefit moving from Foakes to Beer that was not already owed to her.
Even where the creditor promise that he would not sue for money owed, he may still sue where there was part payment of debt.
Sound File
Consideration is really the bargaining element of a contract, e.g. if A agrees to paint the room and B promises to pay £300. The law of contract only enforces reciprocal agreements. If you want to make a gift then you have to draft a deed or covenant but for simple contract you do need consideration.
In Re McArdle, when the repairs and decorations were carried out without request and after this compensation was offered that was a gift. These are exceptions however, to the past consideration rule.
Exception to Past Consideration rule where:
i) Services rendered for an implied promise of payment are an exception (Lampleigh v Braithwait)
ii) Equally if you are looking at a commercial content, where for example you ask a window cleaner to clean your windows, you are expected to pay. So if no price is mentioned and you take your car to the garage and leave it, it may be that the court will construe that given the commercial context a reasonable price maybe payable.
Consideration must move from the promisee
Only a person who has provided consideration can enforce the contract (Dunlop v Selfridge ) . For sufficiency of consideration the doctrine of caveat emptor- let the buyer beware. May apply, the courts will not inquire into the adequacy of the consideration.
One has to consider what has no value in the eyes of the law:
Where there is a public duty
If a promise is intended to be binding the courts may not allow the promisor to go back on his promise. The doctrines of promissory estoppel under certain circumstances will estopped a promisor from going back on his promise to accept a smaller sum in discharge of a larger sum. (London Property Trust v High Trees) The purpose of this lecture will be to describe:
i) What consideration is.
ii) Types of consideration.
iii) The proposition that consideration has to move from the promisee.
iv) Sufficiency of consideration & insufficiency of consideration.
v) Role of consideration in bringing a contract to an end.
Emphasis should be also placed on the Dunlop v Selfridge as it highlights the bargaining elements of consideration.
Past Consideration
is where the promise is totally independent of the act and the promise comes after the act. Thus is described as bad consideration because it lacks bargaining power.
See Roscorla v Thomas, if such a claim was brought today it would go under the Sale of Goods Act, where defective goods are returned.
Note when looking at past consideration, it is not so much the chronology of the promise and the act but, the independence of the promise from the act, and that’s why when you consider the common law exception, you can see that the exceptions are an attempt to bring together into one transaction the promise of payment or benefit and the act. One way this can happen is when there is an initial request for service or act (Lampleigh v Braithwait). In the said case because the service was asked for they (promise & act) were treated as a single transaction.
The value of consideration is always thought to be material. In Bolton v Madden, Lord Blackburn said the adequacy of the consideration is a matter for the parties to consider and you do that at the time of making the agreement, and it is not for the court to decide at-a-later date whether that should be enforced or not.
Promise to perform an existing public duty
Word v Byham; The Father of the child promised to pay the mother provided that she could prove the child was well looked after and happy. The mother claimed.
Held, the mother was entitled to sum promised as she had acted over and above public duty of just feeding, maintaining and clothing the child she had to demonstrate that child was happy.
In Williams v Roffey Bros & Nicholls, there are a number of requirements that need to be performed. First of all you need to look at the nature of the contract, it seem like the principle in Williams only apply where there is a contract to supply goods or supply services in return for payment. Note also it was the main contractor who invited the work so there could be argument of economic duress.
The court refused to extend the principle laid down within Williams v Roffey in the context of contract other than contract for the supply of goods or services (Re Select move Ltd). Although consideration is often spoken of as an important ingredient for the formation of a contract, it can also be viewed as an ingredient in bringing a contract to an end. This is sometimes referred to as accord and satisfaction. Accord is the agreement and Satisfaction is the consideration, but it operates in a negative way. Example, A is contracted to work Y for 3 years. At the end of the first year both parties are sick of each other/ having disagreement. A decides he want to work somewhere else and Y promise not to pay. This is a negative consideration and will bring the contract to an end.
Part Payment of Debts
If A owes B £50 and B accepts £25 in full satisfaction on the due date, there is nothing to prevent B from claiming the balance at a later date, since there is no consideration proceeding from A to enforce the promise of B to accept part-
payment. This is because he is already bound to pay the full amount, an agreement based on the same principle as Stilk v Myrick (existing duty).
In Pinnel’s case, Cole owed Pinnel £8.50 which was due on 11 November. At Pinnel’s request Cole paid £5.11 on 1 October, which Pinnel accepted in full settlement of the debt. Pinnel sued Cole for the amount owed.
It was held that part-payment in itself was not good consideration. However, it was also held that agreement to accept part-payment would be binding if the debtor, at the creditors request provided some fresh consideration. Consideration might be provided if the creditor agrees to accept:
i) Part-payment on an earlier date than the due date (i.e. as in Pinnel’s case itself) of the creditor’s request.
ii) Chattel instead of money (a horse, hawk or robe maybe more beneficial than money) D & C Builders v Rees
iii) Part-payment in a different place from that originally specified.
In Foakes v Beer, despite the harshness of the rule in Pinnel’s case, it was affirmed by the House of Lords and still represents the law.
Exceptions to the Rule
Apart from the exceptions to the rule mentioned in Pinnel’s case itself, there are two other at common law and one exception in equity.
a) Part payment of the debt by a third party
A promise to accept a smaller sum in full satisfaction will be binding on a creditor where the part payment is made by a third party on the condition
that the debtor is released from the obligation to pay the full amount see Punamchand v Temple. A father paid a smaller sum to a money lender to pay his son’s debts, which the money lender accepted in full settlement.
Later the money lender sued for the balance. It was held that part payment was valid consideration.
b) Composition Agreements
The rule does not apply to composition agreements. This is an agreement between a debtor and group of creditors, under which the creditors agree to accept a
percentage of their debts in full settlement. Despite the absence of consideration the court will not allow an individual creditor to sue the debtor for the balance (Wood v Roberts). The reason usually advance for this rule is that to allow an individual creditor to claim the balance would amount to a fraud on the other creditor who had all agreed to the percentage.
c) Promising Estoppel
The principal source is in the dicta of Denning J, in London Property Trust v High Trees. The equitable doctrine provides a means of making a promise binding, in certain circumstances, in the absence of consideration. The principle is that if someone (promisor) makes a promise, which another person acts on, the promisor is estopped from going back on his promise, even though the other person did not provide consideration (in so far as it is inequitable to do so). The creditor will be barred from his legal rights where it is inequitable for him to enforce it.
