Introduction to Business Law: Consideration

Consideration: something given, promised or done in exchange for ‘the contract.’

•          Essential to create a binding contract unless

–        The contract is a deed

–        It must state it is a deed and

–        It must be signed & witnessed

•          It must be of recognisable value

•          Concept revolves around benefit and detriment:  “act or forbearance..or promise..is the price..(paid) for the promise..for value is enforceable”

•          Approved by House of Lords in Dunlop Pneumatic Tyre Co. Ltd v Selfridge and Co. Ltd [1915]

Consideration must be sufficient

•          Adequate consideration – parties decide, not the courts:

–        Thomas v Thomas (1842) – peppercorn rent sufficient. Something of value in the eye of the law

–        Chappell and Co v Nestle and Co Ltd [1960] – no economic value but still sufficient

–        Midland Bank Trust Co Ltd v Green [1981] – consideration ‘real’

–        Hamer v. Sidway, 124 N.Y. 538, 27 N.E. 256 (N.Y. 1891),  – Consideration provided by promise to give up drinking, smoking, swearing and gambling

–        Sufficient:

–        White v Bluett (1853) – No consideration given by promise not to bore father with complaints

Consideration

•          May be executory or executed but not past

•          It must move from the promisee but not necessarily to the promisor

•          It must be sufficient though not necessarily adequate

Past consideration

Pao On v Lau Yiu Long (1980) per Lord Scarman

                               ‘An act done before the giving of a promise can be valid consideration for the promise. The act must have been done at the promisor's request, the parties must have understood that the act was to be remunerated either by payment or conferment of a benefit, and the payment or conferment of a benefit must have been enforceable had it been promised in advance.’

•          Executory consideration – unfulfilled, to be completed in the future

•          Executed consideration – completed performance of one side of the contract

•          Past consideration – something done & complete at the time the promise was made

–        Roscorla v Thomas (1842)

–         Re McArdle [1951]

Performance of an existing duty

•          Suppose a person does or promises to do something he or she was already bound to do. Can this be consideration for a promise?

•          Distinguish a duty owed (a) to the public, (b) to a third party, (c) to the promisor

Williams v Roffey (1991) per Glidewell LJ

(i)                  If A has entered into a contract with B to do work for, or to supply goods or services to, B in return for payment by B; and

(ii)                at some stage before A has completely performed his obligations under the contract B has reason to doubt whether A will, or will be able to, complete his side of the bargain; and

(iii)               B thereupon promises A an additional payment in return for A's promise to perform his contractual obligations on time; and

(iv)              as a result of giving his promise, B obtains in practice a benefit, or obviates a disbenefit; and

(v)                B's promise is not given as a result of economic duress or fraud on the part of A; then

(vi)              the benefit to B is capable of being consideration for B's promise, so that the promise will be legally binding

Exceptions to past consideration

Common Law:

•          Implied promises to pay – by conduct e.g. Lampleigh v Braithwait (1615)

•          Understanding payment was implicit: Re Casey’s Patents [1892]

Statutory exceptions:

•          Limitation Act 1980 s.27(5) – acknowledgement of debt

•          Bills of Exchange – e.g. payment by cheque

Perform pre-existing duties

•          Promises to perform pre-existing duties – no consideration – therefore insufficient

•          Distinguish between public & contractual duties

•          Performance of existing public duty

–        Collins v Godefroy (1831) – witness not consideration

–        Glasbrook Bros v Glamorgan CC [1925] – public duty? Exercised with discretion

•          Generally not consideration – distinguish between paying more or less for a service

•          Paying more (further consideration)

–        Stilk v Myrick (1809)

–        Hartley v Ponsonby (1857)

•          Practical benefit

–        Williams v Roffey Bros & Nicholls (Contractors) Ltd [1990]

Part payment of a debt

Pinnel’s case

                Payment of a lesser sum on the day in satisfaction of a greater cannot be satisfaction of the whole… But the gift of a horse, hawk or robe in satisfaction is good. For it shall be intended that a horse, hawk or robe might be more beneficial to the plaintiff than the money in respect of some circumstance, or otherwise the plaintiff would not have accepted it in satisfaction

In Foakes v Beer (1884), where B agreed with F that she would accept payment of a judgment debt by instalments and that she would not “take any proceedings whatever on the judgment”, the HL held that B could still claim interest on the debt

                In Collier v P & MJ Wright Ltd (2008) the Court of Appeal held that where a creditor had voluntarily accepted a debtor’s offer to pay part only of the amount he owed, and the debtor paid that part, the creditor was estopped  from claiming the whole debt.

Part payment generally not binding

Four qualifications:

1. Composition arrangements – agreement with creditors to accept part payment
2. Third party pays debt:  Hirachand Punamchand v Temple [1911]
3. Preferable payment – Pinnel’s Case (1602) – different kind of payment = fresh consideration
4. Promissory estoppel

Promissory estoppel

•          Doctrine = exception to consideration requirement. If one party makes a promise with the intention that the other party acts on it and he does act on it, then the first party may be estopped from going back on his promise

•           Promise enforceable despite no consideration

•          Hughes v Metropolitan Railway (1877) per Lord Cairns

•                          If parties … enter upon a course of negotiation which has the effect of leading one of the parties to suppose that the strict rights arising under the contract will not be enforced, … the person who otherwise might have enforced those rights will not be allowed to enforce them where it would be inequitable having regard to the dealings which have thus taken place between the parties

The High Trees principle

                Where, by words or conduct, a person makes an unambiguous representation as to his future conduct, intending the representation to be relied on and to affect the legal relations between the parties, and the representee alters his position in reliance on it, the representor will be unable to act inconsistently with the representation if by so doing the representee would be prejudiced.

Promissory estoppel

•          Clear and unequivocal representation

•          Reliance by promisee

•          Inequitable to go back on promise

•          Effect generally suspensory

•          A shield, not a sword

Limitations on promissory estoppel

Promise must be clear & unequivocal not to enforce strict legal rights

•          Cannot be a separate course of action

•          Available to both claimants & defendants if issue arises from pre-existing contractual relationship – Combe v Combe [1951]

•          Has to be reliance

Summary of the doctrine of promissory estoppel:

–        Can sometimes be relied on prevent going back on a promise

–        Consideration still required

–        Only varies or discharges rights within contract

–        Suspends rights

–        Promise relied on must be voluntary

Consideration

•          Consideration is ‘some benefit to the promisor or detriment to the promisee’

•          Provided at creation of contract (executed) or at a later date (executory)

•          Past consideration – generally not enough

•          Must be sufficient not necessarily adequate

•          Performance of existing duty – not valid consideration but Williams v Roffey Bros [1990] contrary possibility