Consideration - in the existence of a contract.

Consideration

To establish the existence of a contract we have firstly seen that we need to find an agreement, this has been explained in terms of Offer and Acceptance. For the courts to enforce such an agreement however there are other elements that need to be found, the one we will deal with next is consideration, the final element is an intention to create legal relations, which will be dealt with subsequently.

So what is consideration?

In its simplest form consideration can be viewed as the price of the contract. If I offer to sell you a PS2 for £75 and you accept, then it is possible to see that both parties are giving something for the contract, I will transfer legal ownership of the PS2 and you will give me £75.

There are various ways that the courts have described this situation and not always aiding clarity one of the more common definitions comes from the case Currie v Misa (1875) LR 10 Ex 153. In that case Lush J defined consideration thus “A valuable consideration, in the sense of the law, may consist either in some right, interest, profit, or benefit accruing to the one party, or some forbearance, detriment, loss, or responsibility, given, suffered, or undertaken by the other.”

It is possible to see the notion of benefit and loss in contracts but often it is possible to say that actually what happens is that there is a benefit gained by both parties but a loss suffered too. In the above example my benefit is gaining £75 and yours is gaining a PS2, our loss is the PS2 for me and the £75 for you. This situation is not though automatic and it is possible for contracts to exist where the benefit and detriment isn’t suffered equally by both parties, to take the above example all that would need to happen to show this is that instead of you paying the £75 to me I ask that you pay it to my favourite charity, no longer do I get the benefit of the £75 but you clearly are still giving consideration for the PS2.

Consideration is then the exchange element of the contract and it is important to appreciate that it has to be exchanged, if there is no consideration given by one party then under English and Welsh law they cannot enforce the contract. Indeed if I give you the PS2 but you give nothing in exchange then a week later I can ask for it back and you will be unable to prevent me claiming it back under contract law. To circumvent this problem the law has created a means for making the granting of a gift legally enforceable through the use of a deed to see what happens if no such deed is created look at Re Hudson (1885) 54 LJ Ch 811.

What can amount to consideration?

The most obvious form of consideration is the exchange of goods for money, at this point there is little to create confusion, but the courts are rather open to persuasion as to what consideration can be with few rules existing to restrict this. Indeed consideration can be found in a promise, if I promise to sell you the PS2 on Friday and you promise to pay me the £75 in exchange then there is a contract with consideration at that point. If it becomes clear that I will not sell you the PS2 on Friday then you would be able to take legal action. Consideration doesn’t have to be physical therefore.

One point which can create problems is that the courts do not look at the value of consideration only for its existence, this is usually presented in the phrase consideration need not be adequate. In Thomas v Thomas (1842) 2 QB 851 the court found that £1 paid each year was consideration for living in a house, even though the commercial value for the annual rent would have been considerably higher. This is an example of the courts supporting freedom of contract and refusing to intervene with what is a bad bargain but still remains legally at least a good contract.

There is case law which suggests that although the consideration need not be adequate it does have to have some economic value, for instance in White v Bluett (1853) 23 LJ Ex 36 the court found that a promise made by a son to his father to stop complaining about his father’s treatment of him was not good consideration in return for his father not enforcing a promissory note against the son.

The courts have though found some rather remarkable things to amount to good consideration, ensuring a child was happy (Ward v Byham [1956]), or empty chocolate wrappers (Chappell v Nestle [1960]). Indeed in contrast perhaps to White v Bluett, an American case of Hamer v Sidway (1891) did find that a promise to not drink or gamble was good consideration.

Those cases tend to show that the courts do take a rather pragmatic approach to this issue and so long as some consideration can be found its exact form is less important.

Past Consideration

This is a preview of the whole essay

Past Consideration

There is one major point where consideration is often not considered acceptable and that is where it is what the courts call past. To return to my PS2, lets suggest that instead of asking £75 for it I take pity on you because you are badly strapped for cash and accept only £20, the following day after successfully picking 4 balls on the lottery you say you will pay me an extra £75 once you’ve claimed the money. When you try to claim the money you discover that you’ve only won £50 can I claim the extra £75? The courts would say no; I have not given any consideration for the £75, the consideration is past. To show this in action in the courts look at the case of Eastwood v Kenyon (1840) 11 A & E 438. In that case a man had become the legal Guardian of a girl who stood to inherit a considerable sum in the future. He spent considerable money of his own on her estate and education. When she came of age she promised to pay him back the money he had spent, she shortly after married and her new husband again reiterated the promise. This promise was never kept but his attempt to force the payment failed because he had provided no consideration for such a payment. His original actions were entirely gratuitous and not done in the expectation of payment. For a more recent case that reached a similar conclusion see Re McArdle [1951] Ch 669.

In the above cases is there not a moral obligation to pay? Do you think the courts should perhaps be rather more understanding?

The courts have in many other areas of contract law had to perhaps re-evaluate a traditional doctrine slightly in the face of modern commercial practices and this is one such area. Although in its strictest principle the doctrine is still perfectly good law the courts have shown some tendencies to find that what at first might appear to be past consideration is in fact good consideration. The leading explanation of this comes from a Privy Council case Pau On v Lau Yiu Long [1979] 3 All ER 65 where Lord Scarman provides this summary. “An act done before the giving of a promise to make a payment or to confer some other benefit can sometimes be consideration for the promise. The act must have been done at the promisors' request: the parties must have understood that the act was to be remunerated either by a payment or the conferment of some other benefit: and payment, or the conferment of a benefit, must have been legally enforceable had it been promised in advance.”

Lord Scarman was not creating new law as such with that statement but was perhaps instead placing some already accepted points into a better framework. This can be seen by looking at the three points raised in succession.

1) The Act must have been done at the promisors’ request.

The law had for some considerable time suggested that if you asked someone to perform an act for you and once completed offered payment that you would be liable to make that payment. In Lampleigh v Braithwait (1615) Hob 105 a person who had killed a man asked his friend to attempt to gain a pardon for him from the King. This the friend managed but only at some considerable expense to himself. On gaining his freedom the former prisoner said he would pay £100 for his friends efforts, but reneged on this promise. The friend went to court and was successful in claiming the £100.

2) The parties must have understood that the act was to be remunerated either by a payment or the conferment of some other benefit.

The case of Re Casey’s Patents [1892] 1 Ch 104 demonstrates this point. The owners of certain patents asked Casey to perform some work for them and once that work had been completed they offered him a one third share in the rights from such patents. This was duly performed but on the death of one of the other parties a dispute arose. It was argued that the work Casey had done was prior to any mention of him being granted patent rights and so was clearly past consideration. The Court disagreed saying that in a commercial context it must have been understood by the parties that Casey would be remunerated for his work, what appeared as past consideration was in fact just defining the form this payment would take and was therefore not past.

3) Payment, or the conferment of a benefit, must have been legally enforceable had it been promised in advance.

This is really straightforward and basically just requires that the other rules of contract law have been complied with.

Existing Duties as Consideration

A number of existing duties may be given as purported consideration for a contract but they do not all receive support under contract law as being good consideration. There are a number of reasons for this and one that is prominent is what may be considered just a matter of public policy. To show this lets look at the first form of existing duty an existing duty imposed by law.

Existing duty imposed by law

There is the possibility for fraud and corruption to occur if it is possible for someone to gain extra consideration for performing a duty they are obliged to do by law. In Collins v Godefroy (1831) 1 B & Ad 950 a witness who had been offered money to attend court was not able to claim that money because they were under an existing duty to attend. The exact grounds for the decision are not clear but a public policy element does seem likely.

In areas where there is less obvious risk of extortion the courts have perhaps tended to be more tolerant. Lord Denning was one such judge to consider the matter less stringently. In Ward v Byham [1956] 2 All ER 318 a mother of an illegitimate child was promised £1 a week for looking after the child, a duty she already had under the law. The case came to court and it was decided that her agreement to look after the child could be good consideration. Denning’s argument was that although she already had a duty to undertake such actions she was conferring a benefit on the other party by doing so, indeed if the other party was not to benefit in some way why did they enter into the agreement? This is rather a pragmatic approach and may not be simply a question of deciding if the consideration is valid or not in a strict contract law sense.

Denning may have been pragmatic in suggesting that although under certain circumstances it may be desirable for an agreement to perform an existing legal duty to not amount to good consideration it should not mean that is the rule for all such situations but it does create problems with regard to certainty. Another more calculated way for the courts to circumvent this problem of an existing legal duty has been to say that such a duty has been exceeded (this indeed was the decision reached by the other judges in Ward v Byham). A clearer example can be seen in the case of Glasbrook Brothers ltd v Glamorgan CC [1925] AC 270. There was a strike at a mine and the owners contacted the police for extra protection, the police offered only limited extra protection. The owners made an agreement that they would pay for a stationary guard to be placed at the mine, this they subsequently refused to pay. The court decided that they did have to pay because the police had made an assessment of the protection needed and the owners wanted extra and so the police had exceeded their duty and could receive the consideration for it. A more recent example of this was seen in Harris v Sheffield Utd FC [1987] 2 All ER 838.

An existing duty to a third party

In this situation what is occurring is that someone offers consideration to X so long as they perform something they are already legally bound to perform for/to Y. To give an illustration lets say a wedding is being organised and the couple contract with the caterers for food and wine. The caterers actually have their wine supplied by another company and to ensure the correct volume and type of wine is supplied in good time the couple offer £250 to the wine suppliers if they perform their contract with the caterers on time. There is of course an agreement between the caterers and the suppliers of wine for such delivery; can the suppliers claim the additional consideration from the couple? The answer would appear to be yes, see the early case of Shadwell v Shadwell (1860) 9 CBNS 159 which concerned an inducement to marry. The principle has also been accepted in more commercial settings see the recent case of The Eurymedon [1974] 1 All ER 1015 and that decision was supported in the case Pau On v Lau Yiu Long. That later case went so far as to say the promise to perform such an existing duty was good consideration and not just the performance something we have already discovered with consideration anyway.

An existing duty to the same promisor

This is of course the obvious question to follow from the above and may well have close links with what might appear to be past consideration. Simply put we are looking at a situation where there is contract between A and B, if later A offers B more money for performing the same contract is this enforceable? Under strict contract law thinking it shouldn’t be, once a contract is agreed the terms are fixed, if there is any alteration of the terms this must be met with consideration from both parties or it would surely be unfair the new agreement would be only one sided.

This was indeed the traditional approach to the question. Stilk v Myrick (1809) 2 Camp 317 concerned a crew of a ship, after the outward leg of the journey a small number of crewmen deserted. The Captain offered the remaining crew a share of the saved wages if they returned the ship. The Captain on arrival in port refused to pay the money, the court agreed with him that the sailors had not provided any fresh consideration for the extra money.

Could this be as much a public policy decision as a strictly contract law one?

The only way the courts had under this traditional approach to circumvent this was to undertake a similar approach to that used in Glasbrook brothers and say the original duty had been exceeded. In Hartley v Ponsonby (1857) 7 El & Bl 872 a crew of 36 was reduced to 19 by desertions. Under those circumstances the court were prepared to enforce the promised extra payment, but only because the voyage with such a small crew had become dangerous, thus the crew had exceeded their original duty.

If though it is possible to suggest that a person may exceed their duty and use that argument for supporting extra payments is it not also possible to see that Denning’s thoughts may also apply. Could it not be said that by offering an extra payment that person does indeed gain some benefit if only peace of mind. It has tended to be that this has been rebuffed by saying that to allow such extra payments may open the way for fraud and extortion the earlier public policy consideration.

A new approach

The traditional approach was re-evaluated in the case Williams v Roffey & Nicholls Contractors) Ltd [1990] 1 All ER 512. The facts of the case are rather complicated but in essence they are these, M was a main contractor on a block of flats and they had to complete the job by a certain date or face a heavy penalty clause. The carpentry work in the flats was subcontracted to S, but as the work progressed it was clear that S was losing time over the carpentry because they had under priced their work and could prevent completion on time. M decided to offer them extra money to ensure completion on time, but after a short period of time defaulted on these extra payments. S stopped work and sued M for the extra payments; M said that no consideration had been given for the payments.

If we were to look at the case purely from the traditional standpoint of Stylk v Myrick it would be clear that no extra consideration had been given. The fact that S had made a bad bargain would be no concern of the courts. Williams v Roffey changed that, the Court of Appeal said there was no evidence of extortion or economic duress exerted by S (economic duress is a topic we will return to later in the course) indeed it was M who had commenced the renegotiations. There was though a further important factor and that was that S would have been able to confer a benefit upon M the extra money would have been used by S to complete on time and thus avoid the penalty clause benefiting M in the process. It was this that distinguished the case from Stylk v Myrick.

Part payment of a debt

If Stylk v Myrick had been the traditional approach with regards to goods and services then Pinnel’s case (1602) 5 Co Rep 117a and Foakes v Beer (1884) 9 App Cas 605 supply the traditional approach with regards to debts. In Pinnel’s case it was decided that part payment of a debt could not amount to consideration for the whole debt. The exception to this was if a further gift was granted then this could, because consideration need not be adequate. The court appears to view money as only being money but an object has the value given to it by an agreement; this may seem a little odd but it does seem to comply with contract law’s view of consideration and the need for adequacy. The only other way a lesser sum may amount to full consideration was if it was given early but this could be seen as conferring some benefit to the creditor, which could amount to consideration.

The House of Lords affirmed this principle in the case of Foakes v Beer and indeed the contract law position over part payment of a debt is often labelled the rule in Foakes v Beer. The rule has been criticised and it can be said that it has perhaps left those relying on an agreement to accept less money for a debt with no safety despite their honest and full reliance. The rule can though work favourably too for such an example see D & C Builders v Rees [1966] 2 QB 617.

There has been further criticism of the rule following the developments of Williams v Roffey, surely it could be argued that so long as the renegotiation is not a product of extortion or economic duress and the person accepting a lesser sum gains some benefit then the situation in Williams v Roffey is mirrored. The CA have considered this in Re Selectmove [1995] 2 All ER 531 and although deciding the case on other grounds concluded that the HL decision in Foakes v Beer would take precedence over the CA decision in Williams v Roffey with regard to debts.

Promissory estoppel

At this point it is now important to depart from the strict contract law of consideration and part payment of a debt. It has already been suggested that the rule in Foakes v Beer may not always if applied lead to a just result and although that is the rule under contract law a further area of law may be resorted to by the judiciary. That area is of equity and the particular part of interest is promissory estoppel. The origins of the idea are not always clear but reference to the common law idea of estoppel (this though only applies to facts see Jordan v Money (1845) 5 HL cas 185) and the equitable remedy of waiver should be given (this relates to a party waiving some right under a contract see Hartley v Hymans [1920] 3 KB 475). The real focus though and the notion of the idea of promissory estoppel comes from Lord Denning and the case Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130. The case concerned a block of flats that were let by the owners to the defendants at an annual rent of £2500. The commencement of the Second World War meant that the defendants had trouble finding people to reside in the flats and so were losing money. The owners appreciating the difficulties agreed to reduce the rent by half, this arrangement continued until the end of the war. At that point the difficulty in letting the flats ceased and the owners brought an action to return to the original terms of the lease, they also made enquiries of the court as to whether they could claim the rent lost during the war as they had received no consideration for accepting a lesser sum. Denning J as he was at this time said that the rent could be returned to the original value but that the owners would be estopped from claiming the lost rent. It must be said that this last element was really only obiter but no further action was taken by the owners thus allowing it to remain uncontested. Denning knew he wasn’t acting strictly under the rules of contract law or equity and so explained his actions thus:-

“In my opinion, the time has now come for the validity of such a promise to be recognized. The logical consequence, no doubt is that a promise to accept a smaller sum in discharge of a larger sum, if acted upon, is binding notwithstanding the absence of consideration: and if the fusion of law and equity leads to this result, so much the better. That aspect was not considered in Foakes v. Beer. At this time of day however, when law and equity have been joined together for over seventy years, principles must be reconsidered in the light of their combined effect.”

Denning could not just invent a new area of law he had to show support for his thinking and this he did by referring to the case of Hughes v Metropolitan Railway Co (1877) 2 App Cas 439, this is though really a case of waiver as mentioned above. The remaining problem is though that Denning was rather broad in his explanation and on face value his discussion could have weakened the role of consideration in contracts entirely. That has not happened and what has evolved is a series of limitations upon the principle of promissory estoppel these are:-

There must be an existing legal relationship

There must have been detrimental reliance

By this what is meant is that the party relying on it must have taken some action relying on it.

The doctrine can only be used as a ‘shield and not a sword’

This element comes from the case Combe v Combe [1951] 2 KB 215, in other words one cannot launch an action under promissory estoppel but only defend oneself from an action.

It must be inequitable for the promising party to go back on their promise.

It is for this reason that the builders were successful I gaining their full payment in D & C Builders v Rees, because the builders had agreed because of intimidation it was not inequitable to go back on their promise.

Does promissory estoppel only suspend rights?

One final possible limitation exists but this is debated and that is whether the principle only suspends rights or not. In High Trees the impact was to suspend rights and although any claim on the lost revenue was lost the original terms could be reinstated. The case of Tool Metal Manufacturing Co Ltd v Tungsten Electric Co Ltd [1955] 1 WLR 761 supports that idea and that once notice has been given to revive the original terms then it will be effective. Both of those cases though related to ongoing obligations and so it is left unanswered if in a one off situation the principle could extinguish the rights or just postpone their operation. If it could extinguish rights then it could affect greatly the issue of part payment of a debt but it is important to note that this issue was not considered in Re Selectmove.