Chapter 2 - Formation of Contract (Part 2)

Question 1

What is consideration?

Answer 1

Every agreement (offer + acceptance) comprises a promise to do or not to do smth. Promises are legally blinding only if there is an exchange of ‘something for some other thing”. This ‘something for some other thing” is called consideration.

It is some benefit or profit accruing to one party or some detriment or loss suffered or undertaken by the other party.

All contracts require consideration to be legally binding, with the exception of deeds.

Question 2

What are the three types of considerations?

Answer 2

Executory, executed , Past

Question 3

What is executory consideration?

Answer 3

Executory- The promise to do something in the future.

When the contract is made, the promiser had not executed his promise.

E.g. promisor promises to deliver 10,000 tons of steel bars in return for a price to be paid by the promisee. The steel bars have not been delivered yet.

Question 4

What is executed consideration?

Answer 4

executed - when one party makes the offer or acceptance in such a way that he has fulfilled his liability under the contract.

E.g. seller require buyer to send in cash together with the order fork for the purchase of a vacuum cleaner, with the delivery to take place on a future date.

Hence, the consideration to be performed by the buyer is executed after the buyer sends in the cash with the order form.

Question 5

Is “past consideration” “good consideration”? What are the two conditions?

Answer 5

No, ‘past consideration” is not “good consideration”.

Past consideration can be considered good consideration if two conditions are satisified.

1) The other party must have requested for the act to be performed.
2) Both parties must have contemplated at the time of contract that payment be made.

Question 6

What are the four rules on consideration?

Answer 6

1) Consideration must be real
2) Past Consideration is not good consideration
3) Consideration must move from the promisee
4) Consideration must be sufficient but need not be adequate.

Question 7

What is “Consideration must be real?” and name some examples.

Answer 7

This means that consideration, however small, must be of some value. It should not be illusory and must be capable of being performed.

E.g. #1 - Acts of Love and Affection or to behave as a good son and not complain does not suffice as consideration

E.g. #2 - Acts done out of a moral or social duty. A fireman rescuing a victim from a ranging fire is not valuable consideration as he is employed to do it.

Question 8

What is “Past Consideration is not good consideration”?

Answer 8

When an act has already taken place in the past and a promise is made in exchange for that act subsequently (later), there is no value given for the promise.

Consideration must be given in return for the promise or act of the other party. An act done and a promise given later cannot form good consideration.

For e.g. pg 13 of chapter 2

Question 9

What is “consideration must move from the promisee”?

Answer 9

This means that the person to whom the promise is made must furnish the consideration.

The promisee must show that the consideration ‘moved’ from (was provided by) him. A third party cannot derive any benefit or incur any liability on a contract to which he is not a party to. If a person had given nothing, he cannot enforce the promise if it is not kept.

This is also known as doctrine of principle of privity of contact ; only parties to the contract can sue and be sued.

Question 10

What is “Consideration must be sufficient but need not be adequate” ?

Answer 10

Parties to a contract have the freedom to negotiate or decide on the bargain. As long as some value is give, it does not matter whether it is proportional in value to the thing given in return.

Legally, the word “sufficient” is not the same as “adequate”.

Question 11

Is sufficient consideration upheld by the courts as good consideration or not?

Answer 11

Yes, sufficient consideration is upheld by the courts as good consideration.

Question 12

What are 2 examples of sufficient consideration?

Answer 12

1. Forbearance to sue

2. Performance of existing contractual duty to a third party

Question 13

Explain on “forbearance to sue?”

Answer 13

Generally goods, money. property and services are sufficient consideration.

Sometimes, forbearance to sue someone or enforce a legal claim may also constitute valuable consideration.

E.g. Motorist ‘giving up his right to take legal action against an errant cyclist, in exchange for compensation.

Question 14

Example of “Performance of an existing contractual duty to a third party?”

Answer 14

Shadwell v Shadwell (1860)

Question 15

What are 3 examples of insufficient consideration?

Answer 15

1. Moral Obligation
2. Performance of a duty imposed by law
3. Performance of a contractual duty owed to promisor (promising to pay more)

Question 16

Explain on “Moral Obligation”

Answer 16

A promise to reimburse plaintiff out of gratitude or moral obligation even with the noblest of intentions cannot be enforced as it lacks good consideration.

Question 17

Explain on “Performance of a duty imposed by law”

Answer 17

When a promisee already owes the promisor a legal duty, then performing that duty cannot be called good consideration as he is merely performing a duty imposed by law.

Question 18

Explain on “Performance of a contractual duty owed to promisor”

Answer 18

The promise to pay for the performance of a contractual duty already owed to the promisor will be void for want of consideration. This is because nothing is done beyond the scope of the obligation.

Question 19

Explain on the “payment of a lesser sum/part payment of a debt?”

Is part payment of a debt good consideration?

Answer 19

Part payment of a debt is not good consideration for the promise to discharge the entire debt.

When a debtor seeks to settle a debt by part payment with the agreement of the creditor, the debtor has given no consideration for the creditor’s promise to cancel the balance of the debt.

Therefore the debtor cannot enforce this promise, if the creditor subsequently changes his mind (and wants to be repaid in full).

However, this resulted in unfairness in many situations and the courts have developed exceptions to this rule.

Question 20

What are the exceptions to the part payment rule?

Answer 20

1. Payment before the due date
2. Payment at a different place
3. Payment in the form of a substitute or gift of value to the creditor
4. Promissory Estoppel

Question 21

What is promissory estoppel?

Answer 21

Promissory Estoppel is an equitable doctrine based on the principal of fairness which prevents a person from going back on his promise.

Promissory Estoppel can only be used a shield and not a sword. This means it can only be used to defend a claim and not to initiate a new cause of action.

Question 22

What are elements required for promissory estoppel to be established?

Answer 22

The following four elements have to be established

1) The parties have an existing legal relationship
2) There must have been a clear promise made
3) The promisee relied on that promise to his detriment
4) It would be unfair for the promisor to go back on his promise.

Question 23

What is the Contracts (Rights of Third Parties) Act?

Answer 23

The Contracts (Rights of Third Parties) *CRTPA Act provides a statutory exception by allowing a third party to enforce a contract.

The third party has all the rights under the contract as if he were a party to the contract, even if he had not furnished consideration.

Question 24

What are either of the 2 condition in order for a third party to enforce a contract provided?

Answer 24

1) It is expressly stated (in the contract) that the third party had the right to enforce the contract or
2) It (the contract) is for the benefit of the third party ad the parties had intended for him to benefit.

Question 25

What is “intention to create legal relations?”

Answer 25

Before a contract can be legally enforceable, it must be shown that the parties had intended the contract to be legally binding between them. Thus creates rights and obligations between the parties. If the parties expressly state that intention, the courts will respect it.

Question 26

What is used to determine whether or not an intention to create legal relations exist?

Answer 26

An objective test is used, whether a reasonable person looking that all the facts of the case would think that there was such an intention. It is not determined by the subjective intention of the parties.

Question 27

What are the 2 presumptions the court will make when it is unclear what the intention of the parties is?

Answer 27

1) In commercial and business agreements, there is an intention to be bound.
2) In domestic and social agreements, there is no intention to be bound.

Question 28

Explain on “in commercial and business agreements, there is an intention to be bound.”

Answer 28

The law presumes that there is an intention to be bound for the purposes of efficacy of business.

The presumption may be rebutted if there is contrary evidence on the facts. The use of the words “subject to contract”, or “in honour only” or other equivalent words in a business agreement rebuts the legal presumption.

Question 29

Explain on “In domestic and social agreements, there is no intention to be bound.”

Answer 29

In domestic and social agreements, there is always a presumption that the parties do not intent to create relations. These agreements usually cover close friends or family members.

The general presumption when family members for example, husband and wife are living amicably, is that they have no intention to settle their domestic issues in court. However, the legal presumption can be rebutted if there are no facts to the contrary.

Question 30

Name the case study/example on “In domestic and social agreements, there is no intention to be bound.”

Answer 30

Merritt , Merritt (1970)