Consideration Flashcards
1
Q
Definition of consideration
A
- The element of exchange in a contract.
- Classic definition by Lush J in the case of Currie v Misa
> a valuable consideration in the eyes of law may consist either in some right, interest, profit or benefit to one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other - Sir Frederick Pollock in Dunlop v Selfridge
> an act of forbearance by one party, or the promise thereof is the price for which the promise or the other is bought, and the promise thus given for the value is enforceable.
> the price of the promise - Combe v Combe
> During the divorce process, a husband promised to pay his wife a tax-free sum of £100 each year to represent a permanent maintenance payment.
> The wife was aware that the husband was not in a good financial state and made no claim to this payment.
> Several years later, she brought an action to claim the arrears that were owed under their agreement.
> The court held that a party could not revert on an earlier promise made, it was required to consider whether the husband could withdraw from his earlier promise to pay the wife the sum of money.
> The court has to understand whether the wife had given consideration in return for the sum of money that had been promised previously, despite the fact she had not claimed for the money for several years.
> No consideration for defendant’s promise to pay ex-wife £100 per year even though in reliance on that promise she had not applied to divorce court for maintenance and in that sense she suffered a detriment.
> This is because detriment did not constitute consideration because the husband did not request the wife (express or implied) to refrain from taking the maintenance payment (no exchange of promise).
> The court held that the wife could only enforce her agreement for the payment which was promised by the husband if she had given consideration.
2
Q
First type of consideration
A
Executory
- A promise to do something in the future.
- A promise made for a promise.
- Example, mutual promises.
3
Q
Second type of consideration
A
Executed
- An act wholly performed at the time the contract is made.
- When one of the parties has done all that is required of them, leaving the outstanding liability on the other party.
- Carlill v Carbolic Smokeball
> the defendant, Carbolic Smokeball placed an advertisement in a newspaper for their products, stating that any person who purchased and used their product following the instructions but still contracted influenza would be entitled to a £100 reward.
> the advert further stated that the company had demonstrated its sincerity by placing £1000 in a bank account to act as a reward.
> the claimant, Mrs Carlill, this purchased some smoke balls and, despite proper use, contracted influenza and attempted to claim the £100 reward from the defendant.
> defendants contended that they could not be bound by the advert as it was an invitation to treat rather than an offer on the grounds that the advert was: mere ‘puff’ and lacking true intent; that an offer could not be made ‘to the world’; the claimant had not technically provided acceptance; the wording of the advert was in sufficiently precise; and that there was no consideration, as necessary for the creation of a binding contract in law
> the Court of Appeal found for the claimant, determining that the advert amounted to the offer for a unilateral contract by the defendants. In completing the conditions stipulated by the advert, Mrs Carlill provided acceptance.
> the court further found that: the advert’s own claim to sincerity negated the company’s assertion of lacking intent; an offer could indeed be made to the world; wording need only be reasonably clear to imply terms rather than entirely clear; and consideration was identifiable in the use of the balls
4
Q
Third type of consideration
A
Past consideration
- Something already completed before the promise is made.
- Not valid consideration in the eyes of law as it cannot be proved that a bargain actually existed if consideration is given before the agreement.
> if the promise is made after the consideration was given, the promise can only be regarded as an expression of gratitude and is not a binding contract - GR: past consideration is not a good consideration
> Roscola v Thomas
» claimant bought a horse from the defendant
» after the purchase of the horse, the defendant told the claimant that the horse was free from vice
» however, in truth, the horse had a very bad temper and was vicious
» claimant found out and sued the defendant for breach of contract
» the court held that the claimant failed to prove breach of contract as the defendant’s statement was made after the sale was completed, and there was no consideration for it to become a binding contractual warranty
» Lord Denman CJ said that it may be taken as a general rule, subject to exceptions that, the promise must be coextensive with the consideration.
» In this case, the only promise that would result from the consideration, and be coextensive with it, would be to deliver the horse upon request. - Exception: past consideration can be valid consideration when certain conditions are satisfied.
> Conditions 1 and 2: there must be an earlier (implied or expressed) request to carry out the act
» Lampleigh v Braithwaite
»> Braithwaite was accused of killing a man and asked Lampleigh to get him a king’s pardon
»> this Lampleigh achieved, at considerable expense to himself.
»> Braithwaite, in gratitude, promised to pay him £100, which he in fact never did.
»> Lampleigh claimed that there was a contract.
»> he succeeded because the service was requested by the promisor even though no price mentioned at the time, but clear that both parties would have contemplated a payment. The later promise to pay was evidence of this.
»» the later express promise secures the reward in relation to the earlier promise, so that the consideration is not past
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> Condition 3:
» Lord Scarman in Pao On v Lau Yiu Long laid down the conditions as follow:
»> the act must have taken place at the promisor’s request
»> the parties must have understood that the act was to be remunerated, either by payment, or the conferment of some other benefit
»> the payment or conferment of benefit must have been legally binding
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Summary:
> the service was requested by the promisor
> parties would have contemplated a payment
> promises must be legally enforceable
5
Q
Consideration must move from the promises
A
- Promisee is the person whom the promise is made.
- GR: someone cannot sue on a contract to which they are not a party.
> Dunlop Pneumatic Tyre Co v Selfridge
» Day, on the request of Dunlop, inserted a term prohibiting Selfridge from reselling the tyres below list price
» Selfridge broke the terms and Dunlop sued for breach of contract
» Selfridge argued that Dunlop could not enforce the contract as Dunlop was not part of the agreement between the dealer and Selfridges
» the court held that even if Day had acted as agents for Dunlop, Dunlop could not enforce the contract as:
»> they had not provided any consideration for the promise by Selfridge and therefore could be no binding contract between the parties
»> only a party to a contract can claim upon it
»» Dunlop was not listed as an agent within the contract and could therefore not be included as a valid third-party who had the rights to claim on the contract - GR: a person cannot sue or be sued under a contract unless they have provided consideration
> Tweddle v Atkinson
» two fathers of an engaged couple who were about to be married each agreed to pay the couple a sum of money
» the woman’s father died before making the payment, and her husband sued the estate
» as he was not party to the contract, he was not successful - Exception: collateral contracts which is a contract that runs parallel to the main contract (side-by-side contract); when a promise is made of relevance to the contract by a person who is not party to the contract but derives a benefit from it
> Shanklin Pier Ltd v Detel Products Ltd
» the plaintiffs who wished to have their pier painted, were given some assurances from the paint manufacturer who said that their paint would be good for the pier
» the pier owner then stipulated in the contract with the contractor that they were to use that paint when doing the pier
» the paint turned out to be unsuitable and the pier owner successfully sued the manufacturer for breach of the undertaking as the manufacturers had derived a benefit from the promise despite not being a party to the contract
6
Q
Consideration must be sufficient need not be adequate
A
- Sufficient means that what is being supplied as consideration (such as money, a service or an object) must be of the type that is regarded in law as capable of supporting the contract; something of value in the eyes of law.
- Court looks to see whether purported consideration contains any value.
> if it sees some value, it will not be concerned with the accuracy of value - GR: Chappell v Nestle
> defendants, Nestle, contracted with a company manufacturing gramophone records to buy several recordings of music
> plaintiffs, Chappell & Co., held the copyright in these recordings
> Nestle offered to sell these records at a discount price to anyone presenting three wrappers from their chocolate bars
> the wrappers themselves were worthless and were thrown away by Nestle
> plaintiffs sought an injunction restraining the manufacturers and sale of the records because they breached copyright
> defendants argued that the wrappers were part of the consideration and this was not covered by S8 Copyright Act 1956, which only applied to monetary sales
> the issue was whether the wrappers were consideration for the sale of records or whether they were merely a qualification for buying the records
> the House of Lords held that the wrappers did form part of the consideration for the sale of records despite the fact that they had no intrinsic economic value in themselves
> therefore, as the wrappers had no monetary value, the sale was not covered by S8 1956 Act, and the Lords found in favour of the defendants - GR: Ward v Byham
> father of an illegitimate child wrote to the mother from whom he was separated, saying that she could have the child and an allowance of £1 per week if she can prove that the child was ‘well-looked after and happy’.
> the court held that the mother was entitled to enforce the promise because in undertaking to see that her child was ‘well-looked after and happy’ she was doing more than her legal duty to maintain the child
> this is an obliterated dictum
> Lord Denning based on the ground that mother provided consideration by performing her legal duty to maintain the child - Rule: consideration must be sufficient and hence must have some value in the eyes of the law
- Traditionally, doing something which one is already legally bound to do, cannot amount to good consideration.
7
Q
Performance if an existing duty imposed by law
A
- GR: a promise to perform a legal duty and nothing more is not sufficient consideration.
> Collins c Godefroy
» a policeman was subpoenaed to attend court.
» it was important for the defendant that he attended and so he offered the policeman money to ensure that he did so
» there was no consideration, the witness had a public duty to attend
» therefore this agreement was not contractual and unenforceable - Exception: if a promisee exceeds his legal duty, he provides consideration.
> award v Byham
8
Q
Performance of existing duty imposed by contract
A
- GR: if a promisee performs existing contractual duty owed to the promisor, thus is not sufficient consideration.
> Stilk v Myrick
» Stilk was contracted to work on a ship owned by Myrick for £5 a month, promising to do anything needed in the voyage regardless of emergencies
» when the ship was docked, two sailors of an 11-man crew deserted the ship, and the captain offered the remaining crew their salary if they sailed the ship safely home
» upon arrival at the home port, the owners refused to pay the extra wages
» the court held the promise was not binding. The sailors were bound by their existing duty to sail the ship home, and gave no extra consideration. - Exception: where the claimant does something in excess of existing duties.
> Hartley v Ponsonby
» only 19 members of a 36-man crew remained
» a similar promise to pay more money for the safe return trip of the boat was made
» it was held that the promise could be enforced, because the significant reduction in numbers made the voyage far more dangerous
» this meant that the crew were discharged from their original agreement and were free to enter into a new one - Privy Council has ruled that a promise to perform an existing obligation that is made to a third party can be valid consideration for a new contract.
> Pao On v Lau Yiu Long
» Lau wished to purchase a property owned by Pao; the property was in fact Pao’s main asset
» a contract was entered into, whereby Lau’s company would buy a large number of shares in Pao’s company
» there was a clause in the contract that Pao should retain 60% of the shares for at least one year, to avoid possible panic in the trading of such a high volume of shares
» Pao wanted a guarantee that the shares would not suddenly fall in value, and a subsidiary agreement was entered into in which Lau would buy back 60% of the shares at £2.50
» Pao subsequently realised that this might benefit Lau more if the shares rose in value, and refused to carry out the contract unless the subsidiary agreement was scrapped and replaced by a straightforward indemnity by Lau against the fall in value of the shares
» Lau could have sued at this stage for breach of contract but feared loss of public confidence and agreed to the new terms
» the shares fell in value
» Lau refused to honour the agreement and Pao sought to enforce the indemnity
» Lau’s defence was that the indemnity was past consideration and that Pao had given no consideration, as he was only doing what he was bound to do under the main agreement
» as to the defence of past consideration, the Privy Council applied that the 60% of shares should not be sold for one year carried with it an implied promise to Pao
» as to the defence that there was no consideration, the Privy Council found that this also failed - by continuing the contract, Pao was protecting the credibility and financial standing of Lau’s company, and the price payable in return for this was the indemnity - Exception: the courts now seem to be taking a different approach to the payment of additional consideration.
> it may be argued that where the party promising the additional reward has received a ‘practical’ benefit, that will be treated as consideration even if, in law, he has received no more that he was already entitled to under contract
> a recent exception to the basic rule occurs where the party making the promise to pay extra receives an extra benefit from the other party’s agreement to complete what he was already bound to do under an existing agreement
> Williams v Roffey Bros & Nicholls Contractors
» defendants were building a number of flats, and subcontracted the carpentry to the claimant for £20,000
» claimant had in fact under-quoted and ran into financial difficulty
» defendants had a clause in their contract for building the flats saying that they would be liable to pay money if the flats were not ready on time
» claimant said he would not be able to complete the carpentry on time, so the defendants offered him another £10,300 to do this
» the work was completed on time but the defendants refused to pay the extra money
» the claimant was only doing what he had been contracted to do
» it was held that the defendants were gaining the benefit of not having to pay the penalty for not completing the work on time
» three benefits conferred on defendants by claimant:
»> defendant continued work
»> avoided penalty
»> avoided the trouble and expense of employing another carpenter
» Williams was providing consideration for the work merely by completing his existing obligations
» this is a ratio decidendi
» there was no attempt on claimant’s part to extract the extra money by threats or coercion
» the rules of economic duress would in any case have prevented him from succeeding if there were such findings when Williams completed the work and Roffey failed to pay extra, his claim to the money succeeded - Practical benefit principle in Williams v Roffey is limited to its facts
> Re Selectmove
» the Inland Revenue petitioned the court for a winding-up order in respect of a company, Selectmove, which had accrued arrears in the tax it owed under the PAYE system of tax collection
» the company appealed on the grounds that a tax collector had met with the company and agreed that the company could pay the arrears in instalments instead of being wound up
» the Inland Revenue argued that the tax collector had no authority to make an agreement which bound the Revenue and there was no consideration for this agreement as the company was only paying what they owed already
» the company argued that, according to Williams v Roffey Bros & Nicholls Contractors, where an agreement was varied, there would be good consideration if the other party obtained some practical benefit from the new arrangement
» the Revenue obtained a practical benefit as if the company had gone into liquidation, it might not have received as much tax back
» the tax collector lacked actual authority to bind the Revenue. Therefore, the agreement was not binding.
» Gibson LJ said that Williams v Roffey Bros only applied to cases where work was done or goods supplied.
» to extend it to debts would go against Foakes v Beer, which expressly said that a practical benefit was not good consideration in law
9
Q
Performance of existing duty owed to third party
A
- Shadwell v Shadwell
> claimant was engaged to marry; this is a binding contract with a duty owed to his wife to be
> claimant’s uncle promised to pay the claimant, if he married, £150 per year of their joint lives
> the uncle died after 18 years owing six annual payments and the claimants claimed the arrears from his uncle’s executors who denied that the claimant had given consideration for the promise
> the court held that there was good consideration for the promise by marrying his wife, despite the fact that the marriage had already occurred when the promise was made
> there was good consideration in performing a pre-existing duty, so long as it was with a third party - The same consideration can only be used once against one person, it can be used as consideration to different promises from different people.
10
Q
Sufficiency of consideration and part payment of debts
A
- Rule in Pinnel’s Case
> payment of a smaller sum will not discharge the duty to pay a higher sum
> the creditor will always be able to issue proceedings for the outstanding money - GR: part payment of a debt is not valid consideration for a promise to forgo the balance.
> Foakes v Beer
» claimant owed Julia Beer the sum of £2090 after a court judgment
» Beer agreed that she would not take action against Foakes for the amount owed if he signed an agreement promising to pay an initial sum of £500 and £150 twice yearly until the whole amount was paid back
» Foakes tricked Beer into an agreement where she allegedly waived any interest on the amount owed
» Foakes paid back the principal but not the interest, but Beer sued him for the interest
» the Court of Appeal and the House of Lords found in favour of Beer. They reasoned that although the agreement did not contemplate the interest owed, it could still be implied given an enforceable agreement. However, the promise to pay a debt was not sufficient consideration as there was no additional benefit moving from Foakes to Beer that was not already owed to her
» the agreement reached amounted to part payment of debt
» the common law rule contained in Pinnel’s case was confirmed by the House of Lords - Exceptions to the rule in Pinnel’s Case:
A. Where the promise to accept a smaller sum in full settlement is made by deed, or in return for consideration
B. Disputed claims - where the debt and amount owed is disputed
C. Unliquidated claims - where the amount is uncertain
D. Accord and satisfaction - an agreement to accept something other than the money from existing debt (may amount to good consideration)
> In British Russian Gazette v Associated Newspaper, ‘Accord and satisfaction is the purchase of a release from an obligation whether arising under contract, by means of any valuable consideration, not being the actual performance of the obligation itself. The accord is the agreement by which the obligation is discharged. The satisfaction is the consideration which makes the agreement operative.’
> it ends the contract by both parties agreeing to release each other from the obligations under the original contract
> example, where debtor does something different, i.e., where payment is made at the creditor’s request:
» at an earlier time
» at a different place
» by a different method
»> payment by cheque is not payment by a different method
»> D and C Builders v Rees
»»The builders were owed £482 for work they had done.
»» After several months of waiting for payment, during which they suffered severe financial problems, the builders were asked to accept a cheque from the defendant for £300 in final payment, which they reluctantly did.
»» The builders subsequently sued for the balance and were successful. They were not prevented by the agreement to accept less, which in the event was extracted due to pressure.
»» Rule in Pinnel’s Case will not apply where the creditor is giving into pressure by the debtor to accept less.
» where payment is accompanied by a benefit of some kind
E. Composite agreement - pay % to creditor in full settlement
> An agreement among the creditors of an insolvent debtor to accept an amount less than they are owed, in order to receive immediate payment.
