Consideration Flashcards
What are the two types of consideration?
Executory consideration: Where contracting parties make promises to each other to perform something in the future after the contract has been formed.
Executed consideration: Where, at the time of the formation of the contract, the consideration has already been performed.
What are the four rules governing consideration?
Consideration must not be past – it cannot generally have taken place prior to the promise to pay.
Consideration must move from the promisee – a party who has not provided consideration may not bring an action to enforce a contract.
Consideration need not be adequate – the court will not assess the adequacy of the
consideration.
Consideration must be sufficient – it must have some value in the eyes of the law.
What does it mean that consideration must not be past?
It is not generally possible to use as consideration some act or forbearance which has taken place prior to the promise to pay. Consideration must be given in exchange for the promise of the other
party. If the act/forbearance has taken place prior to the promise, then it cannot be in exchange for that promise.
What is the exception to the past consideration rule?
An exception to the past consideration rule exists where some prior act or service was provided by the promisee at the promisor’s request and it was always understood that payment would be made for that act or service.
3 conditions for the exception to apply:
(a) The act must have been done at the promisor’s request.
(b) The parties must have understood that the act was to be rewarded either by a payment or the conferment of some other benefit. These could be because it was expressly agreed that there would be a reward/benefit, or because such an understanding can be implied. The
latter is more likely in a commercial context.
(c) The payment, or conferment of other benefits, must have been legally enforceable had it been promised in advance. This case is conventionally cited as creating an exception to the rule of past consideration but the exception may be more apparent than real. The three conditions together indicate that, at some
point in the request, an act was done at person A’s request and with an understanding of reward/benefit for doing that. Perhaps at that stage (when the consideration is not yet ‘past’) a simple contract is formed, and all that happens later is that the precise value to be paid is fixed.
What does it mean that consideration must move from the promisee?
The rule that consideration must move from the promisee effectively means that a party who has not provided consideration may not bring an action to enforce a contract.
What does it mean that consideration need not be accurate?
According to the doctrine of freedom of contract, the courts will not interfere with a bargain freely reached by the parties. It is not the court’s duty to assess the relative value of each party’s contribution to the bargain. If the agreement is freely reached, the inadequacy of the price is immaterial.
What does it mean that consideration must be sufficient?
Consideration must have some value ‘in the eyes of the law’. It matters not how small that value is, so long as it is worth something. If a thing of value can be identified, then there will be sufficiency of consideration and the court will not enquire as to its adequacy.
When will an existing obligation be good consideration?
Executory consideration amounts to a party taking on an obligation - promising to do (or not do) something. Before entering into a contract, a party might already be under an obligation to do the same thing, perhaps due to:
(a) An existing contract between the same parties;
(b) A public duty; or
(c) An existing contract with a third party (ie not one of the parties entering into the contract – the existing obligation is owed to the third party).
When will there be good consideration for an obligation in an existing contract between the parties?
Not when a a party was already contractually bound to do any extra work to complete the task. If the party had agreed to exceed their existing obligations, then there would have been consideration.
What is the rule set out in Williams v Roffey?
(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.
What constitutes obligations under a public duty?
The principle in these circumstances is that merely carrying out a public duty imposed by the law will not amount to sufficient consideration.
The issue of sufficiency of consideration has also arisen in respect of rewards claimed by police officers for giving information. It was held that the duty of a police officer is the prevention of crime and they are not under a duty to provide information to a private individual. In doing so he went beyond his public duty and thus provided consideration for the offer of reward.
What constitutes existing obligations to a third party?
It is clear that the performance of the pre-existing duty owed to a third party will be regarded as sufficient consideration for a promise given by the promisor.
In The Eurymedon the claimant made an offer to the defendant that, if the defendant would unload the claimant’s goods from a
ship, then the claimant would treat the defendant as exempt from any liability for damage to the goods. In fact, the defendant was already bound to do this by a contract with a third party. A party offering this sort of consideration is offering to put itself at risk of double liability – if it fails to meet its obligations, it will face action from two parties.
Is part payment of a debt good consideration?
Where a debtor promises to pay part of their debt in return for a release from the remainder of their liability, they are simply offering to do something which they are already obliged to do: they are seeking to offer an existing obligation as consideration. This is not good consideration: the debtor remains liable even where the creditor has agreed to release them from further liability.
Simply paying a smaller sum than that owed will not be sufficient consideration.
In Foakes v Beer (1884), Mrs Beer had obtained a judgment against Dr Foakes for £2,090. Dr Foakes requested time to pay and the parties agreed in writing that, if Dr Foakes paid £500 at once and the balance by instalments, Mrs Beer would not ‘take any proceedings whatever on the judgment’. The agreement made no reference to the question of interest although by virtue of the Judgments Act 1838, all judgment debts carry interest until paid. Dr Foakes ultimately paid the whole amount of the judgment debt itself and Mrs Beer then claimed the accrued interest. Dr Foakes refused to pay on the basis of the written agreement whilst Mrs Beer claimed that the agreement was unsupported by consideration. The House of Lords held that Mrs Beer’s claim should succeed – the agreement was unsupported by
consideration.
When does Foakes v Beer not apply?
The rule in Foakes v Beer is only applicable if the promise of the creditor to accept a lesser sum is unsupported by fresh consideration from the promisee. However, if, at the creditor’s request, some new element is introduced, then this will amount to good consideration, and the court will not enquire as to the value of the new element. Examples might be payment at a different place, or at a different time or by providing a different thing in place of money.
Payment of a lesser sum by a third party
Where a third party enters into an agreement with a creditor, by which the creditor accepts payment by the third party of a lesser sum than the debt in full satisfaction of the debtor’s obligation, the creditor cannot sue the debtor for the difference.
In Williams v Roffey, consideration for a promise to pay was found in the practical benefit obtained from the other contracting party completing its contracting obligations.
This case created a clear dividing line between promises to pay more for an existing contractual obligation, where practical benefit can be applied, and promises to accept less than your legal rights, where it cannot.
The court acknowledged that part payment of a sum already due is not normally good consideration. However, the judges agreed that there was sufficient consideration. Their justification was that the landlord obtained a practical benefit by keeping the tenant in the property (compared to leaving the property vacant). This benefit went beyond the advantage of receiving prompt payment of a part of the arrears and a promise that it would be paid the balance over the coming months. The court also considered the fact that the landlord was not under economic duress from the tenant.
What is promissory estoppel?
Most commonly, promissory estoppel is relied on to create an exception to the rule that part payment of a debt without fresh consideration does not discharge the debt obligation.
Promissory estoppel is an equitable doctrine that effectively allows a promise to be enforced despite not being supported by consideration. In essence, promissory estoppel aims to protect a party who has relied on such a promise. Equity prevents, or ‘estops’, the promisor from going back
on their promise in situations where the promisee has relied on it. Many of the instances in which promissory estoppel is invoked involve part payment of a debt. In such a case, a debtor may seek to defend a debt action against them by arguing that they have relied on a promise by the
creditor that they will not require the debt to be paid in full. However, promissory estoppel is not limited to such circumstances.
Key case: CLP Trust v High Trees [1947]
In 1937, the plaintiff landlord let a block of flats to the defendant tenant on a 99-year lease at a ground rent of £2,500 a year. When war commenced in 1939, only about one third of the flats had been let and the tenant was having difficulty paying the rent. Consequently, in 1940, the landlord
agreed in writing to reduce the ground rent to £1,250, while the difficulties in letting the flats continued. The parties did not specify how long the reduced rent would operate for and there was no consideration for the reduction. By 1945, the flats were fully let, and the tenant continued to pay the reduced rent. The landlord sought payment of the arrears for the last two quarters of 1945, from the time the flats were fully let, and for full rent for future years. Denning J held that the landlord should succeed in their claim. Although, the landlord was not seeking to obtain arrears for the war years, when the problems with letting the flats existed, Denning J considered, in obiter, whether such an action would succeed.
Denning J concluded that had the landlord sought the full rent from 1940 to 1945 this action would fail. In reaching this conclusion, Denning J relied on the doctrine of promissory estoppel.
Denning J stated that where a promise was made which was intended to create legal relations and which, to the knowledge of the person making the promise, was going to be acted on by the person to whom it was made and which was in fact so acted on, then the promise would be binding. The tenant could rely on the defence of promissory estoppel to prevent the landlord from going back on their promise to accept reduced rent during the war years when the flats were not fully let.