Consideration Flashcards
I – Consideration
- Orthodox view
- Criticisms of the doctrine
- Support of the doctrine
- Orthodox view = consideration is about reciprocity or bargains (in order to be entitled to enforce a promise, a promisee must have given something in return) → a bargain is enforceable, whereas a promise to make a gift is not unless under deed.
- Criticisms of the doctrine:
(i) It is too narrow in scope so fails to give effect to promises that ought to have legal effect (Dawson)
(ii) It is too technical
(iii) It is divorced from commercial reality (but this question usually isn’t at issue in commercial transactions because lawyers can relatively easily ensure that consideration is provided, and the law does not (in general) inquire into the adequacy of consideration) or just use a deed)
(iv) It is difficult to reconcile with any modern theoretical model of contract law
(vi) It is over-broad and its function can more effectively be achieved by more specific doctrines like duress/unconscionability/intention to create legal relations - Support of the doctrine (Chen-Wishart):
(i) It expresses our deep instinct for reciprocity which enhances cooperation and division of labour while preserving social equilibrium
(ii) It represents the terms of engagement between equals deserving of respect – it keeps the state away from the private domain (where external coercion would distort the practice of gift-giving and so destroy much which is valuable about it)
I – Consideration
→ Currie v Misa (1875) LR 10 Ex 153 (definition)
- “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.”
I – Consideration
→ Atiyah (Introduction to the Law of Contract) 106-130
Key Qs which emerge from the doctrine of consideration:
- What purpose is served by consideration?
- Does it ensure that only bargains are enforced?
- Why are bargains more deserving of enforcement?
- Why can token benefits be enforced?
- Why are unilateral contracts enforced (where the person who performs an act is not involved in any exchange)?
6, Identifies situations where one party gained a benefit or the other suffered a detriment or both?
- But why are executory contracts binding from the moment of formation, where no party has received a benefit yet?
- Indeed consideration doesn’t fulfil any single function – as its historical development shows:
- Medieval times: [Stopped at 108]
I – Consideration
A - Something of value (consideration must be sufficient but need not be adequate)
Who decides whether consideration is sufficient?
ϖ 1 - Where the consideration is promise to pay money for a service/product → nominal consideration (usually) sufficient
Nominal consideration is “just about the clearest possible indication that the promisor intended his promise seriously and intended to give the promisee a legally enforceable right” (Atiyah) because the person was probably instructed by a lawyer to do it (and if he were coerced other doctrines (duress) would vitiate it)
ϖ 2 - Where the consideration is promise to provide some non-monetary benefit → more complex
I – Consideration
A - Something of value (consideration must be sufficient but need not be adequate)
→ Chappell v Nestlé [1960] AC 87
Facts
and Viscount Simonds dissenting
- Facts: D, Nestlé, offered to supply records to anyone sending in a postal order for 1s 6d with three Nestlé wrappers. The question was whether the sending in of the wrappers was part of the consideration (YES) or merely a condition of purchase.
- the wrappers are valueless and thrown away, and the purchase of the chocolate bars is not necessarily part of the same transaction as the subsequent purchase of a record (because the “purchaser” could have acquired the wrapper through another, through a retail store… not necessarily through Nestlé itself)
I – Consideration
A - Something of value (consideration must be sufficient but need not be adequate)
→ Chappell v Nestlé [1960] AC 87
Lord Reid
- to determine the nature of a contract one must find the intention of the parties as shown by what they said and did. Nestlé’s intention was to use the records to increase their sales of chocolate by inducing people interested in this kind of music to buy chocolate that they otherwise wouldn’t buy.
- It doesn’t matter that some of the wrappers come from chocolate already bought or some buyers would have bought the chocolate anyway – where there is a large number of transactions we should not consider an isolated case where it would be impossible to say whether there was a direct benefit from the acquisition of the wrappers. Cannot divorce the sale of chocolate from supplying of records. The possibility that in some cases the acquisition of the wrappers does not directly benefit Nestlé should not require the court to exclude from consideration the cases where it did – even indirect benefit from advertisement.
I – Consideration
A - Something of value (consideration must be sufficient but need not be adequate)
→ Chappell v Nestlé [1960] AC 87
Lord Somervell:
- The wrappers are described as consideration in the offer (“they will help you to get smash hit recordings”) and the record itself. The fact that the wrappers when received are of no value to Nestlé is irrelevant – a contracting party can stipulate to whatever consideration he chooses. A peppercorn does not cease to be good consideration if it is established that the promisee does not like pepper and will throw it away.
It is not always easy to draw the distinction between condition and consideration:
I – Consideration
A - Something of value (consideration must be sufficient but need not be adequate)
→ Chappell v Nestlé [1960] AC 87
Lord Wedderburn (1959, CLJ)
- It is “notoriously difficult to set out satisfactory theoretical distinctions between bare promises of gifts subject to contingent conditions, and offers proper”
Chappell did not ask the court to enforce a contract, but the question of consideration was still of central importance… Nevertheless, did it hold that three chocolate bar wrappers would always be good consideration in whatever context, or was the court influenced by the fact that Nestlé had good
commercial reasons for asking for the wrappers? - Perhaps if there is no objectively good reason for asking for chocolate wrappers, it would not be good consideration? (MI seems to support Lord Reid’s view)
- Perhaps it is no concern of the law if a party chooses to ask for a performance which the others would regard as bizarre? (MI seems to support Lord Somervell)
Nevertheless, the courts do appear to care:
I – Consideration
A - Something of value (consideration must be sufficient but need not be adequate)
→ Thomas v Thomas (1842) per Patteson J
- “Consideration means something which is of some value in the eye of the law”
- Difficult to reconcile with Lord Somervell’s view. But the court should be slow to conclude that something which the parties believed to be of value is not in fact of value.
- Per Lord Wedderburn:
It is not open to the courts to speculate about whether it has any real value in the mind of the offeror – such an inquiry would approach perilously near to an investigation of motive. Provided it is not wholly illusory, the act becomes part of the consideration because it is asked for by the offeree.
Note, however, a New York case that adopts a different approach:
I – Consideration
A - Something of value (consideration must be sufficient but need not be adequate)
→ Hamer v Sidway (1891, NY) per Parker J
- The “contract” was to pay $5000 for nephew to stop drinking, using tobacco, swearing and playing cards for money until he should become 21, argued that it was void without consideration as the uncle obtained no benefit and the nephew suffered no detriment as he was actually benefited from the promise.
- Held that it was a valid contract as the definition of consideration is less about one party profiting than the other abandoning some legal right in the present or limits his legal freedom of action in the future as an inducement for the promise → in this case the son limited his freedom to drink and use tobacco.
I – Consideration
A - Something of value (consideration must be sufficient but need not be adequate)
→ Atiyah, “Consideration in Contracts: A Fundamental Restatement” (1971)
- The promise in Hamer has been held enforceable in America and is generally thought that it would be enforceable in England, even though there appears to be no benefit or detriment.
o No benefit: Possible to argue indirect benefit (gratification, uncle had his reasons…) but this is a matter of motives and not benefit. If it were a benefit, then many gratuitous promises would become enforceable simply because the promisor derives a sense of satisfaction from his generosity.
o No detriment: Treitel argues that he gave up a right, but in unilateral contract cases there need be no giving up of a right (ex. in reward cases even if the winner would have run just as effectively absent the promise of a reward, such a promise is still generally believed to be legally enforceable).
- Thus it appears that the promise may be enforced because, if the promisee is induced to act on it, it may appear to the courts just to enforce it – though a detrimental change of position is the usual reason for thinking it would be just, the absence of detriment does not by itself seem fatal.
I – Consideration
A - Something of value (consideration must be sufficient but need not be adequate)
→ Smith, The Law of Contract – Alive or Dead?
- Language of benefit and detriment, and the idea that consideration must be an economic benefit, is out of date → all that is necessary is that D should (expressly or impliedly) ask for something in return for his promise. If he gets what he asks for, there is consideration unless there is a vitiating factor.
- “Benefit” and “detriment” have no substantial meaning in light of the principle that the court will not inquire into the adequacy of consideration:
- Wrappers are good consideration, though they are of no value for me and you suffer no detriment from giving them away
I – Consideration
B - Past consideration
General rule = past consideration is not good consideration because of the bargain theory of consideration. Thus distinction between a bargain (I wash your car on the basis of an unexpressed bargain that you would pay me £X, then you promise to pay me £X → enforceable) and a gift followed by a promise to make a gift (I wash your car as a favour then you promise separately to pay me £X as a gift → unenforceable).
I – Consideration
B - Past consideration
→ Eastwood v Kenyon (1840) (past consideration is not good consideration)
- Facts: C, guardian of Sarah, took out a loan and spent it for the benefit of Sarah, which she promised to repay when she became of full age. Sarah later married D and he promised that he would discharge C’s liability to the lender. Issue was whether the promise was binding.
- Held (Lord Denman CJ):
(i) The promise was not binding because the consideration was “past and executed” long before the express promise to pay was made.
(ii) Indeed C performed services that were of value to Sarah and D promised to pay for them, but there was never a bargain between them to the effect that if C performed the services, D would pay for them – instead, there was one event (loan by C) followed by a second event (D’s promise to reimburse C) but no sufficient connection between the two to constitute a bargain to this effect. C had merely conferred a gift on Sarah, and her husband (out of gratitude or moral obligation) promised to repay the money borrowed, but the promise is unenforceable in law. - 3 The rule that past consideration is no consideration is subject to exceptions
- 3.1 ex. where the earlier act was performed at the request of the promisor (citing Lampleigh v Brathwait)
- 3.2 ex. where the promisor later ratifies an obligation which was not binding on him (ex. a child who ratifies a contract that was not binding on him during his childhood)
- 4 A promise to perform a pre-existing moral obligation cannot constitute good consideration.
I – Consideration
B - Past consideration
→ NOTE Atiyah (The Rise and Fall of Freedom of Contract, 1979)
- This is a “puzzling” decision – despite the whole trend of contract law in stressing the importance of the promissory basis, the Court invoked the doctrine of consideration, which “elsewhere had been reduced by this time to a bare technicality”, to defeat a clear and express promise!
- Three factors might have influenced this decision:
(i) Growing strength of positivism → reluctance of the courts to convert moral obligations into legal ones
(ii) Downgrading quasi-contractual duties → the decision might be significant not so much in denial of liability on the express promise, but in the denial of any pre-existing quasi-contractual duty, as part of a process (since 1840) of the courts cutting down on quasi-contractual liabilities consistently with the idea that one is not to be held liable for some benefit conferred upon his wife or child, unless authorized by him (and this authority must be contemporaneous with the conferring of benefit)
(iii) Disappearance of the idea that the binding nature of promises rests upon some pre-existing obligation → Lord Denman rejects the argument that a moral obligation can amount to consideration by arguing that all promises give rise to moral obligations, and the doctrine, literally applied, would eliminate the need for consideration altogether.
I – Consideration
B - Past consideration
PaO On v Lau Yiu [1980] AC 614 (exceptions to the rule that past consideration is not good consideration)
Facts/held
- Facts: C and D agreed to buy each other’s shares, and C agreed:
(i) that the market value of the shares was to be deemed at $2.50 and
(ii) that they would not sell D’s shares before a certain date to prevent a depression in value of the shares. - To protect C against the risk of drop in value of the shares, D entered into a subsidiary agreement, agreeing to buy back the shares before that date for $2.50.
- However, the agreement was advantageous for D because D could require C to sell back the shares at $2.50 even if the market value rose. When C discovered this, they informed D that they would not perform the main agreement unless the subsidiary agreement was replaced by a guarantee that only came into operation if the price of the shares fell below $2.50. D agreed to the terms because they were anxious to complete the transaction so that public confidence in their newly formed company would not be undermined.
- When the market value of the shares dropped, C sought to enforce the guarantee against D and D argued that there was no consideration and that there was duress.
- Held (PC): there was good consideration and no duress.
I – Consideration
B - Past consideration
PaO On v Lau Yiu [1980] AC 614 (exceptions to the rule that past consideration is not good consideration)
Lord Scarman:
- C contends that the consideration is not in reality a past one, because the instrument refers to the main agreement, so incorporates the promise to buy the shares and not sell them before the agreed date. Thus, at the time of the guarantee, the promise of the main agreement still lay in the future.
- An act done before the promise can sometimes be consideration for the promise if it is:
(i) done at the promisor’s request,
(ii) the parties understood that the act was to be remunerated by payment/other benefit,
(iii) and that the payment/benefit is legally enforceable had it been promised in advance. - All three features are present in this case.
I – Consideration
C - Pre-existing Duty Rule (Good consideration to promise to do something you’re already bound to do?)
Law is in a state of flux, but can identify three categories, with some important questions:
1) Is there any continued justification to differentiate between the categories?
2) Role of duress (perhaps reluctance to impose a duty is to protect the promisee from duress on the part of the promisor?)
3) Conception of benefit and detriment – if we adopt a view of “legal” benefit/detriment then it seems like the promisor is only getting what he was entitled to anyway, but if we use “factual” benefit/detriment then it seems different…
4) Should the law distinguish between formation and modification of contract?
I – Consideration
C - Pre-existing Duty Rule (Good consideration to promise to do something you’re already bound to do?)
ϖ 1 - Performance of a contractual duty owed to a third party → good consideration
→ Shadwell v Shadwell (1860) (performance of a contract with third party is good consideration)
- Facts: C engaged to marry a woman (a binding contract) in exchange for his uncle’s promise to pay him a sum of money.
- Was there consideration? There can be good consideration for fulfilling a pre-existing contractual obligation, as long as it is with a third party.
- Erle J: In looking at C’s loss (if he married the woman relying on the promise, then that is a type of loss, and so is if he had non-pecuniary loss (embarrassment etc.) or lowering of status) and D’s benefit (marriages are usually of interest to nearly relatives, and if he wanted C to marry the woman it may be regarded as an “inducement” to marry), they are both present, so there is good consideration.
- Boyle J (dissenting): A testator requesting C to marry is ample consideration, but this was not the case. Indeed, C may suffer loss due to the marriage, but this is not enough as D must also receive some gain, which was not the case here, because D knew that, at the time he wrote the letter, C was already legally bound to marry the woman, so it was not a marriage by request.
I – Consideration
C - Pre-existing Duty Rule (Good consideration to promise to do something you’re already bound to do?)
→ New Zealand Shipping v Satterthwaite, The Eurymedon [1975] AC 154 (ibid.)
- PC held that a shipper of goods had made a promise to D (stevedores) who unloaded its goods from a ship, that it would not sue them for any damage that was done to the goods while they were being unloaded. The PC held that the stevedores had provided good consideration for the shipper’s promise not to sue, because performance of their contractual duty (to a third party – the carrier) was good consideration.
More difficult is the case of a promise to perform (as opposed to actual performance) of a contractual obligation owed to a third party. In Jones v Waite (1839) the courts thought that it was NOT good consideration, but Pao o v Lau Yiu held that it was:
I – Consideration
C - Pre-existing Duty Rule (Good consideration to promise to do something you’re already bound to do?)
→ Pao On v Lau Yiu [1980] AC 614 (promise to perform a contract with third party is good consideration)
- Lord Scarman: “a promise to perform, or the performance of, a pre-existing contractual obligation to a third party can be valid consideration”, because the promisee obtains the benefit of a direct obligation.”
I – Consideration
C - Pre-existing Duty Rule (Good consideration to promise to do something you’re already bound to do?)
ϖ 2 - Performance of a contractual duty owed to the promisor → not clear
This concerns situations where A and B have a contract that B does something for A for £X and then B informs A that he can’t do it unless an additional £Y is paid, A promises but then refuses to honour the promise upon completion.
Traditionally, B cannot enforce the promise because he had not provided any consideration, but simply performed his existing contractual duty (Stilk v Myrick) but challenged by Williams v Roffey on the ground that the promisor received a practical benefit as a result of B’s performance, and that absent duress, there was no public policy objection to giving effect to the promise.
I – Consideration
C - Pre-existing Duty Rule (Good consideration to promise to do something you’re already bound to do?)
ϖ 2 - Performance of a contractual duty owed to the promisor → not clear
→ Stilk v Myrick (1809) 2 Camp 317 (not good consideration)
- Facts: Cs worked for D on a ship, in a contractual promise to do everything necessary in all emergencies for the trip. Two men deserted, and D promised to split their wages among those remaining if they took on the extra work. At the port of return, D refused to pay Cs the extra.
- Held: The promise is not binding because a pre-existing contract cannot be consideration for a new contract.
- Lord Ellenborough:
o Espinasse Report: Cs had already promised to do everything under all emergency, so there was no consideration in D promising the extra money. If the two crew had died, the remainder would have forced to work more – no reason for the difference because the crew deserted.
o Campbell Report: If D had discharged the two men, or had the Cs been free to stop work, then agreeing to the extra work might be consideration enough, but these weren’t the facts here – desertion is as much an “emergency of the voyage” as death.
Both reports are to be treated with caution, and multiple interpretations are possible. But if it were decided on the ground of want of consideration, then it appears that Lord Ellenborough only considered the detriment side of the equation and not whether the employer had gained any benefits from the promise. He also only considered that as a matter of law, Cs had only done what they were legally obligated to do, and not whether in fact Cs worked harder.
Contrast modern cases that focus on whether the promisor obtained a “practical benefit” from the promise:
I – Consideration
C - Pre-existing Duty Rule (Good consideration to promise to do something you’re already bound to do?)
ϖ 2 - Performance of a contractual duty owed to the promisor → not clear
→ Williams v Roffey [1990] 1 All ER 512 (may be good consideration if practical benefit and no economic duress or fraud)
Facts/held
- Facts: D contracted to refurbish 27 flats, and subcontracted C to do carpentry. C then said the contracting price was too low and that they weren’t going to be able to finish the work, and since D was going to be under a penalty if the flats weren’t finished on time, promised extra payment in exchange for finishing on time.
Held: C had provided good consideration even though he was merely performing a pre-existing duty (consideration consists of the practical benefits of timely completion).
I – Consideration
C - Pre-existing Duty Rule (Good consideration to promise to do something you’re already bound to do?)
ϖ 2 - Performance of a contractual duty owed to the promisor → not clear
→ Williams v Roffey [1990] 1 All ER 512 (may be good consideration if practical benefit and no economic duress or fraud)
- Glidewell J:
o At the time of Stilk v Myrick there was rigid adherence to a doctrine of consideration, but subsequent developments make it less relevant:
♣ Promissory estoppel → possible for a person who relies on a promise to make an additional payment for services which he is in any event bound to perform, to show that the promisor is estopped to rely on the absence of consideration
♣ Economic duress → if a contractor declines to continue contracted work unless the other party agrees to pay an increased price, the former may be guilty of securing the promise by taking unfair advantage of the difficulties he will cause if he doesn’t complete → policy arguments undermined
o Thus, the current state of the law is that where A and B have a contract for goods/services in exchange of money, and before completion B has reason to doubt whether A will complete, and B promises additional payment as a result of which B obtains a practical benefit or obviates a disbenefit, then absent economic duress or fraud, the benefit is capable of being consideration.
o This is not contrary to Stilk but merely refine and limit it, leaving the principle (where B secures no benefit from his promise) unscathed.
I – Consideration
C - Pre-existing Duty Rule (Good consideration to promise to do something you’re already bound to do?)
ϖ 2 - Performance of a contractual duty owed to the promisor → not clear
→ Williams v Roffey [1990] 1 All ER 512 (may be good consideration if practical benefit and no economic duress or fraud)
- Russell LJ:
o Advantages accruing to D: D recognized that the price originally agreed on was less than a reasonable price, and wanted to retain the services of C so that work would be done without need to employ another subcontractor. There was a need to replace the hitherto haphazard method of payment with a more formalized scheme.
o True that C did not undertake to do any additional work, but the terms were varied, and that variation was supported by consideration which a pragmatic approach to the true relationship between the parties demonstrates.
o Does not displace Stilk (a gratuitous promise remains unenforceable) but where a party undertakes to make a payment because it will gain an advantage arising out of the continuing relationship with the promisee, the new bargain will not fail for want of consideration.
I – Consideration
C - Pre-existing Duty Rule (Good consideration to promise to do something you’re already bound to do?)
ϖ 2 - Performance of a contractual duty owed to the promisor → not clear
→ Williams v Roffey [1990] 1 All ER 512 (may be good consideration if practical benefit and no economic duress or fraud)
- Purchas LJ:
o Stilk v Myrick remains valid as a matter of principle (a contract not under seal must be supported by consideration), so that where extra payment is promised in exchange for work done that the payee is already obliged to do, then unless some other consideration is detected then the agreement will not be enforceable.
o At the time of Stilk there were strong public policy reasons (not allowing crews to hold their masters to ransom) but modern cases rely on economic duress to deal with these situations.
o In this case, there was a clear commercial advantage to both sides from a pragmatic point of view. There was a risk that without the extra payment C would not or could not comply with existing obligations. Thus D secured their position commercially through the payment.
o Thus the modern position is that where both parties benefit from an agreement it is not necessary that each also suffers a detriment.
I – Consideration
C - Pre-existing Duty Rule (Good consideration to promise to do something you’re already bound to do?)
ϖ 2 - Performance of a contractual duty owed to the promisor → not clear
→ Williams v Roffey [1990] 1 All ER 512 (may be good consideration if practical benefit and no economic duress or fraud)
Commentary:
1) Scope of the case – all judges mentioned the “practical benefit”, what is that?
a. Not breaking the contract (Purchas LJ)? This would give no regard to the fact that D had purchased the right to C’s performance under the original contract, so that in the eye of the law they were already entitled to that performance.
b. Replacing the haphazard method of payment (Russell LJ)? This probably does amount to consideration so that the result of the case is rightly decided, but it is the dicta that consideration is provided by the work and not breaking the contract that are problematic.
2) Relationship with Stilk – all judges discuss it but don’t overrule it – on what basis?
a. Absence of duress or possibility of duress? → Then Stilk must be interpreted as deciding that there was consideration but the case was set aside for duress or public policy reasons.
b. No practical benefit? → Then Stilk must be interpreted as deciding that there was no consideration.
3) Role of duress – if the real fear in contractual modification cases is the fear that one party would exploit the vulnerability of the other to extract a promise of more pay, then should a distinction between modifications that are freely negotiated (enforceable) and those as a result of illegitimate pressure (non-enforceable) be drawn instead?
a. US v Stump Homes (US, Posner CJ): the requirement of consideration has a distinct function in the modification setting (though one it does not perform well) – to prevent coercive modifications. The rule that modifications are unenforceable unless supported by consideration strengthens one party’s position by reducing the other’s incentive to seek a modification, but it does so feebly, because the law does not require that consideration be adequate. The sensible course would be to enforce modifications regardless of consideration and use duress to deal with the problem.
i. NB UCC § 2-209(1) (only applies to sale of goods) makes modification of contracts not dependent on consideration (but other contractual modifications need consideration)
b. If this is correct, then does that mean we should (1) be readier to find the existence of consideration or (2) abolish consideration or (3) not apply consideration to modification cases so that consideration at the conclusion stage is enough?
i. Difficulty with (2) is that there is a difference between a promise to make a gift of £X and a promise to pay an extra £X in modifying a contract, because in the latter case there is already a contract and the danger of mistaking casual promissory language for an intention to be legally bound is slight.
ii. But difficulty with (3) is that the current doctrine of duress is unstable and it’s hard to determine whether duress has been applied to the facts of particular cases.
4) Abandonment of old contract? – Purchas LJ refers to the US case Watkins v Carrig (holding that there was no variation but an abandonment of the earlier contract and replacement by a second contract on real terms, both supported by consideration):
a. Applied by CoA in Compagnie Noga v Abacha (No. 2) per Tuckey LJ:
i. The difference is that if a rescinded agreement is replaced by a new agreement to perform the same obligations, it is not the original agreement which compels performance, but the new agreement. Stilk v Myrick only applies where there is variation and not rescission.
ii. There does not need to be a scintilla temporis between rescission and new agreement.
b. The distinction might be difficult to draw on the facts but important legal consequences.
5) Role of estoppel – all three judges make reference to estoppel and Russell LJ said he would have welcomed an argument that Ds were estopped from taking the position that their promise was non-binding. But note that here C did not need to rely on estoppel because his primary argument (consideration) succeeded – the wider a doctrine of consideration, the less the need for estoppel and vice versa.
6) Relationship with cases on third party and duty imposed by law – the judges drew on caselaw from both areas:
a. Glidewell J analysed Ward v Byham as where consideration is found in the father obtaining a “practical benefit” from mother’s promise that the child would be happy.
i. Thus this shifts attention away from the mother (and whether she was doing no more than contractual obligations) to the father
ii. But can’t take this argument too far – because if in Glasbrook the HL had concluded that the police had only done their legal duty, they probably wouldn’t have been entitled to charge the manager on the basis of a practical benefit!
b. Glidewell LJ also drew from Pao On v Lau Yiu (performance of a contractual obligation to third party) but this reliance was criticized by Colman J in South Caribbean v Trafigura because in Pao On consideration moved from the promisee because he has made himself liable to an additional party, whereas in two-party cases he has not undertaken anything that he wasn’t already obliged to do.
7) Relationship with part payment of a debt cases?
I – Consideration
C - Pre-existing Duty Rule (Good consideration to promise to do something you’re already bound to do?)
ϖ 2 - Performance of a contractual duty owed to the promisor → not clear
→ Antons Trawling Co Ltd v Smith [2003] 2 NZLR 23 (New Zealand)
- ‘We are satisfied that Stilk v Myrick can no longer be taken to control such cases as Roffey Bros… where there is no element of duress or other policy factor suggesting that an agreement, duly performed, should not attract the legal consequences that each party must reasonably be taken to have expected. On the contrary, a result that deprived Mr Smith [the plaintiff] of the benefit of what Antons [the defendants] promised he should receive would be inconsistent with the essential principle underlying the law of contract, that the law will seek to give effect to freely accepted reciprocal undertakings. The importance of consideration is as a valuable signal that the parties intend to be bound by their agreement, rather than an end in itself. Where the parties who have already made such intention clear by entering legal relations have acted upon an agreement to a variation, in the absence of policy reasons to the contrary, they should be bound by their agreement. Whatever option is adopted, whether that of Roffey Bros or that suggested by Professor Coote or other authorities, the result is in this case the same.’
I – Consideration
C - Pre-existing Duty Rule (Good consideration to promise to do something you’re already bound to do?)
ϖ 3 - Performance of a duty imposed by law → probably not, except Lord Denning who says yes
Traditionally, not good consideration (Collins v Godefroy per Lord Teterden CJ), but:
I – Consideration
C - Pre-existing Duty Rule (Good consideration to promise to do something you’re already bound to do?)
ϖ 3 - Performance of a duty imposed by law → probably not, except Lord Denning who says yes
→ Ward v Byham [1956] 1 WLR 496 (might be good consideration)
- Facts: Father of illegitimate child agreed to pay 1 pound weekly allowance provided the child is cared for and happy. Mother remarried and father stopped allowance. Mother tried to force the continuance of payment, and father argued that there was no consideration supporting his promise.
- Held: There is good consideration for the father’s promise.
- Lord Denning: The mother is only doing what she is legally bound to do. But a promise to perform an existing duty, or the performance of it, should be regarded as good consideration, because it is a benefit to the person to whom it is given.
- In this case, the father would get as much benefit from the mother as from a neighbor; he can’t get out of the promise by saying that the mother was under a duty to maintain the child.
- This is a case of unilateral contract (promise in return for an act) – once the mother embarked on the task of looking after the child, there was a binding contract.
- Morris LJ: The father was saying effectively that irrespective of the strict legal position, he asked that the child would be well looked after and happy, and that the child would be allowed to decide for herself whether or not she wanted to live with the mother. Upon these terms, the contract became operative. There was sufficient consideration.
I – Consideration
C - Pre-existing Duty Rule (Good consideration to promise to do something you’re already bound to do?)
ϖ 3 - Performance of a duty imposed by law → probably not, except Lord Denning who says yes
→ Williams v Williams [1957] 1 WLR 148
In Williams v Williams, Lord Denning once again came to the same conclusion, but not the other judges:
- Facts: a wife claims sums under a maintenance agreement where husband agreed to pay the wife a weekly sum so long as the wife (1) shall lead a chaste life, (2) indemnify the husband of all debts to be incurred by her and will not in any way thereafter pledge the husband’s credit, and (3) not sue the husband. The husband argued that there was no consideration, since clause 2 is worthless and clause 3 is unenforceable.
- Lord Denning:
o Clause 3 is void and is therefore not consideration.
o Clause 2: the husband claims that since the wife deserted him she would not be entitled to pledge his credit in any way so Clause 2 is worthless to him. However:
♣ Basis 1: a promise to perform an existing duty is sufficient consideration to support a promise, so long as there is nothing in the transaction which is contrary to the public interest.
• In this case, she might have sought to pledge her husband’s credit, in which case he might have been summoned before the magistrates or sued in the county court – he would have an answer to all these claims, but nevertheless be put through all the trouble, worry and expense of defending himself. The added safeguard against this worry, trouble and expense is good consideration.
• Thus, the promise to maintain herself during the time she is living separate from her husband constitutes good consideration.
♣ Basis 2: desertion is never irrevocable, so her right to pledge his credit is only suspended and not forfeited, and would be resurrected if she made an offer to return to D. Therefore, the forfeit was good consideration. - Hodson and Morris LJJ concurred but on Basis 2 only.
Thus, though Lord Denning attacked the pre-existing duty rule, the other judges were more circumspect (Morris LJ in Ward and Hodson and Morris LJJ in Williams) and both cases can be explained by the fact that C had done more than her existing legal duty (keep the child happy; suspension not forfeit).
But the question of whether one has done more than their legal duty can be difficult:
I – Consideration
C - Pre-existing Duty Rule (Good consideration to promise to do something you’re already bound to do?)
ϖ 3 - Performance of a duty imposed by law → probably not, except Lord Denning who says yes
→ Glasbrook Bros v Glamorgan CC [1925] AC 270
Facts/held
- Facts: A colliery manager applied for police protection for the colliery after a national coal strike, where the workers stopped work out of fear for their safety for want of police protection. The police superintendent thought that the level of protection asked for was unnecessary, so the manager promised to pay a sum for it, and the superintendent agreed. The manager then argued that there was no consideration.
- Held: there was consideration because the police had done more than their legal duty.
I – Consideration
C - Pre-existing Duty Rule (Good consideration to promise to do something you’re already bound to do?)
ϖ 3 - Performance of a duty imposed by law → probably not, except Lord Denning who says yes
→ Glasbrook Bros v Glamorgan CC [1925] AC 270
Viscount Cave LC:
Lord Carson (dissenting):
Lord Shaw:
- Viscount Cave LC: The question is whether the police authorities considered in good faith the level of protection asked for to be unnecessary (i.e. whether the superintendent, in refusing special protection unless paid, made a decision that a man in his position and with his duties could reasonably take).
- In this case it was additional and not substituted or alternative means of protection, so there was good consideration.
- Lord Carson (dissenting): In this case the demands of the manager was nothing in the nature of a luxury – the workers left and only came back after police protection started, and in this way a great disaster was avoided. It is difficult to define “special services” when there is actually being carried on an open invasion of the rights of subjects and where rights to property and work are threatened.
But if it is so difficult to define whether one has done more than their legal duty, then why not accept Lord Denning’s opinion?
- Why can’t performance of a legal duty amount to consideration? (1) It is against public policy that the performance of a public duty shall be a matter of private purchase, and (2) a promise to pay accepted in times of nervous alarm or anxiety would fail anyway on the ground of duress.
I – Consideration
C - Pre-existing Duty Rule (Good consideration to promise to do something you’re already bound to do?)
ϖ 3 - Performance of a duty imposed by law → probably not, except Lord Denning who says yes
→ Glasbrook Bros v Glamorgan CC [1925] AC 270
Commentary
The second rationale is narrower than the first (and would not hold in a case where a citizen freely agrees to pay the police for performance of his legal duty). But the public policy rationale applies with less force to Ward and Williams where no “public duty” is being turned into a matter of “private purchase”.
In either case this group of cases will probably come under pressure from the cases on performance of contractual obligations owed to the claimant.
I – Consideration
C - Pre-existing Duty Rule (Good consideration to promise to do something you’re already bound to do?)
ϖ 4 - Part Payment of a Debt
→ Foakes v Beer (1884) 9 App Cas 605
Facts/Held
- Facts: C obtained judgment against C for a sum, and was entitled to interest on the sum. Later, D asked C for more time to pay, and C made an agreement with D for immediate payment of part of the sum due and then £X periodically until the sum of the judgment (without interest) is entirely paid, in exchange for not taking any proceedings against D. One of the issues was whether, if as a matter of construction C had agreed to forego her claim to interest, the agreement was supported by consideration.
- Held (HL, by majority): it was not supported by consideration so C was entitled to recover interest.
I – Consideration
C - Pre-existing Duty Rule (Good consideration to promise to do something you’re already bound to do?)
ϖ 4 - Part Payment of a Debt
→ Foakes v Beer (1884) 9 App Cas 605
Earl of Selborne LJ:
Lord Blackburn:
Earl of Selborne LJ:
- On the face of the agreement no consideration is expressed except the present payment of a sum on account and in part of a larger debt then due and payable by law under the judgment. He did not contract to pay the future instalments, nor give any new security.
o Whether the promise of instalments could be consideration (NO): payment at those deferred dates, by the forbearance and indulgence of the creditor, of the residue of the principal debt and costs could not be a consideration for the relinquishment of interest.
o Whether the immediate part payment could be consideration (NO): payment of a lesser sum on the day (or after the day) in satisfaction of a greater cannot be any satisfaction for the whole (rule in Pinnel’s case), as by no possibility a lesser sum can be a satisfaction to C for a greater sum. - It might be preferable to treat release of a whole debt on payment of a sum that the creditor might be content to receive as generally binding, but it would be impossible without refinements which practically alter the sense of the word, to treat such a release as supported by new consideration.
Lord Blackburn:
- merchants or tradesmen do everyday recognize and act on the ground that prompt payment of a part of their demand may be more beneficial to them than insisting on their rights and enforce payment of the whole. [But he doesn’t dissent]
Note that the issue of construction might have influenced the findings on consideration:
I – Consideration
C - Pre-existing Duty Rule (Good consideration to promise to do something you’re already bound to do?)
ϖ 4 - Part Payment of a Debt
→ NOTE Treitel, Some Landmarks of Twentieth Century Contract Law
- What seems to have happened was that the Debtor’s solicitor dug a technical trap for the Creditor (i.e. the rule that recitals cannot control “clear” words in the operative provisions of a contract, i.e. “£2090 19s” not “£2090 19s plus interest”), and the HL arranged an equally technical rescue (Pinnel’s rule) – probably she did benefit in fact from the agreement (Lord Blackburn stressed this and was critical of the rule, and the other judges were unprepared to overrule it because it ‘has been accepted as part of the law of England or 280 years’ (unconvincing)). Sometimes the antiquity of a rule is a justification for retaining it (ex. legitimate expectations), but this rule is not – do people really rely on it, and if they do, should the law encourage them to?
I – Consideration
C - Pre-existing Duty Rule (Good consideration to promise to do something you’re already bound to do?)
ϖ 4 - Part Payment of a Debt
→ NOTE Treitel, Some Landmarks of Twentieth Century Contract Law
Thus, there can be a lot of criticisms of the rule:
1) It is generally of benefit to the creditor to accept part payment (Lord Blackburn)
2) It is easy to evade so encourages artificial behaviour (if you pay a day early it would be good consideration)
3) It is out of step with recent developments like Williams v Roffey Brothers
I – Consideration
C - Pre-existing Duty Rule (Good consideration to promise to do something you’re already bound to do?)
ϖ 4 - Part Payment of a Debt
→ NOTE Treitel, Some Landmarks of Twentieth Century Contract Law
So why has the rule survived for so long?
1) It is useful in protecting creditors from unscrupulous debtors (Foakes v Beere, D and C Builders v Reese)
2) It is precedent from the HL so only the SC can overrule it (In Re Selectmove)
3) It is consistent with the general common law rule that a promise to perform an existing duty owed to the promisor does not generally constitute good consideration for a fresh promise given by the promisor
I – Consideration
C - Pre-existing Duty Rule (Good consideration to promise to do something you’re already bound to do?)
ϖ 4 - Part Payment of a Debt
→ D & C Builders v Reees [1966] 2 QB 617 (rejection to protect creditors)
Facts/held
- Facts: C did building work for D and D only paid a partial amount. C faced bankruptcy if D didn’t pay the rest; D telephoned saying work was bad and only paid another partial sum in cheque, and C was forced to take it and issue a receipt stating completion of payment. Later sued D.
- Held: The later sum was claimable – payment of a lesser sum is no discharge for a greater sum. D had effectively held C to ransom and any subsequent allowance was void.
I – Consideration
C - Pre-existing Duty Rule (Good consideration to promise to do something you’re already bound to do?)
ϖ 4 - Part Payment of a Debt
→ D & C Builders v Reees [1966] 2 QB 617 (rejection to protect creditors)
- Lord Denning:
- The principle that payment of a lesser sum cannot discharge a greater sum applies the same if the lesser sum is paid in cash or in cheque, because the cheque is conditional payment, once cashed, becomes actual payment and the same as cash.
- The principle that a smaller sum cannot discharge a greater has come under much criticism, so that an equitable principle developed whereby when a creditor and a debtor enter upon a course of negotiation, which leads the debtor to suppose that, on payment of a lesser sum, the creditor will not enforce payment of the balance, and on the faith thereof the debtor pays the lesser sum and the creditor accepts it as satisfaction, then the creditor cannot enforce payment of the balance when it would be inequitable to do so (example – Central London Property Trust v High Trees House).
- However, this is only true if it would be inequitable for the creditor to insist on the full amount (where there has been a true accord between creditor and debtor – i.e. the creditor voluntarily agrees to accept a lesser sum in satisfaction, and the debtor acts upon that accord by paying the lesser sum and the creditor accepts it).
- In this case there was no true accord as the debtor knew the creditor needed money and so held him “on ransom”.
I – Consideration
C - Pre-existing Duty Rule (Good consideration to promise to do something you’re already bound to do?)
ϖ 4 - Part Payment of a Debt
→ D & C Builders v Reees [1966] 2 QB 617 (rejection to protect creditors)
- Danckwerts LJ:
- In Foakes v Beere Lord Selborne said that by giving negotiable paper or otherwise there had been some new consideration for a new agreement distinct from mere money payments. But IJO giving a cheque is very different from the “gift of a horse, hawk, or robe” evoked in Pinnel’s Case – a cheque from some other person than the debtor, in the appropriate circumstance, may be sufficient, but the debtor’s own cheque for a smaller sum cannot be better than payment of the whole amount of the debt in cash.
- There was also no true accord – D knew of C’s financial difficulties and used the awkward situation to intimidate them. C did not wish to accept the smaller sum, but were desperate to get some money. D also misled C as to their own financial situation.
I – Consideration
C - Pre-existing Duty Rule (Good consideration to promise to do something you’re already bound to do?)
ϖ 4 - Part Payment of a Debt
→ D & C Builders v Reees [1966] 2 QB 617 (rejection to protect creditors)
Commentary:
1) No distinction between cash and cheque – in both cases there would be no new consideration.
2) Difference in reasoning between Denning and Danckwerts – Danckwerts (and Winn) LJ reached the conclusion by a straightforward application of Foakes v Beer whereas Lord Denning resorted to equity to confine Foakes, so that the reason why C were entitled to sue for the balance was that D had behaved inequitably.
3) Why did D behave inequitably? – Lord Denning relied on the tort of intimidation (emphasizing D’s wife’s threat to break the contract unless C agreed to discharge of the entire debt. Winn LJ emphasized that D knew of C’s financial difficulties and had misrepresented their own financial position.
4) Consideration vs. estoppel – whether or not C entered into the new agreement freely or under duress, there is no consideration. But this factor can be important in estoppel (CF Collier v Wright (infra), which has potential to severely limit Foakes v Beere though what effect it actually had remains to be seen)
I – Consideration
C - Pre-existing Duty Rule (Good consideration to promise to do something you’re already bound to do?)
ϖ 4 - Part Payment of a Debt
→ Re Selectmove [1995] 2 All ER 531 (rejection because Foakes is HL precedent)
Facts/held
- Facts: C owed income tax to the Inland Revenue. C’s manager met with a tax collector and agreed to pay off arrears at a rate of £X per month, and pay future liabilities as they fell due. The tax collector said that he would have to seek approval from his superiors and would revert to the manager if the proposal was unacceptable. He didn’t revert back, until the Inland Revenue demanded payment of the entire arrears threatening a winding-up petition if payment wasn’t made. C argued that an agreement had been reached and it was supported by consideration.
- Held (CoA): no agreement had been reached, and in any case there was no consideration.
I – Consideration
C - Pre-existing Duty Rule (Good consideration to promise to do something you’re already bound to do?)
ϖ 4 - Part Payment of a Debt
→ Re Selectmove [1995] 2 All ER 531 (rejection because Foakes is HL precedent)
Peter Gibson LJ
- the promise to pay the future instalments was merely promise to pay what was due anyway and not good consideration. As to the promise to pay arrears, Foakes v Beere has been followed and applied in numerous cases since, and though C argued that Williams v Roffey Brothers should be extended where B’s obligation is to pay A (≠do services or supply goods to A), doing so would leave the principle in Foakes v Beere without any application.
- Where a creditor and debtor at arm’s length reach agreement on payment of debt by instalments to accommodate the debtor, the creditor will always see a practical benefit to himself in doing so. This was however held not to constitute good consideration in Foakes v Beere.
- It would be impossible, consistently with the doctrine of precedent, for this court to extend the principle in Williams to the circumstances governed by the principle in Foakes v Beere – this would have to be by the HL or more appropriately, Parliament.
Thus Re Selectmove establishes that Foakes v Beere is still good authority and has not been undermined by Williams v Roffey Brothers. But it also seems clear that were it not for authority, Peter Gibson LJ would have reached a contrary conclusion.
I – Consideration
C - Pre-existing Duty Rule (Good consideration to promise to do something you’re already bound to do?)
ϖ 4 - Part Payment of a Debt
→ NOTE Peel, “Part Payment of a Debt is no Consideration” (1994) 100 LQR 353
NOTE Peel, “Part Payment of a Debt is no Consideration” (1994) 100 LQR 353
- If the Law Commission does decide to deal with the question of consideration and the performance of an existing obligation, it is interesting to dwell briefly on the possible options available to it.
o The least attractive option is to do nothing → the question of whether a promise to perform an existing obligation maybe good consideration is to be determined upon the arbitrary basis of thenatureof the obligation in question:i.e.is it an obligation to pay money or to perform services?
o Nor is it clear that it would be enough to overturnFoakes v. Beerand apply Williams v. Roffeyto any existing obligation → concentration solely on the issue of consideration would fail to address the real problem of distinguishing between those renegotiated contracts which should be enforced and those which should not.
o Consequently, a third possibility is simply to abolish the requirement of consideration in cases of renegotiated contracts and to test their enforceability on the basis of economic duress → a more sophisticated approach under which bona fide renegotiations would be enforceable whereas those obtained by exploitation would not.
o A fourth possibility, but one which would produce much the same result as the third, would be to extend the scope of promissory estoppel. But a plea of promissory estoppel is subject to a number of other restrictions which severely limit it as a means of giving effect to renegotiated contracts (esp. shield not sword).
But it is still significant that payment of money will always constitute a “practical benefit” to the creditor, so that extending Williams to part payment of debt would leave Foakes without any application.
But where does this leave Foakes –vs- Williams? The latter didn’t consider Foakes so we don’t know of the relationship… But what is the relevant difference between them? One is a promise to pay more, whereas the other is a promise to accept less → but is this a distinction in principle? CF Treitel – might there be a difference in principle between an “increasing pact” and a “decreasing pact”?
I – Consideration
C - Pre-existing Duty Rule (Good consideration to promise to do something you’re already bound to do?)
ϖ 4 - Part Payment of a Debt
→ Musumeci v Winadell Pty Ltd (1994) 34 NSWLR 723, 747 (New South Wales test inspired by Williams v Roffey)
i. e. the non-underlined part is the Williams v Roffey test and the underline parts are the NSW recasting, stating in particular that Australia should adopt the Williams test but with a few revisions, especially because conceptually it can make no difference whether B promises A an additional payment for A’s promise to perform, or grants A the equivalent concession of promising a reduction in A’s payment obligations, where these pre-exist:
- Santow J: ‘(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 be able to, complete his side of the bargain and
- (iii) B thereupon promises A an additional payment or other concession (such as reducing A’s original obligation) in return for A’s promise to perform his contractual obligation on time and
- (iv) (a) as a result of giving his promise B obtains in practice a benefit, or obviates a disbenefit provided that A’s performance, having regard to what has been so obtained, is capable of being viewed by B as worth more to B than any likely remedy against A (allowing for any defences or cross-claims), taking into account the cost to B of any such payment or concession to obtain greater assurance of A’s performance, or
- (b) as a result of giving his promise, A suffers a detriment (or obviates a benefit) provided that A is thereby foregoing the opportunity of not performing the original contract, in circumstances where such non-performance, taking into account B’s likely remedy against A (and allowing for any defences or cross-claims) is capable of being viewed by A as worth more to A than performing that contract, in the absence of B’s promised payment or concession to A, and
- (v) B’s promise is not given as a result of economic duress or fraud or undue influence or unconscionable conduct on the part of A nor is it induced as a result of unfair pressure on the part of A, having regard to the circumstances, then (vi) the benefit to B or the detriment to A is capable of being consideration for B’s promise, so that the promise will be legally binding.’
I – Consideration
C - Pre-existing Duty Rule (Good consideration to promise to do something you’re already bound to do?)
ϖ 4 - Part Payment of a Debt
→ Musumeci v Winadell Pty Ltd (1994) 34 NSWLR 723, 747 (New South Wales test inspired by Williams v Roffey
Commentary:
1) This test expands the scope of the Williams principles to concessions and thus undermines any contention that there can be a principled difference between promise to pay more and promise to accept less.
2) This test enlarges the defences available to the promisor beyond economic duress.
I – Consideration
C - Pre-existing Duty Rule (Good consideration to promise to do something you’re already bound to do?)
ϖ 4 - Part Payment of a Debt
→ MWB Business Exchange Centres Ltd v Rock Advertising Ltd [2016] EWCA Civ 553 (not part payment of a debt?)
Facts
Judge Maloney
- Facts: D, licensee of C’s property, could not pay the licence fee and it accumulated arrears. C purported to terminate the licence agreement but D sought to rely on an oral agreement to ‘re-schedule the licence fee payments over the period from February to October 2012’ so D would pay less in the early months but more towards the end of the year so that the arrears would be paid off by the end of the calendar year. D sought to deny effect to the agreement on the ground that it was not supported by consideration, relying on Foakes v Beere.
- Judge Moloney rejected this submission and held that it was good consideration because there was a ‘possible commercial benefit’ to the claimant in retaining an existing tenant in the hope of perhaps recovering some of the arrears.
I – Consideration
C - Pre-existing Duty Rule (Good consideration to promise to do something you’re already bound to do?)
ϖ 4 - Part Payment of a Debt
→ MWB Business Exchange Centres Ltd v Rock Advertising Ltd [2016] EWCA Civ 553 (not part payment of a debt?)
COA
- upheld the decision and distinguished Foakes on the ground that the benefit which the claimant derived from the defendant’s agreement to enter into the oral variation was not simply a promise to pay part of the debt which it owed but that the claimant secured a better prospect of recovering the arrears which had built up and that the defendant would remain a licensee and continue to occupy the property so that it would not be left standing empty for some time at further loss to the claimant → practical benefit, following Williams.
- Kitchen and McCombe LJJ reached this conclusion by an application of the practical benefit test of consideration derived from Williams v Roffey Bros.
- Arden LJ preferred to adopt the analysis of Professor Chen-Wishart in terms of a ‘collateral unilateral contract’ according to which the original bilateral contract between the parties was supplemented by a unilateral contract under the terms of which the claimant agreed to accept less by way of payment in the early period of the variation of the agreement provided that the defendant adhered to the revised payment schedule (Kitchen and McCombe declined to adopt this analysis not because they disagreed but because it had not been argued)
