Consideration

Question 1

Consideration definition

Answer 1

‘An act or forbearance of one party, or the promise thereof, is the price for which the promise of the other is bought, and the promise thus given for value is enforceable.’

Question 2

Executory consideration

Answer 2

Where contracting parties make promises to each other to perform something in the future, after the contract has been formed e.g. a contract for the sale of goods where the seller promises to deliver the goods at some time in the future

Question 3

Executed consideration

Answer 3

Where, at the time of the formation of the contract, the consideration has already been performed e.g. a unilateral contract where the promise of a reward is made and the ‘price paid’ in that exchange is performance of the act stipulated in the offer. The performance of the act is both acceptance of the offer and executed consideration

Question 4

Rules governing consideration

Answer 4

(1) Must not be past.
(2) Must move from the promisee
(3) Need not be adequate
(4) Must be sufficient

Question 5

Rules governing consideration - Must not be past

Answer 5

It is not generally possible to use as consideration some act or forbearance which has taken place prior to the promise to pay.

Eastwood v Kenyon: a father died leaving his daughter in the case of a guardian, Eastwood. Eastwood borrowed £140 to pay for the daughter’s upbringing. When she came of age, the daughter married Kenyon, who promised Eastwood he would pay off the debt for having brought up the daughter. It was held that Eastwood’s consideration (bringing her up) was not good consideration because it was in the past.

Question 6

Rules governing consideration - Must not be past: exceptions

Answer 6

Pao On v Lau Yiu Long:
three necessary considerations for the exception to apply:
(a) act must have been done at the promisor’s request
(b) the parties must have understood that the act was to be rewarded
(c) the payment must have been legally enforceable had it been promised in advance.

Question 7

Rules governing consideration - Must move from the promisee

Answer 7

A party who has not provided consideration may not bring an action to enforce a contract.

Tweddle v Atkinson: two fathers os a couple about to get married agreed that the father of the bride was to pay £200 and the father of the groom £100 to the groom. The groom tried to enforce the promise but it was held he could not as the consideration had been provided by the fathers, not him.

Question 8

Rules governing consideration - Need not be adequate

Answer 8

It is not the court’s duty to assess the relative value of each party’s contribution to the bargain. (Chappell & Co v Nestle Co Ltd)

Question 9

Rules governing consideration - Must be sufficient

Answer 9

Consideration must have some value ‘in the eyes of the law.’ 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.

Thomas v Thomas: executor of estate agreed to transfer a house to the deceased’s widow in return for a payment from the widow of £1 per year. The court made it clear that it did not matter whether the widow’s obligations in any way matched the value of the property.

Question 10

Existing obligation

Answer 10

Before entering into the 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;
(c) an existing contract with a third party

Question 11

An existing contract between the same parties

Answer 11

If a party is already contractually bound to Party A to do something, then agreeing again with Party A to do that thing is not generally good consideration for a new contract.

Stilk v Myrick: The captain of a ship promised the crew that if they shared between them the work of two seamen who had deserted, the wages of the deserters would be shared between them. The court held that the promise was not binding because the seamen gave no consideration: they were already contractually bound to do any extra work to complete the voyage.

Question 12

An existing contract between the same parties - going beyond existing obligations

Answer 12

Hartley v Ponsonby: the sailors were contractually obliged to take ‘all reasonable endeavours’ to get a ship home, but they went beyond these existing obligations when they agreed to make the journey in dangerous conditions and when the ship was undermanned - this amounted to good consideration.

Question 13

An existing contract between the same parties - Williams v Roffey

Answer 13

• A enters into contract to do work for or supply goods/services to B
• at some stage before A has completed obligations, B has reason to doubt that A will or will be able to complete his side of the bargain
• B therefore promises A more money in return for a promise to finish on time
• as a result of giving this promise, B obtains a benefit or gets rid of a disadvantage
• B’s promise is not given as a result of economic duress or fraud
• the benefit to B is capable of being consideration and therefore legally binding.

Question 14

Two major limits to Williams v Roffey

Answer 14

(a) no application outside the context of renegotiation
(b) it applies only to a promise to increase the agreed price, and has no application to cases where a creditor agrees to pay a lesser sum in settlement of debt.

Question 15

A public duty

Answer 15

Merely carrying out a public duty imposed by the law will not amount to sufficient consideration.

England v Davidson: the defendant offered a reward for information leading to the conviction of a criminal. A police officer gave the relevant information. The defendant refused to pay and alleged that the police officer was doing no more than a public duty enforced on him by law. The court held that the duty of a police officer is the prevention of crime and he was not under a duty to provide information to a private individual, therefore he had provided consideration.

Question 16

Existing obligations to a third party

Answer 16

Where Party A has an existing obligation to Party B, and wishes to rely on a promise to do the same thing as consideration for a contract with Party C. Performance of the pre-existing duty owed to a third party will be regarded as sufficient consideration.

New Zealand Shipping Co v AM Satterthwaite & Co: Lord Wilberforce made the point that 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.

Question 17

Part payment of a debt (limit to the principle in Williams v Roffey)

Answer 17

Where a debtor promises to pay part of his debt in return for a release from the remainder of his liability, he is simply offering to do something which he is already obliged to do: he is seeking to offer an existing obligation as consideration. At common law, this is not good consideration. (Foakes v Beer)

Question 18

Circumstances in which Foakes v Beer does not apply

Answer 18

(a) Introducing a new element into the payment e.g. payment at a different place or different time (Pinnel’s case) or providing an item instead of money (Sibree v Tripp)
(b) 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.

Question 19

Conflict between Foakes v Beer and Williams v Roffey

Answer 19

MWB Business Exchange Centres v Rock Advertising: a landlord agreed to reschedule rent payments under a licence agreement to give a tenant longer to pay, thereby varying the licence. The court acknowledged that part payment of a sum already due is not normally good consideration. Their justification was that the landlord obtained a practical benefit by keeping a tenant in their property. In doing this, the court applied the terms practical benefit and absence of duress from Williams v Roffey.
- The question of whether providing a practical benefit in the absence of duress is sufficient to make a promise to accept less binding went unanswered.

Question 20

Promissory estoppel

Answer 20

An equitable doctrine that effectively allows a contract to be enforced despite not being supported by consideration. It is about protecting a party’s reliance on a non-bargain promise.

Question 21

Hughes v Metropolitan Railway Co

Answer 21

• the tenant was under an obligation to keep the premises in good repair
• in October, the landlord gave the tenant six months in order to undertake some repairs, to which the tenant agreed.
• in November, negotiations began regarding the tenant’s purchase of the lease. The tenant stated that while negotiations were ongoing, he would not undertake the repairs.
• at the end of the six month notice period, relying on the failure of the tenant to undertake repairs, the landlord sought forfeiture of the lease.
• held that the landlord’s conduct was an implied promise to the tenant that he would not enforce the forfeiture at the end of the notice period, and in not doing the repairs, the tenant had been relying on this promise.

Question 22

Lord Chancellor quotation from Hughes

Answer 22

‘if parties who have entered into definite and distinct terms involving certain legal results…afterwards by their own act or with their own consent enter upon a course of negotiation which has the effect of leading one of the parties to suppose that in the strict rights arising under the contract will not be enforced, or will be kept in suspense…the person who otherwise might have enforced these rights will not be allowed to enforce them where it would be inequitable having regard to the dealings’

Question 23

Central London Property Trust v High Trees House

Answer 23

• in 1937, the landlord led a block of flats to the defendant tenant on a 99 year lease for £2,500 a year
• when war commenced, only 1/3 of the flats had been let and the tenant was having difficulty paying rent.
• in 1940, the landlord agreed to reduce the ground rent to £1,250
• 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.
• in September 1945, the landlord requested that the full rent be paid and requested payment of the arrears for the last two quarters of 1945.
• the tenant argued that the reduced rent was payable for the whole 99 year term or until September 1945 on the grounds that the landlord was estopped from claiming the additional rent.

Question 24

Denning’s judgment in High Trees

Answer 24

• 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 landlord could recover rent for the last two quarters of 1945 and going forward. Denning stated obiter that if he had sought to recover the full rent from 1940 to 1945, he would have been estopped from doing so.

Question 25

Parameters of promissory estoppel

Answer 25

(a) It acts as a shield and not a sword
(b) There must be a clear and unequivocal promise or representation that existing legal rights will not be fully enforced (Woodhouse A.C.Israel Cocoa v Nigerian Produce)
(c) The promisee (usually a debtor) should have relied upon the promise or representation, i.e. it must have influenced their conduct
(d) The doctrine only applies where it would be inequitable for the creditor to go back on his promise. (D & C Builders v Rees: it had been extracted by intimidation, he who seeks equity must do equity)

Question 26

Parameters of promissory estoppel - it acts as a shield and not a sword

Answer 26

It can only act as a defence to the action; cannot be used a cause of an action.

Combe v Combe: following a divorce, the husband indicated he was prepared to pay an allowance a year. He didn’t make any payments, and the wife brought an action. She could not succeed in an action because she had given no consideration to the husband’s promise.

‘It does not create new causes of action where none existed before. It only prevents a party from insisting on his strict legal rights when it would be unjust to allow him to do so.’

Question 27

Parameters of promissory estoppel - the promisee should have relied upon the promise/representation

Answer 27

• an act which takes place before the promise cannot be in reliance on the promise
• the promise need not be the only reason for the promisee’s change in position, it just must have influenced the promisee’s conduct in some way
• where the promisee has, after the promise, conducted himself in the way intended by the promisor, it will be up to the promisor to establish that the conduct was not induced by the promise.
• it is not essential that the promisee has acted to their detriment, but where they have, it will be easier to establish that it is inequitable for the promisor to go back on their word.

Question 28

The effect of promissory estoppel is generally to suspend rights, not to extinguish them

Answer 28

• The right to periodic payments may resume once the period over which the promissory estoppel operates ceases (High Trees)
• the promisor may resume his full legal rights after giving reasonable notice of his intention to do so (Tool Metal v Tungsten)

Question 29

Intention to create legal relations

Answer 29

An intention to enter into an agreement that has legal ramifications. One of the necessary requirements for a binding contract.

The test is objective, so to be determined more by the actions of the parties than any evidence of what was actually in their minds.

Question 30

ICLR: Lord Denning in Merritt v Merritt

Answer 30

Would reasonable people regard the agreement as binding?

Question 31

Rose and Frank v Crompton Bros

Answer 31

• intention may be implied from the subject matter, but it may also be expressed by the parties
• if it is a commercial/business agreement, it is presumed there is ICLR. If it is a social/domestic agreement, it is presumed there is not.

Question 32

Commercial and business agreements

Answer 32

Well Barn Farming v Backhouse: the slight importance and temporary arrangement was still seen as evidence of legal intention. If a party to a business agreement wishes to assert that legal relations were not intended, the onus is on him to rebut the presumption and the burden of doing so is a heavy one.

Bunn & Bunn v Rees & Parker: it is open to the parties to include wording within the agreement that indicates that the parties do not intend to create legal relations.

Edward v Skyways: the use of the expression ‘ex gratia’ was sufficient to show they did not have ICLR

Rose and Frank: paragraph in the document stated that it was not a ‘formal or legal agreement, and shall not be subject to legal jurisdiction’

Licences Insurance Corporation v Lawson: angry statement at a meeting was held not to have ICLR because on an objective view, the person at the meeting would not reasonably take it to have been intended as such.

Question 33

Advertisements

Answer 33

Carlill v Carbolic Smoke Co: the assurance that the company had deposited £1,000 in a named bank account was a demonstration of its intention to be bound and would be understood by a reasonable person to have that effect.

Question 34

Difficult cases

Answer 34

Esso Petroleum Co v Comissioners of Customs and Excise: specially produced World Cup coins were distributed by Esso to their dealers, who offered customers a free coin with purchase of four gallons of petrol. House of Lords were divided on whether there was any contract with regard to the coins.

• Majority felt there was ICLR, relying on the business context and commercial advantage Esso expected to derive from the promotion
• Minority found no ICLR, relying on the language used in the offer, the trivial value of the coins and the unlikelihood that a motorist denied a coin would believe that a legal remedy was available to them. However, these are not relevant tests in establishing ICLR

Question 35

Statutory provisions

Answer 35

• Some statutory provisions may stipulate that no ICLR can be inferred unless there is an express provision to the contrary
• s 179 Trade Union and Labour Relations Act 1992: collective agreements between trade unions and employees are presumed to lack the require intention unless the agreement is in writing and contains a provision that they do have ICLR

Question 36

‘Subject to contract’

Answer 36

• The expression ‘subject to contract’ creates a strong inference that the parties do not intend to be bound until the formal execution of a contract.
• However: (a) if any other form of wording is used, care must be taken to show there was not ICLR, (b) a tentative agreement can be binding even if it is clear that the parties were intending to negotiate further, and (c) it is possible that there is a sufficient strong and exceptional case for holding that even something marked ‘subject to contract’ is binding (Alpenstow v Regalian Properties plc)

Question 37

Social and domestic agreements

Answer 37

Do not usually amount to legally enforceable agreements.
Balfour v Balfour: will be resolved by examining the circumstances of each case and language used by the parties
Merritt v Merritt: ‘it is altogether different when the parties are not living in amity but are separated, or about to separate…It may safely be presumed that they intend to create legal relations’

Question 38

Capacity

Answer 38

If a person (person A) does not have capacity to enter into a contract, then a contract with person A is unlikely to bind him/her.
- Persons over the age of 18 have full contractual capacity, if they are of sound mind and not suffering from a factor ruling out capacity e.g. drunkenness

Question 39

Capacity - minors

Answer 39

• Does the contract concern necessaries?
• Is it a contract of employment/apprenticeship/education?
• If it is no for both, the child is not bound

Question 40

Capacity - minors: Necessaries

Answer 40

• A minor is bound by a contract to supply necessaries to them if the contract is for their benefit. A minor must pay a ‘reasonable price’ for these rather than the actual cost.
• SGA 1979: necessaries means goods suitable to the condition in life of the minor or other person concerned and to his actual requirements at the time of the sale and delivery
• Nash v Inman: waistcoats supplied to a minor who was an undergrad at Cambridge university at the time were suitable according to the minor’s station in life but not necessary because he already had sufficient clothing, so the contract was not enforceable.

Question 41

Capacity - minors: contracts of employment, apprenticeship or education

Answer 41

• A minor is also bound by contract of employment, apprenticeship or education, but only if it is for their benefit.
• Aylesbury Football Club v Watford Football Club: a young footballer’s contract with the club was not beneficial and could not be enforced because the player received no extra training or experience, the terms were onerous for him, and they restricted his freedom to pursue a football career.

Question 42

The effect of entering into a contract with a minor

Answer 42

Unless one of the exceptions apply, the contract cannot be enforced against the minor, although the minor can enforce it against the other party.
If a minor ratifies a contract once they turn 18, the contract will then be binding on him/her.

Question 43

Mental capacity and intoxication

Answer 43

• A person lacks capacity under s 2 Mental Capacity Act 2005 if he is ‘unable to make a decision for himself in relation to the matter’ at the time the contract is made, whether the impairment is permanent or temporary.
• Under s 3(1), the impairment is described in terms of being unable to: understand the relevant information, retain the relevant information, use the relevant information, and communicate a decision.
• The Act also gives the Court of Protection power to make declarations as to a person’s capacity and ability to contract in specified situations (s 15)

Question 44

The effect of entering into a contract with a person lacking capacity

Answer 44

Under s 7, a person without capacity still remains liable to pay a reasonable price for ‘necessaries.’
In any other cases, the contract is binding unless the person claiming the incapacity can establish, first, that he did not understand what he was doing and second, that the other party knew that to be the case (Imperial Loan v Stone)
Similar rules apply to contracts entered into by drunken persons (Matthews v Baxter)