Consideration, Promissory estoppel, Intention and Capacity

Question 1

What is consideration?

Answer 1

The price paid for a person’s promise.

Question 2

In terms of what is gained and lost with promisors and promisees, when is there consideration?

Answer 2

There is consideration if:

The promisor obtains a benefit

or

The promisee suffers a detriment

Question 3

What is relevant case law for the doctrine of consideration?

Answer 3

White v Bluett [1853]
A promise made by a father to his son not to enforce a promissory note against his son if his son stopped complaining.

Judgment: Contract not enforceable, because the son had not provided sufficient consideration.

Question 4

Which contract is an exception to the consideration rule?

Answer 4

A deed of gift (bare gifts), because the witnessed signature of the promisor is such clear evidence of their intention to keep their promise, that consideration is not needed as further evidence of that intention.

Question 5

What are the two types of consideration?

Answer 5

Executed consideration: party performs their part at the time of entering the contract.

Executory consideration: parties exchange promises to do something in the future.

Question 6

When is a contract with executory consideration binding?

Answer 6

Once the promises have been exchanged, not at the performance of the actions (because they are in the future).

Question 7

What is executed consideration?

Answer 7

Executed consideration: party performs their part at the time of entering the contract. (e.g. unilateral contract)

Question 8

What is executory consideration?

Answer 8

Executory consideration: parties exchange promises to do something in the future.

Question 9

What are the four rules of consideration?

Answer 9

1. consideration must move from the promisee
2. consideration must not be past (N.B. implied assumpsit)
3. consideration need not be adequate
4. consideration must be sufficient

Question 10

What does ‘consideration must move from the promisee’ mean?

Answer 10

The claimant must show that they supplied consideration for the promise. They can’t sue if consideration was provided by a third party.

Question 11

What case law supports (and qualifies) ‘consideration must move from the promisee’?

Answer 11

1. Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co [1915] - Dunlop did not provide any consideration for the contract between Selfridge and the wholesaler.
2. Tweddle v Atkinson [1861], although consideration must move from the promisee, the contract does not have to directly benefit the promisor, it can benefit a third party (i.e. Tweddle’s son).

Question 12

What does ‘consideration must not be past’ mean?

Answer 12

Past consideration is not good consideration.

Question 13

What case law supports ‘consideration must not be past’?

Answer 13

Roscorla v Tomas [1842], seller promise the horse was healthy after sale already happened.

Re McArdle [1951], child did work on house and other children agreed to pay after event, which then proved not to be good consideration.

NVA Management Ltd v Obafemi Martins [2010], contract with footballer spoke of past events, which was held to be past consideration.

Question 14

What is the major exception to the past consideration rule?

Answer 14

The doctrine of implied assumpsit.

If one party has been asked to perform a service which is normally paid for, the courts will assume to service was meant to be paid for, e.g. taxi, hairdresser.

Cases:
Lampleigh v Braithwait [1615]
Pao On v Lau Tui Long [1980]
Re Casey’s Patents [1892]

Question 15

What is the case law that supports the doctrine of implied assumpsit?

Answer 15

Lampleigh v Braithwait [1615], Braithwait agreed to pay Lampleigh after he secured a pardon for him, then refused to pay. Normally, these services would qualify for payment.

Pao On v Lau Tui Long [1980], must be performed at the request of promisor, understood that some sort of reward could be expected, otherwise unlawful.

Re Casey’s Patents [1892], Casey agreed to promote Stewart’s patents, Stewart wrote promising him 1/3rd and promise was held.

Question 16

What is the doctrine of implied assumpsit? What is it an exception for?

Answer 16

If one party has been asked to perform a service which is normally paid for, the courts will assume to service was meant to be paid for, e.g. taxi, hairdresser.

For past consideration.

Question 17

What does ‘consideration need not be adequate’ mean?

Answer 17

Consideration does not need to be economically adequate in the sense that it is equal value to the thing in exchange. It is not for the court to make a fair contract on their behalf, just sufficient consideration will be fine.

Question 18

What case law supports ‘consideration need not be adequate’?

Answer 18

Chappell & Co v Nestle Co Ltd [1960], where HoL held that taking chocolate wrappers as part payment for a record amounted to sufficient consideration. Even thought the wrappers had no intrinsic value, they represented evidence of the purchase of chocolate.

Question 19

What does ‘consideration must be sufficient’ mean?

Answer 19

Consideration does need to give sufficient consideration, rather than adequate. The maxim is ‘consideration need only be sufficient and not adequate’.

Question 20

What case law supports ‘consideration must be sufficient’?

Answer 20

Thomas v Thomas [1842] sufficient consideration was defined as something which has ‘some value in the eyes of the law’. £1 was held to be sufficient consideration even though the rental value of the property in question was much more.

White v Bluett [1853], the son had no sufficient consideration (withholding his complaints he had no legal right to make any complaints).

Ward v Byham [1956], where a promise to keep a child ‘well looked after’ and ‘happy’ amounted to be sufficient consideration, as ‘well looked after’ would be a detriment to the promisee.

GNR v Witham [1873], Brett J stated that it would be valid consideration to promise to pay £100 if. In return, the promisee would walk to York.

Question 21

Is it consideration to do something you intend to do anyway?

Answer 21

No, consideration is not sufficient if the promisee is doing something that they are already legally obliged to do as consideration for a new contract.

E.g.

Existing public duties
Existing contractual duties
Existing duties to repay a debt
Existing contractual duties to a third party

Question 22

What is an example of when consideration is the same as an existing public duty?

Answer 22

1. Collins v Godefroy, where a witness was promised payment to attend a trial. However, they were already legally required to attend, so there was no obligation to pay them.
2. Glasbrook v Glamorgan, policemen were asked by a property owner to protect the property during a strike in exchange for money. They then refused to pay due to existing public duty, but as the policemen were exceeding their existing duty, so were entitled to pay.

Question 23

If Alfie is contractually obliged to build a wall for Bashir for £5,000 and Bashir then promises Alfie an extra £2,000 to have the wall finished on time, is there a new legal contract?

Answer 23

No. Alfie provides no fresh consideration for the promise of the extra £2,000 since he is suffering no detriment; Alfie is under an existing contractual duty to Bashir to build the wall on time.

Question 24

What is the exception for when consideration is the same as an existing duty?

Answer 24

Williams v Roffey Bros [1990]

• When the offeror has obtained some practical benefit or the avoidance of a disbenefit
• and has entered into the new agreement in the absence of any economic duress.

Williams was sub-contracted to finish work on a block of flats, which Roffey was going to incur a penalty under the main contract if the work wasn’t completed on time. Williams ran into financial difficulties (meaning he wouldn’t finish on time) and Roffey promise additional payment to finish it on time. Was considered a contract, because Roffey would have suffered a disbenefit if he hadn’t paid the extra money.

Question 25

Existing Duty - Public duty imposed by law. Provide meaning and exception?

Answer 25

Performance of an existing public duty will not form good consideration.

Exception - where performnce is over and above the existing duty.

Question 26

Existing Duty - Contractual obligation already owed to promisor. Provide meaning and exception?

Answer 26

A promise to perform an obligation already owed to the other party cannot constitute good consideration.

Exception - Practical benefit obtained.

E.g. Williams v Roffey.

Question 27

Does a promise to pay part of a debt be sufficient consideration?

Answer 27

No, because in promising to pay a smaller amount, they are agreeing to do less than their existing duty and therefore is not suffering any detriment.

Question 28

If a company owed tax to the Inland Revenue, who agreed that this debt could be paid off in instalments, but after the company had paid some of the instalments, the Inland Revenue demanded full payment immediately - would that be valid?

Answer 28

Yes, because the promise to accept payment in instalments was made for no consideration and that the practical benefits principle from Roffey does not apply in cases where one party will do the same for less.

Question 29

Although part payment is not good consideration, what are the exceptions?

Answer 29

Pinnel’s Case

• payment before the date the debt is due, at the creditor’s request
• payment at someplace other than that where it is due
• payment made using something different as payment, e.g. goods instead of money

These can be used when re-negotiating the deal with slightly different terms to the original contract, the promises are significantly different.

Question 30

If a third party pays off part of a debt, can the creditor claim the rest of the money from the original debtor?

Answer 30

No, the creditor cannot claim the rest of the money from the original debtor, as the third party has discharged the original debtor from liability.

(Exception to Pinnel’s Case)

Question 31

What is a composition agreement?

Answer 31

When a person who owes money to several people make an agreement with their creditors, promising to pay them all a percentage of what is owed. Once agreed, none of the creditors can go back on agreement.

(Exception to Pinnel’s Case)

Question 32

If an amount owed is in dispute, would an agreement to accept less than the creditor claims is owed be binding?

Answer 32

Yes, it would be binding.

(Exception to Pinnel’s Case)

Question 33

If the original claim is for an unliquidated amount (that is, the sum owed has not been finalised), would an agreement that settles the amount to be paid be valid, even if this is for a lesser sum than may have originally been demanded?

Answer 33

Yes, it would be valid.

(Exception to Pinnel’s Case)

Question 34

Is performance of a duty owed to a third party under an existing contract be good consideration?

Answer 34

Yes, it will. E.g. If Scotson supplies coal to X, however, X then sold the coal to Pegg, and an agreement was made by which Scotson would deliver the coal directly to Pegg. It was held that the agreement between Scotson and Pegg was valid, and the fact that Scotson was already bound to deliver the coal under his original contract with X made no difference to this finding.

In Pao On v Lau Yiu Long [1980], it was held that this legal rule applied not just to the performance of an existing duty (executed consideration), but also to a promise to perform such a duty (executory consideration).

Question 35

What is promissory estoppel?

Answer 35

Promissory estoppel is a legal principle designed to stop a party from going back on a promise that they have made to another party that has relied on it to their detriment. It can enforce an agreement that might otherwise fail due to a lack of consideration.

Question 36

What are the two main cases to remember when discussing promissory estoppel?

Answer 36

Hughes v Metropolitan Railway Company (1877) - 6 month repair notice, negotiations, landlord tried to evict but negotiations did not count and was estopped from evicting.

Central London Property Trust Ltd v High Trees House Ltd (1947), war depleted lettings, block of flat’s rent came down 50% but had no finish date, as war was the main cause, the rent was able to go back up after the war had ended.

Question 37

What does promissory estoppel extinguishing or suspending rights hinge on?

Answer 37

The nature of the promise and the circumstances of the agreement.

Question 38

Can promissory estoppel extinguish or suspend rights?

Answer 38

It can do both, depending on the circumstances.

Question 39

What are the 5 limitations on promissory estoppel?

Answer 39

1. There has to be an existing legal relationship between the parties (the doctrine won’t create new obligations)
2. Must have been (detrimental) reliance on the promise
3. Inequitable for promisor to go back on the promise (no undue pressure)
4. A “shield not a sword” - can only be used as a defence
5. It generally suspends rights and does not get rid of them (but can extinguish them in special circumstances)

Question 40

What are the two rebuttable presumptions regarding intent to create legal relations?

Answer 40

1. There is not intention to create a contract governing family and social agreements
2. There is such an intention in business agreements.

Question 41

Is there generally a contract between family, close friends or spouses?

Answer 41

No, there’s not usually any intent to create legal relations.

Question 42

Is there generally a contract between two parties where the relationship have broken down (e.g. spouses have separated or divorced)?

Answer 42

Yes, generally this does not fall in the scope of family, so there probably is an intent to form legal relations.

Question 43

If one party puts themselves at a disadvantage, do they see the agreement as legally binding?

Answer 43

Yes and it would be hard for the other party to deny the existence of a contract.

Question 44

Are there circumstances where the rebuttable presumptions have been successfully rebutted?

Answer 44

Yes, in Simpkins v Pay (1955), an old lady and a lodger entered a competition and won, but the old lady did not share the winnings with the lodger as previously agreed. He sued for breach of contract and won, the court held that there was an intention to be legally bound by the agreement, with the shared payment of competition entry fees being evidence to rebut the presumption.

Question 45

Do you think a lottery syndicate is legally binding?

Answer 45

Yes, as shared payment of competition entry fees, use of syndicate agreement in writing and an agreement with an equal sharing of the lottery fees is likely to show this as binding.

An informal agreement probably wouldn’t be binding.

Question 46

Which of these terms would be legally binding in advertisements?

Delicious
Free from preservatives
Sensational

Answer 46

Free from preservatives, as it is a specific promise.

The rest are mere puffs.

Question 47

If a commercial deal is struck in a pub over drinks, would that be seen as legally binding?

Answer 47

The case concerned an agreement between Mr Michael Ashley, the owner of the Sports Direct Group and Mr Jeffrey Blue, a business consultant which stipulated that if Mr Blue could secure the share price of Mr Ashley’s company to be above £8 per share, Mr Ashley would pay him a £15 million bonus for his services. The agreement was made in a pub alongside other representatives of Sports Direct. The share value did rise above £8 but Mr Ashley alleged that the agreement was mere ‘banter’ and refused to pay the bonus. In deciding whether there had been an intention to create legal relations, the case turned on the factual setting in which the alleged contract was formed and the case against Mr Ashley was dismissed because the social setting did not suggest, on the objective test, that a formal contract had been made.

Question 48

What is an honour (or honourable pledge) clause?

Answer 48

A clause in a contract to the effect that it is not intended to be legally binding.

Question 49

What is a letter of comfort?

Answer 49

A letter of comfort is sent by a rich parent company to persuade a supplier to sell goods on credit to its smaller subsidiary company, who may not have many assets. It means that the parent company does not make any legally binding promise to guarantee the subsidiary company’s debt, but considers itself morally obliged to pay. Suppliers accept this in the belief that it will pay to keep its commercial reputation.

Question 50

If a contract is entered into by someone without capacity, is it void or voidable?

Answer 50

It is voidable, because if a person only lacked mental capacity for a temporary time (e.g. through being drunk), they may agree at a later stage (where they have contractual capacity).

Question 51

In which kinds of circumstances would it be seen that a person lacks mental capacity to enter a contract?

Answer 51

When a person is unable to make a decision for himself at that point in time.

E.g.
Through drink or drugs (Temporary or permanent impairment)
Medical conditions

Question 52

If someone lacks the mental capacity to agree to a contract, but then later agrees when they do have contractual capacity, is this legally binding?

Answer 52

Yes, if they had contractual capacity the second time, this will be seen as legally binding. If they disagree the second time, then the contract is voidable and can be dismissed.

Question 53

Does the other party need to be aware of the mental impairment at the time of making a contract, in order to make an argument for lack of capacity?

Answer 53

Yes, generally a lack of capacity must be noticed by the other party, otherwise the attempted argument of lack of capacity may be defeated.

This was illustrated by Imperial Loan Co. v Stone [1892]. Although this case concerned a mental disorder rather than drunkenness, the court established that it must be established that the mental impairment was known to the other party.

Question 54

What would happen if the information relevant to a decision when entering into a contract is quickly forgotten? Does that point to a lack of capacity?

Answer 54

No, that is not relevant. The focus is upon whether the person appreciated their decision at that point in time, rather than appreciation in the future.

Question 55

Is anyone below the age of 18 able to enter a contract legally?

Answer 55

No, under 18 year olds are called minors and lack legal capacity to enter into a contract.

Question 56

What are necessaries?

Answer 56

In s3 Sale of Goods Act 1979:

Necessaries are vague, but are described as:

1. They have the be suitable to the condition of life of the person
2. They have to meet their actual requirements at the time of sale/delivery
3. The goods have to have been sold and delivered tot the minor before the claim.

What is necessary to one, may not be necessary to another.

Question 57

What is the established category of contract for necessaries: contracts of beneficial service?

Answer 57

A contract of employment or for apprenticeship of the minor. These are seen as benefitting the minor, so are able to be legally binding. Consideration is that they get training in exchange for working.

Question 58

Are contracts that aren’t for necessaries involving a minor voidable or void?

Answer 58

They’re voidable.

more recent example of a sports agreement with a minor concerned the footballer Wayne Rooney, in Proform Sports Management Ltd v Proactive Sports Management Ltd [2006]. This case concerned a management agreement entered into between the claimant and Rooney, then aged 15. It was a two-year contract, under which the claimant would act as Rooney’s representative and negotiate all contracts on his behalf, in return for 5 percent of all contract earnings and transfers. Rooney was prohibited from engaging anyone else in this capacity during the period of the contract. A few months before the end of the two-year period of the contract Rooney signed an agreement with the defendant to act as his representative and gave notice to the claimant repudiating the contract because it was voidable at his option since he had signed it as a minor. The claimant sued the defendant for procuring a breach of contract and the defendant argued that the contract with Rooney was voidable as it was not one for ‘necessaries’, i.e. training or education. The court held that the management contract was not for ‘necessaries’ and therefore it was voidable by Rooney. As such the defendants could not be liable for procuring a breach as the contract was voidable.

Question 59

What does a ‘corporate veil’ do?

Answer 59

It protects the company’s shareholders against the company’s wrongdoing, as the shareholder is only liable for the value of their shares.

Question 60

How is a company’s capacity to contract judged?

Answer 60

Through the company’s articles of association, i.e. its constitution. This sets out the purpose of the company and restricts its actions. Entering into a contract outside of its purpose would be outside of the company’s capacity to act.

Question 61

Does a limited liability partnership have a legal personality?

Answer 61

Yes, same as a limited company.