Contract Law - Consideration, Terms & Exclusion/Limitation Clauses - Week 4

Question 1

Section 1 - Consideration

Answer 1

An agreement needs to be supported by consideration to be legally enforceable

Question 2

Curie v Misa (1875)

Answer 2

Held that 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 → giving of a benefit or the suffering of a loss

Question 3

Dunlop v Selfridge

Answer 3

Consideration was defined in terms of the price by which one party bought the other parties act or promise

Question 4

Defining Consideration

Answer 4

Defining consideration in terms of detriment and benefit (Curie) is outdated.

It might be easier to think in terms of a claimant buying a defendant’s promise by performing some act in return for it → the price paid for the promise (Dunlop)

Question 5

Example

Answer 5

Imagine having two parties - A + B. They enter a contract for A to sell goods to B
A’s consideration will be the goods or the promise of the goods

B’s consideration will be the money or the promise of money

The consideration in a contract is the promise of performance, rather than performance itself.

This means that a contract has legal effect from the moment it’s agreed and that it can be enforced even if that party is not yet due to pay or reform.

Question 6

What is the consideration here?
John runs a car dealership. Bert agrees to buy a car for £10,000. John agrees to deliver the car on a certain date.

Answer 6

The consideration is that John promises to deliver the car and the price paid for that promise is £10,000. Bert promises to pay for the car and the act to buy that promise is the delivery of the car

Contrast a party that promises to do something and receives nothing back. → in the above example. John promises to give Bert the car.

No consideration from Bert to John so it’s a promise to do something and this is unenforceable in law → the law doesn’t enforce gratuitous promises.

Question 7

Executory or Executed Consideration?

Answer 7

A binding contract is formed through the exchange of promises

A promise to perform an action at some point in the future

Question 8

Consideration is classified as one of two types:

Answer 8

Executory → when the promise hasn’t been performed

Executed → when the promise has been performed within the meaning of the contract

Question 9

Executory Consideration

Answer 9

John promises to deliver a car to Bert and Bert promises to pay John £10,000 for the car on delivery

If John fails to deliver the car he’s in breach of contract

The consideration is the exchange of promises and is described as executory because the promises haven’t yet been executed

A promise made in return for a promise - where both promises are still to be performed - such as a contract between a buyer and seller for the future delivery and payment of a car

Question 10

Executed Consideration

Answer 10

A contractual obligation to pay arises when one party has performed their consideration

The offeror promises something in return for the offeree doing something, the promises only become enforceable when the offeree has performed the act

Question 11

Example

Answer 11

For example, this would occur where one person offers a reward for the safe return of their dog. Whoever finds and returns the dog has executed their consideration

The consideration provided by the person who returns the dog is called executed consideration

Where one of the two parties has done all that they’re required to do, leaving any outstanding liability on the other party → where there’s a promise of a reward if lost property is returned.

If the property is returned by B to A, then B has fulfilled their part of the contract and is said to have executed their consideration whilst A’s consideration - payment of the reward - is still outstanding

Question 12

Rule 1 - Consideration must not be past

Answer 12

Any act must not come before any promise (e.g. of payment)

If a promise is made after an act has been completed, it’s called past consideration and isn’t enforceable

E.g. it’s snowing and your neighbour clears your driveway of snow. You didn’t ask them to do this. After the driveway is cleared, you’re so pleased that you offer your neighbour £20 then this payment is not enforceable. The promise to pay £20 came after the act of clearing the driveway.

To be enforceable, the promise to pay needs to come before the act, i.e, you asked your neighbour to clear the snow in return for a payment of £20

Question 13

In what situations would the rule not apply?

Answer 13

Act was completed in response to a specific request

The situation was one where payment would normally be expected

Question 14

Re Stewart v Casey (1982)

Answer 14

An employer asked an employee to work on an invention

After the work was completed, the employee was promised a share of profits

It was held he was entitled to his share as he had undertaken the work at the request of his employer and as it was an employee/employer relationship, there was an implication that payment would be made

Question 15

Leading Case - Re McArdle (1951)

Answer 15

Mr McArdle died and left his house to his wife and after her death to their four children. While Mrs McArdle was alive, one son and his wife moved into the house.

Daughter in law made several home improvements costing £488
After she had completed the improvements, all the children signed an agreement stating the daughter in law would be reimbursed when Mrs McArdle died.

On Mrs McArdle’s death, the children refused to to reimburse the daughter in law

It was held that as the work was completed before the agreement to pay £488, the work was past consideration and the agreement was legally unenforceable

If the work had been carried out because of a promise of reimbursement then she would’ve been entitled to payment

Question 16

Example

Answer 16

Paul falls off the pier into the sea. Heather dives in and saves him
After he’s saved, Paul promises to give Heather £5000

This isn’t a binding promise because the promise to pay the £5000 came after Heather’s actions so it is past consideration

Question 17

Rule 2 - Consideration must move from the promisee

Answer 17

For a promise to be enforceable, a person must have provided consideration

Only those who have contributed consideration can use on the contract
A party that isn’t part of the contract can’t enforce any rights as they haven’t provided any consideration

For example, if Andrew promises Ben £1000, if Ben gives his car to Chris, then Chris can’t enforce Ben’s promise because Chris isn’t a party to the contract. The parties to the contract are Andrew and Ben

Question 18

Consideration must be sufficient but need not be adequate

Answer 18

This means that any consideration must be of material value but it doesn’t have to be the value of a product or service.

For example, is a contract to sell a new iPhone for £1 a valid contract?
A contract to sell the iPhone for £1 would be valid in respect of adequacy of consideration even though the value of an iPhone is much greater than £1 → it’s important that the consideration is of material value, but it doesn’t have to be the value of the product

Question 19

Thomas v Thomas (1842)

Answer 19

An owner of a house promised that the widow of the previous owner could occupy the house for life in return for £1 per year and keep the house in good repair.

Later the owner tried to recover the house from the widow. The promise to pay £1 per year and keep the house in good repair was sufficient consideration

Provided that the consideration has some value in the eyes of the law, however small the value might be, it can be constitute consideration

The court allows parties freedom to make their own contracts and aren’t concerned if one party makes a good or bad bargain

Question 20

Rule 3 - Are existing duties sufficient?

Answer 20

Is performance of an existing contractual duty good consideration?

No and taking on a new obligation is required

Question 21

Stilk v Myrick (1809)

Answer 21

When a ship was at a foreign port two sailors deserted. The captain promised the rest of the crew that the wages of the two deserters would be shared out between them if they sailed the ship back to London.

The crew complied, but on reaching London the ship owners refused to share the wages of the two deserters.

Question 22

What was the outcome?

Answer 22

It was held that in completing the voyage, the crew were performing their existing contractual duties and had given no additional consideration in return for the promise to pay a share of the deserter’s wages.

Crew members were required to cope with the normal difficulties of a voyage which included crew shortages.

There’s always a danger that a promisee, being in a strong bargaining position, may exert pressure on the promisor. → if this case had been decided differently, it may lead to sailors exerting pressure to increase their rewards

Question 23

Hartley v Ponsonby (1857)

Answer 23

Often contrasted with Stilk v Myrick as they have similar facts

This case was decided differently because the crew was so reduced that the crew members had to take on duties over and above their existing contractual duty

Therefore, in this case, the extra work was good consideration

Question 24

Rule 4 - Pinnel’s Case

Answer 24

Part payment of a debt isn’t a good consideration.

Also known as the rule in Pinnel’s case
A promise by a creditor to accept less than the full sum owed on the due date doesn’t discharge the debtor from a legal obligation to pay the balance

Question 25

Example

Answer 25

Lucy owes Tilly 350. On payment day Lucy tells Tilly she can’t pay the full £50 and asks Tilly if she’ll accept £25 instead. (counter offer). Tilly agrees

As part payment of a debt isn’t good consideration, then Lucy still owes the other £25 to Tilly.

This is because Lucy has gained a benefit → paying only half the debt but she hasn’t given anything to Tilly in return.

Question 26

Benefits for a promise to be enforceable

Answer 26

The payment must be earlier than the due date with the creditor’s agreement

The part payment is accompanied by something else of value (a horse, hawk or robe)

So in the above example, if Lucy has given Tilly £25 plus, her bicycle would be good consideration

If Lucy had paid Tilly earlier than the due date then that would also be good consideration → due 1st july but paid on 1st may

Question 27

Section 2 - Express Terms

Answer 27

In this section, contracts are made up of express terms (agreed between the parties) and implied terms (courts statute or custom) → a term of the contract will be one or the other.

Coupled with this the law places more importance on some terms than others by classifying them as either conditions, warranties or innominate terms.

This is important when there’s a breach (someone doesn’t do what they’ve agreed to do)

Question 28

Identify importance of the term

Answer 28

Identifying the importance of the term will help determine the remedy any innocent party may receive.

Any breach can be expensive, parties may seek to limit any damages (money) payable by the inclusion of an exemption or limitation clause

Some breaches may entitle an innocent party to treat the contract at an end

The term of a contract are the contents of the contract and state the parties legal duties and obligations to each other

Question 29

Express Terms

Answer 29

Express terms are terms that are communicated between the parties → spoken or written

Molly offers her bicycle for sale £20
The express terms are the bicycle and the £20

Question 30

Implied Terms

Answer 30

They’re not expressly agreed on by the parties

Question 31

What are the 3 sources of implied terms?

Answer 31

1) Terms implied at common law
2) Conditions
3) Warranties

Question 32

Terms implied at common law

Answer 32

Courts imply terms into contract to help protect parties from exploitation.
E.g. terms are implied into employment contracts

Implied terms are included in the contract by statute, custom or the courts
Courts imply terms into contracts to help protect parties from exploitation

For example, terms are implied into employment contracts to protect employees from unsafe working environments, discrimination

Terms may be implied into certain types of contract. An example can be found in the Consumer Rights Act 2015 which protects consumers against faulty goods

Question 33

Conditions

Answer 33

Most important (root of the contract)
Without these terms, the contract can’t exist. It’s meaningless.

When booking a holiday, the dates and accommodation are fundamental terms. Without these the contract would be meaningless

If a term is important to one party, they can say this before the contract is concluded

For example, when booking a hotel for a holiday, if you stipulate you require a sea view from your room then it’s important to you and its importance in the contract becomes elevated. If you don’t state a preference, you could be given any room

If we agree that i’ll buy your blue car, registration CX34 POI and you deliver a red one with registration MN87 SQA, then I won’t have to pay (released from obligation) as you haven’t kept your side of the bargain

Question 34

Warranties

Answer 34

Minor terms (ancillary to the contract, rather than crucial)

A breach of a warranty will entitle the innocent party to damages only

Example - the hotel may reduce your bill by a certain amount to cover your disappointment.

Question 35

Why is it important to classify terms?
Conditions, warranties, innominate terms

Answer 35

Some terms are more important than others.

When someone is in breach of contract (don’t do what they’re contractually obliged to do), the remedy the innocent party is entitled to depends on the importance of the term breach.

Question 36

Bettini v Gye (1876)

Answer 36

A singer failed to turn up for the first three of the six rehearsal days

This was held to be a minor breach (breach of warranty) as no performances were missed and she could still make half the rehearsal days

Question 37

Innominate Terms

Answer 37

Terms that aren’t identifiable as conditions or warranties are labelled as innominate terms

Court will wait to see the consequences of any breach before deciding the seriousness of the term

If the consequences of the breach are serious and it in effect bring the contract to and end it will be classed as a condition

This will occur when the injured party has been deprived of most of the benefit of the contract

If the consequences of the breach are minor, it will be classified as a warranty

Question 38

Hong Kong Fir Shipping v Kawasaki Kisen Kaisha (1962)

Answer 38

A ship was out of use for 20 weeks of the 24 months it was hired for

It was held that this breach wasn’t serious enough to bring the contract to an end.

It was still available for 18 months out of the 24.

Question 39

Section Three - Exclusion and Limitation Clauses

Answer 39

Limitation v Exclusion - clauses seek to either limit or exclude liability in the event of a breach of contract

E.g. a holiday firm may seek to limit customer claims in the event of a delayed or postponed flights to meals and overnight accommodation or it may specify that claims for lost luggage must be made within 30 days (limitation clauses )

E.g. when entering a car park a sign might say that the owners aren’t liable for any loss or damage to the vehicle (exclusion clause)

As these types of clauses are open to abuse, they’re controlled by the courts and statute. Without some controls it could mean that a business will avoid liability for irresponsible behaviour

Question 40

Incorportaton

Answer 40

1) The clause must be incorporated into the contract
- For a clause to become part of the contract, the party who will be subject to the clause must have reasonable notice of its inclusion.

2) There’s two factors to consider
- Timing
- Sufficiency of notice

Question 41

Timing

Answer 41

Must have notice either before or at the time they enter into the contract

Party seeking to include the clause must give the other party notice of the clause (must bring it to their attention by word of mouth or by a notice/sign)

Ineffective notice can be seen in the case of Olley v Marlborough Court Hotel (1949)

Question 42

Olley v Marlborough Court Hotel (1949)

Answer 42

A notice on the back of Mrs Olley’s bedroom stated the hotel wouldn’t be liable for theft of property from guests

Mrs Olley suffered when her clothes and jewellery were stolen from her room
It was held the clause excluding liability was ineffective as Mrs Olley only had notice of the clause after the contract had been made - which was at the reception desk

Had she seen the clause before she entered into the contract, it would’ve been incorporated

Question 43

Thornton v Shoe Lane Parking (1971)

Answer 43

A notice inside a car park stated the proprietors would not be liable for injuries to customers.

The same notice was also printed on the ticket dispensed from the machine at the entrance to the car park

It was held that the clase didn’t form part of the contract

The contract was made when the customer drew up to the ticket machine (offer) and put his money into the machine (acceptance of that offer)

The ticket was therefore dispensed after the contract had been concluded and the clause wasn’t seen before or at the time the contract was made

Question 44

Contractual Documents & Timings - Chapelton v Barry UDC (1940)

Answer 44

The claimant wished to hire a deckchair.
He took one from a pile and read the notice which said to pay the attendant when asked. He paid the attendant and was issued with a ticket which had an exclusion clause printed on the back.

The claimant was injured when the deckchair collapsed. It was held that the ticket was merely a receipt, not a contractual document, which he received after the contract had been made so the clause was not incorporated into the contract.

The notice was the offer and taking the deckchair was accepted.
Notices must consist of a written sign of some kind displayed at the place of business, or in a contractual document.

Question 45

Sufficiency of Notice

Answer 45

Reasonable steps must be taken to bring any clause to customer’s attention

A clause won’t be binding unless the offeror has taken reasonable steps to bring it to the customer’s attention.

Onerous clauses shouldn’t be hidden in small types in the middle of a long contract

The more onerous the term, the more effort needed to bring it to the attention of the other party

Question 46

Interfoto Picture Library v Stiletto Productions (1988)

Answer 46

A contract for the hire of photographic transparencies included a clause stating that if the transparencies weren’t returned on time, there was a penalty payable of £5 for each transparency per day

Claimants were 14 days late running 47 transparencies

It was held that reasonable steps hadn’t been taken to bring the onerous nature of this term to the other sides attention and the term wasn’t part of the contract

Question 47

What happens if a party signs a document without reading it?

Answer 47

A party is deemed to have notice of any term in that contract, regardless of whether they’ve read it or not.

It’s up to the party signing the contract to read it.

Question 48

L’Estrange v Graucob (1934)

Answer 48

The claimant signed an agreement for a cigarette machine for her cafe

She didn’t read the terms but was nonetheless bound by an exemption clause in the contract

Incorporation by signature

Question 49

The clause must be clear and unambiguous

Answer 49

If a clause is unclear or ambiguous, the court may restrict the effect on the clause against the party seeking to rely on it

This is known as contra proferentem rule

Contra = against
Proferentem = the party who offered it

Question 50

Example

Answer 50

If a car dealer has an exclusion clause covering new cars, it would be ineffective against any second hand cars sold.

For an exemption clause to be valid, whether in a signed document or not, it must be written in a clear and unambiguous manner

If there’s any doubt about the meaning or extent of the clause, the court will construe it against the party seeking to rely on it.