Existing obligations Flashcards
Executory consideration amounts to a party taking on an obligation - promising to do (or not do) something. Before entering into a contract, a party might already be under an obligation to do the same thing, perhaps due to:
(a) An existing contract between the same parties;
(b) A public duty; or
(c) An existing contract with a third party (ie not one of the parties entering into the contract –the existing obligation is clearly owed to third party).
Is an obligation in an existing contract between the parties good consideration?
eg. If a party is already contractually bound to Party A to do something, then agreeing with Party A again to do that thing is not generally good consideration for a new contract
Key case: Stilk v Myrick (1809) 2 Camp 317
The captain of a ship promised his crew that, if they shared between them the work of two seamen who had deserted, the wages of the deserters would be shared out 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.
End of key case
If the sailors had agreed to exceed their existing obligations, then there would have been consideration. In Hartley v Ponsonby (1857) 7 E & B 872 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 seriously undermanned – this amounted to good consideration.
If the sailors in Hartley were entitled to extra payment why weren’t those in Stilk? One explanation is that the proportion of sailors that deserted in Hartley was far greater, radically changing the nature of the voyage home. However, there also appears to have been a concern in Stilk about undue pressure being placed on the captain to pay more money. More recently, the court has developed the doctrine of economic duress which provides that a promise to pay in such circumstances might be unenforceable on the basis that the captain’s consent to the contract was effectively obtained by (economic) force. Perhaps, if the same situation were to repeat itself today, the court would decide Stilk on the basis of economic duress rather than consideration. This element does not address economic duress.
The courts revisited the issue of promises to pay more in the following case.
The courts revisited the issue of promises to pay more in…
Williams v Roffey Bros & Nichol (Contractors) Ltd [1991] 1 QB 1
In this case, the defendants, Roffey Bros, had been contracted to build a block of flats and they sub-contracted the plaintiff, Lester Williams, to carry out the carpentry work in 27 of the flats for an agreed price of £20,000. Before the work was completed, Williams got into financial difficulty and it was clear that, without additional money, he would be unable to finish and would, therefore, be in breach of contract. Had the work not been finished on time, Roffey Bros would have been liable for substantial penalties to the main contractors under their contract to build the flats. Consequently, they promised Williams an additional £575 per completed flat. Roffey Bros did not stick to their promise and Williams sued for the additional sum.
In order to enforce the promise of extra payment, Williams needed to show that they had provided consideration in return. This was difficult for Williams as all they had done was complete the carpentry work they were obligated to under their original contract with Roffey to the same deadline. However, the court, did find consideration in the form of the ‘practical benefit’ that Roffey had received. The practical benefit Roffey obtained in was the avoidance of the late completion payment in the main contract, a more efficient working arrangement and avoiding the need to find an alternative contractor to do the work. Note that the court called the consideration in this case ‘factual’ consideration distinguishing it from legal consideration. The term ‘factual’ consideration acknowledges that nothing new is being promised but the party in receipt of the promise is still getting something out of the reshaped deal. The conditions necessary to establish factual consideration set out by Lord Justice Glidewell in Williams v Roffey are set out below.
(i) if A has entered into a contract with B to do work for, or to supply goods or services to, B in return for payment by B; and (ii) at some stage before A has completely performed his obligations under the contract B has reason to doubt whether A will, or will be able to, complete his side of the bargain; and (iii) B thereupon promises A an additional payment in return for A’s promise to perform his contractual obligations on time; and (iv) as a result of giving his promise, B obtains in practice a benefit, or obviates a disbenefit; and (v) B’s promise is not given as a result of economic duress or fraud on the part of A; then (vi) the benefit to B is capable of being consideration for B’s promise, so that the promise will be legally binding.
Compare and contrast Stilk v Myrick, Hartley v Ponsonby and Williams v Roffey.
What type of consideration was provided by the performing parties in these cases?
First, what did the performing party do in return for the promise of extra payment in each of these three cases?
In Stilk v Myrick, the sailors did nothing additional – they were already contractually bound to do what was required to complete the voyage – and they did this, nothing more.
In contrast, the sailors in Hartley v Ponsonby did provide fresh consideration. They exceeded their existing contractual obligation by making the return journey in dangerous conditions when the ship was undermanned.
In Williams v Roffey nothing additional was done by Williams – they did not exceed their contractual obligations – they simply completed the carpentry work to the original deadline. However, in completing their existing obligation, the court held that Williams had provided Roffey with a practical benefit in return for the extra payment. The avoidance of the late fee in the main contract, the adoption of a more efficient working arrangement and avoiding the need to find an alternative contractor gave a tangible practical benefit to Roffey.
Well no consideration was provided in Stilk and so the promise of extra payment was unenforceable. In Hartley v Ponsonby fresh legal consideration was provided by the sailors exceeding their existing contractual obligation. In Williams there was no legal consideration – remember they hadn’t done anything more than perform their existing obligation. However, the practical benefit Williams provided amounted to factual consideration making Roffey’s promise of extra payment enforceable.
Is an Obligation under a public duty good consideration?
We have just considered whether an existing contractual obligation owed to a party can amount to good consideration for a new contract with that party (or a variation of the contract). A similar question could be asked as to whether the party claiming to have given consideration has done any more than they were already obliged to do under public law (in contrast to being obliged under an existing contract). The principle in these circumstances is that merely carrying out a public duty imposed by the law will not amount to sufficient consideration.
The issue of sufficiency of consideration has also arisen in respect of rewards claimed by police officers for giving information. Could it not be said that police officers, in giving information, are doing no more than their public duty? This point arose for discussion in the case of England v Davidson (1840) 11 A & E 856, where the defendant offered a reward for information leading to the conviction of a particular criminal. The plaintiff, a police officer, gave the relevant information, but the defendant refused to pay, alleging that the police officer, by supplying the information, was doing no more than the public duty imposed on him by law. It was held that the duty of a police officer is the prevention of crime and they are not under a duty to provide information to a private individual. In doing so he went beyond his public duty and thus provided consideration for the offer of reward.
Is an Existing obligation to a third party good consideration?
In New Zealand Shipping Co v AM Satterthwaite & Co (The Eurymedon) [1975] AC 154 the claimant made an offer to the defendant that, if the defendant would unload the claimant’s goods from a ship, then the claimant would treat the defendant as exempt from any liability for damage to the goods. In fact, the defendant was already bound to do this by a contract with a third party. Lord Wilberforce stated:
“An agreement to do an act which the promisor is under an existing obligation to a third party to do, may quite well amount to valid consideration and does so in the present case: the promisee obtains the benefit of a direct obligation which he can enforce.”
Lord Wilberforce makes 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.
Where a debtor promises to pay part of their debt in return for a release from the remainder of their liability, they are…
…simply offering to do something which they are already obliged to do: they are seeking to offer an existing obligation as consideration.
This is not good consideration: the debtor remains liable even where the creditor has agreed to release them from further liability. Simply paying a smaller sum than that owed will not be sufficient consideration.
Explain Foakes v Beer (1884) 9 App Cas 605
Mrs Beer had obtained a judgment against Dr Foakes for £2,090. Dr Foakes requested time to pay and the parties agreed in writing that, if Dr Foakes paid £500 at once and the balance by instalments, Mrs Beer would not ‘take any proceedings whatever on the judgment’.
The agreement made no reference to the question of interest although by virtue of the Judgments Act 1838, all judgment debts carry interest until paid. Dr Foakes ultimately paid the whole amount of the judgment debt itself and Mrs Beer then claimed the accrued interest.
Dr Foakes refused to pay on the basis of the written agreement whilst Mrs Beer claimed that the agreement was unsupported by consideration. The House of Lords held that Mrs Beer’s claim should succeed – the agreement was unsupported by consideration.
What are some circumstances in which Foakes v Beer does not apply?
- Introducing a new element into the payment
The rule in Foakes v Beer is only applicable if the promise of the creditor to accept a lesser sum is unsupported by fresh consideration from the promisee. However, if, at the creditor’s request, some new element is introduced, then this will amount to good consideration, and the court will not enquire as to the value of the new element. Examples might be payment at a different place, or at a different time or by providing a different thing in place of money (Pinnel’s case (1602) 5 Co Rep 117a)..
- 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.
You might consider that the rule on Foakes v Beer decision does not sit well with Williams v Roffey. In Williams v Roffey, consideration for a promise to pay was found in the practical benefit obtained from the other contracting party completing its contracting obligations. Didn’t Mrs Beer obtain practical benefit from the instalment arrangement agreed with Dr Foakes, in the sense that if she had tried to force payment of the full sum, he might have been bankrupted, and she might have received nothing?
This point was considered in Re Selectmove Ltd [1995] 1 WLR. The Court of Appeal took a restrictive approach, concluding that Williams v Roffey and practical benefit had no application to cases where a creditor agrees to accept a lesser sum in settlement of a debt. This case created a clear dividing line between promises to pay more for an existing contractual obligation, where practical benefit can be applied, and promises to accept less than your legal rights, where it cannot. However, a different view was taken by the Court of Appeal in the next case we shall consider, MWB Business Exchange Centres Ltd v Rock Advertising Ltd [2016] EWCA Civ 553.
What happened in MWB Business Exchange Centres Ltd v Rock Advertising Ltd [2016] EWCA Civ 553?
In this case a landlord agreed orally to reschedule rental payments under a licence agreement to give a tenant longer to pay, thereby varying the licence.
The Court of Appeal considered whether there had been valid consideration for the variation. The court acknowledged that part payment of a sum already due is not normally good consideration.
However, the judges agreed that there was sufficient consideration. Their justification was that the landlord obtained a practical benefit by keeping the tenant in the property (compared to leaving the property vacant).
This benefit went beyond the advantage of receiving prompt payment of a part of the arrears and a promise that it would be paid the balance over the coming months.
The court also considered the fact that the landlord was not under economic duress from the tenant. It can be seen that in reaching this decision, the court applied the terminology of ‘practical benefit’ and absence of duress from Williams v Roffey. This decision appeared to blur the dividing line between a promise to accept less and a promise to pay more.
On appeal to the Supreme Court the appeal was allowed on the basis that the oral variation was invalid for reasons unconnected to consideration. Disappointingly, therefore, that made it unnecessary for the court to deal with the issue of consideration. 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. Whilst Lord Sumption considered that Foakes v Beer was ‘ripe for re-examination’, he stated that if were to be overruled:
“It should be before an enlarged panel of the court and in a case where the decision would be more than obiter dictum.”
