Unit 3 Notes - Consideration & Intention

Question 1

Explain the concept of consideration and the basic rule

Answer 1

There is a requirement under English law of contract that, to be binding, a contract must be ‘supported by consideration’. It is not enough that an offer made by one party, made seriously and with the intention to create a contract, has been accepted by the other party—without the added magic ingredient of ‘consideration’ there is no binding, enforceable contract.

The basic rule: Every simple contract must be supported by consideration from each party. However, contracts made by deed (specialty contracts) do not require consideration unless the terms of the agreement require it.

Question 2

Define consideration; specifically the Currie v Misa definition

Answer 2

‘Consideration is an act or forbearance (or the promise of it) on the part of one party to a contract as the price of the promise made to him by the other party to the contract’: Dunlop Pneumatic Tyre Co v Selfridge & Co Ltd (1915).

Currie v Misa (1875).

‘Some right, interest, profit or benefit accruing to one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other’

Question 3

State the 3 main types of consideration

Answer 3

Executed Consideration
Executory consideration
Past consideration:

Question 4

Explain Executed Consideration

Answer 4

Executed Consideration: relates to payment for promise in the present time (e.g. buying groceries in a shop, paying for them straight away)

Question 5

Explain Executory consideration

Answer 5

Executory consideration: is given where there is an exchange of promises to do something in the future. Executed consideration means that the consideration is in the form of an act carried out at the time the contract is made.

Question 6

Explain Past consideration

Answer 6

Past consideration: Past consideration is something of value that was given or done before any promise or payment or reward was made. I.e. there was no mutual exchange of promises.

Therefore consideration has to be in every contract. If it is proved that there is no consideration then it is considered by the law that there is no contract between the parties.

Past consideration is insufficient and therefore is not valid. This is because its not valid, as two parties aren’t simultaneously agreeing to perform/do something the way they are in Executed or Executory consideration.

Question 7

Explain what is meant by Sufficient Consideration

Answer 7

Sufficient consideration:
Consideration must be sufficient but need not be adequate.

Sufficient means that:
there must be some monetary value to the consideration
it must be capable in law of amounting to consideration.

The words ‘need not be adequate’ mean that there is no need for each party’s consideration to be equal in value. It does not have to adequately reflect the promise of which it was given.

Question 8

State the 4 key overarching rules in contract law regarding consideration

Answer 8

The overarching rules:

1. Consideration must move from the promisee
2. Past consideration: invalid
3. Consideration must be legal
4. Consideration must be sufficient but does not need to be adequate

Question 9

Explain the first key principle;

1) Consideration must move from the promisee;

Answer 9

In order to be valid, consideration must ‘move from the promisee’, though it need not necessarily ‘move to the promisor’.

The person who has provided consideration to the contract on offer can look to enforce the contract. A third party cannot enforce the contract, albeit they have an interest in the contract, as the agreement is between the promisee and promisor

Tweedle v Atkinson(1861) + McCoubray v Thomson(1868).

These cases developed the principles of Clark + Friel

Clark – ‘Prevents a contract from being enforceable against someone who is not a party to it.’

Friel – ‘Privity denies the right to a person who is not a party to a contract and therefore
cannot be said to have supplied consideration from enforcing the contact.

Question 10

Explain the 3 exceptions to the principles of clark + Friel (that consideration must move from the promisee)

Answer 10

Equitable Trusts:

Equitable trusts are an obvious exception whereby a person who is not a party to an agreement may still benefit from that agreement – that is their purpose after all.

Agency:

An agent is a person who is authorised to act on behalf of another – ‘the principal.’

Recovery of Losses Suffered by Third Parties:

A contracting party may not be able to recover against the defendant in respect of a loss suffered by a third party where that third party has a direct cause of action against Defendant.

Question 11

Explain the second key principle;

2) Past consideration: invalid

Answer 11

Past consideration:

Past consideration is something of value that was given or done before any promise or payment or reward was made. I.e. there was no mutual exchange of promises.

Past consideration is insufficient and therefore is not valid. This is because its not valid, as two parties aren’t simultaneously agreeing to perform/do something the way they are in Executed or Executory consideration.

The law cannot enforce such a promise McArdle(1951) Roscorla v Thomas(1842).

Question 12

Explain the exemptions to the principle that Past consideration is invalid

Answer 12

Sometimes something can appear to be past consideration but it was actually not. It was not a purely gratuitous act at the time of performance.

Precedent: Pao On v Lau Yiu Long (1980)

A past promise/consideration will be considered if the following are satisfied:

• An act was done at the promisors request
• The parties understood that the act was to be remunerated either pay payment or conferment of a benefit and …
• Payment must have been legally enforceable had it been promised in advance.

NOTE: The later promise crystallises the promise’s reasonable expectation. In the absence of a later promise, a reasonable sum should be paid.

Question 13

Explain principle number 3;

3) Consideration must be legal

Answer 13

Consideration must be legally sufficient. If an act was illegal and a person had full knowledge of this, costs cannot be recovered - Pearce v Brooks (1866)

‘An act done before the giving of a promise to make a payment or to confer some other benefit can sometimes be consideration for the promise. The act must have been done at the promisors’ request: the parties must have understood that the act was to be remunerated either by a payment or the conferment of some other benefit: and payment, or the conferment of a benefit, must have been legally enforceable had it been promised in advance. All three features are present in this case.’

As well as the Lampleigh v Braithwait principle, there are a number of other exceptions to the rule that past consideration is legally insufficient.

Question 14

Explain the rules surrounding the Performance of an existing duty and wether it is ‘good consideration’

Answer 14

Performance of an existing duty

As a general rule, performance of an existing statutory duty is not sufficient consideration.

Pre-existing public duty:

If you are under a public duty to do something, in other words a duty that is enforceable by the general law irrespective of contract, then the performance of this duty (or a promise to perform it) will not count as good consideration to support another person’s promise

Similarly, performance of an existing contractual duty is not consideration.

Pre-existing contractual obligation owed to the other party:
The basic rule has traditionally been that it is not good consideration to do or promise to do what you are already contractually bound to the other contracting party to do. This is because doing what you are already bound to do is no legal detriment (you can already be sued to enforce the original promise) and equally it is of no legal benefit to the other party to receive performance that they are already entitled to receive.

Question 15

Explain the 3 exemptions to the rule that Performance of an existing duty
is not good consideration

Answer 15

As a general rule, performance of an existing statutory duty is not sufficient consideration.

However, there are three exceptions:

1. If the existing contractual or statutory duty is exceeded, there is sufficient consideration.
2. The performance of an existing contractual duty may be sufficient if it confers some benefit of a practical nature on the other party.
3. The performance of an existing contractual obligation is sufficient consideration to support a promise from a third party.

Question 16

Explain The Part payment problem - part payment of a debt

Answer 16

The part-payment problem

General rule “ the rule in Pinnel’s case (1602) states that payment of a smaller sum does not discharge a debt of a greater amount.

This has been affirmed in Foakes v Beer (1884).

Exceptions
There are four exceptions to the rule in Pinnel’s case:

1. Where the part payment is made by a third party
2. composition with creditors (i.e. the creditors all agree to accept a sum which is less than they are owed)
3. accord and satisfaction
   accord means that both the parties agree freely to the part payment.
   satisfaction (i.e. consideration) might be payment at an earlier date, payment at a different place, payment in a different currency, etc.
4. the equitable doctrine of promissory estoppel.

As Lord Coke famously explained in Pinnel’s Case (1602):

That payment of a lesser sum on the day in satisfaction of a greater, cannot be any satisfaction for the whole, because it appears to the judges, that by no possibility a lesser sum can be satisfaction to the plaintiff for a greater sum.

Question 17

Explain the case of Foakes v Beer (1884) and wether it is still dining precedent

Answer 17

The respondent, Beer, loaned the appellant, Dr Foakes, £2090 19s. When he was unable to repay this loan she received a judgment in her favour to recover this amount. The pair then entered an agreement whereby ‘in consideration’ of an initial payment of £500 and ‘on condition’ of six-monthly payments of £250 until the whole amount was repaid, she would not enforce her judgment against him. Foakes made these regular payments until the entire amount was repaid. However, he had not paid any interest on the judgement debt, which Beer was entitled to under statute.

The House of Lords held that there was no consideration for Mrs Beer’s promise not to sue for the interest, since Dr Foakes was doing no more than he was already obliged to do in repaying the debt.

It is a leading case from the House of Lords on the legal concept of consideration. The doctrine that payment by the debtor of a less sum than the whole amount of the debt will not extinguish the debt, although the creditor expressly agree to receive it in full and give a receipt or writing to that effect, is well established by abundant authority.

the Court of Appeal’s reasoning in MWB on Foakes v Beer, Roffey, and practical benefit remains binding for the future, until the opportunity next arises for the Supreme Court to consider it.

Question 18

Explain the fourth key principle;

4) Consideration must be sufficient but does is not required to be adequate

Answer 18

There is no need for the ‘price of the promise’ to be the economic equivalent of the promise or even anywhere near it, as long as the law regards the consideration as something of value. But it will be insufficient if it is of no legal value

The law does not insist that the consideration should be the ‘full’ or ‘equivalent’ economic value of what is being received in exchange.

This is because the law of contract is not concerned with whether the parties are getting a good deal.

Under this rule if two parties negotiate a deal and are in agreement to the value, but others may deem the valuation not adequate, due consideration was given and can be proved to be sufficient.

Question 19

Explain what is meant by Estoppel

Answer 19

Estoppel: a principle, originating in the courts of equity, that is difficult to define but essentially embodies the general idea that if you say or do something and another person takes you at your word or at face value, and relies on what you have said or done, you cannot later change your mind or resile from your position—this would be unconscionable so you will be prevented or ‘estopped’ from doing so

Question 20

Explain what is meant by Proprietary estoppel

Answer 20

Proprietary estoppel: allows the court to give a remedy in the relatively common situation where a landowner encourages a claimant to believe that he has or will be given an interest of some kind in the landowner’s land, either actively by making an assurance to that effect or passively by acquiescing in the claimant’s mistaken belief.

If the claimant acts to his detriment in reliance on this state of affairs, such that it would be unconscionable for the landowner to act inconsistently with it, the court will give effect to the estoppel and give the claimant an appropriate remedy

Question 21

Explain what is meant by Estoppel by convention

Answer 21

Estoppel by convention: unlike proprietary estoppel, which involves one party inducing a belief in the other, estoppel by convention arises where the parties to a transaction have both, for whatever reason, proceeded on a common but mistaken assumption that a given state of facts is true. Having proceeded on that basis, they will be estopped from later challenging the assumed state of facts if it would be unconscionable to do so

Question 22

Explain the doctrine of Promissory estoppel and its origins

Answer 22

Promissory estoppel

The doctrine of promissory estoppel is based on the principles of fairness and justice. It prevents a person going back on his promise to accept a lesser amount.

The principle was established in Central London Property Trust v High Trees House (1947).

The principle is subject to the following conditions:

• There must be an existing contract between the parties.
• The claimants must voluntarily waive their rights under the contract.
• There must be an intention that the defendants should rely on the waiver
• The defendants must alter their legal position because of the waiver.

Question 23

Explain what the doctrine of ‘Privity’ and privity of contract means

Answer 23

Privity of contract

A common law doctrine which prevents a person who is not a party to a contract from enforcing a term of that contract, even where the contract was made for the purpose of conferring a benefit on the third party. The UK Contracts (Rights of Third Parties) Act 1999 reformed the privity of contract rule and gives a person who is not a party to a contract a right to enforce a term of that contract in specified circumstances.

The general rule: Only the parties to a contract:

• acquire rights and obligations under it
• can sue and be sued on it.

Question 24

What are the exemptions to the doctrine of Privity of a contract

Answer 24

Exceptions

There are a number of exceptions to the general rule regarding privity of contract:

The Contracts (Rights of Third Parties) Act 1999 allows a person who is not a party to a contract to enforce it so long as the contract was for his benefit and he was expressly identified, by name or description.

Under the rules of land law, restrictive covenants run with the land to which they relate i.e. that a future owner will be subject to restrictions made in previous contracts.

Question 25

Explain the origins of promissory estoppel

Answer 25

The origins of ‘promissory estoppel’ is found in ‘Central London Properties v High Trees House Ltd’

In 1937, Central London Properties (the landlord) granted a long lease of a block of flats in London to High Trees at an annual rent of £2,500. When the Second World War broke out, High Trees had trouble letting out all the flats in the block and so the landlord agreed in 1940 to reduce the annual rent to £1,250.

By the end of the war, the flats were fully let and the landlord’s receiver (the landlord having gone bust) brought proceedings to claim the balance of the full rent for the last two quarters of 1945.

Denning J held that the balance was payable, but only because the landlord’s concessionary reduction in the rent had been expressed just to cover the war years. If the receiver had been trying to claim the balance for the war years, such a claim would have failed, because Denning J regarded the landlord’s concession as effective despite the absence of any consideration.

Despite it’s weaknesses in the precedent, High Trees has undoubtedly been followed ever since (if in a slightly narrower form than Denning J had in mind) and is the source of what is now called promissory estoppel.

Question 26

What are the elements are required to establish promissory estoppel?

Answer 26

There are number of elements are required to establish promissory estoppel (in what follows the parties will be called ‘creditor’ and ‘debtor’ for convenience,

1. There must be a clear and unambiguous promise or representation that the creditor will not insist on his strict legal rights, satisfying an equivalent test of certainty as is required for contractual obligation

The debtor must have relied on the promise or representation.

Fundamentally, in order to count as reliance, it must be shown that the debtor acted differently from the way in which he would have acted had the representation not been made.

3. The creditor is estopped from going back on or acting inconsistently with what he promised, where it would be inequitable to do so.

So unlike a concession supported by consideration, which is binding immediately without further enquiry into the situations of the creditor and debtor, someone who makes a gratuitous concession will only be estopped from withdrawing it if (and to the extent that) it would be inequitable, unconscionable, or unfair to do so. This element of judicial discretion and flexibility is the essence of promissory estoppel, separating those cases where the debtor does and does not deserve protection.

Question 27

Is promissory estoppel Suspensory or Extinctive?

Answer 27

The most common view in cases and commentary is that promissory estoppel is merely suspensory. After all, the landlord in Hughes was allowed to reactivate the six months’ repair period by giving the tenant the appropriate notice.

promissory estoppel can be part-extinctive, part-suspensory.

Question 28

Explain the four main principles relating to Intention to create legal relations

Answer 28

There are a few concepts of intention to create legal relations. Intention to create legal relations also means an intention to be serious about agreement significance:

a) The contracting parties mind will be obvious to enter a serious contract

b) If there is no intention to create legal relations the contract would not be enforceable, legal and binding

c) Without intention to create legal relations, the parties cannot sue each other

d) Without intention to create legal relations the contract may become a mere promise

e) Without intention to create legal relations the contract may lack the binding effect

Question 29

Explain the 3 primary categories which ‘Intention to create legal relations’ fall into

Answer 29

Domestic and social agreements of intention to create legal relations can be broken down into three groups;

1. Commercial or business relations
2. Social friend’s relations
3. Family or domestic relations.

Question 30

Explain how Commercial or business relations are viewed generally, in terms of wether there’s Intent to create legal relations

Answer 30

1) Commercial or business relations
In term of general rules of commercial or business relations, there is a presumption or intention to be legally binding. Otherwise in term of exception the presumption is rebuttable.

Case examples:

Kleinwort Benson Ltd V Malaysia Mining Corporation Bhd 1989

Edwards v Skyways [1969] 1 WLR 349

Esso Petroleum Ltd v Commissioners of Customs and Excise [1976] 1 WLR

Question 31

Explain how Social friend’s/ relations are generally viewed in terms of wether there’s Intent to create legal relations

Answer 31

2) Social friend’s relations

In term of general rules of social friend’s relations, there is no presumption to be legally binding. Otherwise, in term of exception the presumption is rebuttable.

Case example: Simpkins V Pays 1955

Question 32

Explain how Family or domestic relations are generally viewed in terms of wether there’s Intent to create legal relations

Answer 32

3) Family or domestic relations

In term of general rules of family or domestic relations, there is no presumption to be legally binding. Otherwise, in term of exception the presumption is rebuttable.

Case examples:

Balfour v Balfour 1919

Merritt v Merritt [1970] 1 WLR 1211