Contract Law: Consideration, Variation & ICLR - Week 2

Consideration

• An essential element for a binding contract, alongside offer, acceptance, and intention to create legal relations.
• Defined as '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'.
• This definition emphasizes the concept of exchange: something must be provided in return for a promise to make it enforceable.

Executory vs. Executed Consideration

• Executory consideration involves promises to perform actions in the future after the contract forms.
  • Bilateral contracts usually involve this form of consideration.
• Executed consideration is when the consideration has already been performed at the time the contract is formed.
  • Unilateral contracts are a classic example, like rewards for completing a specific act.
  • Performing the stipulated act acts as both acceptance of the offer and the executed consideration.
• Valuable consideration can be something promised or something already done.

Rules Governing Consideration

• Key rules include that consideration:
  • Must not be past.
  • Must move from the promisee.
  • Need not be adequate.
  • Must be sufficient.

Consideration Must Not Be Past

• Generally, prior actions or forbearance cannot be used as consideration for a later promise.
• Consideration must be given in exchange for the other party’s promise.
• Eastwood v Kenyon (1840): Upbringing of a child was past consideration and insufficient to support a later promise to pay off a debt incurred for that upbringing.
• A moral obligation is insufficient to create a legally binding contract.

Exception to the Past Consideration Rule

• An exception exists if the prior act or service was provided at the promisor's request and with an understanding that payment would be made.
• Pao On v Lau Yiu Long: Lord Scarman outlined three conditions:
  • Act must have been done at the promisor's request.
  • Parties understood the act would be rewarded (expressly or impliedly, especially in a commercial context).
  • The payment or benefit would have been legally enforceable if promised in advance.
• This exception suggests a simple contract forms at the request stage, with the precise value fixed later.
  • Common in everyday transactions like car repairs or professional advice, reflecting reasonable expectations of payment.

Consideration Must Move from the Promisee

• A party who has not provided consideration cannot enforce a contract.
• Related to, but distinct from, the doctrine of privity of contract.
• Tweddle v Atkinson (1861): A groom could not enforce an agreement between his father and father-in-law because he provided no consideration.

Consideration Need Not Be Adequate

• Courts do not interfere with freely reached bargains due to freedom of contract.
• The relative value of each party's contribution is not assessed by the court.
• Chappell & Co v Nestle Co Ltd: Chocolate wrappers, though discarded, were part of the consideration because Nestle stipulated them as such to increase chocolate sales.
• A contracting party can stipulate any consideration they choose.

Consideration Must Be Sufficient

• Must have some value 'in the eyes of the law'.
• The value can be small, as long as it is worth something.
• Thomas v Thomas (1842): A widow's payment of £1 per year and keeping the house in repair was sufficient consideration, regardless of the property's value.

Summary of Key Principles of Consideration

• Executory or executed.
• Must not be past (with exceptions).
• Must move from the promisee.
• Need not be adequate.
• Must be sufficient.

Existing Obligations as Consideration

• Examines when performing an existing duty is valid consideration for a new contract. Obligations might arise from:
  • An existing contract between the same parties.
  • A public duty.
  • An existing contract with a third party.

Existing Contractual Obligation Between the Parties

• Agreeing to pay an additional sum for performing an already contractually obligated act is not binding without additional consideration.
• Stilk v Myrick (1809): Sailors promised extra wages for covering the work of deserters were not entitled to it because they were already obligated to do whatever it took to complete the voyage.
• Agreeing to exceed existing obligations can constitute consideration.
• Hartley v Ponsonby (1857): Sailors who agreed to complete a dangerous, undermanned voyage went beyond their existing obligations, thus providing valid consideration.
• Concerns about undue pressure to pay more led to the development of economic duress (though not covered in this text).

Williams v Roffey Bros & Nichol (Contractors) Ltd

• Roffey Bros subcontracted carpentry work and promised additional payment due to Williams' financial difficulties to avoid late completion penalties.
• The court found consideration in the form of the 'practical benefit' to Roffey, which was avoiding the late completion payment, more efficient working arrangements, and avoiding the need to find a new contractor.
• ‘Factual’ was the type of consideration in this case, because it acknowledges that nothing new is being promised but the party in receipt of the promise is still getting something out of the reshaped deal. Glidewell's conditions for factual consideration:
  • A contracted with B for work, goods, or services in return for payment.
  • B doubts A's ability to complete the bargain.
  • B promises additional payment for A's on-time performance.
  • B obtains a practical benefit or avoids a disbenefit.
  • B's promise is free from economic duress or fraud by A.
  • The benefit to B can be consideration for B's promise, making it legally binding.

Obligations Under a Public Duty

• Performing a public duty imposed by law is generally not sufficient consideration.
• England v Davidson (1840): A police officer who provided information for a reward went beyond their public duty (prevention of crime isn't the same as providing information to private citizens), thus providing consideration.

Existing Obligations to a Third Party

• Performing an existing duty owed to Party B can be consideration for a contract with Party C.
• New Zealand Shipping Co v AM Satterthwaite & Co (The Eurymedon): Unloading goods (already contractually obligated to a third party) was valid consideration because the claimant obtained the benefit of a direct obligation they could enforce
• Offering this consideration puts oneself at risk of double liability.

Part Payment of a Debt

• Promising to pay part of a debt in return for release from the rest is not good consideration, as it's an existing obligation and a smaller sum isn't sufficient
• Foakes v Beer (1884): An agreement to pay a debt by installments did not include interest. Paying the debt without interest was not sufficient consideration.
• The agreement was unsupported by consideration, so the creditor was able to claim the interest.

Exceptions Where Foakes v Beer Does Not Apply

• Introducing a new element into the payment at the creditor's request, like payment at a different place, time, or in a different form (Pinnel's case).
• Payment of a lesser sum by a third party, which prevents the creditor from suing the debtor for the difference.
• Williams v Roffey stated: consideration for a promise to pay was found in the practical benefit obtained from the other contracting party completing its contracting obligations, but Re Selectmove Ltd took a restrictive approach, and concluded 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.

MWB Business Exchange Centres Ltd v Rock Advertising Ltd

• A landlord agreed orally to reschedule rental payments, and the court agreed there was sufficient consideration with a practical benefit as the landlord obtained a practical benefit by keeping the tenant in the property compared to leaving the property vacant.
• Applied the terminology of ‘practical benefit’ and absence of duress from Williams v Roffey
• On appeal to the Supreme Court the appeal was allowed on the basis that the oral variation was invalid for reasons unconnected to consideration.
• Whilst Lord Sumption considered that Foakes v Beer was 'ripe for re-examination', he stated that "It should be before an enlarged panel of the court and in a case where the decision would be more than obiter dictum."

Promissory Estoppel

• Equitable doctrine that allows a contract to be enforced despite not being supported by consideration: protects reliance on a non-bargain promise
• Often involves part payment of a debt following a promise to not require full payment.

Summary of Consideration and Existing Obligations

• Existing obligations under a contract are generally not good consideration for a new contract between the same parties.
• A practical benefit (Williams v Roffey) can create valid consideration.
• Performing a public duty isn't sufficient consideration.
• Obligations owed to a third party can be good consideration.
• Part payment of debt is generally not good consideration, but there are exceptions.

Promissory Estoppel

• Rule in Foakes v Beer states, part payment of a debt will not be good consideration to discharge the whole debt. This is because consideration has not been exchanged between the parties
• Intended to mitigate the harshness of the Foakes v Beer rule, which states that part payment of a debt is not good consideration for discharging the entire debt.
• Protects a party who relies on a promise, preventing the promisor from retracting it.
• Often invoked in cases involving part payment of debt.
• Hughes v Metropolitan Railway Co. (1877): Landlord's conduct implied a promise not to enforce forfeiture, which the tenant relied on by not doing repairs.
• Central London Property Trust v High Trees House:
• Landlord reduced rent during wartime due to low occupancy.
• Denning J stated the landlord could not claim full rent for the war years due to promissory estoppel, even though there was no consideration for the reduction: significant development in the doctrine of promissory estoppel.

Parameters of Promissory Estoppel

Acts as a Shield, Not a Sword

• Can only be used as a defense, not to initiate a cause of action.
• Combe v Combe: A wife could not use estoppel to enforce her husband’s promise to pay an allowance because she had provided no consideration.

Clear and Unequivocal Promise

• Must be a stated promise or representation that strict legal rights will not be fully enforced (Woodhouse A.C. Israel Cocoa Ltd. S.A. and Another v Nigerian Produce Marketing Co. Ltd).
• Must intend to affect legal relations, not just be a gratuitous privilege.

Change of Position in Reliance on the Promise

• The promisee must have relied upon the promise or representation, influencing their conduct.
• An act before the promise cannot be reliance.
• Detrimental reliance not always required, it can be sufficient for the promisee to have impacted their change of position making it inequitable for the promisor to retract the promise.

Inequitable for Promisor to Go Back on Promise

• Based on fairness and discretion: Court will determine whether or not to allow the promisor to go back on their promise
• Detrimental reliance is a factor favoring the defense
• D & C Builders v Rees: Builders could claim the balance of a debt because the debtor had unfairly pressured to accept less.

Does Promissory Estoppel Suspend or Extinguish Legal Rights?

• Rights to periodic payments may resume when the estoppel period ends (High Trees).
• Promisor may resume full rights after reasonable notice (Tool Metal v Tungsten).
• Effect is generally to suspend rights, but not extinguish them: outcome ordered will be just and equitable.
• Exceptionally, rights might be extinguished where it has become impossible for the other to party to meet the obligation concerned or it would be clearly inequitable to require them to do so.

Summary of Promissory

• Commonly creates an exception of rules for payments on debts
• Can only act as a defense to an action.
• Must be a clear and unequivocal promise
• The promisee must have relied upon that promise / representation.
• It must be inequitable for the promisor to revert.

Intention to Create Legal Relations

• An essential element for a binding contract, along with offer and acceptance and consideration.

Intention to Create Legal Relations Defined

• Intention to enter into an agreement with legal ramifications
• The test is objective: determined by actions in the circumstances rather than subjective intentions. Denning MR in Merritt v Merritt: "The court does not try to discover the intention by looking into the minds of the parties... It looks at the situation in which they were placed and asks itself: would reasonable people regard the agreement as intended to be binding?"
• The courts seek to give effect to the intentions of the parties, whether expressed or presumed.

Commercial vs. Domestic Agreements

• Distinctions are made between commercial agreements and domestic agreements.

Commercial Agreements

• Presumption is that parties intend to be legally bound. The courts will readily imply this.
• Burden is on the party asserting no legal intention to rebut the presumption: must use clear words.
• Commercial Agreements do not only apply to businesses, these also extend to agreements made between individuals
• Advertisements can demonstrate intent to be bound.
• Carlill v Carbolic Smoke Ball Co Ltd: Depositing money in a bank showed intention to be bound, making the advert a unilateral offer.
• Esso Petroleum Co. v Commissioners of Customs and Excise: Free 'World Cup coins' with petrol purchase: majority found intention due to business context, minority found no intention due to language, value, and likelihood of legal remedy.
• Collective agreements between trade unions and employees are presumed to lack the required intention to be legally binding unless the agreement is in writing and contains a provision to the effort that the parties do intend the agreement to be a legally enforceable contract (s179 of the Trade Union and Labour Relations (Consolidation) Act 1992).

Subject to Contract

• This expression indicates no intention to be bound until formal execution. Prima facie means not binding
• Common in land sales to allow reflection and advice before binding contract.

Social and Domestic Agreements

• Usual Presumption is there is no intention to create legal relations in social, family, or other domestic agreements, the usual presumption is that there is no intention to create legal relations
• Balfour v Balfour: Agreements between spouses before relationship breakdown showed an unwillingness to find an intention to create legal relations.
• The presumption can be rebutted: examination of circumstances and language used is crucial.
• Willingness for courts to rebut the usual presumption is in relation to arrangements between spouses who were in the process of separating or are separated when the agreement was reached.
• Jones v Padavatton: Arrangement about daughter studying for the bar lacked contractual intent, so mother could repossess the house.

Summary of Intention to Create Legal Relations

• Essential element: no contract without it.
• Commercial agreements: presumed intention.
• Social/domestic agreements: presumed no intention.
• Either presumption can be rebutted.
• 'Subject to contract' implies no intention to be bound until formal execution.

Capacity to Contract

• Rules protect the vulnerable and those lacking capacity.
• Those over 18, of sound mind, and not affected by factors like drunkenness have full capacity.
• Rules apply to children (minors) and those lacking mental capacity.

Minors

• Generally, non-binding under 18, even if fact is unknown or age is misrepresented.

Exceptions:

Necessaries

• Contracts to supply these are binding if beneficial to the minor.
• Minors must pay a 'reasonable price' rather than the actual cost.
• Includes food, medicine, accommodation, and clothing, plus items for the minor’s real use not restricted to products for comfort or pleasure only, and must be something for the real use of the said minor.
• Nash v Inman: Waistcoats were not necessary as the minor already had sufficient clothing.

Contracts of Employment, Apprenticeship or Education

• Binding if beneficial.
• Aylesbury Football Club v Watford Association Football Club: Contract was not beneficial and not enforced as player received no extra training with restrictive terms, wages dependent on employer.

Effect of Contracts

• Contract cannot be enforced against the minor (unless exceptions apply).
• Minor can enforce it against the other party.
• Certain contracts are enforceable unless the minor repudiates them

Ratification

• If a minor validates a contract upon reaching 18, then the contract will be binding on them

Mental Incapacity

• Under s2 of The Mental Capacity Act 2005, a lack of capacity dictates a person is 'unable to make a desicion for himself in relation to the matter' when a contract is made
• Defined under s 3(1) in terms of being unable to:
  • Understand the relevant information
  • Retain the relevant information
  • Use the relevant information
  • and/or communicate a decision.
• The relevant information relates to the consequences of:
  • Deciding one way or another; or
  • Failing to make a decision.
• The Court of Protection makes declarations on capacity (s 15).
• The statutory definition in capacity is for the purposes of the Act only, but it is in practical terms very similar for contract law issues.

Effect of Contracts with Incapacity

• Under s.7 person without capacity still remains liable to pay a reasonable price for 'necessaries.
• In other cases: binding unless the person can establish they did not understand and the other party knew. That makes the contract voidable.
• Imperial Loan Co v Stone: The contract will be voidable.
• Under s 7, a person without capacity remains liable to pay a reasonable price for “necessaries”
• Similar rules apply to intoxicated persons: Matthews v Baxter

Summary of Capacity

• Rules protect vulnerable individuals from contracts, protecting them from potential exploitation
• Full capacity requires being over 18, of sound mind, and not impaired.
• Minors are not generally bound unless the contract is for necessaries, employment, apprenticeship or education.
• S 2 of The Mental Capacity Act 2005 indicates a person incapable of making a decision when the contract is made.
• Incapacity requires paying a reasonable price for necessaries. Other contracts are binding if the the person did not understand what they were doing combined with the other party's knowledge.
• Similar rules extend to those incapacitated due to intoxication.