Consideration, Privity, Agency and Capacity PDF

2 Consideration, Privity, Agency and Capacity LEARNING OUTCOMES When you have completed this chapter, you should be able to: explain and discuss in depth consideration and how it impacts in particular on the formation and vari...

2 Consideration, Privity, Agency and Capacity LEARNING OUTCOMES When you have completed this chapter, you should be able to: explain and discuss in depth consideration and how it impacts in particular on the formation and variation of contracts; appreciate the basic concepts of privity and agency and how they impact on the formation of contracts; apply core legal principles to advise on issues relating to capacity. In Chapter 1 you considered two of the essential constituents of a legally enforceable contract, namely agreement (which manifests itself in terms of offer and acceptance) and contractual intention. Indeed, in many countries, this is all that is required to create a legally binding contract, but in English law there is an additional requirement, ie ‘consideration’. In this chapter you will look at what is meant by ‘consideration’ and circumstances in which it may become an issue. 2.1 What is consideration? The need for consideration is the idea that, in order to be able to hold the other party to a promise, you must have agreed to provide ‘something in return’ for that promise: it is this ‘something in return’ that lawyers call ‘consideration’. The ‘something in return’ may be a promise (called executory consideration) or an act (executed consideration). Bilateral contracts by their nature involve an exchange of promises; whereas a unilateral contract comprises a promise in return for an act (Chapter 1). So in order to sue for breach of a promise, a party must be able to show they gave consideration for that promise. 2.1.1 Definitions of consideration An often quoted definition of consideration is that contained in Currie v Misa (1875) LR 10 Ex 153 which refers to benefit and detriment: A valuable consideration, in the sense of the law, may consist either in some right, interest, profit or benefit accruing to the party or some forbearance, detriment, loss or responsibility, given, suffered or undertaken by the other. 27 Contract In other words, what is provided by way of consideration should either be a benefit to the person receiving it, or a detriment to the person giving it. Often both will be present. For example, if Adam sells his car to Daryl for £9,000, Adam is suffering a detriment by transferring ownership of his car and that is clearly a benefit to Daryl. Conversely, Daryl is suffering a detriment by paying Adam £9,000 for the car and Adam is gaining that benefit. So it will be in many cases that there is both benefit and detriment, but the presence of one or other is enough. For example, suppose that Adam had agreed to transfer the car to Daryl if Daryl paid the price to a particular charity. In that case, Daryl’s consideration in paying £9,000 to the charity is a detriment to him but not a personal benefit to Adam. As well as thinking of consideration in terms of benefit and detriment, it is also possible to think of consideration as the price one party pays for the other party’s promise, ie what one party does or promises to do for the other party’s promise. Sir Frederick Pollock defined consideration as ‘an act or forbearance of one party, or the promise thereof, is the price for which the promise of the other is bought’ (Pollock on Contracts, 8th edn, p 175). This definition highlights the fact that a promise to do something may be consideration. Thus, if I promise to sell you my car for £10,000 and to deliver it to you next Saturday, and in return you promise to pay me on delivery, there will be a binding contract immediately. If either of us defaults on, or before, next Saturday, that person will be liable for breach of contract. For example, if next Thursday I tell you that I have decided to keep my car, you will be entitled to sue me for breach, and if it will cost you more than £10,000 to buy a similar car, you will be entitled to damages. (Damages are dealt with in Chapter 4.) 2.2 Adequacy and sufficiency An often quoted phrase is ‘consideration need not be adequate, but must be sufficient’. ‘Consideration need not be adequate’ means that the consideration does not have to adequately reflect the value of the promise in return for which it is given. ‘Consideration must be sufficient’ means that the consideration must have some value in the eyes of the law. For example, payment of £1 would be good consideration for an Aston Martin car. £1 would be sufficient because it is of some value. The fact that it is not equivalent in value to the car (ie not adequate consideration) does not matter. But what if someone promised you their Aston Martin if you would fetch it from the garage; would that be a binding contract, or a conditional gift? According to Cheshire, Fifoot & Furmston (Law of Contract, 17th edn, p 121), the requirement for you to fetch the car is not the price for the promise, but the condition required to trigger the promisor’s generosity. So it is a conditional gift and not a contract of sale. The fact that consideration must have some value has traditionally been interpreted to mean that it must have some economic value, albeit nominal. Nowadays, however, the need for ‘economic value’ does not seem to be a strict one. In Chappell & Co Ltd v Nestlé Co Ltd AC 87, HL, Lord Somervell said: A contracting party can stipulate for what consideration he chooses. A peppercorn does not cease to be good consideration if it is established that the promisee does not like pepper and will throw away the corn. 28  Consideration, Privity, Agency and Capacity In Chappell v Nestlé the claimants owned the copyright in a piece of music, ‘Rockin Shoes’. Nestlé arranged for copies of this tune to be made into records, and it offered these records to the public for 1s.6d. plus three wrappers from their 6d chocolate bars. The issue before the court involved copyright. The House of Lords had to decide whether the three wrappers were part of the consideration given for the record. The House of Lords held by a majority that the wrappers were part of the consideration. Lord Reid said: … the main intention of the offer was to induce people … to buy (or perhaps get others to buy), chocolate which otherwise would not have been bought. The requirement that wrappers should be sent was of great importance to the Nestlé Co; there would have been no point in their simply offering records for 1s.6d. each … It is a perfectly good contract if a person accepts an offer to supply goods if he (a) does something of value to the supplier and (b) pays money; the consideration is both (a) and (b). Viscount Simonds and Lord Keith of Avonholme dissented. They regarded the requirement for the chocolate wrappers as merely a condition which had to be satisfied in order to qualify to buy the record at a discounted price. Hence their conclusion that the wrappers did not form part of the consideration. What about giving up, or promising to give up, a liberty such as the right to swear or moan? Do you think that should be sufficient to amount to consideration? In White v Bluett (1853) 23 LJ Ex 36, a father promised not to enforce a debt against his son, on condition that the son stopped moaning about the distribution of his father’s property. The court decided that the son had not provided consideration for the father’s promise. The public policy reason behind the decision is that to allow such a promise to amount to consideration might open the floodgates to litigation. There have to be limits on the types of promises that will be enforced by the courts. Also, remember that the parties must intend to create legal relations for the agreement to be binding. If you feel that the argument about not opening the floodgates to litigation is rather a weak one, this approach can be supported by the fact that the parties may not have intended the promise to be legally binding when it was made. In Hamer v Sidway (1891) 27 NE 256, the question before the court was whether William Story was contractually bound to pay his nephew $5,000 on his 21st birthday. On 20 March 1859, William had promised his nephew that if he would stop drinking alcohol, smoking, swearing and gambling until he was 21 years of age, William would pay him $5,000. His nephew agreed and ‘in all things fully performed his part of the said agreement’. Bearing in mind that prior to the agreement, the nephew had occasionally drunk alcohol, smoked etc and that he had a legal right to do so, do you think that by refraining from such activities he had provided consideration for William’s promise? It was argued that there was no consideration as the promise to stop smoking, drinking, etc did not in fact harm his nephew, but actually benefited him, and that William gained no personal benefit from the promise. The court dismissed this argument. The nephew had a legal right to do all the things he abstained from doing. He had abandoned that right in consideration of the promise of $5,000 and the court was not prepared to speculate on the effort which had been required to give up the various activities. 29 Contract As Hamer v Sidway is an American case which may not be followed in England, as a matter of authority, there is no conflict between Hamer v Sidway and White v Bluett. However, it is worth considering why the claim in White v Bluett failed and the claim in Hamer v Sidway succeeded. Could the court’s perception of whether the nephew’s, or son’s, forbearance was sufficient to amount to consideration have been influenced by the nature of the conduct forgone? We are now going to look in detail at a number of situations where the act or promise may not constitute consideration so that no contract is formed. We shall look first at past consideration and then at performance of existing duties. 2.3 Past consideration The need for an exchange and something given in return explains why performance of a gratuitous act or promise is not deemed to be consideration for a later promise of payment. What was done or promised was not done or promised in return for anything at all. It had been gratuitous. Example As a favour, Helen looks after Carl’s cat while Carl is on holiday. When Carl returns he promises to give Helen £30. Helen would not be able to enforce that promise because she did not look after Carl’s cat in return for payment. Carl promised £30 afterwards. She had looked after the cat purely and simply as a favour. 2.3.1 Past consideration will not be sufficient Authority for the principle that past consideration is no consideration is found in Roscorla v Thomas QB 234. Roscorla bought a horse from the defendant. Afterwards, the defendant assured Roscorla that the horse was ‘sound and free from vice’. This proved to be untrue, and Roscorla sued the defendant for breach of contract. The assurance was held to be unenforceable as Roscorla had not given any consideration for it. Roscorla had not bought the horse in exchange for the defendant’s promise. Roscorla had already bought the horse. 2.3.2 Exception to the rule that past consideration will not be sufficient Occasionally, a past act will be good consideration. The following three conditions must be satisfied: (a) The act must have been done at the promisor’s request. This derives from the case of Lampleigh v Brathwait (1615) Hob 105, where the defendant had asked the claimant to seek a royal pardon for the defendant, in relation to a crime which the defendant had committed. The claimant made considerable efforts to do this and the defendant later promised the claimant £100 for doing it. The promise was held to be enforceable. (b) The parties must have understood from the outset that the act was to be rewarded in some way. The case of Re Casey’s Patents, Stewart v Casey 1 Ch 104 made it clear that this second condition also had to be satisfied. (c) The payment, or conferment of other benefit, must have been legally enforceable had it been promised in advance. In other words, the usual requirements for a binding contract apply. If there is an issue here, it will usually be with contractual intention (which we looked at in Chapter 1). 30  Consideration, Privity, Agency and Capacity In Re Casey’s Patents, Stewart v Casey the defendants had asked the claimant (Casey) to manage certain patents for them, which the claimant did. The defendants later promised Casey a one-​third share of the patents for the work. The court held that it must always have been assumed that Casey’s work would be paid for in some way; the defendants’ promise simply crystallised that reasonable expectation. Thus Casey was entitled to the agreed sum. If the subsequent promise had not been made, the claimant would have been entitled in restitution to a reasonable sum for what they had done. (We shall be looking at restitution later in Chapter 4.) Past consideration –​summary A past act will not normally amount to sufficient consideration for a later promise (Roscorla v Thomas). For a past act to amount to consideration for a later promise of payment or other reward, the following three conditions must be satisfied: the act must have been done at the promisor’s request (ie at the request of the person who later promises payment) (Lampleigh v Brathwait); and there must have been a mutual understanding from the outset that the act would be rewarded in some way (Re Casey’s Patents); and had the promise of payment/​reward been made in advance it would have been legally enforceable, ie all the requirements for a binding contract are satisfied. 2.4 Performance of existing duties Can the performance of an act which the promisee is already under a legal obligation to carry out amount to sufficient consideration? There are three types of existing duty, namely: duty imposed by law/​public duty; contractual obligation owed to a third party; contractual obligation owed to the other contracting party. We shall consider each of them in turn. 2.4.1 Existing duty imposed by law As a general rule, the performance of an existing duty imposed by law is not sufficient consideration in exchange for a promise of payment. In Collins v Godefroy (1831) 1 B & Ad 950 the question arose as to whether someone who had been ordered to attend court as a witness (and therefore had a legal duty to attend) could enforce a promise of payment made by the person on whose behalf the testimony was to be given. Such a promise was held to be unenforceable on the basis that there was no consideration for it. Denning LJ took a different view in Ward v Byham 1 WLR 496, CA. In this case, the father of an illegitimate child promised to pay the mother an allowance if the child was ‘well looked after and happy’. The mother had a duty imposed by law to support the child. The Court of Appeal had to decide if the mother had given any consideration in exchange for the father’s promise. Denning LJ decided that she had and commented, obiter: I have always thought that a promise to perform an existing duty should be regarded as good consideration because it is a benefit to the person to whom it is given. 31 Contract Note, however, that in Ward v Byham the other two judges found consideration on the basis that the mother had in fact exceeded her legal duty by promising to keep the child well looked after and happy. To a large extent, the rule against using a legal duty as consideration seems couched in public policy. In a case such as Collins v Godefroy, it would clearly be against the public interest to allow the promise of payment to be enforced. However, in Ward v Byham there is nothing contrary to public policy in allowing the mother to enforce the allowance which she had been promised by the father. Furthermore, in a later case of Williams v Williams 1 All ER 305, Denning LJ said: a promise to perform an existing duty is, I think, sufficient consideration to support a promise, so long as there is nothing in the transaction which is contrary to public policy. As a general rule, then, performance of a duty imposed by law is not sufficient consideration. But what if someone exceeds an existing public duty? Will that be consideration for a promise of payment? In Glasbrook Bros Ltd v Glamorgan County Council AC 270, the owners of a mine, during a coal strike, sought assistance from the police in protecting those workers who had continuing responsibility to maintain the mine. The police reasonably suggested a mobile force, but the owners insisted that officers must be billeted at the premises, and they agreed to pay the council for this service. Later, however, the owners denied any legal obligation to pay, on the basis that the police had merely been carrying out their legal obligation to keep the peace. The House of Lords held that the police had provided protection over and above what they reasonably considered necessary for the safety of the workmen at the mine. In other words, they had exceeded their public duty, and this was consideration for the agreed sum. Viscount Cave LC said: If in the judgment of the police authorities, formed reasonably and in good faith, the garrison was necessary for the protection of life and property, then they were not entitled to make a charge for it …; but if they thought the garrison a superfluity … then in my opinion they were entitled to treat the garrison duty as a special duty and charge for it … 2.4.2 Existing contractual duty owed to a third party If a person is already bound to perform a particular act under a contract, it seems that the performance of this act can amount to sufficient consideration for a separate contract with someone else. For example, consider the following set of facts. Arcos Ltd enters into a contract with Berry plc whereby Arcos agrees to sell and deliver 6,000 widgets to Berry by 30 April. Berry plans to use these widgets in manufacturing goods which it has already contracted to supply to Collins Ltd. Collins therefore has a vested interest in Arcos delivering the goods on time to Berry. Collins contacts Arcos and promises to pay Arcos £1,000 if the goods are delivered to Berry on time. Arcos delivers the goods to Berry on time. 32  Consideration, Privity, Agency and Capacity The question is, if Collins then refuses to pay Arcos the £1,000, can Arcos enforce the promise? What consideration has Arcos provided in exchange for the promise? It seems that Arcos has provided sufficient consideration by delivering the goods to Berry on time. The fact that Arcos had a contractual duty to do this in its contract with Berry does not prevent it using the same act as consideration for a contract with a different party. Authority for this is Scotson v Pegg (1861) 6 H & N 3295, in which a promise to deliver a cargo of coal to the defendant was held to be consideration even though the claimant was already contractually bound to a third party to make such a delivery. 2.4.3 Existing contractual duty owed to the other party Imagine that you and I have a contract, and I then promise you additional payment for performance of the same contract: am I bound by that promise? What extra benefit am I getting, or what additional detriment is there to you, in performing what you were contractually bound to do in any event? On the face of it, none, in which case my promise would be unenforceable for want of consideration. This view is supported by the decision in Stilk v Myrick (1809) 2 Camp 317. This case established the basic rule that simply performing an existing contractual duty owed to the other party will not be sufficient consideration in exchange for a promise by the other party to pay more money. Stilk v Myrick was an action for seaman’s wages on a return voyage from London to the Baltic. At Cronstadt, two of the 11-​man crew deserted, and the captain promised to split the wages of the deserters equally among the rest of the crew if they would work the ship home. They did so, but the captain did not pay them the extra money. The court held that the captain’s promise was unenforceable for want of consideration. If you exceed a contractual obligation which you owed me, that clearly will be consideration as you will have conferred an extra benefit on me (and probably suffered additional detriment). Authority for this is Hartley v Ponsonby (1857) 7 E1 & B1 872. The facts of the case were similar to those of Stilk v Myrick, in that it involved members of a ship’s crew who deserted. Whereas in Stilk v Myrick it was only two out of the 11-​man crew, in Hartley v Ponsonby it was almost half of the crew, and of those left only a few were able seamen. This made continuation of the voyage exceptionally hazardous for the remaining crew. On that basis they were not bound by the terms of the original contract to proceed with the voyage. By agreeing to continue the voyage, the remaining crew had given good consideration for the promise of extra payment. So looking at the facts of Stilk v Myrick and Hartley v Ponsonby, it would seem to be a question of fact and degree. Surely the remaining sailors in Stilk v Myrick had had to put in extra effort to work the ship home: just not as much as in Hartley v Ponsonby. Looking at cases that went before Stilk v Myrick and those that have come after it, the decision is perhaps best explained not in terms of consideration, but in terms of public policy. Lord Ellenborough in Stilk v Myrick had referred to an earlier case of Harris v Watson (1791) Peak 102 (which involved very similar facts) which had been decided on public policy grounds. Lord Ellenborough preferred the view that the agreement was unenforceable as the sailors had given no consideration for the captain’s promise, but in Harris v Watson Lord Kenyon CJ had said: If this action was to be supported, it would materially affect the navigation of this kingdom. It has been long since determined, that when the freight is lost the wages are lost. This rule was founded on a principle of policy, for if sailors were in all events to have their wages, and in times of danger entitled to insist on an extra charge on such a promise as this, they would in many cases suffer a ship to sink, unless the captain would pay an extravagant demand they might think proper to make. 33 Contract This policy argument is now greatly reduced in importance. Since the 1970s, the courts have recognised that threats of economic pressure may amount to duress. Any promise which has been induced by economic duress may be avoided on that ground (and money paid in pursuance of it may be recovered). You will study economic duress in detail in Chapter 7. The decision in Stilk v Myrick was accepted and applied almost without question until the decision of the Court of Appeal in Williams v Roffey Bros & Nicholls (Contractors) Ltd 1 QB 1. Williams v Roffey Bros concerned a contract to refurbish a block of flats. The defendants were the main contractors, and they subcontracted the carpentry work to the claimants for £20,000. Part way through the work the claimants realised they had underestimated the cost and told the defendants of their financial difficulty. The defendants (mindful of the fact that if the work was not completed on time the defendants would be liable to pay compensation under the main contract) promised to pay the claimants extra money (ie £575 per flat) to complete on time. On this basis the claimants continued to work on the flats but in the event were not paid the extra money promised by the defendants and sued. The main issue before the Court of Appeal was what, if any, consideration the claimants had given in return for the promise of additional money. Whilst it was conceded by the defendants that they had secured practical benefits (ie avoiding liability under the compensation clause in the main contract and the cost and expense of finding other carpenters to finish the job), the defendants argued that there was no legal benefit. In his judgment Glidewell LJ said: There is … another legal concept of relatively recent development which is relevant, namely that of economic duress. Clearly, if a subcontractor has agreed to undertake work at a fixed price, and before he has completed the work declines to continue with it unless the contractor agrees to pay an increased price, the subcontractor may be held guilty of securing the contractor’s promise by taking unfair advantage of the difficulties he will cause if he does not complete the work. In such a case an agreement to pay an increased price may well be voidable because it was entered into under duress …. [T]‌he present state of the law on this subject can be expressed in the following propositions … (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 … 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. As I have said [counsel for the defendants] accepts that in the present case by promising to pay the extra £10,300 his client secured benefits. There is no finding, and no suggestion, that in this case the promise was given as a result of fraud or duress. If it be objected that the propositions above contravene the principle in Stilk v Myrick, I answer that in my view they do not; they refine, and limit the application of that principle, but they leave the principle unscathed … 34  Consideration, Privity, Agency and Capacity The defendants had secured practical benefits (or otherwise obviated disbenefits). For example, they did not have to find new sub-​contractors to replace the claimants and had avoided liability under the compensation clause. There was no detriment to the claimants, but if you think back to the definition of consideration (at 2.1), it is not essential for there to be both benefit and detriment. According to Glidewell LJ, the decision leaves intact the principle in Stilk v Myrick. It simply refines and limits the application of the principle, so where a promisor secures no practical or other benefit from performance of the contract by the other party, it will not be good consideration for the promise of extra payment. Despite their Lordships’ view that the decision in Williams v Roffey Bros leaves the principle in Stilk v Myrick intact, it is difficult to reconcile the two cases. In Stilk v Myrick, did the captain not secure practical benefits as a result of his promise? For example, he did not have to seek a replacement crew and he avoided delays. The main reason for distinguishing Stilk v Myrick seems to have been related to the alternative public policy basis for the decision referred to above (ie the need to protect against extortion). The court in Williams v Roffey Bros clearly regarded it as significant that there was no evidence of duress or fraud. Indeed, it was the defendants who had suggested the increased payment. If there had been economic duress then the variation could have been set aside/​avoided (see Chapter 7). Whenever a contract for services is abandoned, the innocent party will have to find someone else to complete the work. For example, as mentioned above, the captain in Stilk v Myrick secured the practical benefit of not having to find a replacement crew and yet there was, apparently, no consideration for his promise of extra payment. It may be argued that the decision in Williams v Roffey Bros suggests that there must be some extra benefit to the promisor and, to that extent, avoidance of having to pay compensation under the main contract was significant. The decision in Williams v Roffey Bros has been welcomed as one which reflects the practicalities of business life as it enables contracts to be modified when unexpected difficulties arise. It can be said to be in the public interest for the parties to negotiate and Figure 2.1 Alteration promises to pay more Performance of an existing contractual duty owed to the other party is NOT good consideration. Did promisee exceed their contractual duty? Yes. Good consideration. No. Did promisee confer a Variation is binding. practical benefit? No. Variation not Yes. Consideration. binding. Duress? No. Variation Yes. Variation binding. voidable. 35 Contract resolve their problems. However, it could be argued that Williams v Roffey Bros has made it too easy for contractual obligations to be modified. From a practical point of view, though, the thing to remember is that performance of an existing contractual duty owed to the other party may be consideration. It depends on whether, or not, the conditions laid down in Williams v Roffey Bros are satisfied. Performance of existing duty –​summary Performance of an existing public duty will not amount to consideration (Collins v Godefroy). If the claimant exceeds their public duty, this will usually be consideration (Glasbrook Bros v Glamorgan CC). Performance of an existing contractual duty owed to a third party will amount to consideration (Scotson v Pegg). Performance of an existing contractual duty owed to the other contracting party will not normally amount to consideration (Stilk v Myrick). If the claimant exceeds their existing contractual duty, this will usually be consideration (Hartley v Ponsonby). The rule in Stilk v Myrick was modified in Williams v Roffey Bros. This case provided that performance of an existing duty owed to the other party will be consideration, provided the other party receives a practical or commercial benefit. So practical benefit per se may be consideration, but if the promise to pay more was only made under duress, the variation may be avoided (see Chapter 7). 2.5 Part payment of undisputed debts We have seen that performance of an existing contractual obligation owed to the other contracting party has not traditionally been regarded as consideration (Stilk v Myrick). Related to this rule is the principle that part payment of a debt is not usually consideration for a promise by the creditor to forgo the balance due. The debtor is already bound to pay the full amount of an undisputed debt, so by paying less they will not usually provide consideration for the creditor’s promise to accept part payment and forgo the balance. This rule on part payment of debts is to be found in Pinnel’s Case (1602) 5 Co Rep 117a, as confirmed by the House of Lords in Foakes v Beer (1884) 9 App Cas 605. The rule stated in Pinnel’s Case was only obiter and so consequently, in strict legal terms, the House of Lords in Foakes v Beer was not bound by the rule. But as the Earl of Selborne LC commented in Foakes v Beer: The doctrine [ie the rule] … may have been criticised … But it has never been judicially overruled; on the contrary, I think it has always … been accepted as law. If so, I cannot think that your lordships would do right if you were now to reverse as erroneous, a judgment of the Court of Appeal, proceeding up to a doctrine which has been accepted as part of the law of England for 280 years … A common law exception to the general rule that part payment of a debt is not consideration for a promise to forgo the balance is where the debtor can show that they gave something different for the creditor’s agreement to accept the lesser sum in settlement. For example, if the debtor provides, or promises to provide, goods instead of cash or if they pay early. Lord Coke in Pinnel’s Case stated: … the gift of a horse, hawk or robe, etc in satisfaction is good for it shall be intended that a horse, hawk or robe, etc, might be more beneficial to the plaintiff than the money … or otherwise, the plaintiff would not have accepted it in satisfaction. 36  Consideration, Privity, Agency and Capacity Equally, if the creditor accepts payment of a lesser sum early, they presumably do so because they regard it as being more beneficial than receiving the full amount on the due date. In fact, this is what happened in Pinnel’s Case, ie the debtor had paid early and had thereby provided consideration to discharge the whole debt. The value of the goods or early payment received by the creditor in satisfaction is irrelevant. Remember that ‘consideration need not be adequate’ –​Chappell v Nestlé –​ie it need not be of equivalent value. Another common law exception to the principle that part payment of a debt is not good consideration for a promise to forgo the balance is part payment of a debt by a third party. This is because it would be a fraud on the person who paid part of a debt in discharge of the whole, if an action could then be brought for the balance of the debt. In the absence of a common law exception, the equitable doctrine of promissory estoppel may provide a defence to a claim brought under Foakes v Beer. 2.5.1 Promissory estoppel Under this doctrine, a creditor may be prevented (‘estopped’) from going back on a promise to accept part payment (even if the promise is not supported by consideration) if in all the circumstances it would be unfair for the creditor to do so. Promissory estoppel is simply the idea that: if you have made a promise not to enforce your legal rights; and the promisee has relied on that promise, even though they have not provided anything in return; then if you try to enforce your legal rights you will be ‘estopped’ (prevented from going back on your promise) if it would be inequitable (unfair) in all the circumstances to do so. The doctrine of promissory estoppel is founded on the judgment of Denning J in the well-​ known case of Central London Property Trust v High Trees House KB 130 (generally referred to as ‘High Trees’). The basic facts of the case were as follows: Lease entered into in 1937 –​annual ground rent of £2,500 (payable quarterly). January 1940 –​agreement by landlord to accept £1,250 per annum (due to very low level of letting, arising from wartime conditions). The defendants paid the reduced rent throughout the war. By June 1945 all the flats were fully let. In 1946 the landlord sought to recover back rent for the last two quarters of 1945 and full rent for the future. So there were basically three ‘periods’ considered by the court: Period 1 unclaimed rent from the beginning of the war until the flats were fully let. Period 2 unclaimed rent for last two quarters of 1945 after the war had ended. Period 3 claiming reinstatement of full rent for the future. The court said obiter that the unclaimed rent for period 1 (the war period) was not recoverable, but it held that as the concession had come to an end by early 1945, the unclaimed rent for the other two periods when the war had ended was recoverable. So promissory estoppel may apply to prevent the enforcement of strict legal rights in circumstances where it would be unfair (inequitable) to do so. We will now examine the four conditions which must be satisfied for promissory estoppel to apply. 37 Contract 2.5.2 Conditions for promissory estoppel to apply 2.5.2.1 There must be a clear promise to waive a strict legal right The promise may be by words or implied by conduct. In the High Trees case, the landlord expressly promised to reduce the rent. 2.5.2.2 The promisee must act on the promise –​what does this mean? In the High Trees case, the act in reliance was payment of half rent. The promisee did not thereby suffer a detriment. It seemed to be enough that the promisee had altered their position in some way as a result of the promise. In WJ Alan & Co v El Nasr 2 All ER 127, Lord Denning said (obiter): I know that it has been suggested in some quarters that there must be detriment. But I can find no support for it in the authorities cited by the judge. The nearest approach to it is … that the other must have been led ‘to alter his position’ which was adopted by Lord Hodson in Emanual Ajayi v RT Briscoe (Nigeria) Ltd 3 All ER 556. But that only means that he must have been led to act differently from what he would otherwise have done. And if you study the cases in which the doctrine has been applied, you will see that all that is required is that one should have ‘acted on the belief induced by the other party’. Therefore, it seems there does not have to be detrimental reliance by the promisee. 2.5.2.3 Promissory estoppel can only be used as a defence; it cannot give rise to a cause of action The authority for the rule that promissory estoppel can only be used as a defence is Combe v Combe 1 All ER 62. Here, a husband and wife were in the process of obtaining a divorce. The husband promised that he would pay the wife £100 a year as permanent maintenance. The husband did not pay, and the wife brought an action based on the husband’s promise to make the payments. At first instance, the judge held that the wife could enforce the payments relying on promissory estoppel. However, the Court of Appeal reversed the decision, making it clear that the doctrine could only be used as a defence and not a cause of action. 2.5.2.4 It must be inequitable for the promisor to go back on their promise An authority for this is the case of D&C Builders v Rees 2 QB 617. In this case, the defendants owed the claimants £482. The claimants were in financial difficulties and the defendants offered £300 in full settlement, indicating that if the claimants did not accept then they would not get any payment at all. The claimants accepted because they felt that they had no choice, but then sued for the balance. Lord Denning MR said that the defendants could not rely on promissory estoppel. It was not inequitable for the claimants to go back on their promise since it had not been freely given. It seems clear that when the court looks at whether it is inequitable for the promisor to go back on the promise, it will consider all of the circumstances of the case including the behaviour of the parties. 2.5.3 The effect of the doctrine of promissory estoppel You have seen that there are four conditions that must be satisfied for the doctrine of promissory estoppel to apply. Assuming all four conditions are satisfied, what effect will the doctrine have? Will the promisor’s rights be extinguished completely, or will they be suspended for a time? It seems 38  Consideration, Privity, Agency and Capacity that the doctrine will generally operate to suspend legal rights, but it may extinguish them depending on what would be equitable and/​or possible on the particular facts. Cases on promissory estoppel may involve continuing obligations such as payment of rent or may involve a one-​off debt. We will consider each in turn. 2.5.3.1 Promissory estoppel and continuing obligations An example of a case involving continuing obligations is the High Trees case. In this sort of situation, where the promisor agrees to accept reduced rent, the promisor will generally be able to give reasonable notice and claim full rent for the future, but they will not be able to claim the full amount of rent for the period before the notice expires (although this does depend on what was agreed). In the case of Tool Metal Manufacturing Co v Tungsten Electric Co Ltd 1 WLR 761, Lord Tucker made it clear that notice may not always be necessary. He said: There are some cases where the period of suspension clearly terminates on the happening of a certain event or the cessation of a previously existing state of affairs or on the lapse of a reasonable period thereafter. In such cases no intimation or notice of any kind may be necessary. But in other cases where there is nothing to fix the end of the period which may be dependent on the will of the person who has given or made the concession, equity will no doubt require some notice or intimation together with a reasonable period for readjustment before the grantor is allowed to enforce his strict rights. Therefore, the court will consider whether the promise was clearly intended to last only until a particular event happened or a particular situation came to an end (such as war-​time conditions in the High Trees case). If so, it may be that the promisor is able to resume the right to the full amount of rent (or other form of continuing payment) from that point. If not, then it is likely that the promisor can give reasonable notice and resume full rights when the notice expires. What will amount to reasonable notice will be a question of fact and equity in each case. The notice does not have to be in any particular form. Also, it seems that if the promisee cannot be returned to their original position then the promisor’s rights may be extinguished completely. In the Privy Council case of Emanual Ajayi v RT Briscoe (Nigeria) Ltd 3All ER 556, Lord Hodson said: … the promisor can resile from his promise on giving reasonable notice, which need not be formal notice … The promise only becomes final and irrevocable if the promisee cannot resume his position. 2.5.3.2 Promissory estoppel and one-​off debts The effect of promissory estoppel in relation to promises to waive full payment of one-​off debts is unclear. This is because all the cases in which promissory estoppel has been applied concern continuing obligations (eg rental payments). In D & C Builders v Rees it seems that Denning LJ would have been happy to apply promissory estoppel to a debt, but only if the debtor had acted equitably. He said: … we can now say that, when a creditor and debtor enter on a course of negotiation, which leads the debtor to suppose that, on payment of a lesser sum, the creditor will not enforce payment of the balance and on the faith thereof the debtor pays the lesser sum and the creditor accepts it in satisfaction; then the creditor will not be allowed to enforce payment of the balance when it would be inequitable to do so. 39 Contract It is difficult to reconcile this approach with the principle in Foakes v Beer whereby a creditor can go back on a promise to accept a smaller sum and sue for the balance of the debt. The difficulty is that Foakes v Beer is a House of Lords decision and the principle established in that case cannot, as a matter of precedent, be overturned by a lower court. It may be possible to reconcile Foakes v Beer with High Trees on the basis that promissory estoppel will usually just suspend the creditor’s right to the balance of the debt, and the creditor may resume that right by giving reasonable notice. However, the doctrine may extinguish the creditor’s right to the balance of the debt in circumstances where the debtor cannot resume their original position, or it would otherwise be inequitable to allow the creditor to go back on the promise. 2.5.4 Review of promissory estoppel Because the doctrine of promissory estoppel is vague and controversial, it has generated much debate over the years and consequently lends itself very well to essay questions which test critical evaluation as well as relevant legal knowledge. A sample essay question on the topic is set out in the following activity. ACTIVITY 1 Essay question Prepare a plan for answering the following question. The structure may consist simply of headings showing the issues you would consider and the order in which you would deal with them. Start first by reading the instructions in bold. Note exactly what you are being asked and make sure you address all aspects of the instructions. Then ‘unpick’ the quotation by identifying key words and phrases that you might critically evaluate in your essay. The harshness of the common law has been relieved. Equity has stretched out a merciful hand to help the debtor … It is worth noting that the principle may be applied, not only so as to suspend strict legal rights, but also so as to preclude the enforcement of them. (Lord Denning in D & C Builders v Rees (1966)) Discuss this statement with reference to consideration and the doctrine of promissory estoppel. It has been suggested that the doctrine should be extended so that, for example, it could be used to found a cause of action in certain situations. What are your views on this? COMMENT The question is in two parts: First, you are asked to discuss Lord Denning’s statement. Secondly, you are asked to express your views on whether the doctrine should be extended. You should make sure that you deal with both parts, although the bulk of your answer will be on the first part. Read the quotation carefully. It starts by saying: ‘The harshness of the common law has been relieved.’ 40  Consideration, Privity, Agency and Capacity You should therefore deal with this by explaining what is the common law rule (ie the rule in Foakes v Beer) and why it can be harsh. The quotation then says: ‘Equity has stretched out a merciful hand to help the debtor.’ Again you need to explain this –​which means explaining the doctrine of promissory estoppel. Finally, Lord Denning says that the principle may be applied not only so as to suspend strict legal rights, but also so as to preclude the enforcement of them. You need to discuss this. You should explain what Denning’s views are by examining the High Trees case and the case of D & C Builders v Rees. You should try to come to some sort of conclusion as to the accuracy of the quotation. A structure for this essay might look like this: 1. Introduction –​statement of what is to be discussed, ie: the statement by Denning: and views as to extension of the doctrine. 2. The common law: Define consideration. Explain the rule in Foakes v Beer and the common law exception (Pinnel’s Case). Explain why the common law can have harsh results. 3. Promissory estoppel –​explain the doctrine, ie: introduced by Denning in High Trees –​ obiter; must be clear promise; can only be used as a defence (Combe v Combe); promisee must act on the promise –​explain; must be inequitable for the promisor to go back on the promise –​explain what this means and illustrate with facts of D & C Builders v Rees. Assuming the conditions are satisfied, how does the doctrine operate? Does it merely suspend rights or does it extinguish them? Denning’s views –​eg in High Trees and D & C Builders. 4. Possible conclusion –​doctrine normally only suspends. Promisor can give reasonable notice and resume full rights. However, in ‘ongoing payments’ situations, eg rent, the doctrine may extinguish the right to claim the balance of past instalments, although the promisor may be able to give reasonable notice and receive in full future instalments. 5. Views on extension: one possibility is to allow doctrine to be used to bring action; radical step –​would it mean abolition of consideration? own personal views. 6. Overall conclusion. 41 Contract Promissory estoppel –​summary Set out below is a summary of promissory estoppel. Figure 2.2 Summary Promise to waive a strict legal right eg to accept part payment Any different consideration? Yes. Binding No. Can promissory estoppel be used as a variation defence? Check the conditions are satisfied Act in reliance Must be inequitable or impossible to resume strict legal right Promissory estoppel –​checklist Whenever you come across a situation where promissory estoppel may be relevant, you must consider the following issues: Has there been a promise to waive a strict legal right? Promissory estoppel can only be used as a defence when the other party is seeking to enforce a strict legal right which they had promised to waive. Did the promisee act in reliance on the promise to waive the strict legal right? It need not be detrimental reliance. It must be inequitable for the promisor to go back on their promise. Look at all the circumstances. Would it be equitable for the promisor to renege on their promise and enforce their strict legal right? If the above four conditions are satisfied then promissory estoppel applies, but does it operate to suspend or extinguish the legal right? In relation to ongoing payments, the legal right is usually just suspended and can be resumed only by giving reasonable notice. The right to past payments is usually extinguished. In relation to one-​off debts, the position is uncertain. At the end of the day, the question may well be determined by what would be fair on the particular facts. You should appreciate that the scope of the doctrine of promissory estoppel is vague and that aspects of it are uncertain (eg the effect of promissory estoppel on one-​off debts (see above)). It is because of this uncertainty that solicitors will tend to advise clients to plead promissory estoppel only as a last resort. 42  Consideration, Privity, Agency and Capacity 2.6 Performance of existing contractual duty owed to other party and part payment of debt: can the legal principles be reconciled? We have looked at the relationship between Foakes v Beer and High Trees; now let us consider for a moment what, if any, relationship there is between the decision in Foakes v Beer and that in Williams v Roffey Bros. If you remember, Williams v Roffey is authority for the principle that performance of an existing contractual duty owed to the other party may be consideration for a promise of extra money if it confers a practical benefit on the promisor and there is no economic duress or fraud. In Re Selectmove 1 WLR 474, CA, counsel for the debtor argued that the principle in Williams v Roffey should be extended to part payment of a debt. Counsel argued that if part payment of a debt confers a practical benefit and is freely accepted (ie there is no duress or fraud), then the practical benefit should be consideration. Whilst the Court of Appeal had some sympathy with the argument, it said obiter that it was constrained by precedent as Foakes v Beer was a House of Lords decision. Peter Gibson LJ said: I see the force of the argument, but the difficulty that I feel with it is that if the principle in Williams v Roffey Bros and Nicholls (Contractors) Ltd is to be extended to an obligation to make payment, it would in effect leave the principle in Foakes v Beer without any application. When a creditor and a debtor who are at arm’s length reach agreement on the payment of a debt by instalments to accommodate the debtor, the creditor will no doubt always see a practical benefit to himself in so doing. Foakes v Beer was not even referred to in Williams v Roffey Bros and Nicholls (Contractors) Ltd, and it is in my judgment impossible, consistently with the doctrine of precedent for this court to extend the principle of Williams’ case to any circumstances governed by the principle of Foakes v Beer. If that extension is to be made, it must be by the House of Lords or … by Parliament. The Supreme Court in Rock Advertising Ltd v MWB Business Exchange Centres Ltd UKSC 24 did not have to consider the point but commented that any decision would involve a re-​examination of the decision in Foakes v Beer, and as such should be before an enlarged panel of the court and in a case where the decision would be more than obiter. The following table sums up and compares the rules and case law on promises to pay more money for the performance of an existing contractual obligation and promises to accept less money in full satisfaction of a debt. Table 2.1 Summary and comparison of rules on ‘upward’ and ‘downward’ variations Rule in Stilk v Myrick Rule in Foakes v Beer If there is a contract between A and B and If there is a contract between A and B and A agrees to pay B more money if B will complete B’s A has fully performed A’s obligations and agrees obligations then you should consider the rule in Stilk to accept a reduced payment from B, you should v Myrick. consider the rule in Foakes v Beer. Here A is agreeing to pay more money to B. Here A is agreeing to accept less money from B. The rule in Stilk v Myrick provides that performance of The rule in Foakes v Beer provides that partial an existing contractual duty owed to the other party is payment of a debt is not sufficient consideration not sufficient consideration for a promise to pay more. for a promise by a creditor to forgo the balance. (Continued) 43 Contract Table 2.1 (Continued) Rule in Stilk v Myrick Rule in Foakes v Beer APPLICATION APPLICATION First state the rule and then consider whether B is First state the rule and then consider whether simply performing B’s existing obligations or whether any of the common law exceptions apply. For B has done something extra in return for A’s promise example, did the debtor pay early (as in Pinnel’s to pay more. Case)? If so, the debtor can rely on the exception If B has done something extra then B can rely on in Pinnel’s Case and will have provided sufficient Hartley v Ponsonby and the extra will amount to consideration. In this case you will not need to sufficient consideration. In this case you need not discuss promissory estoppel. discuss Williams v Roffey. If B cannot rely on a common law exception then If B has not done something extra then you should you should consider promissory estoppel in detail. consider whether the Williams v Roffey exception Always start by defining the doctrine and then go applies. through it in detail. 2.7 Doctrine of privity of contract In this paragraph we are going to consider the doctrine of privity of contract; identify why reform was necessary; and look at the key provisions in the Contracts (Rights of Third Parties) Act 1999. The requirement that to sue for breach of a particular promise you must have given consideration to the defaulting party for that promise necessarily means that only a contracting party (ie someone who is privy to the contract) can sue for breach of contract, or otherwise be liable for breach. This general rule is referred to as privity of contract, ie only the actual parties to a contract are bound by it and therefore have rights and obligations under it. This rule of privity effectively meant that third parties could neither sue nor be sued on a contract. As far as contractual obligations go, no one has ever really questioned the rule, but what about benefits under a contract? What if a contract has been made for the benefit of a third party? The privity rule meant that the third party still had no rights under the contract. This is illustrated by the old case of Tweddle v Atkinson (1861) 1 B & S 393. The claimant was engaged to be married and his father and future father-​in-​law made a contract providing that each of them would give a certain sum of money to the claimant. Even though the contract expressly provided that the claimant was to be entitled to enforce it, the court held that he could not do so. It is this aspect of the rule that has been criticised and, needless to say, ways around it have emerged over the years. The main exception was introduced by the Contracts (Rights of Third Parties) Act 1999, which we look at next. The 1999 Act applies to contracts entered into on and after 1 May 2000. Section 1 of the Act allows a third party to enforce a contract term if either: the contract expressly provides that they may; or the term purports to confer a benefit on them (unless it appears that the parties did not intend the term to be enforceable by the third party). In either case, the third party must be identified by name, as a member of a class (eg ‘employees’) or answering to a particular description. This Act explains why, in the run up to Christmas, shops will often ask if you would like a gift receipt for goods you are buying. If you say you are buying the goods for a friend or family 44  Consideration, Privity, Agency and Capacity member, you thereby confer direct contractual rights on the recipient so if something happens to be wrong with the goods, the recipient (rather than you) can take them back to the shop and seek a remedy. We will be looking at remedies under contracts for the sale of goods in Chapter 3. The Act also extends to the benefit of exemption clauses, which we will also be looking at in Chapter 3. 2.8 Agency 2.8.1 What is agency? Agency is the relationship which arises where someone (the agent) acts on behalf of another (the principal) and has power to affect the principal’s legal position with regard to a third party. Examples of agents include: travel agents; insurance brokers; ticket agents; shop assistants; and auctioneers. Note, however, that lots of persons who get called ‘agents’ may not be agents in the strict legal sense. For example, estate agents do not normally contract to sell property on behalf of their clients –​they only tend to have authority to advertise the property for sale and facilitate the reaching of an agreement. So be aware that the commercial use of the word ‘agent’ is not always the same as the legal use of it. 2.8.2 How is agency created? In order to create a binding contract between a principal and a third party, an agent must generally have authority. 2.8.2.1 Actual authority The simplest way in which agency can be created is by the principal giving the required authority to the agent to contract on its behalf. So, agency normally arises by express appointment, ie the principal will expressly appoint someone to act as their agent to do specific thing(s). When agency arises in this way, the agent is said to have actual authority. Actual authority can be granted expressly or it can be implied. For example, an agent may have express authority to sell particular goods, but also implied actual authority to do things usually carried out by sellers of such goods, eg to advertise them and receive payment for them. But sometimes agents purport to act for their principals in circumstances where they do not have actual authority. This may happen for a variety of reasons –​because agents do not always do exactly as they are told; because they are unsure of the extent of their authority; or even because, although they did have authority, it has been revoked in some way, eg because the principal has become ill or died. Nonetheless, there are some circumstances where the law regards the acts of the agent as binding on the principal, despite the lack of actual authority. The third party, who has entered into a contract with the principal, may claim there is a binding agreement, and the principal may argue to the contrary, because the purported agent had no actual authority to contract on the principal’s behalf. 45 Contract 2.8.2.2 Apparent authority Here the agent does not have actual authority from the principal. But the agent could still be able to form a binding contract because he has a different form of authority –​one which has been made apparent to the third party by the principal. It is not sufficient that the so-​ called ‘agent’ appears to be authorised. The appearance of authority must be created by the principal, and this representation must have been intended to be and in fact was acted upon by the other party. So, for apparent (or what is sometimes called ostensible) authority to arise, the following three conditions must be satisfied: at some stage the principal must have represented (by words or conduct) that the agent had authority; the third party must rely on this representation, believing that the agent has authority; and the third party must alter their position eg by entering into a contract. Example When Paul started up a business manufacturing wooden toys (including traditional rocking horses), he employed Abba Ltd as his selling agent for the toys. Paul agreed not to supply customers direct. He instructed Abba Ltd to sell the rocking horses for at least £500 each. Nigel approached Paul direct to buy a rocking horse. Paul referred Nigel to Abba Ltd telling him that he had to deal through Paul’s agent, Abba Ltd. Abba Ltd contracted to sell a rocking horse to Nigel for £400. Paul refuses to sell for that amount. But is Paul legally obliged to sell it to Nigel for £400? This hinges on whether Abba Ltd was authorised to enter into the contract with Nigel on Paul’s behalf and so bind Paul. Provided Abba Ltd had authority, Abba Ltd would acquire no rights or liabilities under the contract. The contract would be between Paul and Nigel. Authority may be actual or apparent. Abba Ltd had express actual authority to sell the rocking horses but for at least £500 each. Abba Ltd exceeded its authority and so had no express authority to do the deal. As Paul told Nigel to deal through Abba Ltd and did not mention any express limitation on Abba’s authority, Nigel would think Abba Ltd had authority to sell him a rocking horse for £400, ie Abba Ltd had apparent authority. Paul would be estopped from denying, as against Nigel, that Abba Ltd had authority to sell the rocking horse for £400. Consequently, Paul is bound to sell the horse to Nigel for £400; otherwise he will be in breach of contract. Abba Ltd has no rights or liabilities under the contract of sale, but it will be liable to Paul for breach of the agency agreement. If you look at the Specimen Standard Conditions of Sale (Reading 1 of the Appendix), you will see that it is specifically stated at clause 2.2 that ‘The Seller’s sales representatives do not have authority to do any of the following things on behalf of the Seller: …’ You will now appreciate the reason behind this, ie it is to stop a customer claiming that a sales representative had apparent/​ostensible authority (even though the agent may not have had actual authority) to bind the seller. 46  Consideration, Privity, Agency and Capacity 2.8.3 Effects of agency 2.8.3.1 Authorised agent An authorised agent has no rights (or indeed obligations) under the resulting contract. The agent is authorised to enter the contract on behalf of someone else (called the principal) and the resulting contract is between the principal and other party. The agent simply drops out of the picture. Example Jackson’s Store appoints Sara to act as its agent to buy goods. Sara, purporting to act on behalf of Jackson’s Store, enters into a contract with Lewis to buy a consignment of goods for £5,000. They agree that payment will be two weeks after delivery. Lewis delivers but Jackson’s Store does not pay. Lewis would not be able to sue Sara for the money. Provided Sara had authority of some sort (ie either actual or apparent/​ostensible) then the rights and obligations under the contract belong to and bind the principal (Jackson’s Store) and the third party (Lewis). It is as if the contract had been made between the principal and the third party. 2.8.3.2 Unauthorised agent But what about a situation where the agent purported to contract on another’s behalf but did not in fact have any sort of authority? The principal cannot sue the third party or be sued by the third party (because the agent did not have authority to bind the principal). The agent cannot be sued on the contract as the agent was purporting to contract on another’s behalf. The third party never thought there was a contract with the agent. The third party may sue the agent in deceit, where the agent knew they had no authority, or for breach of implied warranty of authority (eg, where the agent’s authority had been terminated without the agent’s knowledge). In Collen v Wright (1857) 8 E & B 647 an agent purporting to act on behalf of a named principal agreed to lease the principal’s farm to the plaintiff. Both the plaintiff and the agent believed the agent had authority to make the lease, but that was not the case. The plaintiff’s action against the principal failed, but the court inferred from the circumstances a separate and independent contract by which the agent promised that they had authority and in consideration of that promise the plaintiff agreed to take a lease of the farm. We have now considered the effects of a disclosed agency (ie where the agent is purporting to act as an agent). Where the agent has some form of authority, they are in a position to bind the principal to a contract with a third party. Where the disclosed agent does not have authority, the agent cannot bind the principal to a deal and, as the agent was purporting to act on behalf of someone else, the agent will not be personally liable on the deal (although the agent may be liable for example in the tort of deceit). In Re Selectmove (which we discussed in Chapter 1 in the context of acceptance by silence and earlier in this chapter in the context of part payment of a debt), the actual decision of the Court of Appeal was based purely on agency. The representative of the creditor had no authority (express or otherwise) to bind the creditor to the proposed arrangement to pay the debt by instalments. 47 Contract 2.9 Capacity This section is intended to provide you with an introduction to some of the basic legal principles governing capacity (ie the legal power to make a contract). Earlier we considered the doctrine of privity and the importance of identifying the parties to a contract. The general rule, remember, is that only parties to a contract can sue or be sued on it. Occasionally, though, a contract will not bind a party because the party lacked the necessary capacity or power to make a contract. The main categories of people whose power, or capacity, to enter contracts is limited by law are minors (persons under the age of 18) and people with a mental incapacity. Also, it goes without saying that a contracting party should be a person recognised as such by the law. Persons in law, however, are not confined to individuals. A lot of contracts are entered into by, or on behalf of, organisations such as companies and local authorities. Such bodies are generally called corporations, and the capacity of a corporation depends on the type of corporation. 2.9.1 Minors The basic common law principle is that minors are not bound by contracts they have entered into –​the other party is bound and can be sued, but not the minor. As with all general principles, though, there are exceptions. Contracts for ‘necessaries’ bind minors. ‘Necessaries’ include not just the supply of necessary goods and services, but also contracts of service for a minor’s benefit. ‘Necessaries’ are defined under the Sale of Goods Act 1979 as goods ‘suitable to the condition in life of the minor and to his actual requirements at the time of sale and delivery’. ‘Necessaries’ therefore extend beyond the absolute essentials (such as food and clothing). What is ‘necessary’ for a particular minor will depend to an extent on their social status and their actual requirements at the time of purchase. Example A bespoke tailor shop supplies an expensive blazer to a 16-​year-​old boy, Michael, who comes from a wealthy family. The contract might be binding on Michael. It will depend on whether, or not, he already has an adequate supply of blazers and the like. Minors are also bound by contracts of service which are on the whole beneficial to them. Generally, this means contracts of employment under which a minor gains training and experience (eg an apprenticeship) as long as, on balance, the contract is more favourable than not to the minor. This point is illustrated by Proform Sports Management Ltd v Proactive Sports Management EWHC 2903 (Ch) (aka the ‘Wayne Rooney case’). When Wayne Rooney, aged 15 years, was playing for Everton FC, he entered into a two-​year contract with Proform to act as his agent. Before the end of the two years, he terminated the contract. The court held that he was entitled to do so as the contract with Proform (unlike the contract with Everton FC) was not a contract for necessaries. 2.9.2 Mental incapacity This category covers persons suffering from mental impairment and those who are drunk when the contract is made. Generally, contracts made with someone in either state will be valid unless, at the time the contract was made, the person was incapable of understanding the 48  Consideration, Privity, Agency and Capacity nature of the transaction and the other party knew that to be the case. In such instances, the contract will be ‘voidable’, which means it is binding unless, and until, the person suffering from the mental impairment or inebriation rescinds it (ie sets aside the contract). We will be considering voidable contracts in Chapters 6 and 7. Example An elderly gentleman, Jack, entered into a contract with Hansaj. Unknown to Hansaj, Jack was suffering from senile dementia. Jack now wants to get out of the contract. Advise Jack. Even if Jack did not understand the nature of the deal he had struck, he would be bound by it as Hansaj was unaware of Jack’s mental incapacity. The final type of legal ‘person’ that may lack capacity is a corporation, which we are going to look at next. 2.9.3 Corporations If two or more people form themselves into an association for the purpose of some concerted enterprise (eg on the formation of a club or a trading company), the association is in some cases regarded by the law as being an independent person called a corporation. A corporation is treated by the law as having a separate legal identity from the person, or persons, who constitute it. Note, however, that not all associations are corporations; it depends on whether or not the association has been incorporated in law. An unincorporated association, such as a club, is not a competent contracting party. If a contract is made on its behalf, no individual member can be sued on it except the person who actually made it and any other member who authorised them to do so. The three main types of corporation are: registered companies; statutory corporations; and limited liability partnerships. 2.9.3.1 Registered companies Most corporations are registered under the Companies Act (CA) 2006. Section 31 of the CA 2006 allows a company to carry on whatever activity it wants (within the law, of course). Further, s 39 of the CA 2006 effectively abolishes the ‘ultra vires’ doctrine with regard to third parties dealing with the company. In other words, s 39 provides that an act undertaken by the company with an outsider (such as entering a contract) cannot be challenged if it is beyond the powers granted in the company’s constitution. Both the company and the other party to the transaction are bound by the act. This is backed up by s 40(1), which states that the powers of the directors to bind a company (eg by entering a contract) are deemed to be free of any limitation under the company’s constitution in favour of a person dealing with the company in good faith. Notwithstanding that, parties looking to enter into a contract with a company are still best advised to check the company’s capacity. 2.9.3.2 Statutory corporations These corporations (as their name suggests) are created by statute. They include local authorities. The statute creating each corporation will set out the purposes for which the corporation may enter contracts. Any contract entered outside of the stated powers will be declared ultra vires and therefore void, ie as if there had never been a contract. We will look at void contracts in Chapter 8. 49 Contract 2.9.3.3 Limited liability partnerships These were created by the Limited Liability Partnerships Act 2000 and benefit from unlimited capacity. ACTIVITY 2 Consideration Please tick the appropriate box to indicate whether the statement is true or false and please give the name of any relevant case. If you think the statement is false, please give a reason for your answer. Statement True False/​reason 1. Consideration must be a benefit to the person who receives it and a detriment to the person giving it. 2. Consideration must be both sufficient and adequate. 3. X finds and returns Y’s mobile phone. Y promises to pay X £10 but then does not do so. Y says Y did not ask X to find it. X has given valid consideration for Y’s promise. 4. Past consideration is sufficient consideration if the act is performed at the promisor’s request or the parties understand that the act will be rewarded. 5. Performance of a contractual obligation owed to the other contracting party may be sufficient consideration for a promise of more money if the party promising to pay obtains a practical benefit. 6. The basic rule is that payment of a lesser sum on the due date is not good consideration for a promise to forgo the balance. 7. To rely on the doctrine of promissory estoppel it is not necessary to have acted equitably in obtaining the promise. 8. Promissory estoppel provides a shield not a sword. COMMENT Statement True False/​reason 1. Consideration must be a √ Currie v Misa: it may be either a benefit to the person who benefit or a detriment; it need not receives it and a detriment to be both. the person giving it. 2. Consideration must be √ It must be sufficient. It does sufficient and adequate. not have to adequately reflect the value of the promise given in exchange: Chappell v Nestlé. 3. X finds and returns Y’s mobile √ X’s consideration is past. X found phone. Y promises to pay X £10 and returned the mobile phone but then does not do so. Y says before the promise of payment was Y did not ask X to find it. X has made. Past consideration is usually given valid consideration for Y’s insufficient consideration (Roscorla promise. v Thomas). (The exception does not apply as X did not act at Y’s request.) 50  Consideration, Privity, Agency and Capacity Statement True False/​reason 4. Past consideration is sufficient √ Three conditions, must be consideration if the act is fulfilled: Lampleigh v Brathwait, Re performed at the promisor’s Casey’s Patents. The two stated request or the parties opposite, and the fact that had the understand that the act will be promise been made in advance it rewarded. would have been legally enforceable. 5. Performance of a contractual √ Williams v Roffey obligation owed to the other Bros. If there was contracting party may be economic duress, the sufficient consideration for a promise to pay more promise of more money if the may be set aside party promising to pay obtains a practical benefit. 6. The basic rule is that payment √ Pinnel’s Case; of a lesser sum on the due date Foakes v Beer is not good consideration for a promise to forgo the balance. 7. To rely on the doctrine √ You must act equitably to rely on of promissory estoppel it is an equitable doctrine. If you seek not necessary to have acted equitable relief you must have clean equitably in obtaining the hands (D & C Builders v Rees). promise. 8. Promissory estoppel provides √ Combe v Combe a shield not a sword. ACTIVITY 3 Agency In the questions listed below there are three statements. Only one of them is accurate. In each case, tick the statement which you consider to be accurate: 1. If an agent with express authority makes a contract with a third party on behalf of the principal then: 1.1 If the principal defaults the third party can sue the agent. 1.2 If the third party defaults the agent can sue the third party. 1.3 If the principal defaults the third party can sue the principal. 2. 2.1 Apparent or ostensible authority is where the agent holds itself out as having authority and the third party alters its position in reliance. 2.2 Where a principal represents (by words or conduct) that an agent has authority the principal may be estopped from denying the agent’s authority. 2.3 An agent will have apparent or ostensible authority provided the third party believes the agent has authority. 3. Hamil has been Ella’s agent for 10 years. Ella terminates the agency, but Hamil then negotiates a contract with Ben who thinks that Hamil is still Ella’s agent. 3.1 Ella is not bound by the contract as she terminated the agency. 3.2 Ella is bound by the contract as Hamil has actual authority. 3.3 Ella is bound by the contract as Hamil has apparent authority. 51 Contract COMMENT 1. Answer 1.3. Provided the agent has authority, the contract is between the principal and the third party and the agent ‘drops out’ of the picture. 2. Answer 2.2. The representation must come from the principal. Where an agent wrongly holds itself out as having authority, the agent will either be liable in the tort of deceit (if the agent was lying) or otherwise for breach of an implied warranty of authority. 3. Answer 3.3. Hamil has no actual authority (as Ella terminated his authority), but by not telling Ben (and other potential customers), Ella will be estopped from denying Hamil’s apparent authority. SUMMARY If you are advising a client on an alleged breach of contract, it is first of all essential to check that the agreement between the parties is legally binding. One of the things you will be checking is that the claimant gave consideration for the contractual promise which has allegedly been breached. In this chapter you have looked at what constitutes good consideration in the eyes of the law, and as you will appreciate from the many cases you have studied it is not always clear-​cut. It is also apparent from the case law how consideration is far more likely to create problems when it comes to varying contractual terms, rather than at the formation stage. Just as you need agreement, contractual intention and consideration to create a binding contract, the same is true if a variation of a contract is to be legally binding. For example, you have looked at the extent to which performance of existing duties and part payment of a debt may constitute good consideration in the context of contractual variations. You have also been introduced to the doctrine of privity of contract and the main exception to it, namely the Contracts (Rights of Third Parties) Act 1999. You will look at this Act again in Chapter 3 in the context of exemption clauses. Then you studied (albeit in overview) the law governing agency. Agency is particularly important in a commercial context, and remember that the effect of agency depends primarily on whether the agent had authority and whether the agency was disclosed. You also considered capacity. As a general rule, minors are not bound by contracts unless it is a contract for ‘necessaries’. Even if a minor is not bound by a contract through lack of capacity, the other party will be bound by it. Persons with a mental disability or intoxicated persons will not be bound by a contract if they did not comprehend the nature of the deal and the other party was aware of that. Corporations have different levels of contracting ability, eg a statutory corporation will not be bound by contracts which are outside its statutory powers, whilst limited liability partnerships have unlimited capacity. 52