Contract Handout 3 - Consideration PDF

Contract Handout 3 - Consideration Not all agreements or promises are regarded as binding by the law. Contract law requires that a promise should fulfil certain formal criteria before it becomes binding. The most important of these criteria is consideration. Consideration can be d...

Contract Handout 3 - Consideration Not all agreements or promises are regarded as binding by the law. Contract law requires that a promise should fulfil certain formal criteria before it becomes binding. The most important of these criteria is consideration. Consideration can be described as a form of quid pro quo. The law will not enforce gratuitous promises, therefore an agreement where something is given for nothing is not a contract, because there is no consideration. It is classified as a gift. So if I promise to give you my car if you pay me €5,000 we have both provided consideration. If I change my mind and refuse to give you the car you can sue me for breach of contract. But if I promise to give you my car and you do not promise anything in return, you have not provided consideration which means that my promise is unenforceable. If I change my mind and refuse to give you the car, you cannot sue me because our agreement is not legally binding. One definition of consideration is that it is ‘the price at which the promise is bought’. Another definition is some right, interest, profit or benefit accruing to one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other. The concept of consideration is found in most common law systems, but not in civil law systems. Exception - The exception to the rule that consideration is essential is the case of contracts under seal. No consideration is necessary to support such contracts. The rationale behind this is that if the parties went to the trouble of using such formalities, the courts should recognise the validity of their agreement and enforce the contract, despite the lack of consideration. Friedmann Equity Developments Inc v Final Note Ltd (2000) 188 DLR (4th) 269 Executory & Executed Consideration Consideration can be divided into two categories - executory and executed. Executory consideration - a promise is given in return for another promise - neither side has completed its side of the bargain yet. 1 Executed consideration - a promise is given in return for an act. Past Consideration Consideration must be provided at the time of or after the agreement. If given before, it is known as past consideration and will not be effective. Nothing fresh has been brought to the agreement therefore there is no consideration and no contract. Past consideration is no consideration. An example is the case of Re McArdle. Here, the occupants of a house carried out some improvements, valued at £488. Once the work had been finished, the owners signed a document that said “in consideration of your carrying out certain alterations and improvements, we hereby agree to repay to you the sum of £488.” The court held that since all the work had been completed before the promise to pay for it was made, the consideration was in the past and therefore not valid. Roscorla v Thomas (1842) 3 QB 234 Smith v. Morrison (1846) 10 ILRCL 213 Re McArdle Ch 669 Provincial Bank of Ireland v O'Donnell (1932) 67 ILTR 142 Exception - There is one exception to the rule that past consideration is no consideration and that is where a. the act was performed at the request of the defendant, and b. it was assumed at the time that the services would ultimately be paid for. This was established in the 17th century in Lampleigh v Brathwait (1615) Hob 105 It was agreed that a meer voluntary courtesie will not have a consideration to uphold on an assumpsit. But if that courtesie were moved by a suit or request of the party that gives the assumpsit, it will bind, for the promise, though it follows, yet it is not naked, but couples itself with the suit before. In other words, it is not merely a bare promise, when put together with a previous request. Bradford v Roulston (1858) 8 IRCL 468 The fact that the parties at all times envisaged that the services would ultimately be paid for is stressed in 2 Re Casey's Patents 1 Ch 104 Pao On v Lau Yiu Long AC 614 Consideration must move from the Promisee A person to whom a promise was made can only enforce it if they provided consideration for it. They cannot sue if the consideration moved from (was provided by) a third party, even if the contract were made for the benefit of the promisee. According to Wightman J in Tweddle v Atkinson, “no stranger to the consideration can take advantage of a contract, although made for his benefit.” An agreement may be made between three people. X promises to paint Y's house, if Y gives €1,000 to Z. X has given consideration - she has promised to paint a house. Y has given consideration - he has promised to pay €1,000. Z has given no consideration - therefore if Y refuses to pay him, he cannot sue for the €1,000. Price v Easton (1833) 4 B & Ad 433 McCoubray v Thompson (1868) 2 IRCL 226 However, while consideration must move from the promisee, it need not necessarily move to the promisor. The requirement of consideration will be satisfied where the promisee suffers some detriment at the request of the promisor, but confers no corresponding benefit on the promisor. In the above example, Y has given good consideration for X's promise to paint the house by promising to pay £1,000, even though X will not benefit from the payment. A. Adequacy of Consideration The courts are not concerned about the relative value of the consideration given by both sides. They do not expect any equality in value. The rule is that the courts will not inquire into the adequacy of consideration. per Manners LJ in Grogan v Cooke (1812) 2 Ball & B 234 if there be a fair and bona fide consideration the court will not enter minutely into it and see that it is full and ample. So if a bargain is an honest one, it will be enforced, even if one party gets more from the bargain than the other. If someone wants to make a bad bargain the courts will not interfere. An agreement to sell a new car for €1 3 will be a valid agreement. The parties are assumed to be capable of looking after their own interests. When a thing is to be done by the plaintiff, be it never so small, this is a sufficient consideration to ground an action. In general, consideration must be capable of being valued in monetary terms. This means that doing something in consideration of natural love and affection, or an agreement to pray for the salvation of someone's soul will not be good consideration. White v Bluett (1853) 23 LJ Ex 36 O’Neill v Murphy NI 16 However, in the US, in Hamer v Sidway (1891), an agreement made by an uncle, promising to pay his nephew $5,000 if he refrained from indulging in alcohol, smoking, swearing and gambling while at university was upheld. The court held that in foregoing that which he was legally entitled to do, he had suffered detriment. This detriment was adequate consideration for the agreement. Something which may seem worthless may nevertheless be held to constitute good consideration. Bainbridge v Firmstone (1838) 8 A & E 743 Thomas v Thomas (1842) 2 QB 851 Chappell v Nestle AC 87 The courts will inquire into the adequacy of consideration only where it is alleged that an unconscionable bargain has been made. [This topic will be dealt with in Semester II] Compromising a Legal Claim Giving up a legal claim may also constitute good consideration. There are some rules about the surrender of claims. The promisee must prove that i. the claim is reasonable, not vexatious or frivolous; ii. they honestly believes it might succeed; iii. they have not concealed any facts from the promisor which might affect its validity. B. Insufficiency of Consideration Consideration must have some value, even if it is very small. However, it must be real. If the purported consideration involves the promisee's merely 4 doing something they are already obliged to do, it will not constitute good consideration. According to Pollock Neither the promise to do a thing nor the actual doing of it will be a good consideration if it is a thing which the other party is already bound to do either by the general law or by a subsisting contract with the other party. There are four areas to be examined; i. where a public duty is imposed by law on the promisee; ii. where the promisee is bound by an existing contractual duty to the promisor; iii. where the promisee is bound by an existing contractual duty to a third party; iv. where there is a composition with creditors. I. Where a public duty is imposed by law on the Promisee A person who is under a public duty to act in a particular way, either by their official status or through the operation of the law, does not furnish any consideration merely by promising to discharge that duty. Collins v Godefroy (1831) 1 B & Ad 950 Exception - If the plaintiff does more than would be expected of them in the bare discharge of their duty, the extra service will constitute good consideration. Glasbrook Brothers v Glamorgan County Council AC 270 Ward v Byham 2 All ER 318 Harris v Sheffield United Football Club QB 77 McKerring v Minister for Agriculture ILRM 82 Leeds United Football Club v West Yorkshire Police EWCA Civ 115 II. Where the Promisee is bound by an existing contractual duty to the Promisor If all the promisee does is perform or promise to perform something they have already contracted with the promisor to do, they are not providing any consideration. Harris v Watson (1791) Peake 102 Stilk v Myrick (1809) 2 Camp 317 5 These can be contrasted with two cases in which the court held that the sailors had provided good consideration because they had done more than was expected under their original contract: Hartley v Ponsonby (1857) 7 E & B 872 Hanson v Royden (1867-68) LR 3 CP 47 An important recent development in the area of sufficiency of consideration is Williams v Roffey Brothers 1 All ER 512 The leading judgement was given by Glidewell LJ, and he set out the state of the law in this area as follows:- i. If A has entered into a contract with B to do work for, or to supply goods or services to, B in return for payment by B, and ii. at some stage before A has completely performed his obligations under the contract B has reason to doubt whether A will, or will be able to, complete his side of the bargain, and iii. B thereupon promises A an additional payment in return for A's promise to perform his contractual obligations on time, and iv. as a result of giving his promise B obtains in practice a benefit, or obviates a disbenefit, and v. B's promise is not given as a result of economic duress or fraud on the part of A, then vi. the benefit to B is capable of being consideration for B's promise, so that the promise will be legally binding. In other words, if the new agreement results in any practical benefit for the promisor, the promise will be binding. Williams v Roffey was followed in Ireland in Truck & Machinery Sales v. Marubeni Komatsu 1 IR 12. However, it has been much criticised because it seems to do away with the need for consideration, as it will be possible in most cases to find a practical benefit of this type. It addition, it appears to conflict with the Stilk v Myrick. Why was the value of practical benefit in contractual negotiations recognised for the first time in Williams v Roffey? The court in that case was able to take a more flexible approach to the requirement of consideration because a new doctrine had been recognised in the interim – economic duress. This doctrine emerged in the 1970s and allows one party to get out of a contract where a threat is made that will lead to serious financial consequences if the threatened party does not agree to enter into 6 that contract. The courts now have a more refined mechanism for distinguishing between extortative and non-extortative renegotiations. Adam Opel v Mitras Automotive EWHC 3481 Williams v Roffey Bros has been restricted to cases in which services are rendered in return for the promise of an additional payment. It does not apply to the situation where one party agrees to accept a lesser amount in satisfaction of a debt. In such a case the rule in Pinnel’s Case will continue to apply. Re Selectmove 2 All ER 531 The Rule in Pinnel’s Case Another problem which arises in this area is where a part payment is made in satisfaction of the whole amount. Has consideration been given? The rule in Pinnel's Case states that payment of a lesser sum is no satisfaction of the debt. Foakes v Beer (1884) 9 App Cas 605 Although this is known as the rule in Pinnel's Case, Pinnel's Case itself is actually an example of an exception to the rule. Payment of a lesser sum will discharge the debt where a new element is introduced at the request of the creditor. The new element might be payment at an earlier time, in a different place, or payment accompanied by a chattel. If the debtor does something different, at the request of the creditor, when he pays a lesser sum, the full debt will be satisfied. A creditor may accept anything in satisfaction of his debt except a lesser amount of money. He might take a horse, a canary or a tomtit if he chose, and that was accord and satisfaction; but, by a most extraordinary peculiarity of the English Common Law, he could not take 19s 6d in the pound. Payment by negotiable instrument (eg. promissory notes or bills of exchanges) constitutes doing something different. Sibree v Tripp (1846) 15 M & W 23 Mayor of Drogheda v Fairclough (1858) 8 ICLR 98 However, payment by cheque does not constitute payment by a different means. D & C Builders v Rees 2 QB 617 7 (Bills of Exchange and promissory notes are documents of title. Title passes the moment the instrument is handed over. With a cheque, title passes only when the cheque is cashed.) Another important exception to the rule in Pinnel's Case occurs in the area of promissory estoppel, which will be dealt with later. III. Composition with Creditors This is another exception to the rule in Pinnel's Case - that payment of a lesser sum is no satisfaction for the debt. It occurs where a debtor is in financial difficulties and comes to an arrangement with a number of creditors. If all the creditors agree to accept a lesser sum, then they are bound by their promise. nb. - there must be more than one creditor - otherwise the rule in Pinnel's Case applies. Also, this only applies where the creditors agree together to accept a lesser sum. If the debtor makes individual agreements with a number of creditors, composition with creditors does not apply. It may not be possible to reconcile this exception with the rule, but it makes good business sense. All creditors get some of the debt owed, rather than allowing one creditor to scoop the pool. The rationale behind this exception is that if one creditor who had agreed to the settlement later sued for the balance, it would be a fraud on all the other creditors. [In this context the word "fraud" is used in the sense of unfairness or injustice, rather than in the common law sense of the word which imputes serious wrongdoing and dishonesty.] This may also arise where a third party becomes involved and pays off part of the creditor's debt. X owes A €500. Y promises to pay A €300 if A will discharge X's debt. A agrees, Y pays, and A sues X for the outstanding €200. The courts will not allow A to sue for the balance because it would constitute a fraud on Y, the third party. Welby v Drake (1825) 1 C & P 557 Cooke v Lister (1863) 13 CBNS 594 Hirachand Punamchand v Temple 2 KB 330 8 IV. Where the Promisee is bound by an existing contractual duty to a third party Here the promisee promises the promisor that they will perform an obligation which they are contractually bound to perform for a third party. The general rule is that in such a situation, the plaintiff is giving good consideration. Shadwell v Shadwell (1860) 9 CBNS 159 Scotson v Pegg (1861) 6 H & S 295 The Eurymedon AC 154 Pao On v Lau Yiu Long AC 614 Further Reading: Chen-Wishart - chapter 3 Clark – chapter 2 Enright – chapter 8 *Williams v Roffey Brothers 1 All ER 512* 9