Contract law- consideration lecture notes PDF

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LA243 CONTRACT LAW CONSIDERATION Reading *McKendrick, Contract Law, 12th ed., ch.5, pp.73-97 (5.2-5.21) *Burrows, Casebook on Contract, 5th ed., ch.3, section 1

Introduction: Consideration   

On one hand is the hallmark of contract law, being the common law, at the same time is not as settled as it once was. Final requirement for contract formation. Without consideration, there is no contract. Number of specific circumstances in case law that has caused specific difficulty

The basic idea of consideration  

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Can find traces of consideration In the 1600 and we can only see that it has started to become part of the contract law rule book is in the 19th century The rule is this: For any contractual promise to be enforceable, unless made by deed, it must be supported by valuable consideration irrespective of the form in which it is made (i.e. oral or written). Historically, consideration= reason for which a party entered into a contract e.g. to obtain something in return. Consideration =something given in exchange for the promise made by the other party. Consideration became a reciprocal promise to do something in return for another promise, such as a promise to pay money in exchange for a promise to supply goods, forbearance (an act to do or not do something e.g. not to pursue claim in law, that would benefit the promisor Consideration= ‘badge of enforceability’ McKendrick A related requirement is that Consideration must move from the promisee. Any person to whom a promise has been made who wants to enforce that promise, must have provided consideration in return for that promise. So if I am offering to sell you a book for 20 quid and u don’t pay money, then there cant be a contract since you do not promise anything back. So each promise has to offer something in order to be able to enforce that promise, has to be something and something valuable

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Definitions of Consideration by courts Currie v Misa (1875) LR 10 Exch 153, 162 “A valuable consideration, in the sense of the law, may consist either in some right, interest, profit or benefit accruing to one party or some forbearance, detriment loss or responsibility, given, suffered or undertaken by the other.” This is why we talk about consideration in terms of benefits and/or detriments

When is consideration required? Unless made by deed, consideration in some form is required for all contracts.  

In a bilateral contract, each party provides consideration for the other’s promise. Unilateral contract where one promise is being made from a party, but the party has to then do the act that is requested by the promisor for there to be a binding contract. so once act is done, there is a binding contract

Different functions of requirement of consideration in other legal systems we do not have consideration Why the judicial insistence on requirement of consideration? ·

analysis of consideration as a kind of quasi-formality requirement- to distinguish a contract to other types of transactions. Regarded as a formal ingredient of a contract otherwise it could be.. e.g. a gif

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analysis of consideration as a judicial test of contractual intention. For courts to work out the degree of intention

Consideration as ‘filter’ on enforceability of mere gif-promises (to distinguish enforceable promises from a gif) ·

distinction between contract (agreed exchange) and proposed gif

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why make the distinction between contract and gif? Well contract= economic benefit from an exchange. No obvious economic benefit behind gif- so law does not want to support those types of promises. Law supports economic activity.

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need for an exchange and the rule against past consideration.

Consideration as ‘filter’ on enforceability of problematic exchanges ( consideration helps to clear up agreements that are problematic) ·

promised payment for performing existing public duty to perform particular obligation

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promised payment for performing existing contract with third party

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increased payment for performing existing contract with promisor 2

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agreements allowing for part payment of an existing debt (when someone has owed some money, and agreed to accept less of what was agreed)

The concept of ‘valuable’ consideration     

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The key principle: Consideration must sufficient but need not be adequate. Consideration has to have some economic value (no matter how little). Does not have to have a balance, just needs some value. E.g. (£1 for a £250k house). Value in eyes of law- usually means that anything that is a detriment to the promisee and a benefit to the promisor is all that is required. Consideration presents no difficulty where the elements of exchange are clearly present. Chappell & Co Ltd v Nestle Co Ltd [1960] AC 87 - chocolate bar wrappers regarded as consideration. Lord Somerville: basically, said that even if there is no use for the promise, no matter how small, as long as you provide something there is consideration Intangible returns- somebody doesn’t promise something of obvious economic value to somebody else- is there consideration? White v Bluett (1853) 23 LJ Exch 36. Son borrowed money from father. Father made decision that son wasn’t to get anything afer his death. Son complained. Father said if you stop complaining, no need to repay a loan. Question was- was it an enforceable agreement to abandon requirement to abandon loan. O consideration- no right for son to complain about how father distributed property. So by stopping complaining – no forbearance of right since he did not have right in the first place. Right to no hassle is not valuable consideration. (BUT surely by not complaining and stopping from persistence= still benefit?

forbearance to sue? Is it valuable consideration?  

Promise not to enforce a valid claim is good consideration. Even if potential claim to sue in court may not even be successful or there is uncertainty of success-courts said it was still valid consideration since you are not going to court to bring a claim.

Invalid claims- no consideration 

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Wade v Simeon (1846) 2 CB 548. Mr wade brought action against mr simeon to recover money. Simeon said he would pay money if you refuse to take legal action. Wade said okay, then simeon refused to pay- sued for having promised to pay but didn’t. but Mr Simeon said that Wade knew he did not have a valid legal claim for the money in the first place. But irrelevant because he still agreed to. HELD court said by pretending t give up a legal right which is invalid- no consideration What if honestly believed in validity of invalid claim Cook v Wright (1861) 1 B&S 559 Cs thought they were entitled to be reimbursed for street works in D’s property. \d told if he did not pay- he wold be taken to court and had to pay. But was then realised that D had no letal entitlement to reimburse- D didn’t want to pay. BUT courts said- yes there was possibilitywas facing possibility to going to court and defend claim- by avoiding not going to court- then there is consideration 3

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CASE LAW NO CONSISTENT It is already apparent that the rule can create strange results at time. Arguably, it is in accordance with the spirit of freedom of contract. As with many contractual principles, it must be made to fit with common transactions.

Consideration - Specific Instances (1) Agreements to perform existing duty already imposed by law 

The traditional approach is that a promise to pay money for the performance of an existing legal/public duty is not enforceable. No good consideration. This is because… 1) - no additional detriment when performing duty 2) public policy concerns e.g. improper demands by police for payment. When they are already doing legal duty  This position has been made somewhat less clear as a result of cases dealing with the performance of existing contractual duties.  Collins v Godefroy (1831) 1 B&Ad 950: example of existing legal duty: C required to give evidence before court. Person who called in promised to pay him 6 shillings for trouble. Then refused to pay, person brought claim. Court said no, you already entitled to come to court. (public policy- we cannot pay witnesses when they are already supposed to be there)  BUT, contrast to Ward v Byham [1956] 1 WLR 496: man agreed to pay woman in weekly instalments for looking afer their illegitimate child, make sure they are happy and that child is looked afer. Court said there was consideration despite mother having existing legal duty to look afer child since mother was doing things extra- e.g. giving child option of where to live with father or mother, and keeping child happy- which was regarded as additional consideration. Denning LJ: "I have always thought that a promise to perform an existing duty, or the performance of it, should be regarded as good consideration, because it is a benefit to the person to whom it is given." Person does get benefit so why not? (Other judges did not endorse Denning’s policy judgement). Not a sweeping/ratio statement of the case, but shows the tension on every case of consideration on how to handle the doctrine/ how strictly/generous. So courts have become more flexible to accept that contract law is integral part of contract law- but there are ways to go around it.  As long as there is MORE than required by law, it is good consideration. Glasbrook v Glamorgan CC [1925] AC 270- confirmed by HL, police payed extra to keep mine open during strike action. Beyond public duty so good consideration- owner had to pay police.

(2) Agreements to perform existing duty under contract with third party 

Question is: is there a benefit to promisor in securing performance of contract with another party? A promise to perform an existing contractual obligation can be generally good consideration on additional promise from somebody else.

Shadwell v Shadwell (1860) 9 CBNS 159- C engaged to be married, being engaged was an enforceable contract in those days. (Existing contractual obligation) uncle prmised to pay 150 a year once they got married until C made enough money from his practise as a barrister. C said there was consideration for promise to pay nephew for money. Consideration= actual act of marrying fiancé 4

despite being contractually obliged to marry her. There is additional promise there was a benefit for paying C in this case, therefore it was enforceable. New Zealand Shipping Co Ltd v AM Satterthwaite & Co Ltd (The Eurymedon Case) [1975] AC 154 

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Somebody sent goods via ship. Transport contract contained term to limit liability of carrier in case goods were damaged in transit. Same limitation was extended to people unloading cargo (stevedores). Stevedores were separate group of people and under separate contract with carrier to unload good. Goods were damaged- could the Stevedores benefit from the exclusion clause in the main contract? was there consideration? PRIVY council said- unloading the goods- which stevedores were already required to do under a different contract, the act of unloading the goods was good consideration to benefit the exclusion clause main contract. The performance of existing contractual obligation (unloading ship) was sufficient consideration for the promise made by the third party to limit the third party for the stevedores when unloading ship Normally when you perform an existing obligation from another contract, that promise will constitute good consideration

How is it that there is no good consideration when already having an existing public duty, but there is good consideration despite having an existing contractual duty?  

legal obligations imposed by law is different from contractual voluntary obligation PUBLIC POLICY-concerns of public bodies having to be paid extra for an existing legal duty imposed by law. public parties extorting additional sums to ensure completion, although this is now addressed by economic duress.

(3) Past consideration There is an existing contractual relationship- and somehow that relationship is adjusted- variation When there is an additional promise, there needs to be supported by additional consideration. Past consideration is not good consideration. Two types of instances 1) Somebody already performed act, then there is a promise made to pay extra money for performing the act Re McArdle [1951] CH 669 

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Mcardle Promise to carry out improvements to bungalow which formed part of the estate of her father in law who had died leaving the property to his wife and family. Afer work carried out brothers and sisters of her husband signed document stating in consideration of you carrying out repairs we agree that executors pay you £480 from proceeds of sale. Payment never made promise not enforceable because improvements already undertaken, retrospective promise, so lack of consideration. Past consideration not valid.

Sometimes there is a moral obligation to pay but not a legal obligation Eastwood v Kenyon (1840) 113 ER 482 5

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Guardian of young girl. Took out loan to pay for education and improve marriage prospect. She got married in the end and husband promised to pay back the loan. But this was an unenforceable promise because there was no consideration being provided. Might have ben an moral obligation but courts said they were only concerned with legal obligations.

Exception: Doctrine of implied assumpsit Where... 1) Promisor has requested performance of an act 2) Promise has performed requested act 3) Promisor then makes promise to pay Pao On v Lau Yiu Long [1980] AC 614, Privy Council court maintained principle and confirmed implied assumpsit principle "The act must have been done 1. at the promisor's request, 2. the parties must have understood that the act was to be remunerated either by a payment or the conferment of some other benefit and 3. payment or the conferment of a benefit, must have been legally enforceable had it been promised in advance."

Agreements to perform an existing contractual duty and variation of that contract Performance of existing contractual duty is not consideration- not enough. If you want to add something to the contract, there has to be fresh consideration from both parties. This is the traditional rule, but is less clear today. Problem is that there are some agreed variations to a contract. rule thus not very difficult to maintain Traditional approach: Stilk v Myrick (1809) 2 Camp 317, 6 Esp 129 

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crew of 11 men engaged to sail from Baltic and back to England. When got to Baltic, two o crew deserted. Ship master said to remaining 9, ill divide their wages for you, if you remain until we reach England. Upon return Stilk (one of crew) demanded payment, master refused. Claim failed. Because Stilk already under contractual duty to sail ship fomr Baltic and back, did not provide anything extra0 no fresh consideration for it. Rationale not clear- there are two different law report- from two different law reporters, both say different things, Espinas (one reporter) said that decision was based on policy- did not want sailors in high seas trying to extract mre money by threatening not to complete ship. Whereas report by campbell (more frequently cited report) expresses this clearly as a result of lack of consideration analysis. Interesting and important connotation.

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Compare to Hartley v Ponsonby (1857) 119 ER 1471 (in this case 17 deserted, very few able seamen lef- would have been unsafe to carry on voyage, so despite being under the contract- could have abandoned it. Master promised remaining crew extra money if they remainded, then refused to pay. Despite the crew already under existing duty- there is consideraetion as the crew had to do extra work due to large number of crew members who had deserted- so consideration and promise enforceable.

Modern and controversial departure: the “practical benefit” doctrine. Must read case in full. *Williams v Roffey Bros. [1991] 1 QB 1 Must read case in full. 

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Building contract, somebody engaged in constructing firm to renovate block of flats. Engaged in subcontracts- one with Mr. Williams who was a carpenter to do carpentry work on flatsfor price of £20,000. Williams underestimated job and ran into financial difficulty. Told them that they were struggling to finish job on time, had meeting and Roffey Bros agreed to pay extra £575 per flat as soon as you finish flats. Another 8 flats finished, about £4600 should have been payed as extra for what they promised, but only gave about £1500 extra. CA said yes STilk and Mirik= good law. But situation is different. Because of promise you made, you gained a practical benefit, because of the fact that the Cs decided to carry on with the work. Avoided potential libailtiy under liability from main contract, practical benefit, instead of the subcontractors walking out of job and you had to find new carpenters, you had a practical benefit. So consideration, promise is enforceable.

Glidewell LJ: set out criteria when you can depart from Stilk and Mirik. (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.

Russell LJ: “in the late twentieth century I do not believe that the rigid approach to the concept of consideration to be found in Stilk v Myrik is either necessary or desirable. Consideration there must still be, but in my judgment, the courts nowadays should be more ready to find its existence so as

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to reflect the intention of the parties to a contract where the bargaining powers are not unequal and where the finding of consideration reflects the true intentions of the parties.” (p.18). Remember: EXCEPTION =ECONOMIC DURESS. Implications of Williams v Roffey Judicial criticism

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See e.g. South Caribbean Trading Ltd v Trafigura Beheer [2005] 1 Lloyd's Rep 128 – inconsistent with various features of the doctrine of consideration Rule in Stilk v Myrik was not formally challenged and remains applicable- although the effect of Williams v Roffrey is that STilk V myriks original scope= curtailed Was there really a ‘practical benefit’ involved? Yes Roffey Bros avoided penalty of main contract, avoided litigation, avoided having to hire new carpenters, by having individual flats being done, plumbers etc.. would have been easily situated, completing flats one at a time adjusted it. BUT not convincing enough? Some of the reasons given are precisely the reason of why hiring a carpenter in the first place- employed them so they wouldn’t pay under penalty clause and could complete job on time. On facts of the case, finding practicalbenefit was on shaky grounds. How/why is case different from Stilk v Myrick? There was no additional consideration , biut can you say that on facts of STilk v Myrick, there wasn’t a practical benefit? Two law report, courts reclassified Stilk v Myrick as a case of duress, one of the law reports was more policy based- preventing an excercise of du...