Contract Lecture IV - Consideration PDF

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CONSIDERATION Consideration: the agreed equivalent and inducing cause of the promise. Even if you have an agreement, a promise is not enforceable unless something has been given in return. Where consideration is lacking, an agreement may still be enforceable where • (i) there is a formal agreement (...

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CONSIDERATION Consideration: the agreed equivalent and inducing cause of the promise. Even if you have an agreement, a promise is not enforceable unless something has been given in return. Where consideration is lacking, an agreement may still be enforceable where • (i) there is a formal agreement (eg, a deed) • (ii) there is promissory estoppel

THE BASIC IDEA In order to acquire the right to enforce another’s undertaking, a party must undertake to give/actually give something stipulated by the other as the price for his undertaking.

JUSTIFICATIONS FOR THE REQUIREMENT OF CONSIDERATION (i) Consideration as evidence and seriousness of the undertaking • Often suggested that consideration merely performs an evidentiary and cautionary function • Antons Trawling Co Ltd v Smith (2003), Baragwanath J: ‘The importance of consideration is as a valuable signal … rather than an end in itself’. • Suggests that consideration is unnecessary if a party’s serious intention to be bound can be proved in other ways. • Counterargument: even if there is consideration, an undertaking may have been made impulsively without intention to be bound; and even if there is evidence that the promisor intends to be bound, his informal undertaking is unenforceable if it is not supported by consideration. (ii) Welfare maximisation • Consideration is the best indicator of value-maximising transactions, since exchanges tend to transfer property or services to those who value them most highly • Counterargument: donative promises (unsupported by a reciprocal promise or performance) may be economically efficient, and exchanges may not be so (iii) Reciprocity – the intuitive justice of exchange • Reciprocation: the norm between equals in most social interactions. Symbolises an ideal of fairness, because it distinguishes between trading from taking, and bargains from exploitation. • Conversely, the one who has paid for the promise has a more compelling reason to enforce the promise. – The expectation measure of damages: the expectation measure gives the promisee the value of the promised performance because they have given the agreed equivalence of that promise – It is often said that abolition of considerations would bring English law more into line with civil legal systems, but civil law draw essentially the same line between gratuitous undertakings and reciprocal undertakings. (iv) Marking the boundary of appropriate legal involvement • Consideration draws the line between public enforceable transactions and private unenforceable agreements • In the social domain, legal enforcement is unnecessary and inappropriate • We do not, however, readily trust strangers, and contract law bridges this gap in trust The doctrine of consideration has met with increasing criticism and hostility.

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THE REQUIREMENT OF NEXUS CONSIDERATION MUST MOVE FROM THE CLAIMANT Who can enforce the undertaking? • Answer: the party who has paid for it A third party who has not provided consideration for a promise cannot usually enforce it (basis for the privity rule) Exception: see The Contract (Rights of Third Parties) Act 1999. Under the Act, a third party can enforce a contract made for their benefit even if they have given no consideration for it

CONSIDERATION MUST BE IN RETURN FOR THE PROMISE There is no consideration if the promisee incurs a detriment or confers a benefit merely in reliance on, rather than in exchange for, a promise. • Combe v Combe [1951]: A husband promised to pay his wife £100 a year on their divorce. Six years later, the wife sought to enforce the promise. Her argument was that she gave consideration for it by not applying for maintenance. The court held that no consideration had been given, as the husband did not request for her to do this. Her forbearance resulted from his promise to pay but was not given in return for it. (The court may have reasoned this way because 1) she had left the issue for six years, and 2) she was richer than him.) • Alliance Bank v Broom (1864): A debtor promised to provide some security for his debt to a bank. No security was given, and the bank sued to enforce this promise. The debtor argued that no consideration had been given. The court enforced the promise by finding that the debtor made an implied promise to the bank. (A request may have been more readily found in Broom because a bank is likely to institute proceedings.)

PAST CONSIDERATION IS NOT GOOD CONSIDERATION Since consideration must be given in response to a promise, it cannot be given before the other’s promise was made. (i) Where consideration has already even given for a promise, and cannot buy additional promises from the same promisor • Roscorla v Thomas (1842): R purchased a horse from T. T subsequently promised that the horse was sound and free from vice. This additional promise was unenforceable because the only possible consideration was the original contract price, and this consideration was past. (ii) Where performance predates the promise sought to be enforced • Eastwood v Kenyon (1840): the guardian of a young girl raised a loan to educate her and improve her marriage prospects. After marriage, the girl’s husband promised to pay off the loan. This promise was unenforceable because the consideration was past. • Re McArdle, Decd [1951]: A woman made improvements to her father-in-law’s house, thinking that she will live there. It turned out he gave the house to all of the siblings, who promised her that they would contribute to the money spent on making the improvements. Consideration was past, because the work was completed before the promise was made. Exception: the doctrine of implied assumpsit , where the court is satisfied that the promisor’s promise and the promisee’s past actions are a part of the same overall transactions. • Lampleigh v Braithwait (1615): B, who was sentenced to death, asked L to obtain a pardon from the king. L was unsuccessful. B’s subsequent promise to pay £1000 tp L was held to be enforceable. 2

• Pao On v Lau Yiu Long [1980]: P and L entered into an agreement to exchange shares, in which L agreed to buy back its shares at the end of the year at $2.50 each in exchange for P agreeing to not sell 60% of L’s share for a year. P, in anticipation of rising share prices, asked for a guarantee by way of indemnity. Prices fell dramatically, and L refused to pay for its shares. The court found that P’s promise not to sell was valid consideration, because it was given at L’s request with the common intention that L should protect P against a drop in value. – The court opined that a claimant wanting to sue must show that (i) he performed the original act as a response to a request, (ii) it was clearly understood at the time of the request that it would be paid for, and (iii) the eventual promise is one that would have been enforceable if it had been made at the time of the act. Parliament has also mitigated the past consideration rule: • Bills of Exchange Act 1882, s 27(1)(b): a pre-existing debt or liability is good consideration for a bill of exchange • Limitation Act 1980, s 27(5): a debt is deemed to have accrued on and not before the date of the debtor’s acknowledgement of the debt

THE REQUIREMENT OF VALUE THE DEFINITIONS OF VALUABLE CONSIDERATION There is an unavoidable vagueness in the concepts used to define consideration. Currie v Misa (1875): ‘a valuable consideration, in the sense of the law, may consist either in some right, interest, profit or benefit to one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other.’ (i) Benefit or detriment • Usually, benefit and detriment are both present – eg delivering something is a detriment to the seller and a benefit to the buyer. • Exceptions: an agreement may entail detriment to one party without apparent benefit to the other (Jones v Padavatton (1969)), or may benefit one party without detriment to the other (Pao On v Lau Yiu Long) • Where consideration is yet to be performed (executory ), benefit and detriment can only be understood in terms of the right to enforce the promised performance. (ii) Factual or legal • Factual benefit/detriment is usually sufficient for consideration. • Sometimes, the courts insist on legal benefit/detriment - of ‘value in the eye of the law’ - and consideration may be denied/found regardless of the presence of factual benefit/detriment. • Example: performing pre-existing contractual duties confer no legal value, even if they were to factually benefit/detriment the parties. (iii) Request • Value is subjective, and therefore if a party requests something, they must value and will have factually benefitted from its receipt. (iv) Tangible and intangible value • Performance with economic value readily qualifies as consideration. • Non-monetary performance gives rise to difficulties: – Bret v JS (1600): love and affection are not valid consideration 3

– Shadwell v Shadwell (1860): an uncle’s promise to pay a sum on the event of his nephew’s marriage to a particular person was found to be valuable consideration – Ward v Byham (1956): a man’s promise to pay a sum for the mother of his child to keep her ‘well looked after and happy’ was found to be valuable consideration (v) Good reason for enforcement • Atiyah argues that that ‘consideration’ has a broader meaning: When the courts found a sufficient reason for enforcing a promise they enforced it; and when they found that for one reason or another it was undesirable to enforce a promise, they did not enforce it. It seems highly probable that when the courts first used the word ‘consideration’ they meant no more than that there was a ‘reason’ for the enforcement of a promise. (vi) ‘Invented’ consideration • Treitel argues against Atiyah’s ‘good reasons’ theory • Emphasises instead that the courts may invent consideration by treating an act or forbearance as valid consideration despite it not being the promisor’s purpose to obtain it ( Chappell v Nestle) and although there is no prejudice to the promisee ( Shadwell v Shadwell)

THE PROS AND CONS OF ENFORCEMENT Pro-enforcement that push out the boundaries of enforceable promises: Desirability of: • Recognising performance actually bargained for when there is some technical obstacle to its qualifying as consideration • Recognising the subjectivity of values and respecting parties’ intension • Protecting the promisee’s reliance • Preventing the promisor’s enrichment at the promisee’s expense • Encouraging finality in dispute resolution • Imposing responsibility otherwise regarded as just

Anti-enforcement factors that restrain the scope of enforceable promises: Undesirability of: • Gifts and other transactions in the private domain, because the law’s involvement may do more harm than good • Wholly one-sided ‘bargains’ • Prevention of extortion or corruption

CONSIDERATION NEED NOT BE ADEQUATE, BUT MUST BE VALUABLE IN THE EYE OF THE LAW A promise is enforceable as long as something valuable in the eye of the law is exchanged for it. The values need not be equivalent. • Parties are free to determine what they value and how much they value it. • (Note that a contract supported by consideration, which has glaring disparity between the values exchanged, may still be set aside for vitiating factors such as misrepresentation, duress and undue influence.)

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Nominal consideration: trifling benefits/detriments can constitute valid consideration Cases where good consideration was found: • Chappell & Co v Nestle [1960] AC 87: A promisee supplied three chocolate wrappers (plus 1s 6d) in exchange for a gramophone record. The owners of the record copyright sought an injunction to prevent infringement of their copyright. The court held that the three wrappers were sufficient consideration. Nestle was running an advertisement campaign, and they were getting sales – reference to the request conception of value. • Bainbridge v Firmstone (1938): A promisee lent two boilers to the promisor for weighing, in exchange for them to returned in the same condition. • Haigh v Brooks (1839): A promisee surrendered a document which they thought was a guarantee (but was actually worthless) in exchange for a promise to pay certain bills. In these cases, factual benefits/detriments are doubtful. Other cases: • Lipkin Forman v Karpnale Ltd (1991) • Spreadex Ltd v Cochrane (2012) Limits to the nominal consideration device: • When the consideration alleged is incontrovertibly less than the promise sought to be enforced, then the promise in unenforceable, unless it relates to specific money (e.g. bearing a certain date or in a certain currency). • In some circumstances, the contractual right obtained by giving normal consideration is less secure: e.g. specific performance will not be ordered, and the promise will not be enforced if it would prejudice third party interests (Law of Property Act 1925, s 205(1)(xxi))

Intangible consideration: Normally, intangible consideration is not good consideration because of their uncertainty and impossibility of enforcement. • White v Bluett (1853) 23 LJ Ex 36 : a father promised his son to give him property in exchange for a promise for his son to not annoy him with complaints. The court held that this was not good consideration. • North Ocean Shipping Co v Hyundai Construction Co (The Atlantic Baron) (1979): a customer promised to pay the builder ‘in order to maintain an amicable relationship’. This was not good consideration. However, intangible benefit may be considered to be good consideration if the courts think it is just to do so in order to enforce the promise: • Dunton v Dunton (1892): a woman promised to behave ‘with sobriety, and in a respectable, orderly, and virtuous manner’ in exchange for allowance from her husband. Good consideration. • Ward v Byham: a mother's promise to keep her child 'well looked after and happy' in exchange for upkeep from her husband was good consideration. Intangible benefit may also arise from the promise to refrain from some activity. • Hamer v Sidway (1891) 124 NY 538 (American case): an uncle promised to pay his nephew a sum of money if he refrained from 'drinking liquor, using tobacco, swearing and playing cards and billiards for money' until he was 21 years of age. It was held that good consideration had been given. • Pitt v PHH Asset Management Ltd (1993): PHH accepted P's bid for £200,000 'subject to contract', but withdrew the next day when someone else made a higher offer. PHH subsequently agreed to a lock-out agreement with P. The court held that P gave good consideration

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• The court reasoned that P did so by promising to 1) exchange contracts within two weeks; 2) refrain from telling B that he was no longer interested in the property; 3) withdraw his threat to seek an injunction against the sale to B. (Mindy opinion: 2 and 3 are questionable as they amount to recognising value in being free of a nuisance)

Illusory consideration Courts will not find consideration where the recipient will inevitably get nothing/nothing which is enforceable/nothing more than they would have received anyway. (i) Impossibility • Clifford (Lord) v Watts (1870): where 'the parties could not be supposed to have so contracted' at the time of contract formation because the promisee's performance is known by both parties to be physically or legally impossible, the contract may be void for mistake. (ii) Discretionary promises • where a contract contains a clause excluding all liability for breach (effectively rendering promises discretionary), legislation may render such exemption clauses ineffective and leave the substantive promises as being binding. (iii) Un-induced performance by the promisee • Arrale v Costain Civil Engineering Ltd [1976] 1 Lloyd's Rep. 98: J wanted to sell his shares in a company. To incite approval from P, J said that he would persuade the purchaser to buy P's shares at the same price in six months' time, and if he failed to do so he would buy P's shares himself. The court held that it is not good consideration to promise something you never intended to do.

MOTIVE IS NOT CONSIDERATION A promise is only enforceable if a promisor’s motive can be construed as that of obtaining something valuable in the eye of the law. • Thomas v Thomas (1842) 2 QB 851: A testator expressed his intention for his wife to have his house for the rest of her life. The wife was to pay £1 per year for the upkeep of the house. The court held that the £1 constituted sufficient consideration. The husband’s intention, however, was merely a motive, and could not be good consideration.

COMPROMISE OR FORBEARANCE TO SUE Compromise: when neither concede but agree to differ. Forbearance: when you admit that you are wrong, and the other person agrees not to sue. Valid consideration • Where X’s claim is valid in law, his compromise or forbearance is good consideration for Y’s reciprocal promise. Where the duration of forbearance is unspecified, an implication of reasonable time will be made (Payne v Wilson (1827)). • Where X’s claim is doubtful in law, his compromise or forbearance is still good consideration (Haigh v Brooks). • The same applies if X’s claim is clearly invalid in law but made in good faith and on reasonable grounds (Cook v Wright (1861) at 569). – If a party's claim is invalid, compromising or forbearing from suing entails no factual detriment to the party. However, recognising legal value here is supportable as (i) encouraging settlements and (ii) conferring factual benefit on the promisor in being rid of the nuisance of litigation. Not valid consideration 6

• If X knows that his claim is invalid, compromising or forbearing from suing on it is not valid consideration. (Wade v Simeon (1846): 'It is almost contra bonos mores [against good conscience], and certainly contrary to all the principles of natural justice, that a man should institute proceedings against another, when he is conscious that he has no good cause of action')

PRE-EXISTING DUTIES Whether there is good consideration where X promises to do something that he was already bound to do depends on what the source of the original duty is: • (i) by the general law; • (ii) by a contract with a third party; or • (iii) by an existing contract with the promisor. Traditionally, (Ii) is good consideration, and (i) and (iii) are not.

PRE-EXISTING DUTIES IMPOSED BY PUBLIC LAW A promise to perform an existing public duty is no consideration for a reciprocal promise. The concern is about corruption in public life. If you are doing something extra, however, you can get consideration. • Collins v Godefroy (1831): Godefroy promised to pay Collins if Collins gave evidence at Godefroy's trial. This promise was unenforceable, as Collins had already been subpoenaed to give evidence. • Glasbrook Bros. v Glamorgan C.C. [1925] A.C. 270 : Involved a strike action in a mine. The owners were concerned about violence, and so said to the police that they would pay them if they sent people. The police already had a duty to go, but they sent more people than they normally would have. The court held that valid consideration had been given, as more was promised than was strictly owed under the pre-existing legal duty. See now Police Act 1996, s 25(1). • West Yorkshire Police Authority v Reading Festival Ltd (2006): where services 'have been asked for but will be beyond what the police consider necessary to meet their public duty obligations, or they are services which, if the police do not provide them, the asker will have to provide them from his own or other resources', an offer to pay will be considered to be valid consideration. • Ward v Byham [1956] 1 WLR 496: the father of an illegitimate child said to its mother that he would pay her £1 a week for the child to be kept 'well looked after and happy'. The father did not pay the promised amount. The court held that this was good consideration - the mother had promised to do more than what was required by promising to keep the child 'happy'. (Lord Denning interpreted this case differently in Williams v Williams (1957) - that the father had factual benefitted from this arrangement.)