Topic 2- Consideration PDF

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Lecture notes for Law of Contract I ...

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Topic 2- Consideration Consideration is some act or forbearance involving legal detriment to the promisee, or the promise of such an act or forbearance, furnished by the promisee as the agreed price of the promise. • Detriment • Bargain Consideration must flow both ways;

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Australian Woollen Mills v Commonwealth AWM sued the commonwealth as they claimed that their was a unilateral contract with the commonwealth; • The commonwealth promised to pay the subsidy • AWM purchased wool The court decided that, though the Commonwealth had promised subsidies, these promises were not enforceable because they were noncontractual. The purchase of wool is not a good consideration as it was not done at the request of the promisee. The relation had no quid pro quo 'this for that'. This case tells us that benefit detriment alone isn’t enough to show consideration, a bargain is also needed. In the case the court provides an example; • A promises B that 'I will pay you $1000 on your arrival in Sydney'

• A promises B, that I will pay you $1000 on your arrival in Sydney • B travels to Sydney • It is non-contractual as the promise to pay is not given in an exchange for a promise by B, therefore has B provided consideration?- No • There is no quid pro quo unless A requested it • Due to the lack of a bargain, it is not a consideration therefore making it a conditional gift, with travelling to Sydney the condition and the $1000 the gift • B travels to Sydney because he needs the money, the airfare costs him $250 • Due to there being no consideration, there is a reliance on promise and detriment • Therefore it may be estoppel Consideration Rules 1. 2. 3. 4. 5. 6. 7.

Must be given on request of promisor Must move from the promisee Must be sufficient Need not be adequate Must not be illusory Past consideration is no consideration Promise to perform an existing duty is not consideration

Examples 1. Must be given on request of promisor This is another way of saying that consideration must be a benefit or detriment given in exchange for a promise. If neither then it is not part of the bargain and will therefore not be a consideration. E.g. Australian Woollen Mills v Commonwealth 2. Must move from the promisee Only the person who has paid the price for the promise can sue on the promise. So the price must be paid by the promisee. This can often arise in

conjunction with the privity rule. This is seen in the case of Price v Easton. In this case the plaintiff sued the defendant. The contract between the defendant and X was that the defendant promised to pay the plaintiff for the work performed by X.

Due to the plaintiff not providing a consideration as promisee, they are unable to sue. However if X had of sued, they would have succeeded as even though the promise was not paid to them, the consideration must still move from promisee to promisor, and then it is still valid if it moves to a third party such as the plaintiff. Joint Promisees; Coulls v Bagot's Executor and Trustee Mr. Coulls entered a contract to allow stone to be quarried from his property by a company. Mr. and Mrs. Coulls received royalties from the quarrying as joint tenants, even though no consideration was given by Mrs. Coulls. The court held as a result that she was not a party to the contract and as a result the action failed. They then stated that where consideration is given on behalf of both it can be held that it has moved from both. 3. Consideration must be sufficient but need not be adequate (and 4) In order to qualify as a consideration, the price paid for something must be recognised as having a value, this is known as the threshold. Meaning that whatever is nominated as consideration must be ascribed a valuation. Once something of value is identified, whether the price is fair or equivalent is not relevant. Meaning for example that you could rent a valuable property in return for the payment of one peppercorn per year. This then rolls back to the freedom of contract meaning that each party is

able to determine the meaning and value of the bargain for them. If a party wants to enter into an agreement that might appear unbalanced, then it is not up to a court to decide whether the price they are willing to accept is adequate. Each person has autonomy to decide what is valuable to them. Woolworths v Kelly In this particular case Justice Kirby provides three reasons to support the sufficiency rule; 1. The courts cannot assess the value which an individual might ascribe to something. It is a subjective assessment 2. If courts were empowered to decide whether a bargain was fair, then this would make the enforcement of the contract uncertain 3. The rule protects economic freedom Chappel v Nestle The court had to decide whether the consideration given in exchange for a record included three chocolate wrappers. Nestle were selling the records to members of the public who gave them 1s 6d AND three wrappers from a Nestle chocolate bar, it was being run as a promotional deal and the plaintiffs were seeking royalties for copyright of the music on the records. It was questioned as to whether the wrappers were part of the consideration as they had no intrinsic value and therefore no direct benefit to Nestle. The court stated that the wrappers were sufficient as consideration, due to them having a value to Nestle through the indirect benefit from sales and promotions. As long as the wrappers have value to the promisee, then the adequacy of that value is for the promisee to determine. 5

Consideration should not be illusory

5. Consideration should not be illusory This rule can be invoked in two different situations; Firstly if a contract provides for one party to have an unfettered discretion as to whether or not they should perform obligations, then the promise is illusory consideration. Placer Development v Commonwealth Was an agreement whereby the Commonwealth promised to pay a subsidy 'of an amount or at a rate determined by the Commonwealth from time to time'. The majority found that this did not impose an obligation to determine the pay of any subsidy at all, therefore determining it as not a good consideration at all. The other example of illusory consideration is where the obligation is too uncertain to be enforceable. As noted, natural love and affection are not good consideration. White v Bluett A promise by a son not to 'bore his father' with complaints was found to be illusory consideration. Dunton v Dunton A promise by a wife to conduct herself with sobriety and in a respectable, orderly and virtuous manner was upheld as good consideration. 6. Past consideration is no consideration If the benefit or detriment which is relied on as consideration occurred before the agreement between the parties was made, then it cannot qualify as good consideration. Roscorla v Thomas Th

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The plaintiff had purchased a horse from the defendant. After the sale had been completed, the defendant asked for a promise that the horse was 'sound and free from vice'. The plaintiff gave this promise, but it then turned out that the horse was 'vicious, restive, ungovernable and ferocious'. The plaintiff then sued for breach of contract, the court however stated that the promise given was not supported by the consideration. As the money paid for the horse was part of an earlier contract and was not coextensive with the promise of soundness. Therefore making it a past consideration and not valid. However there is one exception to this rule. Where one party performs services at the request of another party, then even if the person receiving the services promises to pay after the services are provided, that will be deemed enforceable. The service may be regarded as a past consideration, but the court has interpreted it differently. Lampleigh v Braithwaite The court determined that the request for payment 'coupled itself' with the provision of services. The services were provided with a tacit understanding that they would be paid for. The later promise to pay is simply evidence of the understanding, or fixes the price to be paid. 7. A promise to perform an existing duty is not good consideration This is a complex rule that often has exceptions and inconsistencies. The general rule is that to perform a duty which the promisor owes is not a good consideration. The duty may be public or private (contractual). Exceptions to the general rule include; • Fresh consideration • Compromise and forbearance to sue • Practical benefit • Promises made to third parties • Termination and replacement

Glasbrook v Glamorgan County Council During a national coal strike, the owners of a coal mine sought extra police protection. The local council had responsibility for the police force. They insisted on payment for the provision of 70 policemen and entered into a written agreement with the mine owners. The police remained at the colliery until the dispute was settled. The mine owners then refused to pay under the agreement, arguing that the provision of the police was an existing public duty owed by the council and therefore was not good consideration. The court found that the provision of extra police was not within the obligations of the council and therefore did not fall within the scope of the existing duty. This was for the public authorities to determine. The promise to give evidence was already required as the promisor had been subpoenaed. Pre-existing contract between parties These are cases that involve promises to perform duties already owed under contract. Assume there is a contract between A and B, in which B pays A for their services for a year. However, after 6 months A seeks to modify the agreement by requesting a higher pay. Since A already has a contractual duty to perform these tasks, the modification isn't supported by any consideration. A is only doing or promising to do something they are already required to do under the existing contract. Stilk v Myrick The plaintiffs were seamen who were contracted to serve on a ship, however during the voyage two of the crew deserted. The captain then promised to split their pay evenly among the crew, if they were to continue on the voyage, which they did. However, the captain refused to pay the extra wages, one of the crew then sued and lost. This is because the original contract provided for the crew to

continue to work in emergency situations, so they already had a duty to man the ship if it was short-handed. Therefore all they had promised in exchange for the promise of extra hours was to perform their existing contractual duties. Hartley v Ponsonby Also concerned a promise to pay extra wages to the crew of a short-hand vessel, it was decided in favour of the crewmen, on the basis that the voyage was rendered dangerous by the shortage of crewmen, and therefore the promise went beyond the scope of the pre-existing contractual duty. Part payment of a debt In Pinnel's case from 1602 it was decided that part payment of a debt was not good consideration for a promise not to sue for a balance. In that case an exception to the rule was identified whereby 'the gift of a horse, hawk or robe etc. might be more beneficial to the plaintiff than money' and therefore could be good consideration. Foakes v Beer The problem with the rule is that it doesn’t sit well with commercial reality. Creditors very often agree to accept part payment in satisfaction of a greater debt, on the grounds that a bird in the hand is worth two in the bush. Exceptions to the pre-existing duty rule (7) 1. 2. 3. 4. 5.

Fresh consideration Compromise and forbearance to sue Practical benefit Promises made to third parties Termination to existing contract and replacement

1. Fresh consideration

If the promise is to perform duties that lie outside the scope of the existing contract, then this will be good consideration. Both Glasbrook v Glamorgan County Council and Hartley v Ponsonby are examples. 2. Compromise and forbearance to sue When parties to a contract enter into dispute, then one party may assert a legal claim. If the parties reach a compromise to settle the dispute, this might include a promise by one party to perform an obligation which was part of the original agreement. The compromise must be a bona fide one. In other words, if the party bringing a claim has a genuine belief that they have a good legal claim, then the compromise is valid consideration even if that belief turns out to be wrong. Example, Wigan v Edwards 3. Practical Benefit In Williams v Roffey Bros an exception to the pre-existing duty rule was found, an exception that is very hard to reconcile with other cases and the conceptual basis of the rule. The case concerned a contract for the plaintiff to renovate 27 flats in a block for payment of $20,000. Before the work was finished, the plaintiff suffered financial problems and it seemed that he would be unable to complete the project. The defendant then promised to pay him an extra $10,300 at a rate of $575 flat if he promised to keep working. He agreed and completed 8 more flats before abandoning the work. When he sued for the extra payment, the defendants raised the argument that the only consideration he had furnished was a promise to do work he was already obliged to do under the original contract. In fact, the plaintiff ended up doing less than what he had agreed under the original contract. The court allowed the plaintiffs claim and the contract was upheld. 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 A b f Ah l l f d hi bli i

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 Musumeci v Winadell the court discussed the case of Williams v Roffey Bros and it was outlined why the case should not be followed in Australia. i. The rule could be exploited to allow a party to extort a promise for more money by threatening to breach their existing contract unless they are paid more. In other words, once a contract is formed, then one party could put the other party in a difficult situation deliberately in order to extract more money. ii. The promisee (the party that asks for more money) suffers no legal detriment, they are just doing what they have already promised to do under the original contract iii. Abandoning the doctrine of the 'existing duty' rule undermines the meaning of consideration. ‘if these matters are capable of being regarded as consideration the reality is that the existing duty rule no longer applies, for in every case these types of benefits will be present… Indeed, it is because contracting parties regard such matters as benefits that the argument can be made that [the] existing rule should be abolished.’ The case answers these three concerns; 1. Law of duress provides a remedy for extortion, but needs to provide for lesser unfair pressure 2. If a party promises to pay more money for performance of an existing contract that indicates that he or she must have a reason to do so. Legal detriment isn't really relevant

3. If a promisor's actual performance is worth more to the promisee than likely damages, that should be an alternative basis for consideration 4. Promise to a third party Where A owes a contractual duty to B, a promise to X to perform the same duty will be good consideration. In the case of Shadwell v Shadwell the promise was by the plaintiff to the defendant that the plaintiff would marry his fiancée. An engagement to marry was, at that time, considered to be a contractual obligation. Therefore the plaintiff’s promise to his uncle was already a contractual duty he owed to his fiancée. It was found to be good consideration. 5. Termination to existing contract and replacement The rule often arises when parties try to modify an existing agreement in a way that directly benefits only one party. The parties can terminate the original agreement and enter into a new contract....