CONTRACT LAW ( PART 4)

By Law Teacher

2.4.1 Consideration & Promissory Estoppel – Introduction

Welcome to the second lesson of this module guide – consideration and promissory estoppel! This chapter will examine and analyse two principles of contract law. The first is consideration, whichalong with the offer, acceptance and intention to create legal relations, helps form a legally bindingcontract. Promissory Estoppel is a related principle which can act as the exception to one of the mainrules of consideration – that for consideration to be valid, it must have economic value and involve anexchange of benefit/detriment between the parties. This chapter will ensure you understand the rulesof consideration and when exactly promissory estoppel can operate.

This chapter will begin by examining what consideration is, as well as the types and whether the exchange of a benefit or detriment can constitute as it. Following this the requirements and limitations of consideration will be outlined and discussed. The chapter will then move on to consider promissory estoppel, specifically how it operates and its interplay with consideration.

Below are some goals and objectives for you to refer to after learning this section.

Goals for this section

  • To understand what consideration and promissory estoppel are
  • To understand the importance of consideration to a contract
  • To understand the different principles governing consideration

Objectives for this section

  • To be able to define consideration
  • To understand the different types of consideration
  • To understand the requirements of consideration and its limits
  • To understand and be able to apply the legal principles of consideration to a scenario
  • To understand when and how the principle of promissory estoppel operates

2.4.2 Consideration & Promissory Estoppel

What is consideration?

Whether consideration has been provided by the parties is one of the fundamental steps in determining the legally enforceability of a contract.

Consideration was defined aptly in the case of Currie v Misa(1874) LR 10 Ex 153 and is summed as;

“A valuable consideration, in the sense of the law, may consist either in some right, interest, profit, or benefit accruing to the one party, or some forbearance, detriment, loss, or responsibility, given, suffered, or undertaken by the other.”

Essentially, consideration is the exchange of benefits/detriments between parties.

Does the exchange of the promise to a benefit/detriment constitute valid consideration?

It is a mistake to believe that the consideration must itself transfer to form a binding agreement.  A promise to transfer such consideration is often sufficient.

This assertion was confirmed in Dunlop v Selfridge Ltd [1915] AC 847, where Lord Dunedin stated that promises were indeed considered enforceable.

Types of consideration

There are two types of consideration:

  1. Executory consideration:  This type of consideration is formed when there has been an exchange of promises between parties otherwise known as a bilateral contract.
  2. Executed consideration: This type of consideration is found in unilateral contract where one party makes a promise in exchange for an act or conduct to be performed by another party.  When this performance occurs the consideration is considered executed.

Remember:

  • Executory consideration is yet to be executed, unlike executed consideration only promises of said consideration have been exchanged.

The requirements of consideration

There are a number of things to remember with consideration, namely the most important are:

  1. Consideration does not need to be adequate.
  2. Consideration must have economic value.

Consideration need not be adequate

Consideration does not need to be adequate.  You may be asking yourself what this means.  Essentially it means that the consideration provided by either party does not need to be equivalent to the other party’s consideration.  Sometimes this means that situations arise where the consideration provided by both parties is vastly dissimilar.

In Thomas v Thomas(1842) 2 QB 851 a situation arose where a rental property was let for £1 consideration, said property’s regular rent cost could have afforded much higher rates.  The courts affirmed in this case that adequate consideration is not necessary, simply some consideration.

The reason the court affirmed this decision, is due to the fact the court is unwilling to interfere with bad bargains, as parties to a contract are typically free to bargain on whatever terms they wish – Chappell & Co Ltd v Nestle Co Ltd [1960] AC 97.

Consideration must have economic value

As mentioned earlier, Thomas v Thomas(1842) 2 QB 851 confirmed that although consideration need not be sufficient, it must have economic value.

To demonstrate this the case of White v Bluett(1853) 23 LJ Ex 36 will be examined.  In this case a father waived a debt owed to him by his son, in return for his son to stop complaining about his will.  When this situation was reviewed by the court it was found that this was not valid consideration.  An agreement to not complain in this instance was viewed as not having any economic value.

In Chappell & Co Ltd v Nestle Co Ltd [1960] AC 97 it was found that sweet wrappers being returned to Nestle in an attempt to win a prize were considered to have economic value.  In contrast however in Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548 it was found that casino chips did not suffice in having economic value.

The important thing to remember about the two above cases is the recipient of the consideration.  In Nestle, the goods were considered by the Court to have economic value to Nestle.  This should be kept in mind when considering whether or not something will be considered to have economic value.

Limits of consideration

There are also numerous things that the Court have decided will not suffice to amount to consideration.

Performance of an existing duty

There are three different circumstances that can arise if the consideration is the performance of an existing duty.

  1. Performance of legal obligation which are independent of any contract.

Collins v Godefroy(1831) 1 B & Ad 950 – Typically the performance of a legal obligation such as the jobs of the public service e.g. fireman, will not provide adequate consideration for an agreement.

Exception – Glasbrook Bros v Glamorgan County Council [1925] AC 270 – If the obligation extends beyond that which is beyond that of ordinary duties then the obligation can amount to valid consideration.  In this case a police force dedicated officers to an event for an entire day when they didn’t have the resources in return for financial remuneration.  Said obligation carried out by the police force was considered sufficient for the purposes of consideration because it extended beyond what was ordinary[AL1].

  1. Performance of a duty already promised in a different contract.

Stilk v Myrick (1809) 2 Camp 317, 170 ER 1168 – Performing duties already required under an existing contract is not sufficient to amount to consideration.

Exception – Hartley v Ponsonby [1857] 7 EL BL 872 – Extending beyond the duty required under a contract will amount to valid consideration.

Exception – Williams v Roffey [1991] 1 QB 1 – This case provides a set of circumstances in which performance under an existing duty under a contract will amount to valid consideration.

  • 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
  • At some stage before A has completely performed his obligations under the contract B has reason to doubt whether A will not, or will be able to, complete his side of the bargain; and
  • B thereupon promises A an additional payment in return for A’s promise to perform his contractual obligations on time; and
  • As a result of giving his promise, B obtains a benefit, or obviates a disbenefit; and

B’s promise is not given as a result of economic duress or fraud on the part of A.

The emphasis of this case is the concept of a “practical benefit”.  It is also important to remember that this case did not overrule Stilk v Myrick (1809) 2 Camp 317, 170 ER 1168.

  1. Performance of a duty owed to a third party

This limitation of consideration is similar to that of above example, however, in this case, the duty will be owed to a third party, and not the same party.

New Zealand Shipping Co Ltd v AM Satterthwaite & Co Ltd (The Eurymedon) [1975] AC 154 – The facts have been listed below because this case is quite complex.

  • Party A, the shippers, had a contract of carriage with Party B, the carriers.
  • This contract included an exemption clause whereby the carriers would not be liable for any damage as a result of the unloading of the goods
  • Party B then entered a contract with Party C, the stevedores, to unload the goods.
  • Subsequently, Party A promises Party C that they can take benefit of the exemption clause they offered to party B

Therefore, the general rule created is that performance of an existing duty owed to a third party may be valid consideration if it allows the party to enforce a direct obligation against the other.

Past consideration

Past consideration is insufficient to form a legally binding agreement.  Only consideration which is given at the time or after the promise for which it is given will be enforceable.  Promises given after the consideration has been completed are unenforceable.

Re McArdle [1951] Ch 669 provides the authority for the above assertion.

Exception – The case of Pao On v Lau Yiu Long [1980] AC 614 affirmed the judgement in Lampleigh v Braithwaite (1615) Hob 105 that stated if certain criteria met the requested performance of the parties may be sufficient to amount to consideration.

  • The consideration which is ‘past’ would have operated as valid consideration if the act was done at the promisor’s request.
  • There was an understanding there would be the conferment of some kind of reward, payment or benefit for the act.
  • The consideration would have been valid had it been promised in advance of the act.

Part-payment of a debt

Foakes v Beer (1883) LR 9 App Cas 605 – Part-Payment of a debt (alone) is never valid consideration.  This is due to the ability of a party to exploit another party in a difficult financial position.

Pinnel’s Case (1602) 5 Co Rep 117 does provide however for 2 exceptions to this rule.

  • Part-payment of a debt will constitute valid consideration if it is accompanied by another form of consideration such as goods.
  • Payment of a debt may also be sufficient if it has been given in a different form, time, or place.  These exceptions should however be reviewed with caution as they are all fact based and subject to heavy scrutiny.

Promissory estoppel

Promissory estoppel is an equitable remedy that prevents a party from ‘going-back on’ or rescinding a promise.  Clearly the concept is not simple as just preventing the rescission of a promise.

How does promissory estoppel operate?

To determine whether promissory estoppel will apply in a situation where a promise has been rescinded the test laid out in the Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130 must be examined.

The requirements of the test are:

  1. There must have been an existing legal relationship between the parties

Promissory estoppel generally only operates when there is a pre-existing relationship between the parties and will not work to create new ones, as affirmed by Lord Denning in Combe v Combe [1951] 2 KB.

  1. There must have been a reliance on the promise

The promisee must rely on the promisors’ promise in order to attempt to apply promissory estoppel.  This means that by relying on the promise the actions of the promisee have changed.

This requirement has a very low threshold and although there has been argument that a detriment may be required to establish reliance both the cases of Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130 and Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130, dispute this.

  1. Promissory estoppel can only be used as a defence

This is where the famous equitable maxim applies, promissory estoppel can only be used as a “shield not a sword” – Combe v Combe [1951] 2 KB.

Essentially this means promissory cannot be used as a cause if action, only a defence.  This decision makes sense considering the purpose of equity.

  1. It must be inequitable to allow the promisor to go back on the promise

The courts of equity are remedies which attempt to ‘fill the gap’ where the common law produces unfair results. Therefore, it would be illogical to not allow the promisor to go back on the promise where it is in fact equitable. The law of equity, unlike the common law, affords discretion to the courts to decide whether it is fair or not to impose the principles of equity.

A case which provides a good example of this is The Post Chaser [1982] 1 All ER 19, in which the promise was revoked within a few days, due to this small lapse in time, the promise would not have relied upon their promise or changed their position, therefore, it was equitable to allow the promisor to go back on the promise.

  1. The doctrine is generally suspensory and does not extinguish rights

A contractual modification supported by consideration will create the effect of a permanent set of obligations for the duration of the contract. Promissory estoppel operates slightly differently, only suspending the rights where relevant.

The operation of this principle is clear in High Trees. Promissory estoppel suspended the rights of Party B to claim £2,500 during the time of the war, but the right to charge the full £2,500 was reintroduced following the end of the war.

2.4.3 Consideration & Promissory Estoppel – Hands on Example

Now you have a comprehensive understanding of what consideration is, the limitation to it, and how it can be applied, you can attempt a problem scenario which will test your knowledge. The answers can be found at the bottom of the page. Each of the questions will have a specific legal issue it focuses on.

Problem questions which involve consideration and promissory estoppel will usually be limited only to those principles, however, be aware that sometimes these will be paired with issues of offer, acceptance and intention to create legal relations. In the event it is a problem question focused just on consideration and promissory estoppel, here is a suggested approach.

  • First, consider the requirements of consideration – is it adequate, and does it have economic value?
  • Second, is the consideration being used subject to any of the limitations of consideration (performance of existing duty, past consideration, or part-payment of a debt)
  • Finally, is there any element of promissory estoppel?

With this approach, you should be able to identify the general issues you should be focusing on. You will then need to use your more in-depth knowledge to tackle to specifics, ensuring to apply the correct authority and come to sensible conclusions.

Scenario

Jeff is the director of a successful business who specialise in selling fridge freezers. Unfortunately, after a few disagreements with his legal team, he has decided he doesn’t need their advice anymore. He has made various different contracts the past week with no issues, but is concerned about the validity of some of them.

  1. Jeff’s supplier of refrigerator parts, Freeze4lyfe, are in some financial difficulties. Jeff, being the diligent businessman that he is, sees this as a golden opportunity. His business owes Freeze4lyfe £100,000, but this isn’t payable until next year. He is aware that Freeze4lyfe may be willing to accept a lesser amount now in order to get out of their difficulties. He contacts Freeze4lyfe and offers them £40,000 and 5 new fridge freezers to waive the debt. Freeze4lyfe reluctantly accept the offer and waive the debt.

Is this contract valid or will Jeff have to pay the full £100,000?

  1. Jeff is selling 20 fridge freezers to a Houses4u, who are refurbishing some houses which they wish to rent out. Houses4u have some viewings in one week, however, Jeff has let them know they might not be ready by then. Houses4u offer Jeff £5,000 to ensure they are delivered before the viewings, Jeff accepts and does so, then Houses4u refuse to pay the extra £5,000.

Can Jeff force Houses4u to pay the extra £5,000?

  1. Jeff’s main customer, Chilly Food, are aware of a brand new fridge freezer supplier who offer goods for a lower price. As a show of good faith, Chilly Food would like to maintain their agreement with Jeff for 10 fridge freezers a week, but would like to reduce the price slightly. Jeff agrees to a 25% price reduction.

Was there valid consideration for this contract? If not, how could this be resolved?

  1. The legal issue to identify here is a limitation to consideration. Jeff has offered a part-payment of a debt in order to waive the full debt. As per Foakes v Beer, the part payment of a debt is not considered to be valid consideration. Therefore, it would seem the contract would not be valid, and Jeff will have to pay the full debt.

However, one of the exceptions to the rule from Foakes v Beer is in operation. In Pinnel’s case, if the part-payment is accompanied by or replaced with something other than money, this can be valid consideration. Therefore, as there are fridge freezers offered alongside the cash payment, this will constitute valid consideration.

  1. This issue pertains to whether the performance of an existing duty owed to the same party can constitute valid consideration. Stilk v Myrick is the authority which rules that this will not form valid consideration; therefore, Houses4u will not have to pay the extra £5,000.

One exception which may apply is suggesting that Jeff has to go above and beyond his contractual obligations, as was the case in Hartley v Ponsonby.However, it would be difficult to argue that Jeff would have to go above and beyond his obligations by delivering the fridge freezer by a certain date.

The exception to this principle from Williams v Roffey may be applied to this scenario. The scenario clearly fits Glidewell LJ’s criteria – there is a contract for the supply of goods, before the contract is complete, Houses4u fear the contract may not be completed in time, and therefore offer some extra payment, this promise to complete the contract in time produces a practical benefit for Houses4u, as they have the fridge freezers in time for their house viewings, which may result in sales. Finally, there is no duress from the parties.

Therefore, Jeff will be able to enforce the £5,000 payment on the grounds of the ‘practical benefit’ principle from Williams v Roffey.

  1. This issue is similar to the above issue, there is a performance of an existing duty owed to the same party, and as per Stilk v Myrick, this is not valid consideration.

In this circumstance, the first option is that Jeff renegotiates a whole new contract. However, alternatively, Jeff could go ahead with the contract at a reduced cost. This is a viable option for both parties, as although there is no strict consideration for the promise, the equitable doctrine of promissory estoppel would apply to the agreement. If Jeff attempted to claim Chilly Foods were required to pay the full amount, due to the lack of consideration, Chilly Foods would be able to use promissory estoppel as a defence to prevent this. Both parties clearly have an existing legal relationship, and have relied upon the cost reduction (paying less, and using the saved costs elsewhere). Finally, it would be inequitable for Jeff to go back on his promise.

Therefore, applying the High Trees case, the requirements of promissory estoppel are made out.

 

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