NATURE OF CONSIDERATION
1. A promise given in a contract is only binding on the promisor if
(i) it is supported by consideration; or
(ii) the promise is in the form of a deed.
2. The requirement of consideration for a promise made in a simple contract (one not made by deed) has a long history which has encrusted this artificial doctrine with many technicalities. Basically, in distinguishing the characteristics of a contract the law looks for an element of bargain a contractual promise is one which is not purely gratuitous. Consideration is what the promisee must give in exchange for the promise to him (or alternatively in a contract made by deed. the promisor binds himself by a document of maximum formality).
3.The accepted-full length definition of consideration (given in Currie v Misa 1875) states that consideration is either an advantage to the promisor or a detriment incurred by the promisee. A better definition adopted by the House of Lords in Dunlop v Selfridge 1915 is
An act or forbearance of one part; or the promise thereof, is the price for which the promise of the other is bought, and the promise thus given for value is enforceable'.
4. There are two broad types of valid consideration – executed and executory. If consideration is 'past' then it is not enforceable. These terms are explained below.
EXECUTORY, EXECUTED AND PAST CONSIDERATION
1.Executed consideration is an act in return for a promise. If, for example, A offers a reward for the return of lost property, his promise becomes binding when B performs the act of returning A's property to him. A is not bound to pay anything to anyone until the prescribed act is done. C's act in Carlill's case in response to the smoke ball company's promise of reward was thus .
executed consideration.
2. Executory consideration is a promise given for a promise. If, for example, a customer orders goods which a shopkeeper undertakes to obtain from the manufacturer, the shopkeeper promises to supply the goods and the customer promises to accept and pay for them. Neither has yet done anything but each has given a promise to obtain the promise of the other. It would be breach of the contract if either withdrew without the consent of the other.
3. Both executed and executory consideration are provided at the time when the promise as given; the act required as executed consideration is given subsequently (e.g the return of lost property). Anything which has already been ‘done before a promise in return is given is past consideration which as a general rule is not sufficient to make the promise binding. In such a case the promisor may by his promise recognize a moral obligation (which is not consideration), but he is not obtaining anything in exchange for his promise (as he already has it before the promise is made).
Case: Re Mc Ardle 1951
Under a will the testator's children were entitled to a house at their mother's death. In the mother's lifetime one of the children and his wife lived in the house with the mother. The wife made improvements to the house. The children later agreed in writing to repay to the wife the sum of f 488 which she spent on improvements. But at the mother's death they refused to do so. Held: at the time of the promise the improvements were past consideration and so the promise was not binding.
4. In deciding whether consideration is past the courts do not always take a strictly chronological ' view. If the consideration and the promise are substantially the same transaction, it does not matter in which order they are given. Thus manufacturers may give guarantees to persons who buy their products from retailers. The buyer then sends a card to the manufacturer to claim the benefit of the guarantee, and he usually does this after he has bought the goods.
in three cases past consideration for a promise does suffice to make the promise binding.
(a) Past consideration is sufficient to create liability on a bill of exchange (such as a cheque) under s27 Bills of Exchange Act 1882. Most cheques are issued to pay existing debts.
(b)After six (or in some cases twelve) years the right to sue for recovery of a debt becomes statute-barred by the Limitation Act 1980. If, after that period, the debtor makes written acknowledgement of the creditor's claim, it is again enforceable at law. The debt, although past consideration, suffices.
(c)When a request is made for a service this request may imply a promise to pay for it. If, after the service has been rendered, the person who made the request promises a specific reward, this is treated as fixing the amount to be paid under the previous implied promise rather than as a new promise.
Case: Lampleigh v Braithwait 1615
B, who had killed a man, asked L to obtain a royal pardon for him. L went to considerable trouble and made journeys to arrange this. Afterwards B promised to pay L f 100 for his services.
Held: B's initial request implied a promise to pay which was therefore given before L rendered the service at B's request. The promise was binding.
Case: Re Casey's Patents. Stewart v Casey 1892
A and B, joint owners of patent rights, asked their employee, C, a§ an extra task (additional to his normal duties) to find licensees to work the patents. After C had done so A and B agreed to reward C for his past services with one third of the patent rights. A died and his executors denied that the promise made was binding.
Held: the promise to C was binding since it merely fixed the `reasonable remuneration' which A and B by implication promised to pay before the service was given.
ADEQUACY AND SUFFICIENCY
1.As well as determining whether consideration is valid on the grounds of being executed or executory, the court will also seek to ensure that consideration
(a) has some value, thought it need not be adequate; and
(b) is sufficient – it must be capable in law of being regarded as consideration.
2. Consideration must also be legal. A promise to pay a reward for a criminal act would be unenforceable if the crime had been committed.
3. Consideration is sufficient if it has some value The value may however be nominal e.g 50p in consideration of a promise worth 1 million, or it may be very subjective. The law only requires an element of bargain, not that it shall be a good bargain
Case: Chappell & Co v Nestle Co 1959
As a sales promotion scheme, N offered to supply a record to anyone who seat in a postal order for 1/6d and three wrappers from 6d bars of chocolate made by N. C owned the copyright of the popular tune to the record. In a dispute over royalties the issue was whether the wrappers, which were thrown away when received, were part of the consideration for the promise to supply the record (which N obtained in bulk for 4d each from the recording company).
Held: N had requited that wrappers be sent (for obvious commercial reasons). It was immaterial that the wrappers when received were of no economic value to N. The wrappers were adequate consideration as they had commercial value.
Case: Thomas r Thomas 1842
y his will a husband expressed the wish that his widow should have the use of his house during her life. The executors allowed the widow to occupy the house in return for her undertaking to pay a rent of £ 1 per annum. They later said that their promise to let her occupy the house was not supported by consideration.
Held: compliance with the husband's wishes was not consideration (no economic value attached to it), but the nominal rent was sufficient consideration though inadequate as a rent.
4. As stated earlier, forbearance or the promise of it may be sufficient consideration if it has some value or amounts to giving up something of value. A promise not to pursue a genuine but dispute claim may be consideration even forbearance without any suffice but promise not to perform an act which the promisor had no intention of performing anyway does not suffice as consideration: .arraeL v Costain Engineering 1976.
Case: Alliance Bank v Broom 1864
A customer who had an overdraft at his bank promised to provide security. The bank did not enforce immediate repayment of the overdraft.
Held: the bank's forbearance in not enforcing its rights was consideration for the customer's promise.
5. But waiver of a claim which is known to be hopeless is not consideration since nothing qf value is given up. So also is abstaining from pressing a purely moral claim.
Case: While v 3lueu 1853
In a dispute with his father's executors W said that he had given consideration to his father for a promise of benefits under his will by promising not to complain continually that his father had disinherited him.
Held: no consideration had beer, given for the promise W said he had obtained from his father
6. A person who gratuitously promises to do something does not receive consideration and so no contractual liability arises if the act is performed defectively. However, there may be a claim in tort or, if there is a contract of bailment, claim under that. Bailment arises where one person is given temporary custody of property on the understanding that it be returned – for example, when a coat is deposited at a theatre counter. The law imposes certain duties on the bailee which may be supplemented to form a cont-ac; of bailment. Consideration in these cases may be identified merely as the trust placed in the bailee, or as the loss of benefit of possession suffered by the bailor.
Insufficient consideration
7. If there is already a contract between A and B, and B promises additional reward to A if he (A) will perform the contract, there is no consideration to make that promise binding; A assumes no extra obligation and B obtains no extra rights or benefits.
Case: Stilk v Myrick 1809
Two members of the crew of a ship deserted in a foreign port. The master was unable to recruit substitutes and promised the rest of the crew that they should share the wages of the deserters if they would complete the voyage home. The shipowners however repudiated the promise.
Held: in performing their existing contractual duties the crew gave no consideration for the promise of extra pay and the promise was not binding. (In Hartley v Ponsonby 7857. where desertions had reduced the crew below the workable minimum, the crew were held to have provided consideration by doing more than their contractual duties).
8. But-if A promises B a reward if H will perform-his existing contract with C, there is ~ consideration for A's promise since he obtains a benefit to which he previously had no right and B assumes new obligations.
Case: Shadwell v Shadwell 1860
B, a barrister, was engaged to marry C (an engagement to marry was at this time a binding contract). B's uncle (A) Promised B that if B married C (as he did) A would during their joint lives pay to B f 150 p.a. until such time as B was earning 600 guineas p.a. at the bar (which B never did). The uncle died after eighteen years owing six annual payments. B claimed the arrears from A's executors who denied that there was consideration for A's promise.
Held: there was sufficient consideration for the reasons given above.
9. for the same reason as set out in paragraph 3.7 above, performance of an existing obligation imposed by statute, such as to appear as a witness when called upon in a lawsuit, is no consideration for a promise of reward. But if some extra service is given that is sufficient consideration.
Case: Glasbrook Bros v Glamorgan CC 1925
At a time of industrial unrest, colliery owners asked for and agreed to pay for a special police guard on the mine. Later they repudiated liability saying that the police had done no more than perform their public duty of maintaining order etc.
Held: the police had done more than perform their general duties. The extra services given were consideration for the promise to pay.
consideration for waiver of existing rights
10. Particular complications arise over sufficiency of consideration for promises to waive existing rights, especially regarding rights to common law debts.
11. If X owes £ 100 but Y agrees to accept a lesser sum, eg £ E0, in full settlement of Y's claim, that is a promise by Y to waive his entitlement to the balance of £ 20. The promise, like any other, should be supported by consideration. In other words, payment on the day that a debt is due of less than the full amount of the debt is not consideration for a promise to release the balance.
Case: Foakes v Beer 1884
Y obtained judgement against X for the sum of £ 2,091 with interest. By a written agreement Y agreed to accept payment try installments of the sum of £ 2,091. Later Y claimed the interest.
Held: Y was entitled to the debt with interest. No consideration had been given by X for waiver of any par; of Y's rights against him.
12. There are, however, exceptions to the rule that the debtor (X) must give consideration if the waiver is to –)e binding, concerning variation of the original contract terms.
(a) If X arranges with a number of creditors that ,they will each accept part payment in full settlement, that is a bargain between the creditors. X has given no consideration but he can hold the creditors individually to the agreed terms.
(b) If a third party (Z) offers part payment and Y agrees to release X from Y's claim to the balance, Y has received consideration from Z against whom he had no previous claim.
(c) If X offers and Y accepts anything to which Y is not already entitled (for example goods instead of cash, or payment before the date payment is due) the extra thing will be sufficient consideration for the waiver (Pinnel's Case 1602).
(d) The principle of promissory estoppel may prevent Y from retracting his promise with retrospective effect.
RE DOCTRINE OF PROMISSORY ESTOPPEL
1,IF a creditor (Y) makes a promise (unsupported by consideration) to the debtor (X) that Y will )t insist on the full discharge of the debt (or other obligation), and the promise is made with ve intention that X should act on it and he does so (by more than just making part payment), Y estopped (prohibited) from retracting his promise, unless X can be restored to his original position. This last point will prevent Y from retracting his waiver with retrospective effect, though ,it may permit him to insist on his full rights in the future.
case: Central London Property Trust v High Trees House 1947
in 1939, Y let a block of flats to X at an annual rent of £2,500 p.a. It was difficult to let ie individual flats in wartime. Y agreed in writing to accept a reduced rent of £ 1,250 p.a. No me limit was set on the arrangement but it was related to wartime conditions. The reduced rent was paid from 1940 to 1945 and X let flats during the period on the basis of its expected ability to pay rent under the head lease at £ 1,250 only. In 1945 the flats were fully let. Y demanded a full rent of £ 2,500 p.a. both
(i) for part of the previous period in which f 1,250 .a. had been accepted and
(ii) (ii) for the future.
held: Y was entitled to the full rent of £ 2,500 p.a. for the future (claim (ii) was valid) but [aim (i) was rejected and the principle of promissory estoppel as stated above was formulated y Denning J.
the precise scope of promissory estoppel is still uncertain (though the principle is now well established) but two Limitations are clear.
(a) it only lies to a promise of waiver which is entirely voluntary
case: D and C Builders v Rees 1966
X owed 1482 to Y (a small firm of builders). Y, which was in acute financial difficulties, reluctantly agreed to accept E300 in full settlement (in order to obtain the money quickly). X had been aware of and had exploited Y's difficulties (`he was held to ransom' said Lord Denning). The builder later claimed the balance.
Held: the debt must be paid in full. Promissory estoppel only applies to a promise voluntarily given. In this important case it was also held that payment by cheque (instead of in cash) is normal and gives no extra advantage which could be treated as consideration the waiver under the rule in Pinnel's Case.
(b) It applies only to a waiver of existing rights.A promise which creates new obligations is not binding unless supported by consideration in the usual way. The principle is `a shield not a–sword'.
(c)There are statutory exceptions which permit a person injured in a road accident to claim against the motor insurers, and which permit husband and wife to insure his or her own life for the benefit of the other under a trust which the beneficiary can enforce: Road Traffic Act 1972- Married Women's Property Act 1882.
(d) An undisclosed principal may adopt a contract made for him by an agent.
ASSIGNMENT
1.A party to a contract can assign or transfer to another person (the assignee) the benefit of the contract (subject to the rules stated below). But he cannot (without the consent of the other party) assign the burden of his contractual obligations.
2. A legal assignment must be in writing with notice to the other party. The assignee has no better
rights under the contract than the assignor had. It is not possible to assign:
(a)a right of action, which is a claim for unliquidated damages for breach of contract (or tort);
(b)rights which are so personal to the original parties to the contract that assignment to another would alter them.
Case: Kemp v Baerselman 1906
A supplier contracted to supply to a cake manufacturer all the eggs which the latter might require over a period of a year. During the year the manufacturer sold his business to a much larger concern (the National Bakery Company) and purported as part of the sale to assign the benefit of the egg supply agreement.
Held: the assignment was invalid since the assignee's requirements were much larger and the supplier's right to supply all the assignor's requirements (he would no longer have any) became valueless. Although a party to a contract cannot escape from his contractual obligations by assignment, he may (unless the contract requires personal performance by him) delegate performance to another person. But he remains liable if his substitute's performance is a breach of contract.
4. A bank may agree with its customer that the bank will open a commercial credit or give a performance bond for the benefit of a third party. This is in effect a bank guarantee that its customer will perform his contract with the third party and make payments (through the bank) as required by the contract. There is no Privity of contract between the bank and the third party hut the arrangement would be valueless ;f the third party had no -enforceable rights–against the bank. As an exception to the general principle of Privity of contract the bank is usually bound by its undertaking in favour of the third party.
SUMMARY
The basic rule is that a contract cannot be binding unless consideration has been given for it (or it is a contract by deed). This underlies the principle that a contract is essentially a bargain entered into by two persons – it is not (usually) a gift.
The ways in which a binding contract can be disputed on the grounds of lack of consideration are usually
(i) that consideration was past and
(ii) that consideration is insufficient. Promissory estoppel and Privity of contract are frequent examination areas, and must be properly understood. Finally, you should ensure that you understand how the benefit of a contract can be assigned, since these principles arise again in the context of negotiable instruments.