Consideration

Lush J in Currie v Misa (1875):

“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… ”

A simple way to remember the key word is: Rest In Peace Bro, Find Danmark’s Law Reports. Credit shall be given to my contract law lecturer, Mr. SARAVANA MEHENDRAN.

In Thomas v Thomas (1942), Patterson J:

“Consideration must be something of value in the eyes of law.”

This excludes promises of love and affection, gaming and betting etc. A one sided promise which is not supported by consideration is a gift. The law does not enforce gifts unless they are made by deed.

According to Professor Ewan McKendrick, consideration provides a “badge of enforceability” to a particular contract.

In contract law, consideration is concerned with the bargain of the contract. It is based around the concept of a ‘benefit’ to the person making the promise (promisor), or a ‘detriment’ to the person to whom the promise is made (promisee). This benefit and detriment is referred to as consideration.

Consideration is subject to certain rules:

1. Consideration must move from the promisee
2. Past consideration is no consideration
3. Consideration must be sufficient but it need not be adequate
4. Rules relating to performance of existing duty
5. Rules relating to part payment

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Consideration must move from the promisee

The benefit must be conferred, or the detriment must be incurred, by the promisee himself or herself.

While consideration must move from the promisee, there is no requirement that it must move to the promisor.

The promisee can provide consideration by conferring a benefit on a third party at the request of the promisor: Bolton v Madden (1873)

In Tweddle v Atkinson (1861), a couple was getting married. The father of the bride entered an agreement with the father of the groom that they would each pay the couple a sum of money. The father of the bride died without having paid. The father of the son also died so was unable to sue on the agreement. The groom made a claim against the executor of the will (of his father). The court held that the groom could not enforce the agreement because he did not provided consideration.

This rule is somehow linked to the doctrine of privity of contract, in which the groom was considered as a stranger to the contract. The groom was not a party to the contract between the fathers.

However, following the enactment of Contracts (Rights of Third Parties) Act 1999, a third party is empowered to enforce the contract if the contract was made for his or her benefits, even though no consideration has ‘moved’ from them.

Past consideration is no consideration

A past consideration is no a valid consideration. If one party voluntarily performs an act, and the other party then makes a promise, the past conduct is not a valid consideration to support a contract.

In Roscorla v Thomas (1842), the defendant promised the plaintiff that a horse which had been bought by the plaintiff was sound and free from vice. Upon delivery, it was discovered by the buyer that the horse was vicious in behaviour. The buyer consequently sued for breach of contract. It was held that, since the promise was made after the sale had been completed, there was no consideration for it and it could not be enforced.

In Pao on v Lau Yiu Long (1979), the Privy Council has established the doctrine of implied assumpsit, which can be taken as an exception to the past consideration rule. It has somehow mitigated the harshness of the past consideration rule.

• Fu Chip Investment Co Ltd (Fu Chip), a public company majority owned by Lau Yiu Long, wished to buy a building owned by Tsuen Wan Shing On Estate Co Ltd (Shing On), whose majority shareholder was Pao On. Pao On (the plaintiffs) wished to realise the value of the building by selling the shares of Shing On and Lau Yiu Long (the defendants) wished to extend the property holding of Fu Chip by acquiring Shing On's shares.
• Instead of simply selling the building for cash, Lau Yiu Long and Pao On did a swap deal for the shares in their companies.
• In addition to the main agreement relating to the sale of shares, Pao On agreed not to sell 60% of the Fu Chip shares for at least one year, in order to protect the share value. Also, in case the share price dropped in that year, Lau Yiu Long agreed to buy 60% of the Fu Chip shares back from Pao On at $2.50 per share.
• Pao On then realised that this was a bad bargain, because if the shares price rose over $2.50 in the year, the price would stay fixed and he would not get the gains. Pao On then refused to proceed with the first agreement unless Lau Yiu long cancelled the second agreement and replaced it with “guarantee agreement” that Lau Yiu Long would merely indemnify Pao On if the shares price fell below $2.50. Pao On made it clear that unless he got this “guarantee agreement”, he would not complete the main agreement. Subsequently the shares did fall in value and Pao On tried to enforce the “guarantee payment”. Lau argued that the “guarantee payment” was not valid because:

1. There was no valid consideration corresponding to the “guarantee payment”, as the consideration provided was past consideration and was under a pre-existing duty.
2. The “guarantee payment” was a contract procured by duress.

• The second argument is hardly our concern at this point of time, so I’ll skip it.
• In relation to the argument of past consideration, the Pricy Council held that where the act of promisee was performed at the request of the promisor, and subsequent to the performance of the act by the promisee, the promisor promises to pay for it, and then such a promise may be enforceable.
• Lord Scarman laid down three conditions that must be satisfied by a promisee who wishes to invoke the doctrine:

1. The promisee must have performed the original act at the request of the promisor
2. The parties must have understood that the work was to be paid for in some way, either by money or some other benefit
3. The promise would have been legally enforceable if it had been promised in advance.

Consideration must be sufficient but it need not be adequate

There is no requirement that consideration must be market value, provided that something of value is given. The courts are not concerned with whether the parties have made a good or bad bargain.

In Chappell v Nestle (1960), Nestle was having a promotion of 3 chocolate wrappers in exchange of CD, which was underpriced. Nestle was sued by the CD owners for lesser royalties. It was held that the chocolate wrappers formed part of the consideration as the object was to increase sales and therefore provided value. The fact that the chocolate wrappers were simply to be thrown away did not detract from this.

Consideration is found when a person whatever he requests in return for a promise whether or not it has economic value, provided that it is not too vague.

In White v Bluett (1853), Mr. Bluett had lent his son some money. Mr.Bluett died. The executor of Mr.Bluett’s estate sued the son to pay back the money. In his defence, the son argued that his father had said the son need not repay if the son stop complaining about Mr.Bluett would distribute his property in his will among the children. It was held that the promise was incapable of amounting to consideration because it was too vague.


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Rules relating to performance of existing duty

In relation to performance of existing duty, a distinction must be made between:

1. Performance of a duty imposed by law  
2. Performance of a contractual duty owed to the promisor.

Rules relating to performance of existing duty - Legal duty

Performance of a duty imposed by law is not good consideration for a promise given in return, unless the promisee has done beyond his or her existing legal duty.

In Collins v Godefroy (1831), the agreement centred on a promise made by the defendant to pay fee to a witness who had been property subpoenaed to attend a trial. It was held that the witness had a public duty to attend and give evidence, thus the promise was made without consideration.

In Glasbrook Bros v Glamorgan CC (1925), the council, as police authority, on the insistence of a colliery owner, and in return for a promise of payment, provided protection over and above that required by law. It was held that the police authority was able to enforce the promise, as their additional activities were deemed to constitute consideration for the promise of payment.

However, subsequent cases appear to be conflicting with the general rule.

In Ward v Byham (1956), the father of an illegitimate child (that is, a bastard) promised to pay the mother an allowance of £1 per week if she proved that the child was ‘well looked after and happy’. It was held that the mother was entitled to enforce the promise because in undertaking to see that the child was ‘well-looked after and happy’, she was doing more than her legal obligation. Denning LJ, however, based his decision on the ground that the mother provided consideration by performing her legal duty to maintain the child. In other words, for Denning LJ, performing an existing legal duty is a sufficient 

Denning LJ said:

“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. Take this very case. It is as much a benefit for the father to have the child looked after by the mother as by a neighbour. If he gets the benefit for which he stipulated, he ought to honour his promise; and he ought not to avoid it by saying that the mother was herself under a duty to maintain the child. ”

Denning LJ’s statement has launched a direct assault to the long established general rule, and the other judges in the Court of Appeal in the same case did not expressly approve it. It remains unclear if a person who is performing nothing more than his or her legal obligation is good enough to constitute consideration.

Professor Treitel agreed with Denning LJ that performance of a duty imposed by the law can be consideration for a promise. He argues that it is public policy which accounts for the refusal of the law in certain circumstances to enforce promises to perform existing duties. Where there are no grounds of public policy involved, then a promise given in consideration of a public policy duty can be enforced.

Following Professor Ewan McKendrick, an alternative analysis of Ward v Byham (1956) is to look at in terms of benefit to the father. Thus in Williams v Roffey Bros & Nicholls (Contractors) (1991), Glidewell LJ interpreted Ward v Byham (1956) as a case in which the father obtained a ‘practical benefit’ as a result of the mother’s promise that the child would be ‘well-looked after and happy’.

Rules relating to performance of existing duty - Contractual duty

A performance of contractual duty is not a valid consideration, unless the promisee is required to act beyond his or her existing contractual duty.

• In Stick v Myrick (1809), Myrick promised the rest of the crew extra wages if they would sail the ship back home after two sailors had deserted.  Stick and the other crews were unable to enforce the promise, as they were already bound by their contract to meet the normal emergencies of the voyage and were doing no more than their original contract.
• Stick v Myrick (1809) is to be contrasted with Hartley v Ponsonby (1857), where nearly half the crew deserted the voyage. The 17 crews were asked to take place for those 19 crews who have deserted, which consequently caused the remaining crews to work under a dangerous situation. This discharged the contracts of the remaining sailors as it was dangerous to sail the ship home with only half the crew. Thus the sailors were free to make a new bargain, and the captain’s promise to pay them additional wages was enforceable.

Subsequently, a new principle has been established by the court in the case of Williams v Roffey Bros & Nicholls (Contractors) (1991). A pre-existing duty to the promisor can be legally sufficient consideration if there is a practical benefit to the promisor.

In Williams v Roffey Bros & Nicholls (Contractors) (1991), the defendants (the main contractors) were refurbishing a block of flats. They sub-contracted the carpentry work to the plaintiffs. The plaintiffs ran into financial difficulties, whereupon the defendants agreed to pay the plaintiffs an additional sum if they completed the work on time. It was held that where a party to an existing contract later agrees to an ‘extra bonus’ in order that the other party performs his obligations under the original contract, then the new agreement is binding if the party agreeing to pay the bonus has thereby obtained some new practical advantage or avoided a disadvantage. In this particular case, the advantage was the avoidance of a penalty clause and the expense of finding new carpenters, among other factors.

In particular, Glidewell LJ pointed to the ‘practical benefits’ that would be likely to accuse to the defendants from the promise of the additional money.

The court relied upon a number of factors in identifying the practical obtained:

1. The plaintiffs continued with the work and did not breach his sub-contract.
2. The defendants avoided the trouble and expense of finding other carpenters to complete the work.
3. The defendants avoided incurring a penalty under the main contract for delay in completion of the work.
4. A ‘rather haphazard method of payment’ was replaced by a more ‘formalised scheme involving the payment of complete one flat at a time’.
5. By directing the claimant to complete one flat at a time, the defendants ‘were able to direct their other trades to do work in the completed flats which otherwise would have been held up until the claimant had completed his work’.

In simple language, following Williams v Roffey Bros & Nicholls (Contractors) (1991), a person performing nothing more than his existing contractual obligation would be able to enforce a promise, if the promisor has obtained ‘practical benefit(s)’. In the case itself, the Court of Appeal has identified the five ‘practical benefits’ as I have mentioned above.

Unsurprisingly, the new principle has attracted many criticisms, which include:

1. The scope of practical benefit is too wide, as everything could amount to practical benefit
2. The principle of practical benefit conflicts with the requirement that consideration must move from the promisee

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Rules relating to part payment

According to the Pinnel’s Case (1602), payment of a smaller sum will not discharged the duty to pay a higher sum, as there is no consideration provided for the balance of money.

In Foakes v Beer (1884), Dr. Foakes was indebted to Mrs. Beer on a judgment sum of £2090 (he was a judgment-debtor). It was agreed by Mrs. Beer that, if Foakes paid her £500 in cash and the balance of £1590 in instalments, she would not take ‘any proceedings whatsoever’ on the judgment. Foakes paid the money exactly as requested, but Mrs. Beer then proceeded to claim an additional £360 as interest on the judgment debt. Foakes refused and, when sued, pleaded that his duty to pay interest had been discharged by the promise not to sue. The House of Lords deferred as to whether, on its true construction the agreement merely gave Foakes time to pay or was intended to cover interest as well. But they held, even though on the latter construction, there was no consideration for the promise and that Foakes was still bound to pay the additional sum.

Rules relating to part payment – Common law exception

A smaller sum cannot discharge the liability for the original sum unless it was made in return of consideration. For example, the debtor makes another promise in return for the part payment.

In the Pinnel’s Case (1602), if there is a “gift of a horse, hawk or robe”, this would be good consideration for a promise to forgo the balance if they were to the accord and satisfaction of the creditor.

Thus it was suggested that if the debtor do something different, for example, where payment is made, at the creditor’s request, at an earlier time, at a different place and by a different method, the lesser sum may be discharge the original sum.

It was held that payment by cheque is not payment by a different method: D & C Builders Ltd v Rees (1966).

In Hirachand Punamchand v Temple (1911), it was held that if the creditor accepted the part-payment by a third party, it can discharged the duty (of debtor) to pay the original sum.

Rules relating to part payment – Equity (The doctrine of promissory estoppel)

The doctrine of promissory estoppel provides a means of making a promise binding, in certain circumstances, in the absence of consideration. Denning J defines estoppel as:

“A promise was made which was intended to create legal relations and which, to the knowledge of the person making the promise, was going to be acted on by the person to whom it was made and which was in fact so acted on.”

In Central London Property Trust Ltd v High Tree Houses Ltd (1947), the owners of a block of flats had promised to accept reduced rents in 1940, which was during the beginning of World War II, the occupy rates were drastically lower than normal. Over the next five years, the tenants paid the reduced rate while the flats began to fill, and by 1945, the flats were back at full occupancy. The owners sued for payment of the full rental. Denning J held that the full rent was payable from the time that the flats became fully occupied in 1945.

Furthermore, Denning J mentioned that (obiter dicta) the owners could not claim for the full rent of the period from 1940-1945. In other words, the promise between the parties was valid before the flats became fully occupied in 1945, as it was difficult to find tenants during the war. Once the houses were full to capacity again the agreement expired. The owners would not able to sue for full payment during the World War II.

The obiter statement is not actually binding precedent, but yet it has essentially created the doctrine of promissory estoppel. Under the doctrine of promissory estoppel, a part payment is allowed even though no consideration has been provided.

A promisee can reply on the doctrine if the following conditions are satisfied:

1. There must be a clear and unequivocal promise or representation that the existing legal rights will not be enforced.

• In Woodhouse AC Israel Cocoa Ltd SA v Nigerian Produce Marketing Co Ltd (The Scaptrade) (1972), the mere fact of not having enforced one’s full rights in the past was not sufficient. It must be a clear and unequivocal promise, the promise doesn’t need to be express (can be implied) and whether or not it is clear and unequivocal promise is a question of fact.
• In Kim v Chasewood Park Residents (2013) and Closegate Hotel Development (Durham) Ltd v McLean (2013), the court considered that where the words said to form the basis of a promissory estoppel were ambiguous and could reasonably be interpreted in several ways (one of which did not support the alleged estoppel) then the words would not found an estoppel unless the representee sought and obtained clarification of the statement. For a plea of promissory estoppel to succeed, there must have been a clear and unambiguous statement and ambiguity was fatal to the success of the plea. 

2. It can used only as a shield not a sword.

• In Combe v Combe (1951), Lord Denning held that promissory estoppel can only be raised as a defence and cannot be raised as a cause of action.

3. There must a contractual or pre-existing legal relationship between the parties. 

• It is generally, though not universally, accepted that promissory estoppel operates to modify existing relationships, rather than to create new ones. However, this is not essential point.
• In Evenden v Guildford City FC (1975), Lord Denning MR held that promissory estoppel could apply in a situation where there appeared to be no existing legal relationship at all between the parties.

4. The promisee must have acted in reliance on the promise.

• In WJ Alan & Co v EL Nasr Export and Import Co (1972), Denning J held the promisee must have been led to act differently from what he otherwise would have done. Hence, promissory estoppel requires that the party rely on the actions of the other party and alter their position as a result.  However, detriment reliance is not required for promissory estoppel.

5. It must be inequitable for the promisor to go back on his promise. In other words, the parties must come to equity with clean hand.

• D & C Builders v Rees (1965), the debtor took advantage of the creditors’ financial straits to pressure them into accepting part-payment. In an action for the balance of the money owed, Lord Denning MR was of the view that it was not inequitable for the creditors to go back on their word and claim the balance as the debtor had acted inequitably by exerting improper pressure.

Effect and consequence of promissory estoppel

Unlike a contract modification which is supported by consideration will generally be of permanent effect, it is not clear whether the doctrine of promissory estoppel extinguishes rights, or merely suspends them.

In Central London Property Trust Ltd v High Tree Houses Ltd (1947), it was accepted that the promise to take the reduced rent was only to be applicable while Second World War II continued. Once it came to an end, the original terms of the contract revived.

In Tool Metal Manufacturing Co v Tungsten Electric Co Ltd (1955), the owner of a patent promised to suspend periodic payments during the war. It was held by the Court of Appeal that the promise was binding for the duration of war but the owner could, on giving reasonable notice at the end of the war, revert to their original legal entitlements.

Therefore, the doctrine of promissory estoppel is generally suspensory. These cases show that, as regards existing or past obligations, it is extinctive; but, as regards future obligations, it is suspensory. 




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