Consideration Law Case Study

Networked Knowledge - Law Lectures

Consideration - in Acceptance of Contract

Authors: Dr Robert N Moles

and Bibi Sangha

Contract Law Homepage
A state of Injustice - table of contents
Losing Their Grip - The Case of Henry Keogh - table of contents

The issue of "consideration"

This involves an analysis of the different types of promises and the ways in which the court can ascertain which promises are intended to be taken seriously enough to be enforceable by the courts.

To be bound by a promise usually means that some sort of sanction will follow for not keeping it. With a breach of a moral promise, the sanction is likely to be ostracism or disapproval. With the breach of a legal promise, the sanction will be imprisonment, fine or community service for a criminal offence, damages or specific performance for breach in a civil case.

The lack of consideration is one reason then for saying that a promise will not be recognised by the courts. It is worth noting that the concept of consideration is peculiar to the English common law. Other systems, such as the European Civil Law system, will enforce gratuitous promises (Khouri and Yamouni - Understanding Contract Law)

Historical background

We have already seen how originally consideration was closely related to the causa of the civil law - it provided a motive for contracting and a motive for why the arrangement should be enforced. With the shift away from motive to the notion of a quid pro quo, consideration assumed an appearance more recognisable to the law of today. Nevertheless it would be a mistake to imagine that the consideration of the common law was a replacement for the intention which was the basis of promissory liability in the civil law.

See the problem of deciding whether a particular situation is a conditional gift or a promise supported by consideration if the condition is performed by the promisee

The notion of exchange - consideration must move from the promisee

To find out if a promise is enforceable, one must look to see what the other party - the person to whom the promise was given - has done in return for it. If I promise to do something, has the other party done anything for it - promised to pay, actually paid, delivered something to me etc. In most cases, this is perfectly straightforward - I have promised to build the extension to your house and you have paid me a deposit and agreed to pay the balance in stages.

A contract of guarantee can be difficult to see in this way - think of a loan from Bob to Beverley - Geraldine is asked to guarantee the loan (Bob wants security as Beverley is a student) - the general rule is that consideration must move from the promisee, but the provision of Geraldine's guarantee constitutes good consideration for the enforceability of the loan. 

Formality is one way of providing it - a deed under seal

Reliance can be another. It is a contentious matter as to the extent to which this has been adopted in our system. The modern case of Walton's Stores indicates that it may be becoming more important.

Consideration means that a promise made to you will not necessarily be enforceable in the courts unless you can establish that you have given something for it. Suppose I promise to deliver a ton of gravel to you next week - you get your shovel and barrow ready, and I don't turn up. I probably would not be liable to you in damages, because you haven't given anything in return, and merely getting your barrow ready would not be sufficient reliance to make it enforceable. However, if at the time of making the arrangement, you said that you would pay me $10 per ton for the gravel that would be sufficient consideration. A promise to pay is sufficient to count as giving something, even though the promise is not to be put into effect for some time yet.

Benefit and \ or detriment

Consideration is often spoken of as a benefit to the promisor or a detriment to the promisee. Some will make the point that a mere promise from one party is neither a detriment to that party, nor is it a benefit to the other. Atiyah also argues that real benefit and detriment is not sought, because of the adequacy point - that the courts will not concern themselves with the adequacy of consideration - a point we will look at in a moment. Is it really a benefit to someone to get $1 for a car? Maybe not, but it may well be good consideration

The Logical Problem

The promise might, of course, become a benefit or a detriment if it is enforceable. But its being a benefit or detriment is a condition of its enforceability, and therefore, one should be able to establish that it is a benefit or detriment, independently of that.

Quid pro quo - Beaton v McDivitt - bargain theory - the way to go

(1987) 13 NSWLR 162 Court Appeal, Sup Ct NSW

McD believed his land was to be rezoned. He worked part of it and sought someone to work the other as permaculture. B's took the 4th block, built a house farmed the land and assisted to create access road. After 7 years they had a dispute and B's were ordered off the land.

Historically, there is little difference between the common law consideration and the Roman causa. But in the 19th C there was a shift from motive and reliance to bargain. So in Thomas, (1842) we distinguish motive from consideration - which is something of value moving from the plaintiff. Currie v Misa:

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

This is the bargain view, supported by O.W. Holmes and approved in R v Clarke (1927). The ratio of Woollen Mills accepts the basic elements of the bargain theory, and rejects the reliance based view. None of the cases referred to by the judge can be seen as contract unless there is a quid pro quo.

McD's promise was an offer the consideration for which was the act of the plaintiff in coming and working the block. Once he went on to the land to work it, it was not open to McD to withdraw the offer.

Australian Woollen Mills v The Commonwealth (1954) 92 CLR 424 High Court of Australia

This case involved a subsidy scheme to assist local manufacturers to remain competitive in their use of wool. Plaintiff claimed to have made purchases of wool "in pursuance of the said agreement", during a period for which the Govt was unwilling to pay. Here, the announcements were not from commercial motivation but from a Govt trying to deal with the aftermath of war - public money is involved. To what extent is this important in explaining the decision? The court took the view that the subsidy was not a request, invitation or an inducement to purchase wool - would you agree with this? There was nothing, they said, to suggest that the subsidy and purchase of wool were related, no quid pro quo.

Govts can of course make contracts in the normal way - purchase of equipment, employment etc. But in this type of case, it may have been thought that this was an attempt to bind the Govt in a policy type of situation where flexibility was more important.

The privity rule

The general rule is that only those who are parties to a contract can enforce it or have rights under it. Other people might benefit indirectly from the contract being enforced, but the third parties cannot bring legal action in their own name to have it enforced.

This is why the manufacturer in Donoghue v Stevenson denied liability - because they did not have any contract with the consumer (the cafe owner did) and they thought there was no other ground of action.

Otherwise it is claimed that a third party to a contract, intended to benefit from it, but who has not given consideration for the promise of the promisor, cannot obtain enforceable rights under the contract. If the promisee wishes to sue for damages for the benefit of the third party, there is some question as to whether anything greater than nominal damages can be obtained - if the loss is that of the third party and not the promisee. The promisee may be able to have the contract specifically enforced for the benefit of the third party, but this may not always be satisfactory.

Agency is different

The normal agency relationship is not really a qualification to this, because the agent is bringing the principal into a contractual relationship with the other party. The Agent as such is not a party to the contract. However, the "undisclosed principal" makes it slightly different. So long as the agent has authority, and intends to contract for the undisclosed party, and the other party has not shown that they are unwilling to enter into the contract with another (even though they do not know of the other's existence) then the agent can contract on behalf of that principal. In this situation, the agent and the principal can sue and be sued, but there must be something like an election, as you could not proceed against both.

Trust is different

A trust is used where someone has the legal title to something (a contract) but is then taken to be holding it not for their own benefit but for the benefit of a third party. It is possible that the third party could claim that the promisee holds the benefit of the promise on trust for that third party so as to enable them to get around the rules of contract law? See the discussion on this in Trident.

Trident General Insurance Co Ltd v McNiece Bros Ltd

(1988) 165 CLR High Court of Australia (Court Appeal, Sup Ct, NSW)

A company took out public liability insurance for construction work being carried out at the plant. The "assured" was stated to be contractors and sub-contractors. McN became a principal contractor for construction work being carried out at the plant. A worker injured at the site obtained judgement against McNiece who sought an indemnity under the policy. Trident denied liability.

Trident says there are 2 important principles
Only a party to a contract can sue under it
Consideration must move from the promisee

Is privity was just another way of putting the consideration point? These fundamental rules have been under siege throughout the common law world. Rules which generate uncertainty in their application to ordinary contracts commonly entered into by citizens call for reconsideration.

Justifications for privity and consideration rules? Preclude risk of double recovery from the promisor by the promisee and the third party. Privity is a barrier for the contracting party to a whole range of potential plaintiffs. Third party right to sue would limit freedom of action of parties, especially the promisee. At present, with the consent of the promisor, the promisee could rescind, modify, compromise or assign rights under the contract. Could even take rights intended for the third party.

Corbin "Third Party Beneficiary Contracts in England" 1968 35 University of Chicago Law Review said that third party rights would exist at the expense of the rights of the contracting parties. Should there be just intention to benefit third party, or also intention that third party should be able to sue?

Regardless of the layers of sediment, we consider that it is the responsibility of this court to reconsider in appropriate cases common law rules which operate unsatisfactorily and unjustly. Estoppel is not adequate and even if it were, the rights of persons under a policy of insurance should not be made to depend on the vagaries of such an intricate doctrine.

The likelihood of reliance of the third party in the case of benefit to be provided is so tangible that the common law rule should be shaped with that in mind; even more so when the insurance is said to cover the insured and the subcontractors. Many will assume it to be effective and refrain from taking other cover. That is what happened here. But why should respondent depend on making out a case of estoppel?

Notwithstanding the caution with which the Court ordinarily reviews earlier authorities, and the operation of long established principle, we conclude that the principled development of the law requires that it be recognised that McNiece was entitled to succeed in the action. Appeal dismissed.

Brennan J took a much more cautious view and thought that this change would not fit in with the overall system of law and was foreign to the system of the common law.

Gaudron thought that the third party would have a right based on principles of restitution and unjust enrichment.

New Zealand Shipping [1975] AC 154

This seems to be a clear example where the judges clearly avoided the privity rules in order to give effect to the business efficacy of the contract and the intention of the parties - they had clearly intended all along that the stevedores would be covered by the exemption clauses and presumably insurance arrangements had been made on this basis.

The exclusion clause deemed the carrier to be trustee and agent for the independent contractors.

Carter and Harland ask if it would not have been better for the courts to declare that privity is no longer a part of the modern law of contract - but what then of all the difficulties which Brennan in Trident pointed to?

Port Jackson Stevedoring v Salmond (1978) 139 CLR 231 High Court of Australia

(1980) 144 CLR 300 Privy Council

The decision of this case further supported the New Zealand decision. The "Himalaya clause" is capable of conferring upon a third party falling within the description "servant or agent of the carrier", defences and immunities conferred by the Bill of Lading upon the carrier as if such persons were parties to the contract contained in the Bill of Lading. Stevedores employed by the carrier will also come within it. It was said that this was not so much a new principle, as finding that accepted principles require the stevedores to obtain the benefits. The importance of that case is the way in which the judges were able to find a contract between the shipper and the stevedores. Their lordships would not encourage the seeking of fine distinctions to diminish the applicability of the general principles.

More recent cases enable this to be perhaps developed to other forms of transport - Celthene Hauliers [1981] and Frigmobile [1983]

Adequacy of consideration

The normal rule for contracting is caveat emptor - let the buyer beware. As the buyer has not only the best incentive, but also the best opportunity to assess the situation and the relative merits of the exchange, the court will not be drawn into assessing whether or not someone has made a good deal, or whether they have got good value. The value of something does not consist merely of what it is objectively, but also upon the needs of the purchaser.

Woolworths Ltd v Kelly (1991) 22 NSWLR 189

Kirby Plaintiff suggested that whilst certain things given as consideration might seem inadequate to the court, they may in fact be valued as consideration for idiosyncratic or sentimental reasons by the promisor.

I throw away my telephone cards but others place great value on them and there is a brisk collectors market for them.

A book may only be of certain value on its own, but if you have all the other books in that series, apart from that one, then you may well be willing to pay more for it. If there is no unfair advantage, then the courts will not look at the ADEQUACY of the consideration. There might be extreme cases where a deal is such an obviously bad deal that the courts will infer that there was in fact some unfair advantage present. See CBA v Amadio (1983) for an example of this.

Thomas v Thomas - nominal rent and covenant to repair

(1842) Queen's Bench UK

Here we had a promise to convey a house, provided Plaintiff paid £1 pa rent and kept the premises in good repair. The provision for payment and the obligation to repair were held to be quite sufficient consideration for a contract. The moral feeling which motivated it was seen to be not relevant.

Given that the courts say that they will not be drawn into the adequacy of the consideration, does that mean that if I promise to do something for you in return for something which appears to be of negligible value, that the promise is still just as binding? What if I ask you to send in packet tops, or milk bottle tops, does that count as some "value or detriment"? The answer could well be YES.

Chappel v Nestles - chocolate bar wrappers

[1960] House of Lords

Nestles asked people to send in wrappers from chocolate bars. The repeated doing of something, of value to the promisor, was held to be part of the consideration, even though in one sense the wrappers were worthless. One of the judges making the interesting point that a peppercorn does not cease to be a good consideration if it is established that the promisor does not like pepper and will throw away the corn.

Thus, an option is binding because a relatively small sum has been paid or promised in return for a right to have an offer kept open for a specified period, though the consideration if the option is exercised may be an astronomical amount by comparison.

Forbearance and Compromise

Practically all tortious actions are settled out of court. Each time a claim is settled, the plaintiff will be asked to sign a document to say that the payment is accepted "in full and final settlement of the claim" - making any further legal action in the matter no longer possible. Forbearance and compromise is present in all settlements - "forbearance" being the willingness not to proceed with the action, "compromise" being the actual settlement.

The consideration is said to be the giving up of one's right to use the courts - to sue. But what if the initial action was without merit - has one given up anything? The assumption is that you have unless it can be established that the action was started without good faith. This could be a difficult thing to prove.

There is an important public policy issue at stake here. There is a public interest in seeing an end to litigation, to avoid a case from constantly being re-opened. On the other hand, it might be seen as a way of converting a somewhat shaky claim into a more certain claim.

Wigan v Edwards - (honest belief sufficient)

(1973) 47 ALJR 586 High Court of Australia

P agreed to buy a house from Defendant for $15,000. Before the formal documentation was completed, Plaintiff said they had found defects and were not going to proceed. In return for their promise to go ahead, Defendant gave an additional promise that any major faults within 5 years from purchase, would be put right. [This situation is like that of exemption clauses which appear after the event, or like Roscorla v Thomas where the purchaser attempted to get additional promises after having agreed the purchase of the horse].

The court took the view that the general rule was that to perform an existing duty is no consideration. A qualification to the general is that to promise do what one is bound to do is good consideration when it is given by way of a bona fide compromise of a disputed claim - the promisor believing that circumstances exist. Here it was suggested that the work was shoddy, and although the defects complained of may not have allowed the party to pull out of the contract altogether, this did not matter - so long as the issue taken up was bona fide - it does not matter that the court may take the view that the claim may have been unsuccessful if pursued. Only that there should be an honest belief - that the claim should not be vexatious or frivolous.

As with other contractual relationships, the arrangement might be bilateral (a promise for a promise) or unilateral (a promise or request, express or implied, followed by an act in reliance upon that promise or request).

Wigan v English and Scottish Life Assurance Association - security w/o consideration

[1909] 1 Ch 291 Chancery Division

Hackblock had a life insurance which was to be forfeited if the insured committed suicide, but without prejudice to the bona fide interests of third parties. He owed money to Wigan, and had effected an assignment of the policy to secure the debt in order to obtain more time to pay. Wigan gave him more time without knowing of the assignment, which was subsequently destroyed. After Hackblock had committed suicide, Wigan learned of the assignment, and claimed benefit under the policy as an assignee for valuable consideration.

Wigan did not give any consideration for any interest he might have acquired under the deed. The mere existence of a debt from A to B is not sufficient consideration for the giving of a security from A to B in respect of it. Such security may well be given in return for extra time to pay, or for forbearance to sue. None of those things existed here, therefore the security was voluntary.

Butler v Fairclough - abandonment of claim as consideration

(1917) 23 CLR (Isaacs J)

It must not be assumed that a promise to abstain from issuing a writ is always valuable consideration. A promise not to sue for a limited period, as abandonment of a claim may be good consideration where there is liability or a bona fide belief. But temporary forbearance to sue where there is no liability is no consideration.

Callisher v Bischoffsheim - Doubtfulness of original claim not relevant

(1870) LR 5 QB Queen's Bench

A person promised not to sue for an agreed time, provided that some bonds were delivered to them. When the bonds were not delivered, the person claimed damages for breach of that agreement. The other person said that, as the money had not been due in the first place, (assumed for the purpose of these proceedings that that was true). they could not enforce the delivery of the bonds. The court took the view that if D's claim were accepted, no agreement to compromise a doubtful claim could be enforced. If a party to an action believes bona fide that there is a chance of success, then there is reasonable ground for suing and the forbearance will constitute good consideration. The other party obtains an advantage - being free from the necessity to defend the action.

If a party made a claim which they knew to be unfounded - then an attempt to derive an advantage by compromise would be fraudulent.  Essential to understand that there are in fact 2 contracts - the initial contract which is the subject of the dispute, and then the 2nd contract which is intended to settle the dispute arising from the first. The question is whether there is consideration for the 2nd contract, and what effect this has on the obligations arising from the first.

McDermott (D) v Black (P) - Accord executory and accord and satisfaction

(1940) 63 CLR 161 High Court of Australia

Plaintiff complained that an initial agreement which had become the subject of a dispute between the parties, had been induced by fraud. Plaintiff then said that he would withdraw the allegations of fraud, in return for a further 3 week extension of time to pay, which was agreed to. Plaintiff did not pay eventually, and subsequently brought proceedings for fraud, and sought the return of his security. The lower court held that the initial agreement had been based on fraud, and that the negotiations between Plaintiff and Defendant were too vague to constitute a contract of compromise. On appeal, HELD the arrangement was to release from an obligation to pay damages for deceit - in return for an extension of time - "which is in law an accord and satisfaction". There is no doubt that the general principle is that an accord without satisfaction has no legal effect and the original cause of action is not discharged as long as the satisfaction agreed upon remains outstanding. However, if it can be shown that the parties agreed to accept the promise and not the performance of the promise, then the cause of action is discharged from the date that the promise was made.

One of the other judges took the view that the agreement to withdraw the allegations did not amount to an agreement not to revive the allegations at any time. This can be seen to be a difference of view re the underlying facts, and not a difference re the legal principles involved.

Past Consideration

If an act is performed then a subsequent promise to pay by reference to that act is not enforceable as the consideration was past.

This gives rise to some interesting problems. Can something be good consideration for this contract, if it has already been consideration for a previous contract? In which case, you may only be promising to do again what you are already obliged to do. Today, one would have to be mindful of the extensive additional protection available under the Sale of Goods Acts and other statutory provisions such as the Trades Practices Act.

Roscorla v Thomas - horse free from vice - additional promise after sale

(1842) 3 QB 234 Queen's Bench

In this case someone had already bought a horse, and then obtained some extra undertakings from the seller "in consideration of that sale". The sellers additional promises were that, the horse was not more than 5 years old, was "sound and free from vice" - presumably it did not stay up late at night playing cards etc. The court took the view that the pre-existing and executed consideration could not support the subsequent promise. In other words, after the deal has been completed, you cannot go back and get some additional undertakings, unless those additional undertakings are themselves supported by some ADDITIONAL consideration.

This was probably one of the early manifestations of a rejection of consideration as causa. Nevertheless aspects of moral consideration remained in the principle that a subsequent promise to pay would be enforceable if the original act had been undertaken at the request of the promisor.

Lampleigh v Braithwait (1615) 80 ER 255

Braithwait who had been found guilty of murder asked Lampleigh to do his best to obtain a pardon from the King. As a result Lampleigh rode about the country doing his best to obtain the pardon. Subsequently, in consideration of his efforts, Braithwait promised to pay him £100. Hobart CJ said that a mere voluntary courtesy will not do. But if the courtesy were moved by a request of the party which gives the assumpsit, it will bind, for the promise, though it follows is not naked but couples itself with the suit before. It could be said that the type of request would have given rise to an implied promise to pay what it was worth, and the subsequent promise serves to fix the amount.

Past service - implication to pay

This principle has been modified in the modern law so that the subsequent promise to pay is enforceable only if there was an implication at the time it was performed that the act would be paid for.

The argument here is that a past service raises an implication that at the time it was rendered, it was to be paid for. When subsequently there is evidence of a promise to pay, that may be seen as an admission which fixes the amount of the bargain, on the basis of which the service was rendered. Perhaps this addition was to prevent someone taking unfair advantage of another in respect of work which has already been done - the back pedalling on your obligations after you've got someone else to do the work for you.

Casey v Commissioner of Inland Revenue [1959] NZLR 1052 Supreme Court, New Zealand

In Feb and June 1918, the wife loaned her husband sums of money amounting to £875. He promised that when in a position to do so, he would repay the loans with interest. Although no rate was specified, they believed that the current rate payable on loans to farmers by stock merchants would do. In 1954, the farm property was sold and the wife was reimbursed £5000. The Inland Revenue claimed that duty was payable on the amount over £875 as it was a payment without valuable consideration (a gift). At the time of the loans, the payment of interest was contemplated, and their subsequent agreement fixed the amount - Casey's Patents. No basis for saying that the claim had become Statute barred. Judge made law allowed that after the expiry of the period, a continued acknowledgement of the indebtedness allows the period to run.

Re Casey's Patents; Stewart v Casey [1892] 1 Ch 104 Court of Appeal

- I shall not go into the case here but it is noted up in the case outlines.

Existing duty as consideration

A person may be under a duty to perform an act for 3 principal reasons
because of a promise to the person with whom you are negotiating.
because of a promise to a third party
because required by the general law
If one already has an obligation to do the act in question, can the promise to do that act, or the doing of it, constitute consideration for an additional promise of payment for it?

Duty owed to other contracting party

It is easy enough to see a "policy" issue for the courts to deal with in that it could lead to much unfair pressure if A was able to insist upon an additional payment from B who had already promised to pay a lesser sum for the exact same performance by A.

The issue of public policy arose in the so-called "seamen" cases - the reason being that for a seaman serving on a British ship to leave the vessel before the end of its voyage, amounted to an act of mutiny. However, as in Glasbrook it was accepted that, if a seaman performed acts beyond his contractual obligations, he could be paid over and above the money promised for the original performance.

Stilk v Myrick - tasks within existing duty

(1809) King's Bench

Plaintiff was employed as a seaman under articles at £5 per month. On a voyage from London to the Baltic and back, 2 of the crew deserted. The captain could not replace them and the rest of the crew said that they would work the vessel back to London, and share the wages of the other 2. The extra money was not paid. It was said that before they left on the voyage, they had undertaken to do all they could under all the emergencies of the voyage and the desertion of the crew is to be taken as part of such an emergency. The court found that the remaining crew had no liberty to quit when the other men left.

Hartley v Ponsonby - tasks beyond existing duty

(1857) 119 ER 1471 Queen's Bench

Plaintiff was a seaman on a ship sailing from UK to Bombay and earning £3 per month. During the course of the voyage, 17 of the crew refused to work and were sent to prison. Defendant undertook in writing to pay Plaintiff £40 to assist in sailing the vessel to Bombay with a crew of 19. They arrived in Bombay 6 weeks later. The extra payment was refused. At trial, it was established that Defendant entered the agreement voluntarily. Additional crew could not have been found at a reasonable price. There should have been crew of 36. The court found here that it was unreasonable for the ship to proceed with just 19. Because it was dangerous for the ship to proceed with so few hands, Plaintiff could not have been required to perform the work. Therefore Plaintiff was free to undertake the remaining voyage or not. The agreement was voluntary on both sides. They were free to make a new contract. Plaintiff may have taken advantage of this position to make a hard bargain, but this did not amount to duress.

Sundell v Yannoulatos - Non-enforcement of contractual rights can be duress

(1955) 56 SR (NSW) 323

[comments taken from judgment in North Ocean]

Plaintiff entered into a contract to buy iron from Defendant at £100 per ton for delivery some months ahead. Plaintiff set up a letter of credit in favour of Defendant. Some months later, Defendant said that because of rising costs, unless the price was increased, delivery could not go ahead. Eventually a new order was sent with a new letter of credit at £140 per ton. Plaintiff reserved the right to stick to the original agreement, and Defendant supplied without acknowledging that condition. Plaintiff sought to recover the excess as having been paid under "practical compulsion". It was argued that the contract had been superseded by a new one - this failed as there was no consideration for the increased letter of credit. Also argued that practical compulsion did not extend to non-enforcement of contractual rights. This failed also, indicating that Australian courts would be more likely to allow recovery of such an excess payment, and the threat to break a contract may be seen as a form of economic duress.

North Ocean Shipping v Hyundai - additional benefit in new arrangement (letter of credit)

[1979] 3 WLR 419 Queen's Bench Division

We will look at this more closely under Duress - this was a contract which involved the building of a super tanker - the shipbuilder asked for more money which was eventually paid under pressure. What did Hyundai do as consideration? Given deals as complex as this, one can always find some shift in position - as part of the dealings the parties agreed to some adjustments in the letter of credit, and this was found to be sufficient to satisfy the requirement of consideration. The judge said that merely to agree to a change to "maintain amicable relations" would not be enough to amount to consideration. But if the parties were willing to cancel the old deal and replace it with a new one, that would be quite acceptable.

Compare with

[note here and on following case from Cheshire and Fifoot]

Judicial support for the views [that an existing consideration is good] can be found in the judgment of Denning LJ in Ward v Byham where he challenged the accepted rule. "[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." He repeated this view in Williams v Williams but added the rider "so long as there is nothing in the transaction which is contrary to the public interest". The same view was recommended by the English Law Revision Committee in 1937 and endorsed by Treitel. In Australia a single voice, Hudson J in Popiw v Popiw164 has given support to Denning LJ in Ward v Byham. In the United States there has been judicial hostility to the rule and some legislative reform in some states and in the Uniform Commercial Code in relation to sale of goods.

Williams v Roffey Bros & Nicholls (Contractors) Ltd - existing duty a benefit?

[1991] 1 QB 1

Here we have a building contractor who entered into a contract to refurbish a block of flats. It subcontracted the carpentry work for £20,000. The plaintiff carried out some of the work and received interim payments amounting to £16,200. The plaintiff then found that he was in financial trouble and had agreed to a price which was too low. The defendant became aware of this and, wishing to avoid penalty provisions in the head contract and the disruption associated with finding another sub-contractor, agreed to pay the plaintiff an extra £10,300 to complete the work. The defendant's representative initiated this subsidiary agreement, recognising that the plaintiff's original price was too low. Only £1500 was paid pursuant to the subsidiary agreement. The plaintiff sued for the additional money.

The Court of Appeal held that the subsidiary agreement was enforceable. Glidewell LJ drew on Ward v Byham, Williams v Williams and the Pao On case and concluded:

(i) if A has entered into a contract with B to do some work for, or to supply goods or services to, B in return for payment by B and (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 dis-benefit, 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.

This was a case where the plaintiff, by agreeing merely to complete the work already contracted for, suffered no detriment but he did provide a benefit. "If both parties benefit from an agreement it is not necessary that each also suffers a detriment."

Musumeci v Windadell Pty Ltd

Charles and Margaret Musumeci entered into a lease for premises within a shopping centre. They claimed that the terms of the lease had been varied so that the sum due was two thirds of that which was otherwise due and that the consideration was like that in Williams v Roffey. P’s had to overcome the Stilk v Myrick and Wigan v Edwards arguments re fulfilment of existing duty.

Santow J pointed to the view of Gibson LJ in Selectmove Ltd, where it was said that the Roffey principle could not be extended to the Foakes v Beer situation, unless done by the House of Lords or Parliament. He went on to acknowledge the trend to sidestep the artificial results of strictly applying the doctrine of consideration. He pointed out that consideration does not need to be adequate, an existing duty to A can become good consideration to B, and that a deed can do away with consideration altogether. Estoppels can be used to avoid unconscionability where consideration is lacking. So Santow suggested that Australian courts should follow Roffey and regard practical benefit as good consideration. The principles are:
A has contract with B to provide goods or services
B, before completion has reason to doubt that A can or will complete the bargain.
B then promises A some additional consideration in return for A’s promise to perform his obligations.
B obtains a benefit or avoids dis-benefit so long as A’s continuing is seen as worth more to B than any likely remedy against A, bearing in mind the cost to A of obtaining the assurance.
A thus suffers detriment, in that A is foregoing the opportunity not to perform the contract, where the non-performance could be seen by A as worth more than performance in the absence of the additional benefit.
B’s promise is not given by way of economic duress or fraud or undue influence or unconscionable conduct by A, nor as result of any unfair pressure
The benefit to B is capable of being consideration for the promise so as to make it legally binding.

Here, the practical benefit from allowing lower rent was the enhanced capacity of Ps to stay in occupation and carry out their future obligations despite new competition from another tenant. The practical benefit was the enhanced capacity to continue to operate at full capacity.

One might conclude that the High Court has eroded the strict requirement for consideration in every contract.

The fact that consideration may be found in such a situation will not deprive a promisor of relief in a case of unfair pressure on the ground of economic duress.

Greig and Davis point out in Law of Contract that

the doctrine of consideration with its arbitrary choice between a new contractual obligation which is enforceable, and one which fails entirely for want of consideration, seems a clumsy means of resolving a dispute.

Duty owed to third party

Despite doubts that have from time to time been expressed, it is well established that a promise by A to pay B if B performs a duty owed to X for which X has already agreed to pay B is enforceable by B if B does the act required by A.

Shadwell v Shadwell - Payment by 3rd party in consideration of marriage

(1860) 142 ER 62

P entered into an agreement to marry Ellen. His uncle, writing to congratulate him said, "I will pay you £150 per year during my life until you income as a barrister shall reach £600 pa." When the uncle died, Plaintiff sought to recover outstanding amounts. The personal reps argued that Plaintiff was under a contractual obligation to marry, therefore no consideration. The court held that the marriage was an object of interest to the uncle and he benefited by its taking place, thus there was consideration.

A reminder that unilateral contract analysis is often a useful way to get around tricky problems - difficulties of promising, communication of acceptance and consideration which cannot be dealt with within the traditional rules. It was used effectively in the following case.

This is referred to by Treitel as the "invented consideration" case

New Zealand Shipping Co v Satterthwaite (The Eurymedon) - 3rd party, exemption clause

[1975] AC 154 Privy Council

The clause

The clause of contract read inter alia "it is hereby expressly agreed that no servant or agent of the carrier (including every independent contractor from time to time employed by the carrier) shall in any circumstances be under any liability to the shipper consignee or owner of the goods for any loss or damage, and the carrier shall be deemed to be agent or trustee for the benefit of all persons, servants or agents from time to time (including independent contractors)

Clearly the clause was intended to benefit the independent contractors or stevedores, who in this case were a company which was part of the same group of companies as the carrier, and the stevedoring company acted as the agent of the carrier in New Zealand.

This case was an ordinary contract of sale for a machine - the parties being in UK and Australia. Machine to be shipped. Shipping contracts use some technical language, and we should be clear we know what some of it means. This involves a contract of carriage, between the Consignor (the shipper) and the consignee. The carrier runs the ship. The Stevedore Co provides the people to unload the ship. The contract of carriage is called a Bill of Lading - It amounts to a document of title during shipping - goods can change hands many times, and it is therefore negotiable during the voyage (can be assigned from one to another and each assignee is entitled to the rights of the original owner). A copy of the Bill of Lading goes to the consignee. In this case, the machine was dropped by the stevedores whilst unloading. An attempt to sue the stevedores was met with the claim that they were protected by the exemption clause in the contract of carriage. "No servant or agent of the carrier will be under any liability for loss or damage during transit"

Can a TP benefit from a contract to which they are not a party? The general rule is that only a party to a contract can obtain rights under it - privity of contract - consideration. Argued here that there is a unilateral contract between the stevedores and the owner. "I offer an exemption to anyone willing to unload the goods." It may not be much like the reward cases, but the PC said that that was how it was to be seen. Very artificial. Why then was the court so keen to allow the stevedores the benefit of the contract?

In the shipping trade, most of those involved are big players. Ship owners, carriers, owners of goods. What the courts were really looking at was who is in the best position to insure - to bear the risk? If one knows clearly where the risk lies, then it can be covered by appropriate insurance. If this decision makes it clear that the owners are the appropriate people to take out the insurance, then the carriers and stevedores do not need to cover the risk and that cost factor does not need to be included in the freight rates. Also - avoid the complications of multiple insurances on the one risk. It does not really matter at what stage the additional cost occurs - the ultimate consumer will cop for it anyway.

Lord Wilberforce's statements in this case are very revealing - when he looked at the question of consideration, he said that the rules with regard to offer and acceptance and so on often do not fit modern transactions. Better to see the exemption as designed to cover the whole of the carriage, irrespective of whether it is done by the carrier, the agent or an independent contractor.

Port Jackson v Salmond - exemption clause effective after unloading?

(1978) 139 CLR 231 High Court of Australia (NSW Court of Appeal)
(1980) 144 CLR 300

Shipment of razor blades from Canada to Australia. Goods unloaded at Sydney and mis-delivered by agents of stevedore. It was argued: [another example of putting forward arguments in the alternative]

Fundamental breach by bailee - the idea that a fundamental breach does away with the protection of any exemption clauses never got very far in Australia.

Agency - "Himalaya clause" (extends protection of defences of Bill of Lading to independent contractors) could not help because not shown that carrier had authority to act on stevedore's behalf.

Capacity - The Bill of Lading ceased to operate once the goods passed over the ships rail.

HELD that in Satterthwaite's case they had taken the view that a Himalaya clause could extend the defences of a Bill of Lading to 3rd parties as if they were parties to the contract. Their lordships would not encourage fine distinctions to diminish the applicability of the general principle in the light of established commercial practice. A nod and a wink to potential litigants to let them know the courts attitude to this line of cases - If you want to try and be clever in distinguishing cases, we will not be impressed.

Celthene v WKJ Hauliers - Extension of principle to inland transport

[1981] 1 NSWLR 606

This case indicates that the Satterthwaite principles would be extended to inland transport. Here the Ps had given a parcel to TNT and the agreement allowed for the fact that someone else may carry it on their behalf. The exclusion clause covered almost every possible event, and a sub-contractor and driver were sued. Neither of them were parties to the contract. It was held that Eurymedon (Satterthwaite) applied and the judge said that this would be in accordance with commercial expectations. It was found that Reid's criteria applied? We might think that it was a bit of a stretch to see how they could apply to the driver. R v Clarke not even mentioned here - that suggested that you should know of the offer and be acting upon it. Here the driver clearly did not know of the existence of the contract - but the judges said that that did not matter. It shows how the judges can manipulate the rules or even ignore them - play "fast and loose" with the rules as Denning said in Latec Finance

Life Savers (A'asia) Ltd v Frigmobile Pty Ltd

[1983] 1 NSWLR 431

took the view that The Eurymedon case was applicable to all forms of transportation of goods per Huntley JA at 438

Pao On v Lau Yiu Long

[1980] AC 614 Privy Council

An act done before the giving of a promise can sometimes be consideration for it. If done at promisor's request, and on the understanding that the act was to be remunerated, and the payment must have been legally enforceable if promised in advance.

The promise here, not to sell under the main agreement was at D's request. Parties understood that request was to be compensated for and that such a guarantee would be legally enforceable. The modern statement of the law is in Casey's Patents.

Argued that there was no implication that restriction on selling was to be compensated for. But the promise of indemnity must be linked back to the prior promise not to sell.

There is also the question of the real consideration for the indemnity, being the promise to perform the pre-existing contractual obligations to Fu Chip. There is no doubt that a promise to perform a pre-existing contractual obligation to a third party can be valid consideration - New Zealand Shipping. Unless the guarantee was void for illegality, or voidable on grounds of duress, the extrinsic evidence establishes that it was supported by consideration.

Duty required by law

Collins v Godefroy - witness expenses

[1831] 109 ER 1040

Plaintiff sued to recover compensation for loss of time in attending court as a witness under subpoena. Held that since the law imposes a duty on people to turn up, a promise of remuneration to do that which the court requires is without consideration. The principle also applies to promises not to do that which the law prohibits.

Glasbrook Bros Ltd v Glamorgan County Council - extra police

[1925] AC 270 House of Lords

During the 1921 coal strike, miners were involved in picketing which sometimes led to violence. The colliery manager insisted on extra police cover and some 70 people were provided. Under a written agreement, Defendant promised to pay specified amounts. When payment was sought, Defendant refused to pay. HELD that any attempt by a public authority to extract payment for normal services should be strongly resisted. If in any situation the provision of police is deemed necessary, then it would not be proper to exact payment for those services.

However, where the person or institution under a duty has, in return for a promise of payment, gone further than that duty requires, the additional performance can constitute consideration. Where there is no public policy bar to the performance of the duty being a matter of contract, then another person can acquire a right to enforce the duty by a promise to pay for its performance. If the provision of extra police was in excess of operational requirements, (as was the case here) then it could be proper to ask for payment for it.

Popiw v Popiw

[1959] VR 197, Supreme Court of Victoria

The wife claimed an interest in the matrimonial home. She had left her husband, and to encourage her to return home, he said that if she did return, he would put the title to the home in their joint names. She returned and stayed for four weeks, when she left again. Husband acknowledged obligation in affidavit.

Debts - Payment of lesser sum

The converse of a situation where a promisor agrees to pay an additional sum for the same performance is that where a debtor owing a sum for a past act pays, with the creditor's agreement, a lesser sum to that which is due. As there is no consideration supporting the creditor's agreement, the creditor may not be bound by it and so be able to insist on payment of the full amount which was due.

Suppose you owe me $100 and I say give me $80 and I'll forget the rest. Can I after getting the $80 sue you for the balance of $20? What have you given to render the promise to give up the $20 enforceable? If nothing, then no reason why the $20 is not still recoverable.

Pinnel's Case - horse, hawk or robe - variation required

(1602) Court of Common Pleas

P sued Defendant on a bond. The defence was that the Plaintiff had agreed to accept £5 2/6d on 1 Oct instead of £8 10s on 11 Nov. This is quite a famous case, but note that the most often quoted remarks from this case, in the light of the facts, are obiter dicta

Held: Payment of a lesser sum on the day in satisfaction of a greater cannot be satisfaction for the whole. But the gift of a horse, hawk or robe might be more beneficial than the money. But where the whole sum is due, then in no way can an acceptance of part of it be satisfaction for the whole. But payment of part of it before the day on which the whole is due, might be more beneficial. Similarly, if I am due to pay you £10 at Westminster, and you say that you will accept £5 at York, then that will be good satisfaction for the whole.

Couldery v Bartrum - canary birds, or tomtits or rubbish of that kind

(1880) Court of Appeal UK

Clearly, in this case, the MR is indicating that he feels that the principle of Pinnel's case leads to some unsatisfactory, and maybe absurd consequences. "According to English common law, a creditor might accept anything in satisfaction of his debt except a less amount of money. He might take a horse, a canary, or a tomtit if he chose and that was accord and satisfaction, but by a most extraordinary peculiarity of the English common law, he could not take 19s 6d in the £ - that was nudum pactum - it would not be accord and satisfaction. Now there are situations in which creditors would be given less, if they could assure the debtor that that would be an end of it, whereas if they pressed for the full amount, they would maybe get nothing - the available funds would be taken up in legal wrangling. How could you bind the creditors - "for not every debtor had got a stock of canary birds or tomtits or rubbish of that kind" [I must say, I think that is very funny - for a judge]

It was decided that if the creditors together decided that they would take less than the full amount, the fact of that agreement between them would be counted as consideration. That meant then that no one creditor could then try and go for the whole lot, because that would give that creditor an unfair advantage. [this still applies to compositions with creditors]

The other judge in the case took the view that - the requirement in our law that a gratuitous contract should be under seal is not unreasonable.

Foakes (D) v Beer (P)

(1884) House of Lords

Plaintiff obtained judgment against Defendant for £2090. There is a statutory rule that judgment debts carry interest. Defendant asked for time to pay, and Plaintiff said if you pay me £500 on account and £150 twice a year, until paid off, I'll not proceed to enforce the judgment or claim the interest. After the amount had been paid off, Plaintiff claimed the interest. At trial, the judge held that Plaintiff could not proceed for judgment and interest.

This case extended the concern which had been expressed in Couldery about Pinnel's case. Business people recognise that prompt payment without hassle rather than having to press for the full amount. Isn't a promise to accept less, followed by an action for the full amount a bit like cheating? Why shouldn't a promise to accept less be enforceable? Otherwise the balance can be sued for within 6 years. It is OK to pay less if you pay it earlier than it would otherwise be due, or if the payment takes some different form to that which had been agreed to.

It seems to have been accepted that payment of a lesser sum by a third party in full satisfaction of a debt releases the debtor

Budget Rent-A-Car v Goodman

[1991] 2 NZLR 715 High Court New Zealand

Additional cases

Coulls v Bagot's Executor and Trustee Co - Joint promisees

(1967) High Court Australia

Arthur owned a property, and allowed a Construction Co to quarry on it with royalties to be paid to himself and his wife Doris with payments "going to the living partner".

Where only one of 2 joint promisees provides the consideration for the promise, it does not mean that the other promisee cannot benefit from it. However, the action should be brought by both, and it may well fail if brought by one only.

Dunton v Dunton - Promise to remain sober?

(1892) Sup Ct Victoria

Mr Defendant promised he would pay £6-00 per month as part of a maintenance agreement in return for his wife's promise to conduct herself "with sobriety and in a respectable, orderly and virtuous manner and provided she did no act that would subject him or her to hate contempt or ridicule. HELD that this was not just a promise to do what one was already bound to do - it was a promise which involved surrendering a degree of liberty - it was a good consideration. The dissenting judge thought that it was too vague to count as consideration. Yet one has to ask, how can a person stipulate for what they want in return for the promise, and then turn round and say that it doesn't count as consideration?

Placer Development Ltd v The Commonwealth - Govt Subsidy

(1969) 121 CLR 353 High Court Aust

The Commonwealth provided that it would pay a subsidy on any timber on which import duty had been paid and not remitted on export. HELD that a promise combined with a discretion as to whether it will be carried out, amounts to no promise (or no contract at all). A promise of a subsidy is meaningless if there is no specification of the amount. There is no implication that a reasonable subsidy should be paid, for there is no standard by which to judge such a thing. If the Govt promises to pay such a subsidy as it thinks fit, then there is no contract. The dissenting judge, Menzies J, said that if one asks whether there is a duty to fix a subsidy, the answer must be yes. Hard to imagine the parties giving the agreement any other interpretation at the time. I do not regard a promise by the Commonwealth to fix an amount as being illusory. Windeyer J, also dissenting, said that ordinarily the court would have no difficulty, where an unspecified sum is to be paid, in inferring that a reasonable sum was intended. A quantum meruit, requires such a judgment. In this case there is no course of business dealing which the court can use for comparison, therefore the court has no basis upon which to substitute its own judgment. But because the court cannot make such a judgment, it does not follow that the Commonwealth is released from the obligation to make such a judgment.

To what extent should one have regard to the fact that this case involves the expenditure of public money? Does this mean that one should avoid placing a requirement to pay on a public (govt) body? Shouldn't one expect a public body to act as an ideal litigant, and to set proper standards of conduct - to act in an ethical manner?

Ward v Byham - promise to keep child happy

[1956] Court of Appeal

The father of a child, promised the mother that he would pay £1 per week maintenance, provided that the mother could prove that the child was well looked after and happy.

Denning MR said that the mother could have brought affiliation proceedings, and an agreement not to do so would have been good consideration [an agreement not to pursue a legal right can amount to a detriment which constitutes consideration] - but the mother did not think of that at the time. So it could be said that the mother is only doing what she is obliged to do. Then Denning added, going against basic doctrine on consideration - "I have always thought that a promise to perform an existing duty should be regarded as good consideration, because it benefits the person to whom it is given. If the father gets the benefit for which he has stipulated, then he ought to honour the promise. The mother's act completed a unilateral contract.

Illusory promises

Discretionary promises

Where a promise may be said to be lacking in substance for some reason, the court might well hold that even though it looks to be promissory, it is in fact not so. This might occur for example, where the promise is lacking in substance - a promise to carry someone on an aeroplane combined with an exclusion clause which allows the carrier not to carry the person or effects, might be said to contain no enforceable obligation at all. See MacRobertson Miller Aeroplanes - and Cheshire and Fifoot.

Promises lacking content

Where there is a promise which has no discernible content, it might be said that the promissory appearance is illusory. My offer to let you buy shares in a non-existent company for example - See Cheshire and Fifoot and

Biotechnology Australia Pty Ltd v Pace

(1988) 15 NSW LR 130

An option to participate in an equity scheme which does not exist.

 

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Contract consideration

 

 

 

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Intro

 

 

 

 

In contract law consideration is concerned with the bargain of the contract. A contract is based on an exchange of promises. Each party to a contract must be both a promisor and a promisee. They must each receive a benefit and each suffer a detriment. This benefit or detriment is referred to as consideration.

 

Consideration must be something of value in the eyes of the law - (Thomas v Thomas) (1842) 2 QB 851.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.

 

 

Whilst the common law strictly adheres to the requirement of consideration (although in some instances the courts seem to go to some lengths to invent consideration eg Ward v Byham [1956] 1 WLR 496, Williams v Roffey Bros [1990] 2 WLR 1153) equity will, in some instances, uphold promises which are not supported by consideration through the doctrine of promissory estoppel.

 

 

 

 

Rules of consideration

 

 

There are various rules governing the law of consideration:

 

1. The consideration must not be past.

 

 

2. The consideration must be sufficient but need not be adequate.

 

 

3. The consideration must move from the promisee.

 

 

4. An existing public duty will not amount to valid consideration.

 

 

5. An existing contractual duty will not amount to valid consideration.

 

 

6. Part payment of a debt is not valid consideration for a promise to forego the balance.

 

 

 

 



 

 

 

1. Consideration must not be past:



Re McArdle (1951) Ch 669            Case summary

 

 

Past consideration may be valid where it was proceeded by a request:

Lampleigh v Braithwaite [1615] EWHC KB J17                                             Case summary

 

 

 

2. Consideration must be sufficient but need not be adequate:



There is no requirement that the consideration must be market value, providing something of value is given eg £1 given in exchange for a house would be valid. The courts are not concerned with whether the parties have made a good or bad bargain:



Chappell v Nestle [1960] AC 87      Case summary


 

 

3. Consideration must move from the promisee

If a person other than the promisee is to provide the consideration, the promisee can not enforce the agreement:


 
Tweddle v Atkinson [1861] EWHC QB J57 Case summary



 

 

4. An existing public duty will not amount to valid consideration

Where a party has a public duty to act, this can not be used as consideration for a new promise:



Collins v Godefrey (1831) 1 B & Ad 950 Case summary 

 

Unless the promisor goes beyond their duty:



Glasbrook Bros v Glamorgan County Council [1925] AC 270                                      Case summary



 

Ward v Byham [1956] 1 WLR 496  Case summary


 


 

 

 

 

5. An existing contractual duty will not amount to valid consideration


 


If a party has an existing contractual duty to do an act, this act can not be used as consideration for a new promise:



Stilk v Myrrick [1809] EWHC KB J58 Case summary



 

Unless the party goes beyond their existing duty:



Hartley v Ponsonby [1857] 7 EB 872 Case summary



or if they confer a practical advantage:



Williams v Roffey Bros[1990] 2 WLR 1153 Case summary


 

 

If the existing contractual duty is owed to a 3rd party this may be used as valid consideration for a new promise:



New Zealand Shipping v Satterthwaite [1975] AC 154 Case summary

 



Scotson v Pegg[1861] EWHC Exch J2 Case summary



6. Part payment of a Debt


Part payment of a debt is not valid consideration for a promise to release the debt in full:



Pinnel's case 1602 5 Rep, 117 Case summary 



Part payment of a debt is not valid consideration for a promise to forebear the balance unless at the promisor's request part payment is made:

a). before the due date
b). with a chattel
c). to a different destination

This rule from Pinnel's case was affirmed by the House of Lords in:




Foakes v Beer
 (1883-84) L.R. 9 App. Cas. 605 Case summary


Further exceptions to the rule in Pinnel's case:

 



1. Where part payment is made by a third party:

 



Hirachand Punamchand v Temple
[1911] 2 KB 330 Case summary

 

 



2. Promissory estoppel  see here

 

 

 

 

Contract consideration  

 

 


 

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