Consideration under English law

Consideration is one of the three main building blocks of a contract in English contract law. Consideration can be anything of value (such as an item or service), which each party to a legally-binding contract must agree to exchange if the contract is to be valid. If only one party offers consideration, the agreement is not legally a binding contract. In its traditional form, consideration is expressed as the requirement that in order for parties to be able to enforce a promise, they must have given something for it (quid pro quo): something must be given or promised in exchange or return for the promise. A contract must be "met with" or "supported by" consideration to be enforceable; also, only a person who has provided consideration can enforce a contract. In other words, if an arrangement consist of a promise which is not supported by consideration, then the arrangement is not a legally enforceable contract. Mutual promises constitute consideration for each other. ("I promise you to do X, in consideration for which promise you promise me to do Y").

In Australia, the bargain theory of consideration prevails, where the act or forebearance of one party or promise thereof is the price for which a promise is bought.

Definition

Consideration for a particular promise exists where some "right", "interest", "profit" or "benefit" accrues ("or will accrue") to the promisor as a direct result of some "forbearance", "detriment", "loss" or "responsibility" that has been given, suffered or undertaken by the promisee. The consideration must be executory or executed, but not past.Consideration is "executoryConsideration can be anything of value (such as an item or service), which each party to a legally-binding contract must agree to exchange if the contract is to be valid. If only one party offers consideration, the agreement is not legally a binding contract. In its traditional form, consideration is expressed as the requirement that in order for parties to be able to enforce a promise, they must have given something for it (quid pro quo): something must be given or promised in exchange or return for the promise. A contract must be "met with" or "supported by" consideration to be enforceable; also, only a person who has provided consideration can enforce a contract. In other words, if an arrangement consist of a promise which is not supported by consideration, then the arrangement is not a legally enforceable contract. Mutual promises constitute consideration for each other. ("I promise you to do X, in consideration for which promise you promise me to do Y").

In Australia, the bargain theory of consideration prevails, where the act or forebearance of one party or promise thereof is the price for which a promise is bought.

" when a promise to do something in the future is given in exchange for another promise to be done in the future. Consideration is "executed" when a promise is actually executed, in exchange for another promise to be executed in the future. Consideration is "past" when a promise has been given or executed "before" and "independently" of the other promise. For example, I promised to take you to lunch, and then when we got there I said "you must pay, because I have given you the benefit of my company" This is past consideration and therefore NO consideration.

*"Currie v. Misa" (1875) LR 10 Ex 153, 162

Consideration need not be adequate

For consideration to be good consideration, it must be of some value, even if it is minimal value. There is no requirement that the consideration be commensurate in economic terms to the original promise.

*"Chappell & Co Ltd v. Nestle Co Ltd" [1960] AC 87

Consideration must be sufficient

Past Consideration

A promise cannot be based upon consideration that was provided before the promise was made. For example, if X promises to reward Y for an act that Y had already performed, the performance of that act, while good consideration for the promise to be rewarded for it, is past consideration and therefore not good consideration.

In "Eastwood v Kenyon", the guardian of a young girl raised a loan to educate the girl and to improve her marriage prospects. After her marriage, her husband promised to pay off the loan. It was held that the guardian could not enforce the promise as taking out the loan to raise and educate the girl was past consideration, because it was completed before the husband promised to repay it.

Furthermore, where a contract exists between two parties and one party, subsequent to formation, promises to confer an additional benefit on the other party to the contract, that promise is not binding because the promisee's consideration, which is his entry into the original contract, had already been completed (or "used") at the time the next promise is made.

In "Roscorla v Thomas", Roscorla and Thomas contracted to buy a horse for £30. After the sale, Thomas promised Roscorla that the horse was sound; the horse turned out to be vicious. It was held that Roscorla could not enforce the promise, as the consideration given for entering into the contract to buy the horse had been completed by the time the promise was made; in a sense, the consideration was "used up".

The rule that past consideration is not good consideration is subject to the exception discussed by the Privy Council in "Pau On v Lau Yiu Long". In that case, their Lordships held that past consideration can be good consideration where:
# The promisee performed the original act at the request of the promisor;
# It was clearly understood or implied between the parties that the promisee would be rewarded for the performance of the act;
# The actual promise made, if made before the promisee provided the consideration, must be capable of being enforced, in other words giving rise to a legally binding contract.

*"Lampleigh v Brathwait" (1615) Hobart 105; 80 ER 255
*"Pao On v Lau Yiu Long" [1980] AC 614

Illusory Consideration

There must be some kind of connection between a promise and the consideration offered to support the promise. It is no consideration to "refrain from a course of conduct which it was never intended to pursue" ("Arrale v. Costain Civil Engineering Ltd" [1976] 1 Lloyd's Rep 98). The consideration must have been at least an inducement to enter into the promise.

This requirement also imposes a restriction on conditional gifts. This test is an objective test - whether a reasonable person in the position of the offeree would perceive it as a gift as opposed to an offer. For example, the payment of $10,000 for the switching of a television channel is not met with consideration.

Certainty

Consideration is sufficient where it amounts to something that is capable of expression in economic terms. In "White v. Bluett", Bluett, when sued by his father’s executors for an outstanding debt to his father, claimed that his father had promised to discharge him from it in return for him stopping complaining about property distribution. The Court held that the cessation of complaints was of no economic value; thus, Bluett’s father had received no real consideration for the promise, and the debt was unenforceable at law.

*"White v. Bluett" (1853) 23 LJ Ex 36

Consideration must move from the promisee

A promise is enforceable if it is supported by consideration, that is, where consideration has moved from the promisee. For example, in the case of Tweddle v Atkinson, John Tweddle promised William Guy that he would pay a sum of money to the child of William Guy, and likewise William Guy promised John Tweddle that he would pay a sum of money to the child of John Tweddle, upon the marriage of the two children to each other. However, William Guy failed to pay the son of John Tweddle, who then sued his executors for the amount promised. It was held that the son could not enforce the promise made to his father, as he himself had not actually given consideration for it - it was his father who had done so instead. This particular rule of consideration forms the basis of the "doctrine of privity" of a contract, that is, only a party to a contract is permitted to sue upon that contract's terms. (Note that the doctrine of privity has been somewhat altered in the Contracts (Right of Third Parties) Act 1999.)Therefore consideration from the promisee was indulgent of the claim. Although consideration must move from the promisee, it does not necessarily have to move to the promisor. The promisee may provide consideration to a third party, if this is agreed at the time the parties contracted (see "Bolton v. Madden").

*"Tweddle v. Atkinson" (1861) 1 B&S 393; 121 ER 762

The offeree must provide consideration, although the consideration does not have to flow to the offeror. For example, it is good consideration for person A to pay person C in return for services rendered by person B. If there are joint promisees, then consideration need only to move from one of the promisees. (see "Price v Easton")

Promised performance of existing duty

;Public dutyIf the promisee provides what he was required by public law to do in any event in return for a promise, this is not good consideration. In "Collins v. Godefrey" ["Collins v. Godefroy" (1831) 1B & Ad 951; 109 ER 1040] Godefrey promised to pay Collins for his giving of evidence. It was held that Collins could not enforce the promise as he was under a statutory duty to give evidence in any event.

However, if the promisee provides more than what public duty imposes on him, then this is good consideration. In "Ward v. Byham" a mother was under a statutory duty to look after her child. The ex-husband promised to pay her £1 a week if she ensured that the child was well looked after and happy. It was held that notwithstanding the statutory duty imposed on the mother, she could enforce the promise since the act of keeping the baby 'happy' provided additional consideration.

*"Glasbrook Ltd v. Glamorgan County Council" [1925] AC 270

;Duty to the contracting partyPromising to perform a pre-existing duty owed to one's contracting party also fails to make good consideration. However this rule has been considerably narrowed by recent case law. The general rule is that if a creditor promises to discharge a debt in return for a fraction of payment, in paying the agreed fraction, the promisee is not providing consideration for the promise, as this is merely part performance of a contractual duty already owed (see "Pinnel's Case"; confirmed by "Foakes v. Beer" ["Foakes v. Beer" (1884) 9App. Cos 605] ). Consequently, the debtor is still liable for the whole amount, as he cannot force the promisor to accept less. A leading example is in "Stilk v. Myrick". ["Stilk v. Myrick" (1809) 2 Camp 317; 170 ER 851] Stilk, a seaman, agreed with Myrick to sail his boat to the Baltic Sea and back for £5 per month. During the voyage, two men deserted. Myrick promised he would increase Stilk's wages if Stilk agreed to honour his contract in light of the desertions. Stilk agreed and on return to port, Myrick refused to pay him the extra wages. It was held that Myrick's fresh promise was not enforceable as the consideration Stilk had provided for it, the performance of a duty he already owed to Myrick under contract, was not good consideration for Myrick's promise to increase his wages.

Initially, there were only two exceptions to this rule:
*"Hanson v. Royden", the promisee has done, or has promised to do, more than he was obliged to do under his contract.
*"Hartley v. Ponsonby", before the fresh promise was made, circumstances had arisen which would have entitled the promisee to refuse to carry out his obligations under his contract.

However, the strictness of this rule was severely limited in "Williams v. Roffey Bros & Nicholls (Contractors) Ltd". ["Williams v. Roffey Bros & Nicholls (Contractors) Ltd" [1991] 1 QB 1; [1990] 1 All ER 512] The Roffey Brothers entered into a contract to refurbish a block of flats for a fixed price of £20,000. They sub-contracted carpentry work to Williams. It became apparent that Williams was threatened by financial difficulties and would not be able to complete his work on time. This would have breached a term in the main contract, incurring a penalty. Roffey Brothers offered to pay Williams an additional £575 for each flat completed. Williams continued to work on this basis, but soon it became apparent that Roffey Brothers were not going to pay the additional money. He ceased work and sued Roffey Brothers for the extra money, for the eight flats he had completed after the promise of additional payment. The Court of Appeal held that Roffey Brothers must pay Williams the extra money, as they had enjoyed practical benefits from the promise they had made to Williams. The benefits they received from it include: Having the work completed on time, not having to spend money and time seeking another carpenter and not having to pay the penalty. In the circumstances, these benefits were sufficient to provide consideration for the promise made to Williams of additional payment. It now seems that the performance of an existing duty may constitute consideration for a new promise, in the circumstances where no duress or fraud are found and where the practical benefits are to the promisor. The performance of an existing contractual duty owed to the promisor is not good consideration for a fresh promise given by the promisor. However, performance of an existing contractual duty owed to a third party can be good consideration, see further below.

According to the Court of Appeal, it is unlikely that either avoiding a breach of contract with a third party, avoiding the trouble and expense of engaging a third party to carry out work or avoiding a penalty clause in a third party contract will be a "practical benefit". In "Simon Container Machinery Ltd v. Emba Machinery AB", the practical benefit was held to be the avoiding of a breach of contract, which was clearly not an extension of the principle.

This is true unless the debtor provided fresh consideration for the promise. The following, mentioned in "Pinnel's Case" itself and confirmed by "Sibree v. Tripp", may amount to fresh consideration:
# If the promisee offers part payment earlier than full payment was due, and this is of benefit to the creditor;
# If the promisee offers part payment at a different place than where full payment was due, and this is of benefit to the creditor; or,
# If the promisee pays the debt in part by another chattel (note, however, that part payment by cheque, where full payment was due by another means, is not consideration (see "D & C Builders Ltd v. Rees")).

Another exception is that part payment of the debt by a third party as consideration for a promise to discharge the creditor from the full sum, prevents the creditor then suing the debtor for full payment (see "Welby v Drake").

The Court of Appeal, in "Re Selectmove Ltd" ["Re Selectmove Ltd" (1995) 1 WLR 474] stated that the "practical benefit doctrine" arising from "Williams v Roffey" cannot be used as an additional exception to the rule. In that case, it was held that the doctrine only applies where the original promise was a promise to pay extra and not to pay less. It should be noted, however, that the Court of Appeal in "Re Selectmove" were unable to distinguish "Foakes v. Beer" (a House of Lords decision), in order to apply "Williams v Roffey" (Court of Appeal). It therefore remains to be seen whether the House of Lords would decide this point differently. In any event, the equitable principle of promissory estoppel may provide the debtor with relief.

*"Atlas Express Ltd v. Kafco" [1989] QB 833

To third party

Consideration for a promise can be the performance of a contractual duty owed to someone other than the promisor (see "Shadwell v Shadwell"; confirmed by "The Eurymedon"). In "Shadwell", Shadwell was under a contractual duty with a third party to marry. Shadwell’s uncle promised to pay him £150 per year after he was married. It was held that Shadwell marrying was good consideration, notwithstanding that he was obliged by a contract with a third party to marry in any event.

A promise to perform a pre-existing contractual duty owed to a third party (as opposed to the performance of that duty) may also amount to consideration ("Pau On v Lau Yiu Long").

*"Shadwell v. Shadwell" (1860) 9 CBNS 159; 42 ER 62
*"New Zealand Shipping Co Ltd v. A M Satterthwaite & Co Ltd" [1975] AC 154

Forbearing to sue and compromising

*"Callisher v. Bischoffsheim" (1870) LR 5 QB 449

Estoppel

*"High Trees Case" [1947] KB 130
*"Hughes v. Metropolitan Railway" (1877) 2 App. Cas 439
*"D & C Builders v. Rees" [1966] 2 QB 617
*"Ogilvy v. Hope Davies" [1976] 1 All ER 683
*"Combe v. Combe" [1951] 2 KB 215
*"Re Selectmove Ltd" [1995] 1 WLR 474
*"Collier v P&MJ Wright (Holdings) Ltd" [2007] EWCA Civ 1329
*"Waltons Stores (Interstate Ltd) v. Maher" (1988) 164 CLR 387
*"Crabb v. Arun District Council" [1976] 1 Ch 170

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