Consideration under English law
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- This page deals with consideration under English law, a United States focused article is available here.
Consideration under English law is anything of value (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 then the agreement is not a contract.
Consideration in its traditional form in English law usually is expressed as the requirement that for parties to be able to enforce a promise, they must have given some quid pro quo for it: something must be given or promised in exchange or return for the promise.
At English law, 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.
[edit] Existence of consideration
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 (see Currie v Misa).
The consideration must be executory or executed, but not past. Consideration is executory 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. Kay Said, Contract For The Ignorant", 2011.
[edit] Exceptions to the requirement of consideration
No consideration is needed in case of modification of the contract (Williams v Roffey Bros [1991] 1 QB 1; [1990] 1 All ER 512). The estoppel may replace an unexisting consideration.
Williams v Roffey Brothers & Nicholls (Contractors) Ltd [1991] 1 QB 1, 18
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.
[edit] Rules of consideration
There are a number of complicated rules governing consideration, all of which have exceptions. Each rule, and its exception is dealt with below:
- Consideration must be referable to the promise
- Consideration must move from the promisee - but not necessarily to the promisor;
- Consideration need not be adequate - but must be sufficient;
- Consideration must not be illusory - see illusory promise;
- Consideration must be current - it cannot be past;
- Performance of an existing obligation under a contract owed to the promisor - is not consideration for a promise;
- Part payment of a debt - is not consideration for a promise to discharge the whole sum;
- Performance of a public law duty - is not consideration for a promise;
- Performance of a contractual obligation owed to a third party - does amount to consideration for a promise.
[edit] Consideration must be given
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).
[edit] Consideration must be referable to the promise
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.
[edit] Consideration must be sufficient but not adequate
For consideration to be good consideration, it must be of some value, even if it is minimal value. Consideration is sufficient where it amounts to something that is capable of expression in economic terms (see White v Bluett). In that case, 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.
There is no requirement that to be sufficient, consideration must be adequate, in the sense of being commensurate in economic terms to the original promise (see Chappell & Co v Nestle Co Ltd).
[edit] Consideration must move from the offeree
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)
[edit] Past consideration is no 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.
[edit] Performance of an existing contractual duty to the promisor is not consideration
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.
For example, in Stilk v Myrick, 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:
- The promisee has done, or has promised to do, more than he was obliged to do under his contract (see Hanson v Royden);
- 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 (see Hartley v Ponsonby).
The seminal case of Williams v Roffey Brothers & Nicholls (Contractors) Ltd added another exception to the rule. In this case, it was held that performance of an existing contractual obligation will be good consideration if:
- The original contract is one for goods and services; and
- X doubted that Y would perform his obligations under the contract; so
- X promised to pay Y an extra amount in return for a promise from Y that he would in fact fulfill his obligations under the contract; and
- As a result, X received (or was set to receive) a practical benefit or obviated a disbenefit; but
- X did not make the promise to pay more under duress from Y.
The following, as per the Court of Appeal in Williams v Roffey, is highly likely to constitute a practical benefit:
- Avoiding the breach of a contract with a third party;
- Avoiding the trouble and expense of engaging a third party to carry out the work; and/or
- Avoiding a penalty clause incorporated into a contract with a third party.
Some commentators argue that practical benefit can amount to anything capable of expression in economic terms. This, however, remains to be seen.[vague] The law reports contain only one case in which Williams v Roffey was applied. 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.
[edit] Part payment of a debt is not good consideration
At common 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). Consequently, the debtor is still liable for the whole amount, as he cannot force the promisor to accept less.
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 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 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.
[edit] Performance of a public law duty is not good consideration
If 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 Godfrey, Godfrey 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 (see Ward v Byham). In this case, 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.
It remains to be seen whether Williams v Roffey has any application to this rule. For example, if X promises to pay Y to perform precisely, what would be required from him under statute? Thus following Collins v Godfrey, Y's performance does not amount to consideration, but X receives a practical benefit from Y actually performing that duty.
[edit] Third party obligation is good consideration
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).
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