Consideration in English law

Consideration in English law is one of the three main building blocks of a contract. 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, 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 consists 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 that I will do X, in consideration for which you promise me that you will do Y").

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

Value

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 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.

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 consists 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 you promise me to do Y").

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

Lush J. in Currie v Misa (1875) LR 10 Exch 153 referred to consideration as consisting of a detriment to the promisee or a benefit to the promisor:

"... some right, interest, profit or benefit accruing to one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other."

The definition given by Sir Frederick Pollock, approved by Lord Dunedin in Dunlop v Selfridge Ltd [1915] AC 847, is as follows:

"An act or forebearance of one party, or the promise thereof, is the price for which the promise of the other is bought, and the promise thus given for value is enforceable."

Adequacy

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. Nominal consideration will suffice as good consideration for a contract, Courts will not measure the adequacy of the consideration as it is up to the parties to decide the subjective worth of each promise.

Past conduct

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 then while the performance of that act is good consideration, for the promise to be rewarded for it is past consideration and therefore not good consideration.

In Eastwood v Kenyon,[2] 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,[3] 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 Pao On v Lau Yiu Long.[4] In that case, their Lordships held that past consideration can be good consideration where:

  1. The promisee performed the original act at the request of the promisor;
  2. It was clearly understood or implied between the parties that the promisee would be rewarded for the performance of the act;
  3. 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.

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.

Forbearing to sue

Privity

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,[5] 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. The son didn't receive any consideration, so he cannot enforce the promise. 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 by the Contracts (Rights 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).

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.

Pre-existing duties

If the promisee provides what he was required by public law to do in any event in return for a promise, promised performance of existing duty is not good consideration. In Collins v Godefrey[6] 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.

Promising 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.[7] 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.[8] 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:

Factual benefits

However, the strictness of this rule was severely limited in Williams v Roffey Bros & Nicholls (Contractors) Ltd.[10] 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:

  1. If the promisee offers part payment earlier than full payment was due, and this is of benefit to the creditor;
  2. 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,
  3. 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[11] 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.

Existing duties to third parties

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).

Estoppel

Deeds and formality

Alternatives

See also: Principles of European Contract Law and UNIDROIT Principles

See also

Notes

  1. ↑ (1853) 23 LJ Ex 36
  2. ↑ [1840], 11 Ad. & E. 438, 113 Eng. Rep. 482
  3. ↑ Roscorla v Thomas [1842] EWHC KB J74
  4. ↑ [1980] AC 614
  5. ↑ (1861) 1 B&S 393; 121 ER 762
  6. ↑ Collins v Godefroy (1831) 1B & Ad 951; 109 ER 1040
  7. ↑ See Pinnel's Case, confirmed by Foakes v Beer (1884) 9 App Cas 605
  8. ↑ Stilk v Myrick (1809) 2 Camp 317; 170 ER 851
  9. ↑ [1857] 7 E&B 872
  10. ↑ Williams v Roffey Bros & Nicholls (Contractors) Ltd [1991] 1 QB 1; [1990] 1 All ER 512
  11. ↑ Re Selectmove Ltd [1993] EWCA Civ 8, [1995] 1 WLR 474

References

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