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3.
Consideration
Case study
C, a computer engineer, is employed by D. His monthly salary is £ 3,000. Due to an overload
of work, C works extra hours between September and December 2006. As a reward D
promises C a bonus payment of £ 5,000 and a pay rise to £ 3,500, effective from January
2007. In February 2007, D’s company runs into financial difficulties. D therefore tells C that,
unfortunately, he can neither afford to pay the bonus nor the extra salary of £ 500 per month.
Can C claim the sum of £ 6,500 at the end of March 2007?
Background
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Not all gratuitous promises are enforceable (compare in German law §§ 516, 518 BGB).
Position of English law: A promise is only binding if made in a deed or if supported by
consideration.
Deed = under common law instrument made in writing, sealed and delivered to other
party, Law of Property (Miscellaneous Provisions) Act 1989, s. 1: seal no longer required
for deeds executed by individual, if document in writing, signed in presence of a witness,
delivered to other person.
The doctrine of consideration represents one possible test to determine which promises
should be enforceable: idea of bargain and exchange
Currie v Misa (1875) LR 10 Ex 153: A valuable consideration, in the sense of the law,
may consist either in some right, interest, profit, or benefit accruing to the one party,
or some forbearance, detriment, loss, or responsibility, given, suffered, or
undertaken by the other
- The promisor must receive a benefit / something of value, there must be a “price” for
the promise, but the price need not be adequate
- Sir Frederick Pollock: consideration is the price for which the promise of the other is
bought.
Elements:
- Benefit to the promisor
- Detriment to the promise
- In return for the promise
Justification = test of seriousness
- Objection: there may be other valid tests (intention to create legal relations, concept
of economic duress).
- Doctrine has indeed been contested in English law, i.a. by Lord Mansfield (17051793, Chief Justice from 1756) who thought that it was just a rule of evidence.
- But it has never been abolished, although it is still criticised by many authors.
Loose assortment of different rules, only some of which will be considered here.
Consequences:
- Gratuitous promises are not binding unless made by deed (compare German law: §§
516, 518 BGB, but also §§ 598 ff., 662 ff. BGB).
Lehrstuhl Zivilrecht VIII
Prof. Dr. Ohly
Introduction to English Law
24
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The same applies to modifications of an existing contract or a waiver of debts
(contrast in German law § 397 BGB).
Consideration must not be past.
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When the promisor requests a specific act in exchange for his promise then the
performance of this act will be good consideration (executed consideration).
A mere exchange of promises (executory consideration) is sufficient.
However, a promise made after the act has been performed is generally not enforceable,
because this act is gratuitous ( in the case of executed consideration, promise and
consideration are integral parts of the same transaction)
Examples:
Roscorla v Thomas (1842) 3 QB 234: C bought a horse; afterwards D warranted that
the horse was "sound and free of vice". The horse turned out to be vicious. Warranty
not binding, because the horse had been paid for before the warranty was made.
Re McArdle [1951] Ch 669
exception:
- act done at the request of promisor and understanding between the parties that act
was to be remunerated, example: Lampleigh v Braithwait (1615),
- explanation: subsequent promise is simply a formalisation of what that payment
should be (Re Casey’s Patent [1892] 1 Ch 104 (CA))
Consideration must move from the promisee.
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Tweddle v Atkinson (1861) 1 B & S 393: Promises made at the wedding of a couple by
both parents (father of bride and father of groom) to pay a sum of money, contract not
enforceable by the couple.
Closely related to doctrine of privity of contract: a third party cannot claim benefits from a
contract,
- Doctrine of privity of contract modified by Contracts (Rights of Third Parties) Act
1999.
- Modification does not alter rule that consideration must move from promisee: when
A promises B to pay a sum of money to C, B is the promise and consideration must
move from B
Consideration must be real but need not be adequate.
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Consideration must either represent a real value or a promise which can be realised.
But the court will refuse to examine whether the price was adequate: If you sell a
Stradivarius for € 100 - bad luck!
Consideration represents the idea of a bargain rather than the reality of it.
Consequence: Even acts of small value can be consideration,
Lehrstuhl Zivilrecht VIII
Prof. Dr. Ohly
Introduction to English Law
25
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See Chappell v Nestlé per Lord Sommervell: “A contracting party can stipulate for
what consideration he chooses. A peppercorn does not cease to be good consideration
if it is established that the promisee does not like pepper and will throw away the
corn.”
The provision of a nominal consideration will suffice, see Mountford v Scott
However, a mere promise to refrain from complaints is insufficient.
Specific questions
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Forbearance to sue can be good consideration.
Performance of an existing legal duty:
- public duty: performance is not consideration, example (Collins v. Godefroy, 1831):
promise to pay a witness for appearing in court. However, consideration will be
furnished, when the promisee does more that he strictly has to, example: Ward v
Byham, duty to look after illegitimate daughter in order to make sure that child was
“well looked after and happy”
- private duty already owed to promisor: traditional view: cannot be good consideration,
see Stilk v Myrick (1809), two sailors jumped ship, wages were shared between others
– lack of consideration,
- Restriction of this rule in Williams v Roffey & Nicholls: promise to carry out work
already owed under a contract in a timely manner may be good consideration if
promisee received practical benefit.
Payment of a debt:
- Pinnel’s case (1602): payment of a lesser debt cannot be consideration for the
creditor’s promise to accept this lesser sum unless something other than money (Coke
CJ: “a horse, a hawk or a robe”) is given or payment is made at an earlier time
- Foakes v Beer (1884): D owed C the sum of £ 2,090. C agreed that she would not take
any action against D if he promised to pay an initial sum of £500 and pay £150 twice
yearly until the whole amount was paid back. Since D was in financial difficulty, C
waived any interest on the amount owed. Although D made the payments as agreed, C
sued for interest. Court of Appeal: C can claim interest since the waiver was not
supported by consideration.
- This seems to contradict commercial reality: sometimes it makes sense to accept a
lesser sum, e.g. in order to prevent the debtor’s insolvency. But: waiver by deed
(which furnishes objective evidence) is possible.
- No application of practical benefit rule (Williams v Roffey & Nicholls) to payment of
debt: Re Selectmove [1995] 2 All ER 531.
Promissory estoppel
Background and development
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Hardship of common law, particularly of Foakes v Beer Æ intervention of equity.
Lehrstuhl Zivilrecht VIII
Prof. Dr. Ohly
Introduction to English Law
26
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Doctrine of estoppel: If X makes an unequivocal statement of fact to Y which he intends
Y to rely on and which Y does in fact to his detriment, X is prevented from later acting
inconsistently with that representation.
High Trees Case (judgment made by Denning J after less than a year of being High Court
judge!)
- Clear and unambiguous statement by promisor that strict legal rights will not be
enforced
- Promisee must have acted in reliance on the promise.
- It must be inequitable for the promisor to go back on his or her word and revert to his
or her strict legal rights.
"The Doctrine of promissory estoppel was born with a far from unimpeachable pedigree."
– Why?
Further development:
- limits of the doctrine of promissory estoppel, see Combe v Combe: Doctrine does not
create a cause of action ("a shield, not a sword"), doctrine of consideration remains
relevant for the formation of a contract, but not for its modification or discharge
- The doctrine is equitable in nature, hence it will not help a debtor who behaves in
unconscionable or inequitable way, see D & C Builders v Rees [1966] 2 QB 617:
financial hardship of creditor exploited by debtor.
- Agreement between creditor and one of three shared debtors that he would accept
payment from him and not pursue him for the debt owed by his joint creditors is not
binding, but doctrine of promissory estoppel may apply: Collier v Wright [2007]
EWCA Civ 1329 Æ further restriction of Foakes v Beer.
open questions:
- What exactly is “reliance”?
- Is there a requirement of pre-existing contract? See the Australian case of Walton
Stores (Interstate) Ltd v Maher (1988) 62 ALR 110: construction contract close to
conclusion, but formal exchange of documents had not yet taken place – specific
performance or damages? Judgment for claimant in High Court of Australia.
Lehrstuhl Zivilrecht VIII
Prof. Dr. Ohly
Introduction to English Law