Consideration
Consideration is what passes from one contractual party to another; each party in a contract
must give something of value.
Consideration is traditionally thought of as money, goods or services. However, in modern
cases the courts seem willing to define almost anything as consideration even if that element
is not part of the contract.
The usual attitude of the courts to consideration is to attempt to reach a decision, which
allows the court to enforce what the parties have agreed. Our commercial and business world
is based on contractual obligations and the court does not like allowing parties to escape
these obligations.
Consideration need not be adequate but it must be sufficient
The courts view is that the adequacy of consideration is a matter for the parties to decide and
is best shown in the case of Thomas v Thomas (1842). The court will not interfere if one
party has made a bad bargain.
To be sufficient, consideration must:
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Be real (the consideration must exist)
Be tangible (the consideration must be definite, e.g. a vague promise may not be
definite enough for consideration).
Have some value (even if of a nominal amount)
The case of Chappell & Co. v Nestle (1960) demonstrates the criteria in action.
Past consideration
To be valid, consideration must be a mutual exchange of promises. If one party carries out an
act voluntarily and a second party later promises to pay for or contribute to this act then this
is called ‘past’ consideration. The promise to pay by the second party is not good
consideration as it is a promise to pay for something that has already happened. The first
party is not able to enforce the promise of the second party, as there is no valid contract. In
Re McArdle (1951) some family members redecorated the family home and other family
members then promised in writing to contribute a fixed sum to the cost of the redecoration
but never did. No payment was due as the promise to pay was for something that had already
occurred: it was past consideration so there was no contract.
There is an exception to this rule from an old case of Lampleigh v Braithwaite (1615), when
a party:
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Requests a service from another and
The promise of payment can be implied into the request
This exception may apply in commercial situations where the payment is implied due to the
context of the facts. In Re Casey’s Patents (1892) a manager worked on patents for a
company, which then promised him a one-third share in the patents. The company then
refused to share the patents claiming past consideration. The manager was entitled to the
share as it was implied that when he worked on the patents he would receive payment of
some form.
Part payment of a debt in place of the whole debt gives no consideration
This rule from Pinnel’s case (1602) is that a creditor is able to claim the remainder of a debt
even if the creditor has agreed with the debtor that a part payment by the debtor will clear
the debt.
In a scenario, Miriam owes Vicky £600 for costumes. Vicky agrees to accept £500 and confirm
that the balance of £100 will be written off. However, under Pinnel’s rule Vicky is still entitled
to claim the £100. The reasoning behind the rule is that Vicky is ‘giving’ something to Miriam
(a reduction in the debt) but what ids Miriam giving in return? As Miriam is not supplying
any form of consideration for the reduction in debt there is no valid agreement as to the part
payment so the original debt is still outstanding.
In Foakes v beer (1884) Foakes owed Beer £2,000 and they agreed he would repay by
instalments and Beer would do nothing more. Beer then asked for interest and Foakes
refused. Foakes was giving Beer no considerations to be allowed to pay by instalments;
therefore Beer was entitled to sue for the whole amount and to claim interest.
The above case should be compared with D & C Builders v Rees (1966), when builders were
owed £482 by Rees but agreed to accept £300 in full settlement as the builders were near
bankruptcy. The builders were liable to claim the balance of £182.
There is a subtle difference between these two cases. In Rees the reduction in payment had
been obtained by the use of economic pressure on the builders who had a cash-flow problem.
In Foakes there was no such pressure and the original arrangement as to payment by
instalments had been reached with mutual consent. It could be argued that the Rees decision
is correct but in Foakes some flexibility could, and should, have been allowed to Foakes, who
was trying to resolve the dispute on terms fair to both parties.
The law appreciates that Pinnel’s rule may seem harsh, so exceptions have been developed.
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Accord and satisfaction: if the debtor agrees to pay a smaller amount on a date earlier
than originally agreed or in cash when a cheque was originally agreed then the debtor
has provided consideration for the new agreement. Alternatively, if the creditor agrees
to accept something other than money for the whole debt this is good consideration
even if the item provided is not comparable in value to the debt. This is another
example of the rule about adequacy of consideration.
Promissory estoppel: if one party to an existing contract (promisor) promises to vary
the contract (for the other’s benefit) and the other party relies on that promise to vary
then the promisor cannot go back on their promise, i.e. the promisor is ‘estopped’ from
breaking the promise.
In Re Selectmove (1995) a company owed money to the Inland Revenue. An agreement was
reached that the tax owed would be paid by instalments and Selectmove commenced
payment. The Inland Revenue then claimed the whole debt, which would put Selectmove into
liquidation. Selectmove argued that it had relied on the Inland Revenue’s promise not to sue.
The Inland Revenue was not bound by the agreement and, applying the principle from Foakes,
the whole debt was due.
An existing duty
If a contractual party performs an existing duty (and no more) then this performance cannot
be consideration for a new contract. This is shown in the case of Stilk v Myrick (1809).
In the scenario, Vicky has contracted to manufacture twelve costumes for £600 (contract 1).
Vicky then discovers the cost of material has suddenly increased. As a result she asks id
Miriam agrees to pay an additional £10 per costume making a new total of £720 (contract 2).
Miriam agrees but then only pays the original amount of £600. Is the additional £120 due?
The court will ask what consideration both parties were giving for contract 2. Obviously
Miriam is paying the extra £120 but Vicky is manufacturing the costumes that she was
contracted to complete in any event. Vicky is merely performing her ‘existing duty’ and that is
not sufficient to be valid consideration for contract 2. The additional £120 is not payable.
Activities
1. Define consideration
2. Explain, in your own words, the difference between ‘adequacy’ and ‘sufficiency’ in
respect of consideration
3. Describe two examples of when Pinnel’s rule would not apply to part payment of a debt
4. A student wants to make holiday money so visits a property without warning, mows the
lawn, weeds and cleans the paths. He then asks the owner for payment who promises
him £20. Can the student insist on payment?