Paper 2.2 – Corporate and Business Law
By Ahmed Alasalli
Chapter 5 – Consideration and Doctrine of Privity
This article attempts to explain that an agreement requires five things before it amounts to a binding
contract:
1.
2.
3.
4.
5.
an agreement
consideration
intention to create legal relations
capacity
form
The basic rule
Every simple contract must be supported by consideration
Specialty contracts
Contracts made by deed do not require consideration unless the terms of the agreement require it.
Consideration
Consideration is the price paid by each party to the contract for the other party’s promise.
The crucial idea in consideration is exchange, i.e. on person does something, etc. because the other person
does something.
A more modern definition, and one which reflects more the importance of respective promises, rather than
the concept of benefit/detriment is: ‘consideration is an act or forbearance (or the promise of it) on the part
of one party to a contract as the price of the promise made to him by the other part to the contract’.
Executed consideration
- is given where a promise is made in return for the performance of an act.
The rules for consideration:
1.
2.
consideration must be valuable and sufficient but need not be adequate
consideration must move from the promisee
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Valuable consideration means something upon which a monetary value can be placed such as
rendering a service.
However, where the consideration for a transaction is highly inadequate it may raise a suspicion of
fraud, duress or undue influence on the part of the person gaining the advantage.
Valuable consideration must be distinguished from consideration in the moral sense. For example, a
promise from feelings of natural love and affection for the promisee is not legally enforceable, as
where a father promises to buy a house for his daughter who is homeless after her husband’s death.
If the parties make a bad economic bargain, the law will not intervene
The consideration provided must be sufficient in the sense that it must be something the law recognises
as consideration
Where a person has to do something by law the discharge of that duty will not amount to consideration
and cannot support a contract.
If an act, however, is performed over and above that required by law or public duty, the act is sufficient
consideration for any promise to confer a benefit in return.
A new contract requires new consideration
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Example: Williams v Roffey Brothers
Williams agreed to do some carpentry in a block of flats for Roffey at a fixed price of ₤20,000. There was
an agreed date by which the work was to be completed. The work ran late and Roffey agreed to pay an
extra ₤10,000 to ensure that the work was completed on time. If the work was not completed on time
Roffey would have suffered a penalty in his own contract with the owner of the flats.
Held: the Court of Appeal decided that even though Williams was in effect doing nothing over and above
the original agreement to complete the work by a completed time there was a new contract here for the
₤10,000. The court decided that both Williams and Roffey benefited from the new contract. Two reasons
are given:
1.
2.
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the consideration given by Williams was enabling Roffey to avoid the penalty sum-due to the owner of
the flats if the work was delayed. As such he provided ‘something new’
Roffey’s promise to pay the extra ₤10,000 had not been extracted by fraud or pressure.
performance of an existing contractual obligation is sufficient consideration to support a promise from
a third party. This means that were B is in agreement with C, but made or accepted an offer from A, B
is liable to A as well as C.
Past consideration is no consideration
Example: Re McArdle – a man and his wife spent ₤488 on improvements to a bungalow in which they
resided with the husband’s mother. When the mother died the house would become the joint property of the
husband, and his brothers and sisters. The man attempted to enforce a promise, to repay the cost of the
improvements, made by the brothers and sisters after the completion of the work. It was held that since all
the work had been carried out before the promise was made, this past consideration could not support the
later promise to reimburse the cost so as to bring a binding obligation into existence.
However, there are exceptions to the rule:
1.
2.
Bills of exchange
Past consideration is sufficient to support a written acknowledgement of a debt in order to re-start time
running for the purpose of the Limitations Act.
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The doing of, or promise of doing, an illegal act is insufficient to amount to consideration
The doctrine of privity of contract
The general rule is that only the parties to the contract can sue and be sued on the contract.
There are a number of exceptions:
1.
2.
3.
4.
Where the beneficiary under a contract sues in some other capacity, e.g. administrator
Where there is a valid assignment of the benefit of the contract. Basically a party to a contract can
transfer the benefit of the contract to a third party through formal process of assignment. The
assignment must be in writing, with the consent of the other party to the contract. The assignee
receives no better rights under the contract than the assignor.
Where one of the parties has entered the contract as trustee for a third party
Contract (rights of third parties) act 1999
a) the contract must expressly allow the third party to enforce the term
b) the term gives the third party a benefit
c) the third party must be expressly identified either by name or by description but need not be in
existence at the time the contract is made. E.g. rights to unborn children.
The part-payment problem
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the promise to accept payment of a smaller sum to discharge a debt for a larger amount is generally not
binding.
But:
a) the rule only applies to specified claims
b) the rule only applies to undisputed claims
Exceptions
Variation of terms at the creditor’s request (Accord and satisfaction)
Accord means an agreement which must be freely given.
Satisfaction means consideration
Where the payment of a lesser sum in discharge of a greater debt is accompanied by the introduction of
some new element at the creditor’s request, the new element is sufficient consideration to support the
creditor’s promise not to claim the balance. Such as:
1.
2.
3.
payment of the debt on a date earlier than that originally agreed
payment at a different place to that stipulated in the agreement
payment of a smaller sum accompanied by the transfer of another item, e.g. a book!
If the promise to accept less than is owed, or nothing at all, is made by deed it will be binding, because an
agreement made by deed does not require consideration.
Equitable doctrine of promissory estoppel
Promissory estoppel may operate to prevent a person going back on his promise to accept a lesser amount
at least for a period of time. The exact scope is unclear it is very rarely applied, and there are difficulties
with it as it does have certain limitations:
1.
2.
3.
it is a shield not a sword – this means that it is a defense and does no create new rights; it does not
create a new cause of action where none existed before
it may have only a suspensory effect – the obligation imposed by the original contract, later modified
by mutual agreement, may be reverted to after the promisor has given sufficient notice to the promisee
of his intention to do so, or where the situation giving rise to the modification comes to an end. The
future relationship between the parties is then governed by their original contract.
A party seeking to rely on promissory estoppel must also have acted fairly and in accordance with
equitable principles.