Contract Law Week 2
Consideration and Promissory Estoppel
CONSIDERATION
Three Cardinal rules:
1) Consideration need not be adequate
2) Past consideration does not count
3) Is promise to perform a pre-existing duty consideration? (Controversial)
Requirement of form play a minor role in modern contract law.
Chappell & Co Ltd v Nestle Co Ltd 1960
Consideration need not be adequate. Chocolate wrappers can also be consideration,
even if they are thrown away after they are obtained.
Lord Somervell of Harrow: “a peppercorn does not cease to be good
consideration if it is established that the promise does not like pepper and will
throw away the corn”
N. Co. entered into a contract with a company manufacturing gramophone
records to purchase a number of recordings of a piece of dance music, the
copyright of which was vested in the plaintiffs. On the cards on which the
records were mounted there was an advertisement that the records could be
obtained by sending to N. Co. for each record 1s. 6d. together with three
wrappers from N. Co.'s 6d. milk chocolate bars. The wrappers when received
were worthless and were thrown away. The plaintiffs sought an injunction
restraining the two companies from manufacturing and selling the records on
the ground that the transactions involved breaches of copyright.
Held, there was no "ordinary retail selling price" within the Copyright Act 1956
s.8 because the 1s. 6d. was not the whole consideration for the sale of the
records, the wrappers – though of nominal value – were also part of the
consideration; accordingly, neither N. Co. nor the record manufacturers were
protected by the provisions of Copyright Act 1956 s.8.
Eastwood v Kenyon 1840
Past consideration does not count.
The claimant was the guardian of a girl under the age of 21. He took out a loan
from a Mr Blackburn for GBP140 to cover the costs of maintaining and educating
the girl and improving some cottages that had been left for her. After she had
come of age and on her marriage, her husband, the defendant, promised the
claimant to pay off the claimant’s debt to Mr. Blackburn. When he failed to do so,
the claimant sued him. The action failed because it was held that no present
(only past) consideration had been given by the claimant for the defendant’s
promise.
Reasoning, Lord Denman CJ: The enforcement of such promises by law, however
plausibly reconciled by the desire to effect all conscientious engagements, might
be attended with mischievous consequences to society; one of which would be
the frequent preference of voluntary undertakings to claims for just debts. Suits
would thereby be multiplied, and voluntary undertakings would also be
multiplied, to the prejudice of real creditors. The temptations of executors would
be much increased by the prevalence of such a doctrine, and the faithful
discharge of their duty be rendered more difficult.
PaO On v Lau Yiu Long 1980
What counts as past consideration?
The two parties entered into a contract in which the claimants (the Paos) would
sell their shares in Shing On to Fu Chip, in which the defendants (the Laus) had a
majority share and in return would get 4.2 million shares of $1 each in Fu Chip.
The market value of Fu Chip shares was deemed to be $2.5.
The arrangement was complicated. There was an agreement that Laus would
buy back 60% of the shares for $2.5. The claimants were not happy with this and
made it clear that they would not complete the main contract unless the
defendants agreed (which they did in a “guarantee agreement”) to cover the
claimants for any loss suffered if share price fell. Share price did fall, and the
claimants sough to enforce the guarantee agreement. The defendants resisted by
stating that the their promise to cover the claimants was not supported by
consideration because the consideration was past. It was held that the
consideration was NOT, in fact, past.
Held, that (1) an antecedent (past) act could be valid consideration where it was
done at the promisor's request, where the parties understood that such act was
to be remunerated by the conferment of a benefit and where such benefit would
have been enforceable if promised in advance; and such criteria were here
satisfied; (2) a promise to perform a contractual obligation for the benefit of a
third party was good consideration;
Glasbrook Brothers Ltd v Glamorgan Country Council 1925
On consideration and the promise to perform, or the performance of, a pre-existing
duty imposed by the general law.
During a miner’s strike, the defendant’s colliery manager requested that the
police should be billeted at the colliery so as to ensure that the colliery was kept
open. The police superintendent thought that adequate protection could be given
by having a mobile force ready, but he agreed to send over 70 policemen on the
condition that the defendant would pay for them. After the strike, the defendant
refused to pay arguing that the police was under a duty to provide adequate
policing so there was no consideration. The majority of the House of Lords held
that there was good consideration as the police had gone beyond their public
duty.
Reasoning, Viscount Cave LC: The question for the Court was whether on July 9,
1921, the police authorities, acting reasonably and in good faith, considered a
police garrison at the colliery necessary for the protection of life and property
from violence, or, in other words, whether the decision of the chief constable in
refusing special protection unless paid for was such a decision as a man in his
position and with his duties could reasonably take. If in the judgment of the
police authorities, formed reasonably and in good faith, the garrison was
necessary for the protection of life and property, then they were not entitled to
make a charge for it, for that would be to exact a payment for the performance of
a duty which they clearly owed to the appellants and their servants; but if they
thought the garrison a superfluity and only acceded to Mr. James' request with a
view to meeting his wishes, then in my opinion they were entitled to treat the
garrison duty as special duty and to charge for it.
Ward v Byham 1956
On consideration and the promise to perform, or the performance of, a pre-existing
duty imposed by the general law.
When the unmarried parents of an illegitimate child, Carol, split, the father wrote
to the mother saying that he’ll give her GBP1 a week in provided she can prove
that Carol will be “well looked after and happy and is allowed to decide for
herself whether or not she wants to live with you”. When the mother remarried,
the father stopped paying the 1 pound. She sued, and the action succeeded, the
court of appeal holding that the mother looking after the child (although in Lord
Denning’s view merely performing her statutory duty) constituted good
consideration for the father’s promise.
Lord Denning LJ: I have always thought that a promise to perform an existing
duty, or the performance of it, should be regarded as good consideration,
because it is a benefit to the person to whom it is given.
Williams v Williams 1957
On consideration and the promise to perform, or the performance of, a pre-existing
duty imposed by the general law.
A wife deserted her husband. A few months later they agreed that the husband
would pay the wife 1 pound 10 s a week for their joint lives as long as the wife
led a chaste life. The wife promised to use the money to maintain herself and not
to pledge her husbands credit. When the husband stopped paying, the wife sued
him and won. The courts held that the wife was providing consideration even
though she was merely performing her legal duty to maintain herself.
Shadwell v Shadwell 1860
On consideration and the promise to perform, or the performance of, a pre-existing
duty under a contract with a third party.
An uncle wrote to his nephew as follows: ‘ I am glad to hear of your marriage to
Ellen Nicholl. As I promised to assist you at starting, I will pay you one fifty
pounds a year until you start earning six hundred Guineas a year’. On his uncle’s
death, the nephew claimed money from his estate stating that his uncle had not
paid the full early income promised.
In allowing his claim, held that the uncle’s promise was supported by good
consideration constituted by the nephew marrying Ellen Nicholas.
Stilk v Myrick 1809
On consideration and the promise to perform, or the performance of, a pre-existing
duty under a contract with the promisor. Promise to pay more for a pre-existing
duty.
Stilk was contracted to work on a ship owned by Myrick for £5 a month,
promising to do anything needed in the voyage regardless of emergencies. After
the ship docked at Cronstadt two men deserted, and after failing to find
replacements the captain promised the crew the wages of those two men divided
between them if they fulfilled the duties of the missing crewmen as well as their
own. After arriving at their home port the captain refused to pay the crew the
money he had promised to them. Held that he did not have to as the defendants
provided no good consideration by performing what they were already
contractually bound to do.
Held that the crew only did there pre-existing duty, and there was no good
consideration.
Williams v Roffey Bros & Nicholls (Contractors) Ltd 1991
On consideration and the promise to perform, or the performance of, a pre-existing
duty under a contract with the promisor. Promise to pay more for a pre-existing
duty.
R appealed against judgment in favour of W for payments arising out of a
building contract. W was engaged by R, building contractors to carry out
carpentry work. W was offered bonus payments by R when it became apparent
that W's financial difficulties would make it unlikely that the work would be
completed in time and therefore R would be penalised under the main contract.
R failed to make the promised payments and W ceased work. R's grounds of
appeal were that W had substantially completed the work and the promise to
pay the bonus was unenforceable.
Held, dismissing the appeal, that a promise to make bonus payments was
enforceable when the promisor obtained a benefit or obviated a disbenefit
where the promise had not been obtained by fraud or duress. On the facts R had
obtained a benefit and so there was consideration to support the agreement to
make bonus payments to W.
Foakes v Beer 1884
Dr Foakes owed Mrs Beer £2090 plus interest until the sum was paid off. Him
and Mrs Beer agreed that if he paid £500 upfront and £150 twice a year until the
sum was paid off, she would not sue for the interest. After he had paid off the
sum, Mrs Beer sued for the interest. The HoL held that there was no good
consideration for their agreement and hence she was entitled to the interest.
The judges based their decision on the doctrine stated by Lord Edward Coke,
which states that a lesser sum cannot be paid on the day in satisfaction of the
whole. However, paying quicker or paying at a specific place however can make
the lesser sum sufficient.
Re Selectmove Ltd 1995
Selectmove Ltd owed Inland Revenue substantial sums of income tax and
national insurance contributions. At a meeting, it was agreed that Selectmove
would pay future tax as it fell and that the arrears would be paid off at a rate of
£1000 per month. Inland Revenue’s representative said that he would speak to
his supervisors and let the company know if the proposal was unacceptable to
them. No further communication took place till a few months later when the
Revenue wrote demanding the full payment immediately and threatening a
winding-up of the company of payment wasn’t made. The company argued that
an agreement had been reached, which the court of appeal rejected as there was
(among other things) no consideration for the agreement.
Rejected the argument that the Willaims v Roffey principle can be extended to a
case in which there is promise to accept less, even if there is a practical benefit to
the party accepting less, as it would render Foakes v Beer without any
application.
ESTOPPEL
Ingredients:
1) It is not a cause of action
2) The promise must be clear and unequivocal
3) The promise must have relied on the promisee
4) The promise must not have induced the making of the promise by
unequivocal conduct
5) It is open to debate whether the doctrine’s effect is extinctive rather than
suspensory only
Hughes v Metropolitan Rly Co 1877
The emergence of promissory estoppel. Where a notice to repair has been given,
and the lessee makes an offer to sell his interest in the premises, and a negotiation
takes place on that offer, the effect of that offer and the negotiation is to suspend
the notice till the negotiation has been terminated, from which event alone the date
of the notice can properly be calculated. Equity will relieve against an ejectment
founded on the original notice.
A notice to repair, within six months, houses held on lease by the Metropolitan
Railway Company, was given on the 22nd of October, 1874, to expire on the 22nd
of April, 1875. It was answered by a letter of the 28th of November, suggesting
that the lessor might like to purchase the premises. Negotiations broke down on
the 31st of December. No further communication on this subject took place till
the 19th of April, 1875, when the agent for the company (the defendant) wrote
to say that as “the negotiations had not resulted in a sale” the company would
take in hand the repairs. On the 22nd of April the notice expired, and on the 28th
the ejectment was served. Appeal was dismissed.
Reasoning, Lord Cairns LC: It is the first principle upon which all Courts of Equity
proceed, that if parties who have entered into definite and distinct terms
involving certain legal results—certain penalties or legal forfeiture—afterwards
by their own act or with their own consent enter upon a course of negotiation
which has the effect of leading one of the parties to suppose that the strict rights
arising under the contract will not be enforced, or will be kept in suspense, or
held in abeyance, the person who otherwise might have enforced those rights
will not be allowed to enforce them where it would be inequitable having regard
to the dealings which have thus taken place between the parties. My Lords, I
repeat that I attribute to the Appellant no intention here to take advantage of, to
lay a trap for, or to lull into false security those with whom he was dealing; but it
appears to me that both parties by entering upon the negotiation which they
entered upon, made it an inequitable thing that the exact period of six months
dating from the month of October should afterwards be measured out as against
the Respondents as the period during which the repairs must be executed.
Central London Property Trust Ltd v High Trees House Ltd 1947
A promise which was intended to create legal relations and which was acted on
was binding in law, despite the absence of consideration.
The plaintiff lessor (C) sought to recover rent from the defendant lessee (H). By a
lease made in 1937, C had granted H a tenancy of a block of flats in London for a
term of 99 years at a ground rent of £2,500 a year. The block of flats was a new
one and was not fully occupied at the start of the Second World War owing to the
absence of people from London. With war conditions prevailing, it was apparent
to those responsible that the rent under the lease could not be paid out of the
profits of the flats, and discussions took place between the directors of C and H
which resulted in an written arrangement whereby the ground rent would be
reduced as from the commencement of the lease to £1,250 per annum. H paid the
reduced rent from 1941 to the beginning of 1945, by which time all the flats in
the block were fully let, and continued to pay it thereafter. C sought to recover
£625, being the difference between rent at the rate of £2,500 per annum and rent
at the rate of £1,250 per annum for the last two quarters of 1945. By its defence
H pleaded that there had been an agreement that the rent should be £1,250 only
and that such agreement related to the whole term of the lease. In the
alternative, H asserted that C was estopped from alleging that the rent exceeded
£1,250 per annum.
Judgment for plaintiff. There had been a series of decisions over the last 50 years
which, although they were said to be cases of estoppel, were not really such.
They were cases in which a promise was made which was intended to create
legal relations and which, to the knowledge of the person making the promise,
was going to be acted on by the person to whom it was made and which was in
fact acted on. In such cases, the courts had said that the promise had to be
honoured. In each case, the court held the promise to be binding on the party
making it, even though under the old common law it might be difficult to find any
consideration for it. The courts had not gone so far as to give a cause of action in
damages for the breach of such a promise, but they had refused to allow the
party making it to act inconsistently with it. It was in that sense, and that sense
only, that such a promise gave rise to an estoppel. The time had now come for
the validity of such a promise to be recognised. The logical consequence, no
doubt, was that a promise to accept a smaller sum in discharge of a larger sum, if
acted on, was binding notwithstanding the absence of consideration; and if the
fusion of law and equity led to that result, so much the better. A binding promise
had been made in the instant case. As to the scope of that promise, the evidence
showed that C had agreed that the ground rent would be reduced to £1,250 a
year as a temporary expedient while the block of flats was not fully, or
substantially fully, let owing to the conditions prevailing. When the flats became
fully let, early in 1945, the reduction ceased to apply. Rent was therefore payable
at the full rate for the last two quarters of 1945.
Collier v P & MJ Wright Ltd 2008
The appellant (C) appealed against a decision not to set aside a statutory demand
served on him by the respondent (W). W had obtained a judgment by consent
against three partners of whom C was one. The partners' liability was joint. The
consent order provided for the three partners to pay the judgment debt by
monthly instalments. C had paid a third of the debt by instalments. His partners
had become bankrupt. W served a statutory demand on C for the balance of the
judgment debt. C applied to set aside the demand relying on an alleged
agreement by W that if C continued to pay his share of the judgment W would
not look to him but only to his partners for the balance. C submitted that (1) his
alleged agreement with W was binding because by agreeing to accept sole
responsibility for his one-third share he gave consideration for W's promise to
accept him as a debtor for only a one-third share of the judgment debt; (2) a
promissory estoppel prevented W from proceeding against him for more than a
one-third share of the debt.
Appeal allowed. (1) The mere fact that a creditor agreed with a joint debtor to
accept payment from him alone of his proportionate share did not result in a
binding agreement. The alleged agreement made between C and W was merely
to accept a lesser sum from C than that which was due and that was not a binding
agreement in law since it had no consideration to support it. (2) There was a real
prospect of success on the promissory estoppel issue. It was arguable that there
was an agreement or representation by W not to sue C for the full judgment sum.
It could be sufficient reliance for the purpose of promissory estoppel if a lesser
payment was made as agreed, provided there was an accord. It was arguable that
it would be inequitable for W to resile from its promise.
Combe v Combe 1951
Promissory estoppel is not a cause of action
High trees principle1
When a promise is given which:
1) Is intended to create legal relations
2) Is intended to be acted upon by the promisee
3) Is in fact so acted upon
The promisor cannot bring an action against the promisee which involves the
repudiation of his prose or is inconsistent with it
The principle stated by Denning, J., in Central London Property Trust v. High
Trees House, does not create new causes of action where none existed before. It
only prevents a party from insisting on his strict legal rights when it would be
unjust to allow him to do so having regard to the dealings which have taken
place between the parties. In none of the decided cases was the defendant sued
on a promise, assurance or assertion as a cause of action in itself. He was sued for
some other cause, for example, a pension or a breach of contract, or possession,
and the promise, assurance or assertion only played a supplementary role,
though, no doubt, an important one. That is its true function. It may be part of a
cause of action, but it is not a cause of action in itself. The principle is that where
one party has, by his words or conduct, made to the other a promise or
assurance which was intended to affect the legal relations between them and to
be acted on accordingly, then, once the other party has taken him at his word and
acted on it, the one who gave the promise or assurance cannot afterwards be
allowed to revert to their previous legal relations as if no such promise or
assurance had been made by him, but must accept their legal relations subject to
the qualification which he himself has so introduced, even though the promise or
assurance is not supported in point of law by any consideration.
Combe v Combe
1
Central London Property Trust v. High Trees House [1947-51] C.L.Y. 5601
This was the first case to make clear that, in English law, promissory estoppel does
not create a cause of action. This is sometimes expressed by saying that it operates
only as a defence or, in a description approved by Birkett LJ in this case, as a ‘shield
and not a sword’. To found a cause of action a promise must therefore be supported
by consideration (or made by deed). But as Denning LJ’s judgement clarified, this is
not to say that promissory estoppel can be used only by defendants and not
claimants, What is essentially meant is that it applies only to promises to forgo
one’s existing rights.
A divorced husband agreed in writing in 1943 to allow his former wife GBP 100 a
year free of tax by way of permanent maintenance. Being aware that he was not
then in good financial circumstances, she made no claim to permanent
maintenance then. But in 1950 she brought an action on the agreement claiming
arrears under it. Held, the wife could only enforce the agreement in writing for
the payment of maintenance if there was consideration for it; there was no
evidence of any intention by the husband that the wife should forbear from
applying to the Court for maintenance, or, in other words, any request by the
husband, express or implied, that the wife should so forbear; her forbearance
was not intended by him, nor was it done at his request; therefore, it did not
amount to consideration for the husband's promise (and as the high trees
principle did not apply, she needed consideration). As a result the wife could not
recover the arrears.
Reasoning, Denning LJ: The principle, as I understand it, is that, where one party
has, by his words or conduct, made to the other a promise or assurance which
was intended to affect the legal relations between them and to be acted on
accordingly, then, once the other party has taken him at his word and acted on it,
the one who gave the promise or assurance cannot afterwards be allowed to
revert to the previous legal relations as if no such promise or assurance had been
made by him, but he must accept their legal relations subject to the qualification
which he himself has so introduced, even though it is not supported in point of
law by any consideration but only by his word.
Crabb v Arun District Council 1976
According to Denning LJ’s view and unlike Scarman LJ’s vie, it is better to
categorise this case as involving a proprietary rather than promissory estoppel. It
is established that proprietary estoppel – which concerns conferring rights over
one’s land – does create a cause of action.
A landowner, who induces another to believe that a right of access will be given
over the landowner's land, may be estopped from denying the existence of such
right where the other has acted to his detriment in reliance upon the assurance
given. The plaintiff and the defendants owned adjoining areas of land, the
northern boundaries of which adjoined a public highway. The defendants
proposed to build a road along the boundary with the plaintiff's land and the
plaintiff was granted a right of access at a defined point from the northernmost
position of his land to the roadway. The plaintiff desired to sell his land in two
lots and in negotiations with the defendants was assured that a gap would be left
in a proposed boundary fence adjoining the southern portion of the plaintiff's
land and that there would be a right of access from such southern portion to the
new road. Pursuant thereto when the fence was erected a gap was left at the
agreed point and gates constructed. In reliance upon the defendant's assurance
the plaintiff sold the northern portion of his land without reserving any right of
way thereover to the public highway; in the result the only means of access from
the southern portion to the public highway was via the agreed gap in the fence
on to the road constructed by the defendants. Subsequently the defendants
closed the gap in the fence and refused to allow the plaintiff access to the road
unless he paid GBP 3,000 for such right. The plaintiff sought a declaration that he
was entitled to such right of access and an injunction to enforce that right.
Held, granting the declaration and injunction sought, that for over a year the
defendants had not indicated their intention to resile from their assurance that
access would be allowed and that, the plaintiff having acted to his detriment in
reliance thereon, the defendants were estopped from denying the right of access;
that the damage suffered by the plaintiff as a result of his being denied access
exceeded any sum he could reasonably be expected to pay towards the cost of
providing access and accordingly the plaintiff was not required to make any
payment prior to the granting of the injunction.
Amalgamated Investment & Property Co v Texas Commerce International
Bank Ltd 1982
The claimant (AIP) requested the defendant bank to make a loan to AIP’s
subsidiarity (ANPP) in the Bahamas, agreeing under a guarantee that it would
pay on demand all money owed to the bank by ANPP. The banks subsidiarity in
the Bahamas (Portsoken) made the loan, and AIP and the bank assumed that the
guarantee applied to Portsoken as well. When the bank sought to enforce the
guarantee, AIP argued that it was not liable in the guarantee and sought a
declaration that the guarantee did not apply to Portsoken. Court of appeal held
that, even if it didn’t apply (which it held that it did), AIP was estopped from
denying that the guarantee applied.
Reasoning, Lord Denning: When the parties to a contract are both under a
common mistake as to the meaning or effect of it - and thereafter embark on a
course of dealing on the footing of that mistake - thereby replacing the original
terms of the contract by a conventional basis on which they both conduct their
affairs, then the original contract is replaced by the conventional basis. The
parties are bound by the conventional basis. Either party can sue or be sued
upon it just as if it had been expressly agreed between them.
The doctrine of estoppel is one of the most flexible and useful in the armoury of
the law. But it has become overloaded with cases. That is why I have not gone
through them all in this judgment. It has evolved during the last 150 years in a
sequence of separate developments: proprietary estoppel, estoppel by
representation of fact, estoppel by acquiescence, and promissory estoppel. At the
same time it has been sought to be limited by a series of maxims: estoppel is only
a rule of evidence, estoppel cannot give rise to a cause of action, estoppel cannot
do away with the need for consideration, and so forth. All these can now be seen
to merge into one general principle shorn of limitations. When the parties to a
transaction proceed on the basis of an underlying assumption - either of fact or
of law - whether due to misrepresentation or mistake makes no difference - on
which they have conducted the dealings between them - neither of them will be
allowed to go back on that assumption when it would be unfair or unjust to allow
him to do so. If one of them does seek to go back on it, the courts will give the
other such remedy as the equity of the case demands.
Baird Textile Holdings Ltd v Marks & Spencer plc 2001
B, who had supplied clothing to M&S for 30 years until M&S terminated the
arrangement without warning, appealed against a finding dismissing their
argument that there had been an implied contract requiring M&S to give
reasonable notice of termination. M&S cross appealed in respect of a finding that
the issue of whether they should be estopped from terminating the arrangement
without giving reasonable notice should proceed to trial. The court held,
dismissing B's appeal and allowing M&S's cross appeal, that the alleged
obligation on the part of M&S to acquire clothing from B was insufficiently
certain to found either a contractual obligation or a claim based on estoppel.
Firmly rejects the view that under present English law promissory estoppel can be
used as a cause of action. Yet Mance LJ suggests that Walton Stores might have
been decided in the same way in England. Do you agree with his reasoning on this
point.
The court of appeal here accepted that different principles apply to different types
of estoppel. Do you agree with this approach?
Woodhouse AC Israel Cocoa Ltd SA v Nigerian Produce Marketing Co Ltd
1972
To found a promissory estoppel a representation had to be clear and unequivocal.
To found a promissory estoppel, a representation must be clear and unequivocal,
and if a representation is not so made, it matters not that the representee should
have misconstrued it and relied upon it. W were English cocoa buyers, and N.P.
were Nigerian sellers. Before 1967 the contract prices were stated in GBP
Nigerian, which were equal in value to GBP Sterling. In anticipation of
devaluation, W asked that payment might be made in Sterling, and N.P. agreed.
Later, devaluation having taken place, N.P. refused to release shipments until
payment was made in the amount of Sterling equivalent to the full contract value
in GBP Nigerian. W contended that they need only pay on the basis of GBP 1
Sterling for GBP 1 Nigerian.
Held, that the representation had not been sufficiently precise to found a
variation of the contracts, or an estoppel.