Contract Law - Essay by Andreea Bostan www.bostico.co.uk
QUESTION
1
Consideration is an essential element for the
formation of a contract, often considered the touchstone of enforceability. “
It may consist of a promise to perform a desired act or a promise to refrain
from doing an act that one is legally entitled to do. In a bilateral
contract—an agreement by which both parties exchange mutual promises—each
promise is regarded as sufficient consideration for the other. In a unilateral
contract, an agreement by which one party makes a promise in exchange for the
other's performance, the performance is consideration for the promise, while
the promise is consideration for the performance”[1]
Several
changes in contract jurisprudence challenge this classical model, most
importantly the ‘practical benefit’ test in Williams
v Roffey[2] in the context of
contractual modification, and the continued importance placed on promissory
estoppel and particularly the case of Walton
Stores v Maher[3].
Classical model of contractual
consideration.
In the
paradigm contract model, consideration is a benefit provided to the promisor or
a detriment suffered by the promisee that is deemed sufficient to render a
promise enforceable as a contract (Chappell
v Nestle[4]). The
consideration must move from the promisee to the promisor, and the act must
have been performed at the express or implied request of the promisor. (Pao On v Lau Yiu Long[5]). The classical
model also states that the performance of an existing duty owed to the promisor
is not good consideration for a new promise (Stilk v Myrick[6]).
This
requirement of consideration has arguably been limited in the context of
contractual modifications. In the case of Williams
v Roffey the court held that in contractual negotiations, there will be
consideration for a new promise where the promisee provides a practical –
rather than legal – benefit to the promisor. On the facts of the case the court
construed completion of existing contractual duties of the promisee as factual
benefit: it held that the continued performance, the avoidance of trouble and
expense of finding substitute performance, and the avoidance of imposition of a
penalty by a third party as a result of delayed performance constituted
‘practical benefit’. It has been argued that this broad conception of practical
benefit has the effect of moving away from and undermining the classical
requirement of consideration, since it is plausible that practical benefit can
be found in all contractual renegotiation contexts and that new promises are
therefore supported without traditional legal consideration.
Consideration
must not be in the past, as generally it has no legal value. Past consideration
cannot be used to form a contract. Normally a conditional consideration is
considered as valid consideration.
Consideration
must also be adequate and it must be of some value, regarless of wheather this
is minimal or not. Generally speaking Courts will see nominal consideration as
“good” consideration and therefore binding in a contract.
Generally,
promised performance of existing duty or performing a
pre-existing duty owed to one's contracting party is not sufficient to make a
good consideration (Collins v Godefroy).
Stilk
v Myrick sets the general rule according
which if a creditor promises to discharge a debt for a portion of payment, – which
he/she then pays - the promisee is not providing consideration for the promise
– and the debtor is still liable for the full sum. He/she e cannot force the promisor to accept a lesser amount. As with
any rules, there are also exceptions, and these are in force when:
·
“ a public duty is exceeded”
·
“ a contractual duty is exceeded”
·
“there is an existing contractual duty owed to a third party”
·
“where Williams v Roffey
applies”[7]
The
requirement of consideration has been challenged in the context of promissory
estoppel. Promissory estoppel (translation
from French) is an equitable contract doctrine which prevents a party from
resiling from a representation despite the absence of consideration from the
counter-party.
It can
come into operation only when the following three conditions are satisfied:
·
the party has made a clear promise or representation to the
counter-party;
·
the counter-party has acted in reliance on that representation;
·
it would be inequitable for the party to resile from that representation
(Central London Property Trust v High
Trees House[8]).
Promissory
estoppel has traditionally been of limited importance to the doctrine of
consideration because of its limitation to use as a shield rather than a sword;
a promissory estoppel claim can generally only be used as a defence to an
action (Combe v Combe[9]) rather than the
foundation of an action. This places intrinsic limits on its scope. However,
promissory estoppel can be used to enforce representations made in a Foakes v Beer[10] type contractual
negotiation where the promisor agrees to relieve the promisee’s obligation to
make full repayment of a debt, and thereby undercuts the rule in that case that
a contract for discharge of a debt upon part-payment is not enforceable for
want of consideration. In addition, the Australian case of Walton Stores v Maher allowed the claimant to use a promissory
estoppel claim to found an action – i.e. allowed it to operate as a sword in
addition to a shield – and although this argument has been rejected in the
English courts (Baird Textile Holdings v
Marks and Spencer[11]) it has been
argued that an increased use of promissory estoppel in contract would be
consistent with the doctrine of proprietary estoppel in land law.
As
proven in this essay, the above named mechanisms of consideration have been used
by the judiciary system in order to enable them to distinguish between business
dealings and gifts.
QUESTION
2
There
are two central questions in this case scenario for which Dives (D) requires
advice. The first is the question of whether the agreement made between D and L
to charge a lower rent is binding on D, and in the event that it is found not
be binding, whether D can claim the difference between the lower amount and the
higher initial charge. The second question is whether the agreement to accept a
lower purchase price for the skidoo is binding on D as an agreement to
discharge a debt. I shall address each of these in turn.
In
relation to the first question, the standard rule is that part-payment of a
debt is insufficient consideration for a promise by the promisor to relieve the
remainder (Foakes v Beer[12]). Although in this case it may
be that the hire contract for the speedboat is not structured as a debt – it
requires a payment of £25pw to be made by L for four years – it is for all
relevant purposes analogous to the debt payment cases as a ‘the same for less’
contractual renegotiation. Prima facie, D should not be bound to the
renegotiated price because L has not provided consideration.
However,
the rule in Foakes v Beer has been criticized on the ground that part-payment
is generally of benefit to the promisor, and that the rule is therefore
inconsistent with the ruling in Williams v Roffey that practical benefit – such
as the continued payment rather than the total cessation of performance – is
valid consideration in the context of renegotiations. In addition, L may be
able to claim the doctrine of promissory estoppel to argue that it would be
inequitable for D to resile from the promise that he made to L to reduce the
contract price since L has acted in reliance on the contract price (Hughes v
Metropolitan Properties[13]). Subject to proving reliance
on the representation, it would seem that L’s promissory estoppel argument is
strengthened by the holding of Lady Justice Arden in Collier v Wright[14] that in such cases of
contractual modification the requirement of inequitability is removed. The
result is that L does not need to demonstrate – as he is unlikely to be able to
do, having subsequently won the lottery – that it would be inequitable for D to
resile from the agreement to lower the rental price to £15pw. I would therefore
advice D that it is likely that the agreement entered into between himself and
L to lower the rental price will be held to be binding on him, and that he will
be unable to claim the difference in the higher and lower contract prices as damages.
In
relation to the second question, it seems prima facie that a similar analysis
would apply. In this case, the facts directly fit the Foakes v Beer model of an
agreement to relieve an existing debt where there is only the payment of
pre-existing debt offered as consideration by the promisee. However, it is
similarly likely that L will have the benefit of a promissory estoppel claim –
strengthened by the holding in Collier v Wright – that will prevent D from
claiming the original contract price for the skidoo: the promissory estoppel
claim is particularly strong in this second question because of the receipt
provided by D which states that the final payment represents ‘full
satisfaction’ of the debt. The receipt constitutes a clear and unambiguous representation.
In addition, it appears that the requirement of L to pay in an alternative form
– by cheque – could be construed as provision of direct legal consideration for
this contract alteration. In this case, the alteration would be directly
supported by consideration provided by L at the request of D. I would advise D
that this second agreement is highly likely to be found binding on D.
Bibliography
1.
Baird
Textile Holdings Ltd v Marks & Spencer plc [2001] EWCA Civ 274
2.
Central
London Property Trust Ltd v High Trees House Ltd [1947] KB 130
3.
Chappell
& Co Ltd v Nestle Co Ltd [1960] AC 87
4.
Collier v P
& M J Wright (Holdings) Ltd [2008] 1 WLR 643
5.
Combe v
Combe [1951] 2 KB 215
6.
Foakes v
Beer (1884) 9 App Cas 605
7.
Hughes v
Metropolitan Railway Co (1877) 2 AC 439
8.
Pao On v
Lau Yiu Long [1980] AC 614
9.
Stilk v
Myrick [1809] EWHC KB
10.
Waltons
Stores (Interstate) Ltd v Maher (1988) 164 CLR 387
11.
Williams v
Roffey Bros & Nicholls (Contractors) Ltd [1991] 1 QB 1
12.
M
Chen-Wishart, Contract Law (1st edn
OUP, Oxford 2005)
13.
E McKendrick,
Contract Law: Text, Cases and
Materials (4th edn OUP, Oxford 2010)
14.
J Poole, Textbook on Contract Law, (10th edn OUP, Oxford 2010)
15.
S Fafinski
and E Finch, Contract Law (2nd
edn, Pierson Education Ltd, 2010)
16.
LL Fuller,
‘Consideration and Form’ (1941) Columbia Law Review 799
17.
W Wright,
‘Ought the Doctrine of Consideration to be Abolished from the Common Law?’
(1936) HLR 1225
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