Saturday, May 26, 2012

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

























[1] http://legal-dictionary.thefreedictionary.com/consideration
[2] Williams v Roffey Bros & Nicholls (Contractors) Ltd [1991] 1 QB 1

[3] Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387

[4] Chappell & Co Ltd v Nestle Co Ltd [1960] AC 87

[5] Pao On v Lau Yiu Long [1980] AC 614

[6] Stilk v Myrick [1809] EWHC KB

[7] S Fafinski and E Finch, Contract Law (2nd edn, Pierson Education Ltd, 2010)

[8] Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130

[9] Combe v Combe [1951] 2 KB 215

[10] Foakes v Beer (1884) 9 App Cas 605

[11] Baird Textile Holdings Ltd v Marks & Spencer plc [2001] EWCA Civ 274


[13] Hughes v Metropolitan Railway Co (1877) 2 AC 439

[14] Collier v P & M J Wright (Holdings) Ltd [2008] 1 WLR 643

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