Beruflich Dokumente
Kultur Dokumente
Consideration
In contract law consideration is concerned with the bargain of the contract. A contract is
based on an exchange of promises. Each party to a contract must be both a promisor and
a promisee. They must each receive a benefit and each suffers a detriment. This benefit or
detriment is referred to as consideration.
'A valuable consideration in the sense of the law may consist of
For one party
some right,
interest, profit or
Benefit
For other party
some forbearance(an intentional delay in collecting debt or demanding performance
on contract),
detriment (loss, harm )
loss or responsibility given, suffered or undertaken by the other.
Legal detriment means to give consideration. Someone must either give up an existing right
or accept a dutyyou don't get something for nothing, you get something for something.
Each party that is bound to a contract must be giving up something for what they are going
to receive from the other party. The concept which underlies legal detriment basically says
that there is no binding contract without consideration.
For example, Mel's promise to drywall Jack's living room is the acceptance of a duty, which is
a form of consideration. Well, now that there is consideration, there must necessarily be
legal detriment. That's because legal detriment is the giving of consideration by one party to
another.
The other party, Jack, in this case, is now obligated to also give some type of consideration,
as outlined in the contract. In non-legal terms, this means Jack's got to promise to pay Mel
for the drywalling. So, Jack's promise to Mel is Jack'slegal detriment. Something to
remember for later: the consideration has to be something that a person is not already
obligated to do or give.
Using the language of purchase and sale, it could be said that one party must know that they
have bought the other party's promises either by performing some act of their own or by
offering a promise of their own.
An example of giving consideration by suffering detriment is in Carlill v Carbolic Smoke Ball
Company 1883. Mrs Carlill gave consideration by using the smoke ball as she was instructed.
Valid consideration
Valid consideration may be executed (an act in return for a promise) or executory (a promise
in return for a promise).
Executed consideration can be defined as follows.
'That which takes place at the present time. Thus in a contract for the sale of goods,
the consideration is executed if the price is paid at the same time that the goods are
delivered.'
Executory consideration is a promise given for a promise. The consideration in
support of each promise is the other promise, not a performed act.
If a customer orders goods which a shopkeeper undertakes to obtain from the
manufacturer, the shopkeeper promises to supply the goods and the customer
promises to accept and pay for them. Neither has yet done anything but each has
given a promise to obtain the promise of the other. It would be breach of contract if
either withdrew without the consent of the other.
Additional rules for valid consideration
As well as being either executed or executory, there are additional rules that must be met
for consideration to be valid:
Performance must be legal. The courts will not enforce payment for illegal acts
Performance must be possible. Agreeing to perform the impossible is not a basis for
a binding contract
Consideration must pass from the promisee
Consideration must be sufficient but not necessarily adequate
Past consideration
In three instances past consideration for a promise is sufficient to make the promise binding.
(a) Past consideration is sufficient to create liability on a bill of exchange
(such as a cheque) under The Bills of Exchange Act 1882. Most cheques are
issued to pay existing debts.
(b) After 6 (or, in some cases, 12) years the right to sue for recovery of a debt
becomes statute barred by the Limitation Act 1980. If, after that period, the
debtor makes written acknowledgement of the creditor's claim, the claim is
again enforceable at law.
(c) When a request is made for a service this request may imply a promise to
pay for it. If, after the service has been rendered, the person who made the
(a) Consideration need not be adequate (that is, equal in value to the consideration
received in return). There is no remedy at law for someone who simply makes a poor
bargain.
(b) Consideration must be sufficient. It must be capable in law of being regarded as
consideration by the courts.
Adequacy
It is presumed that each party is capable of serving their own interests, and the courts will
not seek to weigh up the comparative value of the promises or acts exchanged.
Thomas v Thomas 1842
Sufficiency
Consideration is sufficient if it has some identifiable value. The law only requires an element
of bargain, not necessarily that it should be a good bargain.
Chappell & Co v Nestle Co 1960
As stated earlier, forbearance or the promise of it may be sufficient consideration if it
has some value, or amounts to giving up something of value.
Horton v Horton 1961
Performance of existing statutory duties
Ilstration
If X owes Y 100 but Y agrees to accept a lesser sum, say 80, in full settlement of Y's claim,
there is a promise by Y to waive their entitlement to the balance of 20. The promise, like
any other, should be supported by consideration.
Foakes v Beer 1884
Re Selectmove 1994
There are, however, exceptions to the rule that the debtor (denoted by 'X' in the
following paragraphs) must give consideration if the waiver is to be binding.
Exceptions
1. Alternative consideration
Anon 1495 and Pinnel's Case 1602
If X offers and Y accepts anything to which Y is not already
entitled, the extra thing is sufficient consideration for the
waiver
Goods instead of cash
Early payment
2. Bargain between the creditors
Woods v Robarts 1818
If X arranges with creditors that they will each accept partpayment in full entitlement, that is bargain between the
creditors X has given no consideration but he can hold the
creditors individually to the agreed terms
3. Third-party part-payment
Welby v Drake 1825
If a third-party (Z) offers part-payment and Y agrees to release
X from Y's claim to the balance, Y has received consideration
from Z against whom they had no previous claim
4. Promissory estoppel
The principle of promissory estoppel may prevent Y from retracting
(withdrawing) their promise with retrospective effect.
Promissory estoppel
Various cases give us a set of rules to apply when determining whether the parties to a
contract intended to be legally bound by it.
Where there is no express statement as to whether or not legal relations are intended, the
courts apply one of two rebuttable presumptions to a case.
Note: A rebuttable presumption is an assumption of fact accepted by the court until
disproved. All presumptions can be characterized as rebuttable. It is an assumption that is
made in the law that will stand as a fact unless someone comes forward to contest it and
prove otherwise.
Social, domestic and family arrangements are not usually intended to be binding.
Commercial agreements are usually intended by the parties involved to be legally
binding.
Intention to create legal relations can be defined as follows.
'An agreement will only become a legally binding contract if the parties intend this to be so.
This will be strongly presumed in the case of business agreements but not presumed if the
agreement is of a friendly, social or domestic nature.'
Domestic arrangements
Husband and wife
Note: Where agreements between husband and wife or other relatives relate to property
matters the courts are very ready to impute an intention to create legal relations.
Relatives
Agreements between other family members may also be examined by the courts.
Jones v Padavatton 1969
Other domestic arrangements
Domestic arrangements extend to those between people who are not related but who have
a close relationship of some form. The nature of the agreement itself may lead to the
conclusion that legal relations were intended.
Simpkins v Pays 1955
Commercial agreements
When business people enter into commercial agreements it is presumed that there is
an intention to enter into legal relations unless this is expressly disclaimed or the
circumstances indicate otherwise.
Rose and Frank v Crompton 1923
The words relied on by a party to a commercial agreement to show that legal
relations are not intended are not always clear. In such cases, the burden of proof is
on the party seeking to escape liability.
Edwards v Skyways Ltd 1964
Care needs to be taken during the negotiation stage as to whether a contract is
intended. Use of the words subject to contract amounts to a strong presumption
that no immediately binding contract is intended.
RTS Flexible Systems Ltd v Molkerei Alois Muller GmbH 2010
Statutory provisions
Procedural agreements between employers and trade unions for the settlement of disputes
are not intended to give rise to legal relations, in spite of their elaborate content, under the
Trade Union and Labour Relations (Consolidation) Act 1992.
Letters of comfort
For many years, holding companies have given 'letters of comfort' to creditors of
subsidiaries which purport to give some comfort as to the ability of the subsidiary to pay its
debts. Such letters have always been presumed in the past not to be legally binding.
Kleinwort Benson Ltd v Malaysia Mining Corpn Bhd 1989
Transactions binding in honour only
If the parties state that an agreement is 'binding in honour only', this amounts to an express
denial of intention to create legal relations.
Jones v Vernons Pools 1938
Privity of contract
Benefit from a contract can be re-assigned from the original beneficiary to a third party if it
is in writing, it transfers the same or no more benefits to the new beneficiary and has the
consent of the other party.
Foreseeable loss to the third party
Road Traffic Act 1972: A person injured in a road accident may claim against the
motorist's insurers.
Married Woman's Property Act 1882: Permits husband and wife to insure his or her
own life for the benefit of the other under a trust which the beneficiary can enforce.
Contracts (Rights of Third Parties) Act 1999:
There is a two-limbed test for the circumstances in which a third party may
enforce a contract term.
1. Whether the contract itself expressly so provides
2. Where the term confers a benefit on the third party, unless it appears
that the contracting parties did not intend them to have the right to
enforce it
The third party must be expressly identified in the contract by
name, class or description, but need not be in existence when the
contract is made (for example, an unborn child or a future spouse).
The Act enables a third party to take advantage of exclusion
clauses as well as to enforce 'positive' rights.
The Act also protects third parties from the original parties
varying contract terms without their consent and the promisor is
protected from double liability. Damages awarded to the third
party will be reduced by the amount of damages already awarded
to the original promisee.
The Act does not confer third-party rights in relation to a
company's constitution, or employment contracts. So, for
example, a customer of an employer cannot use this Act to enforce
a term of a contract of employment against an employee.
Agency
In normal circumstances the agent discloses to a third party with whom they contract that
they are acting for a principal. The contract, when made, is between the principal and the
third party. The agent has no liability under the contact and no right to enforce it.
Covenants