LAW OF CONTRACT

Consideration

General Rule

In English law a promise is not as a general rule binding as a contract unless it is:

Supported by some consideration something of value promised in return

by the offeree, or

Made by deed.

Adequacy

Under the doctrine of consideration a promise has no contractual force unless some
value is attached to it.

However the courts do not in general ask whether adequate value has been given so
that if A offers to sell B his bicyle which has been valued at 100 for 50 and B
accepts this will normally be regarded as a binding contract.

Even items of trivial value can be consideration as shown in the following case:

Chappell & Co Ltd v Nestle Co Ltd (BAILII: [1959] UKHL 1 ) [1960] AC 87

Nestle Co Ltd (Nestle) ran a sales promotion whereby if persons sent in three
chocolate bar wrappers and a postal order for 1 shilling 6 pence they would be sent
a record. Chappell & Co Ltd (Chappell) owned the copyright in one of the records
offered and disputed the right of Nestle to offer the records seeking an injunction to
prevent the sales of the records which normally retailed at 6 shillings 8 pence. Under
Section 8 of the Copyright Act 1956 retailers were protected from breach of copyright
if they gave notice to the copyright holders of the ordinary retail selling price and
paid them 6.25% of this. Nestle gave notice stating the ordinary selling price was 1
shilling 6 pence and three chocolate bar wrappers. The question was whether the
chocolate bar wrappers formed part of the consideration. If they did it was impossible
to ascertain the value they represented and therefore Nestle would not have
complied with their obligation to give notice of the ordinary retail selling price. If the
wrappers were a mere token or condition of sale rather than part of the
consideration, the notice would be valid and Nestle could sell the records.

It was held that the wrappers did form part of the consideration as the object was to
increase sales and therefore they provided value. The fact that the wrappers were
simply to be thrown away did not detract from this. Therefore Chappell were granted
the injunction and Nestle could not sell the records as they had not complied with the
notice requirements under Section 8.

Consideration must be of some Value

Thomas v Thomas (1842) 2 Q.B. 851

John Thomas shortly before dying orally expressed a desire for his wife to have
either the house used as their residence and its contents or 100 in addition to the
other provisions made for her in his will. After his death the executors of his estate

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entered into an agreement with his wife in consideration of John's desires whereby
they would convey the house to his wife and she would in return maintain the house
and pay 1 a year for the "ground rent".
The executors changed their minds and refused to complete the conveyance
claiming that consideration was lacking and the issue before the court was:

Was respecting the wishes of her dead husband (motive) sufficient

consideration?

Did the passing of the house under the will constitute a voluntary gift with the
result that the wife had no rights?
The court held that:
Motive is not the same as consideration; consideration must be something which
is of value in the eyes of the law; but
The agreement entered into between the executors and Mrs Thomas contained
an undertaking to pay 1 rent a year which showed this was not merely a
voluntary gift. It was sufficient consideration although the desire of John Samuel
for his wife to inherit the house was not.

Performance of a duty imposed by law is not good consideration

An example of this is the following case:

Collins v Godefroy (BAILII: [1831] EWHC KB J18 ) 109 ER 1040, (1831) 1 B & Ad
950

Collins had been required to attend court as a witness in a court case involving the
defendant, Godefroy. Godefroy had sued his lawyer for malpractice and Collins was
required by the court to attend as an expert witness. In fact Collins never gave
evidence but was required to be on standby for six days in case he was called. After
the trial Collins gave Godefroy an invoice to cover his time spent at court and
demanded payment by the next day. Without giving him the full day to pay Collins
commenced an action to enforce payment.

The court held that Collins was under a public duty to attend court. Where there
exists an existing public duty this can not be used as consideration for a new
promise. Godefroy was not required to pay him.

Past Consideration

Past consideration is not in general good consideration:

If A makes a present of a car to B and and a year later B promises to pay A 500 for
it there is no consideration for Bs promise as A did not give B the car in return for it.

Re McArdle [1951] Ch. 669

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Mrs Majorie McArdle carried out certain improvements and repairs on a bungalow.
The bungalow formed part of the estate of her husband's father who had died
leaving the property to his wife for life and then on trust for Mrs McArdle's husband
as well as his four brothers and sisters. After the work had been carried out the
brothers and sisters signed a document stating that in consideration of Mrs McArdle
carrying out the repairs they agreed to the executors paying her 480 from the
proceeds of sale. However the payment was never made.

It was held that the promise to make payment came after the consideration had been
performed; therefore the promise to make payment was not binding. Past
consideration is not valid.

However in certain circumstances the past consideration rule can be sidestepped

where an act is performed in response to an express or implied promise of payment
and the payment is subsequently fixed.

Pao On v Law Yiu Long [1980] AC 614

The claimants had promised the defendants that for one year they would not sell
shares in a certain company of which the defendants were the principal
shareholders. This promise was made at the request of the defendants who were
anxious to prevent the value of their own holding being depressed by a sudden sale
of the claimants shares. Later the defendants gave the claimants a guarantee in
which they promised to indemnify the claimants against any loss which they might
suffer if during the year the shares fell in value. The court rejected the argument that
the consideration for the guarantee was past. The later guarantee solidified a
promise which had already been made.

Unilateral Agreements

The above cases on consideration all concern bilateral agreements.

We looked at unilateral agreements in the previous lecture a promise in exchange

for an act such as an offer of a reward.

In a unilateral agreement the consideration is the performance of the act.

Promises in Deeds

An exception to the requirement for consideration is a promise made in a deed which

is a formal written document satisfying the following requirements. It must:

Make clear on its face that it is a deed; and

Be signed by or at the direction of the person making it in the presence of

a) one witness if it is signed by the person making it or b) of two witnesses if it
is signed at the direction of the person making it for example because the
person at whose direction it is made is disabled.

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Contractual Intention

An agreement, although supported by consideration, is not binding as a contract if it

was made without any intention of creating legal relations.

A lack of intention to create legal relations can arise for various reasons.

Here are some examples.

Social and Domestic Arrangements

Balfour v Balfour [1919] 2 KB 571

A husband worked abroad and agreed to send maintenance payments to his wife. At
the time of the agreement the couple were happily married. The relationship later
soured and the husband stopped making the payments. The wife sought to enforce
the agreement.

It was held that the agreement was a purely social and domestic agreement and
therefore it was presumed that the parties did not intend to be legally bound.

Similarly an informal promise made by a parent to pay a child an allowance during

study is not normally legally enforceable.

Statements made as a Joke or in Anger

Licenses Ins Corp v Lawson (1896) T.L.R. 501

The defendant was a director of two companies, A and B. The former company held
shares in the latter and resolved in the defendants absence to sell them. At a later
meeting this resolution was rescinded after an angry discussion during which the
defendant said he would make good an loss which A might suffer if it kept the shares
in B. It was held that the defendant was not liable on this undertaking. Nobody at the
meeting regarded it a contract.

Agreements made subject to contract

An agreement will often be made subject to contract. Such an agreement is

incomplete until the details of a formal contract have been settled and approved by
the parties. This is very common in the sale of real estate property ie land.

Letters of Intent

It is common that in contractual negotiations letters of intent are signed. These may
not be regarded as contractually binding but it is better to put in wording making
quite clear that this is the case:

This letter of intent is not intended to create a legally binding contract.

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Form

General Rule

The general rule is that contracts can be made quite informally. There is no need for
them to be in writing or any particular form.

Exceptions

This general rule is subject to many exceptions. For example some contracts must
be made by deed and some must be in writing.

Here are a few examples although there are many more.

a) Contracts which must be made by Deed.

A lease for more that three years must be made by deed.

b) Contracts which must be in Writing

(i) Under the Consumer Credit Act 1974 consumer credit agreements are
not properly executed unless certain formalities are complied with.
Among other things both parties must sign a document in the form
prescribed by regulations.

(ii) Under Section 2 of the Law of Property (Miscellaneous Provisions) Act

1989 most contracts for the sale of an interest in land must be made in
writing.

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Contents of a Contract

The contents of a contract depend mainly on the words used by the parties. These
are its express terms.

A contract however may contain terms which are not expressly stated but which are
implied. In particular terms may be implied by law.

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Express Terms

Oral Contracts:

An oral contract will depend on what the parties said.

Written contracts:

A written contract may be contained in a single document or several ones.

Examples of contracts consisting of several documents:

An exchange of letters.

A contract which incorporates other terms by reference for example those of

a trade association:

This contract is agreed subject to the Terms and Conditions of Sale of the
Electronic Engineers Association.

Parol Evidence Rule:

Where a contract is in writing there is a presumption that the writing was intended to
include all the terms of the contract. However this presumption can be rebutted and
this is called the Parol Evidence Rule.

There are a number of situations in which oral evidence may be admitted to

supplement the terms of a contract.

One example is terms implied by law. The parol evidence rule prevents a party from
relying on extrinsic evidence only as to the express terms of the contract. Where a
contract is silent on a matter for which a term is usually implied by law (see below)
parol evidence may be admitted.

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Implied Terms

The law implies certain terms. Here are some examples.

Contracts of Employment

The employee impliedly undertakes that he is reasonably skilled and will not act
against his employers interests.

Conversely an employer impliedly undertakes that he will not without reasonable

cause behave in a way so as to destroy or seriously damage the relationship of trust
and confidence between himself and the employee.

Malik and Mahmud v Bank of Credit and Commerce International SA [1997] UKHL
23

Mr Malik and Mr Mahmud both worked for the Bank of Credit and Commerce
International (BCCI). BCCI went insolvent due to massive fraud, connection with
terrorists, money-laundering, extortion and a lot of other criminal activity on a global
scale. Malik and Mahmud had both lost their jobs and they sought employment
elsewhere. They could not find jobs. They sued the company for their loss of job
prospects, alleging that their failure to secure new jobs was due to the reputational
damage they had suffered from working with BCCI. Nobody, they said, wanted to hire
people from a massive fraud operation like that at the company. This raised the
question of what duty the company had owed to its employees that had been broken.
Although there was no express term in their contracts, Malik and Mahmud argued
there was an implied term in their employment contract that nothing would be done
calculated to undermine mutual trust and confidence.

The House of Lords unanimously held that the term of mutual trust and confidence
would be implied into the contract as a necessary part of the employment
relationship.

Terms implied by Statute

Many terms implied by law have been put into statutory form.

For example a number of important terms implied into contracts for the sale of goods
are stated in the Sale of Goods Act 1979 for instance that the goods will of a
certain quality and, if sold for a particular purpose, will be fit for that purpose.

Exclusion of Implied Terms

Where terms are implied by law it may in some cases be possible to exclude them in
a contract by stating this. However some terms implied by statute cannot be
excluded.

Whether the term implied by statute can be excluded will depend on the provisions
of the statute.

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2. Law of Contract - Questions

What does consideration mean?

Felix Johnson writes to Jonathan Hamilton offering to sell his car to him for 5,000
although an independent expert has valued it at double that price. Jonathan writes
back accepting. Is there a contract?

A father informs his 30 year old son that he will pay him 1,000 if the son files his tax
return for 2016 (which the son is obliged to do by law). The son files his tax return for
2016 and claims 1,000 from his father who refuses to pay. Can the son sue his
father for 1,000?

Richard Doe and Jim Hold sign an agreement that Richard Doe will immediately sell
his car to Jim Hold at a price which will be specified by Richard Doe later and will
not be more than 11,000. Richard Doe delivers the car to Jim Hold and three
months later sends him an invoice for 11,000. Is Jim Hold obliged to pay the
11,000?

William Hardcastle agrees to give a valuable oil painting to Jennifer Bolton free of
charge. William Hardcastle signs a document entitled Deed stating William
Hardcastle agrees to give Jennifer Bolton the oil painting, Night Sky, a photograph of
which is attached. The document is signed by William Hardcastle and a witness.
William Hardcastle later refuses to give Jennifer Bolton the oil painting:

Is there any consideration for the oil painting?

Can Jennifer Bolton oblige William Hardcastle to give it to her?

Company A and Company B sign a document entitled Letter of Intent stating that
Company A will sell certain products to Company B. The document contains the
statement at the end This letter of intent is not intended to create a legally binding
contract. Is there a contract?

Wendy Bridge agrees orally with Hilary Thompson to lease her flat to her for five
years at a rent of 5,000 a month. No document is signed. Is there a contract?

Company A sends a quotation to Company B stating:

This contract is agreed subject to the Terms and Conditions of Sale of the
Mechanical Engineers Association.

Company B writes back a letter accepting the quotation. Do the above Terms
and Conditions of Sale apply?

Company A sends Company B a quotation offering to sell a machine tool to

Company B for 7,500 stating nothing else in the quotation. Company B writes back
accepting the quotation and stating nothing else. Will any terms apply in addition to
the agreed price?

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