The Doctrine of Consideration

A gratuitous promise is not enforceable as a contract in English law. An agreement must either be made under seal or the promisee must have provided consideration.

In most legal systems there exists a mechanism to identify agreements which will be viewed as enforceable contracts.

The doctrine of consideration provides this function in English Law.

The recipient of a gratuitous promise may in certain especial circumstances have rights and be able to enforce the promise despite not having provided consideration in the strict sense. ( Infra : The Doctrine of Promissory Estoppel)

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5.1 Definition of Consideration

5.1.1 The traditional definition

Currie v Misa (1875) LR 10 Ex 153

“A valuable consideration in the sense of the law may consist either in some right, interest, profit or benefit accruing to one party, or some forbearance, detriment, loss or responsibility given suffered or undertaken by the other.”

per Lush J, @ 162.

In Williams v Roffey Bros & Nicholls [1991] 1 QB 1 the Court of Appeal rejected the distinction between factual and legal benefit and that factual benefit was sufficient consideration

The jurist Sir Frederick Pollock considered that consideration could be defined as ‘the price for which the promise of the other is bought’, a statement approved by the House of Lords in Dunlop Pneumatic Tyre Co Ltd v Selfridge and Co Ltd [1915] AC 847.

Treitel is critical of this definition on grounds that it is vague and gives little help in determining whether consideration exists on a given set of facts.

Consideration is concerned with the exchange of promises or the doing of an act, in a unilateral contract, in return for the promise.

Treitel observes ‘the general rule is that a promise is only regarded as a consideration if its performance would also have been so regarded.’

The promises must have value, a ‘value’ which the law recognises.

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5.1.2 Critique of the traditional view

Professor Atiyah has argued:

“The truth is that the courts have never set out to create a doctrine of consideration. They have been concerned with the much more practical problem of deciding in the course of litigation whether a particular promise in a particular case should be enforced….When the courts found a sufficient reason for enforcing a promise they enforced it; and when they found that for one reason or another it was undesirable to enforce a promise, they did not enforce it. It seems highly probable that when the courts first used the word “consideration” they meant no than there was a “reason” for the enforcement of a promise. If the consideration was “good”, this meant that the court found sufficient reason for enforcing the promise.”

Atiyah, The Rise and Fall of Freedom of Contract (1976).

While Atiyah argues that there are other ‘good reasons’ for the enforcement of contractual promises Treitel continues to contend that the traditional benefit/detriment analysis serves best as a mechanism for contractual enforcement.

In general Atiyah’s work was concerned with finding the concepts of justice lying behind the juridical techniques of private common law, concept which he regarded as the real motivators for the way in which cases were decided. Treitel on the other hand believed that the law of contract could be described accurately in terms of a coherent set of rules, and his textbook is the result of that approach.

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5.2 Valid consideration

Three conditions must be satisfied:

Consideration must be sufficient but need not be adequate.

Consideration must not be past.

Consideration must move from the promisee but need not move to the promisor.

5.2.1 Consideration must be sufficient but need not be adequate

The consideration must have some value

The court is not concerned with the adequacy of the consideration. In the absence of duress or undue influence the court will uphold a contract even where it appears that the consideration, objectively viewed, is not adequate.

Chappell & Co v Nestle [1960] AC 87
Nestle offered a popular record of the day in return for 1/6d and three wrappers from their chocolate bars. The House of Lords HELD that the wrappers were a good consideration despite the fact that the wrappers had little direct value and were in fact thrown away.

Atiyah argues that this case illustrates the deficiency of the benefit/detriment analysis of consideration.

What is “value”?

Treitel argues that the consideration must have some economic value even though the value is not capable of precise quantification.

The courts have not been consistent in their definition of “value” or benefit. In Stilk v Myrick (1809) 2 Camp 317 the court held that no consideration had been provided despite the factual benefit received by the promisor.

The analysis of cases below illustrates the difficulty and the point.

Natural love and affection

Natural love and affection is not a sufficient consideration.

White v Bluett (1853) 23 LJ Ex 36
A son’s promise not to bore his father about the distribution of the father’s property was HELD not to be a good consideration for the father’s promise not to sue his son on a debt owing to him by his son.

Pollock CB held there was no consideration for any discharge of the obligation to repay. The son had ‘no right to complain’ anyway. Not complaining was therefore an entirely intangible benefit.

“

The plea is clearly bad. By the argument a principle is pressed to an absurdity, as a bubble is blown until it bursts. Looking at the words merely, there is some foundation for the argument, and following the words only, the conclusion may be arrived at. It is said, the son had a right to an equal distribution of his father’s property, and did complain to his father because he had not an equal share, and said to him, I will cease to complain if you will not sue upon this note. Whereupon the father said, If you will promise me not to complain, I will give up the note. If such a plea as this could be supported, the following would be a binding promise: A man might complain that another person used the public highway more than he ought to do, and that other might say, do not complain, and I will give you five pounds. It is ridiculous to suppose that such promises could be binding. So, if the holder of a bill of exchange were suing the acceptor, and the acceptor were to complain that the holder had treated him hardly, or that the bill ought never to have been circulated, and the holder were to say, now, if you will not make any more complaints, I will not sue you, such a promise would be like that now set up. In reality, there was no consideration whatever. The son had no right to complain, for the father might make what distribution of his property he liked; and the son’s abstaining from doing what he had no right to do can be no consideration.

A different view was taken in the American case of Hamer v Sidway (1891) 27 NE 256.
An uncle promised to pay his nephew $5000 if the nephew refrained from ‘drinking liquour, using tobacco, swearing and playing cards or billiards for money’ until he was 21. On the basis that the nephew had a legal right to engage in the aforementioned activities he provided a valuable consideration by refraining.

It would not have been a valuable consideration if the nephew had had no intention whatsoever in engaging in any of the prescribed activities.

Arrale v Costain Civil Engineering [1976] 1 Lloyd’s Rep 98
A workman who did not know of his rights provided no consideration by accepting compensation under a Dubai law in satisfaction of his rights in Dubai and at common law.

Forebearance to sue

A promise not to enforce a valid claim is a good consideration.

A promise not to enforce a claim which is known to be bad in law is not a good consideration.

Wade v Simeon (1846) 2 CB 548

A claim bad in law but seen by the promisee to be good raises a very difficult point of illusory consideration.

Cook v Wright (1861) 1B & S 559

Plaintiffs honestly believed that D was under a statutory obligation to reimburse them for expenditure which they had incurred. D, denying that he was under any such obligation, paid a reduced amount on the sum demanded to avoid litigation. D discovered that he was not under a statutory obligation to pay and reneged on his promise arguing that it was not supported by consideration. The court HELD that his promise was supported by consideration and he had to pay the amount agreed.

Performance of a duty owed by law

Performance of a duty already owed under law is not a valid consideration.

Collins v Godefroy (1831) 1 B & Ad 950

P was subpoenaed to give evidence and alleged that D promised to reimburse her expenses. It was HELD that she could not enforce this promise as she was required by law to attend and give evidence and had not therefore provided any consideration for the promise.

Glasbrook Bros v Glamorgan CC [1925] AC 270

Police under a general duty to protect property went beyond their duty in giving specific protection to a coalmine during a strike and in so doing provided consideration for the remuneration promised.

Ward v Byham : The attack by Lord Denning

Ward v Byham [1956] 1 WLR 496

The father of an illegitimate child promised to pay £1 a week to the mother for the upkeep of the child provided the child was well looked after and happy. The mother, under a legal duty to look after the child, sued to enforce the agreement.

Denning LJ (As he then was) held that the mother provided consideration by performing her legal duty. The CA did not agree and upheld the general principle that the performance of an existing legal duty does not constitute a good consideration. The CA found consideration in the case by asserting that the mother went beyond her legal duty to look after the child by keeping the child happy.

LORD JUSTICE DENNING:

This is a claim for the sum of £1 a week in respect of the maintenance of a bastard child. The father and mother lived together unmarried for four or five years, from 1949 until May, 1954, and a little girl was born of that union on 26th October, 1950. whilst the father and mother were living together, the father went out to work and maintained the household. But in May, 1954, the father turned the mother out. He put the child into the care of a neighbour and paid the neighbour £1 a week. The mother meanwhile found work as a housekeeper to a man who was ready to let the child come too. The mother wanted the child with her, and she wrote a letter to the father asking for Carol, the child, and £1 a week for her maintenance, which was the sum which the father had been paying the neighbour. We have not got a copy of the letter which the mother wrote, but we have the father’s reply, which is the basis of this action. It is dated 27th July, 1954, and says:

“Mildred, I am prepared to let you have Carol and pay you up to £1 per week allowance for her providing you can prove that she will be well looked after and happy and also that she is allowed to decide for herself whether or not she wishes to come and live with you. She is well and happy and looking much stronger than ever before. If you decide what to do let me know as soon as possible”.

On receiving that letter the mother went to see the father, and it was agreed that she could have the child. She took the child with her, and the child has lived with the mother ever since.

In February, 1955, some seven months later, the mother married the man to whom she had been acting as housekeeper; and a few weeks later the father himself married. The father kept up the payments of £1 a week until the mother married, but after that he stopped.

I look upon the father’s letter as dealing with two things. One is the handing over of Carol to the mother. The father agrees to let the mother have the child provided that the child herself wishes to come and provided also that the mother satisfies the father that she will be well looked after and happy. The other thing is the future maintenance of the child. The father promises to pay the mother up to £1 per week so long as the mother looks after the child.

The mother now brings this action, claiming that the father should pay her £l per week, even though she herself has married. The only point taken before us in answer to the claim is that it is said that there was no consideration for the premise by the father to pay £1 a week: because the mother, when she looked after the child, was only doing that which she was legally bound to do, and that is no consideration in law. In support of this proposition, reliance was placed on a statement thrown out by Baron Parke in the course of argument in Crowhurst v. Laverack (reported in 8 Exchequer, page 208) at page 213.

It is quite clear that by statute the mother of an illegitimate child is bound to maintain it: whereas the father is under no such obligation. (see Section 42 of the National Assistance Act, 1948.) The mother can, of course, if she is a single woman apply to the magistrates for an affiliation order against the father: and it might be thought that in this case consideration could be found by holding that, the mother must be taken to have agreed not to bring affiliation proceedings against the father. But the mother in her evidence said that she never at any time had any intention of bringing affiliation proceedings. It is now too late; for her to bring them, because she has married and is no longer a single woman.

I approach the case therefore on the footing that the mother, in looking after the child, is only doing what she is legally bound to do. Even so, I think that there was sufficient consideration to support the promise. 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. Take this very case. It is as much a benefit for the father to have the child looked after by the mother as by a neighbour. If he gets the benefit for which he stipulated,, he ought to honour his promise; and he ought not to avoid it by saying that the mother was herself under a duty to maintain the child.

I regard the father’s promise in this case as what Is sometimes called a unilateral contract, a promise in return for an act, a promise by the father to pay &1 a week in of looking after the child, there was a binding contract. . So long as she looked after the child, she would be entitled to £1 a week. The case seems to me to be within the decision of Hicks & Gregory (reported in 8 Common Bench Reports at page 379) on which the judge relied. I would dismiss the appeal.

The case illustrates the rather elaborate reasoning of the judges to ‘construct consideration’ yet maintain the status quo. Dening LJ returned to the theme that the promise to perform an existing duty can constitute a good consideration in Williams v Williams [1957] 1 WLR 148

See: Denning LJ in Ward v Byham

“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.”

Contrast this with the earlier cases on natural love and affection, White v Bluett et al.

Performance of a duty owed under an existing contract

The performance of an act already required under a prior contract cannot be a good consideration for a later promise.

Stilk v Myrick (1809) 2 Camp 317
Sailors jumped ship. The Captain promised to divide their wages among the remaining crew if they agreed to work the ship home short handed. The Captain reneged on his promise. The sailors sued. It was HELD that they had not provided any consideration and could not enforce the contract.

Lord Ellenborough: I think Harris v. Watson was rightly decided; but I doubt whether the ground of public policy, upon which Lord Kenyon is stated to have proceeded, be the true principle on which the decision is to be supported. Here, I say, the agreement is void for want of consideration. There was no consideration for the ulterior pay promised to the mariners who remained with the ship. Before they sailed from London they had undertaken to do all that they could under all the emergencies of the voyage. They had sold all their services till the voyage should be completed. If they had been at liberty to quit the vessel at Cronstadt, the case would have been quite different; or if the captain had capriciously discharged the two men who were wanting, the others might not have been compellable to take the whole duty upon themselves, and their agreeing to do so might have been a sufficient consideration for the promise of an advance of wages. But the desertion of a part of the crew is to be considered an emergency of the voyage as much as their death; and those who remain are bound by the terms of their original contract to exert themselves to the utmost to bring the ship in safety to her destined port. Therefore, without looking to the policy of this agreement, I think it is void for want of consideration, and that the plaintiff can only recover at the rate of £5 a month.

Hartley v Ponsonby (1857) 7 E & B 872
A ship became so short handed from crew desertion that it was dangerous to sail. The crew were offered additional wages to sail the ship home. It was HLED that the sailors provided fresh consideration. The original contract was discharged and a new contract was entered into under these arrangements.

William v Roffey Bros & Nicholls [1989] NLJ 1713
The CA HELD in the case of bonus payments that these will be enforced if the party agreeing to pay the bonus obtains some new practical benefit or avoided a disadvantage thereby.

Russell LJ : ‘the courts nowadays should be more ready to find [consideration’s] existence so as to reflect the intention of the parties to the contract where the bargaining powers are not unequal’. He noted that Roffey Bros’ employee, Mr Cottrell had felt the original price to be less than reasonable, and there was a further need to replace the ‘haphazard method of payment by a more formalised scheme’ of money per flat. “True it was that the plaintiff did not undertake to do any work additional to that which he had originally undertaken to do but the terms upon which he was to carry out the work were varied and, in my judgment, that variation was supported by consideration which a pragmatic approach to the true relationship between the parties readily demonstrates.’

Wikipedia note: Glidewell LJ held Williams had provided good consideration even though he was merely performing a pre-existing duty. Williams got £3,500 (not full expectation damages). He said that the idea of promissory estoppel was not properly argued and ‘not yet been fully developed’. [ 1 ] The concept of economic duress provided an answer to Stilk’s old problem. The test for understanding whether a contract could legitimately varied was set out as follows.

if A has a contract with B for work
before it is done, A has reason to believe B may not be able to complete
A promises B more to finish on time
A ‘obtains in practice a benefit, or obviates a disbenefit’ from giving the promise
there is no economic duress or fraud…

…then the practical benefit constitutes good consideration. On Stilk v Myrick , Glidewell LJ said, “It is not in my view surprising that a principle enunciated in relation to the rigours of seafaring life during the Napoleonic wars should be subjected during the succeeding 180 years to a process of refinement and limitation in its application to the present day.”

See also: North Ocean Shipping v Hyundai Construction (The Atlantic Baron ) [1978] 3 All ER 1170

Pao On v Lau Yiu Long [1980] AC 614; [1979] 3 All ER 65

Payment of a smaller sum in satisfaction of a larger sum is no satisfaction of that larger sum

The debtor is already contractually bound to repay the larger sum and provides no consideration by agreeing to pay a smaller sum without more.

Pinnel’s Case (1602) 5 Co Rep 117a

Earlier repayment of the smaller sum or payment on the due date of the smaller sum at a place appointed by the creditor and different from the place originally required under the obligation would constitute a valuable consideration.

‘The gift of a horse, hawk or robe etc in satisfaction is good……. ‘ but not 19/6 for a £1.

The rule was upheld by the House of Lords in Foakes v Beer (1884) 9 App Cas 605. B obtained judgment against F who asked for time to pay. B agreed to take no proceedings on the judgment in consideration of an immediate payment with the balance payable by instalments. F paid in full. B sued for interest. The House of Lords HELD that she was entitled to succeed on the claim. F provided no consideration for her promise.

Wikipedia note: Pinnel’s Case and the line of authority that flowed from it was distinguished in the decision of Williams v Roffey Bros , [ 4 ] where the English Court of Appeal held that performing an existing obligation could be good consideration where it conferred some “practical benefit” above what was originally envisaged. In that case, it was held the a subcontractor who had asked for additional remuneration to do previously agreed work was enforceable, as avoid the subcontractor going into bankruptcy (which otherwise would have happened) constituted a practical benefit. The reasoning in Williams v Roffey Bros has been doubted in subsequent cases, although it has not been overruled. Please note the decision of the Court of Appeal in Re Selectmove [1995] 1 WLR 474 which made clear that Williams v Roffey cannot be used to subvert the part-payment of a debt principle accepted by the House of Lords in Foakes v Beer.

Important note: We return to this issue when we consider Promissory Estoppel and examine the criteria for the application of relief under that doctrine as first laid out in the High Trees case by Denning J (as he then was)

Payment of a smaller sum by a third party

Where a third party makes the smaller payment in satisfaction of the larger sum the creditor may not sue the original debtor for to allow the creditor to do so would be a fraud on the third party.

Snelling v Snelling [1973] 1 QB 87

Hirachand Punamchand v Temple [1911] 2 KB 330

Gore v Van Der Lann [1967] 2 QB 31

Where a third party agrees to pay a creditor what is due to him, there may also arise a contract between the creditor and the third party which would prevent the creditor from suing the debtor for the balance under the Contracts (Rights of Third Parties) Act 1999.

Performance of a duty owed to a third party

While the performance of an existing duty owed to a promisor is not a good consideration (Supra) the performance of a contractual duty owed to a third party is a good consideration.

Shadwell v Shadwell (1860) 9 CB (NS) 159

P, engaged to EN, was promised £150 per annum by his uncle if he married EN (a pre-existing contractual obligation). P successfully sued to enforce the promise to pay £150 per annum.

The principle was affirmed by the House of Lords in New Zealand Shipping v Satterthwaite (The Eurymedon ) [1974] 1 All ER 1015

“An agreement to do an act which the promisor is under an existing obligation to a third party to do, may quite well amount to a valid consideration….the promisee obtains the benefit of a direct obligation…..This proposition is illustrated by Scotson v Pegg which their Lordships consider to be a good law.”

per Lord Wilberforce.

Lord Scarman in Pao On v Lau Yiu Long [1980] AC 614; [1979] 3 All ER 65 confirmed the point.

Jones v Waite (1839) 5 Bing NC 341

A promise to do an act (as opposed to the actual performance of the act) did not constitute a good consideration – the opposite of the holding in Scotson v Pegg and Pao On .

Scotson v Pegg (1861) 6 H & N 295

A agreed to deliver coal to B’s order. At B’s order A delivered the coal to C who had promised A to unload it. A successfully sued C on this promise, despite the fact that he was already under a duty to B to deliver the coal.

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5.2.2 Consideration must not be Past

Rooted in the bargain theory of contract the rule that past consideration is not a good consideration stems from the fact that there is no reciprocity – the promisee does not give anything in return for the promise of the promisor.

The Rule

When two parties have entered into a contract and one of them later promises an additional benefit, unsupported by a fresh consideration, that promise is not binding on the person making it. The original contract and consideration is in the past.

Roscorla v Thomas (1842) 3 QB 234

D agreed to sell a horse to P. D then warranted the soundness of the horse. P could not enforce this later promise, the consideration for it, entry into the original contract, was in the past.

Re McArdle [1951] Ch 669

A promise made ‘in consideration of your carrying out’ certain work was unenforceable. The work, despite the wording in the contract suggesting the opposite, had been done and was in the past.

Eastwood v Kenyon (1840) 11 A&E 438

A guardian raised a loan to pay for a girl’s education. After the marriage the husband promised to pay off the loan taken out by the guardian. The guardian could not enforce the promise. Past consideration is no consideration.

Mitigation of the rule

Lampleigh v Braithwaite (1615) Hob 105 D, under sentence of death, asked P to obtain a pardon from King James I. P did so. D promised to pay P £1000. It was held that P could recover the £1000.

Where an act of the promisee was requested by the promisor any later promise by the promisor to pay for the act may be referred back to the original request and treated as done in response to it.

The Privy Council imposed limits to the rule in Pao On v Lau Yiu Long [1980] AC 614; [1979] 3 All ER 65

1. The promisee must have performed the original act at the request of the promisor.

2. That it must have been understood that the act would be paid for.

3. The eventual promise to pay must have been one capable of enforcement had it been made just prior to performance of the act.

Consideration must move from the Promisee but need not move to the Promisor

While it is essential that the promisee provides consideration personally (by conferring a benefit or sustaining a detriment in the traditional analysis, the consideration need not move to the promisor – indeed, in the case of sustaining a detriment, nothing moves to the promisor.

De La Bere v Pearson [1908] 1 KB 280

D, owners of a newspaper, solicited letters about financial matters to allow financial advice by way of reply to be published in the newspaper. P’s letter was published. P followed the advice, suffered financial loss and sued. D argued that the advice was given gratuitously that no consideration had moved from the promisee and that they were not liable.

It was HELD that P had given consideration (by writing a letter)

Thomas v Thomas (1842) 11 LJ QB 104

A promise to pay £1 ground rent per annum was good consideration for a promise by a testator who wished to give his wife a house.

Under Contracts (Rights of Third Parties Act) 1999 a third party can enforce a contract made for his benefit under certain circumstances. This is not a real exception to the rule.

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Contracts (Rights of Third Parties) Act 1999

1999 CHAPTER 31

An Act to make provision for the enforcement of contractual terms by third parties.

[11th November 1999]

Be it enacted by the Queen’s most Excellent Majesty, by and with the advice and consent of the Lords Spiritual and Temporal, and Commons, in this present Parliament assembled, and by the authority of the same, as follows:—

1 Right of third party to enforce contractual term

(1) Subject to the provisions of this Act, a person who is not a party to a contract (a “third party”) may in his own right enforce a term of the contract if—

(a) the contract expressly provides that he may, or

(b) subject to subsection (2), the term purports to confer a benefit on him.

(2) Subsection (1)(b) does not apply if on a proper construction of the contract it appears that the parties did not intend the term to be enforceable by the third party.

(3) The third party must be expressly identified in the contract by name, as a member of a class or as answering a particular description but need not be in existence when the contract is entered into.

(4) This section does not confer a right on a third party to enforce a term of a contract otherwise than subject to and in accordance with any other relevant terms of the contract.

(5) For the purpose of exercising his right to enforce a term of the contract, there shall be available to the third party any remedy that would have been available to him in an action for breach of contract if he had been a party to the contract (and the rules relating to damages, injunctions, specific performance and other relief shall apply accordingly).

(6) Where a term of a contract excludes or limits liability in relation to any matter references in this Act to the third party enforcing the term shall be construed as references to his availing himself of the exclusion or limitation.

(7) In this Act, in relation to a term of a contract which is enforceable by a third party—

“the promisor” means the party to the contract against whom the term is enforceable by the third party, and
“the promisee” means the party to the contract by whom the term is enforceable against the promisor.

2 Variation and rescission of contract

(1) Subject to the provisions of this section, where a third party has a right under section 1 to enforce a term of the contract, the parties to the contract may not, by agreement, rescind the contract, or vary it in such a way as to extinguish or alter his entitlement under that right, without his consent if—

(a) the third party has communicated his assent to the term to the promisor,

(b) the promisor is aware that the third party has relied on the term, or

(c) the promisor can reasonably be expected to have foreseen that the third party would rely on the term and the third party has in fact relied on it.

(2) The assent referred to in subsection (1)(a)—

(a) may be by words or conduct, and

(b) if sent to the promisor by post or other means, shall not be regarded as communicated to the promisor until received by him.

(3) Subsection (1) is subject to any express term of the contract under which—

(a) the parties to the contract may by agreement rescind or vary the contract without the consent of the third party, or

(b) the consent of the third party is required in circumstances specified in the contract instead of those set out in subsection (1)(a) to (c).

(4) Where the consent of a third party is required under subsection (1) or (3), the court or arbitral tribunal may, on the application of the parties to the contract, dispense with his consent if satisfied—

(a) that his consent cannot be obtained because his whereabouts cannot reasonably be ascertained, or

(b) that he is mentally incapable of giving his consent.

(5) The court or arbitral tribunal may, on the application of the parties to a contract, dispense with any consent that may be required under subsection (1)(c) if satisfied that it cannot reasonably be ascertained whether or not the third party has in fact relied on the term.

(6) If the court or arbitral tribunal dispenses with a third party’s consent, it may impose such conditions as it thinks fit, including a condition requiring the payment of compensation to the third party.

(7) The jurisdiction conferred on the court by subsections (4) to (6) is exercisable by both the High Court and a county court.

3 Defences etc. available to promisor

(1) Subsections (2) to (5) apply where, in reliance on section 1, proceedings for the enforcement of a term of a contract are brought by a third party.

(2) The promisor shall have available to him by way of defence or set-off any matter that—

(a) arises from or in connection with the contract and is relevant to the term, and

(b) would have been available to him by way of defence or set-off if the proceedings had been brought by the promisee.

(3) The promisor shall also have available to him by way of defence or set-off any matter if—

(a) an express term of the contract provides for it to be available to him in proceedings brought by the third party, and

(b) it would have been available to him by way of defence or set-off if the proceedings had been brought by the promisee.

(4) The promisor shall also have available to him—

(a) by way of defence or set-off any matter, and

(b) by way of counterclaim any matter not arising from the contract,

that would have been available to him by way of defence or set-off or, as the case may be, by way of counterclaim against the third party if the third party had been a party to the contract.

(5) Subsections (2) and (4) are subject to any express term of the contract as to the matters that are not to be available to the promisor by way of defence, set-off or counterclaim.

(6) Where in any proceedings brought against him a third party seeks in reliance on section 1 to enforce a term of a contract (including, in particular, a term purporting to exclude or limit liability), he may not do so if he could not have done so (whether by reason of any particular circumstances relating to him or otherwise) had he been a party to the contract.

4 Enforcement of contract by promisee

Section 1 does not affect any right of the promisee to enforce any term of the contract.

5 Protection of promisor from double liability

Where under section 1 a term of a contract is enforceable by a third party, and the promisee has recovered from the promisor a sum in respect of—

(a) the third party’s loss in respect of the term, or

(b) the expense to the promisee of making good to the third party the default of the promisor,

then, in any proceedings brought in reliance on that section by the third party, the court or arbitral tribunal shall reduce any award to the third party to such extent as it thinks appropriate to take account of the sum recovered by the promisee.

6 Exceptions

(1) Section 1 confers no rights on a third party in the case of a contract on a bill of exchange, promissory note or other negotiable instrument.

(2) Section 1 confers no rights on a third party in the case of any contract binding on a company and its members under section 14 of the [1985 c. 6.] Companies Act 1985.

(3) Section 1 confers no right on a third party to enforce—

(a) any term of a contract of employment against an employee,

(b) any term of a worker’s contract against a worker (including a home worker), or

(4) In subsection (3)—

(a) “contract of employment”, “employee”, “worker’s contract”, and “worker” have the meaning given by section 54 of the [1998 c. 39.] National Minimum Wage Act 1998,

(b) “home worker” has the meaning given by section 35(2) of that Act,

(d) “relevant contract” means a contract entered into, in a case where section 34 of that Act applies, by the agency worker as respects work falling within subsection (1)(a) of that section.

(5) Section 1 confers no rights on a third party in the case of—

(a) a contract for the carriage of goods by sea, or

(b) a contract for the carriage of goods by rail or road, or for the carriage of cargo by air, which is subject to the rules of the appropriate international transport convention,

except that a third party may in reliance on that section avail himself of an exclusion or limitation of liability in such a contract.

(6) In subsection (5) “contract for the carriage of goods by sea” means a contract of carriage—

(a) contained in or evidenced by a bill of lading, sea waybill or a corresponding electronic transaction, or

(b) under or for the purposes of which there is given an undertaking which is contained in a ship’s delivery order or a corresponding electronic transaction.

(7) For the purposes of subsection (6)—

(a) “bill of lading”, “sea waybill” and “ship’s delivery order” have the same meaning as in the [1992 c. 50.] Carriage of Goods by Sea Act 1992, and

(b) a corresponding electronic transaction is a transaction within section 1(5) of that Act which corresponds to the issue, indorsement, delivery or transfer of a bill of lading, sea waybill or ship’s delivery order.

(8) In subsection (5) “the appropriate international transport convention” means—

(a) in relation to a contract for the carriage of goods by rail, the Convention which has the force of law in the United Kingdom under section 1 of the [1983 c. 14.] International Transport Conventions Act 1983,

(b) in relation to a contract for the carriage of goods by road, the Convention which has the force of law in the United Kingdom under section 1 of the [1965 c. 37.] Carriage of Goods by Road Act 1965, and

(i) the Convention which has the force of law in the United Kingdom under section 1 of the [1961 c. 27.] Carriage by Air Act 1961, or

(ii) the Convention which has the force of law under section 1 of the [1962 c. 43.] Carriage by Air (Supplementary Provisions) Act 1962, or

(iii) either of the amended Conventions set out in Part B of Schedule 2 or 3 to the [S.I. 1967/480.] Carriage by Air Acts (Application of Provisions) Order 1967.

7 Supplementary provisions relating to third party

(1) Section 1 does not affect any right or remedy of a third party that exists or is available apart from this Act.

(2) Section 2(2) of the [1977 c. 50.] Unfair Contract Terms Act 1977 (restriction on exclusion etc. of liability for negligence) shall not apply where the negligence consists of the breach of an obligation arising from a term of a contract and the person seeking to enforce it is a third party acting in reliance on section 1.

(3) In sections 5 and 8 of the [1980 c. 58.] Limitation Act 1980 the references to an action founded on a simple contract and an action upon a specialty shall respectively include references to an action brought in reliance on section 1 relating to a simple contract and an action brought in reliance on that section relating to a specialty.

(4) A third party shall not, by virtue of section 1(5) or 3(4) or (6), be treated as a party to the contract for the purposes of any other Act (or any instrument made under any other Act).

8 Arbitration provisions

(1) Where—

(a) a right under section 1 to enforce a term (“the substantive term”) is subject to a term providing for the submission of disputes to arbitration (“the arbitration agreement”), and

(b) the arbitration agreement is an agreement in writing for the purposes of Part I of the [1996 c. 23.] Arbitration Act 1996,

the third party shall be treated for the purposes of that Act as a party to the arbitration agreement as regards disputes between himself and the promisor relating to the enforcement of the substantive term by the third party.

(2) Where—

(a) a third party has a right under section 1 to enforce a term providing for one or more descriptions of dispute between the third party and the promisor to be submitted to arbitration (“the arbitration agreement”),

(b) the arbitration agreement is an agreement in writing for the purposes of Part I of the Arbitration Act 1996, and

the third party shall, if he exercises the right, be treated for the purposes of that Act as a party to the arbitration agreement in relation to the matter with respect to which the right is exercised, and be treated as having been so immediately before the exercise of the right.

9 Northern Ireland

(1) In its application to Northern Ireland, this Act has effect with the modifications specified in subsections (2) and (3).

(2) In section 6(2), for “section 14 of the [1985 c. 6.] Companies Act 1985” there is substituted “Article 25 of the [S.I. 1986/1032 (N.I. 6).] Companies (Northern Ireland) Order 1986”.

(3) In section 7, for subsection (3) there is substituted—

“ (3) In Articles 4(a) and 15 of the [S.I. 1989/1339 (N.I. 11).] Limitation (Northern Ireland) Order 1989, the references to an action founded on a simple contract and an action upon an instrument under seal shall respectively include references to an action brought in reliance on section 1 relating to a simple contract and an action brought in reliance on that section relating to a contract under seal. ” .

(4) In the [1964 c. 23 (N.I.).] Law Reform (Husband and Wife) (Northern Ireland) Act 1964, the following provisions are hereby repealed—

(a) section 5, and

(b) in section 6, in subsection (1)(a), the words “in the case of section 4” and “and in the case of section 5 the contracting party” and, in subsection (3), the words “or section 5”.

10 Short title, commencement and extent

(1) This Act may be cited as the Contracts (Rights of Third Parties) Act 1999.

(2) This Act comes into force on the day on which it is passed but, subject to subsection (3), does not apply in relation to a contract entered into before the end of the period of six months beginning with that day.

(3) The restriction in subsection (2) does not apply in relation to a contract which—

(a) is entered into on or after the day on which this Act is passed, and

(b) expressly provides for the application of this Act.

(4) This Act extends as follows—

(a) section 9 extends to Northern Ireland only;

(b) the remaining provisions extend to England and Wales and Northern Ireland only.

Question & Answer

Analyses in Contract & Sale of Goods
Consideration

Drafted 13th August 2009
Mike Semple Piggot

Question

Ambassador Ltd has been contracted to paint and carpet a new business development park for HappyatWork PLC. Ambassador sub-contracted the carpet fitting work to Carpetbagger Ltd. Work proceeds for the first month but unable to pay for carpetting and their freelance labour Carpetbagger Ltd informs Ambassador Ltd of the difficulty. Ambassador Ltd, concerned that the project may not be completed on schedule agrees to pay an additional 20,000 over and above the original contract price of £100,00 to ensure completion of the project on time and advances the £20,000 to Carpetbagger Ltd

The work is completed on schedule and Ambassador now refuses to pay the additional £20,000 fee and deducts the £20,000 payment from the contract price of £100,000 and pays £80,000.

HappyatWork PLC, claiming difficulty in paying the contract price of £250,00 agreed with Ambassador Ltd for painting and carpeting of the business park because of the recession asks if Ambassador Ltd would be prepared to accept a reduction of £50,000 on the contract price. Ambassador, fearful of not obtaining any of the fee agreed if HappyatWork goes into receivership or liquidation, accepts the reduced amount of £50,000.

Ambassador now discovers that HappyatWork PLC have succeeded in letting the business park at 100 % occupancy asks HappyatWork PLC for the balance of £50,000. HappyatWork PLC reply that they have paid for the work at the agreed revised price and therefore do not owe the £50,000 as £200,000 was paid in full and final settlement of the contract.

You are asked to advise Ambassador Ltd in relation to:

(a) their contract with Carpetbagger Ltd and whether they have to pay the additional £20,000

(b) their contract with HappyatWork PLC and whether they are able to recover the full contract price of £250,000.

1. There are two separate contracts to consider: Ambassador Ltd v Carpetbagger Ltd and Ambassador v HappyatWork PLC ; the contract with Carpetbagger raising issues of the performance of an existing duty under the doctrine of consideration (Stilk v Myrick, Williams v Roffey [1991] et al) and the contract with HappyatWork, the issue of payment of a smaller sum in satisfaction of a larger sum at common law (Pinnels’ Case, Foakes v Beer [1884]) and the application of the doctrine of promissory estoppel (Central London Property Trust v High Trees House [1952] et al).

2. Ambassador Ltd v Carpetbagger Ltd

This is a contract for labour and materials priced at £100,000 which has been varied to a price of £120,000 because of the difficulties faced by Carpetbagger Ltd in securing supplies and labour; raising the issue of consideration to support the variation.

3. The Law

3.1 While the leading theory of consideration over 100 years ago turned on the concept of bargain, the giving of benefit and the sustaining of detriment (Currie v Misa (1875) per Lush J); modern theory appears to be the more simplified exchange of promises with scant attention being paid by the courts to the adequacy of consideration, consistent with the court’s reluctance to interefere in the right of the contracting parties to set the terms of their bargain or contract. (See Consideration must be sufficient but need not be adequate – Chappel v Nestle [1960] et al])

3.2 The main issue lies in the issue of whether the variation from £100,000 to a contract price of £120,000 is supported by fresh consideration. If it is, Ambassador will be liable for the full varied contract price of £120,000.

3.3 The starting point is the principle that the performance of an act already required under a prior contract cannot be a good consideration for a later promise. The leading case on this proposition is the 1809 case of Stilk v Myrick.

Lord Ellenborough: “I think Harris v. Watson was rightly decided; but I doubt whether the ground of public policy, upon which Lord Kenyon is stated to have proceeded, be the true principle on which the decision is to be supported. Here, I say, the agreement is void for want of consideration. There was no consideration for the ulterior pay promised to the mariners who remained with the ship. Before they sailed from London they had undertaken to do all that they could under all the emergencies of the voyage. They had sold all their services till the voyage should be completed. If they had been at liberty to quit the vessel at Cronstadt, the case would have been quite different; or if the captain had capriciously discharged the two men who were wanting, the others might not have been compellable to take the whole duty upon themselves, and their agreeing to do so might have been a sufficient consideration for the promise of an advance of wages. But the desertion of a part of the crew is to be considered an emergency of the voyage as much as their death; and those who remain are bound by the terms of their original contract to exert themselves to the utmost to bring the ship in safety to her destined port. Therefore, without looking to the policy of this agreement, I think it is void for want of consideration, and that the plaintiff can only recover at the rate of £5 a month.”

3.4 Stilk v Myrick must be contrasted with the later case of Hartley v Ponsonby (1857) 7 E & B 872 where A ship became so short handed from crew desertion that it was dangerous to sail. The crew were offered additional wages to sail the ship home. It was held that the sailors provided fresh consideration. The original contract was discharged and a new contract was entered into under these arrangements.

It is rather difficult to see any material distinction on the facts of these cases, but in the latter the judge found that consideration had been provided allowing for a discharge of the original contract with a valid and enforceable varied contract coming into being.

Russell LJ : ‘the courts nowadays should be more ready to find [consideration’s] existence so as to reflect the intention of the parties to the contract where the bargaining powers are not unequal’. He noted that Roffey Bros’ employee, Mr Cottrell had felt the original price to be less than reasonable, and there was a further need to replace the ‘haphazard method of payment by a more formalised scheme’ of money per flat. “True it was that the plaintiff did not undertake to do any work additional to that which he had originally undertaken to do but the terms upon which he was to carry out the work were varied and, in my judgment, that variation was supported by consideration which a pragmatic approach to the true relationship between the parties readily demonstrates.’

3. 5 In Williams v Roffey [1991] Glidewell LJ said of Stilk v Myrick “It is not in my view surprising that a principle enunciated in relation to the rigours of seafaring life during the Napoleonic wars should be subjected during the succeeding 180 years to a process of refinement and limitation in its application to the present day.”

Legal historians have suggested that the courts were more prepared to find a genuine fresh consideration provided by sailors faced with doing more than they were contracted to do originally because of the more stable political situation which pertained at the time when Hartley v Ponsonby was decided. Be that as it may, the decision in William v Roffey Bros & Nicholls [1989] NLJ 1713 certainly clarifies the law on contract variation when the party appears to be doing no more than contractually bound to do and may, if taken to a logical extent, revolutionise the law relating to consideration to the extent of rendering it a totemic or token requirement.

4. The case of William v Roffey Bros & Nicholls [1989] NLJ 1713, on facts similar to those in issue here, reveals the pragmatic approach of the Court of Appeal. In Willams v Roffey the court found that that the defendants had obtained a practical benefit by virtue of the claimants promise to complete the work on time and I can see no reason in the present case why a court would not take a similar line, given the similarity of the factual matrix.

Glidewell LJ’s judgement is of most value on this issue:

Accordingly, following the view of the majority in Ward v. Byham and of the whole court in Williams v. Williams and that of the Privy Council in Pao On the present state of the law on this subject can be expressed in the following proposition:

(i) if A has entered into a contract with B to do work for, or to supply goods or services to, B in return for payment by B; and

(ii) at some stage before A has completely performed his obligations under the contract B has reason to doubt whether A will, or will be able to, complete his side of the bargain; and

(iii) B thereupon promises A an additional payment in return for A’s promise to perform his contractual obligations on time; and

(iv) as a result of giving his promise, B obtains in practice a benefit, or obviates a disbenefit; and

(v) B’s promise is not given as a result of economic duress or fraud on the part of A; then

(vi) the benefit to B is capable of being consideration for B’s promise, so that the promise will be legally binding.

5. Professor McKendrick in his Contract Law Text 8th ed at p77 , Palgrave Macmillan Law Masters stresses the importance of anaylsing two points: “The first is: what exactly was the practical benefit the defendants obtained? The Second is: how can this conclusion be reconciled with Stilk v Myrick?

5.1 Applying the reasoning in Williams v Roffey to the present facts, Ambassador oibtained a practical benefit in having Carpetbagger complete the work on time and therefore did not breach their contract with HappyatWork and did not have to go to the trouble and expense of securing an alternative contractor to complete the work – possibly at a higher fee given the time consraints. There is an attractive logic in this but can it really be said that the practical benefit was any more ‘practical’ when Carpetbagger declared later on variation of the contract that they would still perofrm their contract than it was when they made the original promise? Arguably, the certainty of performance was made more clear after the variation and therein, arguably, lies the consideration for the variation.

5.2 Purchas LJ in Williams v Roffey noted: “That although in ‘normal circumstances the suggestion that a contracting party can rely on his own breach to establish consideration is distinctly ‘unattractive’ on the facts of the case the claimant had given up his right to ‘cut his losses’ by deliberately breaching the contract with the defendants.

“The question must be posed: What consideration has moved from the plaintiff to support the promise to pay the extra £10,300 added to the lump sum provision? In the particular circumstances which I have outlined above, there was clearly a commercial advantage to both sides from a pragmatic point of view in reaching the agreement of 9th April. The defendants were on risk that as a result of the bargain they had struck the plaintiff would not or indeed possibly could not comply with his existing obligations without further finance. As a result of the agreement the defendants secured their position commercially. There was, however, no obligation added to the contractual duties imposed upon the plaintiff under the original contact. Prima facie this would appear to be a classic Stilk v. Myrick case. It was, however, open to the plaintiff to be in deliberate breach of the contract in order to “cut his losses” commercially. In normal circumstances the suggestion that a contracting party can rely upon his own breach to establish consideration is distinctly unattractive. In many cases it obviously would be and if there was any element of duress brought upon the other contracting party under the modern development of this branch of the law the proposed breaker of the contract would not benefit. With some hesitation and comforted by the passage from the speech of Lord Hailsham, to which I have referred, I consider that the modern approach to the question of consideration would be that where there were benefits derived by each party to a contract of variation even though one party did not suffer a detriment this would not be fatal to the establishing of sufficient consideration to support the agreement. If both parties benefit from an agreement it is not necessary that each also suffers a detriment. In my judgment, on the facts as found by the judge, he was entitled to reach the conclusion that consideration existed and in those circumstances I would not disturb that finding. This is sufficient to determine the appeal. The judge found as a fact that the flats were “substantially completed” and that payment was due to the plaintiff in respect of the number of flats substantially completed which left an outstanding amount due from the defendants to the plaintiff in the absence of the payment of which the plaintiff was entitled to remove from the site. For these reasons and for the reasons which have already been given by Glidewell L.J. I would dismiss this appeal.”

per Purchas LJ

McKendrick notes (op cit) “Williams has been applaued as a pragmatic decision, giving effect to the ‘realities’ of the situation”. I agree with Mckendrick’s assessment, but would only add that it comes remarkably close to ‘constructing consideration’, some would say, out of thin air and devalues the principle, reducing it almost to the level of a token.

5.3 Professor Mckendrick, of course, recognises the point and notes later in his text (p100) “After the decision in Williams v Rofferty… the future of consideration in English contract law is somewhat uncertain. He notes that the Court of Appeal did not expressly attempt to throw out the doctrine, its stated aiam was to ‘limit’ and ‘fefine’ the rule in Stilk v Myrick by placing emphasis on the ned to identify practical benefit rather than legal benefit.

5.4 Lord Goff in White v Jones [1995] AC 207, 262-3 said:

“..our law of contract is widely seen as deficient in the sense that it is perceieved to be hampered by the presence of an unnecessary doctrine of consideration’.

5.5 McKendrick points then to Professor Dawson’s view: “..even the most embittered critics of bargain consideration do not really object to the enforcement of bargains. The objection has been to its transformation into a formula of denial, A formula that would deny legal effect to most promises for which there is nothing given or received in exchange.”

Clearly, if the courts take the Williams v Roffey principle to its logical conclusion it could lead to the de facto abolition of the doctrine of consideration. Mckendrick concludes his remarks on p100 of his book by observing: , “There is no room for the doctrine of consideration in the Principles of European Contract Law article 2.101 which states|:

(1) A contract is concluded if:

(a) the parties intend to be legally bound; and

(b) they reach a sufficient agreement without any further requirement

(2) A contract need not be concluded or evidenced in writing nor is it subject to any other requirement as to form. The contract may be proved by any means, including witnesses.

6. A subsidiary, but not unimportant point, is the issue of whether it would be appropriate to raise estoppel. For reasons which will be made clear in the second half of this opinion analysis, estoppel cannot create a cause of action but can only act as a defence to a cause of action and in the present case, there is no need to plead estoppel because it is likely the court would accept the Williams v Roffey principle here and find for the claimant who would be unlikely to raise estoppel here when it is likely they would succeed under Williams v Roffey

7. It is perhaps, in closing, worth noting an extract from Professor Atiyah from thirty years ago:

“The truth is that the courts have never set out to create a doctrine of consideration. They have been concerned with the much more practical problem of deciding in the course of litigation whether a particular promise in a particular case should be enforced….When the courts found a sufficient reason for enforcing a promise they enforced it; and when they found that for one reason or another it was undesirable to enforce a promise, they did not enforce it. It seems highly probable that when the courts first used the word “consideration” they meant no than there was a “reason” for the enforcement of a promise. If the consideration was “good”, this meant that the court found sufficient reason for enforcing the promise.”

Atiyah, The Rise and Fall of Freedom of Contract (1976).

Ambassador Ltd v HappyAtWork PLC

1. This is a contract for labour and materials under which Ambassador Ltd was contracted by HappyatWork PLC to paint and carpet the business park operated by HappyAtWork PLC to contract specification for a fixed and agreed pirce of £250,000. HappyatWork, claiming financial difficulties, sought a reduction in the price to £200,000 to which Ambassasdor reluctantly agreed fearing possible great loss if HappyatWork went into liquidation.

2. Ambassador now seeks to recover the balance of £50,000 in circumstances where it is clear that HappyAtWork PLC has succeeed in letting all the units at the business park.

3. The Law

3.1 The issue turns on the long established principle of law that payment of a smaller sum in satisfaction of a larger sum is not, at common law, a satisfaction of that larger sum and does not discharge the contract inter partes by performance. This principle goes back to Pinnel’s Case (1602) 5 Co Rep 117a and was re-affirmed by the House of Lords in Foakes v Beer (1884) 9 App Cas 605.

3.2 The decision of the Court of Appeal in Re Selectmove [1995] 1 WLR 474 made clear that William v Roffey Bros & Nicholls [1989] NLJ 1713 cannot be used to subvert the part-payment of a debt principle accepted by the House of Lords in Foakes v Beer.

Lord Justice Peter Gibson:

Foakes v Beer has been followed and applied in numerous cases subsequently, of which I shall mention two. In Vanbergen v St. Edmunds Properties Ltd. [1933] 2 K.B. 223 at p.231 Lord Hanworth M.R. said “It is a well established principle that a promise to pay a sum which the debtor is already bound by law to pay to the promisee does not afford any consideration to support the contract.” More recently in D. & C. Builders Ltd. v Rees [1966] 2 Q.B. 617 this Court also applied Foakes v Beer, Danckwerts L.J. (at p.626) saying that the case “settled definitely the rule of law that payment of a lesser sum than the amount of a debt due cannot be a satisfaction of the debt, unless there is some benefit to the creditor added so that there is an accord and satisfaction.”

…….

Foakes v Beer has been followed and applied in numerous cases subsequently, of which I shall mention two. In Vanbergen v St. Edmunds Properties Ltd. [1933] 2 K.B. 223 at p.231 Lord Hanworth M.R. said “It is a well established principle that a promise to pay a sum which the debtor is already bound by law to pay to the promisee does not afford any consideration to support the contract.” More recently in D. & C. Builders Ltd. v Rees [1966] 2 Q.B. 617 this Court also applied Foakes v Beer, Danckwerts L.J. (at p.626) saying that the case “settled definitely the rule of law that payment of a lesser sum than the amount of a debt due cannot be a satisfaction of the debt, unless there is some benefit to the creditor added so that there is an accord and satisfaction.”

…….

Mr. Nugee however submitted that an additional benefit to the Revenue was conferred by the agreement in that the Revenue stood to derive practical benefits therefrom: it was likely to recover more from not enforcing its debt against the Company, which was known to be in financial difficulties, than from putting the Company into liquidation. He pointed to the fact that the Company did in fact pay its further PAYE and NIC liabilities and £7,000 of its arrears. He relied on the decision of this Court in Williams v Roffey Bros. & Nicholls (Contractors) Ltd. [1991] 1 Q.B.1 for the proposition that a promise to perform an existing obligation can amount to good consideration provided that there are practical benefits to the promisee.

………

Mr. Nugee submitted that although Glidewell L.J. in terms confined his remarks to a case where B is to do the work for or supply goods or services to A, the same principle must apply where B’s obligation is to pay A, and he referred to an article by Adams and Brownsword in (1990) 53 M.L.R. 536 at pp. 539-540 which suggests that Foakes v Beer might need reconsideration. I see the force of the argument, but the difficulty that I feel with it is that if the principle of the Williams case is to be extended to an obligation to make payment, it would in effect leave the principle in Foakes v Beer without any application. When a creditor and a debtor who are at arm’s length reach agreement on the payment of the debt by instalments to accommodate the debtor, the creditor will no doubt always see a practical benefit to himself in so doing. In the absence of authority there would be much to be said for the enforceability of such a contract. But that was a matter expressly considered in Foakes v Beer yet held not to constitute good consideration in law. Foakes v Beer was not even referred to in the Williams case, and it is in my judgment impossible, consistently with the doctrine of precedent, for this Court to extend the principle of the Williams case to any circumstances governed by the principle of Foakes v Beer. If that extension is to be made, it must be by the House of Lords or, perhaps even more appropriately, by Parliament after consideration by the Law Commission.

The decision in Re Selectmove highlights the paradox that while the performance of an existing duty can constitute consideration when there is a promise to pay more, it cannot constitute consideration when there is a promise to pay less. Given the fact that Foakes v Beer (which was not raised in in Williams v Roffey) is a House of Lords decision, the doctrine of precedent governs the position – a point made by Lord Justice Peter Gibson in Re Selectmove.

3.3. The principle in Foakes v Beer is well established and noted in the preceding passages extracted from Lord Justice Peter Gibson’s judgment. At common law HappyAtWork PLC has not provided consideration for Ambassador Ltd’s promise to accept a lesser sum in full satisfaction and Ambasssador may, accordingly, claim the balance of £50,000

3.4 The position under the doctrine of Promissory Estoppel

HappyatWork PLC will seek to argue that their debt and obloigation to pay £50,000 should be extinguihsed in equity under the doctrine of promissory estoppel established by Denning J, as he then was, in Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130 (High Trees)

3.5 In setting the context to High Trees it is worth noting the statement in Snell’s Equity

“Where by his words or conduct one party to a transaction makes to the other a clear and unequivocal promise or assurance which is intended to affect the legal relations between them (whether contractual or otherwise), or was reasonably understood by the other party to have that effect, and, before it is withdrawn, the other party acts upon it, altering his or her position so that it would be inequitable to permit the first party to withdraw the promise, the party making the promise or assurance will not be permitted to act inconsistently with it.”

Snell’s Equity (31st Edition) 10-08

3.6 Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130
In 1937 the plaintiffs let a block of flats to the defendants for a period of 99 years at a rent of £2500 per annum. In 1940 plaintiffs agreed to reduce the rent to £1250 because many of the flats were unlet due to the war. At the end of the war the plaintiffs asked for the full rent to be reinstated. Denning J HELD that the plaintiffs were entitled to reinstate the rent. Denning J went on to state that the plaintiffs could not have sued for the full rent for the period covered by the agreement.

“The logical consequence no doubt is that a promise to accept a smaller sum, if acted upon, is binding notwithstanding the absence of consideration.”

Denning J. @ 134.

Denning founded his assertion upon the dictum of Lord Cairns in Hughes v Metropolitan Railway Co (1877) 2 App Cas 439

“it is the first principle upon which all the Courts of Equity proceed, that if parties who have entered into definite and distinct terms involving certain legal rights – certain penalties or legal forfeiture – afterwards by their own act or with their own consent enter upon a course of negotiations 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 these 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.’

3.7 The conditions for the applicability of the doctrine

3.7.1 There must be a pre-existing legal relationship (Hughes v Metropolitan Railway Co (1877)2 App Cas 439. as here and there must be a clear promise intended to alter the contracted (or otherwise legally binding) obligation. The court assesses intention objectively rather than taking evidence on the party’s state of mind (Woodhouse Israel Cocoa Ltd v Nigerian Produce Marketing Board [1972] AC 741)

3.7.2 There must be reliance on the promise. The promisee must have acted upon the promise and altered his position ( Tool Metal Manufacturing Co Ltd v Tungsten Electric Co Ltd [1955] 1 WLR 761 HL) It is clear that HappyAtWork PLC altered their position and relied on Ambassador Ltd’s acceptance of their offer to pay the reduced amount of £200,000, a considerable saving of £50,000 and the question which falls to be determined is whether the element of detriment is required when dealing with the reliance issue. While there was no detriment in High Trees and the point was not taken in Ajayi v Briscoe or in Tungsten Electric it appears to be the case – strictly speaking – that detriment is not required. Detriment was not required in WJ Alan & Co v El Nasr Export and Import Co [1972] 2 QB 189. In Goldsworthy v Brickell [1987] 1 All ER 853 Nourse LJ in the Court of Appeal indicated that detriment was required. Goff J in Societe Italo-Belge v Palm Oils [1982] 1 All ER 19 thought that detriment was not required.

3.7.3. The issue had never been tested on appeal. The usual view is that to invoke the doctrine, it must be ‘inequitable’ for the promisor to go back on his promise. Detriment is one reason why it may be inequitable, but not the only one. ‘Misconduct’ by the defendant, e.g. unreasonably withdrawing the forbearance at short notice, may make it inequitable. While Lord Denning asserted that there need be no reliance to detriment, recent caselaw suggests that reliance should have caused detriment.

3.7.4 In Emery & Another v UCB Corporate Services [2001] EWCA Civ 675 Peter Gibson LJ stated:

A promissory estoppel, in my judgment, arises where

(1) there is a clear and unequivocal promise that strict legal rights will not be insisted upon;

(2) the promisee has acted in reliance on the promise; and

(3) it would be inequitable for the promisor to go back on his promise.

# Some commentators express the second condition in terms of the promisee altering his position to his detriment (see, for example, Snell’s Equity 13th Edition (2000) paragraph 39-08), but that is controversial (see, for example, Chitty: Law of Contracts, 28th Edition (1999), paragraph 3-089). However, the fact that the promisee has not altered his position to his detriment is plainly most material in determining whether it would be inequitable for the promisee to be permitted to act inconsistently with his promise.

3.7.5 Lady Justice Arden in Collier v P & MJ Wright (Holdings) Ltd [2007] EWCA Civ 1329 gave a thorough review of the cases and the point about detriment, whether finally settled or not, is to some extent academic because there is a further element that it must be inequitable to go back on the promise and the assertion here is that if a person has not sustained any detriment by relying on the promise it is may not be inequitable to go back on the promise and the doctrine of promissory estoppel will not apply. Whatever the factual matrix here, the issue of ‘clean hands’ has to be adverted to in addition.

3.7.6 Those who seek the protection of equity must have clean hands – they must have behaved equitably themselves. I can see little prospect of this restriction on the doctrine applying in the present case. There appears to be no evidence of fraud or other inequitable behaviour on the part of HappyATWork PLC to preclude the operation of the doctrine.D &C Builders v Rees [1966] 2 QB 617 The remaining issue, given that a court is most likely to apply the doctrine of promissory estoppel here is whether the doctrine operates suspensively or extinctively.

4. In Tool Metal v Tungsten Electric the effect of the doctrine was to suspend legal rights.

See also: Collier v P & MJ Wright (Holdings) Ltd [2007] EWCA Civ 1329 (Above per Arden LJ)

“The effect of promissory estoppel is usually suspensory only, but, if the effect of resiling is sufficiently inequitable, a debtor may be able to show that the right to recover the debt is not merely postponed but extinguished: see the High Trees case and the Tool Metal case with respect to the wartime payments.”

per Arden LJ

4.1 Attempts have been made to utilize the doctrine of promissory estoppel after High Trees to create a new inroad into the rule in Pinnel’s case that an agreement to accept part payment of a debt in full satisfaction of it is unenforceable for want of consideration. In the High Trees case Lord Denning commented, obiter , that such an agreement should now be enforceable under the doctrine of promissory estoppel. However, the courts have traditionally been reluctant to overrule cases like Pinnel’s case and Foakes v Beer as they have formed part of the common law for so long. Lady Justice Arden in Collier v P & MJ Wright (Holdings) Ltd [2007] EWCA Civ 1329 accepted in principle that High Trees could be used to extinguish a creditor’s right to full payment of a debt in such circumstances.

4.2 In the light of the foregoing it is likely that the court will apply the doctrine of promissory estoppel but applyu it suspensively and give HappyATWork PLC a reasonable opportunity to pay the balance of £50,000. The time is likely to be short, given the 100 % occupancy of the business park

Problem Question – The Doctrine of Consideration

Question

Colin made the following promises:

(a) to give his daughter, Diana, £500 if she will abandon her career as a photographic model and become a social worker.

(b) to pay his secretary, Enid, £250 for having been willing to give up her lunch hour when necessary during the previous three months.

(c) to pay Fred, who has a contract with the local newsagent to deliver the newspapers in that area, £10 if he delivers the newspaper by 8 a.m. every day for a month and puts it through a letterbox without tearing it.

(d) to give his old lawnmower to George, a neighbour, if George collects it from the garden shed.

Advise Colin to what extent, if at all, the above promises are legally binding on him.

Analysis

(a) If D becomes a social worker C is prima facie bound.

C can escape liability by arguing no intention to create legal relations.

Balfour v Balfour

Jones v Padavattan

(b) Past consideration is no consideration

Roscorla v Thomas, Re M c Ardle .

Exceptions:

Lampleigh v Braithwaite

Re Casey’s Patents

Pau on v Lau Yiu Long

(c) Third party obligations cases, and Contracts (Rights of Third Parties Act) 1999 .

(d) Illustrates difference between consideration and a condition. No contract exists between Colin and George. No consideration.

It is a conditional gift.

Wyatt v Kreglinger .

Tutorial – The Doctrine of Consideration

1. Explain what is meant by “valuable consideration” in the law of contract.

2. Jack, the proprietor of Slick taxis, was alarmed at the slump in takings. After investigation he discovered that a major cause of this was that Fred, whom he employed as a taxi-driver, was offensive to potential customers and showed indifference and lack of co-operation in carrying out his duties. In order to remedy the position, Jack promised Fred, that if he would treat his customers with courtesy and encourage business, he would pay him a bonus on the additional takings. This would be paid at the end of the financial year. He also promised to increase the bonus if, during his own time, Fred would be responsible for keeping his taxi clean. Fred’s conduct has from the time of this promise been exemplary and he has kept the taxi clean, but now, after the financial year has ended, jack is refusing to pay the bonus.

Advise Fred.

3. Nut, who lived in Nottingham, learnt that his mother was ill in a hospital in London. He promised a friend, Bolt, that if he (Bolt) would drive him to London immediately, he (Nut) would pay him £50 on their return. Bolt agreed.

At the hospital Nut demanded of Slash, the surgeon, that his mother should be operated on at once. After the operation Nut promised Slash £100 for his trouble.

Nut could not afford to pay both Bolt and Slash, so asked Bolt if he would accept a cheque for £30 drawn on a London bank in full settlement. Bolt agreed and cashed the cheque. However, Bolt is now claiming a further £20 from Nut. Slash, who has not been paid by Nut, is suing him for the £100.

Advise Nut

voidmortgage

5 Consideration