#17401 - Consideration 1 - Contract Law

Consideration

Whether or not a promise that is part of an agreement can be enforced depends on, among other things, whether the promisee has given consideration for the promise. Consideration is perhaps best understood as an act or promise of an act which is the price paid for the other's promise.

The common law will only enforce a promise for which a price is paid. Dunlop Pneumatic Tyre Co v Selfridge & Co.

Purpose: Want contract law to facilitate trade and commerce, if people were able to back out of deal last minute= insecurity and mistrust.

Contentious doctrine in law –

• ‘Our law of contract is widely seen as deficient in the sense that it is perceived to be hampered by the presence of an unnecessary doctrine of consideration.’ As per Lord Goff in White v Jones [1995] 2 AC 207 [at 262-3]. =

• ‘I have no radical proposals for the wholesale review of the doctrine of consideration. I am not persuaded that it is necessary. T]he courts have shown a readiness to hold that the rigidity of the doctrine of consideration must yield to practical justice and the needs of modern commerce’ [Lord Steyn, writing extra judicially in ‘Contract Law: Fulfilling the Reasonable Expectations of Honest Men’ (1997) 113 LQR 433, 437].=

Consideration distinguishes bargains which are legally enforceable from gratuitous promises which aren’t.

Classical Definition-

Currie v Misa (1875) L.R. 10 Ex 153

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

In a bilateral contract which is yet to be performed (i.e. where consideration is executory) each party’s promise is consideration for the other. A bilateral contract is formed where the parties exchange promises. At the time agreement is reached, each party makes a promise. The price paid for that promise – the consideration – is the other party’s promise. Each party promises to do an act or refrain from doing an act. -United Dominions Trust (Commercial) Ltd v Eagle Aircraft Services Ltd.

In a unilateral contract, the promisee’s performance of the requested act is the consideration for the promise. And the promise is the consideration for the performance of the requested act. Unlike bilateral contracts, a unilateral contract does not constitute an exchange of promises. The only promise is the one made by the promisor to do or refrain from doing an act if the other party does or refrains from doing an act. Thus, the act or forbearance itself, rather than the promise, constitutes the consideration.-United Dominions Trust (Commercial) Ltd v Eagle Aircraft Services Ltd

Justifying the doctrine of consideration

• Consideration as evidence of the existence and seriousness of the undertaking - Supported by L.Fuller (Consideration and Form)

It is often suggested that consideration = evidentiary and cautionary function (Williams v Roffey Brothers), and is therefore analogous to that performed by formality requirements.

Baragwanath J (New-Zealand Court of Appeal) in Antons Trawling Co Ltd v Smith: “the importance of consideration is as a valuable signal that the parties intend to be bound by their agreement, rather than an end in itself.”

Consideration is unnecessary if a party’s intention to be bound can be proved in other ways.

• (Arguably a paternalistic approach.)

• Welfare maximisation – supported by Posner (An economic analysis of Law)

Exchanges tend to transfer property or services to those who value them most highly – consideration requirement is the best indicator of value-maximising transactions.

In contrast, donative promises = “sterile” (Posner). This can be easily challenged – donative promises may be efficient (eg. gift from rich grandparents to needy student) and other exchanges may not be (eg. the buyer who mistakenly overvalues the property).

• Reciprocity – the intuitive justice of exchange – supported by Treitel

Enforcement of bargains reflects the idea of reciprocity. Reciprocation is the norm between equals in most social interactions. Symbolisation of an idea of fairness; distinguishes trading from taking and bargains from exploitation. The promisee, having paid for the promise, has a more compelling reason to enforce the promise than one who has not paid.

• Marking the boundary of appropriate legal involvement – Supported by Raz

Consideration requirement draws the line between public enforceable transactions and private unenforceable agreements, a line further reinforced by the presumption against the enforcement of domestic and social agreements. Legal enforcement is unnecessary and inappropriate in the social domain – with friends and family in whom we have a degree of trust, backed up by social or moral sanctions. It is also the context in which gratuitous promises are most likely to occur. Expressions of the value of altruism – regarded as private arrangements: can be broken only on pain of moral, social or non-legal sanctions.

In contrast, we cannot readily ‘do deals’ with strangers; here, contract law bridges the gap in trust and provides sanctions to facilitate reciprocal undertakings that further the purposes of both parties.

What constitutes valuable consideration?

Thomas v Thomas [1842] 2 QB 851: ‘consideration means something which is of some value in the eyes of the law.’ BUT this arguably hinders fundamental concept of freedom of contract+ autonomy of parties.

So basically no one listens to this rule, instead:

Consideration need not be adequate

Imbalance of exchange does not offend the doctrine of consideration. A promise is enforceable as long as something of value in the eye of the law is exchanged for it; the values exchanged need not be equivalent.

Posner: “… in all but very exceptional cases, negotiation between buyer and seller is the more reliable method of determining a price at which exchange is mutually beneficial.”

Consideration need not be adequate, but it should be sufficient

‘A contracting party can stipulate for what consideration he chooses. A peppercorn does not cease to be good consideration if it is established that the promisee does not like pepper and will throw away the corn’. (per Lord Somervell in Chappell & Co Ltd v Nestle Co Ltd [1960] AC 87 (HL) at 114).

The requirement of nexus

1. Consideration must move from the claimant

Which undertakings are enforceable? Those which have been paid for.

Who can enforce the undertaking? The party who has paid for it – ‘consideration must move from the promisee’. A party who has not provided consideration for a promise cannot enforce it – privity rule. The doctrine of privity provides that only a person who is a party to a contract can sue on it. A promisee is only able to sue on a promise if the promisee has given consideration for the promise. - Tweddle v Atkinson .

• Trident General Insurance Company Ltd v McNiece bros Pty Ltd

Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co [1915] AC 847 (HL) at 853 per Viscount Haldane LC: ‘only a person who is a party to a contract can sue on it...A second principle is that if a person with whom a contract not under seal has been made is to be able to enforce it consideration must have been given by him to the promisor or to some other person at the promisor’s request…’

BUT: consideration does not need to move TO the promisor

Jones v Padavatton [1969] 1 WLR 628

2. Consideration must be requested by the promisor

Combe v Combe – a husband promised to pay his wife 100 per year on their divorce. The wife sought to enforce the promise, arguing that she gave consideration for it by not applying for maintenance. CA rejected this argument because the husband did not request her to do this. Her forbearance resulted from his promise to pay but was not given in return for it.

3. Past consideration is not good consideration

Since consideration must be given in response to (in return or in payment for) the promise, it cannot logically be given or done before the other’s promise was made. If it is, the law regards the promise as a gratuitous and unenforceable response to the promisee’s earlier gift.

Re McArdle [1951] Ch 669

“But the true position was that, as the work had in fact all been done and nothing remained to be done by Mrs. Marjorie McArdle at all, the consideration was a wholly past consideration, and, therefore, the beneficiaries' agreement for the repayment to her of the 488l.out of the estate was nudum pactum, a promise with no consideration to support it” (Jenkins LJ at 678).

Eastwood v Kenyon – a young girl’s guardian raised a loan to educate her and improve her marriage prospects.

After her marriage, her husband promised to pay off the loan, but the guardian was unable to enforce the promise because his consideration was past – his actions were not requested by the promisor and could not have performed in response to the later promise. The husband’s moral obligation to pay could not be converted into a legal obligation by his promise.

Roscorla v Thomas – R purchased a horse from T. T’s subsequent assurance to R was that the horse was sound and free from vice was unenforceable because the only possible consideration for it was the price already payable under the original contract and that consideration was past.

Past consideration rule can operate harshly in some circumstances and the exact order of events is not decisive if the courts are satisfied the promisor’s promise and promisee’s past actions are, in fact, part of the same overall transaction; doctrine...