Setting Up a Valid Contract

1.0 Introduction

The main components or an activity in business is contract. It had become a major part in business dealing or transaction as a guideline or as a security document between the two dealers or they are also can be called as promisor and promisee. Contract also has a strong relationship with business law and the most important statue or law that affecting a contract is Trade Practise Act 1974 especially in s 52 which prohibits misleading or deceptive conduct . Contract Law or Law of Contract can be categorised or divided into offer, acceptance, consideration and intention. In this discussion we are going to focus on consideration that is a component to set up a valid contract and its development in the world of legal perspective or business law. Consideration can be defined as an action taken by the promisee to accept an offer made by a promisor and the action taken can be accepted as a key for a valid contract. According to Paul Latimer, consideration is the “something for something” or the exchanges of promises from each party when turns an agreement into a contract . According to Cheshire and Fifoot [1974], they define consideration as to sustain an action on a promise made by the defendant the plaintiff must show either that it is contained in a document under seal or that it is supported by the presence of “consideration” . However the important key is that promisee has to show his/her consideration to support the promise given by the other party or promisor. For example, S promise to marry G but G also promise to marry A. There is a valid contract between them because each promise given by both of them is consideration for promise of other. Later in this discussion we will discuss the application and development in ‘consideration’ from classical law perspective and modern law perspective.

2.0 Discussion

After the birth of Roman law of contract that was found in the 6th century AD , there have been several developments in the law of contract with new perspective of views. The development in merchant trade in 12th and 13th century became an important key for the development of common law of contract in England. However, in the 13th century English Common Law had some problem to deal with debt and covenant. They had problem because the law applied, which only gave solution or justice to a breach on formal promises but not for breach in informal promises. In other word the law only can be applied to the contract or promise which had done with under seal. However to find a solution to the arising problem in contract of law, ‘in the middle of 16th century the lawyers evolved through the action of assumpsit or contract, a general contractual remedy, they decided at the same time that it would not avail to redress the breach of any and every promise, whatever its nature and it was not to be used to enforce a gratuitous promise’. These statement refers that the promisee or plaintiff must been contribute or made an exchange with the promisor as an acceptance for the offer made by the promisor and set out a contract between them. According to this requirement, the name of ‘consideration’ has been founded or given.

The doctrine of consideration as been introduced and established during the 17th century and first half of 18th century as component of law of contract in the world of legal system. However in the year 1756, when Lord Mansfield became as Chief Justice of the King’s Bench, he refused to recognise the establishment of doctrine of consideration in the contract law and treated it as evidence of the parties’ in intention to the bound. There are also against to Lord Mansfield’s approach and we can assured this when refer to the case of Rann v Hughes (1778) , they observed that,

“ all contracts are by the law of England distinguished into agreements by speciality and agreements by parol; nor is there any such third class… as contracts in writing. If they be merely written and not specialties, they are parol, and a consideration must be proved.”

However, Lord Mansfield had accepted the establishment of consideration in English contract law but he defined it in the term of moral obligation. He applied the doctrine in the case of Hawks v Saunders (1782) . In this case the lord mentioned,

“Where a man is under a moral obligation, which no court of law or equity can enforce, and promises, the honesty and rectitude of the thing is a consideration… The ties of conscience upon an upright mind are a sufficient consideration.”

The establishment and concept of consideration is accepted in legal system and it had been implemented for nearly 60 years but there is a rejection occurred in the year 1840 by Lord Denman in the case Eastwood v Kenyon. In this case the Lord Denman mentioned that principle of moral obligation in consideration is only an opinion of Lord Mansfield and the lord mentioned that we need additional facts or evidence to assure that the promisor had set up a contract between promisee and he also mentioned that ‘past consideration is not a consideration’.

During the end of 18th century and in the 19th century, according to the Lord Denman’s definition that plaintiff or promisee can prove his or her legal rights in two ways of law application. The ways are the plaintiff had been exchange any benefits with the defendant upon accepting the offer or contract and the plaintiff suffer from any damages because of the action taken by defendant. ‘Often the consideration is both the benefit to the promisor and a detriment to the promisee, such as a promise to promise to pay money to the promisor’. There are also some problems occurred because of application of the second application in consideration that is a promise result to the detriment of promisee and benefit to the promisor. There are few cases held by court because the concept of benefit and detriment such as Shadwell v Shadwell. In this case the judgement is given to the plaintiff by majority and the judge himself gave opinion that there were both a detriment to the plaintiff and a benefit to the promisor. Other case that is very important is Carbolic Smoke Ball case. In this case Mrs. Carlil won the case because she proved that there is a consideration in her detriment by purchasing the smoke ball and accepts the offer made by the defendant who also receives benefit by the detriment of the plaintiff.

During the 19th century, doctrine of consideration is related to the amount of value given by the plaintiff to the defendant as an acceptance for the contract offered. According to the Sir Frederic Pollock in 1915,

“An act or forbearance of one party, or the promise therefore, is the price for which the promise of other is bought, and the promise thus given for value is enforceable”.

This statement can be supported by the case of Dunlop v Selfridge in year 1915. In this case the judgement had been made by referring to three fundamental of law concepts and one of it is doctrine of consideration. During the approach of modern law or 20th century, the doctrine of consideration is nothing more or less then the sign and symbol of bargain. According to the Professor Shatwell,

“The doctrine of consideration is not a survival from the procedural necessities of assumpsit, but an inheritance in the field of modern substantive law…. the effect of the rules as to consideration is to make bargains enforceable without further requirements to form”

The case can be refer the consideration is a symbol of bargain is Australian Woollen Mills Pty Ltd v. The Commonwealth and through this case there is an establishment that bargain is a component in the Australian contract law. Now in the modern law system, consideration turns an agreement as a contract between promisor and promisee. The basic rule is that, a person cannot enforce a promise unless he or she has given consideration for it. There are also some rules for consideration, such as consideration must not be past, consideration must move from the promisee, consideration must be sufficient, need not to be adequate and insufficient consideration.

3.0 Conclusion

As a conclusion, consideration is basically about exchange made to a promisor as an acceptance of the offer and set up a contract. Consideration had been developed since the 16th century until now the application of modern law perspective. Throughout this discussion, we can understand that law of contract play an important role in the business law and consideration is one of important component in applying contract law. Although there are some problems occurred in application of consideration and the judges had to devise many complex exceptions of the rule, all these have been largely resolved by the implementation of Contracts (Rights of Third Parties) Act 1999.

4.0 Bibliography

1. Articles/ Books/ Reports

• G.C.Cheshire &C.H.S. Fifoot, ‘Law Of Contract’ ( 1974) 3rd Australian Edition

• Michael H. Whincup, ‘Contract Law and Practise: The English System, With Scottish, Commonwealth and Continental Comparisons’ (2006) 5th Edition

• Paul Latimer, Australian Business Law, [2008] 27th Edition

• EncyclopaediaBritannica(2009)”contract”[http://www.britannica.com/EBchecked/topic/135270/contract/21766/Historical-development]

• Heffey, Paterson and Hocker, (1998)”contract commentary and materials” 8th Edition [ http://law.anu.edu.au/colin/Layout/Consid_h.htm]

• John Wilson Tyford, (2002) ‘The Doctrine Of Consideration: The role of consideration in contract modifications’ University Of Technology, Sydney 17.

2. Case Law

• Australian Woollen Mills Pty. Ltd. v Commonwealth (1954), 92 C.L.R 425, at p. 461

• Carlil v Carbolic Smoke Ball Co., [1893] 1 Q.B., at p. 271

• Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] AC 847

• Eastwood v Kenyon (1840), 11 ASd. & El. 438; 113 E.R 482

• Hawks v Saunders (1782), 1 Cowp. 289; 98 E.R 1091

• Rann v Hughes (1778), Term. Rep. 350 n. ; 101 E.R 482

• Shadwell v Shadwell (1860), 9 CB (NS) 159; 142 ER 62.