Contract Legally Enforceable Six Prerequisites Should Be Followed

Contracts are the basis of the business and therefore understanding the law of contract is essential for persons wishing to engage in business. There would be no business without contracts. To make a contract legally enforceable six prerequisites should be followed. They are intention to create legal relations, agreement, consideration, legal capacity, genuine consent and legal consent. Unlike the other elements, consideration is not necessary in all cases. Some agreements do require consideration to be enforceable while some are enforceable without consideration.

2. Main provisions regarding consideration and their importance for an enforceable agreement

Latimer defines consideration as “something for something” or the exchange of promises from each party-from the promisor to the promise-which turns the agreement into a contract. [1] Consideration turns agreement into contract. There are certain elements required to establish consideration, without these elements there is no consideration.

Consideration must be present in every simple contract. [2] Informal contracts are usually referred to as ‘simple contract’ and include contracts which are oral, written or those which are partially oral and partially in written.

One of the essential rules regarding consideration is that consideration must move from the promisee. [3] A person to whom a promise has been made is known as the promisee and a person who makes such a promise is known as the promisor. Latimer P states that a person who wants to enforce a promise must pay for the promise. [4] Consideration need not necessarly move to the promisor.

Consideration can be “executed” or “executory” but cannot be from the “past”. [5] Consideration is said to be executory when all that parties have done is exchange promises. [6] Contract has not yet been performed by both parties and is described as bilateral contract because the agreement is formed by an exchange of mutual promises. In other words mutual promises must stand or fall together.

Consideration is said to be executed when a party to a contract has performed their obligations. [7] The performance of the act by the promise will in most cases be both a benefit to the promisor and a detriment to the promisee.

Unlike executed and executory consideration, past consideration is no consideration at all. Consideration is said to be past when the promise is made after the performance of the act and independent of it. [8] The rule is that later promise cannot be enforced by the promise, because his original act or promise was not done or given in return for the other’s promise. This is supported in Roscorla v Thomas [9] .

It is said that ‘consideration must be sufficient but need not be adequate. [10] The requirement of sufficiency means that consideration must be something that the law regards as valuable. Consideration need not be adequate. In Woolworths ltd v Kelly [11] Kirby (plaintiff) explained that the courts do not generally enquire into the adequacy of consideration. The courts have no way of assessing the value a particular person places on the consideration he or she has contracted to receive. Moreover any requirement of consideration would render the enforceability of contracts uncertain.

The purpose of the law of consideration is to distinguish between gratuitous and non-gratuitous promises. [12] The concept of consideration attempts to define those promises which are ‘contractual’ and ‘legally enforceable’ from the specific perspective. No legal system can allow the proposition that any and every promise imposes a legal obligation. The common law insists upon an intention to be bound by a promise, it holds that an agreement is not a contract unless consideration is present.

The doctrine of consideration requires that something must be given in return for a promise in order to make contract binding. [13] A contract may involve exchange of money for goods and may also involve exchange of promises. The issue of consideration assumes central importance when agreement is entirely one-sided and a promise remains unperformed. [14] When a contract is made by an exchange of promises, each party’s promise provides consideration to support the promise made by the other.

3. Situations in which an agreement without consideration can be enforced and their justifications

There are situations when consideration is not required in the formation of a contract. Consideration is not required for formal promises under seal. [15] These are the form of ‘speciality’ or ‘deed’ and are enforceable as such. Promises under seal are called ‘covenants’ and are enforceable although the consideration was not given for them [16] . There may be no consideration for a promise made by deed. The promise is enforceable by the same way as a contractual promise, in the sense that contract damages may be obtained for the breach of the promise. If there is no consideration it remains a ‘gratuitous’ promise and a document may be executed and take effect as a deed and yet also satisfy the legal requirements of a binding contract.

Promissory estoppel is a legal principle which stops a person from going back on their word in certain circumstances. [17] It allows a promise to be enforced even if there is no consideration. It could only be used if it would be inequitable to allow the promisor to go back on the promise. [18] In Central London Property Trust v High Trees [19] plaintiff was estopped from dishonouring the half rent agreement in 1940.The court held that defendant had acted on plaintiff’s promise of half rent even though the defendant had not given any consideration. The plaintiff’s promise was intended to be legal and his promise was acted by the defendant.

The above cases indicated that promissory estoppel only applied in instances where the parties were in an existing contractual relationship. It was also accepted that it could only be used as a ‘shield’ (that is defence to an action by the promisor seeking to retract from the promise), not as a ‘sword’ (that is as a cause of action). [20]

The concept of unconscionability reached its peak in Australia with the decision of High Court in Waltons Stores case which was a case of an estoppel raised by silence. [21] In Walton Stores v Maher [22] the court held that Maher could rely on promissory estoppel as Walton’s words and conduct had raised assumptions in the minds of Maher. Maher had acted on the faith of the representations by demolishing the building and doing the construction works for Walton. In fact, Walton’s conduct was also unconscionable in failing to inform the Maher that it had changed the mind about the lease. This case shows the application of promissory estoppel can apply to situations where parties are not already in a contractual relationship. It is now clear that not only can it apply where the parties are not in a pre-existing contract but also it can be used as a ‘sword’ to enforce positive promises. [23]

Brenenan J stated that in order to establish a promissory estoppel plaintiff should prove that: (1) the plaintiff assumed to have legal relationship existed with the defendant (2) the defendant was responsible for the assumption (3) the plaintiff relied on the assumption of the defendants promise (4) the defendant knew that the plaintiff was acting on his promise (5) the plaintiff suffered losses if these assumptions were not fulfilled (6) the defendant has taken no actions to warn the plaintiff. [24]

It is clear that that the promise relied upon must be unequivocal, or clear or unambiguous. [25] The promisor must have had knowledge of the promisee’s reliance on their representation. Carter and Harland stated that words which are unclear and equivocal will not be sufficient enough to imply a promise giving rise to promissory estoppel. [26] Moreover the promisee must have adopted the promise ‘as the basis of action or inaction’, and thus be placed ‘in a position of material disadvantage’ if the promisor were allowed to withdraw the promised indulgence without notice. [27] Thus constitutes the necessary element for promissory estoppel. In Waltons Stores v Maher [28] the High Court indicated that promissory estoppel can only apply where there is unconscionable conduct. Therefore unconscionability is the driving force behind promissory estoppel. Getzler stated that the promissory estoppel is based on the prevention of unconscionable conduct. [29] One party has relied on the promise of the other and it would be unfair if the promise is not enforced.

4. Conclusion

There is no doubt that in consideration is essential element to create a legally enforceable contract. It determines whether the promise should be recognised as creating an obligation which is capable of being contractual. Cases such as Legione v Hateley and Walton Stores v Maher shows that promissory estoppel allows the party to enforce a contract even without consideration. It prevents a person from denying the promise made and protect the interest of a person who has relied on that promise. There will always be a need for rules determining what promises will be legally enforceable and rules deciding what obligations are to be imposed. [30] Enforcing a promise may sometimes be the equivalent of enforcing a contract.