Doctrine of Consideration

Topic

“Contract Law is a western idea basically born out of the mutual mistrust of the business people. It was for this reason that the doctrine of consideration was developed. Whatever happened to the idea of relying on a person’s word and intention as the basis of a binding agreement.? Dicuss.”

Introduction

The topic requires critical analysis of why Consideration is a key indeed element of an enforceable Contract. In order to do this, we need to understand what is Consideration and Contract Law and why there is a need of Consideration in Contract Law.

Consideration:

Meaning: It is the price paid for the promisor’s promise and is the benefit received under a contract. The promisor is the person undertaking the promise while the promisee is the person who is receiving or the recipient of the promise. It may be:

• something the promise gives the promisor; or

• the carrying out of some act ( an act of consideration may be a forbearance, deliberately and intentionally not doing something, e.g. forbearance to sue); or

• not doing something that a promise had a legal right to do.

Defination: By (Sir Federick Pollock, 1915)

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

Rules for Consideration: Consideration

1. essential in every simple contract.

2. should be present or future but not past.

3. must move from the promise.

4. must have some value; although the court is not concerned with its adequacy.

5. must be something more than the promise of an existing obligation.

6. must be possible of performance.

7. Must be definite, legal and referable to the other party’s promise.

Contract:

Defination: An agreement between two or more competent parties in which an offer is made and accepted and each party benefits. The agreement can be formal, informal, written, oral or just plain understood. Some contracts are required to be in writing in order to be enforced.

Other Defination: “An agreement concerning promises made between two or more parties with the intention of creating certain legal rights and the obligations upon the parties to the agreement which shall be enforceable in a contract of law.”

(Business Law: Andy Gibson & Douglas Fraser, 3rd edition)

Contracts are a fundamental part of people’s daily lives. They are constantly be entered into by individuals with other individuals or businesses, as well as businesses with other businesses, to sell or transfer property, services and other rights. The purchase of goods, such as books and food, is based on sales contracts; the hiring of employees is based on employment contracts; the lease of a flat or house is based on a rental contract.

Origins of Consideration:

As stated by Sir Edward Jenks, the doctrine of consideration was widely practised in 1890 but traces of its evolution to its origin to the twelfth century. He argues that “the doctrine of consideration was apparently unknown to the Roman jurists. It came into English law purely as a matter of accident, as an incidental consequence of a special manner of proof; and it was not until it was familiar in this capacity that men perceived its value as a doctrine of substantive law.”

But according to John Wilson Twyford, since 1809 the common law has clearly provided that a promise by a party to perform an act that he or she is already legally bound to perform is not good consideration. Accordingly a promise received in exchange is not enforceable. This is so whether the promise would have the effect of creating a new contract. The rule has from time to time has been the subject of criticism but nevertheless operated with full figure until 1991. This existed effectively from that time unconcerned with what the parties hoped to gained from the exchange or what each in fact gained.

History of Contract Law:

The origin of contract law was found in early common law of Middle Ages. During this time, the enforcement of property rights and safety was the main concern which led to the formation of contract law. The transfer of properties was made through offer and acceptance. The informal agreements were made in a “word of honour” and the enforceability of this agreement was a problem for the parties and there existed no actual proof. So it created the need of creation of “contract law”. It was not confined to a single part of the world but was widely recognised. Later much of the modern law of contract developed in the nineteenth century and derived from the laissez – faire principles of economics that characterized the Industrial Revolution.

Contract vs. Gift:

Gift:

A voluntary transfer of property or of a property interest from individual to another, made gratuitously to the recipient. The individual who makes the gift is known as the donor, and the individual to whom the gift is made is called the donee. If a gratuitous transfer of property is to be effected at some future date, it constitutes a mere promise to make a gift that is unenforceable due to lack of consideration. A present gift of future interest is, however, valid. Existence of Consideration in Contract Law:

The mere fact of agreement alone does not make a contract. Both parties to the contract must provide consideration if they wish to sue on the contract. This means that each side must promise to give or do something for the other. The key to understanding the doctrine of consideration is reciprocity. That is, a promise should not be able to enforce a promise unless he or she has given (or promised to give) something in exchange for the promise which will benefit the promisor.

Hypothesis:

The doctrine of consideration has come under increasing fire in recent times due to its somewhat intractable nature and inconsistencies, however it can be argued that much of the ill effects it had engendered in the past have been mitigated through the developments of law. Consideration provides a valuable service to law in determining which promises should be enforced and which are to be regarded as gratuitous. It is arguable that the law’s current functioning is presently acceptable in serving a number of principles which are integral to a strong law of contract, giving effect to the intention of the parties and providing protection to both parties of the contract. It ensures that there will be a remedy if the agreement is not carried out according to the terms laid by the parties.

Sir Frederick Pollock on Consideration

Sir Frederick Pollock was a leading figure in the modernization of English legal studies in the nineteenth century. He was born on December 10, 1850 and was educated at Trinity College, Cambridge. He soon rose to eminence in his field as an author of groundbreaking histories and textbooks. Pollock wrote a series of books that marked a turning point in English Law. His approach was different from that of his predecessors, who have built their work on specific applications of law.

Sir Frederick Pollock’s definition of consideration is considered to be the most important because it was adopted by the House of Lords in ‘Dunlop Pneumatic Tyre Company Ltd vs. Selfridge & Company Ltd. [1915] AC 847.

The definition is as follows:

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

The use of this definition by Lord Dunedin in the above first case in English Law implies its importance because all the other principles were later developed on this main definition.

Doctrine of Privity of Contract

“The doctrine of privity means that a contract cannot, as a general rule, confer rights or impose obligations arising under it on any person except the parties to it.” (GH Treitel, the Law of Contract).

The premise is that only parties to contracts should be able to sue to enforce their rights or claim damages as such. However, the doctrine has proven problematic due to its implications upon contracts made from the benefit of third parties who are unable to enforce the obligations of the contracting parties.

Leading Cases on Consideration Dunlop Pneumatic Tyre Co. Ltd. Vs. Selfridge & Co. Ltd. [1915]

Case:

Dunlop, a tyre manufacturing company, made a contract with Dew, a trade purchaser, for tyres at a discounted price on condition that they would not resell the tyres at less than the listed price and any reseller who wanted to buy them from Dew had to agree not to sell at the lower price either. Dew sold the tyres to Selfridge at the listed price and made Selfridge agree not to sold at a lower price either. However, Selfridge sold the tyres below he promised to sell them from. Dunlop then sued Selfridge for an injunction for selling tyres and damages.

Decision:

At the trial the judge was found in the favour of Dunlop. In appeal the injunction and damages were reversed, saying that Selfridge was not a principal or an agent and thus was not bound because only the parties to a contract can sue.

Comment:

Dunlop had not provided any consideration for Selfridge’s promise and was not a party to the contract between Dew and Selfridge.

Balfour vs. Balfour, 1991

Balfour vs. Balfour [1919] 2 KB 571 is a famous English contract law case that held that there is a rebuttable presumption against an intention to create a legally enforceable agreement.

Case Details:

This case involves a couple where the husband was a civil employee who had to leave for Ceylon as he has been employed there but his wife could not go along with him due to medical reasons and thus had to stay in England. His husband promised her to pay £30 per month until he was able to join her. Later they got divorced and the wife filed a case against the husband for the money he has promised to pay abut he failed to do so.

Decision:

The court held in this case that there was no enforceable agreement as there was not enough evidence to suggest that they it were intending to be legally bound by the promise.

Comment:

The husband and wife did not entered into a contract as the essential element of contract – consideration is absent in this case.

Contract as a Bargain or Exchange The consideration which the parties entering into a contract provide must have some value but may not be adequate. It is this characteristic of consideration which makes it binding in the eyes of the law. This enables a limited number of disputes reaching the courts. It is this freedom of contract bargain which make the parties free to set their own price for the value they personally want to attach to the contract. The parties at the time of entering into a contract should be aware of the adequacy of the consideration.

Consideration in Common Law Countries

Common law evolved in English colonies around the 11th century and was later adopted in the USA, Canada, Australia, New Zealand and other countries such as India, Pakistan, and Bangladesh in the sub – continent which were captured by the British Commonwealth. In common law countries, law are made both by the Judges and the Legislative Authorities. In common law countries, consideration is a pre – requisite. It is very much essential that both parties offer some consideration before the contract could be binding in the court of law. So if there is no consideration, there is no contract. Consideration does not have to be quantified or quantifiable in monetary terms. Any discernible detriment to one of the parties could be that party’s consideration.

Consideration in Civil Law Countries

Civil law has its origin in Roman law. Under the influence of Roman law, the Civil law spread to Continental Europe and the other parts of the world. The concept of consideration does not exist in the Civil Law. The contracts in the Civil law countries are enforced on the consent of the parties. Moreover, certain contracts are binded or enforceable in the court of law depending upon their category e.g. some contracts such as sale or lease are binded only by consent. Whereas there are contracts such as “Real Contracts” which are based on the delivery of the product.

Future of Consideration

Consideration being an essential element of contract law is going to play an important role for the enforcement of contracts in future as contracts are going to become the electronic contracts in the new technological world. Our fast paced movement towards electronic contracts is going to make the consideration change its requirements. We need to make alterations to the doctrine of consideration for a better understanding of it in the modern world so that its enforceability remains possible in the legal structure of the contract law.

Conclusion

The doctrine of consideration is the most important element of the contract law because if it does not exist, the enforceability of contracts in the eyes of law would not be possible. The doctrine of consideration is definitely not a western idea but was developed through the common efforts and principles of the common law countries. The need of doctrine of consideration is now going to be felt more in the civil law countries as well because they need to adopt a universal acceptability of consideration due to changing contractual obligations and system of law in the new technological world.

Bibliography

John Wilson Twyford, The Doctrine of Consideration, University of Technology,2002.

(URL: http://epress.lib.uts.edu.au/dspace/handle/2100/286)

Andy Gibson & Douglas Fraser, Business Law, 3rd edition, Pearson Education Australia.

Edward Jenks, History of Doctrine of Consideration in English Law, 1892, Reprinted 2004.

Asif Tufal, Consideration.(URL: www.lawteacher.co.uk)

Cases and Materials on Contracts, 3rd Edition, Emond Montogomery Publications Limited. 2005.

Sir Frederick Pollock, Principles of Contracts, 8th Edition, Stevens & Sons Ltd., 1911.

Caslav Pejovic, Civil Law and Common Law: Two Different Paths Leading to The Same Goal, Associate Professor of Private International Law, Kyushu University, 2001.

Robert A. Hillman, Rethinking Consideration in the Electronic Age, Cornell Law School, 3rd March, 2009.

Lectlaw.com(URL: http://www.lectlaw.com/def/c123.htm)

Helium.com(URL: http://www.helium.com/items/1529701 evolution of the doctrine of consideration)