Enforceable Contracts

1. Enforceable contracts are created by the promise to do something you’ve previously agreed to do. This was the initiative in Stilk v Myrick (1809) 2 Camp 317. This is not a rigid rule, as the idea of practical benefit has loosened the rule as shown in, Williams v Roffey Bros & Nicholls (construction)] 1 ALL ER 512 Ltd [1990].

“A valuable consideration consists of two ideas (Currie and Others v Misa [1874-75] LR 10 Ex. 153). Some right, interest, profit or benefit to one party, or some forbearance, detriment, loss or responsibility given suffered of or under-taken by the other” [Jill Poole, “Textbook on Contract Law”, Ninth Edition, Oxford University Press]. It is a benefit to one party or a detriment to the other. However, there are a number of limitations of this definition. There is no mention of why the promisee confers a benefit or incurs a detriment, or that the concept of a bargain is centralized to the orthodox notion of consideration. An example of this lapse occurred in Combe v Combe [1951] 2 KB 215. Despite its limitation these definitions are still hazy.

If a party owes a duty to the other, this cannot be ‘a request to avoid part payment of a debt’, nor ‘consideration for a request for extra payment’. If the promisor performs more than he is obliged to do, this can count as consideration (Stilk v Myrick (1809) 2 Camp 317). There are exceptions. The promisor obtains realistic advantages. Performance of existing contractual obligations will not amount to consideration where one party is seen to gain. Stilk v Myrick (1809) 2 Camp 317 only recognizes acts, which have no legal obligations. A limited exception to the rule is provided in Williams v Roffey Bros & Nicholls (construction)] 1 ALL ER 512 Ltd [1990]. The promisor obtains a practical benefit. The decision is answerable by the principle of economic duress, as a means of distinguishing between the enforceable and unenforceable modification of the contract. This shows that the courts are prepared to sanction commercially equitable renegotiation of an existing contract, which benefits both parties, and not avert this by taking on an excessively procedural view of consideration. But, factual benefit can include consideration, where the tailored promise has not been extorted by duress or fraud.

In Shadwell v Shadwell (1860) 9 CB (NS) 159, an uncle promised to pay an annual sum to his nephew on hearing of his intended marriage. The marriage provided consideration, although the nephew was already legally contracted to marry his fiancée. In New Zealand Shipping Co v Satterthwaite & Co Ltd, the Eurymedon [1975] AC 154; [1974] 2 WLR 865 PC, it was held by the Privy Council that, “where a stevedore, at the request of the consignee of certain goods, removed the goods from a ship, this was consideration for the promise by the consignee to give the stevedore the benefit of an exclusion clause, although the stevedore in removing the goods was only performing contractual duties he owed to the carrier” [Robert Duxbury “Contract Law”, 1st Edition, Sweet & Maxwell].

The Court of Appeal decided that the case of Selectmove Ltd, Re [1995] 1 WLR 474, was bound by the previous decision of the House of Lords in Foakes v Beer [1883-84] LR 9 App. Cas. 605 HL, that it could not find good consideration. As a consequence, it was impracticable to apply the recent decision in Williams v Roffey Bros & Nicholls (construction)] 1 ALL ER 512 Ltd [1990], that “a promise to perform services which are already due may total good consideration, provided that the promisee derives some practical benefit therefrom”.

The status of Selectmove Ltd, Re [1995] 1 WLR 474 as a business is important. Continuing cash flow difficulties; most significantly it faced extensive debt to Inland Revenue (tax and NIC). In September 1992, a petition was presented by Revenue to wind up the business. The defence argued that the debt was disputed in good faith on substantial grounds. The ‘substantial grounds’ were in question. There was an alleged agreement was in July 1991. The terms were that Selectmove Ltd, Re [1995] 1 WLR 474 was promising to do more than they were obliged to do. Selectmove Ltd, Re [1995] 1 WLR 474 breached the terms by making late payments of new demand and the instalments of arrears.

Selectmove Ltd, Re [1995] 1 WLR 474 made a proposal, to a Revenue Officer, to pay off debts by instalments. This case could have been decided by decisions of the court, but there was no acceptance by the Revenue officer for want of authority, which raises questions about acceptance by silence. The concept is only concerned with other findings by the court. ‘If there was an agreement, it was unenforceable for want of consideration. A plea of promissory estoppel could not be sustained.’

Peter Gibson L.J., Stuart-Smith and Balcombe L.JJ. were in agreement, attracted to the proposition that underlies the decision in Williams v Roffey Bros & Nicholls (construction)] 1 ALL ER 512 Ltd [1990]. ‘A promise to perform an existing obligation owed to the promisee may amount to good consideration if there are practical benefits to the promisee. Furthermore he had little doubt that a creditor, dealing at arms length, with a debtor, would ‘always see a practical benefit in an agreement for payment of the debt by instalments.’ Even so, they were unable to find that Selectmove Ltd, Re [1995] 1 WLR 474 had provided good consideration. Why? They were arguing on the same grounds as Lord Blackburn (House of Lords case, Foakes v Beer [1883-84] LR 9 App. Cas. 605 HL). Rejected by the House of Lords on the basis of, “the well established principle that a promise to pay a sum which the debtor is already bound by law to pay the promisee does not afford any consideration to support the contract” (Vanbergen v St Edmund Properties Ltd [1993] 2 K.B. 223). If a previous principle is to be transformed, the House of Lords or Parliament must do it. The process can only take place after consideration by the Law Commission.

In Williams v Roffey Bros & Nicholls (construction)] 1 ALL ER 512 Ltd [1990], the Court of Appeal faced a predicament of precedent in the decision of Stilk v Myrick (1809) 2 Camp 317 found by Lord Ellenborough, which supported the conventional view of consideration that a promise to perform an existing obligation is no consideration. However, because of the difficulty in establishing an accurate ratio in Stilk v Myrick (1809) 2 Camp 317, the Court of Appeal was able to shun away from overruling it. In its place, the principle was furthermore cultivated to ‘a practical benefit may amount to good consideration even where there is no legal benefit to the promisee’. A bolder Court of Appeal in Selectmove Ltd, Re [1995] 1 WLR 474 could have taken a more analogous approach with Foakes v Beer [1883-84] LR 9 App. Cas. 605 HL by finding an element of consideration, which had been disregarded by the House of Lords.

Several alternatives would have been obtainable to the law commission if they chose to deal with, ‘the issue of consideration and the performance of an existing obligation’. The least attractive choice is not to act. The issue of whether a promise to perform an existing obligation owed to the promisee may be good consideration is to be resolute along the arbitrary origin of the disposition of the obligation in question. Corroboration is found in Foakes v Beer [1883-84] LR 9 App. Cas. 605 HL and Williams v Roffey Bros & Nicholls (construction)] 1 ALL ER 512 Ltd [1990]. A test of practical benefit can be difficult to apply in some cases. More so, intensity solely on the issue of consideration would fail to address the genuine predicament of distinguishing amid those renegotiated contracts which should be enforced and those which should not.

A third possibility, “abolish the requirement of consideration in cases of renegotiated contracts and to test their enforceability on the basis of the principles now known as economic duress” [Peel, “Part Payment of a Debt is no Consideration” (1994) 100 LQR 353] has been advocated before. Following this, a process of refinement, for which a number of blue prints are available. The result, a more sophisticated approach offered than that in Selectmove Ltd, Re [1995] 1 WLR 474 or Williams v Roffey Bros & Nicholls (construction)] 1 ALL ER 512 Ltd [1990], under which “bona fide renegotiations would be enforceable whereas those obtained by exploitation would not” [Peel, “Part Payment of a Debt is no Consideration” (1994) 100 LQR 353].

The fourth possibility has similar results to the third. Ideas related with extending the extent of promissory estoppel, as attempted by Selectmove Ltd, Re [1995] 1 WLR 474 by attempting to avert Revenue from asserting that the debt was due. Plea was dismissed under two reasons. First, since the Revenue’s officer had no authority to make the alleged agreement with Selectmove Ltd, Re [1995] 1 WLR 474, he had no authority to make the promise alleged to found the estoppel against the Revenue. Secondly, it was inequitable for the Revenue to renege on its promise not to enforce the debt since Selectmove Ltd, Re [1995] 1 WLR 474 had failed to credit its promise to pay new demands as they fell due. But, this point could have also been used against Selectmove Ltd, Re [1995] 1 WLR 474, even if it had established an agreement supported by good consideration. Selectmove Ltd, Re [1995] 1 WLR 474 was in breach of a time obligation, as they made late payments. It is likely that the Revenue would have been entitled to rescind the agreement and ‘revive’ the original debt to support the petition to wind up.

Promissory estoppel encompasses several restrictions, which limits the effect on renegotiated contracts. Two of the judges in Williams v Roffey Bros & Nicholls (construction)] 1 ALL ER 512 Ltd [1990], (Glidewell L.J. and Russell C.J.), would have seriously considered an argument based on a plea of estoppel.

There is a clear divide in the law regarding the subject of consideration. Consideration is essential in order to determine whether the modified contract will constitute good consideration. If one party is doing more than they are obliged to do, than the law does not see this as existing duties but as consideration. Doing more than required can take on subjective interpretation, subsequently certain cases may be decided upon subjectively, which can cause variation. So, although the law does make it comprehensible, in practice application of consideration can be intricate.

Bibliography

Referenced articles and books:

• Peel, “Part Payment of a Debt is no Consideration” (1994) 100 LQR 353
• Phil Harris, “An Introduction to Law”, Seventh Edition, Cambridge University Press
• Jill Poole, “Textbook on Contract Law”, Ninth Edition, Oxford University Press
• Jill Poole, “Casebook on Contract Law”, Ninth Edition, Oxford University Press
• Jonathan Law & Elizabeth A. Martin, “A Dictionary of Law”, Seventh Edition, Oxford University Press
• Marcel Berlins & Clare Dyer, “The Law Machine”, Fifth Edition
• Chitty on Contracts, section on Consideration
• Robert Duxbury “Contract Law”, 1st Edition, Sweet & Maxwell

Referenced Cases:

D and C Builders v Rees [1965] 3 All ER 837

New Zealand Shipping Co v Satterthwaite & Co Ltd, the Eurymedon [1975]

Re Selectmove Ltd, December 21, 1993

Foakes v Beer (1884) 9App. Cas. 605

Vanbergen v St Edmund Properties Ltd [1993] 2 K.B. 223

Stilk v Myrick (1809) 2 Camp 317

Williams v Roffey Bros & Nicholls (Construction) Ltd [1990] 1 All ER 512.

Shadwell v Shadwell [1860] 9 CB NS 159, 142 ER 62

Hartley v Ponsonby (1857) 7 Ellis and Blackburn 872 119 E.R. 1471

Currie and Others v Misa (1874-75) L.R. 10 Ex. 153

Combe v Combe. [1950 C. 3344] [1951] 2 K.B. 215

2. For a contract to exist, three elements must be present. There must be an offer that has been accepted. The parties must have intentions to create legal relations. And, there must be consideration or an element of bargain. Peter had accepted a three-year contract with ‘Yachts-R-Us’. The contract states that, “it shall be a condition of this contract that Peter shall survey all the yachts owned by ‘Yachts-R-Us’ at least once a year. Peter will also provide certification of every yachts seaworthiness”. For the first eighteen months peter visited every yacht in the fleet and provided certificates of seaworthiness. In the last twelve months Peter failed to visit all the yachts (only visited 60%). ‘Yachts-R-Us’ are unhappy that Peter did not visit all yachts and wish to terminate the contract and seek damages. It is important to note that Mediterranean Law states that yachts must have a certificate of seaworthiness one every to years.

Conditions in a contract are “statements of fact or promise which form the essential terms of the contract. If the statement is not true, or the promise is not fulfilled, the injured party may terminate (or treat as discharged) the contract and claim damages” [Jonathan Law & Elizabeth A. Martin, “A Dictionary of Law”, Seventh Edition, Oxford University Press]. If the courts decide that the wording of the contract amounts to a condition, which is possible as the contract clearly states Peter should visit all the yachts, ‘Yachts-R-Us’ will have the power to terminate the contract and claim for damages. The Sale of Goods Act 1979 designates certain implied terms. Satisfactory quality is deemed as a condition, the breach of which entitles the buyer to terminate the contract. In Poussard v Spiers And Pond [1876] LR 1 QBD 410 an actress who had contracted to perform the lead role in an operetta for a full season failed to take up a role in an opera, due to ill health until a week after the season had started. It was held that her promise to perform as from the first performance was a condition, therefore its breach permitted the management to treat the contract as discharged.

It is possible that the courts can decide that a term is not a condition, even when the parties have decided the term is a condition. This was the case in L.Schuler A.G. And Wickman Machine Tool Sales LTD. [1974]. Wickman was given the sole selling rights for Schuler’s panel presses in a contract which had a clause 7(b) which stated that, “it shall be [a] condition of this agreement that (i) [the respondents] shall send its representatives to visit” the six largest United Kingdom motor manufacturers ‘at least once every week’ to solicit orders for panel presses.” The respondents failed to make a number of those visits and the appellants terminated the contract under a separate clause, which allowed repudiation if a material breach is committed and not remedied in sixty days. It was held that the clause 7(b) was not a condition that would allow the entire termination of a contract upon a single breach, no matter how trivial it may seem. Lord Reid commented saying that “the fact that a particular construction leads to very unreasonable results must be a applicable consideration. The more unreasonable the results, the more dubious it is that the parties can have intended it, and if they do intend it the more necessary it is they shall make their intention abundantly clear” [Robert Duxbury “Contract Law”, 1st Edition, Sweet & Maxwell]. The case of L.Schuler A.G. And Wickman Machine Tool Sales LTD. [1974] AC 235 HL resembles the situation that Peter is in. The courts say, that considerations must be ‘crystal clear’. If they are not, and they are open to interpretation, favour will fall to the defendant.

Warranties are contractual terms concerning the less important statements of facts or promises. If a warranty is broken, this does not warrant the other party to terminate the contract, it merely entitles him to sue for damages. The Sales of Goods Act 1979 designates certain terms as warranties, breach of which do not allow the buyer to treat the contract as discharged, but only to sue for damages, for example, the right to quiet employment. Breach of warranty in a contract will not entitle the other party to terminate the contract; it merely enables the indignant party to sue for damages. This was evident in the case of Bettina v Gye [1876] LR 1 QBD 183. A singer was engaged to sing for a entire season and to arrive six days in advance to take part in rehearsals. He arrived only three days in advance. It was held that the rehearsal clause was subsidiary to the main clause. It was only a warranty. The management were therefore not entitled to treat the contract as discharged. They should have kept to the original contract and sought damages for the three days’ delay.

Innominate terms are those terms that cannot be classified as either conditions or warranties. The remedy for breach depends on whether or not the breach is a fundamental breach. The courts want to prevent strategic termination of contracts. As shown in Cehave NV v Bremer Handelsgesellschaft GmbH, The Hansa Nord [1976] QB 44, trivial breach will not allow people to repute a contract. Innominate terms are good, as the can be applied to individual cases, and are therefore flexible. However, remedies are uncertain with innominate terms, as shown by the Court of Appeal in BS & N Ltd (BVI) v Micado Shipping Ltd (Malta), The Seaflower [2001] 1 All ER (Comm) 240. This was a case in which a clause in a charterparty requiring the approval of a ship by the major oil companies was help to be a condition and not an innominate term of the contract. Waller LJ adopted a set of conditions outlining the circumstances when a term will be held to be a condition.

In Hong Kong Fir Shipping Co v Kawasaki Kisen Kaisha [1962] 2 QB 26 it was held that the term in question was neither a condition nor a warranty, and in determining whether the defendants could terminate the contract, it was necessary to look at the consequences of the breach, to see if it deprived the innocent party of substantially the whole benefit he should have received under the contract. On the facts, this was not the case because the charter party still had a sizeable time to run. After the Hong Kong Fir Shipping Co v Kawasaki Kisen Kaisha [1962] 2 QB 26 case, there was some confusion as to whether the breach-based test which applied to innominate terms had replaced the term-based test which relied on the distinction between conditions and warranties, or merely added to it an alternation in certain circumstances. In The Mihalis Angelos [1970] 3 WLR 601 CA the Court of Appeal reverted to the term-based test. The owners of the vessel stated that the vessel was ‘expected ready to load’ on or about 1st July. It was discovered that this was not so. It was held that the term was a condition and that the contract could be treated as discharged. In 1976, two cases were decided on the breach-based principle. In the Cehave v Bremer Handelsgesellschaft MBH, The Hansa Nord [1976] QB 44 it was held that although the Sales of Goods Act 1979 had classified some terms as conditions and warranties, it did not follow that all the terms had to be so classified. Accordingly, the court could consider the effect of the breach. Since this was not serious, the buyer had not been entitled to reject. In Reardon Smith v Hansen Tangen [1976] 1 WLR 989 it was held that the House of Lords rejected the argument. The statement was an innominate term, not a condition and given that the effect of the breach was trivial, it did not justify termination of the contract.

The time for determining whether a clause was a condition or an innominate term is at the time of contracting, not subsequent to the breach. Conventionally, a term is a condition if it has been established as such by statute, by precedent or by the intention of the parties. In Lombard North Central v Butterworth [1987] 2 WLR 7 CA it was held that the claim succeeded because the contract specifically stated that the time of payment of each instalment was to be of the essence of the contract.

The mere use of the word ‘condition’ is not definite. In Schuler v Wickman Tool Sales Ltd [1974] AC 235 HL, the House of Lords held that breach of a ‘condition’ that a distributor should visit six customers every week could not have been intended to allow rescission. The word ‘condition’ had not been used in this particular sense. There was in the contract a separate clause, which indicated when, and how the contract was terminated.

If a term is not a condition, then the ‘wait and see’ modus operandi can be used to decide whether the gravity of the breach is such that it deprived the innocent party as much to terminate the contract. The term-based test has the benefit of predictability and certainty. The only area of possible uncertainty is, where parties have to wait for the courts to decide on the classification of terms. The advantage if certainty is countered by the fact that it is possible to terminate a contract for what may be a minor breach as in Arcos Ltd v E. A. Ronaasen [1933] AC 470. The breach-based test arguably brings flexibility to the law. The courts can decide whether the severity of the breach entitles the innocent party to terminate the contract. But, this makes it more intricate for the innocent party to recognize when they can terminate the contract.

Damages are a “sum of money awarded by a court as compensation for a tort or a breach of contract” [Jonathan Law & Elizabeth A. Martin, “A Dictionary of Law”, Seventh Edition, Oxford University Press]. The law relating to damages is in a state of flux. There is need of clarification by means of authoritative ruling by the House of Lords. Action for damages must be distinguished from ‘action for an agreed sum’. However, where the co-operation of the other party is required, or the innocent party has no legitimate interest in completing performance, the action for the price will not be obtainable. It is important to note that damages are assessed as at the date of the contract of the acceptance of repudiation so that the award for damages would imitate the whole contract period.

The peculiarity between the different types of contract terms remains of significant importance. Where as a breach of a condition entitles the innocent party to discharge and claim for damages, the breach of a warranty only entitles the innocent party to claim for damages. Peter did not affect the running of the business, as ‘Yachts-R-Us’ were not in breach of Mediterranean law. Therefore he was doing what was reasonable. However, regardless of this he did breach the contract. It is the job of the court to determine whether is was a condition or a warranty or an innominate term. With this in mind, suitable remedies (if any) will be put on Peter. I would advise Peter to create an argument saying that the wording of the contract is not a condition or was not crystal clear to say that it was. In past cases, where the conditions have not been clear, the courts have yielded in favour of the defendant.

Bibliography

Referenced articles and books:

• Peel, “Part Payment of a Debt is no Consideration” (1994) 100 LQR 353
• Phil Harris, “An Introduction to Law”, Seventh Edition, Cambridge University Press
• Jill Poole, “Textbook on Contract Law”, Ninth Edition, Oxford University Press
• Jill Poole, “Casebook on Contract Law”, Ninth Edition, Oxford University Press
• Jonathan Law & Elizabeth A. Martin, “A Dictionary of Law”, Seventh Edition, Oxford University Press
• Marcel Berlins & Clare Dyer, “The Law Machine”, Fifth Edition
• Chitty on Contracts, section on Consideration
• Robert Duxbury “Contract Law”, 1st Edition, Sweet & Maxwell

Referenced Cases:

Poussard v Spiers And Pond [1876] LR 1 QBD 410

L.Schuler A.G. And Wickman Machine Tool Sales LTD. [1974]

Bettini v Gye [1876] LR 1 QBD 183

Cehave NV v Bremer Handelsgesellschaft GmbH, The Hansa Nord [1976] QB 44

BS & N Ltd (BVI) v Micado Shipping Ltd (Malta), The Seaflower [2001] 1 All ER (Comm) 240

Hong Kong Fir Shipping Co v Ksawasaki Kisen Kaisha [1962] 2 QB 26

The Mihalis Angelos [1970] 3 WLR 601 CA

Reardon Smith v Hansen Tangen [1976] 1 WLR 989

Lombard North Central v Butterworth [1987] 2 WLR 7 CA

Arcos Ltd v E. A. Ronaasen [1933] AC 470