The Role of Consideration in Law

Lord Goff described contract law in England as being ‘hampered’ by the ‘unnecessary doctrine of consideration’. White v Jones [1995] 2 AC 207 at p263.

Discuss the role of consideration in English law and assess whether it is ‘unnecessary’.

Introduction

The doctrine of consideration has probably been regarded as one of the most controversial issues in the English Law of contract. Never the less it plays a very central role in English Law. To create a legally enforceable contract, consideration must be present. However, when a contract is made by deed, consideration is not a requirement. In the absence of consideration an agreement not made in deed is not binding. This is known as “nundum pactum” (promise made with no agreement to support it). Some people such as Lord Goff argue that consideration is unnecessary whereas others, claim that it is central in determining whether a contract exists or not. Whether consideration is really ‘unnecessary’ or not will be discussed throughout the essay. In contractual terms the meaning of consideration is much different to that in real life. There are many definitions for consideration. Consideration is the ‘agreed equivalent and inducing cause of the promise (pg 119, contract law purple book). It is the price for which the promise of the other is bought (law of contract, pg 60). Traditionally, the doctrine of consideration has been defined as either a detriment to the promisee or a benefit to the promisor.

Currie v Misa (1875) define it as, ‘a valuable consideration, in the sense of the law, may consist either in some right, interest, profit, or benefit accruing to the one party, or some forbearance, detriment, loss, or responsibility given, suffered, or undertaken by the other.’ (at162)(maybe find journal or reference business law james marson). The rule that‘consideration must move from the promisee’, means that detriment to the promisee will be present in nearly all cases and benefit to the promisor is often merely a by-product of this detriment, but either one is sufficient. A number of different features complicate this simple definition. This matter will be discussed further in the essay. A more recent definition suggests that both parties must contribute to the bargain. The house of lords defined consideration in the case of Dunlop v Selfridge (1915) AC 847( journal or lecture notes) as: ‘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.’ In the case of Thomas v Thomas (1842) consideration was defined as ‘something of value in the eyes of the law, moving from the claimant, it may be some detriment to the claimant or some benefit to the defendant’ (reference notes). The definitions themselves suggest that consideration has come under fire due to its somewhat obdurate nature and inconsistencies. However, as the essay shall discuss later some of these past ill effects have been mitigated through developments of the law in promissory estoppels. The basic rule of consideration is to determine which promises should be enforced and which are to be regarded as gratuitous.

Is consideration necessary?

The instability in the definition and scope of consideration gives courts considerable freedom in determining the enforceability of any promise. This has provoked criticisms of the doctrine.

42 P.S. Atiyah, Consideration in Contracts: a Fundamental Restatement (Australian National University. Press, 1971), p9

Atiyah’s, Essays in Contract (Clarendon Press, 1986) 179, Professor Atiyah argues on the basis of the law actually applied in the courts that consideration is used in a broader much wider sense than simply bargain:

‘when the courts found a sufficient reason for enforcing a promise they enforced it; and when they found that for one reason or another it was undesirable to enforce a promise, they did not enforce it. It seems highly probable that when the courts first used the word ‘consideration’ they meant no more than that there was a ‘reason’ for the enforcement of a promise.’ .

This interpretation of consideration admits that the courts have always, though variably, adopted a functional approach to the findings of bargain consideration. Basically, they manipulate the rules or resort to avoidance devices to achieve just results. The main criticism is that the finding of consideration merely signifies the conclusion, rather than explaining why, a promise is enforceable. The doctrine of promissory estoppel is the promisors unconscionable inducement of the promisee’s reliance; the logical response is to avoid the promisee’s detriment although courts have enforced the promise. (pg 180 contract law new bk) It seeks to attract some enforcement of undertakings which aren’t supported by consideration nor contained in a deed. Atiyah however, regards promissory estoppel which protects reasonable reliance on a promise, not as an exception to consideration, but as another ‘consideration’ supporting enforcement.

Invented consideration: In consideration: A critical Analysis of Professor Atiyah’s Fundamental restatement’ (1976) treital argues in favour of the traditional view of bargain consideration. However, he still emphasises the flexibility of bargain consideration. He also suggests that there could be a possibility that the English courts could ‘invent’ consideration. This is because they could treat an act or forbearance as valid consideration, even though it was not the promisor’s purpose to obtain it (chappell v Nestle 1960). Secondly, although there is no prejudice to the promisee (Shadwell)

The doctrine is narrower in the US ‘nothing is consideration that is not regarded as such by both parties (philpots v Gruniger 1872). When compared to the US law, the English definition of consideration seems more accurate. The US law needs a wider doctrine of promissory estoppel.

CONSIDERATION POSITIVE

There are many criticisms against the doctrine of consideration however, the positive aspects must not be overlooked. The doctrine of consideration protects the promisee’s reliance, e.g. forbearance to sue. This is where X has a claim against Y, X provides consideration for Y’s promise if X: forbears from suing on his claim and compromises his claim. For example, where X’s claim is doubtful in law, his compromise or forbearance is still good consideration this is shown in the case of Haigh v Brooks (1839). Haigh (claimant) sold cotton to Lees on credit. Brooks (Defendant) agreed to guarantee his debt to Haigh. The agreement did not satisfy the Statute of Frauds. Lee did not pay his debt on time. Plaintiff sued Defendant that denies the debt failure to follow the Statue of Frauds and lack of consideration.

No matter how small the act can constitute consideration is a party to contract does something they do not have to do or does not do something they have the right to do. This refers to ‘value’

It also helps in Preventing the promisors enrichment at the promisees expense (eg the exception to the past consideration rule. Although past consideration is not good consideration there are exceptions to this rule as sometimes the exact order of events is not decisive if the court is satisfied that the promisor’s promise and the promisee’s past actions are, in fact, part of the same overall transaction. This is the gist of the major exception to the past consideration rule, the doctrine of implied assumpsit. Lampleigh v Brathwait (1615), where B (sentenced to death) asked L to obtain a pardon from King James I. L was successful. B’s subsequent promise to pay £1000 was held enforceable.

Consideration requires at least the form of a present or future exchange. The promisors mere wish to confer a benefit is unenforceable, since nothing comes back the other way in exchange for it. Therefore mere motive is not good consideration it is merely a motive for the promise. In Thomas v Thomas (1842), a testator expressed his intention to let his widow have his house for the rest of her life. The executors after his death promised to carry out the testator’s desire if the widow paid £1 per annum towards the ground rent and kept the house in repair. The court held that the testators wish merely the motive for the transaction and that only the widows promise to pay and make repairs were of value in the eye of the law as good consideration for the executors promise.

AGAINST

Recognising performance actually bargained for (ie desired) when there is some technical obstacle to its qualifying as consideration (eg. Nominal or invented consideration in Chappell v Nestle, and ‘practical benefit’ in Williams v roffey brothers) This case (Chappell and Co Ltd v Nestlé [1960] AC 87 House of Lords) demonstrates that the consideration (see: Consideration) in a contract may be very, very close to non-existent at yet still be sufficient to uphold the agreement. Nestle offered a record to customers who sent a certain number of chocolate bar wrappers. Although the wrappers were simply thrown away, it was sufficient consideration to support the agreement.

In Nestle v Chappell a promisee supplied three wrappers from the promisors chocolate bars, in exchange for a promised gramophone record. This case suggests that factual benefit to the promisor and detriment to the promisee are doubtful. Atiyah fights that the promise in Nestle was enforceable without consideration in the bargain sense since: ‘it would be ridiculous to assert that the sending or the receipt of the wrappers necessarily involved an actual detriment to the sender or a benefit to the defendants.’ (PS Atiyah, ‘Consideration: A restatement’ in Atiyah’s Essays on Contract (Clarendon Press, 1986) 193. Consideration not needed to be adequate. This principle has given rise to some peculiar decisions, eg. That chocolate bar wrappers were capable of being consideration (chapel v Nestle 1959) the need to consider whether the wrappers could constitute consideration arose from copyright law.

Another issue which must be addressed is that of part payments of debt. The law currently refuses to recognise a partial payment of a debt as valid consideration for a promise to clear the entire debt. This was decided in Foakes v Beer. In this case the claimant said she would not take legal action if the defendant gave her £500 immediately and paid the remaining in instalments. The agreement did not mention interest however. After Dr Foakes had paid the debt Mrs Beer asked for the interest but he refused, relying on their agreement. She sued claiming that there was no consideration for the agreement. The House of Lords upheld her claim. This case supports the rule of consideration that a partial payment can’t be seen as a benefit over a legal right to the full sum. This rule was re-confirmed in Re Selectmove. However, this view does not take account of the surrounding circumstances which could result in a practical benefit for the promisor, for example if the debtor owed multiple debts and was on the verge of default. This can be justified as protecting creditors from unfair pressure and maintaining the principal that consideration must consist of some form of benefit to the promisor or detriment to the promisee.

The promise must be more than a duty is also a rule of consideration which must be fulfilled. The case of Williams v Roffey Brothers 1990 attracts much controversy. The case involved the defendants who were the main contractors on a building site realising that the subcontractor carpenters on the job were in financial difficulties and in danger of not completing the work. To ensure the claimants completed work on time the defendants offered them extra payments. This was because the defendants would have been liable to a penalty clause if the work was not complete on time. The offer was accepted but when the payments were not forthcoming the claimants sued for the payments. It was held that the claimant was entitled to the £10,300 because the subcontractors were genuinely in financial difficulties and the defendants did obtain a benefit from the subcontractors work. They wouldn’t have to pay the penalty clause. The case has contributed to the criticisms of the consideration doctrine, as it only validates one sided contract modifications involving ‘the same for more’, but not ‘less for the same’ modification (foackes v beer, confirmed by Re Selectmove).

So far the doctrine supports the distinction between gifts and bargains, it is internally incoherent in making artificial dissimilarities as we have seen in the cases above. The main criticisms of the doctrine is that it is over inclusive in enforcing non- bargains. It is also under- inclusive in failing to enforce some promises that are worthy of enforcement.

The instability of the consideration doctrine is reinforced by the rule that consideration need not be adequate (although it must be sufficient). This allows courts to recognise as valid consideration: nominal consideration, compromises of claims or forbearances to sue and certain intangible benefits. However, consideration must be sufficient, ie of value in ‘the eye of the law’ as mentioned earlier. This allows courts to exclude as invalid consideration: motive, conditional gifts, certain intangible benefits, illusory benefits, and bad faith compromises of forbearance.

English law and French law have rules which may result in enforcement of only those contracts which are bargains. (‘cause and consideration: a study paralled, Markesinis (1978) 37 cambridge lane journal 53)

Forbearing to sue someone can be consideration if the action was honestly thought to be valuable. However, carrying out an existing duty is not consideration, though doing something more could be. This approach applies whether the duty is a public one or a contractual one. For example, in stilk v myrick 1809 a captain of a ship promised extra money to hsi crew id they would bring the ship home following two desrtations. The crew could not sue for the money as they were already contractually bound to bring the ship home. But in Hartley v ponsonby 1857 extra money promised for bringing a ship home could be claimed, because the number of desertations was so great as to release the remaining crew from their contractual duties.

But the attitude of the courts here is changing. An agreement to perform an obligation already owed to a third party may amount to consideration. Also, Considering the definitions mentioned earlier it seems that the requirement for a benefit has moved from the need to show a legal benefit, to a practical benefit. The case of The Eurymedon [1974] shows this. In this case there was a difficulty in establishing how a third party stevedore could benefit from an exemption of liability clause which was part of the contract between the shipper and the carrier. It was held that the practical benefit which was having the goods unloaded provided consideration for a collateral contract between the stevedore and the shipper. This is because it enabled the stevedore to benefit from the exemption. This illustrates that the ill effects of the doctrine of consideration have been alleviated by the courts willingness to find consideration, even minimal and already legally obligated benefit, in a commercial context.

Consideration must not have taken place in the past it must be present (or executed) as with Carlill v Carbolic Smoke Ball Company 1893. In this case Carbolic Smoke Ball manufactured and sold The Carbolic Smoke Ball. Advertisements were placed in newspapers offering a reward of 100 pounds to any person who used the smoke ball as directed and contracted influenza, or any other disease. Carlill after seeing the advertisement purchased a ball and used it as directed. Carlill contracted influenza and made a claim for the reward. The defendant refused to pay and Carlill sued for damages. It was judged that a unilateral contract had been established. The defendants were to pay Carlill the 100 pounds. The claimant must show that s/he has “bought” the defendant’s promise. This can also be shown by promising to do or cease from doing some act in return for it. This is referring to executor consideration which consists of a promise; it is something that is going to occur in the future once the contract has been formed. Typically this type of consideration would arise in bilateral contracts.

But if it was merely done in the past before any express or implied promise was made, then it is not consideration. In Roscorla v Thomas 1842 a promise to pay more for a horse which had been bought if it proved satisfactory was unenforceable. In Re Ccardle 1951 a widow who only had a life interest in a house (ie she was entitled to the use of or income from it during her lifetime) carried out some improvements to it. Her children, who were to inherit it after her death, subsequently promised to pay her for the work. This promise was unenforceable, because the consideration for it was past.

It may however be arguable that there was an implied promise at the time that the act allegedly constituting consideration would be rewarded in some way, and the sum was fixed later. In the case of Lampleigh v Braithwaite 1615 the defendant asked the claimant to obtain a royal pardon for him. When the pardon was obtained, the defendant promised to pay the plantiff £1000. The plantiff could claim this sum as the defendant had asked him to carry out the act.

Conclusion

Overall, the criticisms of the doctrine of consideration over weigh the advantages. Consideration undoubtedly has its benefits and to say that it is completely unnecessary would be an exaggeration. However, reform of the doctrine seems necessary. The doctrine cannot be reduced to its evidentiary and cautionary functions. The main options for reform include firstly, to replace consideration with a test of intention. The case of Williams v Roffey seems to signal a shift away from the bargain view of contract towards enforceability on the intention of the partie. This would leave consideration as a requirement at the formation of the original contract. A redefinition of consideration as ‘any good reason for enforcement.’(contract law). Also, an effective reform would be to supplement consideration with a promissory estoppel doctrine which includes adding promises and promises to comply with formality requirements. Finally, it would be effective if the bargain of consideration was retained whilst recognising other good reasons for non- contractual enforcement. Lord Steyn expresses the prevailing attitude, ‘…On balance it seems to me that in modern practice the restrictive influence of consideration has markedly receded in importance.’

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