CHAPTER 3: Consideration Law

Introduction

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. (Note: if a contract is made by deed, then consideration is
not needed.)

For example, if one party, A (the promisor) promises to mow the lawn of another, B (the
promisee), A's promise will only be enforceable by B as a contract if B has provided
consideration. The consideration from B might normally take the form of a payment of money
but could consist of some other service to which A might agree. Further, the promise of a money
payment or service in the future is just as sufficient a consideration as payment itself or the
actual rendering of the service. Thus the promisee has to give something in return for the
promise of the promisor in order to convert a bare promise made in his favour into a binding
contract.

DEFINITION OF CONTRACT CONSIDERATION

Lush J. in Currie v Misa (1875) LR 10 Exch 153 refered to consideration as consisting of a

"... some right, interest, profit or benefit accruing to one party, or some forebearance, detriment,
loss or responsibility given, suffered or undertaken by the other."

The definition given by Sir Frederick Pollock, approved by Lord Dunedin in Dunlop v Selfridge
Ltd [1915] AC 847, is as follows:

"An act or forebearance 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."

TYPES OF CONSIDERATION

1. EXECUTORY CONSIDERATION

Consideration is called "executory" where there is an exchange of promises to perform acts in the
future, eg a bilateral contract for the supply of goods whereby A promises to deliver goods to B
at a future date and B promises to pay on delivery. If A does not deliver them, this is a breach of
contract and B can sue. If A delivers the goods his consideration then becomes executed.
2. EXECUTED CONSIDERATION

If one party makes a promise in exchange for an act by the other party, when that act is
completed, it is executed consideration, eg in a unilateral contract where A offers £50 reward for
the return of her lost handbag, if B finds the bag and returns it, B's consideration is executed.

RULES GOVERNING CONSIDERATION

1. CONSIDERATION MUST NOT BE PAST

If one party voluntarily performs an act, and the other party then makes a promise, the
consideration for the promise is said to be in the past. The rule is that past consideration is no
consideration, so it is not valid and cannot be used to sue on a contract. For example, A gives B a
lift home in his car. On arrival B promises to give A £5 towards the petrol. A cannot enforce this
promise as his consideration, giving B a lift, is past.

Re McArdle (1951)

A wife and her three grown-up children lived together in a house. The wife of one of the children
did some decorating and later the children promised to pay her £488 and they signed a document
to this effect.

It was held that the promise was unenforceable as all the work had been done before the promise
was made and was therefore past consideration.

EXCEPTIONS TO THIS RULE:

(A) PREVIOUS REQUEST

If the promisor has previously asked the other party to provide goods or services, then a promise
made after they are provided will be treated as binding. See:

Lampleigh v Braithwait (1615)

Braithwait killed someone and then asked Lampleigh to get him a pardon. Lampleigh got the
pardon and gave it to Braithwait who promised to pay Lampleigh £100 for his trouble.

It was held that although Lampleigh's consideration was past (he had got the pardon)
Braithwaite's promise to pay could be linked to Braithwaite's earlier request and treated as one
agreement, so it could be implied at the time of the request that Lampleigh would be paid.
(B) BUSINESS SITUATIONS

If something is done in a business context and it is clearly understood by both sides that it will be
paid for, then past consideration will be valid. See:

Re Casey's Patent (1892)

A and B owned a patent and C was the manager who had worked on it for two years. A and B
then promised C a one-third share in the invention for his help in developing it. The patents were
transferred to C but A and B then claimed their return.

It was held that C could rely on the agreement. Even though C's consideration was in the past, it
had been done in a business situation, at the request of A and B and it was understood by both
sides that C would be paid and the subsequent promise to pay merely fixed the amount.

Note: The principles in Lampleigh v Braithwait as interpreted in Re Casey's Patents were applied
by the Privy Council in:

Pao On v Lau Yiu Long (1980)

Lord Scarman said:

"An act done before the giving of a promise to make a payment or to confer some other benefit
can sometimes be consideration for the promise. The act must have been done at the promisors'
request: the parties must have understood that the act was to be remunerated either by a payment
or the conferment of some other benefit: and payment, or the conferment of a benefit, must have
been legally enforceable had it been promised in advance."

(C) THE BILLS OF EXCHANGE ACT 1882

Under s27(1) it is provided that any antecedent debt or liability is valid consideration for a bill of
exchange. For example, A mows B's lawn and a week later B gives A a cheque for £10. A's work
is valid consideration in exchange for the cheque.
2. CONSIDERATION MUST BE SUFFICIENT BUT NEED NOT BE ADEQUATE

Providing consideration has some value, the courts will not investigate its adequacy. Where
consideration is recognised by the law as having some value, it is described as "real" or
"sufficient" consideration. The courts will not investigate contracts to see if the parties have got
equal value.

Chapple v Nestle (1959)

Nestle were running a special offer whereby members of the public could obtain a music record
by sending off three wrappers from Nestle's chocolate bars plus some money. The copyright to
the records was owned by Chapple, who claimed that there had been breaches of their copyright.
The case turned round whether the three wrappers were part of the consideration. It was held that
they were, even though they were then thrown away when received.

3. CONSIDERATION MUST MOVE FROM THE PROMISEE

The person who wishes to enforce the contract must show that they provided consideration; it is
not enough to show that someone else provided consideration. The promisee must show that
consideration "moved from" (ie, was provided by) him. The consideration does not have to move
to the promisor. If there are three parties involved, problems may arise. See:

Price v Easton (1833)

Easton made a contract with X that in return for X doing work for him, Easton would pay Price
£19. X did the work but Easton did not pay, so Price sued. It was held that Price's claim must
fail, as he had not provided consideration.

4. FOREBEARANCE TO SUE

If one person has a valid claim against another (in contract or tort) but promises to forbear from
enforcing it, that will constitute valid consideration if made in return for a promise by the other
to settle the claim. See:

Alliance Bank v Broom (1864)

The defendant owed an unsecured debt to the plaintiffs. When the plaintiffs asked for some
security, the defendant promised to provide some goods but never produced them. When the
plaintiffs tried to enforce the agreement for the security, the defendant argued that the plaintiffs
had not provided any consideration.

It was held that normally in such a case, the bank would promise not to enforce the debt, but this
was not done here. By not suing, however, the bank had shown forbearance and this was valid
consideration, so the agreement to provide security was binding.
5. EXISTING PUBLIC DUTY

If someone is under a public duty to do a particular task, then agreeing to do that task is not
sufficient consideration for a contract. See:

Collins v Godefroy (1831)

Godefroy promised to pay Collins if Collins would attend court and give evidence for Godefroy.
Collins had been served with a subpoena (ie, a court order telling someone they must attend).
Collins sued for payment. It was held that as Collins was under a legal duty to attend court he
had not provided consideration. His action therefore failed.

If someone exceeds their public duty, then this may be valid consideration. See:

Glassbrooke v GCC (1925)

The police were under a duty to protect a coal mine during a strike, and proposed mobile units.
The mine owner promised to pay for police to be stationed on the premises. The police complied
with this request but when they claimed the money, the mine owner refused to pay saying that
the police had simply carried out their public duty.

It was held that although the police were bound to provide protection, they had a discretion as to
the form it should take. As they believed mobile police were sufficient, they had acted over their
normal duties. The extra protection was good consideration for the promise by the mine owner to
pay for it and so the police were entitled to payment.

6. EXISTING CONTRACTUAL DUTY

If someone promises to do something they are already bound to do under a contract, that is not
valid consideration. Contrast:

Stilk v Myrick (1809)

Two out of eleven sailors deserted a ship. The captain promised to pay the remaining crew extra
money if they sailed the ship back, but later refused to pay.

It was held that as the sailors were already bound by their contract to sail back and to meet such
emergencies of the voyage, promising to sail back was not valid consideration. Thus the captain
did not have to pay the extra money.
Hartley v Ponsonby (1857)

When nineteen out of thirty-six crew of a ship deserted, the captain promised to pay the
remaining crew extra money to sail back, but later refused to pay saying that they were only
doing their normal jobs. In this case, however, the ship was so seriously undermanned that the
rest of the journey had become extremely hazardous.

It was held that sailing the ship back in such dangerous conditions was over and above their
normal duties. It discharged the sailors from their existing contract and left them free to enter
into a new contract for the rest of the voyage. They were therefore entitled to the money.

The principle set out in Stilk v Myrick was amended by the following case. Now, if the
performance of an existing contractual duty confers a practical benefit on the other party this can
constitute valid consideration.

Williams v Roffey (1990)

Roffey had a contract to refurbish a block of flats and had sub-contracted the carpentry work to
Williams. After the work had begun, it became apparent that Williams had underestimated the
cost of the work and was in financial difficulties. Roffey, concerned that the work would not be
completed on time and that as a result they would fall foul of a penalty clause in their main
contract with the owner, agreed to pay Williams an extra payment per flat. Williams completed
the work on more flats but did not receive full payment. He stopped work and brought an action
for damages. In the Court of Appeal, Roffey argued that Williams was only doing what he was
contractually bound to do and so had not provided consideration.

It was held that where a party to an existing contract later agrees to pay an extra "bonus" in order
to ensure that the other party performs his obligations under the contract, then that agreement is
binding if the party agreeing to pay the bonus has thereby obtained some new practical
advantage or avoided a disadvantage. In the present case there were benefits to Roffey including
(a) making sure Williams continued his work, (b) avoiding payment under a damages clause of
the main contract if Williams was late, and (c) avoiding the expense and trouble of getting
someone else. Therefore, Williams was entitled to payment.

7. EXISTING CONTRACTUAL DUTY OWED TO A THIRD PARTY

If a party promises to do something for a second party, but is already bound by a contract to do
this for a third party, this is good consideration. See:

Scotson v Pegg (1861)

Scotson contracted to deliver coal to X, or to X's order. X sold the coal to Pegg and ordered
Scotson to deliver the coal to Pegg. Then Pegg promised Scotson that he would unload it at a
fixed rate. In an action by Scotson to enforce Pegg's promise, Pegg argued that the promise was
not binding because Scotson had not provided consideration as Scotson was bound by his
contract with X (a third party) to deliver the coal.
It was held that Scotson's delivery of coal (the performance of an existing contractual duty to a
third party, X) was a benefit to Pegg and was valid consideration. It could also been seen as a
detriment to Scotson, as they could have broken their contract with X and paid damages.

Part Payments of Debts

THE GENERAL RULE

If one person owes a sum of money to another and agrees to pay part of this in full settlement,
the rule at common law (the rule in Pinnel's Case (1602) 5 CoRep 117a) is that part-payment of a
debt is not good consideration for a promise to forgo the balance. Thus, if A owes B £50 and B
accepts £25 in full satisfaction on the due date, there is nothing to prevent B from claiming the
balance at a later date, since there is no consideration proceeding from A to enforce the promise
of B to accept part-payment. This is because he is already bound to pay the full amount, an
agreement based on the same principle as Stilk v Myrick (1809). It also protects a creditor from
the economic duress of his debtor.

In Pinnel's Case (1602), Cole owed Pinnel £8-10s-0d (£8.50) which was due on 11 November.
At Pinnel's request, Cole payed £5-2s-2d (£5.11) on 1 October, which Pinnel accepted in full
settlement of the debt. Pinnel sued Cole for the amount owed. It was held that part-payment in
itself was not consideration. However, it was held that the agreement to accept part-payment
would be binding if the debtor, at the creditor's request, provided some fresh consideration.
Consideration might be provided if the creditor agrees to accept:

 part-payment on an earlier date than the due date (ie, as in Pinnel's Case itself); or
 chattel instead of money (a "horse, hawk or robe" may be more beneficial than money);
or
 part-payment in a different place to that originally specified.

Despite its harshness the rule in Pinnel's Case was affirmed by the House of Lords and still
represents the law:

In Foakes v Beer (1884) 9 App Cas 605, Mrs Beer had obtained judgment for a debt against Dr
Foakes, who subsequently asked for time to pay. She agreed that she would take no further
action in the matter provided that Foakes paid £500 immediately and the rest by half-yearly
instalments of £150. Foakes duly kept to his side of the agreement. Judgment debts, however,
carry interest. The House of Lords held that Mrs Beer was entitled to the £360 interest which had
accrued. Foakes had not "bought" her promise to take no further action on the judgment. He had
not provided any consideration.
More recent cases include:

 Ferguson v Davies (1996) The Independent December 12th 1996

EXCEPTIONS TO THE RULE

Apart from the exceptions to the rule mentioned in Pinnel's Case itself, there are two others at
common law and one exception in equity.

A) PART-PAYMENT OF THE DEBT BY A THIRD PARTY

A promise to accept a smaller sum in full satisfaction will be binding on a creditor where the
part-payment is made by a third party on condition that the debtor is released from the obligation
to pay the full amount. See:

Hirachand Punamchand v Temple [1911] 2 KB 330 - A father paid a smaller sum to a money
lender to pay his son's debts, which the money lender accepted in full settlement. Later the
money lender sued for the balance. It was held that the part-payment was valid consideration,
and that to allow the moneylender's claim would be a fraud on the father.

B) COMPOSITION AGREEMENTS

The rule does not apply to composition agreements. This is an agreement between a debtor and a
group of creditors, under which the creditors agree to accept a percentage of their debts (eg, 50p
in the pound) in full settlement. Despite the absence of consideration, the courts will not allow an
individual creditor to sue the debtor for the balance: Wood v Robarts (1818). The reason usually
advanced for this rule is that to allow an individual creditor to claim the balance would amount
to a fraud on the other creditors who had all agreed to the percentage.

C) PROMISSORY ESTOPPEL

This is the name that has been given to the equitable doctrine which has as its principal source
the obiter dicta of Denning J in High Trees House Ltd [1947] (see below)

PROMISSORY ESTOPPEL

A further exception to the rule in Pinnel's Case is to be found in the equitable doctrine of
promissory estoppel. The doctrine provides a means of making a promise binding, in certain
circumstances, in the absence of consideration. The principle is that if someone (the promisor)
makes a promise, which another person acts on, the promisor is stopped (or estopped) from
going back on the promise, even though the other person did not provide consideration (in so far
as is it is inequitable to do so).

DEVELOPMENT

The modern doctrine is largely based on dicta of Denning J in Central London Property Trust Ltd
v High Trees House Ltd [1947] 1 KB 130 and on the decision of the House of Lords in Tool
Metal Manufacturing Co Ltd v Tungsten Electric Co Ltd [1955] 1 WLR 761 and can be traced to
Hughes v Metropolitan Railway (1877) 2 App Cas 439.

(a) Hughes Case (1877) - In October a landlord gave his tenant six months notice to repair and in
the event of a failure to repair, the lease would be forfeited. In November the landlord opened
negotiations for the sale of the premises, but these ended in December without agreement.
Meanwhile the tenant had not done the repairs and when the six months period was up, the
landlord sought possession.
The House of Lords held that the landlord could not do so. The landlord had, by his conduct, led
the tenant to suppose that as long as negotiations went on, the landlord would not enforce the
notice. He could not subsequently take advantage of the tenant relying on this. Therefore, the
notice did not run during the period of negotiations. However, the six month period would begin
to run again from the date of the breakdown of negotiations.

(b) High Trees (1947) - In 1937 the Ps granted a 99 year lease on a block of flats in London to
the Ds at an annual rent of £2500. Because of the outbreak of war in 1939, the Ds could not get
enough tenants and in 1940 the Ps agreed in writing to reduce the rent to £1250. After the war in
1945 all the flats were occupied and the Ps sued to recover the arrears of rent as fixed by the
1937 agreement for the last two quarters of 1945.
Denning J held that they were entitled to recover this money as their promise to accept only half
was intended to apply during war conditions. This is the ratio decidendi of the case. He stated
obiter, that if the Ps sued for the arrears from 1940-45, the 1940 agreement would have defeated
their claim. Even though the Ds did not provide consideration for the Ps' promise to accept half
rent, this promise was intended to be binding and was acted on by the Ds. Therefore the Ps were
estopped from going back on their promise and could not claim the full rent for 1940-45.

(c) Tool Metal Case (1955) - see below.

Thus it seems that if a person promises that he will not insist on his strict legal rights, and the
promise is acted upon, then the law will require the promise to be honoured even though it is not
supported by consideration.
REQUIREMENTS

The exact scope of the doctrine of promissory estoppel is a matter of debate but it is clear that
certain requirements must be satisfied before the doctrine can come into play:

(A) CONTRACTUAL/LEGAL RELATIONSHIP

All the cases relied on by Denning J in High Trees House were cases of contract. However, in
Durham Fancy Goods v Michael Jackson (Fancy Goods) [1968] 2 QB 839, Donaldson J said that
an existing contractual relationship was not necessary providing there was "a pre-existing legal
relationship which could, in certain circumstances, give rise to liabilities and penalties".

(B) PROMISE

There must be a clear and unambiguous statement by the promisor that his strict legal rights will
not be enforced, ie one party must make a promise which is intended to be binding: The
Scaptrade [1983] QB 529. However, it can be implied or made by conduct as in the Hughes Case
(1877).

(C) RELIANCE

The promisee must have acted in reliance on the promise. There is some uncertainty as to
whether the promisee (i) should have relied on the promise by changing his position to their
detriment (ie, so that he is put in a worse position if the promise is revoked): Ajayi v Briscoe
[1964] 1 WLR 1326, or (ii) whether they should have merely altered their position in some way,
not necessarily for the worse.

In Alan Co Ltd v El Nasr Export & Import Co [1972] 2 QB 189, Lord Denning disclaimed
detriment as an element of promissory estoppel, saying it was sufficient if the debtor acted on the
promise by paying the lower sum. He said that "he must have been led to act differently from
what he otherwise would have done".

(D) INEQUITABLE TO REVERT

It must be inequitable for the promisor to go back on his promise and revert to his strict legal
rights. If the promisor's promise has been extracted by improper pressure it will not be
inequitable for the promisor to go back on his promise. See:

 D & C Builders v Rees [1965] 2 QB 617 - The Ps, a small building company, had
completed some work for Mr Rees for which he owed the company £482. For months the
company, which was in severe financial difficulties, pressed for payment. Eventually,
Mrs Rees, who had become aware of the company's problems, contacted the company
 and offered £300 in full settlement. She added that if the company refused this offer they
would get nothing. The company reluctantly accepted a cheque for £300 "in completion
of the account" and later sued for the balance. The Court of Appeal held that the company
was entitled to succeed. Lord Denning was of the view that it was not inequitable for the
creditors to go back on their word and claim the balance as the debtor had acted
inequitably by exerting improper pressure.

(E) A SHIELD OR A SWORD?

At one point it was said in Coombe v Coombe [1951] 2 KB 215 that the doctrine may only be
raised as a defence: "as a shield and not a sword". It was held that the doctrine cannot be raised
as a cause of action. This means that the doctrine only operates as a defence to a claim and
cannot be used as the basis for a case. However, this was doubted in Re Wyven Developments
[1974] 1 WLR 1097 by Templeman J, who appeared to think that this was no longer the case and
that it could create rights. Lord Denning in Evenden v Guildford City AFC [1975] QB 917 also
adopted this approach.

(F) EXTINCTIVE OR SUSPENSIVE OF RIGHTS?

Another question raised by this doctrine is whether it extinguishes rights or merely suspends
them. The prevalent authorities are in favour of it merely suspending rights, which can be
revived by giving reasonable notice or by conditions changing.

(a) Where the debtor's contractual obligation is to make periodic payments, the creditor's
right to receive payments during the period of suspension may be permanently
extinguished, but the creditor may revert to their strict contractual rights either upon
giving reasonable notice, or where the circumstances which gave rise to the promise have
changed as in High Trees.

See:

Tool Metal Case (1955) - Patent owners promised to suspend periodic payments of
compensation due to them from manufacturers from the outbreak of war. It was held by the
House of Lords that the promise was binding during the period of suspension, but the owners
could, on giving reasonable notice to the other party, revert to their legal entitlement to receive
the compensation payments.

(b) It is not settled law that there can be no such resumption of payments in relation to a promise
to forgo a single sum. In D & C Builders, which concerned liability for a single lump sum, Lord
Denning expressed obiter that the court would not permit the promisor to revert to his strict legal
right and that the estoppel would be final and permanent if the promise was intended and
understood to be permanent in effect.
The preferred approach is to look at the nature of the promise: if as in High Trees and Tool
Metal, it is intended to be temporary in application and to reserve to the promisor the right
subsequently to reassert his strict legal rights, the effect will be suspensive only; and if on the
other hand, it is intended to be permanent (as envisaged in D & C Builders), then there is no
reason why in principle or authority the promise should not be given its full effect so as to
extinguish the promisor's right.

Further Reading and resources for the chapter:

MacIntyre, E. ( 2012) Business law 6th edn. Harlow: Pearson Longman.

Roach, Lee. (2012) Card & James’ Business law for business, accounting & finance
students 2nd edn. OUP Oxford.

Keenan, D. and Riches S. (2009) Business law 9th edn. Harlow: Pearson Longman.

ACCA PAPER F4 ENG (June 2011), Corporate and business law, the complete text.
ACCA