The Importance of the Doctrine of Consideration in Contract Law - Essay Example

Law: Contract Law. Explain the importance of the doctrine of consideration in contract law. Use examples from case law to illustrate your answer, andexplain why [Name of the writer] [Name of the institution] Law: Contract Law. Explain the importance of the doctrine of consideration in contract law. Use examples from case law to illustrate your answer, and explain why In the formation f contracts two elements are vital. Firstly, the "offer," an indication by one person prepared to contract with another, on certain terms, which are fixed, or capable f being fixed at the time the offer is made.[1] Secondly, there must be an "acceptance", an unconditional assent to a definite offer.[2] These two combine to create certainty that a contract has been formed, for, as in Scammell v Ouston (1941),[3] "if an agreement is uncertain on some important issue...the courts will hold there is no contract."[4] Following this, the elements f consideration and intent provide the contract's "body and substance"[5] So, what is meant by "consideration" and "the intention to create legal relations" English law usually requires prof that the parties have made a bargain, or agreement, [6] this is known as the benefit and detriment test. (Currie v Misa (1875) [7] or "a benefit to one party or a detriment to another."[8] So, in practical terms consideration can be defined as what one party in an agreement is giving, or promising, in exchange for what is being given, or promised, by the other side. [9] This provides mutuality, making the contract enforceable. The Oxford Dictionary f Law definition states, "Consideration is essential to the validity f any contract other than one made by deed. Without consideration an agreement not made by deed is not binding; it is a nudum pactum (naked agreement) governed by the maxim ex nudo pacto non oritur action (a right f action does not arise out f a naked agreement.)"[10] English law does not rely on formalities as a way f identifying intention to create a legally binding contract. Instead it focuses on offer, acceptance and consideration. [11] If these are present, and unless rebutted by contrary evidence, courts operate on the basis f two legal presumptions, that there is no intention to be bound in domestic or social arrangements, but there is intention to be bound in commercial agreements. [12] Professor B.A.Hepple claims that there is no need f a separate requirement f intention, and that a bargain, involving mutuality is sufficient. These views are not generally accepted as it is widely agreed that identifying the parties' intentions is essential to the role f the courts when establishing if a contract was made. [13] It is useful to look at why English law has become so reliant on the consideration element f a contract, and why it has frequently been used as the "badge f enforceability,"[14] Professor Atiyah argues that "consideration" originally meant a "reason for enforcing an agreement."[15] Early forms f contract law mainly involved agreements regarding debt, covenant, or detinue ie., wrongful detention f property, and were only binding if under seal. This method, which required a degree f form such as writing or a deed, was used to prevent fraud and proved that there was an intention to create legal relations. Consideration was first used in the sixteenth century when, in order to enforce informal agreements, the law f assumsit was developed.[16] So, while that the law would, "...still not enforce merely gratuitous promises, ... the law had to develop an element that could distinguish between a proper contractual agreement, and something less that would not."[17] Due to the Law f Property Miscellaneous Provisions Act 1989, form is still required for contracts involving the sale f land. It is also used to offer consumers protection in hire purchase and consumer credit agreements. In the English Common law system, a promise is not legally binding as part f a contract except if it is made in a deed or supported by some consideration. [18] Sir Guenter Treitel Q.C., describes the purpose f consideration as, "...to put some legal limits on the enforceability f agreements even where they are intended to be legally binding and are not vitiated by some factor such as mistake, misrepresentation, duress or illegality."[19] This is a peculiarity found only in English law. In some civil law countries, promises that in England would not be considered binding due to "lack f consideration," can be enforced if they have been made in some notarised writing. The European Civil Law systems were formed around the fifteenth century and based on the Roman Catholic Code f Canon law and the value f good faith. Due to this, their courts take the view that all lawful and sincere agreements are contracts. [20] As English law has developed there has been an insistence on the use f consideration and intention to create legal relations in order to enforce a contract. (Balfour v Balfour (1919))[21] Although it may not be easy to find consideration in a contract, (Ward v Byham (1956)) [22] it could be asked why it is thought to be necessary at all. Originally, the basic idea f consideration was to show that A had bought B's promise. [23] (Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd (1915)) [24] However, there was a general principle f non-interference in the concerns f other people. Therefore, the doctrine was not strictly enforced; it was enough to provide sufficiency f consideration it did not have to be adequate. This meant that, "the consideration provided by one party need not equal in value the consideration provided by the other party."[25](Thomas v Thomas (1842))[26] Since this case it was assumed that consideration must have at least some economic value, and that it must be, "...something which has some value in the eye f the law."[27] The use f the word "sufficiency" also causes uncertainty. Courts have decided it must be real, not as in White v Bluett (1853) [28] where a son tried to use a promise to stop complaining over the distribution f his father's property as consideration. Although, there was an economic element, as a father promised not to enforce the repayment f a debt owed to him by his son, it was held that, "The son had no right to complain, for the father might make what distribution f his property as he liked; and the son's abstaining from what he had no right to do can be no consideration."[29] In this case the court took the view that this type f moral obligation could not be used as any form f value, in other cases the courts appear to almost invent consideration so contracts can be enforced. [30] As in Ward v Byham (1956) where "happiness" was used. In Chappell & Co v Nestle Co Ltd., (1960), [31] the House f Lords held that chocolate wrappers needed to buy records in a special promotion were part f the consideration. The wrappers had no monetary value, for upon receipt Nestl's would simply discard them. [32] Therefore, even something valueless could be used as consideration. From this it can be seen that consideration does not guarantee fairness f bargains. Indeed it could be argued that, as this would not fit the benefit and detriment test, this type f "nominal bargain"[33] should not be allowed. This is the most problematic area f the rules surrounding consideration. To start with, the fact that consideration need not be adequate, just sufficient, means it does not need to be f equal value to that which the other party is offering. This could lead to injustice. There could be some perfectly good reason why A sells his Mercedes to B for a token amount, but what if he is under duress, perhaps being blackmailed by B.[34] Similarly, it is quite fair that, as in Stilk v Myrick (1809)[35] performance f an existing contractual duty was held to be insufficient consideration. An employee should not be allowed to hold his employer to ransom in this way, unless it is proven that the situation changed significantly, and he has undertaken a considerable extra workload after the promise f extra pay. (Hartley v Ponsonby (1857))[36] So why do the courts permit the token element in bargains at all It has been said that, "consideration was originally the reason for the enforcement f a promise."[37] Therefore, even token bargains have a purpose by providing evidence that the parties take the agreement seriously, and show an intention to create legal relations. The doctrine f consideration was also used was where alteration promises were made regarding the part payment f debts. The general rule as established in Pinnel's' case (1602) [38] was that "the gift f a horse, hawk or robe, etc in satisfaction is good." [39] The assumption being that providing something in consideration might be more beneficial to the plaintiff than waiting for the money.[40] This rule was confirmed in the House f Lords in Foakes v Beer (1884)[41]. This "practical benefit" was also the principle in Williams v Roffey Brothers (1990) [42] where it was advantageous to pay more for the same work. However, the rule in Pinnel's Case can be avoided by providing "extra consideration, altering the way payment is made, by paying earlier, at a different time or place or via third party."[43] Possibly due to this, the Law revision Committee 1937 recommended the abolition f the rule in Pinnel's Case, but so far that has not happened. [44] Lord Denning tried a different approach with his use f the equitable principle f promissory estoppel. In his obiter statement in Central London Property Trust v High Trees House (1947), [45] he stated that, "a promise intended to be binding, intended to be acted upon, and in fact acted on, is binding so far as its terms properly apply.[46] Due to this it was held that a promise could be enforced without consideration if it would be wrong for that person to go back on a promise and there has been a reliance on it.[47] He based his views on Lord Cairns' comments in the earlier "equitable waiver" case f Hughes vMetropolitan Railway (1877)[48] It has been suggested that the promisee must have suffered a detriment from reliance on a promise. Lord Denning denied that this was necessary, claiming that someone just needed to have "acted on the belief induced by the other party." (W J Alan & Co v El Nasr (1972))[49]. Other limitations exist, promissory estoppel only applies to the modification or discharge f an existing contractual obligation, [50] therefore "equity is a shield not a sword," it will not allow someone to use equity to instigate a cause f action.[51] (Coombe v Coombe (1951)[52] The promise not to enforce rights must be clear and unequivocal, in The Scaptrade (1983)[53] it was held that the fact that they hadn't enforced their full rights in the past was not sufficient. It must be inequitable for the promisor to go back on his promise, in D & C Builders v Rees (1966)[54], Mrs Rees had forced the builders to accept her cheque by inequitable means and so could not rely on promissory estoppel,[55] for "he who comes to equity must do so with clean hands." [56] This doctrine is also contrary to the House f Lords decisions in Jorden v Money (1854) [57] and Foakes v Beer (1884) As can be seen from these cases, unlike in the past when a gentleman's word was his bond, people can no longer be relied upon to keep gratuitous promises, however seriously meant. They are also likely to use litigation if they later wish to go back on them. Treitel points out that, "the doctrine f consideration has attracted much criticism, "[58] as even the most flimsy evidence is given as consideration, so its use has become somewhat dubious."The doctrine is an historical accident; that foreign systems do without." [59] To overcome these problems, Parliament could extend the scope f existing legislation by using form to prove the intention to create legal relations in more situations than now. That would mean that although not needed for basic everyday events like shopping, or private domestic arrangements; e.g., babysitting, all other contracts f a financial or contractual nature would have to have written agreements. As Treitel says, " English law does recognise, in the deed, a perfectly safe and relatively simple means f making gratuitous promises binding." [60] These would be subject to the usual rules applying to the Sale and Supply f Goods Act 1994, the Consumer Protection Act 1987, the Supply f Goods and Services Act 1982, etc., In the event f a dispute regarding a contract with no written agreement, the courts could consider it to be void, as there was no prof f an intention to create legal relations and therefore the contract has no legal effect. Any money paid out under such a contract would be recoverable and any work that has been done maybe compensated on a quantum meruit basis. [61] Care would also have to be taken to ensure the rights f third parties are protected. [62] The use f form as prof f the intention to create legal relations would provide a "useful safeguard against rash promises."[63] Although, "this does not solve the problem f action in reliance on an informal promise... the court maybe able to give some effect to the promise under the doctrine f waiver or in equity."[64] Endnotes [1] Richard Stone, Principles f Contract Law, fourth edn. (Cavendish Publishing, 2000) p46, [2] Ibid, Stone [3] Scammell v Ouston [1941] AC 251 [4] Op.Cit, Stone, see note 1 [5] Ian Brown & Adrian Chandler, Blackstone's Law Questions & Answers, Law f Contract." Third edn. (Blackstone Press, 2001) p47 [6] "First Thoughts", Consideration, Iolis 2002-2003 CD ROM, (Law Courseware Consortium, 2002-2003) [7] Currie v Misa (1875) LR 10 Ex 153 [8] Cavendish Law Cards Series, Contract Law, third edn. (Cavendish Publishing, 2002) p20 [9] Op.Cit, Stone see note1, p77 [10] The Oxford Dictionary f Law, 5th Edn., (Oxford University Press, 2002) p106 [11] Op.Cit, Stone, se note 1, p91 [12] Lecture notes, 30th October 2002 [13] Richard Stone, quoting B Hepple from "Intention to create legal relations" (1970) 29 CLJ 122, in Principles f Contract Law fourth edn. (Cavendish Publishing, 2000) p92 [14] Op.Cit, Contract Law, Cavendish Lawcards, see note 9, p19 [15] Richard Stone, quoting Professor Atiyah from "Essays on Contract, Consideration: A Restatement2 in Principles f Contract Law fourth edn. (Cavendish Publishing, 2000) p79 [16] Chris Turner, Key Facts, Contract Law (Hodder & Stoughton, 2001) p13 [17] Ibid, Turner [18] G H Trietel, The Law f Contract.10th edn. (Sweet & Maxwell, 1999) p63 [19] Ibid [20] Op.cit. Brown & Chandler, see note 5,p47 [21] Balfour v Balfour [1919] 2 KB 571 [22] Ward v Byham [1956] 2 All ER 318 [23] Op.cit. Brown & Chandler, see note 5, p48 [24] (Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] AC 79 [25] Lecture notes 21.10.02 [26] Thomas v Thomas [1842] 2 QB 851 [27] Op.cit. Stone see note 1 [28] White v Bluett (1853) 23 LJ Ex 36 [29] Ibid [30] Lecture notes 21.10.02 [31] Chappell & Co v Nestle Co Ltd.,[1960] AC 87 [32] Op.cit. Stone see note 1 [33] Op.cit. Brown & Chandler see note 1, p48 [34] Ibid, Brown and Chandler, p49 [35] Stilk v Myrick (1809) 2 Camp 317 [36] Hartley v Ponsonby (1857) 7 E & B 872 [37] Ian Brown & Adrian Chandler, quoting Professor P.S.Atiyah from "Essays on Contract, Consideration: A restatement" in Blackstone's Law Questions & Answers, Law f Contract." Third edn. (Blackstone Press, 2001) p48 [38] Pinnel's Case (1602) 5 Co.Rep 117 [39] (2002) December L.Ex [40] Ibid [41] Foakes v Beer (1884) 9 App Cas 605 [42] Williams v Roffey Brothers [1990] 2 WLR 1153 [43] (2002) December L.Ex [44] Ibid L.Ex [45] Central London Property Trust v High Trees House [1947] KB 130 [46] Op.Cit, Stone, see note 1, p66 [47] (2002) October L.Ex p12 [48] Hughes v Metropolitan Railway (1877) 2 App Cas 439 [49] W J Alan & Co v El NasrExport and Import Co [1972]2 All ER 244 [50] Op.Cit, Contract Law, Cavendish Law Cards see note 8, p31 [51] Op.Cit, L.Ex see note 43 [52] Coombe v Coombe [1951] 1 All ER 767 [53] The Scaptrade [1983] 2 All ER 763 [54] D & C Builders v Rees [1965] 3 All ER 837 [55] Op.Cit, Contract Law Cavendish Lawcards, see note 8, p31 [56] D & C Builders v Rees [57] Jorden v Money (1854) 5 HL 185 [58] Op.cit, Treitel, see note 18, p146 [59] Ibid, see note 59, Treitel p146 [60] Ibid, see note 59, Treitel p147 [61] Op.Cit, Stone, see note 1, p347 [62] OP.cit,Treitel, see note 18, p147 [63] Ibid. [64] Ibid. Read More