Consideration - Pre-existing Duties and Part Payment of Debts - Essay Example

Consideration: Pre-existing Duties and Part Payment of Debts The doctrine of consideration requires that each side should contribute something to the contract. The consideration is required to be sufficient, not in the past, and must move from the promise. “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 forebearance, detriment, loss or responsibility, given, suffered or undertaken by the other.” – Lush J: Currie v Misa [1875], para 162 From Lush J’s comments it is clear that it is a matter of law for the Courts to determine whether consideration has passed from the promisee to the promisor, and it is immaterial whether a benefit or a detriment was received, provided the promisee has given something in return for the promise. Since the Court of Appeal decision in Williams & Roffey Bros [1990] a new area of uncertainty has arisen in the doctrine of consideration, as we shall see. Effectively the Court of Appeal ignored a House of Lord’s decision; a decision which has been around for more than 400 years. Pinnel’s Case [1602] examines the doctrine from the view point of Creditors who are already owed something [a legal duty or money], and appear to agree to accept part-payment of the debt. The facts of the case were that a borrower, Cole, owed Pinnel [the lender] the equivalent of £8.50 [£8-10s-0d] which was to be repaid on 11 November. At the lender’s request, the borrower paid £5.11 [£5-2s-2d] on 1 October, which the lender claimed to accept in full settlement of the debt. The lender then successfully sued the borrower for the outstanding amount. The House of Lords held that since no consideration was exchanged to enforce the promise of the lender to accept part-payment of a debt on the due date from the borrower, then the lender could pursue full payment of the debt at a later date. This remains the general rule at common law. However in Pinnel’s Case it was also said that the agreement to accept part payment would have bound the lender if fresh consideration had been provided to show accord and satisfaction. This might be: part-payment on an earlier date than the due date [ie, as in Pinnels 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. Although influential, this case was actually decided on a technicality. If Cole had extracted from Pinnel an agreement that the early payment was in return for accepting part payment, then Cole would have won the case. The Foakes v Beer [1884] case considered whether statutory interest could be claimed on a judgment debt following the creditor’s agreement to accept payment by instalments. Mrs Beer had obtained judgment for a debt against Dr Foakes. She agreed to accept £500 immediately and the balance by half-yearly instalments of £150. Although Dr Foakes paid the net debt, he did not pay the statutory interest which had accrued and amounted to £360. The House of Lords affirmed the Court of Appeal’s decision, dismissing Dr Foake’s appeal and followed Pinnel’s Case holding that Mrs Beer was entitled to the £360 interest as Dr Foakes had not provided fresh consideration for Mrs Beer’s promise to take no further action on the judgment. It follows from this that the Courts are not interested in whether the consideration is adequate. The reason for this is that consideration goes to the promise; not the value of the contract. Obiter Lord Blackman stated that in his opinion Lord Coke had made a mistake of fact in Pinnel’s Case, whilst Lord Blackman stated: “All men of business … do every day recognize and act on the ground that prompt payment of a part of their demand may be more beneficial tot hem than it would be to insist on their rights and enforce payment of the whole.” Para 622. Foakes v Beer is consistent with the common law rule that completion of an existing duty is not fresh consideration; Foakes had a duty to pay Mrs Beer and so could not then use his offer to pay down a deposit and the balance by instalments as fresh consideration. Again Lord Selbourne commented obiter: “It might be [and indeed I think it would be] an improvement in all law, if a release or acquitance of the whole debt, on payment of any sum which the creditor might be content to received by way of accord and satisfaction [though less than the whole, were held to be, generally binding, though not under seal.” The rule was also applied by the Court of Appeal in Re Selectmove [1995]. In this case the Inland Revenue were threatening to put Selectmove into liquidation as it could not immediately pay its tax arrears. Selectmove proposed that it be allowed to repay the arrears at £1,000 a month. The Collector of Taxes informed Selectmove that its proposal would need the approval of his superiors. However, the Inland Revenue commenced liquidation proceedings. Selectmove tried to rely on the agreement made with the Collector of Taxes. The Court of Appeal dismissed Selectmove’s application as: a promise to pay a sum which the debtor was already bound to pay was not good consideration; any promise made by the Collector of Taxes was made without actual or ostensible authority; Williams v Roffey Bros [1990] was distinguished as it was applicable only where the existing obligation which is pre-promised is one to supply goods or services, not where it is an obligation to pay money. In Williams v Roffey Bros D was a building contractor and P was a carpenter. D agreed to give P more money and also to change the frequency of payments so that P would have some relief from his financial difficulties. P did further work on the flats and then walked off the site. P successfully sued for the improved contract price of partially completed repairs to D’s flats. [P’s non-compliance with the terms of the contract was taken into account in the award he finally received]. The given ratio decidendi of this case was that D had received a ‘practical benefit or a practical avoidance of disbenefit’, and this was considered good consideration. Another reason the Court of Appeal did not find for Selectmove of course is the rule of precedent. Foakes v Beer was a House of Lords’ decision, and could not therefore be over-ruled by a lower Court. Peter Gibson LJ points out that Williams v Roffey Bros made no reference to Foakes v Beer, which expressly excluded the scenario which occurred in Williams v Roffey Bros. The decision in Williams v Roffey Bros further undercuts the decision in Foakes v Beer, as it leaves the ruling without application; there is always a ‘practical benefit’ in receiving money. The only way to reconcile the two cases is to distinguish them: Williams v Roffey Bros covers situations where the promise is to pay more than was originally owed, whilst Foakes v Beer applies to situations where the promise is to pay less than was originally owed. Besides the exceptions mentioned in Pinnel’s Case there are 2 other exceptions at common law and an exception in equity. At common law part payment of a debt by a third party on condition that the debtor is released from the obligation to pay the full amount is considered valid consideration as to allow the lender to sue for the full amount amounts to fraud: Hirachand Punamchand v Temple [1911] - A lender accepted a part payment from a father in full settlement of his son’s debts. The lender could not sue for the balance as it would be defrauding the father. Also at common law where a debtor has agreed with more than one creditor to repay a percentage of their debts [such as happens in Individual Voluntary Arrangement] no creditor may then sue for the full amount, as this would also amount to a fraud on the other creditors who had agreed to accept a percentage. Welby -v- Drake [1825]. It is true that no fresh consideration has been provided by the debtor, but the reason usually given for this exception to the general rule at common law is that to allow an individual creditor to claim the balance of their specific debt would amount to a fraud on the other creditors who had all agreed to accept the percentage. The equitable doctrine of Promissory Estoppel provides a third exception to the rule in Pinnel’s Case. Here if a party relies on a promise, the person making the promise is prevented [estopped] from going back on that promise, if to do so would be considered inequitable. The doctrine of Promissiory Estoppel is derived from the obiter dicta of Denning J in Central London Property Trust Ltd v High Trees House Ltd [1947] and on the decision of the House of Lords in Tool Metal Manufacturing Co Ltd v Tungsten Electric Co Ltd [1955] and can be traced to Hughes v Metropolitan Railway [1877] 1 Hughes Case [1877] – A landlord had given a tenant six months notice to repair or forfeit the lease. However, after this the landlord began to negotiate with another party for the sale of the property. The negotiations for the sale of the property broke down. Unfortunately, the tenant had not done the repairs within the specified time, and so the landlord sought possession. The House of Lords held that the tenant had relied on the landlord’s behaviour and had reasonably thought that as long as negotiations went on, the landlord would not enforce the notice. It would be inequitable to allow the landlord to take advantage of the tenant relying on his behaviour. The six month period would begin to run from the date of the breakdown of negotiations. High Trees [1947] – Due to the outbreak of the Second World War in 1939 the landlord of a block of flats had agreed in writing to allow the leasee to pay only 50% of the original rent as finding tenants was difficult. In 1945 the war came to an end and the landlord sued to recover the arrears of rent as fixed by the 1937 agreement for the last two quarters of 1945. Lord Cairns opined: “It is the first principle upon which all Courts of equity proceed, that if parties who have entered into definite and distinct terms involving certain legal results, afterwards by their own act or with their own consent enter upon a course of negotiation which has the effect of leading one of the parties to suppose that the strict rights arising under the contract will not be enforced, or will be kept in suspense, or held in abeyance, the person who otherwise might have enforced those rights will not be allowed to enforce then when it would be inequitable having regard to the dealings which have taken place between the parties.” - Para 448 Denning J held that the landlord was entitled to recover this money as its promise to accept 50% of the rent only applied during the war. This is the ratio decidendi of the case. However, Denning J stated obiter that any attempt to recover arrears from 1940-45 would fail even though the leasee did not provide fresh consideration for the landlord’s promise to accept half rent. The landlord would be estopped as the leasee had relied and acted upon the landlord’s promise. It would then appear from Hughes that a Creditor cannot treat his Debtor’s non performance as a breach of contract if the Creditor himself is responsible for the Debtor’s non-performance. Here Promissory Estoppel has precluded the enforcement of the landlord’s strict rights. Whilst from Foakes v Beer we deduce that a Creditor can change his mind and request the Debtor to perform the contract after reasonable notice has been given. It is only after this reasonable notice has been given, that the Debtor will be in breach of contract if he fails to perform his obligations under the contract. Here Promissory Estoppel has merely suspended the Creditor’s strict rights. Tool Metal Case [1955] – In this case periodic payments of compensation were suspended due to 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. 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. In order to be able to rely upon a defence of Promissory Estoppel the defendant must establish: A pre-existing legal relationship which gives rise to liabilities and penalties A clear and unambiguous promise that the plaintiff would not enforce his/her legal rights. The promise must clearly have been meant to be binding. From the Hughes Case [1877] it is clear that it may also be implied by behaviour. That the defendant relied and acted on the promise. The defendant does not have to lose out by relying on the promise. In Alan Co Ltd v El Nasr Export & Import Co [1972] Lord Denning said 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". It must be inequitable for the promisor to go back on his promise and revert to his strict legal rights. If the defendant used undue pressure to persuade the plaintiff to make the promise, the courts will allow the plaintiff to go back on the promise. For example in D & C Builders v Rees [1965] the Court of Appeal held that the plaintiff -- a company, which accepted part-payment after being given an ultimatum to accept part-payment or nothing from the defendant -- was entitled to full payment. The trial judge had found as a matter of fact that there was no true accord and satisfaction. As Lord Denning commented, ‘The debtor’s wife held the creditor to ransom.’ The defendant had acted inequitably by exerting improper pressure. He who comes to equity must come with clean hands as Lord Denning intimated – “There is also no equity in the defendant to warrant any departure from the due course of law. No person can insist on a settlement procured by intimidation.” D & C Builders was an important case as it pointed out the absurdity of distinguishing between cash and a personal cheque. In the original case of Sibree v Tripp [1846] the matter had dealt with negotiable securities – not personal cheques. Reading through the judgements it is interesting that the judges were able to agree the outcome even though Danckwerts and Win LJJ relied on Foakes v Beer, whilst Denning applied Promissory Estoppel. Ferguson v Davies [1997] applied the decision in D & C Builders. In this case P owned some specialised recordings and D was a dealer. P agreed to exchange £1,700 worth of stock with D provided D gave P £600 worth of records by an agreed date. D agreed that if he did not do this, he would pay P the £1,700 value for the stock. D did not meet the deadline, giving P only £143.50 worth of stock. P claimed £468.40, but D sent P a cheque for £150 and also admitted the validity of P’s claim. P insisted on full payment and D argued that P had cashed the cheque. As one would expect the Court found in P’s favour as there was no accord and satisfaction and D had not provided any fresh consideration. Whether a defendant can rely on Promissory Estoppel depends on whether the original promise is interpreted as to either extinguish or suspend the plaintiff’s right to full payment. For example in both High Trees and Tool Metal the promise was clearly temporary – due to the outbreak of war. If a creditor agrees to accept periodic payments for a set term, during that term the creditor cannot usually ask for full payment. However, the creditor may revert to their strict contractual rights by giving reasonable notice, or where the circumstances which gave rise to the promise have changed as in High Trees. In D & C Builders, which concerned liability for a single lump sum, Lord Denning said obiter that the court would not permit the Creditor to revert to his strict legal right to sue for full payment and that the estoppel would be final and permanent if the promise was intended and understood to be permanent in effect and where it would be inequitable to do so. One point of view that has emerged in some cases is that if the lesser amount is paid by a negotiable instrument such as a cheque, then this can be construed as fresh consideration. This is mentioned briefly by Lord Selborne in Foakes v Beer on p 176 [reference to "negotiable paper”]. But this exception is doubted by Lord Denning in D & C Builders v Rees: “No sensible distinction can be taken between payment of a lesser sum by cash and payment of it by cheque…. If a creditor is not bound when he receives payment by cash, he should not be bound when he receives payment by cheque.” However, in Andrew Bracken, Ann Tricket v G Billinghurst [2003] the claimant made an offer to the defendant that he would accept £6000 in settlement to see an end to the matter. The defendant rejected the offer. However, he sent a cheque to the claimant for £5000, saying that the cheque was in full and final settlement and its presentation and clearance by the claimant would be acceptance of his offer. The claimant banked the cheque and later tried to recover the balance. The Court found that the matter had been settled. The cheque was tendered in full and final settlement. The banking and clearance of the cheque was evidence the claimant accepted the offer of settlement. Undoubtedly the doctrine of consideration is problematic, more often than not causing an injustice to the debtor. The rule in Pinnel’s Case is noticeably dated and increasingly artificial too; on the one hand I can provide fresh consideration by giving the creditor a horse, a hawk or a robe – or any other thing he is preferred to barter regardless of its value -- but I cannot do so by paying him even one penny less than he is originally owed – even if he appears to accept the part-payment in full accord and satisfaction at the time. It is suggested that this perceived mismatched between modern realities and the rule in Pinnel’s case comes about because consideration does not go the contract; it goes to the promise. In service contracts often the price cannot be accurately fixed until the work is complete. Those service providers who accept less at the end of such a contract than the job was actually worth will not be able to recover the difference; only liquidated and undisputed claims will be successful under Pinnel’s Case. Cleary as far back as Couldery v Bartram [1881] the judiciary did not care for the rule and the Law Revision Commission [1945 Cmd 5449; paras 20 and 21] suggested that it be abolished. Nonetheless it has been accepted as the law for 404 years. A possible reason for the rule is to avoid extortion of the creditor. This has less credence however, given that there is a doctrine of economic duress. In British Columbia and many other jurisdictions, the rule has been overridden by legislation.  The Law and Equity Act, R.S.B.C. 1996, c. 253, s.43 provides:   “Part performance of an obligation either before or after breach of it, when expressly accepted by the creditor in satisfaction or rendered under an agreement for that purpose, though without any new consideration, must be held to extinguish the obligation.” As Lord Steyn [1997] points out there are good reasons why the rule has not yet been abolished in the United Kingdom: “First, there are a few cases where even in modern times Courts have decided that contractual claims must fail for want of consideration…. Once a serious intention to enter into legal relations and a concluded agreement is demonstrated in a commercial context there is virtually a presumption of consideration…. Secondly, it seems to me that in recent times the Courts have shown a readiness to hold that the rigidity of the doctrine of consideration must yield to practical justice and the needs of modern commerce.” Professor Atiyah [1986] argued twenty years ago that abolishing the doctrine of consideration would simply make things more difficult, with the onus being on proving the intention to create a legal relationship - which he suggests will also lead to problems: ‘Nobody can seriously propose that all promises are to be enforceable.” It is submitted that while the rule is nonsensical, it remains the position at common law. It does fly in the face of commercial reality and is simply a trap for the unwary since knowledge of the exceptions to it is sufficient to get around it. It is possible to be relieved of a debt provided the agreement to pay a lesser amount is under seal [a deed].  The number of legally enforceable exceptions to the rule in Pinnel’s Case over the years is a clear indication that it is time for the law to be changed. References Books Koffmann & MacDonal, 2004. The Law of Contract. 5th Edition. LexisNexis. Martin J & Turner C (Eds)., 2004. Unlocking Contract Law. Hodder & Stoughton. McKendrick, E., 2005. Text, Cases & Materials Contract Law. OUP pp. 161-278 Articles Atiyah, P.S., 1986. “Consideration: A Restatement”. In Atiyah, P.S. Essays on Contract. Oxford University Press. pp. 179-243 Steyn, J., 1997. ‘Contract Law: Fulfilling the Reasonable Expectations of Honest Men’. 113 LQR 433, 437 Statutes Law and Equity Act, R.S.B.C. 1996 Cases Alan Co Ltd v El Nasr Export & Import Co [1972] 2 QB 189 Andrew Bracken, Ann Tricket v G Billinghurst [2003 EWHC 1333] Central London Property Trust Ltd v High Trees House Ltd [1947] 1 KB 130 Currie v Misa [1875] LR EX 153 D & C Builders v Rees [1965] 2 QB 617 Foakes v Beer [1884] 9 App Cas 605 Hirachand Punamchand v Temple [1911] 2 KB 330 Hughes v Metropolitan Railway [1877] 2 App Cas 439. Pinnels Case [1602] 5 CoRep 117a] Re Selectmove [1995] 2 All ER 531 Sibree v Tripp [1846] 15 LJ EX 318 M & W 23 Tool Metal Manufacturing Co Ltd v Tungsten Electric Co Ltd [1955] 1 WLR 761 Welby -v- Drake [1825] 1 Car & P 557 Williams v. Roffey Brothers [1990] 2 WLR 1153 Online Case Reference http://www.swarb.co.uk Read More