The Doctrine of Consideration and Variation of a Contract - Coursework Example

The Doctrine of Consideration and Variation of a Contract Introduction The doctrine of consideration has long since been the cornerstone of valid contracts in English law. A contract freely negotiated by competent parties under consideration comprise the essential elements of a legally enforceable contract effectively distinguishing it from a gratuitous exchange of bargains.1 Prior to the decision in Williams v Roffey, a promise to continue an existing obligation under a contract was deemed to be insufficient consideration to create a new contract. 2 However the decision in Williams v Roffey challenged this concept by holding that if the promise to continue with existing obligations consisted of varied terms, consideration could be inferred.3 Moreover, in the absence of economic duress, the courts should be more willing to find consideration by reference to the contracting parties’ intentions. In essence the Court of Appeals’ decision in Williams v Roffey not only defines the scope and range of valid consideration, but also widens its scope and range.4 This paper critically examines the doctrine of consideration in light of the decision rendered in Williams v Roffey. The Doctrine of Consideration While offer, acceptance and certainty make up the basic structure for the formation of a contract, consideration together with intention have always represented the substantive form in the creation of the contract.5 Although, consistently under both judicial and academic attack, the doctrine of consideration as laid out in Currie v Misa have provided the primary principles of consideration and its importance to the validity of a contract.6 Currie v Misa defined consideration as : “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.”7 In this vein, consideration has value if a benefit or detriment moves from one party to another. A quid pro quo scenario can involve an exchange of promises where one party agrees to either do or refrain from doing one thing in exchange for something from the other party and will generally form the basis for valuable consideration.8 In fact even forbearing to sue can be valuable consideration. 9 In defining and applying the rules of consideration the courts have over the years developed various tests whereby certain promises do not rise to the level of valuable consideration. For instance past consideration is not valuable consideration.10 For instance a promise from one party to reward the other party for an act that the other party has previously performed will not be valid consideration because the consideration predates the contract.11 Another test was devised in Arrale v Costain Civil Engineering Ltd. [1976] 1 Lloyd’s Rep 98 in which it was held that the promise will not be valuable consideration if it is a promise to: “...refrain from a course of conduct which it was never intended to pursue.”12 In other words, in order to give rise to valid consideration the promise must be such that it induced the contract. Otherwise the promise itself is deemed to be illusory consideration.13 In many cases what amounts to or does not amount to valuable consideration will be determined by reference to the particular facts of a case. For instance in White v Bluett (1953) 23 LJ Ex 36 the defendant was sued by his late father’s estate for failure to discharge an outstanding debt owed to his father. The defendant claimed that his father had previously promised to forgo the debt should the defendant refrain from challenging the devolution of his estate. It was held that the promise to refrain from challenging the distribution of assets carried no economic value denying the defendant’s father of a valuable consideration in exchange for his promise.14 In general a promise to perform an existing duty under a contract will not be valuable consideration.15 The case of Faoakes v Beer, a House of Lords decision mandated that a promise to discharge an existing debt was not valuable consideration because it did not confer an additional benefit on the promisee. 16 A leading example of this limitation on the construction of valuable consideration is provided for in the case of Stilk v Myrick [1809] 2 Camp 317. In this case, a ship on a return voyage from London to the Baltic was initially manned by a crew of eleven sailors. At some stage during the voyage, two sailors deserted the ship while the remaining crew refused to work unless their wages were increased. The captain agreed to the increased wages and ultimately refused to pay with the result that the crew members sued to enforce the new terms of the contract.17 The court ruled that the promise by the captain could not be enforced since the crew members had merely agreed to perform a duty already existing under the contract between them and the captain. The promise therefore was not valuable or good consideration.18 Until the decision in Williams v Roffey, this limitation on the application of the doctrine of consideration with respect to pre-existing duties under a contract was subject to only two discernible exceptions. One exception was laid out in the case of Hanson v Royden (1867) LR 3 CP 47. In this case it was held that a promise to do more than that which was originally promised under the initial terms of the contract would amount to valuable consideration.19 The other exception was accentuated in the case of Hartley v Ponsonby [1857] 119 All ER 1471 in which it was held that if events gave rise to reasonable grounds for a promisee to refuse to carry out that which was initially promised a fresh promise could give rise to valuable consideration.20 The rules of consideration and the exceptions were challenged by the decision in Williams v Roffey. Williams v Roffey and its Impact on the Doctrine of Consideration In Williams v Roffey, the defendant (Roffey Brothers & Nicholls Contractors Ltd.) contracted to complete the refurbishment of a block of flats in consideration of a price fixed at 20,000 pounds. That work was subsequently sub-contracted to the plaintiff, (Williams). It eventually came to light that the plaintiff was suffering from financial constraints and would not be in a position to complete the refurbishment within the time set for completion. Under the terms of the main contract failure to complete the refurbishment on time would not only breach the contract but would be subject to a penalty. 21 In order to avoid complications under the main contract the defendant offered Williams an additional 575 pounds in respect of each flat completed on time. Based on this undertaking by the plaintiff continued with the refurbishment but when it became obvious that the defendant was not going to pay the addition sum promised. At this point the plaintiff discontinued the work, suing the defendant in respect of the eight flats completed following the defendant’s promise of an additional 575 pounds for each completed flat.22 The Court of Appeal held that the defendant was obliged to make the additional payment for the completed flats because they obtained a practical benefit as a result of the promise made to the plaintiff. Those practical benefits were having the work completed in the time required under the main contract, not having to lose money and time looking for replacement carpenters and not having to pay the penalty under the main contract.23 Based on this rationale it is difficult to reconcile the judgment in Williams v Roffey with the judgment in Stilk v Myrick. The Court of Appeal attempted to reconcile the two cases by relying upon principles of economic duress. The underlying principle appears to be that provided the promise does not use excessive or undue pressure to alter the terms of the contract and the promiser achieves a practical benefit there will be fresh consideration. Russel LJ said that: “Consideration there must be but in my judgment the courts nowadays should be more ready to find its existence so as to reflect the intention of the parties to the contract where the bargaining powers are not unequal and where the finding of consideration reflects the true intentions of the parties.”24 In principle this explanation by Russel LJ makes it clear that the courts when dealing with commercial contracts where the parties are equal the doctrine of freedom will prevail. The result is, the courts will typically attempt to discern the parties’ intention based on what they have agreed between them.25 Richard Stone explains that once the parties’ intentions have been identified and there is no evidence of coercion giving rise to claims of economic duress: “...the courts will as far as possible give effect to them, unless there is a good reason for taking another approach.”26 In the end, the judges in the case of Williams v Roffey were looking at the arrangement as an entirely voluntary arrangement in which both parties derived a benefit.27 This is the basis upon which the Court of Appeal attempted to reconcile the decision in Williams v Roffey with the decision in Stilk v Myrick. The law lords insisted that the ruling in Williams in Roffey was not intended to overrule the judgment rendered in Stilk v Myrick.28 The latter case involved an inducement of a promise by virtue of duress. Mindy Chen-Wishart argues however that relying on the principles of duress as a means of distinguishing between the decision in Williams v Roffey and Stilk v Myrick makes little sense when one considers that there was “no less evidence of pressure inducing the promise” in both cases.29 Mindy Chen-Wishart goes on to explain that: “The two cases are obviously analogous: if RB received practical benefit from W’s promise to complete performance, so must the master of the ship have from S’s promise to work the ship back home. In substance, while Williams v Roffey affirms Stilk v Myrick on the need for fresh consideration to enforce an additional promise, it had overruled Stilk v Myrick as to what counts as fresh consideration.”30 Following the decision in Williams v Roffey, the courts too have struggled with the distinction between fresh consideration and an existing duty under the rationale advanced by the Court of Appeal in Williams v Roffey. In fact in the case of South Caribbean Trading Ltd. v Trafigura Beheer BV [2005] 1 Lloyd’s Rep 128 Coleman J freely admitted that the Williams v Roffey decision is inconsistent with the decision in Stilk v Myrick. 31 Maintaining that the legal benefit enunciated in Stilk v Myrick was far more preferable to the practical benefit requirement in Williams. The legal benefit requirement served to strengthen the doctrine of consideration.32 Coleman J went on to note that the Williams case: “...appears to have introduced some amelioration to the rigidity of this rule in cases where there has been refusal to perform not amounting to economic duress by the party who might otherwise be in breach of any existing contract and where the party will derive a practical benefit from such performance.”33 Noting that he himself does not agree with the Williams ruling, Coleman J did however state that he was bound by it nonetheless since the House of Lords had not declared that it had been wrongly decided.34 In an attempt to reconcile the decision in Williams with age old concepts of valuable consideration in the context of a pre-existing duty under a contract Coleman J. explained that economic duress could be used to counter a claim of practical benefit. According to Coleman J, a promisee who threatens not to live up to his undertakings under a contract is not entitled to rely on the argument that the promisor stands to gain a benefit from the performance because such a threat is “analogous to economic duress” if it cannot be supported by an argument that it was previously discharged from obligations under the contract.35 Mindy Chen-Wishart allows that there is reasonable explanation however for the House of Lords failure to overrule the decision in Williams. As Chen-Wishart explains prior to the Court of Appeals’ decision in Williams v Roffey: “...the risk of improper pressure in the context of contract modifications of the ‘same for more’ type did not need to be directly address because the Stilk v Myrick rule automatically barred such modification for lack of consideration. The more liberal approach to consideration in Williams v Roffey is apparently balanced by the call to control improper pressure via the doctrine of economic duress.”36 The common belief is that the decision in Williams v Roffey was spurred by the introduction of the doctrine of economic duress.37 While the decision can certainly be regarded as having relaxed the constraints on Purchas LJ questioned the propriety of permitting a contracting party to rely upon his own breach to establish the requisite consideration.38 Even so the courts are attempting to limit the application of Williams’ practical benefit as a prerequisite to fresh consideration under a contract. For instance in the case of Re Selectmove [1995] 1 WLR 474 in which centred around an agreement to repay to the Inland Revenue arrears of taxes, the court ruled that the practical benefit principle would not be extending to renegotiations with respect to part payment of an existing debt. Having considered the principles enunciated in both Foakes and Williams the court decided against following the Williams decision holding that to do so would be inconsistent with firmly established principles. Moreover, the facts of the Foakes case were more closely aligned to the facts of Re Selectmove.39 Conclusion There is little doubt that the decision by the Court of Appeal in Williams v Roffey has created even more ambiguity in the construction and application of the doctrine of consideration. There have been concerns that the relaxation of the rules and guidelines with respect to consideration have only made the way clear for ambitious business persons to seek to establish consideration when they themselves have breached the terms and conditions of an existing contract.40 However, the Court of Appeal was rather clear in its approach to the practical benefit principle in Williams v Roffey. The approach is one that seeks to guard against scenarios where a party who breaches a contract might seek to invoke practical benefit as a means of establishing fresh consideration. This safeguard in found in Williams v Roffey’s insistence that fresh consideration will not be established in cases where the promisee uses coercion and/or economic duress to induce the modification of the contract.41 Bibliography Arrale v Costain Civil Engineering Ltd. [1976] 1 Lloyd’s Rep 98 Callisher v Bischoffsheim (1870) LR 5 Chen-Wishart, Mindy. (2007) Contract Law. Oxford University Press Currie v Misa (1875) LR 10 Ex 153 Foakes v Beer [1881-1885] All ER 106 Furnston, M.P. (2001) Cheshire, Fifoot and Furnstaon’s Law of Contract. London: Butterworths Hanson v Royden (1867) LR 3 CP 47 Hartley v Ponsonby [1857] 119 All ER 1471 Hird, N and Blair, A. (1996) “Minding Your Own Business – Williams v Roffey Revisited? .” Journal of Business Law, 254 McKendrick, E. (2000) Contract Law. Bassingstoke: Macmillan. Phang, Andrew. (1991) “Consideratin at the Crossroads.” Law Quarterly Review, Vol. 107, 21 Re Selectmove [1995] 1 WLR 474 Roscorla v Thomas [1842] 114 All ER 496 South Caribbean Trading Ltd. v Trafigura Beheer BV [2005] 1 Lloyd’s Rep 128 Stilk v Myrick [1809] 2 Camp 317 Stone, Richard. (2005) The Modern Law of Contract. Routledge Cavendish White v Bluett (1953) 23 LJ Ex 36 Williams v Roffey [1991] 1 All ER 512 Read More