Contract Law: Creation of Valid Contractual Relations - Case Study Example

Contract Law By Due Consideration is one of the most important elements of creation of valid contractual relations. In the absence of consideration, a contract is deemed void and unenforceable by law. Consideration is generally something in return for something. In a contract, both parties should receive a benefit from it. It should not be that only one party receives a benefit to the detriment of the other. Similarly, both parties to a contract must suffer a detriment to achieve a benefit. Promises that are one-sided, and do not have the support of a consideration, are regarded as gifts and are not enforceable by law. This extends to agreements related to payment of debts too. Consideration does not need to be adequate: it does need to match its counterpart in value. But it does need to be something of value. In Thomas v Thomas1, a husband orally expressed his wish on his deathbed that his wife should get his house and its contents or £100 during her lifetime. Some other provisions were also made for her in the will. After the death of the husband, the executors of his state entered into an agreement with the wife in consideration of the husband’s desires. According to this agreement, the wife had to maintain the house and pay £1 per year for the “ground rent” in return of taking possession of the house. The wife took possession and stayed in the house for some time but after the death of one of the executors, the co-executor refused to complete the conveyance on the grounds that the consideration was lacking. It was held that the adequacy of consideration was not an essential. There was sufficient legal consideration and was independent of the moral feeling generally attached with inadequacy of consideration. Hence, the wife was granted the possession of the house as per her husband’s wishes. In Chappell v Nestle2, Nestle ran a sales promotion according to which those persons were to be sent a record that sent in 3 chocolate bar wrappers and a postal order for 1 shilling 6d. Chappell owned the copyright in one of the records that were offered by Nestle and disputed Nestlé’s right to offer the records seeking an injunction to prevent the sales of the records which normally retailed at 6 shillings 8d. S.8 of the Copyright Act 1956 protects retailers from breach of copyright if they give notice to the copyright holders of the ordinary retail selling price and pay them 6.25% of this. Nestle gave notice according to their sales promotion stating that the ordinary selling price was 1 shilling 6d and three chocolate bar wrappers. It was held that the wrappers formed part of the consideration as the object was to increase sales hence providing value. Wrappers are usually thrown away but this fact did not detract from the consideration that had been formed. Therefore, the injunction was granted to the Chappell, and Nestle was prevented from selling the records since they had not complied with the notice requirements under s.8. These cases show that consideration does not need to be adequate and the courts are not concerned with the fact whether the parties have made a good or a bad bargain. It has been seen that the courts have gone to some lengths to invent consideration. There are instances where equity is able to uphold promises unsupported by consideration through the doctrine of promissory estoppel. This doctrine is an exception to rule formed in the Pinnel’s case3. In this case, a debtor paid part of his debt. He wanted the creditor to forebear the balance and regarded the partial payment as consideration for this promise. It was held that the creditor was entitled to full payment of the debt. Part payment of a debt is not a valid consideration for a promise to forebear the balance unless this payment is made at the promisors request either: a) before the due date; b) with a chattel; or c) to a different destination. Promissory estoppel is an equitable doctrine that can stop a person from going back on a promise unsupported by consideration in some instances. This doctrine was established in Central London Property Trust v High Trees House4. In this case, the defendant leased a block of flats from the plaintiff at a ground rent of £2,500. The lease was taken out in 1937 and it was a new block of flats. Due to the war, the defendant had very few tenants and could not rent the flats to the full capacity. The defendant had no profit and he struggled to make the ground rent. The conditions looked bleak for the future as the war still prevailed. The plaintiff agreed to reduce the rent to £1,250 as long as the war prevailed. Hence, according to this agreement in writing, the defendants paid half of the rent initially agreed from 1941. The flats became fully occupied when the war was over. The plaintiff sought to return to the original return retrospectively. It was held that the rent was to be returned to the originally agreed price only for the future. The arrears accrued during the war years could not have been claimed by the plaintiff since those were waived by them. The plaintiffs were stopped from going back to the original contract despite the fact that the promise to accept lower rent was unsupported by consideration. Hence, the doctrine of promissory estoppel was established. Denning J based this doctrine on the decision in Hughes v Metropolitan Railway5. In this case, Lord Cairns CJ historically said, “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 - certain penalties or legal forfeiture - 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 them where it would be inequitable having regard to the dealings which have thus taken place between the parties.” This doctrine of promissory estoppel was also upheld in Tool Metal Manufacturing v Tungsten6. In this case, the defendants had been infringing a patent right held by the plaintiffs. When it came into the plaintiffs’ knowledge, they waived all infringements in return for the defendant paying 10% Royalty and also 30% compensation if sales exceeded 50kg in any month. Despite these sums being excessive, the defendants agreed to pay them as they had to face a claim for infringing the copyright if they did not pay them. The defendants struggled to make the payments due to the Second World War. They got into arrears and an agreement was reached with the plaintiffs in which the 30% compensation payments were waived off during the war years. It was held that the plaintiffs could not enforce the compensation payments during the war years but could enforce them after the end of the war. The defendants were estopped from going back to their promise to waive the payments in equity. The doctrine of promissory estoppel does not extinguish legal rights but merely suspends them. However, promissory estoppel can be used to extinguish legal rights where periodical payments are involved and a promise has been made to waive a part of the payments because of pressing circumstances which are not likely to persist. There are four major requirements of promissory estoppel. They are: a. There must be a pre-existing contract or legal obligation which is then modified. In Combe v Combe7, a husband promised his estranged wife to make maintenance payments. He failed in making those payments. The wife invoked promissory estoppel and brought an action to enforce the promise. It was held that there was no pre-existing agreement which could have been modified later by a promise. The wife’s action failed as she sought to use the doctrine of estoppel as a sword instead of a shield; b. There must be a clear and unequivocal promise. In Woodhouse A.C. Israel Cocoa Ltd v Nigerian Product Marketing Co Ltd8, the parties agreed to a contract of sale of some coffee beans. The price was agreed to be payable in pound sterling. However, the sellers made a mistake and sent an invoice in which it was written that the price was payable in Kenyan shillings. The value of pound sterling and Kenyan shillings was the same at that time. The buyers also accepted the invoice without any objection regarding the currency of the payment. Later, the value of pound sterling fell dramatically in relation to Kenyan shillings. The buyers sought to make the payment in pound sterling instead of Kenyan shillings. It was held that the buyer’s conduct in accepting the invoice irrespective of the mistake implied that they had made a clear and unambiguous promise to make the payment in Kenyan shillings. Hence, they were not allowed to make the payment in pound sterling; c. There must be a change of position. In Alan v El Nasr9, a contract was made when the sellers agreed to sell 250 tons of coffee beans at 262 pound sterling per cwt to the buyers. The price was payable on credit. The value of Kenyan shillings and pound sterling was similar at the time. However, the credit account referred to payment in pound sterling despite the contract stipulating the price payable in Kenyan shillings. There were also some other discrepancies such as date of shipping and the quantity to be shipped. In order to rectify these discrepancies, a revised agreement was reached which still referred to payment in pound sterling. The sellers accepted the first instalment of £57,000 without any objection. The value of the pound fell dramatically after that resulted in a loss of 165,530.45 shillings. This made the sellers ask for the later instalments to be made in Kenyan shillings. The buyers defended by raising promissory estoppels. They maintained that in accepting the first instalment in pound sterling and revising the credit agreement without changing the currency, there was an implied promise that the sellers would not revert to Kenyan Shillings later. The sellers argued that the buyers had gained a benefit and had not acted to their detriment in reliance of this promise. It was held that detrimental reliance is not an essential requirement of promissory estoppel. It only needs to be established that the promisor has changed their position; d. It must be inequitable to allow the promisor to go back on their promise. In D & C Builders v Rees10, the defendant instructed the plaintiff to do some building work at his home to the value of £746. He paid £250 in that respect and the plaintiff reduced the bill by £14. The sum still owed was of £482. The plaintiff wrote to the defendant several times demanding payment but was unsuccessful. Also, the defendant had not made any complaints regarding the plaintiff’s workmanship till then. Being on the verge of bankruptcy and out of sheer necessity, also the defendant being aware of that, the plaintiff telephoned the defendant’s home and his wife answered. She made complaints about the work and offered £300 in satisfaction of the whole debt. The defendant refused saying that he would take the £300 and promised to give the defendant a year to clear the balance. He called at the defendant’s house again to collect the money but the wife still said that she would only pay £300 demanding the defendant to write on the receipt in completion of the account or she would pay him nothing. The defendant reluctantly agreed to write this on the receipt since he needed the money badly but he stated his full intention to pursue the balance as £300 did not cover the costs he had incurred. He brought an action to recover the balance subsequently. The defendant sought to rely on estoppel. She relied on the written receipt as demonstration of a promise to accept the lesser sum. It was held that the defendant could not rely on estoppel because of the absence of a true agreement to accept less. Also, the defendant had taken advantage of the plaintiffs position. The doctrine of promissory estoppel has a very close connection with the doctrine of consideration as it provides an exception to the general rule. If a creditor agrees to accept a lower sum in full settlement of the debt and he intends the debtor to rely on that promise, the debtor can rely on the doctrine of estoppel if the creditor subsequently sues for the recovery of balance. In such a case: a. There is a pre-existing contract to pay the full sum which is modified when the creditor agrees to accept a lower sum; b. There is initially a clear promise to accept a certain sum of payment; c. There is a change in position by the creditor when he agrees to accept a lower sum; d. If the creditor is allowed to go back to his original promise, it would be inequitable because the debtor would have relied on the creditor’s promise to accept a lower payment. Such agreements are usually made by creditors because of pressing circumstances of the debtors. Hence, subsequent claim for recovery of the balance fails. Since all the requirements of promissory estoppel are fulfilled, the debtor would be entitled to invoke it despite the fact that the creditor’s promise to accept a lower payment is devoid of consideration. Therefore, the current legal position is fully justifiable. References Alan v El Nasr [1972] 2 WLR 800 Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130 Chappell & Co Ltd v Nestle Co Ltd [1960] AC 87 Combe v Combe [1951] 2 KB 215 Copyright Act 1956 (UK) s8 D & C Builders v Rees [1966] 2 WLR 28 Hughes v Metropolitan Railway Co [1876-77] LR 2 App Cas 439 UKHL Poole, J (2012). Casebook on Contract Law. Oxford University Press. p148. Print. Pinnels Case [1602] 5 Co. Rep. 117a Thomas v Thomas [1842] 2 QB 851 Tool Metal Manufacturing Co Ltd v Tungsten Electric Co Ltd. [1955] 2 All ER 657 Woodhouse A.C. Israel Cocoa Ltd. v. Nigerian Product Marketing Co. Ltd. [1972] AC 741 Read More