Consideration as One of the Fundamentals of a Legally Binding Contract - Assignment Example

Part Consideration Contracts are about enforcement of promises made by one party to the other. In order for such promises to be legally enforceable, there must be consideration moving between the parties. Consideration is the price at which one party pays for the promises made by the other party.1 It could constitute some benefits accruing to the promisor or detriments suffered by the promisee. Although consideration should have some economic value, they need not be equal value to what is being offered in the contract. Consideration should be satisfactory but not adequate meaning the court will not determine the value of consideration in relation to what was being offered by the other party.2 Consideration determines the nature of the agreement between the parties and the nature of remedies in case of breach of the contract. Consideration is one of the fundamentals of a legally binding contract. It depicts the party’s commitment to performing the contract in accordance with the agreement. Without consideration, the promises exchanged between the parties are unenforceable as the Court stated in the case of Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd.3 In this case, Dunlop bargained with their retailers (Dew and Co) and also dealers Selfridge not to sell the tyres Dunlop manufactured at a price below the recommended retail price. Selfridge sold the tyres at a price lower than the suggested price. Dunlop brought a claim to the court against Selfridge seeking to enforce the contract by injunction and demanded damages. The condition was that if retailers sold the tyres at a price below the list price they would pay £5 to Dunlop as liquidated damages. The court issued that there was no consideration between Dunlop and Selfridge hence there was no legal agreement between them. In an executor contract, the promise each party makes to the other constitutes consideration.4 This is so because enforcing the contract under the promises can result in benefits of detriments to one party at the expense of the other party. When making ruling on cases involving consideration as a prerequisite for a bidding agreement the court has to consider several factors. In the case of Thomas v Thomas,5 the plaintiff’s husband had made testament to the executors of his will that his window would either have £100 or continue living in one his house throughout her life or till she got remarried. Her brother was one of the executors of her husband’s testament and also the defendant. The plaintiff agreed to stay in the house throughout her life or until remarriage. They made an agreement to pay £1annually as the ground rent and take care of the house maintenance. Following the death of the second brother the defendant raised a claim against the plaintiff arguing that there was no consideration for the agreement. The court upheld that there was a consideration and that there was an express agreement to pay the ground rent as an annual sum and a separate agreement to repair the house. In another case of Chappell v Nestle Co Ltd, 6 the court issued that parties have the freedom to decide what to use as consideration. Therefore, the motives for forming the agreement are not taken into focus. What matters is that the parties have exchanged something of value to a mutual agreement. The intentions as to why parties accepted particular considerations are a matter of no concern to the court. Consideration should not be something a party was legally obliged to do. It should be something that a party did beyond the ordinary legal duties.7 For example, where a public officer performs some of his or her duties after making an agreement for payment from a member of the public the promise is considered unenforceable. The reason is that the public officer is obliged to serve the members of the public in their ordinary duties and need not expect payment from the public. They are doing what the law anticipates them to do hence asking for the paying from the very public that they are employed to serve is legally unacceptable. This requirement separates private issues from legal duties. This is because a contract is a private issue between the parties in agreement and is enforceable between the parties involved. It upholds the privity of contract whereby the persons involved in the contract remains bound by the agreement and is the only ones who can enforce the promise.8 Therefore, when a person is executing his or her legal duty, there is no contractual obligation between that person and an individual member of the public. In the case of Stilk v Myrick, 9 stated that a person is performing the duty that they are bound to do under an existing contract that duty does not amount to a consideration for a new agreement. In this case, the plaintiff was employed to work on a ship owned by the defendant for 5 pounds a month under condition that he would do all that was necessary for the voyage irrespective of the circumstances. After the ship stopped at Cronstadt, two of the crewmen disserted and the captain could not get their replacement. He promised the remaining men to share the wages of the deserted men among them if they would do all that was necessary to get the ship home. However, after arriving home, the captain refused to add the promised amount. The plaintiff sued the defendant to recover the promised amount. However, the court argued that the plaintiff’s claim was against the public policy hence it was void. The judge had a view that the captain acted out of pressure and had gained nothing extra by having the crews do something extra to get the ship home safely. In that regard, the judge appeared to protect the captains against extravagant desires of the crews. Rewarding the crews for doing something extra to save the ship would put the captains at risk because failure to pay such additional wages would result to capsizing of the ships due to negligence acts of the crew. The case in Stilk v Myrick differs from the case of Williams v Roffey Bros10 in which the court considered payment of an additional amount to be of benefits to both the plaintiff and the defendant. The parties had come to an agreement that the initial pay was low hence the new promise was valid. However, the main distinguishing feature, in this case, is that the defendant was under no pressure to make the promise to pay the plaintiff extra money to compensate for the extra work. In Pinnels Case, 11 the court issued that payment of a lesser amount on the day in satisfaction of a greater is unenforceable and at no time can less amount be equivalent to more significant amount. However, as issued in the case of Foakes v Beer , 12 if a party pays the lesser amount before the date of settlement of a larger amount is enforceable. Situations may arise and demand the parties make modifications of the original promises as defined by the theory of promissory estoppel. For example, in the case of Central London Property Trust Ltd v High Trees House Ltd,13 the plaintiff sued the defendant in order to have the defendant pay for rental amount after the recovery situation that had otherwise compelled them to reduce that rent by half since 1940 to mid-1945. Lord Denning stated that “to the effect 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.” The mutual agreement between the parties on changes of the terms of the original agreement makes the agreement binding. However, the promissory estoppel is applicable to existing agreement and does not form a new contract. In conclusion, consideration provides the court with means to determine whether the promises are enforceable. It involves some benefits to the promisor or some loss to the promisee. There are no requirements at to the adequacy of consideration in terms of value. Furthermore, discharge of existing contractual obligations does not constitute consideration unless someone does something in excess of ordinary duty or the requirement was in the agreement with the third party. Past considerations are not valid unless it was done in anticipation of payment. Partial payment of the debt in the discharge of complete debt cannot constitute consideration. Part 2 Flexibility of Terms of Contracts Parties to a contract commit to adhere to the terms of the contracts during the contract performance. The terms can either be conditions, warranties of innominate. It is essential for the parties to a contract to distinguish the three categories of terms of a contract because their breach will determine the remedy the wronged party can claim against the party in breach. Conditions are terms of the contract that goes into the roots of the contract whose breach offers the wronged party an opportunity to repudiate the contract and claim for damages from party at fault for the damages as stated in the case of Poussard v Spiers.14  In this case, the plaintiff entered into a three months agreement with the defendant to perform as an Opera singer. The plaintiff fell sick fiver days prior to the opening night and missed the performance during the first four nights. The defendant replaced her with another singer. The court issued that the defendant was in breach of conditions because she failed to perform during the opening night that were the most critical for the entire performance. The reasoning of the judge was that the critics and public would judge the performance based on the opening day. Therefore, since the plaintiff was in breach of condition, the defendant was bound to terminate the contract. On the other hand, warranties form minor terms of the contract, and their breach does not have a significant impact on the contract. As stated in the case of Bettini v Gye, 15 when one party is in breach of a contract the other can sue for damages without affecting the position of the contract. In this case, the claimant formed a three months agreement with the defendant to perform as an opera singer. However, he fell sick and missed rehearsals for six days. The defendant fired him and replaced him with another opera singer. The court’s ruling was that the claimant was in breach of warranty thus the defendant was not supposed to terminate the contract. Rehearsals did not form the hub of the agreement hence the defendant should have treated it as breach of warranties. Innominate terms refer to a class of terms of the contract between conditions and warranties. Initially, the terms of the contract recognized by the law were conditions and warranties until the court’s decision in the case of Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd16. Instead of categorizing the terms either as warranties of conditions, innominate procedure explores the consequences of the breach to determine whether the wronged party was deprived of the entire gains of the contracts or partially. In this consideration, the innocent party can terminate the contract only when the breach results in loss of the entire proceed of the contract. In this case Hong Kong Fir Shipping, 17 the defendant had chartered a ship for two years under a term that the owner of the ship would maintain her in the seaworthy state during the entire period of hire. However, the ship experienced a problem with the engine and due to the incompetence of the crews it went out of service for a total of twenty weeks. The defendant terminated the contract under the claim of breach of conditions. However, the court declined the claim of breach of conditions and established an innominate approach that required the wronged party to examine the extent to which the defendant had suffered loss. The court viewed seaworthiness as neither a condition nor a warranty. They referred the term to maintain the ship in the seaworthy state an “intermediate term” since it could have been broken in insignificant way. , Innominate terms impose challenges regarding the extent in which the breach can be termed serious so as to require termination of the agreement and even how to determine the term is an innominate term and not warranty or condition. The case in Cehave v Bremer18 supports innominate terms. In this case, a customer rejected citrus pulp pellets since they were damaged during shipping. The appellate court issued that there was breach of innominate claiming that partial damages did not warrant the customer to terminate the contract while the substantial damages caused by the goods could not be treated as a mere breach of warranty. Following the appellate court ruling the buyer was allowed to purchase the goods at reduced price and used them for the intended purpose. The decision, in this case, supported the innominate terms since the damages on goods could not deprive the wronged party of entire proceeds of the contract. Nevertheless, in the case of Bunge Corp v Tradax Export SA19, court’s ruling refuted innominate terms. In this case, the term was about the time of performance. Although the appellant claimed that the delay in issuing notice could not deprive the claimant of the whole profit of the contract, the court stated that the time of performance was not predictable and discrete. They implied that unlike in the case of Hongkong Fir Case in which seaworthiness could be insignificant or severe hence impossible to accredit to the commitment at the beginning, while regarding the time of performance it can either be late or not late. The court upheld the term as a condition and dismissed the appeal. Therefore, due to the challenges posed by innominate terms the legal counsel has experienced significant challenges when issuing advice to the clients and making a prediction on the outcome of the legal case. Breach of the contract is not the only way in which a contract can come to an end. There are various means in which party can end the agreement.20 For example, when it is impossible to perform the contract due to natural causes such as floods the parties have no option other than terminating the agreement. Where parties terminate the contract in this way no party can raise a claim against the other. Termination by frustration whereby some changes in legislation renders the subject matter of the contract illegal and unenforceable.21 Parties can also terminate the contract in case of mutual mistake where the both parties were unaware of the mistake at the time of forming the contract. The affected party can repudiate the contract, but only if the other party has not performed the contract. Also, the parties can agree to end the contract. Termination can also occur where one party discovers misrepresentation by the other party.22 This occurs where the party claimed to have made misrepresentation makes a false claim willingly or unwillingly while the other party relying on the claim enters into an agreement. If that party discovers misrepresentation they can petition the court and call for termination of the agreement. The parties will terminate the contract by the performance after each party has successfully discharged his or her contractual obligations as in the case of Cutter v Powell.23 However, parties may regard performance as partial or substantial if the party has not discharged all their contractual obligations fully. In this case, the court may require the party in breach to pay damages to the wronged party. On the other hand, as stated in the case of Sumpter v Hedges,24 if the partial performance amount to fundamental breach of the contract the court may require specific performance from the party at fault or the wronged party can terminate the contract and claim refund for uncompleted work. Sometimes a party may anticipate non-performance of the contract by the other party or anticipatory breach. For example, where one party writes to the other party explaining that they cannot perform their requirements due to particular reasons.25 When such a situation occurs, the law allows the party anticipating breach to terminate the contract under anticipatory repudiation. The repudiating party can terminate the contract immediately and claim for damages without waiting until the time of defaulting. The parties should ensure they perform part of their contract in order to avoid law suit. However, failure to perform by one party gives the other party an opportunity to terminate the contract and sue for damages. Despite the significant flexibility of the innominate terms, such flexibility creates difficulties of predicting the outcome of the case and determining the point at which the parties can seek for damages of termination of the contract. Therefore, innominate terms are not appropriate for dealing with cases of breach of contract because of difficulty in arriving at an absolute decision on various issues. The limitation of the human precognition requires some bit of flexibility in some conditions when making a decision because one cannot forecast the outcome of every breach of a given term. On the other hand, the predictability of conditions and warranties provides simplicity and uniformity the legislature with the conclusive approach to settling issues involving a breach of contract. Bibliography Bettini v Gye (1876) QBD 183. Bunge Corp v Tradax Export SA (1981)1. Cehave N.V. v Bremer Handelgesellschaft m.b.H. (The Hansa Nord) [1976] QB 44.  Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130. Chappell & Co Ltd v Nestle Co Ltd [1960] AC 87. Cutter v Powell [1795] EWHC KB J13. Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] UKHL 1. Janet OSullivan, & Jonathan Hilliard, The Law of Contract, (Oxford University Press, 2012): 491. Foakes v Beer [1884] UKHL 1. Hong Kong Fir Shipping v Kawasaki Kisen Kaisha [1962] 2 QB 26. Laurence Koffman, & Elizabeth Macdonald, The Law of Contract, (Oxford University Press, 2010): 649. Pinnels Case [1602] 5 Co. Rep. 117a. Poussard v Spiers (1876) 1 QBD 410. Stilk v Myrick [1809] EWHC KB J58. Sumpter v Hedges (1898) 1 QB 673. Thomas v Thomas, 1842 2 QB 851, 114 ER 330. Williams v Roffey Bros & Nicholls (Contractors) Ltd [1989] EWCA Civ 5. Read More