Consideration in Contract Law - Case Study Example

Consideration in Contract Law Consideration is either a benefit that is conferred on the promisor by the promisee, or a detriment to the promisee1. It makes a promise legally binding. It constitutes the motive behind the promise made by the promisor. Consideration requires a promise and a promise requires consideration to be valid2. Thus, a reciprocal inducement exists between consideration and promise. In the realm of equity, the notion of promissory estoppel binds the parties to agreements, despite the absence of consideration. The plaintiffs in breach of promise cases can invoke this concept. However, legal luminaries have contended that it can be used as a shield and not as a sword3. Therefore, an aggrieved party cannot use this concept to enforce a promise. Initially, a promise was not legally enforceable, in the absence of consideration. It is something given in exchange for the performance of the contract, by the promisee to the promisor. Consideration is an important element in every contract, and the promisee receives something of value4. English law had long subscribed to the belief that there was no consideration, if the promisee were merely discharging his contractual obligation. This principle was established in Stilk v Myrick5. Consequently, additional consideration was indispensable if the promise were to benefit from a new promise in an existing contract. However, an exception to this rule was provided in William v Roffey Brothers6. In Stilk v Myrick, the defendant Myrick entered into a contract with the plaintiff to work as a sailor. The plaintiff was asked to work as one of eleven other sailors on the boat during a voyage. In the course of the voyage, two of the seamen deserted the boat. Myrick made a promise to the remaining sailors that he would pay an extra amount if they worked on the boat and if they sailed the boat to London. Stilk and others sued Myrick for the wages of the two deserted sailors as they had performed the work of these sailors7. It was held by Lord Ellenborough that the agreement made by Myrick was not supported by consideration to be performed by the plaintiffs. As such, they could not enforce the promise of the defendant to pay additional money8. Moreover, the crew who had not deserted were obligated to sail the boat back to London, as they were bound by their contractual terms, which included sailing the boat. As such, in this case, the defendant Myrick, a ship captain, promised the plaintiff that he would pay extra money to sail the boat back to England. This promise was made, when two of the boat’s crewmen had deserted. The crewmen believed in this promise and sailed the boat back home. Subsequently, Myrick refused to pay the enhanced wages, and Stilk sued Myrick9. The court held that the new promise was not enforceable, as Stilk had merely performed his duty of sailing the boat, which did not constitute good consideration. The principle involved is that if a promisee performs a duty under a contract, then it will be deemed that the promisee owed that duty to the promisor. Such performance cannot be good consideration for any new promise made by the promisor. The promisee can claim performance of a duty, in compliance with a new promise made by the promisor. However, such duty has to be external to the existing contractual duty10. In such cases, the performance can constitute good consideration for a new promise. A party to a contract cannot compel the other party to accept new terms. The use of such force against a party would result in economic distress to that party. In this case, the seamen demanded extra money from the defendant to sail the boat back11. As the contractual duty of the sailors was to sail the boat back home, and as the desertion was by an insignificant number of sailors, the court held that there were no new developments that were of sufficient seriousness to warrant such additional payment. In Australia the doctrine of promissory estoppel underwent a significant change with the decision in Walton Stores. The prerequisites for promissory estoppels were established, with this case. These are first, the defendant should have made a promise. Second, the defendant must have created an impression on the plaintiff that the promise would be carried out. Third, plaintiff should have relied upon the promise to his loss. Lastly, the promise should have been unconscionable12. A person is obliged to conduct an act, under a contract for one of the following reasons. On account of a promise to the other party to the negotiation, due to a promise to a third party, or as necessitated by the law13. The subject of public policy came to the fore in the seamen cases. In these cases it was decided that a seaman working on a British ship should not leave it, until the voyage had been completed. If a seaman violated this principle, then it would be construed that he had committed an act of mutiny. In Ward v Byham Lord Denning LJ opined that a promise to discharge an existing duty or its performance constitutes good consideration; as it is beneficial to the person to whom it is made. This was reiterated in Williams v Williams, albeit with the condition that the transaction should not harm public interest. This was recommended by the English Law Revision Committee in 193714. Musumeci v Windadell Pty Ltd was a case in which, Charles and Margaret Musumeci executed a lease deed, in respect of commercial space in a shopping complex. It was their contention that the terms of the lease had been altered, thereby causing a significant reduction in the sum due. It was also argued by them that the consideration was akin to that in Williams v Roffey15. The presiding judge Santow, referred to the decision in Selectmove Ltd. The latter decision had precluded the application of the Roffey principle, to situations similar to that in Foakes v Beer, and that such extension was the sole prerogative of Parliament or the House of Lords. Santow further stated that it was not essential for consideration to be adequate, and that an existing contractual duty could be treated as good consideration. In addition, he opined that a deed could entirely eliminate the need for consideration. In instances where there is no consideration, unconscionability can be circumvented by means of estoppels16. In the case of Musumici, the plaintiff leased a shop in the shopping complex of the defendant company, Winadell Pty Ltd. Later on, the defendant leased out another shop to a competitor of Musumici. The latter protested and bargained with Winadell to reduce the amount of rent. Winadell accepted this proposal. Subsequently, a dispute arose between Musumici and Winadell, and the latter asked Musumici to vacate the shop and terminate the lease agreement between them17. Musumici sued Winadell for damages alleging that it had breached its promise to reduce the rent. The reduced rent enhanced the capacity of the plaintiff to stay for a greater period of time, as a tenant of the defendant and to operate profitably, by contending with the completion. It also reduced future lease obligations. Moreover, Winadell had gained a practical benefit by its promise to reduce the rent. Hence, according to Santow J, there was practical benefit for both the parties, and this was the valid consideration for their agreement18. Moreover, Santow J examined whether the decision in Williams v Roffey applied to this case. He also analysed the decision in Stilk v Myrick to see if it establish any consideration in this case. However, he opined that the William’s decision would be more appropriate in this case. The judge also considered whether the William’s decision could be applied in Australia19. He found that the contract to perform existing duties could not be enforced, under three circumstances. First, enforcement of the contract would make the promisor vulnerable to extortion. In such instances, performance of existing duties was not to be enforced. Second, there will be no legal detriment to the promisee by performing the existing duties. Moreover, there will be no benefit to the promisor, if he completes his duty. Third, the judge was of the opinion that the outcome of the performance of a promise could not constitute good consideration20. The result of such performance would benefit the promisor, and have no other effect. The following situation will now be considered, the first party to a contract promises to provide goods or services to the second party to the contract. However, prior to the completion of the contract, the second party entertains doubts, on the basis of reliable information that the first party would fail to discharge his contractual duty. In such a situation, the second party agrees to provide additional consideration to the first party, on the condition that the first party will complete his contractual duties21. It is to be construed that the second party is benefitted or at least not put to loss, as long as the first party’s continuance is considered to be of greater benefit to the second party than any remedy against the first party. Obviously, there is some detriment to the first party, as he cannot withdraw from the contract, and where the performance of the contract without any additional benefit would be less beneficial than not performing the contract22. Moreover, the second party’s promise to provide additional benefit to the first party should not be the outcome of economic compulsion, fraud, undue influence or unconscionable conduct on the part of the first party. Such benefit to the second party can be deemed to be adequate consideration for the promise, in order to make that promise legally binding23. In William v Roffey, it was to be ascertained whether existing duty constituted good consideration. The Court of Appeal examined this concept and opined that if there was no detriment to the promisor and if there was a benefit to him, then the existing duty was good consideration. In this case, the plaintiff, William was forced to inform the defendant that he would not be able to complete his contractual obligations, due to financial difficulties. This would have caused substantial loss to Roffey Bros24. Accordingly, he offered an extra amount to William, and asked him to complete the work, within the initially stipulated time. William agreed to do so, but stopped the work after completing the work in some of the flats, as Roffey Bros did not pay him for the work done by him. Subsequently, Roffey Bros engaged another carpenter to complete the work. William claimed damages and the court held that the additional amount promised by Roffey Bros was good consideration. The court came to this conclusion, because, the defendant would have undergone a significant loss, if he had failed to complete the work, within the stipulated time. Moreover, William had agreed to complete the work for an amount that was unrealistically low. The reasoning adopted by the court William v Roffey served to show the circumstances, under which an existing contractual duty becomes good consideration. These are first, the performance of an existing contractual duty by the parties; second, the promise should not cause detriment to the parties; and third, the promisor must have received some benefit for the additional amount promised by him. In Hartley v Ponsonby, it was feared that the seamen would desert in large numbers. The captain offered extra money to the sailors, if they would safely bring the ship back home. The court ruled that this act was good consideration25. This ruling provides an important tenet regarding good consideration, which is described in the sequel. If the promisee had refused to perform a contractual duty, on account of unexpected or unpredictable reasons, prior to the formation of a new promise by the promisor; and subsequently, if the promise performs a duty under the new promise, he can claim this to be the consideration. The additional work done by the sailors, was substantial and of a sufficiently important nature to constitute good consideration. Moreover, the return voyage proved to be hazardous. The situation in this case differs significantly from that in Stilk v. Myrick. In the latter case, an insignificant number of sailors had deserted, and the captain had merely asked the remaining crew to complete their contractual duty. However, in Re Selectmove Ltd26, the Court of Appeal, which had to determine whether the principle of practical benefit applied to promises to pay money, arrived at a different conclusion. In this case, the Selectmove company contended that it had entered into an agreement with the Inland Revenue. This agreement was for the purpose of making payment of arrears of PAYE and NIC. The Court held that this did not constitute good consideration, and that the Inland Revenue could seek immediate payment of the arrears. The Court of Appeal decided on the basis of the ruling in Foakes v Beer27. It held that the Williams v Roffey principle was not applicable to cases relating to debtors and creditors. There have been several debates, as to whether due performance of contractual obligations constitutes good consideration, in respect of some further contract. This question arises if the parties are already under some contractual obligations. There are several important cases in this area. The courts have dealt with these cases in detail, and analysed whether the performance of obligations, under a new contract constitutes consideration. It had been the tradition to accept that the performance of an existing contractual duty did not constitute valid consideration to pay extra money to a contractor. Stilk v Myrick, demonstrated the fact that the performance of a promise cannot constitute good consideration. This principle prevents a party from threatening the other party that it would not perform its obligations under the contract if the other party did not provide additional consideration. In this case, the parties were under a contractual obligation to each other. The promise made by the defendant to bring the ship back home, for extra payment from the plaintiff, was considered to be a part of the original contractual obligation between these parties. The court held that this act of the defendant did not constitute good consideration. In the initial stages, the performance of existing duties in a contract did not constitute valid consideration. However, in William v Roffey Brothers, a new legal principle of practical benefit was established. Specifically, it determined whether the performance of pre-existing contractual obligations could constitute good consideration for a new contract. In this context, the test of practical benefit was instrumental in assessing the proper performance of pre-existing obligations. In Musumici v Winadell Pty Ltd the court applied the principle of practical benefit. It was pointed out that the practical benefit for the promise of reducing rent would be occupation for a longer period by Musumici. As a consequence, the Australian courts give cognisance to the decision in William v Roffey, and consider practical benefit as good consideration. In the Walton Stores case, the principle of unconscionability was established, while determining what constitutes valid consideration. The doctrine of consideration, per se, is applied in English law with some flexibility. The concept of reasonable reliance, constitutes a strong exception to this theory. This concept of reasonable reliance is termed as the doctrine of promissory estoppel, and it is chiefly applicable to varying legal obligations. Bibliography Consideration. (2008). Australian Contract Law. Retrieved 18 March 2010 from http://www.australiancontractlaw.com/law/formation-consideration.html Consideration – in Acceptance of Contract. Retrieved 18 March 2010 from http://netk.net.au/Contract/04Consideration.asp Consideration. (2006). In Collins Dictionary of Law. London: Collins. Retrieved 12 March 2010 from http://www.credoreference.com/entry/5979319/ Foakes v Beer (1884) 9 App. Cas. 605 Hanson v Royden (1867) LR 3 CP 47 Hartley v Ponsonby (1857) 26 LJ QB 322 Martin Davis, Sourcebook on Contract Law, 2000, Cavendish Publishing Limited Musumici v Winadell Pty Ltd (1994) 34 NSWLR 723 Oliver Wendell Holmes, The Common Law, Digireads.com Publishing; 2005 Re Selectmove Ltd (1995) 1 WLR 474 Stilk v Myrick (1809) 170 ER 851 Ward v Byham (1956) 2 All ER 318 Williams v Roffey Bros & Nicholls (Contractors) Ltd (1991) 1 QB 1 Read More