Two Essential Requirements to Form a Contract - Essay Example

Law of Contract Case Law Introduction A contract consists in an actionable promise and promises. Every such promise involves two parties, a promiser and promise and an expression of a common intention and of expectations as to the act or forbearance promised (1).But question is, if there is a promise made by one party to do something, parallel to the main contract, to other party, then what will be the consequence of performance of that pre existing duty and how does the law consider the same. Before proceeding to discuss all these, first we shall look into the other aspects of contract. Generally there are two essential requirements to form a contract; they are mutual assent and consideration. Mutual assent Mutual assent implies what a person is thinking rather than what is outwardly manifested. It is what a party objectively demonstrates, not what a party may subjectively be thinking. Mutual assent is manifested in an offer, acceptance, and consideration. An offer is an indication by one party, offeror of a willingness to enter into a contract with another party, offered on some specific terms. A valid offer creates a power exclusively in the hands of the offeree such that all that is needed to form a contract is acceptance. If one or more of the terms are missing from the offer, a court may supply those terms. Acceptance is an unequivocal indication that the offeree agrees. Consideration Ex nudo pacto non oritur action -The will not enforce a promise given for ------------------------------------------------------------------------------------------------------------ 1. Anson's Law of Contract 23rd edn. 1971 edt. By A.G Gues 2 nothing. The scope of Consideration arises from when a person makes promise to another; he does so with the intention of deriving some advantage which the person to whom the proposal is made is capable of conferring upon him. In this sense we can define consideration as a legal detriment bargained for in exchange, i.e. agreeing to do something which you have no legal obligation to do or agreeing not to do something which you have a legal right to do. In Currie Vs Misa (2)the term consideration defined as " a valuable consideration in the eye of law may consist either in some right, Interest, profit or benefit accruing, to the one party ,or some forbearance, and detriment, loss or responsibility given, suffered, or undertaken by the other." In Dunlop v Selfridge (3) the consideration is defined as "an act or forbearance of one party, or the promise thereof, is the price for which the promise of the other is bought, and the promise thus given for value is enforceable." From all these definitions and explanations of consideration it is apparent that an act without consideration is not legally binding; it is a so-called naked act, which does not give rise to a right of action. There exist some rules governing the Consideration. 1. If one party voluntarily performs an act, and the other party then makes a promise, the consideration for the promise is said to be in the past. The rule is that past consideration is no consideration, so it is not valid and cannot be used to sue on a contract. 2. Consideration must be sufficient but need not be adequate. ----------------------------------------------------------------------------------------------------------- 2. Currie Vs Misa 1875 LR 10 Ex. 153 3. Dunlop v Selfridge 1915 AC 847 3 3. The person who wishes to enforce the contract must show that they provided consideration; it is not enough to show that someone else provided consideration. The promisee must show that consideration "moved from" him. 4. If one person has a valid claim against another but promises to forbear from enforcing it that will constitute valid consideration if made in return for a promise by the other to settle the claim. 5. If someone is under a public duty to do a particular task, then agreeing to do that task is not sufficient consideration for a contract. But if someone exceeds their public duty, then this may be valid consideration. 6. If someone promises to do something they are already bound to do under a contract that is not valid consideration. 7. If a party promises to do something for a second party, but is already bound by a contract to do this for a third party, this is good consideration. This rule invited a great attention to the scope of consideration in various manners. There was a controversy for a long time as to whether a promise for the performance of an existing duty would constitute a good consideration. Pre-existing contract with the third party Performance of an existing contractual duty does not amount to fresh consideration to make a renegotiated contract binding. The rule governing pre-existing duties in financial arrangements is that 'payment of a lesser sum cannot be any satisfaction for the whole'. However there are still considerable pressures to allow and enforce contractual renegotiations in financial relationships the most common example of which is where a party has agreed to accept less than is owed because the other party is incapable of paying the whole. 4 In Shadewell Vs Shadewell (4) the plaintiff has already promised to marry a girl. The plaintiff's uncle the defendant in consideration of his intend marriage with the said girl ,promised, through a letter to pay him 150 pound yearly during his life or until the Plaintiff's income as a practicing lawyer increased to 600 guineas. The plaintiff married the girl. His annual income never increased. The uncle having died the plaintiff filed the suit to enforce the said promise. It was held that there was sufficient consideration for the promise. So the promise could be enforced. This decision was criticized as the uncle desired no personal benefit from the marriage; the engagement was in no way induced by his promise. But it is to be noted that whatever it is, either the performance or the promise of the performance, the act which is already obligatory towards a third party constitutes a good consideration. This view finds support from a number of cases decided in which the prominent one is Williams Vs Roffey Bros & Nichols. Williams Vs Roffey Bros & Nichols (5) The plaintiff entered into a subcontract with the defendants, who held the main building contract, to carry out carpentry work in a block of 27 flats for an agreed price of 20,000. The plaintiff got into financial difficulty because the agreed price was too low for him to operate satisfactorily and at a profit. The main contract contained a time penalty clause and the defendants, worried lest the plaintiff did not complete the carpentry work on time, made an oral agreement to pay the plaintiff an additional sum of 10,300 at the rate of 575 for each flat on which the carpentry work had been completed. Approximately seven weeks later, when the plaintiff had substantially --------------------------------------------------------------------------------------------------------- 4. Shadewell Vs Shadewell 1860 9 CP (NS) 159 5. Williams Vs Roffey Bros & Nichols 1990 1 All ER 5 completed eight more flats, the defendants had made only one further payment of 1,500 whereupon the plaintiff ceased work on the flats. The plaintiff then sued the defendants for the additional sum promised. The judge held that the agreement for payment of the additional sum was enforceable and did not fail for lack of consideration, and gave judgment for the plaintiff. The defendants moved the appeal but the appeal was dismissed and it was held that where a party to a contract promised to make an additional payment in return for the other party's promise to perform his existing contractual obligations and as a result secured a benefit or avoided a detriment, the advantage secured by the promise to make the additional payment was capable of constituting consideration therefore, provided that it was not secured by economic duress or fraud; that the defendants' promise to pay the plaintiff the additional sum of 10,300, in return for the plaintiff's promise to perform his existing contractual obligations on time, resulted in a commercial advantage to the defendants; that the benefit accruing to the defendants provided sufficient consideration to support the defendants' promise to pay the additional sum; and that, accordingly, the agreement for payment of the additional sum was enforceable. So it is clear that the consideration not necessary for the performance of existing contractual duty since the consideration is already fixed in the main contract. It was also held in the william's case if the consideration obtained by the duress /force in the first phase of the contract then then it cannot be considered good consideration at the time of performance of the contract in the second phase. Duress The general rule is for the creation of the contract there should not be force or duress applied, i.e a contract obtained by duress can be set aside at the option of the person against whom the duress was directed. Duress is an act used by the party to the contract by the means of threats, moral compulsion, physical force or psychological pressure to 6 overbear the other party to the contract and thereby deprive the other party of the exercise of free will. The controlling factor is the condition of the mind of the person subjected to such kinds of coercive measures at the time the contract is entered into. This act of duress completely goes against the mutual assent which is considered to be one of the main requirements of contract. At common law if a party enters into a contract under duress, the Contract may be set aside on ground of duress unless it has been affirmed expressly or impliedly after the duress has been withdrawn. The aspect of duress has been explained in the case Barton v Armstrong (6) in which A threatened to have B killed if he did not buy A's shares in a company of which B was the managing director. The majority of the Privy Council held that the agreement was vitiated by duress. In this context another point was resolved is a party cannot derive benefit from others efforts. If a party has done some job for other he has to be paid even it is assured contract. This rule related to the aspects of unjust enrichment. Unjust enrichment Unjust enrichment is a legal term in English law and in several other jurisdictions, denoting a particular type of causative event in which one party is unjustly enriched at the expense of another, and an obligation to make restitution arises, regardless of liability for wrongdoing. These types of events are always considered as parallel to breach of contract, a tort or equitable obligations. Liability under the principle of unjust enrichment is wholly independent of liability for wrongdoing, i.e., gain or benefit that is the result of another's efforts or acts but for which that other has received no compensation, and for which the one receiving the benefit has not paid. ---------------------------------------------------------------------------------------------------------- 6. Barton v Armstrong [1975] 2 All ER 465 7 Claims in unjust enrichment do not depend upon proof of any wrong. A claim based on unjust enrichment always results in an obligation to make restitution. A claim based on a wrong always results in an obligation to make compensation, but may additionally result in an obligation to make restitution. In Westdeutsche Landesbank Girozentrale v Islington London Borough Council (7)it was held that a bank which had made a lump sum payment to a local authority under an interest rate swap agreement which was ultra vires the local authority and void ab initio was entitled to recover the balance of the money in quasi contract as money had and received or on the ground of unjust enrichment at the expense of the bank as owner of the money, since there had been no consideration for the payment by the bank. The bank was also entitled to interest on the money awarded under a restitutionary remedy. Another assumption arises in the case of pre existing contractual obligation is that the materializing of new agreement between the parties. Here the question is whether these agreements are legally binding or not. New agreement- Legal or not Here the parties are performing the existing duties. Promise to perform the duty is itself constitute the consideration .So there can not be no new agreement between the parties. Even if the parties themselves consider it as an agreement, the said agreement will never constitute as legally binding. There will be only one contract between the parties. Willliam's case has fetched a lot of assumptions and presumption on the rule of existing contractual obligation and the scope of consideration. Later this cases was -----------------------------------------------------------------------------------------------------------7. Westdeutsche Landesbank Girozentrale v Islington London Borough Council 1994 4 All ER 890 8 discussed in Stilk v. Myrick where the decision of william's case was tailored into touch the more crucial aspects of this rule. Stilk v. Myrick (8) A captain fixed an amount of money each to sailors to complete a journey. During the voyage, 2 sailors deserted the ship. The captain promised to divide the deserters' wage among remaining crew if they completed the voyage. On completion, the captain refused to pay the additional money. The crew action to sue the captain failed. Entitlement of extra money is invalid because when the crew initially contracted for their wages, they agreed to complete the journey, even other deserted. The general rule in this situation is given in the case of Stilk v Myrick where it was held that performance of an existing duty does not amount to good consideration for a new promise. Contrary to decision in william's case here the court held that entitlement to extra money is not valid. Now we can see how this decision was justified. In william's case the Court of Appeal rejected the argument and allowed the appeal. Because a contractor who agrees too low a price is acting contrary to his own interests and accepted .The reasoning of the trial judge that, "where the original sub-contract price is too low, and the parties subsequently agree that additional monies shall be paid this agreement is in the interest of both parties"., while "the defendants may have derived a practical benefit from their agreement to pay the bonus, they derive no benefit in law, since the plaintiff promised no more than he was already bound to do by his sub-contract. This happened in stilk's case. This means that the performance of an existing contractual duty owed to the promisor could constitute good consideration. ------------------------------------------------------------------------------------------------------------ 8. Stilk v. Myrick 1809 2 Camp. 317 9 By taking different view on pre existing contractual obligation and giving same validity to consideration the decision in Williams case can be reconciled with Stilk, which was not expressly overruled. Why contractors pay more money to sub-contractors (9) While discussing the validity of pre existing contractual obligation between contractors and sub-contractors and also about that consideration, the importance of a discussion regarding the payment and rate of payment and reasons of high payment, if any, are inevitable. Contractors and subcontractors in the construction industry run on cash. Lord Denning many years ago made the oft repeated phrase that cash flow is the lifeblood of the construction industry and this sentiment is still relevant today. Estimators when preparing tenders usually concentrate on building profits into the price. Of equal importance is the amount of working capital required to fund the contract and the need to keep the amount to a minimum. The payment terms are therefore crucial to every contractor and subcontractor. The high payment always inspires the subcontractors to bring a efficient and effective work for the main contractors. Certification and payment should be the subject of careful strategy and planning. Moreover the cost of manufacture is often greater than onsite erection but many standard contracts do not provide for certification and payment until the goods have been delivered to site. Whatever it is, the payment is necessary in the later stages. Nowadays many contractors resorted to the specialist sub contractors. . Collateral design warranties became widespread due to the design of specialist installations being ----------------------------------------------------------------------------------------------------------- 9. www.longworthconsulting.com getting the tender right 10 passed down to the specialist subcontractor. Here also the main contractor has to invest more money for such specialist work of sub contractors. Conclusion In conclusion, we can say that even though there is a performance of pre existing duty as agreed in the original contract then it is a good consideration. But it is to be remembered that it should not be in contrary to the public policy. If there is sufficient pay in time, it naturally reduces all the conflicts main and subcontractors and also it ensures an efficient work from the subcontractors. **************************** References Books and Authors 1. Anson, W.R Anson's Law of Contract, edited by Gues , A.G ,Oxford university Press ,London. 2. Cheshire, G.C and Fifoot, C.H, Law of Contract Butterworths, London 3. Pittel, Stephan G.A Characterization of Unjust Enrichment in the conflict of laws Chapter 13 P334 4. Swadling, Birks W Restitution and Unjust Enrichment Towards European Civil code P26 Martinus Nijhoff Publishers 1994 Websites 5. www.geosites.com Law of Contract Rules governing the consideration 6. www.longworth consulting.co.uk Importance of contractor program payments getting the tender rights Table of cases 1. Barton v Armstrong [1975] 2 All ER 465 2. Currie Vs Misa 1875 LR 10 Ex. 153 3. Dunlop v Selfridge 1915 AC 847 4 .Shadewell Vs Shadewell 1860 9 CP (NS) 159 5. Stilk v. Myrick 1809 2 Camp. 317 6. Westdeutsche Landesbank Girozentrale v Islington London Borough Council 1994 4 All ER 890 7. Williams Vs Roffey Bros & Nichols 1990 1 All ER Read More