CConsideration in Contracts - Essay Example

Running Head: CONSIDERATION Consideration in Contracts of the of the In English Law a contract becomes legally binding, on the parties to it, if there is consideration for the promise made under the contract. In the absence of consideration a contract is not enforceable in law. Accordingly, the offeror expects remuneration either in cash or kind as an exchange for the contract. This consideration, which can be anything of value to the offeror, is sometimes unfavourable to the offeree. A major requirement of consideration is that it should be sufficient in Law and it imposes a future responsibility. In general, it is incorrect to enter into a contract that is based on a consideration gained in the past1. The fact that past consideration cannot constitute valid consideration was depicted in Eastwood v Kenyon2. In this case the guardian of a young girl obtained a loan in order to defray the cost of her education. After the completion of her education this girl entered holy wedlock. Her husband agreed to repay the loan. The court opined that the guardian of the girl was not entitled to enforce the promise because of the fact that the loan was availed by him to educate the girl constituted past consideration which had been completed long before her husband had made the promise to repay this loan. However, in Pau On v. Lau Yiu Long past consideration was deemed to be good consideration. In this case the court decided that for a new contract, an advantage that was bestowed or a disadvantage that had been undergone in the past could be deemed to be valuable consideration if payment was forthcoming. Further, the court opined that commercial pressure cannot be considered to be coercion if it is a reasonable business practice3. In all such exceptional cases the original act should have been conducted by the promisee at the behest of the promisor; an unambiguous perception should exist between the parties that remuneration would be made available for performing the contract and the promisee should have agreed to these terms, prior to receiving the consideration, which must be enforceable as a legally binding contract. In the month of February road repair work commenced in front of Tommy’s establishment. This made access to Tommy’s establishment difficult and resulted in a drastic reduction of business. The Arcadia Company consented to reduce the rent, for a period of three months, to £30 per week. The road repair work was over at the end of three months and normalcy was restored. However, due to the road repair work a lot of dust had accumulated and Tommy was compelled to engage interior decorators to restore the previous status of his establishment. Tommy informed Arcadia Company that this combination of slack business and repairs had reduced him to near bankruptcy. Accordingly, he requested the Arcadia Company to continue charging the lower rent for a further period of six months. Arcadia agreed, although with some reservations. It was held by the Court of Appeal in Williams v Roffey that where a party to an existing contract later agrees to pay an extra bonus in order to ensure that the other party performs his obligations under the contract, then that agreement is binding if the party agreeing to pay the bonus has thereby obtained some new practical advantage or has avoided a disadvantage. In the present case, there were benefits to Roffey such as: (a) making sure Williams continued his work, (b) avoiding payment under a damages clause of the main contract if Williams was late, and (c) avoiding the expense and trouble of sub contracting the work to someone else. Therefore, Williams was entitled to payment4. In CTN Cash and Carry Ltd v. Gallaher Ltd, it was decided that the practical benefit accruing to the promisor must be treated as consideration for extra payment5. In July a fire occurred at the pub situated down the road and this brought about its indefinite closure. Consequently, Tommy’s business improved by leaps and bounds. However, Arcadia Company developed severe financial problems and claimed the enhanced rent from February. Similarly, in the Central London Property Trust Ltd V. High Trees House Ltd. In this case, during the war, rent was reduced as per the new agreement. After, the war was over, the landlord attempted to invoke the original contract, in order to obtain higher rent. In this case the tenants attempted to invoke the principle of estoppel against the landlord and prevent him from enhancing the rent. Similarly, in Tool Metal Manufacturing Co Ltd v. Tungsten Electric Co Ltd, the patent owners promised to suspend periodic payments of compensation due to them from the manufacturers from the outbreak of war. It was held by the House of Lords that the promise was binding during the period of suspension and that the owners after giving reasonable notice to the other party could revert to their legal entitlement to receive the compensation payments6. The court held that the agreement to accept lower rent was an acceptance of part payment and hence the plaintiff was well within his rights to recover the complete arrears of rent at a later date. It was held that the agreement to accept lower rent lacked consideration and was consequently not binding. The court held that the new promise was enforceable against past payments but was inapplicable to the post war payments. This type of estoppel is termed as equitable estoppel, which remains in force only as long as it is justified and it cannot be invoked as a right7. Tommy had faced problems due to the road repair work for three months from February and the Arcadia Company had agreed to charge lower rent for this period. In the High Trees case the judge stated that after the emergency situation was over, the landlord could invoke the original agreement. Therefore, Arcadia Company is justified in claiming the original higher rent from the time that normalcy was recovered. Moreover, in D & C Builders v. Rees, Mrs. Rees had stated that she would only pay £ 300 as full and final settlement of her debt after realizing that D & C Builders were facing severe financial problems. The hapless company accepted this amount, but later on initiated legal action to recover the full amount of their dues. The court opined that the company was entitled to the full amount. In his judgment Lord Denning was of the view that it was not inequitable for the creditors to go back on their word and claim the full amount due to them, as the debtor had behaved in an inequitable manner by taking undue advantage. In this instance, financial duress compelled the creditor to accept the lesser amount and there was no true agreement. Therefore, the agreement was not binding. A creditor will be deprived of his legal rights if it would be inequitable to insist upon them and a promise given under compulsion should not be prevented by the principle of estoppel8. In our case, Arcadia Company agreed to receive the lower rent due to economic duress. Nevertheless, this does not preclude him from claiming the full amount of rent in a court of law. Tommy had engaged a refurbishing firm Quickfix Builders at £ 3, 000 to renovate his establishment. Once they commenced the work these builders informed Tommy that an additional sum of £ 500 would be required as some of the walls had to be double plastered. Tommy did not want to pay this additional amount as he had assumed that this amount had already been included in the original estimation. However, he agreed to pay this amount as he was pressed for time. This refurbishing work was completed in time and only £ 3, 000 were paid by Tommy as remuneration for the work done. In Williams v Roffey, the court held that executing an existing contractual obligation constitutes valid consideration because it prevents the breaching of a contract with a third party, avoids the problem of engaging a third party to complete the work and in this manner ensures that no penalty clauses are incurred at the instance of the third party. Thus these tangible benefits that are consequent to the completion of the existing obligation represent the consideration9. Tommy obtained practical benefit from the extra work done by Quickfix Builders. Since, Tommy had agreed to pay the extra amount; the builders had taken extra effort to complete it in time. Hence, according to the decision in Williams v. Roffey, Tommy has to pay the extra amount of £ 500 to the builders. In our case, Tommy’s business had improved tremendously in July due to the destruction of his competitor’s business establishment. However, Tommy was willing to pay only £30 per week, which was inequitable when compared to Arcadia’s financial position. Hence, Tommy has to pay the difference amount of rent from May onward, i.e., three months from the completion of the road works, according to the decision in the High Trees case. References 1. Central London Property Trust Ltd V. High Trees House Ltd. (1947) KB 130. 2. CTN Cash and Carry Ltd v. Gallaher Ltd (1994) 4 All ER 714. 3. D & C Builders v Rees. (1965). 2 QB 617. 4. Eastwood v Kenyon, 1840. 5. Kevin’s collaborative English law glossary. Consideration. Retrieved February 26, 2007 from http://law.web-tomorrow.com/twiki/bin/view/Main/Considertion. 6. Pau On v. Lau Yiu Long. (1980). AC 614 (PC). 7. Pinnels Case. (1602). 5 Co Rep 117 Court of Appeal. 8. Tool Metal Manufacturing Co Ltd v. Tungsten Electric Co Ltd (1955). 1WLR 761. 9. Williams v Roffey Bros. and Nicholls (Contractors) Ltd (1991) 1 QB 1. Read More