Contract I – Tutorial 3: Consideration and Intention to create legal relations

Consideration separates a promise from a bargain. A bargain is enforceable. A promise is only enforceable if it is in a deed.

Consideration must be sufficient, but need not be adequate

- There is conflict surrounding how to define ‘benefit’ when deciding whether or not the promisee receives a benefit as a result of the promisor’s promise.

o Williams v. Roffey looks for the existence of a practical benefit (Court of Appeal)o Foakes v. Beer looks for a benefit as a matter of law (House of Lords)o Arol v. Constane – no consideration when you promise not to do something that you

were never going to do anyway.

Consideration must not be past

- Past consideration: If the performance of the consideration comes before the promise then this is past consideration.

- If one consideration is used for two promises this may also be considered past consideration. - A contract cannot be enforced if consideration is past.

Consideration must move from the promisee

- I.e. The promisee must perform the consideration not a third party. However, consideration doesn’t have to move to the promisor, the promisee may give consideration to a third party, without making the contract void.

Consideration must not be an existing obligation: If you already have a duty to do something, this cannot count as consideration.

Doctrine of implied assumpsit: English law sometimes allows, under the doctrine of implied assumpsit, that something done in the past by the promisee for the promisor can be valid consideration for a subsequent promise. In order for the past act to count as good consideration it must have been done at the request of the promisor and with the understanding that the promisee would be rewarded for the act.

Other exceptions from past consideration rule: When a car is taken to a mechanic, the work may be done before the payment is decided upon. This is an enforceable contract and counts as good consideration.

Intention to create legal relations: Established in Balfour v. Balfour. It is assumed that most commercial transactions have an intention to create legal relations, although this is not irrebuttable. It is assumed that most domestic and social agreements do not have intention to create legal relations, although this is not irrebuttable. Tested objectively – reasonableness.

Cases

Williams v Roffey Bros & Nicholls (Contractors) Ltd [1991] 1 QB 1

Case relating to the defining of consideration: Practical benefit or legal benefit?

Carpenter and Building Society case. Carpenter promised extra payment to complete his work quickly. The judgments all support the view that there was consideration for the extra payments. The varying of the terms and the ensuring that the carpenter gets the job done (and for the building contractors to avoid the penalty clause) were considered to be practical benefits for the promisor and therefore valid consideration. Although at law there was no benefit to the promisor, because they already had an agreement for the carpenter to do the work so this consideration was past, in practice there was. This case adopts the practical benefit approach to defining consideration as opposed to the ‘at law’ method. However, all of the specific practical benefits mentioned by the judgment (e.g. the avoidance of the penalty fine) relate back to the fact that the carpenter already had an existing obligation under the original contract.

Pao On v Lau Yiu Long [1980] AC 614

This is the implied assumpsit case.

An agreement is made to sell shares. There is also a collateral contract: In this contract our claimant agrees not to sell 60% of the shares for the first year after exchange. In return, Lau agrees to protect the other party against the drop in value of the shares and to buy them back for the original price at the end of the year. Pao realised that they might be forced to sell the shares at the end of the year and didn’t like this. Pao saught to get this changed. Instead Pao wanted a guarantee of indemnity – this means that Lau would get compensated for the drop in value of the shares instead. This promise (indemnity) was not enforceable because it was too distinct from the original agreement. Judgment: The promise not to sell the shares was a promise in the future, not a promise in the past and because of this it coincides with the new arrangement (the indemnity agreement). It was implied at the time the agreement was made that there would be some reciprocal benefit for the agreement not to sell the shares. 3 things must be shown for this exception: 1) The request was made by the promisor. 2) It was understood at the time the promise was made that the promise would be rewarded. 3) The later promise would have been enforceable if there’d have been consideration at the time.

Foakes v Beer (1884) 9 App Cas 605

Authority: Payment of a part debt is not good consideration for a promise to discharge the whole

debt.

Foakes owes Beer money after a judgment. Foakes asks for more time to pay and Beer agrees. Beer is entitled to interest on the debt. Foakes finishes paying the debt at a reduced rate. Beer then tries to claim interest, Foakes doesn’t pay. If, in the agreement, Beer agreed to forego interest payments, was this supported by consideration on the part of Foakes? It was deemed that there was no consideration.

In Re Selectmove Ltd [1995] 1 WLR 474.

South Caribbean Trading Ltd v Trafigura Beheer BV [2005] 1 Lloyds Rep 128

Balfour v. Balfour [1919] 2 K.B. 571

Husband promises to pay wife £30 a week until she returns to Shri Lanka. Differences arise and they get divorced. Wife tries to enforce this agreement. Judgments: There was no consideration on the part of the wife and there was no intention to create legal relations in this husband & wife scenario.

Esso Petroleum Ltd v Commissioners of Customs and Excise [1976] 1 All ER 117