FORMATION OF CONTRACT: CONSIDERATION NOTES

Definition of Consideration

Many attempts have been made to define consideration but few if any have been entirely satisfactory. A promise is only binding if it is made in return for another promise or act. Consideration is a part of bargain whereby something of value must be given or promised by each party. The essence of consideration is that something must be promised or given in return for something else. In Currie v Misa (1875), consideration was defined as:

Some right, interest, profit or benefit accruing to one party or some forbearance, detriment, loss or responsibility given, suffered, or undertaken by the other.



Consideration is thus the benefit accruing or the detriment sustained by one party in return for a promise given or received by the other. Sir Fredrick Polluck defined consideration not in the terminology of benefit and detriment but in terms of the price paid by one party for the other party’s promise. He defined consideration as:

An act or forbearance of one party, or the promise there of, is the price for which the promise of the other is bought, and the promise thus given for value is enforceable.

The typical modern contract is the bargain struck by the exchange of promises. The above definition of consideration by Polluck is based on the notion of exchange and corresponds to the normal exchange of promises. It is, therefore, preferable to that of benefit and detriment. Some recent cases may be regarded as coinciding with the above definition by Sir Fredrick Polluck. For example, in Chappel and Co Ltd. v Nestle’ Co Ltd. (1960), the requirement of exchange demonstrated the existence of consideration. There, N. Co, who were manufacturers of milk chocolate offered to public records of popular tune at a very low price. The normal price of the record was around 6s 6d but it was offered at 1s 6d each, but with a stipulation to the effect that the intending purchasers must be in respect of each record send in addition to the money, three wrappers of their chocolate bar. The wrappers when received were worthless and were thrown away. The records were manufacturedby H Co and sold to N Co. for 4d each. P owned copyright in the recorded tune and they sought to restrain the two companies selling the records on the ground of infringement of copyright. They were offered royalty of 6¼ percent as provided by the statutory law: P refused the offer contending that the money price was only part of the consideration for the record and that the balance was represented by the

three wrappers.Held, the acquiring and delivering of the wrappers were part of the consideration because acquisition of wrappers by the purchaser was of direct benefit to the N. Co and required expenditure by the acquirer and also becuase a contracting party can stipulate for what  consideration he chooses. In this case the delivery of the wrappers in exchange for the delivery of record demonstrated the existence of consideration.

Intext Question

 

  What consideration was given in this case?

What is sufficient?

 



6.4 Classification of Consideration

Consideration may be classified into three categories, executory, executed and past consideration.

6.4.1 Executory Consideration

Consideration is said to be executory when it takes the form of a promise to be performed in future. In other words, consideration is described as executions where it consists only of an exchange of promises and nothing has yet been done to fulfill the mutual promises under the agreement. For example, S promises to deliver goods to B at sometime in future, and B promises to pay for them on delivery. At the time of making this agreement neither side has done anything towards performance of the promises. The consideration is therefore executory.  Take Note

Where a bargain consists of mutual promises to be performed in future, the consideration is said to be executory.

 

6.4.2 Executed Consideration

Consideration is said to be executed when the promise constituting the consideration is completely performed or executed. For example, X sells to Y his car for Kshs.2 million. X receives Kshs.2 million and delivers the car to Y. Here, both parties have performed their obligations at the time of making the contract.  The consideration is, therefore, executed.

 

Take Note

  Where promises are performed by each party to the contract, the consideration is said to be executed.

 

6.4.3 Past Consideration

Past consideration is where the act put forward as consideration was performed before the promise was made. For example, A without any arrangement with B gives tuition to B’s son. Son passes with good grades and B promises A to pay Kshs.5000 for his services. This is past consideration because A rendered services before B promised to pay for them. Past consideration is not sufficient to constitute a contract. Consideration may be executory or executed but it should not be past.

6.5 Rules Relating to Consideration

6.5.1 Consideration Required for Simple Contracts

All contracts must be supported by consideration other than those made under seal. Even contracts in writing require it. An agreement without consideration is void. The law will not, therefore, enforce gratuitous promises such as that of gift or donations to a charity. For example, if X promises to give a television to Y as a present on his birthday, the promise is not enforceable because no consideration has been given by Y in return for X‘s promise. However, if such a contract is made by deed or under seal, then it is enforceable.

Take Note

  Consideration is required for all contracts unless under a seal.

 

6.5.2 Consideration Must Move from the Promisee

Before a person can enforce another’s promise, he must himself have provided the consideration for it. This means ‘’consideration must move from the promise. An illustration from the rule is to be found in Tweddle v Atkinson (1861), where T was to be married to the daughter of G. G and T’s father each agreed to pay a sum of money to T.G died without ever having done so and T brought an action against G‘s executor. Held (1) T had not provided any consideration in return for G‘s promise under the agreement, his action could not therefore, be maintained. T being a stranger to the contract he was not entitled to sue on it.

Similarly, in Dunlop Pneumatic Tyre Co Ltd v Selfridge Co Ltd (1915)D sold tyres to X, a distributor under a contract which provided that he would not resell them below D‘s list prices and on terms that if X resold tyres to a trader buyer, he would obtain a similar undertaking from him. X resold some tyres to S who agreed with X not to sell below the list prices. S broke this undertaking and D sued them for the breach of contract. Held, D could not enforce the contract because consideration did not move from them.

It should be noted agreements on resale price maintenance as in Dunlop case are now governed by the Restrictive Trade Practice Monopolies and Price Control Act.

Take Note

  This rule is similar in effect to the doctrine of privity of contract which we shall be discussing shortly.

 

6.5.3 Consideration Need Not Be Adequate But Must Be Of Some Value

The courts will not inquire into the adequacy of consideration as long as some value is given. It is for the parties to strike their own bargains and determine what they consider is the proper value of their acts or promises. If a party has made a bad bargain the courts are not there to repair it. For example, if A sells his car worth Kshs.3 million to B for only Kshs.100, 000. The consideration given by B is of some value, although it is not equivalent to the market value of the car. Bad or foolish bargains as this may still be enforceable at law. In Thomas v Thomas (1842), P‘s husband expressed his wish to the executor that if she survived him she should be allowed to live in his house for as long as she wanted and did not marry again. After his death the executor allowed P to occupy the house because of her husband’s wish, and also if she paid £1 per year rent and kept the house in repair.

Held, that satisfying the wishes of the husband was not a good consideration but P‘s promise to pay £1 a year was a valuable consideration.

However, inadequacy of consideration may be evidence of deception, fraud, duress, undue influence or mental incapacity.

Activity 6.1

  Explain the relational behind the rule that consideration need not be adequate

 

6.5.4 Consideration Must be Sufficient

Although consideration need not be of adequate value, it must nevertheless be sufficient. In order to be sufficient the consideration need not be of some economic value, something of purely nominal value may be treated as valid consideration. In Chappell & Co v Neastle Co. Ltd, discussed earlier, worthless chocolate wrappers were considered as sufficient consideration. Inthe case it is clear authority for the principle that sufficiency rather than adequacy is the requirement of consideration Lombard Banking Ltd v Gandhi and Patel (1964), the defendants originally made a promissory note in favour of a bank that cancelled forty nine earlier notes and promised not to take any legal action upon them. This bank then endorsed the promissory note to the plaintiff bank who sued the defendants to recover the balance of the amount due on the promissory note. The defendants denied liability by arguing that the plaintiff had given no consideration for the promissory note. Held, the act of cancellation of the forty nine notes and handling over of the replaced note whatever their value was a good consideration because the bank had suffered detriment in doing so.

In certain cases even though the bargain has been struck, the consideration may be deemed insufficient. In most circumstances the general rule is that the performance of an existing duty does not amount to a consideration for a fresh promise.

Take Note

  Performance of an existing duty does not amount to a good consideration for a fresh promise unless the promisee had done something more than what is required under the duty.

 

 

6.5.4.1 Performance of a Public Duty

Where a person is under a public duty imposed by the general law, he is not regarded as

furnishing consideration merely by discharging that duty. In Collins v Godfroy (1831),P attended and gave expert evidence at a trial in which D was a litigant. He was in any case obliged to attend and give evidence because he had been summoned by subpoena. P alleged that D had promised to pay him a certain amount for his loss of time. Held, the promise of payment was not enforceable because P was already under a duty imposed by the law to attend and give evidence at the trial.

This rule, however, does not apply where a person goes beyond the mere performance of an existing public duty imposed by law. In Glassbrook Bros. Ltd v Glamorgan County Council (1925), during a miner’s strike, the colliery owners feared violence. They felt the mobile force provided by the police authorities was inadequate though the authorities thought it was enough. The company asked for extra protection and agreed to pay £2,200 for that purpose. Later they refused to make any payment. The company argued the police were already under a legal duty to provide such protection. Held, the police were entitled to the agreed sum because they had undertaken to provide more protection than they deemed necessary and that was consideration for the promise of reward.

6.5.4.2 Performance of Existing Contractual Duty to the Promisor

Performance of an existing duty imposed by contract does not amount to consideration for a fresh promise. In Stilk v Myrick (1809),P was a member of the crew on a ship on a voyage. The crew had undertaken before they sailed to do all that they could do under all the emergencies of the voyage. During the voyage two of the crew deserted and the master of the ship promised the remaining crew if they would work the ship home they should have the wages of two crew members who had deserted equally divided among them. On completion of the voyage P demanded his share and was denied. Held, the promise of extra payment was unenforceable as there was no consideration for further payment, because the crews were already under a contractual duty to work the ship home.

In Williams v Roffery Bros (1990), the rule in Stilk v Myrics was apparently relaxed: D, a building contractor entered into a contract to refurbish a block of 27 flats. D subcontracted some work to PP soon realized that the price was too low to cover his costs. It also became apparent that P would not be able to finish the work on time. D was subject to a penalty in their main contract if the contract was not completed on time. D promised to P a further £575 per flat on completion to ensure that the work would be finished on time. D failed to pay the extra money. He argued that no consideration had been provided to him in return for the promise of extra payment. Held P was entitled to extra payment since D had obtained the benefit in the form for

£20,000;

of completion of the work on time because of which D avoided loosing money under the penalty clause in the main contract. The Court, however, cautioned that in such cases there must be absence of economic duress or fraud on the part of the promisee.  Activity 6.2

  Explain clearly distinction between adequacy and sufficiency of consideration.

 

6.5.4.2.2 Performance of Existing Duty already owed to a Third Party

An agreement to do an act which the promissor is under an existing obligation to a third party to do may amount to a valid consideration. In Scotson v Pegg (1861),P entered into a contract with XD. D then made an agreement with P by which if P would deliver the coal to him, D would unload the coal at a fixed rate per day. D breached his promise and pleaded lack of consideration because P were already under a contractual duty to X to deliver the coal to them. Held, D were liable because performance of an existing contractual duty might be consideration for a separate promise by a third party. to deliver coal to

6.5.4.3 Part Payment of a Debt

In Re Selectmove (1995), however, the court held that the principle in Williams v Roffrey Bros. could not be applied to a promise by a creditor to accept part payment of a debt from his debtor in satisfaction of the whole amount.

In Pinnel case (1602), it was laid down that part payment is not a satisfaction of an agreement to pay the full amount, even though the creditor agreed to take it in full discharge. This principle

was re-affirmed by the House of Lords in Foakes v Beer (1884), where B advanced a loan to FF asked for sometime to pay. The parties then agreed that if F and obtained judgment against him.  paid £500 at once and balance punctually by instalments B would not take any proceedings  whatsoever on the judgment. After receiving the whole amount due under the judgment, B sued

for interest due from the date of the judgment. F pleaded agreement, but B argued that it was not supported by consideration. Held, B was entitled to recover interest because there was no consideration for the fresh promise made by her.

To this general rule there are three common law exceptions:

  • Payment of a smaller sum before larger sum becomes due.
  • Payment at a different place.
  • Payment by something different in kind.

For example, where the creditor asks for an article such as a television set, fridge, car or land or where the debtor pays by bill of exchange.

Equity has reduced considerably the effect of the above rule by the doctrine of promissory estoppel.

6.5.4.2.3 The Doctrine of Promissory Estoppel

The concept of promissory estoppel may be expressed as follows:

If a person, party to a legal relationship makes to the other party a clear and unambiguous representation or promise that he will not insist on his full right under that relationship, and intending that the other party to act on it, and if the other party as a result of the promise does act upon it to his detriment or alter his position or rely on the promise, the promissory is prevented or “estoppel” from denying its truth. The promissory is bound by his representation or promise so that he will not be allowed to act inconsistently with it.

In Central London Property Trust Ltd v High Trees House Ltd (1947), (popularly known as High Trees Case) in 1937 P let to D a block of flats for a term of ninety-nine years at a ground rent of £2,500 a year. In 1940 owing to war only a few of the flats were let to tenants and it became apparent that D would be unable to pay rent. P therefore, agreed to reduce the rent to £1,500. DD continued to pay only the reduced rent. P then claimed full rent for the future and the arrears of the rent at the rate of £2500 from 1940 to 1945. Held, P could not recover full rent for the period 1940-1945 because they are bound by their initial promise to accept a lesser sum from

  1. D. They could not be allowed to go back on the promise made by them to D because the agreement for reduction of rent had been acted upon. The Court further held that the full rent was recoverable from 1945 when the flats had been fully let. thereafter paid the reduced rent. In 1945 all the flats were let but

There are, however, important limitations upon the operation of the doctrine of promissory estopppel.

  1. The effect of promissory estoppel is normally to suspend rather than to extinguish legal right as in the High Trees Case.
  2. The doctrine does not create a cause of action but operates only by way of defence.

In Combe v Combe (1951),H, the husband had promised to pay his wife W a certain sum per year as permanent maintenance at the time of divorce. W did not apply to the Court for maintenance. HW sued him on his promise. Applying the doctrine of promissory estoppel the trial judge held that H‘s promise was enforceable. On appeal by H, the Court of Appeal held that the doctrine of promissory estoppel must be used only as a defence and not as a cause of action.

Accordingly, H‘s appeal was allowed. failed to make any payments and

  • It must be inequitable to go back on the promise. In C. Builders v Rees (1965),P did some work for D for which D owed him £482. D knowing the P were in financial difficulty offered them £300 in full settlement of the debt. P reluctantly accepted the cheque and later sued for the balance of the original debt. Held, P were entitled to go back on their promise and could demand the full sum originally agreed as D attempted to take

advantage of P‘s financial difficulty D did not come to equity with clean hands and therefore, it was not inequitable for P to go back on their promise. The Court in this case did not consider payment by cheque as different from cash.

  1. For the doctrine to operate there must be a promise either by words or by conduct, and that its effect must be clear and unambiguous.

6.5 Past Consideration is no Consideration

The general rule is that a promise made subsequent to and independent of the act does not amount to a valid consideration. This means past consideration is no consideration. In Roscorla v Thomas (1842),P entered into a contract of sale of a horse to D. After the contract was completed, D gave an undertaking that the horse was sound and free from any vice. This undertaking was proved to be wrong as the horse in fact was vicious. Held, the consideration was past because the promise that horse was sound was made after the contract of sale and there was no fresh consideration for that promise.

However, there are exceptions to the rule on past consideration. First, when the act must have been done at the promisor’s request and the parties must have understood that the act was to be remunerated. In Lampleigh v Braithwait(1615),B committed a murder and asked L to seek a pardon for him from the King. L did so but at a considerable personal expense. Afterwards BL eventually sued him. BL was entitled to the payment since the services were performed at the promisor’s request, promised to pay him £100 for his trouble, but this payment was not made. argued that the consideration was past. Held,



Similarly, in Re Casey’s Patents (1892),A and B were joint owners of certain patent rights. They promised to give one-third shares in these rights to C in return for his past services as manager in working their patents. Held, the contract was enforceable because there had been an implied understanding between the parties at the time, to the effect that C‘s services would be remunerated and the subsequent promise merely fixed the amount.

The second exception is that past consideration is a good consideration with regard to a bill of exchange.

 

6.6 Doctrine of Privity of Contract

The doctrine of privity of contract states that only a party to the contract can enforce rights or have duties enforced against him under that contract. This means that a stranger cannot take the benefit or burden of a contract. A person who is not a party to the contract cannot sue or be sued on that contract even when the contract was expressly made in his favour.

The rule of privity of contract may be illustrated by the case of Tweddle v Atkimson (1861),G and T‘s father entered in a contract for the benefit of T. When T sued it was held that he being a stranger could not bring an action on that contract, although it was made for his benefit. discussed earlier. In that case

In Scrutton Ltd v Midland Silicones Ltd (1962),D, a firm of stevedores was employed by a shipping company to unload a cargo belonging to P, as consignees. D negligently damaged the cargo causing a loss of £593. In an action by P for the recovery of the loss, D claimed to be protected by a limitation clause contained in a contract between the shipping company and P (which was evidenced by a bill of lading), whereby the liability of the former was limited to £179 only. Held, DBeswick v Beswick(1967),J purchased a coal business from his uncle, W‘s husband. The contract provided that J should pay his uncle £6 a week and that if W survived him J should pay her an annuity of £5 a week. When the uncle died, J refused to make payments to W. Held, W was entitled to enforce the contract as an administrator of her husband’s estate but she could not enforce the obligation in her personal capacity as she was not a party to the contract though it was for her benefit. were not a party to the bill of lading and could derive no right under it. Similarly, in

 

6.6.1 Exception to the Doctrine of Privity of Contract

The doctrine has been critised for several reasons. In modern business situations is some cases it proved to be problematic. So several exceptions have been created either by statutes or by the judges to mitigate its effects. Some of these exceptions are as follows:

(a) Implied Trusts

The concept of privity is restricted to contracts and does not extend to trust. The equity may confer a benefit on a third party by using device of trust. Under such device a promisee under a contract might declare himself trustee of the benefit of the promise in question on behalf of a third party and latter can sue the trustee in case of breach of trust. In Gregory Parker v Williams (1817),P owed money to both X and D. He agreed with D to assign to him the whole of his property, if D would pay the debt due to X. P duly assigned the property to D but D failed to pay X. At the common law X could not sue D because of the rule of privity of contract so P and X brought an action in equity. Held, P must be regarded as trustee for X and the latter derived equitable right through P‘s agreement. Accordingly, X could bring an action jointly with P against D.

(b) Collateral Contract

The word “collateral” suggest something that stands side by side with the main contract. It is a device to enforce a promise given prior to the main contract, but for which the main contract would not have been made.

In Andrews v Hopkinson (1957),P wanted to obtain a second hand car. D a car dealer showed him one and said, “it’s a good little bus. I would stake my life on it”. P agreed to take it on hire purchase terms. Ppaid £50 deposit to D. D then sold the car to F, a finance company, who entered into a hire purchase contract with P. P had not so far examined the car. A week later, the car was involved in an accident as a result of which the car was wrecked and P was seriously injured. It was found the steering mechanism of the car was badly at fault. P sued D for the damage he suffered. Held, P could recover damages from D for breach of undertaking given by him before the hire purchase contract was made.

Here, D had given an undertaking to P which had induced P to make the hire purchase agreement. The Court was able to construe a “collateral contract”, the consideration for which was the making an independent contract with another person, the finance company.

(c) Assignments of Choses in Action

The assignment of choses in action or things in action is a significant exception to the rule of privity of contract assignment is a device which enables one party to transfer the benefit of a performance which he has contracted to another person (the assignee) in such a way that the assignee may enforce performance. Chose in action is a thing in action, that is, a right of bringing an action or right to recover a debt or money. If A owes B Shs5, 000, B can assign or transfer the debt to CA directly. A debt is a chose in action, it is intangible property. You cannot see or touch it, but it gives rise to rights that can be enforced. a third party who will then be able to enforce the debt against

In Jaffer Mohammed v Bandali Allarakhia it was held the right to monies to become due under a contract could be assigned and valid under the Transfer of Property Act.

(d) Contracts Relating to Land

It is possible for the owner of the land to attach to it restrictive covenants which run with the land and regulate its future use. Such covenants are enforceable by adjacent landowners and bind all subsequent purchasers. Such covenants impose burdens on subsequent purchasers and confers enforceable rights on persons who are not parties to the contract. Similarly, if A lets land to B, the contract of lease will contain mutual rights and duties. B may assign the lease to C, the assignee who takes it with all the rights and duties of a the assignor B. Although there is no contract between A and C, the latter may sue or be sued by A.

(e) Insurance

There are several exceptions to the privity rule in insurance contracts, which provide for benefits to be payable to third party. For instance, under the Road Traffic Act, an injured third party mayrecover damages from the insurance company although he is not a party to the contract of insurance. Also, if a person insures his life with an insurance company andintends his wife and children to benefit from the policy, that is, the contract of insurance, the law allows the beneficiary a right to enforce that contract.

(f) Agency

Under the law of agency, a person called an agent (A) can make a contract with a third party (T) on behalf of another person called the principal (P). In such cases both P and T are bound by the contract made by A.

(g) Bills of Exchange and Cheques

The Bills of Exchange Act provides a statutory exception in as much as the holder of a bill of exchange or a promissory note or a cheque, may sue the original drawer on it even though he himself has provided no consideration for it. The only requirement is that somebody earlier must have provided some consideration.

 

6.7 Summary Summary

  Consideration is at the heart of the contract. A contract not supported by consideration is void. The concept of consideration requires that something of value, even nominal, must be given or promised by each party. It is thus something for something else. It involves the idea of benefit or detriment. That means that each party must either offer some benefit to the other or suffer some detriment on behalf of the other.

 An alternative concept is, however, the price which one party pays to buy the promise or act of the other. When a promisor promises to do or abstain from doing something, the other party must pay a price for it. This concept of consideration is a better one since it emphasizes on the notion of exchange. In modern business context, in deciding whether consideration exists in an agreement it would be better to rely in the notion of exchange. Consideration may be executory, executed or past.

The doctrine of consideration is made of several rules. Consideration must not be past where an agreement is made on the basis of an act followed by a promise the courts will not enforce such a promise. In some circumstances, however, past consideration is a good consideration.

An important rule is that consideration need not be adequate but it must be of some value. This means that the courts do not insist that consideration should have any significant value at all. Even nominal payment such as one shilling or one chocolate wrapper will always suffice as a valid consideration in exchange of something of consideration such as sale a house. However, consideration must be sufficient sufficiency of consideration means that the consideration must be of some economic value to the promisee. Performance of an existing public or contractual duty is not a sufficient consideration unless the promisee has done something more than what was required under the duty. Similarly, part payment of a debt in full satisfaction of it is not a sufficient consideration. The harshness of this rule is somewhat mitigated by the doctrine of promissory estoppel which applies only as a defence and does not create a cause of action. Performance of an existing duty however towards a third party is a sufficient consideration.

  Consideration must move from the promise.  This rule is similar in effect to the doctrine of privity of contract.  Under this doctrine a person is not entitled to enforce a contractual promise if he is not a party to the contract.

The doctrine of privity is criticised on several grounds and has proved problematic in modern circumstances.  A number of devised, therefore, have evolved to circumvent it.

 

Activity 6.3

  1.  Explain the concept of consideration.

2.  Discuss various types of consideration.

3.  Explain the rules relating to consideration.

4.  Discuss the doctrine of promissory estoppel and its limitations.

5.  Examine the doctrine of privity of contract and its exceptions.

6.  Discuss the legal position in the following cases.

(a)             X promises his friend Y Shs.5,000 as a help for his study at the  University of Nairobi. Later X refuses to pay Shs.5,000 to Y.

(b)             Mberia went to a police station to file a report of a robbery in his  house. Mwangi, a police officer at the police station was very  cooperative and helped Mberia in filing the report. Mberia promised to  pay Shs.1,000 to Mwangi. Mberia failed to keep his promise of

Shs.1,000 to Mwangi.

(c)             Murangu entered into a contract for the sale of his land to Musyoki for  Shs.5,000. The land in fact was worth about Shs.5 million. Murangu  later refused to transfer the land to Musyoki on the ground that the  consideration was not adequate.

  (d)             David on finding that his neighbour Christopher’s car is very dirty,  cleans it without any arrangement with Christopher. Christopher later  promises to pay him Shs.300 for the job. Later Christopher refuses to  pay.

(e)             Janet buys some ointment for her son Steve’s minor injury at the school  from Chemi-Chem Co. Ltd. The ointment sold was fake as a result  which Steve developed complications. Steve sued Chemi-Chem Co.

Ltd. in contract.

 



6.8 References

6.8 References

  1.               William Mbaya, Commercial Law of Kenya (1991) (Nairobi: Petrans  Ltd), Chapter 6

2.               Keith Abbot, et al,Business Law (2007) (London: Thomson, 8th Edition), Chapter13.

3.               Paul Dobson, Charlesworth’s Business Law (1997) (London: Sweet & Maxwell, 16th Edition), Chapter 4.

 

 

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