2.4.2 Consideration & Promissory Estoppel

This chapter will examine and analyse two principles of contract law. The first is consideration, which along with the offer, acceptance and intention to create legal relations, helps form a legally binding contract. Promissory Estoppel is a related principle which can act as the exception to one of the main rules of consideration – that for consideration to be valid, it must have economic value and involve an exchange of benefit/detriment between the parties. This chapter will ensure you understand the rules of consideration and when exactly promissory estoppel can operate.

Consideration

What is consideration?

As you will have learnt in chapters one and two, the offer and acceptance are two key components of the contract. However, a valid offer and acceptance only constitutes an agreement. In order for that agreement to be legally enforceable, there must be an intention to create those legal relations (see chapter 3), and the subject of part of this chapter – consideration. The consideration of contract can be described as the ‘badge of enforceability’.

A simple definition of consideration is as follows – an exchange between the parties which results in a benefit to one party, and a detriment to the other. The case of Currie v Misa(1874) LR 10 Ex 153 provides an apt description of this:

“A valuable consideration, in the sense of the law, may consist either in some right, interest, profit, or benefit accruing to the one party, or some forbearance, detriment, loss, or responsibility, given, suffered, or undertaken by the other.”

A practical example of this can be found by examining a simple contract. Party A offers £500 to Party B, who in exchange will fit his car with a new engine. Party A receives the benefit of his car being fixed, whilst Party B incurs the detriment of having to take time, effort, and perhaps expenses to fix the car.

You can also identify from the above contract that there is a parallel detriment to Party A and benefit to Party B; Party A suffers the detriment of having to pay £500, and party B receives the benefit of the £500. It should be noted that this parallel detriment/benefit is not required to form valid consideration, but it is often present.

It is worth noting that the only contract where consideration is not required is when a contract is made via a deed.

Does the exchange of the promise to a benefit/detriment constitute valid consideration?

One common misunderstanding with regards to consideration is that consideration is only valid once the benefit/detriment has been transferred between the parties. This is understandably so, if you take the definition from Currie v Misa, the promise to do something would surely not constitute valid consideration. However, it is commonly accepted practice that a promise can constitute valid consideration.

If we examine our example contract involving the £500 exchange for the replacement car engine, under the assumption that a promise does not amount to valid consideration, the reason behind this will become clear.

After the exchange of the promise, Party B orders the required engine part for the replacement at the cost of £200. Party A is then offered a cheap replacement car, and instead opts to purchase this, and leaves Party B a voicemail to let him know he will no longer need the replacement engine. Party B is then left with an engine part he has no need for, and will no longer receive the £500 from Party A that would have resulted in profit for him. There are two principles clear from this example:

  1. If a promise did not constitute valid consideration, it could result in extremely unfair outcomes for some parties
  2. If a promise did not constitute valid consideration, it would stifle the economy and business, as parties would be unwilling to deal with each other in fear of circumstances similar to the example

A promise operating as consideration in the above example results in Party B having a remedy as a result of the breach of contract, negating the above issues.

Lord Dunedin confirmed this principle in Dunlop v Selfridge Ltd [1915] AC 847:

“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.”

Types of consideration

Executory consideration: This is the kind of consideration which is formed by an exchange of promises by the parties. Most commonly found in a bilateral contract

Executed consideration: This type of consideration is found in unilateral contracts, where one party makes a promise in exchange for an act by the other party (remember the example of the reward for the lost dog in chapter 1 – offer?). Therefore, when the act is completed, the consideration is executed.

Consideration which is promised is called executory consideration

Consideration which has been completed is called executed consideration

The requirements of consideration

Unfortunately, consideration is not just as simple as identifying a benefit/detriment exchange between the parties, as often is the case with legal principles, there are some requirements that must be fulfilled. These rules are as follows:

  1. Consideration does not need to be adequate
  2. Consideration must have economic value

These rules/requirements should be considered in turn when assessing a contract. This section will examine each in depth with case/practical examples.

Consideration does not need to be adequate

As identified earlier in this module guide, the objectives of the courts in contract law is to help to give effect to contracts in a fair and equitable manner, but the courts will not protect the parties from a bad bargain. This is the basis upon which the first rule of consideration is formed. Consideration does not need to be a sufficient, it merely needs to exist.

The case of Thomas v Thomas(1842) 2 QB 851 highlights this principle in operation. This case involved the rental of a property for the cost of £1. It was argued that this £1 could not be considered valid consideration due to the actual value of the property rental significantly exceeding the £1 consideration. The courts ruled that this was irrelevant; the fact that there was some consideration made it valid.

Chappell & Co Ltd v Nestle Co Ltd [1960] AC 97 is evidence of the courts’ justification for this approach –  Lord Somervell stated ‘A contracting party can stipulate for what consideration he chooses’, implying the courts will not interfere in bad bargains.

Exam consideration: Be careful when analysing contracts and considering whether the consideration is valid. The consideration needs to be assessed alongside whether there was an intention to create legal relations. Although a £1 offer for a house may be able to operate as valid consideration, it only does when there is an intention to create legal relations.

Consideration must have economic value

The case discussed above of Thomas v Thomas confirms that although consideration need not be sufficient, there must be at least some consideration. There is now the question of what the definition of ‘some’ consideration is. ‘Some’ consideration refers to anything that has economic value.

The case of White v Bluett(1853) 23 LJ Ex 36 is a good starting point for examining the definition of ‘economic value’. In this case, a father waived his son’s debt on the condition that he stops complaining about his Father’s will. The son argued he had provided valid consideration by not complaining about the will. The court ruled the contract was unenforceable due to the son’s promise not having any economic value.

Economic value can be of extremely minimal value, as seen in Chappell & Co Ltd v Nestle Co Ltd [1960] AC 97, where the wrappers of sweets amounted to consideration with an economic value. However, the contrasting case of Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548 ruled that gambling chips were not a valid form of consideration.

Exam consideration: Can you reconcile the two above cases? Why were gambling chips seen as different to sweet wrappers – surely they both have economic value? Consider the argument that gambling chips are only worth something to the casino who owns the chips. Could you distinguish the sweet wrappers on this basis? These cases highlight the potentially inconsistent nature of the courts when deciding whether something amounts to consideration or not. When you are assessing a contract for consideration, you may often be correct in thinking that there is no wrong or right answer, just be sure to justify your decision, drawing comparisons with cases and distinguishing the facts from others, this shows the marker you understand the concepts and can make a reasoned decision.

Limitations of consideration

The previous section examined how the courts decide whether something amounts to consideration or not. Unfortunately, there is even more to remember! The courts have identified particular ways and circumstances in which consideration is ruled to be insufficient to form a binding contract. Of course, along with these circumstances come some exceptions for each. Ensure to learn these and be able to identify them in a problem scenario. These limitations are as follows:

  1. Performance of an existing duty
  2. Past consideration
  3. Part-payment of a debt

Performance of an existing duty

There are three different types of existing obligations which will need to be examined, these all have different rules and exceptions.

  1. Performance of legal obligations which are independent of any contract
  2. Performance of a duty already promised in a different contract
  3. Performance of a duty owed to a third party

Performance of existing legal obligations which are independent of the contract

This type of existing duty refers to one which is already owed prior to the creation of a contract. The most commonly cited example of this is individuals employed to do a public duty, such as policemen or firemen. Therefore, what happens when Party A promises Party B (a fireman), £100 to save his wife from perishing in a fire?

As a general rule, performance of an existing legal obligation will not constitute valid consideration. In the example above, the £100 payment would not be enforceable. The case of Collins v Godefroy(1831) 1 B & Ad 950 is good authority for this principle. In that case, a contract was formed which promised payment to a witness to give evidence. This contract was not enforceable by virtue of the existing legal obligation the individual had to give evidence.

Exam consideration: Why do you think the performance of a legal obligation cannot amount to valid consideration? Think about the possible policy and public interest arguments.

Exception: The performance of an existing legal obligation can be valid if the contract requires an individual to go further than their normal existing legal obligation. Take the example of the fireman, who is under a legal obligation where reasonable to attempt to save humans from perishing in fires. If somebody offered £100 to the fireman in order to save a pet rabbit from perishing in the fire, this would be going further than their normal existing legal obligation, and could therefore constitute valid consideration.

The case of Glasbrook Bros v Glamorgan County Council [1925] AC 270 is authority for this exception. An individual requested police protection in the form of a constant presence on his property; the police did not have the resources to do so, but did in exchange for a financial contribution. It was argued the police were under an existing legal obligation to protect members of society, however, the court ruled that the consideration was valid as it required the police to go above and beyond their ordinary duties.

Performance of a duty already promised in a different contract

The performance of a duty already promised in a different contract is not valid consideration. If in our earlier example of the exchange of £500 for the engine replacement, Party A ed party B and said he would now pay £600, this promise to pay £600 would not constitute valid consideration, as Party B is promising the same performance as they did under the previous contract (to replace the car engine).

The seminal case for this rule comes from Stilk v Myrick (1809) 2 Camp 317, 170 ER 1168. In this case, the contractual duty of the crewmen of a ship was to sail a vessel. Two of the crewmen refused to sail, and the remaining members of the crew were promised a split of the deserting crew’s wages, forming a new contract to sail the vessel for a higher price. Therefore, similar to our above example, the crewmen were offered extra money to complete their already existing duty (to sail a vessel). The court held that this consideration of performance of an existing duty was not valid consideration, meaning the contract was not valid.

Exception - going beyond the existing duty: Similar to the exception of the performance of an existing legal obligation, if the performance of a duty already promised in a different contract goes beyond the original duty, it will be held as valid consideration. In Hartley v Ponsonby [1857] 7 EL BL 872, the facts were identical, but more crewmen had deserted the ship. Therefore, as the sail back was dangerous due to the lack of crew, and the remaining crew had to do a significantly higher amount of work, they had exceeded their contractual duty, meaning the consideration was valid.

Exception – Williams v Roffey: The case of Williams v Roffey [1991] 1 QB 1  provides a specific set of circumstances in which performance of a duty already promised in a different contract can amount to valid consideration. The criteria set out by Glidewell LJ are as follows (See Williams v Roffey at 16):

  1. If A has entered into a contract with B to do work for, or to supply goods or services to, B in return for payment by B; and
  2. At some stage before A has completely performed his obligations under the contract B has reason to doubt whether A will not, or will be able to, complete his side of the bargain; and
  3. B thereupon promises A an additional payment in return for A’s promise to perform his contractual obligations on time; and
  4. As a result of giving his promise, B obtains a benefit, or obviates a disbenefit; and
  5. B’s promise is not given as a result of economic duress or fraud on the part of A.

In Williams v Roffey, these criteria were successfully fulfilled. Party A had a contract to refurbish a number of flats with Party B, a housing association. Party A then subcontracted the refurbishment out to Party C. Party C were unable to complete the building on time due to financial difficulties, and Party A offered them extra payment to ensure they did complete it on time. Following the logic from Stilk v Myrick, this would be an unenforceable contract, due to the consideration of Party B being an already existing obligation. However, if you apply Glidewell LJ’s criteria to the circumstances, the consideration becomes valid. This is because Party A would incur severe penalty costs from Party B, the housing association, if the work was not completed on time. Therefore, criterion 4 is also fulfilled, as Party A avoided the disbenefit of these penalties by ensuring Party C completed the work on time.

We can again examine our example contract. If Party A needed the car engine replaced immediately in order to attend to a lucrative business opportunity, and was unsure Party B would complete this in time, and offered additional payment to do so, this would be valid consideration. This is because Party A has obtained the benefit of being able to attend to the business opportunity.

It should be noted that this principle from Williams v Roffey does not overrule Stilk v Myrick. Glidewell LJ explained that it acts to “refine and limit the application of that principle, but they leave the principles unscathed”.

Exam consideration: What kind of things do you think could constitute a ‘practical benefit’ or avoidance of a ‘disbenefit’? Does it need to be a severe one or could it be trivial? This is an interesting point to assess when criticising the rule from Williams v Roffey.

Limitation: Re Selectmove [1995] 1 WLR 474 was a case in which an individual promised to pay their debt in instalments over time, rather than in full. It was argued that a practical benefit was obtained because the debtor would receive full payment, instead of some due to the insolvency in event of having to pay in full at the time. The courts confirmed that the rule from Williams v Roffey could not extend to the part-payments of debts. See the part-payment section later in this guide for more information.

Performance of a duty owed to a third party

This limitation of consideration is similar to that of above example, however, in this case, the duty will be owed to a third party, and not the same party.

A basic example of this can be found in Shadwell v Shadwell(1860) 9 CB NS 159, where an uncle promised his nephew a sum of money to marry his fiancée. At the time, the nephew had already agreed to marry his fiancée (which in 1860 created an enforceable legal obligation). The outcome of the case is not considered good law, but it is a good example to cite of a duty owed to a third party.

The current law is found in New Zealand Shipping Co Ltd v AM Satterthwaite & Co Ltd (The Eurymedon) [1975] AC 154. This is a notoriously complex and unintuitive decision, so you may have to re-read these facts a few times alongside the decision!

  1. Party A, the shippers, had a contract of carriage with Party B, the carriers.
  2. This contract included an exemption clause whereby the carriers would not be liable for any damage as a result of the unloading of the goods
  3. Party B then entered a contract with Party C, the stevedores, to unload the goods.
  4. Subsequently, Party A promises Party C that they can take benefit of the exemption clause they offered to party B

It is important at this point to note that this is where the consideration fails. The agreement to take benefit of the exemption clause requires a contract between Party C and Party A. Party A’s consideration is the benefit of the exemption clause, and Party C’s consideration is the unloading of the goods. Party C already owe that duty to Party B, meaning their consideration to Party A would be invalid as it is the performance of an existing duty.

Similar to the decision in Williams v Roffey, the court held that the consideration of the existing duty was valid, on the grounds that is conferred a practical benefit. The practical benefit being Party C’s ability to enforce a direct obligation against Party A. This is a surprising decision as it ignores the privity of contract doctrine (see chapter 5).

Therefore, the general rule created is that performance of an existing duty owed to a third party may be valid consideration if it allows the party to enforce a direct obligation against the other.

Past consideration

Past consideration is insufficient to form a legally enforceable agreement. Only consideration which is given at the time or after the promise for which it is given will be enforceable. A promise given after the consideration has been completed is unenforceable.

Re McArdle [1951] Ch 669 is authority for this point. In this case, a sum of money was promised for some building work. However, this promise was made subsequent to the building work being completed; therefore, the building work was ‘past consideration’

Exception – requested performance: The case of Pao On v Lau Yiu Long [1980] AC 614 confirmed and restated the requested performance exception first identified in Lampleigh v Braithwaite (1615) Hob 105. The three criteria are as follows:

  1. The consideration which is ‘past’ would have operated as valid consideration if the act was done at the promisor’s request

The case of Lampleigh v Braithwaite (1615) Hob 105 highlights this criterion. Party A asked Party B to obtain a pardon for his murder charge. Party B did so, and Party B subsequently promised to pay him £100. This contract would normally not be valid due to the consideration of obtaining the pardon being ‘past’. However, the court decided that if the performance (obtaining the pardon) was at the request of the promisor (whoever promised the £100), the performance would constitute valid consideration.

  1. There was an understanding there would be the conferment of some kind of reward, payment or benefit for the act

Re Casey’s Patents [1892] 1 Ch 104 is good law for this point. Due to the commercial relationship of the parties, it was presumed payment would eventually be promised despite it not being so at the time of performance of the contractual requirements. A mutual understanding should be identifiable.

  1. The consideration would have been valid had it been promised in advance of the contract.

This requirement is fairly simple and just requires an examination of whether the consideration would normally be valid (is there an economic value, etc).

Part-payment of debt

It was mentioned earlier in discussions regarding Williams v Roffey and Re Selectmove about part-payments of debt. The general rule is that part-payment of a debt is never good consideration to discharge that debt.

This rule stems from Pinnel’s Case (1602) 5 Co Rep 117 and was confirmed by the House of Lords in Foakes v Beer(1883) LR 9 App Cas 605. The judicial reasoning for this is rooted in the Stilk v Myrick principle, that performance of an existing duty is not valid consideration. Part-payment of a debt is simply the performance of an existing duty. No practical benefit argument can be used to negate this principle – it does not matter if the part-payment comes before the due date, or some other benefit is conferred (see Re Selectmove)

Exam consideration: The part-payment of a debt is a common topic of exam questions or moots. Consider exactly why the rule is so strict. The decision is rooted in the potential for parties to exploit those in poor financial positions. For example, Party A owes Party B £1,000, but is aware Party B is in dire financial need of £500. With this knowledge, Party A can offer £500 as part-payment of the debt if Party B waive the remaining £500, knowing that Party B have no choice but to accept the money. The case of D&C Builders Ltd v Rees [1966] 2 QB 617 is an excellent example of this in operation.

Pinnel’s case also ruled there are two exceptions to the part-payment rule.

Exception: Part-payment of a debt is valid if something else is exchange along with/instead of money. For example, £1 and a mobile phone could be valid consideration for a debt of £1,000. This is because the court can presume the mobile phone has some value which goes beyond the debt, even if in reality it does not.

Exception: Payment in a different form or at a different location. If you are required to pay via bank transfer, but are later asked to pay in person, the part-payment of a debt can be sufficient consideration here, as the effort and expense of travelling helps to amount to sufficient consideration.

Promissory Estoppel

So far in this module guide we have only examined and analysed forms of common law. As can be identified throughout this chapter, there are many circumstances in which the common law might produce unfair results. Equity, in the form of Promissory Estoppel, can provide a remedy for those unfair circumstances.

Where does promissory estoppel fit in with consideration?

Promissory estoppel operates to ensure a party does not go back on their promise when another party has relied upon that promise. Clearly, consideration relates to the exchange of promises, therefore it becomes an extremely useful tool in providing a remedy for aggrieved parties. Promissory estoppel will have the effect of stopping the party who attempted to go back on their promise to do so.

How does promissory estoppel operate?

The decision in Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130 is the leading authority on promissory estoppel and also provides a clear example of the principle. The facts are as follows

  1. Party A leased some properties from Party B, at the cost of £2,500 a year. This lease was signed in September 1937
  2. Following the outbreak of World War 2, Party B agreed to reduce the rental cost to £1,250 due to the difficulty in letting all of the flats out.
  3. Following the end of World War 2, Party B attempted to re-assert the £2,500 a year cost, not only for the future payments, but for the rent in arrears.

Unsurprisingly, the £2,500 a year cost could now be re-asserted, as the difficulties of the war were now over. The question of the arrears is where the promissory estoppel becomes relevant. The £1,250 payments would have been considered as part-payments of a debt, which as we identified in the previous section from Foakes v Beer, would not be valid consideration, and therefore, the arrears in full for £2,500 would be able to be reclaimed.

In his judgment, Lord Denning explained that where a promise is made which is intended to be binding, intending to be acted upon, and is also acted upon, it comes binding, notwithstanding any limitations of consideration. Therefore, in the case, as Party A had been paying £1,250 rent instead of £2,500, they had acted upon that promise, and therefore Party B would be estopped from going back on the promise.

This principle of promissory estoppel may be seen to operate as a way in which the requirement of consideration is removed altogether and instead as long as there in reliance on a promise, the agreement can be binding. However, there are restrictions to promissory estoppel; again, each will be explained in turn:

  1. Need for an existing legal relationship between the parties
  2. There must have been a detrimental reliance on the promise
  3. Promissory estoppel can only be used as a defence
  4. It must be inequitable to allow the promisor to go back on the promise
  5. The doctrine is generally suspensory and does not extinguish rights

There must have been an existing legal relationship between the parties

Generally, promissory estoppel can only operate when there is a pre-existing legal relationship, and will not create new ones. Lord Denning, in the case of Combe v Combe [1951] 2 KB, confirmed this

Exam consideration: Despite Lord Denning confirming this, in the case of Evenden v Guildford City FC [1975] QB 917 he expressed the view that it could apply to parties without an existing legal relationship. Would this be a sensible idea?

There must have been a reliance on the promise

The promisee must rely on the promisor’s promise in order for promissory estoppel to operate. In the High Trees case, this was by paying £1,250 rent instead of £2,500, alongside this, they would have used the spare money to fund something else, therefore relying on the promise that the rest of the £2,500 would not need to be paid, meaning it would be unfair and unreasonable to force them to comply with the original terms of the contract.

The test for reliance has an extremely low threshold, all one party must do it act differently to what they would have otherwise done based on the promise. It has also been suggested the reliance must be detrimental, but there is clearly no detriment in High Trees and Denning also maintained this view in C.

Promissory estoppel can only be used as a defence

This means promissory estoppel can only be used as a defence in an action, not be the cause of an action. The case of Combe v Combe provides authority for this point, where it was stated that promissory estoppel can only operate as a ‘shield not a sword’.

In Combe v Combe, a wife attempted to sue her former husband for a promise to pay her maintenance, although she had provided no consideration for the promise. She tried to rely upon promissory estoppel, arguing that she had relied on the promise. Therefore, as this was the cause of action, promissory estoppel could not be relied upon.

It must be inequitable to allow the promisor to go back on the promise

The courts of equity are remedies which attempt to ‘fill the gap’ where the common law produces unfair results. Therefore, it would be illogical to not allow the promisor to go back on the promise where it is in fact equitable. The law of equity, unlike the common law, affords discretion to the courts to decide whether it is fair or not to impose the principles of equity.

A case which provides a good example of this is The Post Chaser [1982] 1 All ER 19, in which the promise was revoked within a few days, due to this small lapse in time, the promise would not have relied upon their promise or changed their position, therefore, it was equitable to allow the promisor to go back on the promise.

The doctrine is generally suspensory and does not extinguish rights

A contractual modification supported by consideration will create the effect of a permanent set of obligations for the duration of the contract. Promissory estoppel operates slightly differently, only suspending the rights where relevant.

The operation of this principle is clear in High Trees. Promissory estoppel suspended the rights of Party B to claim £2,500 during the time of the war, but the right to charge the full £2,500 was reintroduced following the end of the war.


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