CITY UNIVERSITY OF HONG KONG Consideration and Estoppel Refer to Richards Law of Contract Chapter 3 A Introduction Background and function Consideration sits alongside, offer and acceptance to form a legally binding contract. Thomas v Thomas [1842] 2 QB 851 A house was conveyed to a widow by executors in accordance with her late husband s wishes, it was described as being, in consideration of such desire. The Court s held that the 1 annual ground rent was consideration rather than the late husband s wishes. Is 1 enough for the ground rent? B Definition of Consideration Dunlop v Selfridge [1915] AC 847 Consideration was described 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. It has three main parts: (a) (b) (c) It identifies two elements: detriment to the promisee and benefit to the promisor. But it arguably lays greater emphasis on benefit to the promisor (Edmonds v Lawson [2000] QB 501). The focus on benefit, rather than detriment, is relatively recent. It permits an act, forbearance (an obligation not to do something you otherwise would be able to do) or promise to constitute good consideration. It insists that the consideration be of some economic value. Currie v Misa [1875] LR 10 Ex 153 The doctrine of consideration has been defined in terms of either a detriment to the promise or a benefit to the promisor. The ratio was: 1
A valuable consideration in the sense of the law, may consist either in some right*, interest, profit or benefit accruing to one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other. *The above words underlined are generally called the pairing words for explaining consideration. Terminology (a ) Executory and executed consideration Executory consideration is one promise in exchange for another (Exchange of promise). Executed consideration is where performance is the consideration. (b) Gratuitous Promises They are unsupported by consideration and are generally unenforceable. C Requirements of Consideration 1 Past Consideration One example of past consideration may be seen where A paints the outside of B s house as a voluntary act while B is on holiday. When B returns he is pleasantly surprised by A s kindness and promises to pay 50. Later if B refuses to pay, can A claim his 50? The answer here is that this action must fail. A s consideration of painting the house is past in relation to the promise to pay made by B and, of course, past consideration is no consideration. There is no casual link between the actions of A and B in that the act of painting the house was not made in response to the promise to pay for the act. Re McArdle [1951] Ch 669 (CA) As a result of the plaintiff s efforts, certain work was done to decorate and improve a house. The defendant s promise to the plaintiff was expressed in a letter sent after building works were completed stating that, in consideration of your carrying out certain alterations and improvements to the property shall repay you from the said estate when so distributed the sum of 488, was held to be past consideration. The agreement was not enforceable. Pau On v Lau Yiu Long [1979] 3 All ER 65 Something illegal cannot be consideration. 2
The defendant shareholders of a company were forced to give a guarantee against loss which might occur in the performance of a contract. The plaintiffs forced the defendants to give the guarantee by threatening to break that contract. It was held that there was no duress because there had been no coercion of the will which vitiates consent and that the guarantee was therefore valid. The decision was made by the Privy Council and was therefore an obiter. Lord Scarman stated: The act must have been done at the promisor s request, the parties must have understood that the act was to be remunerated and payment must have been legally enforceable had it been promised in advance. 2 Adequacy of Consideration Consideration must be sufficient, it needs not be adequate (not needed to be of worth, not needed to be satisfying all needs). Chappell v Nestle [1960] AC 87 The consideration for a promotional offer was empty chocolate wrappers. Although the wrappers themselves were of nominal value they had economic value in that they were evidence of increased sales. White v Bluett [1853] 23 LJ Ex 36 The cessation of complaints about a father s unfairness was not of economic value. 3 Sufficiency of Consideration Has, in reality, the promisee voluntarily provided anything of value so as to bind the promisor? There are 3 problematic situations. (a) Existing Duties Imposed by Law Harris v Sheffield Utd [1987] 2 All ER 838 Supplying large numbers of police for football matches went beyond the police s normal duty, and therefore Sheffield Utd could be expected to pay. (b) Existing Contractual Duty to a 3 rd Party The Eurymedon [1974] 1 All ER 1015 Also known as New Zealand Shipping - the existing contractual duty owed by the defendant to the third party could amount to consideration for the promise of the plaintiff. (c) Existing Contractual Duty to Promisor: Asking to be Paid More 3
Stilk v Myrick [1809] 2 Camp 317 The crew was reduced from 11 to 9 sailors during the return voyage. A promise to share the wages of two missing crew members was not enforceable as the sailors had done than they already obliged to do. Hartley v Ponsonby [1857] 7 El & Bl 872 A ship s crew was reduced from 36 to 19 and it was held that the return journey was so dangerous that it would involve much more than the sailors had original contracted to do. Accordingly they were free to negotiate a new contract. Williams v Roffey Brothers [1990] 1 All ER 512 A building sub-contractor in difficulty re-negotiated the contract receiving extra money for work completed on time. The sub-contractor sought the extra monies due. The main contractor argued that there was no consideration for the promise of the extra sums. It was held that the main contractor had received a benefit from the re-negotiation and therefore there was consideration. (d) Existing Contractual Duty to Promisor: Asking for a Relaxation of Terms Pinnel s Case [1602] 5 Co. Rep 117a Payment of a lesser sum on the day in satisfaction of a greater cannot be any satisfaction for the whole. But the gift of a horse, hawk or robe, etc. in satisfaction is good. D & C Builders Ltd v Rees [1966] 2 QB 617 Where the plaintiffs had done building work for the defendant for which they were owed 482. The plaintiffs pressed for payment for six months and in fact were in dire financial straits. The defendant s wife, knowing of the financial difficulties, offered them 300 in full settlement, adding that if this was not accepted they would get nothing. The plaintiffs reluctantly agreed to this arrangement but once the cheque for 300 had cleared they sued for the balance. It was held that their claim would be successful, the Court of Appeal based its decision on Pinnel s case. Given the development of economic duress, it is questionable whether the rule in Pinnel s case continues to serve any useful purpose, especially when it can result in unfair decisions, as in: Foakes v Beer [1884] 9 App Cas 605 Mrs Beer had on obtained judgment against Dr Foakes for 2,090 and some time later he asked for time pay. The parties entered into agreement to pay first by 500 and then by instalments. The parties failed to take into account that a judgment debt carries interest from the date of the judgment. Five years later Dr Foakes paid all debt, but Mrs Beer still claimed 360 for the interest on the debt. It was upheld by the House of Lords that Mrs Beer could claim it, the court relying on the rule in Pinnel s case. 4
How can the case of Foakes v Beer be reconciled with D & C Builders Ltd v Rees? It would be very harsh to see the results of the Foakes v Beer. One of the exceptions to the rule in Pinnel s case is the doctrine of promissory estopppel. The modern doctrine of promissory estoppel is founded in the case: Central London Property Trust Ltd v High Trees House Ltd. [1947] KB 130 In September1939, the plaintiffs leased a block of flats to the defendants at 2,500 per annum. In January 1940 many of the flats became vacant because of the war and the plaintiffs reduced the rent to 1,250 per annum in recognition of this factor. The intention was happily observed in the contract. No time limit has been set for this arrangement. When WWII ended in August 1945, the flats were again full and in 1946 the defendant sought to recover the reduced rent for the last quarters of 1945 and for future years. Denning J agreed that the reduced rent was applied under war conditions but not after the war ends. Denning allowed the recovery of the full rent for the said two quarters and for future years. He also turned his attention to see whether the full rent should be allowed between 1940 to 1945. Basing on the lack of consideration and the rule in the Pinnel s case, undoubtedly, if the rule was applied, the plaintiff s claim would have succeeded. Denning J however, concluded that the action would fail, relying on the operation of the doctrine of equitable esptoppel as expressed in: Hughes v Metropolitan Railway Co. Ltd. [1877] 2 App Cas 439 Negotiations for the sale of a property started after a repair notice had been issued. During negotiations the repair notice was suspended. Promissory Estoppel was a modern (compared with the 19 th century cases) approach in the Law of Contract. To waive the need for considerations in the common law system was very uncomfortable for many judges, and the followings are some prerequisites for Invocation of Promissory Estoppel: 1. There must be a promise. Hughes v Metropolitan Rly [1877] 2 App Cas 439 2. The express or implied promise must be a clear and unambiguous representation. Woodhouse AC Israel Cocoa v Nigerian Produce Marketing [1972] AC 741 3. There must be a waiver of the promisor s strict legal rights. Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130 5
Hughes v Metropolitan Rly [1877] 2 App Cas 439 4. The promisee s act must be in reliance. EA Ajayi v RT Briscoe (Nigeria) Ltd [1964] 3 All ER 556 You must alter your position on the basis of the promise. 5. The promise must act equitably. D & C Builders v Rees [1966] 2 QB 617 The builders were owed 482 but accepted payment of 300 in completion of the account because of financial difficulties, of which the customer was aware. They went to claim the balance. Denning J: The debtor s wife held the creditor to ransom in my opinion, there is no reason in law or equity why the creditor should not enforce the full amount of the debt due to him. Central London Property Trust Ltd v High Trees House Ltd [1947] In Combe v Combe [1951] The principle is said to be used as a shield and not a sword. The use of the estoppel as a cause of action was an illegitimate extension of the principle, and would be completely contrary to the whole principle of the need for consideration in the law of contract. How can you allow promises to be enforceable without consideration being present? Lord Denning said that he preferred to apply the principle that a promise intended to be binding, intended to be acted on and in fact acted on, is binding in so far as its terms properly apply. Where one party has, by his words or conduct, made to the other a promise or assurance which was intended to affect the legal relations between them and to be acted on accordingly, then, once the other party has taken him at his word and acted on it, the one who gave the promise or assurance cannot afterwards be allowed to revert to the previous legal relations subject to such qualifications which he himself introduced, even though it is not supported in point of law by any consideration but only by his word. The promisor should not have been allowed to go back on his promise, that is he is being estoppeled in the law of equity. The promise to reduce rental during 1940 to 1945 was estoppeled. The absence of consideration was therefore established. Dr Eric Cheng City University of Hong Kong 8 February 2015 6