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Home arrow Articles arrow Issue 1 - The British Constitution arrow 01: Barbara Lisá - Consideration Considered: How English Law Identifies Valid Contracts
01: Barbara Lisá - Consideration Considered: How English Law Identifies Valid Contracts PDF Print E-mail

Consideration Considered

 How English Law Identifies Valid Contracts

 

Barbara Lisá

 

No legal system allows all contracts to be enforced. In every legal system, therefore, rules exist to identify which contracts are enforceable at law and which are not. In English law this function is performed mainly by the doctrine of consideration. The doctrine of consideration establishes consideration as an element for the valid formation of contracts and requires that consideration be given for a contract to exist: if there is no consideration, there is no contract. The requirement of consideration is, in part, what distinguishes contracts from gratuitous legal acts, such as gifts.

 

What is meant by the term consideration? Consideration is the price paid for the other party's obligation. It means that a promise by one party to do something for another party will not become binding unless the other party promises something in exchange. Consideration is "an act, forbearance, or promise by one party to a contract that constitutes the price for which he buys the promise of the other".[1] It is based on the idea of reciprocity. An act without consideration is not legally binding; it is a so-called naked act, which does not give rise to a right of action. The leading case of Curie v Misa[2] sets out the definition of consideration that is still used today: "Valuable consideration …[is]…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."

 

The doctrine of consideration sets out four requirements for consideration to be valid. The first is that the consideration must be valuable. Secondly, the consideration must be sufficient, but it does not need to be adequate. The third condition is that the consideration must move from the promisee - the person to whom the promise is made. Finally, the consideration may be executory or executed, but past consideration cannot be used to support a promise. While these four conditions are simple to state, this paper will demonstrate how complex and cumbersome they can be in their application.

 

The first requirement, that the consideration should be valuable, is particularly difficult as it has not been consistently defined by the courts. It is derived from the definition quoted above and some boundaries have been clearly established. For example, natural love and affection or the performance of a moral duty is not enough to render a promise enforceable as a contract. This is illustrated by the case of White v Bluett.[3] The court found a son's promise not to complain to his father about how the father's property was distributed among his children not to be good consideration for his father's promise not to sue his son for a debt owed to him. Judge Pollock held that the son had not provided good consideration as he had no legal right to complain. Thus, in promising not to complain, the son did not forbear or give up anything of value in exchange for his father's promise.

 

This decision can be attacked on two grounds. Firstly, it ignores the "practical benefit" the father obtained in being free of his son's complaints. This argument is supported by the recent case of Pitt v PHH Asset Management Ltd.[4] Secondly, Judge Pollock's finding that there was no right to complain can be disputed. It could be argued that, since there is no express prohibition of complaining to one's father, the son did have a right to complain and in promising to abstain from doing so he had given valuable consideration. A contemporary of the White decision, the American case of Hamer v Sidway,[5] follows this approach. 

 

Another clear characteristic of the notion of value is that it is primarily objective. Generally, the courts have held that the consideration must be of value in the eyes of the law, regardless of how it is seen in the eyes of the parties, for it to be valid. However, difficulties arise when the parties genuinely believe the promise to be good. Consider, for example, the case of Cook v Wright,[6] where the court found valid consideration to exist where one of the parties believed that it had a legally valid claim against the other party (which was later determined to have little legal merit) and reached a compromise with the other party over taking proceedings to enforce it.

 

Similarly, the law is also clear that promising to perform a duty that is already owed to the other party because it is already imposed by law or by contract does not constitute valid consideration. Promising to perform a contractual duty owed to a third party, however, can be valid consideration. This is because someone may still receive something of value even when he personally is not the ultimate beneficiary of the thing promised. The rule against allowing pre-existing contractual obligations to be used again as consideration in a later contract originated in the case of Stilk v Myrick.[7] The facts of the case are that a crew was to sail to the Baltic Sea and back to London with the defendant as a shipmaster. When two crewmen deserted, the defendant could not find replacements so he promised the remaining crew that he would distribute the wages of the deserters amongst them if they would sail back to London. After arriving in London, the defendant refused to pay the extra money and the crew brought suit. The defendant successfully argued that the crew had not provided consideration for his promise because they were already obligated to sail the ship.

 

The rule in Stilk v Myrick has been criticized as being too harsh since applying it often defeats the expectations of parties who believe their mutual promises to be binding. Several exceptions to the rule have now been developed under English law. An example is the case of Williams v Roffey Bros. & Nicholls (Contractors) Ltd.[8] The defendant building contractors entered into a contract with the plaintiff sub-contractors to renovate a block of twenty-seven flats for a certain price. The plaintiffs were to receive payment after the work was completed. After renovating the roof and nine flats, the plaintiffs ran into financial difficulties, in part because the price they had charged under the contract was too low to cover the cost of the work. The defendants promised to pay the plaintiffs an additional amount for every flat completed on time. However, at the time of the deadline for completion set by the contract, the defendants refused to pay the plaintiffs the additional amount promised. Applying Stilk v Myrick, the defendants argued that the promise was not supported by consideration.

 

The Court of Appeal rejected the argument and allowed the appeal. Glidewell LJ held that, "a contractor who agrees too low a price... is acting contrary to his own interests" and accepted the reasoning of the trial judge that, "where the original sub-contract price is too low, and the parties subsequently agree that additional monies shall be paid...this agreement (i.e.: the subsequent one)[9] is in the interest of both parties". Furthermore, Glidewell LJ held that, while "the defendants may have derived...a practical benefit[10] from their agreement to pay the bonus, they derive no benefit in law, since the plaintiff promised no more than he was already bound to do by his sub-contract". This means that the performance of an existing contractual duty owed to the promisor could constitute good consideration. It remains to be seen how Williams can be reconciled with Stilk, which was not expressly overruled.

 

The nature of the value requirement becomes less certain in non-commercial settings as is illustrated by the case of Ward v Byham.[11] In that case, the father of an illegitimate child promised to pay its mother one pound per week provided that the child was well looked after and happy. When he stopped making payments, the mother brought suit. The father argued that the contract was unenforceable as the mother had not provided consideration because it was her existing legal duty to ensure that the child was well looked after and happy. Lord Denning held that the father did benefit from the mother's promise to look after the child and characterized the father's promise as a unilateral contract - a promise made in exchange for an act.

 

The discussion in the preceding paragraphs shows how complicated the case law relating to the seemingly simple requirement that the consideration should be valuable has become. A similar situation exists for the other requirements of the doctrine of consideration. A classic illustration of how the second requirement of the doctrine of consideration (i.e. that it be sufficient, although it need not be adequate) applies is provided by the case of Chappell and Co. v Nestle.[12] Nestle offered gramophone records for sale in return for 1s 6d plus three wrappers from their chocolate bars. The House of Lords held that though the wrappers were trivial in value, they were nonetheless valid consideration. Lord Somerville found that, "a contracting party can stipulate what consideration he chooses. A peppercorn does not cease to be good consideration if it is established that the promisee does not like pepper and will throw away the corn". Thus, the term adequate means "to have economic value" but does not require that it be precisely quantified. Consideration does not need to constitute a realistic price for the promise it buys as long as it has some economic value.[13]

 

The third principle of the doctrine is that the consideration must move from the promisee - the person to whom the promise is made. This is another way of stating the privity rule: consideration must be provided by the promisee who is a party to the contract. This rule is shown in the case of Tweddle v Atkinson.[14] Mr Tweddle, Jr married Ms Guy. After the marriage their fathers made a contract in which Mr Tweddle, Sr promised to give one hundred pounds to his son and Mr Guy promised to give his daughter two hundred pounds. But Mr Guy died before he could give the money to his daughter, so his consideration of two hundred pounds never moved. The executor of his estate refused to pay the money to Mr Tweddle, Jr on the ground that there was no contract between Mr Tweddle, Jr, Mr Tweddle, Sr and Mr Guy as Mr Tweddle, Jr had not provided any consideration; rather the contract was only between Mr Tweedle, Sr and Mr Guy. This rule was much criticised by judges over the years and was finally abolished by Parliament in 1999 by the passing of the Contract (Rights of Third Parties) Act.

 

The final principle of the doctrine of consideration is that the consideration may be executory or executed but not past. A bilateral contract is binding from the moment when the promises are exchanged. This form of consideration is executory because at the time the promises are given, neither party has yet undertaken performance, but both are contractually bound to perform the contract. Consideration in a unilateral contract is executed because the promise is in exchange for a performed act. Past consideration is consideration that was already provided before the promise was even made as, for example, in Stilk v Myrick cited above; in such a case there is no reciprocity.

 

Roscola v Thomas[15] illustrates the problem of past consideration. The defendant agreed to sell a horse and shortly afterwards added the promise that he would give a warranty as to the fitness of the horse. The horse was later found to be unhealthy and the plaintiff sued for breach of the warranty. The court held the defendant's promise unenforceable because the only consideration the plaintiff had provided was his entry into the original contract of sale. This occurred before the promise of fitness was made and so it was past consideration.

 

This paper has attempted to illustrate some of the difficulties associated with the doctrine of consideration, particularly with the concept of value. Recently, the doctrine has come under attack from legal scholars and some advocate its abolition. As we have seen, Parliament has just abolished one of its four requirements. Even the courts seem to be becoming critical of the doctrine, and after the decision of the Court of Appeal in Williams[16] its future in English contract law is very uncertain.

 

While the court did not attempt to throw out the doctrine, it significantly limited the rule in Stilk v Myrick[17] by emphasizing the need to identify a practical rather than a legal benefit. Courts will now be more willing to find consideration valid where doing so would reflect the intentions of the parties. This approach brings the doctrine of consideration closer to the doctrine of legal relation. If the doctrine of consideration is to be abolished, then it is for those who support such a development to formulate some other mechanism by which the boundaries of English contract law can be established.       

 

 

Barbara Lisá

Barbara Lisá, a former Vice-President of the Common Law Society, is student at Charles University Law Faculty in Prague. Between 1999 and 2001, she studied a two-year Cambridge University distance course receiving a Diploma in an Introduction to English Law and the Law of the European Union. 

 



[1] See Martin, E. A., A Concise Dictionary of Law.

[2] (1875) L.R. 10 Ex 153.

[3] (1853) 23 L.J. Ex 36.

[4] (1994) 1 W.L.R. 327.

[5] (1891) 27 N.E. 256.

[6] See Cook v Wright, (1861) 1 B&S 559.

[7] (1809) 2 Camp. 317 and 6 Esp. 129.

[8] (1991) 1 Q.B. 1.

[9] My addition to the quote.

[10] My emphasis.

[11] (1956) 1 W.L.R. 496.

[12] (1960) A.C. 87.

[13] See Martin, E. A., supra, note 1.

[14] (1861) 1 B. & S. 393.

[15] (1842) 3 Q.B. 234.

[16] Supra, note 8.

[17] Supra, note 7.

 

 

Bibliography:

Beale, H.G., Bishop, W.D. and Furmston, M.P., Contract: Cases and Materials, 3rd ed., 1995

McKendrick, E., Contract Law, 3rd ed., 1997

Smith, Sir John, Smith and Thomas: A Casebook on Contract, 10th ed., 1996

 

 

 
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