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Home arrow Articles arrow Issue 8 - Contract Law arrow 13: Tereza Šimanovská - When values change: Re-negotiating Consideration
13: Tereza Šimanovská - When values change: Re-negotiating Consideration PDF Print E-mail

When values change

Re-negotiating Consideration

Tereza Šimanovská

 

1. Introduction

Throughout history, a number of common law doctrines have developed to determine whether a contract was validly concluded and whether it is enforceable in law. One such doctrine is the need for a contract to be supported by consideration.

The basic idea behind the doctrine of consideration is reciprocity – i.e. a person should not be allowed to enforce another”s promise unless he or she has given or promised to give something in exchange for that promise.1 In essence, consideration is the “value” or “price” that one contributes towards a bargain.

Consideration must also be provided when modifying a contract. This rule of the orthodox doctrine of consideration has recently undergone a very significant change and it may have cast doubt on the future of consideration itself. The issue concerns the nature of consideration upon the variation or re-negotiation of a contract and, more specifically, when one party is promised additional money to perform a pre-existing contractual obligation.

 

2. Re-negotiation of a contract – Need for fresh consideration

Until recently it was well-established that performance of a pre-existing contractual duty owed to the other contractual party could not amount to good consideration. In plain words, when someone merely performs what he was already bound to do, such performance is not good consideration to enforce a promise of extra money. He did not provide anything additional – he did not provide any consideration for the extra money paid by the other party. It can be said that the promisee does “the same for more”.2

In reality, however, contractual renegotiations are commonplace in the daily commercial practice of almost all industries: whilst performing a previously-concluded contract, circumstances may arise which force the parties to renegotiate their agreement and alter the original price. Indeed, it seems rather unfair to deny the parties such a possibility.

When parties decide to modify a contract they should bear in mind that, just as consideration was necessary to create the original contract, “fresh” consideration is required to effect a valid modification of that original contract. There are two ways to ensure that a promise for extra money is enforceable. Either one party does something “more” than was required by the original agreement or that original agreement is discharged by both parties and a new agreement concluded.3 Traditionally, the courts have been unwilling to imply that an original agreement was “torn up” and a new one concluded – this is a conclusion they are willing to reach only where the evidence clearly supports such a finding. Regardless of how artificial these two ways may appear, if the parties wish to alter the price stipulated in the original contract, they should ensure there is fresh consideration for the promise of such additional money.

3. Traditional doctrine of Stilk v Myrick

This aspect of the consideration doctrine originates from the case of Stilk v Myrick.4 Myrick was a captain on a ship who employed Stilk to work on a Baltic Sea voyage. During the voyage two members of the crew deserted and the master promised that the remaining sailors could share the deserters” wages amongst themselves if they sailed the ship back home. Upon arrival at the dock, the master refused to honour that promise and Stilk sued for the sum. His claim failed.

When explaining the grounds upon which the judgment was decided, it must be emphasised that this case was published in two separate law reports, both of which offered different ratios. Nevertheless, Campbell”s report has generally been considered correct, and its ratio accepted as the precedent governing this area of law.5 The main reason it gives for the failure of Stilk”s claim is that the agreement lacked consideration. The sailors were not entitled to the additional payment because they merely did what they were obliged to do by virtue of their original contract. They provided no new consideration for the captain”s promise of extra money.

The other source, the Espinasse report, says that the main reason for the result was public policy. It was undesirable that it should be open to the sailors in the future to exercise improper pressure on their master to increase their wages. This report makes no reference to the fact that lack of consideration would bar the claim, and instead focuses on the need to avoid what would in modern law be referred to as economic duress.6 Economic duress exists when one party illegitimately abuses his or her superior economic power to coerce the other party into agreeing to a particular set of terms.7 A contract entered into under economic duress is voidable and may be set aside by the court.8

In any case, it has always been the first report that was applied. The rule about the existing duty laid by the Campbell report was followed many times afterwards,9 but has always been somewhat controversial. It simply does not seem fair that a party can breach his or her promise and get away with it, even if the other party acted upon that promise in good faith.

There have been some voices criticising this rule. For example, Lord Denning tried to escape it because it can often lead to unfair results. He stated in Ward v Byham10 that “a promise to perform an existing duty,11 or the performance of it, should be regarded as good consideration, because it is a benefit to the person to whom it is given.” The promisor in fact benefited from the situation – he obtained “factual benefit”.12

Nevertheless, most of the judiciary were not willing to come to such radical conclusions. In Ward v Byham the remaining judges expressly refused Lord Denning”s revolutionary proposition. Throughout history, rather than going against the traditional doctrine, courts were often ready to find consideration even where one could say that there was none to be found. Sometimes it is said that courts “invented consideration” to abide by the orthodox doctrine.13

4. Revolution against the old approach: No legal benefit necessary

The controversial case of Williams v Roffey Bros. & Nicholls (Contractors) Ltd.14 might be labelled as falling into this category. This decision has dramatically changed the traditional doctrine regarding pre-existing contractual duty and has cast great uncertainty over the future development of consideration in this area.

 

4.1 Williams v Roffey

The Roffey Brothers were builders who contracted with a housing association to refurbish a block of 27 flats. They sub-contracted the carpentry work to Williams for £20,000. Williams got into financial difficulties and it was apparent that he might not be able to complete the work on time. It was mainly because Wiliams had underpriced his contract. The second reason was deficiency in William”s supervision of his workers. Roffey Bros. became worried that they would be liable under a penalty clause in their main contract and promised Williams an additional sum of £10,300. This was to be paid at the rate of £575 per flat on completion. Williams finished eight more flats but only received £1,500. Williams ultimately sued Roffey Bros. for the remaining sum.

The main issue before the Court of Appeals was whether Williams provided consideration for the additional £10,300 promised by Roffey Bros. The court held that the agreement to pay the extra money was enforceable. This came as a great surprise. It defied the traditional rule set out in Stilk v Myrick. What was the consideration provided by Williams? He only did the work that he was bound to do by his original agreement – he only performed a duty already owed to Roffey.

 

4.2 New form of consideration: Practical benefit

In Williams v. Roffey, the court found valid consideration in the practical benefit that Roffey obtained by his agreement with Williams. So far the practical/factual benefit (Denning) has been refused as good consideration. The argument has always been that consideration must be something of value in the eyes of law – something that provides or brings about a legal benefit.

What was this practical benefit? It consisted of a number of factors. The court held that it was the fact that Williams continued his work and did not breach the sub-contract. Therefore, Roffey avoided the trouble of looking for somebody else to complete the work. Furthermore, Roffey avoided the penalty payment for the delay under the main contract. Also, by directing the claimant to complete one flat at a time, the defendant was able to organize their work with other subcontractors in a more efficient manner. It is clear that the logic of “factual benefit” earlier argued by Lord Denning was applied here. Even though there was no legal benefit to Roffey, the contractual modification, in fact, benefited Roffey.

It is questionable whether this reasoning about “practical benefits” is persuasive enough to disregard the need for a legal benefit and change this rule in such a dramatic way. When looking at each of the “practical benefits”, one realizes that they do not consist of anything additional. Roffey would have received all of these benefits under the original contract, even if it were not modified. In fact, all of these new “advantages” were the very reason why they concluded the original contract. Williams was hired as the subcontractor to do the work. Therefore, the main purpose here was not to look for anyone else to do the job. Similarly, the fact that Roffey did not have to pay the penalty because the plaintiff continued the work was the very reason that a subcontractor would have been hired initially. The question is: how can this count as a fresh consideration? Was this not yet another “invented consideration” by the courts?

 

4.3 Practical benefit justified by commercial reality

On the other hand, it can be argued that this pragmatic decision finally concedes what can be called “commercial reality”. After all, it is a common practice in the building industry for the main contractor to increase sub-contractors” payments if the parties see that the price is too low. As the counsel for the plaintiff argued, “It would be unfortunate if English law deprived an acceptable commercial practice, which both parties regard as beneficial, of legal effect.” Thus, the court should look at the situation as it stands and acknowledge what in fact is beneficial for the parties, as opposed to seeking a theoretical “legal benefit”. The preference should be given to what the actual intention of the parties was when renegotiating the contract, so that their intended agreement is given effect. Would it not be unfair to negate their clear arrangement that was entered into voluntarily? Russel LJ said: “Consideration there must be but courts should be more ready to find its existence as to reflect the intention of the parties.”

Obviously, there are two competing principles to be weighed regarding the doctrine of consideration. It can be said that modifications are in the public interest and both parties should be encouraged to bargain their way out of an unanticipated difficulty. On the other hand, it is also desirable to hold parties to the contractual terms of their bargain.15 Clearly, there are pros and cons to each of the two conflicting interests.

 

5. Potential escape from a contract as a value?

Another issue should be contemplated in this area. It was said that Williams suffered a detriment by continuing the work and not breaching the contract. His counsel argued “he (Williams) might have been better off by breaking the contract, getting higher paid work elsewhere and paying such damages as the contractor can recover against him”.16 Can this constitute good consideration? Can this be anything of value in the eyes of law? This proposition seems to undermine the sanctity of contracts. It is an old principle of law that people should be held to their bargains – Pacta sunt servanda. Therefore, the legal practice should promote this principle and not acknowledge that a threatened breach of contract is a viable basis for finding consideration. Such reasoning does not seem correct as a part of legal practice.

Threatening with breach of contract to increase the agreed price is indeed walking on thin ice. As mentioned above, agreements that are achieved by illegitimate pressure exercised by the party with greater economic power can be set aside on the grounds of economic duress.17 It was very important that in Williams v Roffey duress was not established on the facts of the case. The main reason that the judgment was given for Williams was almost certainly because duress was not involved. Roffey called for the meeting because it was obvious that the work would not be finished as planned. Williams did not explicitly threaten with breach of contract.

 

6. Consequences of the new approach to consideration

Undoubtedly, Williams v Roffey significantly widened the scope of the doctrine of consideration. Promises to perform existing duties can now be good consideration when they lead to practical benefit. As the doctrine of duress is a relatively new concept (first acknowledged in 1976), in the past, courts used consideration in situations that would nowadays be judged in terms of duress. In situations like those in Stilk v Myrick, the judge could not avail himself of economic duress and instead used lack of consideration as the reason for his judgment. Thus, a case like Stilk would be decided differently today. Most likely, it would be brought as a duress case and not necessarily fail for lack of consideration. It could be stated that the Court of Appeals followed the reasoning from the Espinasse report.18

 

6.1 Reconciliation of Stilk v Myrick and Williams v Roffey

It would seem that Williams v Roffey overruled Stilk v Myrick, but the court emphasized that Stilk still remains good law and distinguished Williams v Roffey. Glidwell LJ said that Williams v Roffey does not contravene the principles from Stilk, but that it “refines and limits” the application of them. However, it is not wholly clear from the judgment on what basis the court arrived at this conclusion. The judges argued that the rigid approach to consideration in Stilk was only a product of the special conditions of the seafare in the 18th century, and that it was too harsh to exist without changes in the modern day. However, the two cases are very similar. Myrick also obtained practical benefit because the sailors continued performance of their contract. Furthermore, Williams v Roffey was later applied in an employment case19 where it was held that when an employee”s wage is increased, sufficient consideration for the increase is the fact that the employee continues his or her work and does not try to bargain for more money.20 Is this not exactly the same situation as in Stilk?

Even if the court was so resolute that Stilk has not been overruled, it seems difficult to defend this idea for much longer. The conclusion could be drawn that the only principle that has survived the attack of Williams v Roffey is that consideration is still required when modifying a contract, while Stilk has been overruled as to what counts as fresh consideration.21

6.2 Application in day-to-day business

It is without a doubt that “practical benefit” is now a recognized category that can be used in practice to establish consideration. Lawyers arguing enforcement of promises for extra payment when the consideration is of doubtful value should avail themselves of “practical benefit” and argue that effect should be given to “commercial reality.” Furthermore, lawyers should argue that it is in the interest of the parties to reach a viable solution that is acceptable to everyone. It is, after all, in the public interest to bargain one”s way out of a stalemate rather than end up in a costly litigation process.

On the other hand, it has become more difficult for the opposing party to attack such contractual modifications because it is no longer so simple to plead lack of consideration where some sort of benefit can be found. It should be argued that there is no legal or practical benefit, and therefore no consideration. The security of contracts should be emphasized – people should get what they bargain for and not be pushed to pay more if difficulties arise. Any sign of duress makes such modification unenforceable. Therefore, one should always look at the process of renegotiation. Simply, was there any sign of improper pressure from the party who was in the stronger contractual position? If so, economic duress should be pleaded as a vitiating factor to the promise.

Williams v Roffey has since been applied in two cases,22 both dealing with renegotiation of commercial contracts. In each case it was held that consideration lay in the “practical benefit” that one party obtained because the other party did not breach the contract and continued its performance.23

 

7. Conclusion: What is the future of consideration?

A new liberal approach has been set. Courts are now more willing to find consideration just to give effect to what they perceive as the actual intent of the parties. This tolerant attitude is counter-balanced by the use of duress as the tool to limit bargains that have been achieved by improper means. The issue is whether this situation is wholly satisfactory. Courts have not been clear enough about the future application of this new approach, and it is evident that the doctrine of consideration in this area has been plunged into confusion.

These reflections might lead to a more revolutionary interpretation of Williams v Roffey. Is there really a need for consideration when varying a contract? American law, for example, does not require it.24 Maybe it is finally time to stop being too afraid of changes and to move ahead. After all, is this not the real unexpressed meaning of Williams v Roffey? It seems that law would become more efficient without the formalistic burden of consideration when modifying a contract.

Reflections about contractual modifications might logically lead us even further. Is consideration necessary at all? It appears that consideration as a principle is still adhered to, but this effort has become somewhat forced. The civil law system can do well without consideration. There exists an increasing hostility towards the old doctrine. It has become more of a technical obstacle than a useful and essential tool. Maybe the modern law should finally get rid of this ancient principle and replace it with more effective doctrines.

Were the judges too afraid to explicitly admit that Williams v Roffey might be the beginning of the end of consideration?

Tereza Šimanovská is a second-year law student at the Faculty of Law, Charles University in Prague. She has spent one year in London, where she studied at the Faculty of Law at the University of Westminster.

 

 

 

Bibliography


Atiyah P S, Essays on Contract, 1st Edition, Reprinted (US: Oxford University Press Inc., New York, 2001)


Chen-Wishart M, Contract Law, 1st Edition (US: Oxford University Press Inc., New York, 2005)


McKendrick E, Contract Law, 6th Edition (New York: Palgrave MacMillan, 2005)


Noble M, For Your Consideration, November 8 1991, New Law Journal, Butterworth &Co (Publishers) Ltd


Stone R, The Modern Law of Contract, 6th Edition (UK: Cavendish Publishing Ltd, 2005)


Treitel G, Some Landmarks of Twentieth Century Contract Law, 1st Edition (US: Oxford University Press Inc., New York, 2002)

 

 

...................

1 McKendrick E, Contract Law, 6th Edition (New York: Palgrave MacMillan, 2005) pp 85

2 Chen-Wishart M, Contract Law, 1st Edition (US: Oxford University Press Inc., New York, 2005) pp147

3 McKendrick E, Contract Law, 6th Edition (New York: Palgrave MacMillan, 2005) pp 96

4 Stilk v Myrick (1809) 2 Camp 317 and 6 Esp 129

5 McKendrick E, Contract Law, 6th Edition (New York: Palgrave MacMillan, 2005) pp 95

6 Ibid

7 Ibid pp 358

8 Nevertheless, there is no evidence that the sailors in Stilk v Myrick actually used any pressure to get the extra money. On the contract, it was Myrick himself who promised the increase of wages because he needed to get the ship home. Thus, whilst no actual duress was proved in this, the decision aimed to pre-emptively prevent such situations occurring in the future.

9 For example Atlas Express v Kafco [1989] QB 833

10 Ward v Byham [1956] 1 WLR 496

11 However, here Lord Denning was concerned with a pre-existing duty deriving from public law, not a duty owed under a contract.

12 Chen-Wishart M, Contract Law, 1st Edition (US: Oxford University Press Inc., New York, 2005) pp 145

13 Prof Treitel as cited in McKendrick E, Contract Law, 6th Edition (New York: Palgrave MacMillan, 2005) pp 86

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

15 McKendrick E, Contract Law, 6th Edition (New York: Palgrave MacMillan, 2005) pp 99

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

17 However, a distinction should be made between threats of breach of contract that amount to economic duress and behaviour that only amounts to acceptable commercial pressure. It should be highlighted that at the moment the law is not very clear about where the exact borderline lays. It seems that not all threats of breach of contract are automatically illegal.

18 McKendrick E, Contract Law, 6th Edition (New York: Palgrave MacMillan, 2005) pp 100

19 Lee v GEC Plessey Telecommunications [1993] IRLR 383

20 Stone R, The Modern Law of Contract, 6th Edition (UK: Cavendish Publishing Ltd, 2005) pp 92

21 Chen-Wishart M, Contract Law, 1st Edition (US: Oxford University Press Inc., New York, 2005) pp153

22 Anangel Atlas Compania Naviera SA v Ishikawajima-Harima Heavy Industries Co Ltd (no 2) [1990] 2 Lloyd”s Rep 526; Simon Container Machinery Ltd v Emba Machinery AB [1998] 2 Lloyd”s Rep 429

23 Stone R, The Modern Law of Contract, 6th Edition (UK: Cavendish Publishing Ltd, 2005) pp 92

24 McKendrick E, Contract Law, 6th Edition (New York: Palgrave MacMillan, 2005) pp 102.

 
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