Consideration

For a promise set out in an agreement to amount to a breach of contract if it is not carried out, the promise must be supported by consideration - if no consideration is given for the promise there is no contract, but rather a promise is a gift: Eastwood v Kenyon (1840).

* Consideration is the price paid for the promise - for consideration to exist the promise must promise or do something that is of value in the eyes of the law: Thomas v Thomas (1842)

Definitions of consideration fall into 2 groups:

1. Definition in terms of benefit and detriment: there is at least a need to imply, or infer, an element of cause and effect between the promise and the consideration: Currie v Misa (1875).
2. Definition in terms of bargain: Consideration is the price of the promise - ‘An act or forbearance of the one party, or the promise thereof is the price for which the promise is bought’: Dunlop Pneumatic Tyre v Selfridge [1915].

PRINCIPLE: Bargain theory is the only law of consideration - a quid pro quo is necessary meaning:

1. The promise must incur a detriment on the promise and/or confer a benefit on the promisor (benefit/detriment requirement); and
2. That this benefit or detriment must be given in return for the promise (the bargain requirement)

Consideration must be bargained for

Under the bargain definition of consideration, before a promisee’s promise or act can be regarded as consideration, it must be established that the promise or act is given at the request of the promisor and in reliance upon the promisor’s promise: Australian Woolen Mills v The Commonwealth (1954).

A contract arises merely because a person performs an act in reliance of the promisor’s promise. The Act must also be shown to have been done in return for the promise for a contract to arise: Beaton v McDivitt (1987)

Deeds and Consideration

Contracts fall into 2 types:

1. Formal Contract: Historically referred to as agreements under seal, but are more commonly referred to today as deeds - this reflects the fact that such documents were sealed by the party to be bound, it is common to refer to the promisor and the covenantor and the promise as the covenantee.

2. Simple contract: not entered into as deeds and consideration is always necessary: Rann v Hughes (1778).

Agreements set out in a deed do not require consideration and will be binding - if there has been a breach of the deed, damages at common law can be rewarded as confirmed in Pinnel’s Case (1602) - though equitable remedies can not be awarded due to the maxim that equity does not assist a volunteer: Colman v Sarrell (1789).

* Seals are no longer necessary for a valid deed - the procedure for execution and delivery of a deed is now largely governed by statute: s. 38 Conveyancing Act 1919 (NSW).

Only a party providing consideration can enforce a promise

The essence of a doctrine of consideration is that a promisor’s promise can only be enforced by a promise if he or she has provided consideration for the promise - 2 parts to this rule:

i. Consideration must move from the promise, and

ii. It need not move to the promisor.

In Dunlop v Pneumatic Tyre Company Ltd v Selfridge & Company Ltd [1915], Lord Haldane LC said: If a person with whom a contract not under seal has been made is to be able to enforce it consideration must have been given by him to the promisor or to some other person at the promisor’s request. ‘C’ cannot sue because he/she has not provided consideration.

* An important qualification to this rule relates to joint promises - If A makes a promise to B and C jointly as promisees, it is only necessary for one of the joint promisees to provide consideration. If one joint promisee (B) provided consideration, the other joint promisee (C) can enforce the promise against the promisor (A): Coulls v Bagot’s Executor & Trustee Co Ltd (1967)

‘Past Consideration’ is not consideration

Attorney-General for England and Wales v R, Tipping J said that ‘an act already done without reference to a promise does not satisfy the concept of an exchange which underpins the law of consideration’.

Past consideration is the situation where something is done before a promise to pay for it is made - a more typical situation is where a contract is entered into and completed and subsequently one party makes a further promise to the other. That other’s having previously contracted with the promisor does not amount to consideration for the subsequent promise – the earlier contract is past consideration: Roscorla v Thomas (1842).

* Exceptions are shown in Pau On v Lau Yiu Long [1980]; where it is said that the later promise to pay will be enforceable if:

i. The earlier act was done at the promisor’s request,

ii. The parties understood at the time that the act done would attract some payment or other form of remuneration, and

iii. Payment, or other form of remuneration must have been legally enforceable had it been made in advance of performance of the act.

Consideration cannot be illusory

This relates to circumstances in which it is claimed that there is consideration by the promise of performance of some act, but where there is also a discretion as to whether to perform that act.

The conditional nature of the obligation to perform precludes the promise from being consideration: Placer Development Ltd v The Commonwealth (1969).

Consideration need not be adequate – it must be sufficient

What is offered as consideration does not have to have parity in terms of value to the promisor’s promise - consideration needs not be adequate, as long as what is offered is of some value it will be seen as sufficient: Thomas v Thomas (1842). Even a token which would be seen as ‘nominal consideration’.

Adequacy may be relevant in some cases - Equity is seen to follow the law therefore accepts as consideration what the common law accepts as consideration, though when looking at the remedy of specific performance, the court may refuse to grant the order in favour of a plaintiff if the result would be to inflict unconscionable hardship upon the defendant, which can be established through the consideration for the defendant’s promise being inadequate.

When is consideration sufficient?

* Promise to perform an existing public law duty: To perform an obligation already imposed upon a person by the State – one’s public law duty – is not good consideration: Collins v Godefroy (1831).

However, if what is promised is in excess of one’s public law duty there will be good consideration.

Performance of an existing contractual duty already owed to the promisor: The principle as stated in Wigan v Edwards (1973) – The general rule is that a promise to perform an existing duty is no consideration, at least when the promise is made by a party to a pre-existing contract, when it is made to the promise under that contract, and it is to do no more than the promisor is bound to do under that contract.

However, if the promise was in excess of an existing contractual duty already owed to the promisor, that excess will be sufficient consideration: Hartley v Ponsonby (1857), where the mariner performed more than his contractual duty was.

Though, in the case of Williams v Roffey Bros & Nicholls (Contractors) Ltd [1990], the English Court of appeal held that the promise to perform an existing duty was consideration because the promisor was benefited in fact by the promise or its performance - this is irreconcilable with the decision in Stilk v Myrick.

Compromise of a claim or forbearance to sue:

1. A compromise of a claim is where A, without admitting liability to B, agrees to settle B’s claim out of court, usually by A agreeing to pay money to B.
2. A forbearance to sue is where A has admitted liability to B and agrees to settle B’s claim out of court, usually by agreeing to pay money to B. Here there is a forbearance to sue by B.

For B to be able to enforce A’s promise B will need to show that his/her claim is reasonable, and not frivolous and vexatious.

B must show that there is liability on A’s part or that B has a bona fide (in good faith; or with an honest intention) belief in liability on A’s part: Miles v New Zealand Alford Estate Co (1886)

There must be an honest belief by B that his/her claim would be successful if Litigated: Wigan v Edwards (1973) - where it was found that the Edwards had provided consideration in the form of dropping their grievances, which the judge found favourable.

The fact that B’s claim is in fact bad in law is of no consequence: Spies v Commonwealth Bank of Australia (1991) - A’s belief as to the validity of B’s claim is irrelevant: Hercules Motors Pty Ltd v Schubert (1953) – where It was found that a compromise to a dispute was good consideration.

The rule in Pinnel’s case: It is that part payment of a debt is not sufficient consideration for a promise to discharge a whole debt: Pinnel’s case (1602) - Lord Coke also said, “…if the obliger also pay a lesser sum either before the day or at another place than is limited by the condition and the obligee receives this, this is good satisfaction…also the gift of a horse…etc. in satisfaction is good for these might be more beneficial to the plaintiff than the money.” - Also found in Foakes v Beer (1884) that Mrs Beer could sue for the interest she was entitled to receive due to allowing a judgement debt.

The promisee can escape from the harshness of the rule in Pinnel’s case by showing that additional consideration was given. The promisee can show this in several ways:

1. The promisor can promise to pay the lesser sum at a time earlier than originally promised.
2. The promisor can promise to pay the lesser sum at a place different to that originally promised.
3. The promisor can promise to pay the lesser sum and to do something else.
4. The promise can be part of a composition agreement. The Bankruptcy Act 1996 (cth) allows a debtor to make an arrangement to pay a lesser sum to creditors. Once a copmposition is made, a creditor cannot go behind the agreement and claim the full amount. This would amount to fraud in the other creditors eyes.
5. Where a lesser sum is paid by someone else to discharge the debt, the creditor cannot then claim the amount unpaid from the original debtor: Hirachand Punamchand v Temple (1911).

The question arises as to whether the practical benefit rule where the payment of a part debt results in a practical benefit to the creditor which can be seen as consideration in Williams v Roffey Bros but there is question as to whether this can overcome the consequences of the rule in Pinnel’s case.

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