Published on 20/05/2007

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.

Continued on page 2

Promissory Estoppel

Promissory Estoppel

Doctrine of Promissory Estoppel evolved to overcome the injustices of consideration - ‘estopped’ means ‘precluded’ or ‘prevented’ - the very essence of Promissory Estoppel is that the promisor is precluded from going back to his or her promise even though the promise is not supported by consideration moving from the promise.

Equity also developed other areas of estoppel including propriety estoppel, where, if X, the owner of property, induced Y to believe that Y had an interest in that property, equity would recognise and enforce Y’s interest in that property.

Waltons Stores (interstate) Ltd v Maher (1988) - recognized that the various forms of estoppel in equity all arose in situations where it would be unconscionable for a plaintiff’s against a defendant to be denied.

· The modern doctrine of equitable estoppel can provide relief in various other areas where contractual remedies are unavailable, including:

1. Where, during negotiations to enter into a contract, an offeree, believing that the offer will not be revoked proceeds to act to his detriment upon that belief;

2. Where there has been non-compliance with the statutory requirement of writing with respect to a contract involving land;

3. Where the rule in Hoyt’s Pty Ltd v Spencer (1919) precludes the finding of a collateral contract: Wright v Hamilton Island Enterprises [2003];

4. Where the doctrine of privity prevents a third party to the contract from enforcing it: Trident General Insurance Co Ltd v McNiece Bros (1988);

5. Where a contract is rendered illegal and thus unenforceable because a party to it is not licenced as required by legislation, but had stated to the other party that he or she was so licenced.

Development of Equitable Estoppel

An illustrative early case of promissory estoppel is Central London Property Trust v High Trees House Ltd [1947] - where it was found that even though the promise to accept a reduced rent was not supported by consideration, principle of promissory estoppel would have been raised, preventing recovery of forgone rent.

· For many years the operation of promissory estoppel principles were subject to two important limitations:

1. the promise had to be in the context of a pre-existing legal relationship. In High Trees, this was satisfied in that the parties were in a lease relationship and the promise was in relation to the terms agreed under that lease.

2. promissory estoppel could only be used as a defence to an action bought by the promisor to the promisee. It was said that it could only be used as a ‘shield’ and not as a ‘sword’. In High Trees, this was satisfied as it was HTH, the defendant/promise, that would have used promissory estoppel as a defence to a claim for the forgone rent by CTP, the plaintiff/promisor.

***In Australia, the doctrine of promissory estoppel was first authoritatively accepted by the High Court in Legione v Hateley (1983).

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* The most significant High Court decision on the subject was 5 years later in Waltons Stores (interstate) Ltd v Maher (1988) - the significance of this case was that it was a key case which has led to the removal of both of the above limitations on the operation of the doctrine of promissory estoppel - on finding in favour of the Mahers on the basis of promissory estoppel, the majority did so in circumstances where there was no pre-existing contract between the parties and on the basis that the Mahers used estoppel as the basis for a cause of action and not merely as a defensive mechanism - the underlying rationale for equitable estoppel was firmly based on the notion of uncnscionabiliy.

Elements of Promissory Estoppel

To establish a case based upon principles of equitable estoppel there needs to be a promise or a sufficiently clear and unambiguous representation: Australian Crime Commission v Gray [2003].

6 elements noted by Brennan J in Waltons include:

1 - Assumption or Expectation:

If assumption is one of an existing fact, a case of common law estoppel arises.

If the assumption is that the promisor will act in a particular way in the future, equitable estoppel will arise - as in the case of Waltons, the promisee needs to show that he or she assumed that a particular legal relationship existed or would exist between the parties to the dispute.

However, Brennan J’s requirement of a legal relationship would exclude equitable estoppel from a promise made where the promise assumes that the promisor will behave in a manner outside the context of a legal relationship, e.g. A promises to pay B $200 within 10 days - A’s behaviour is outside ant existing or expected legal relationship between A and B.

Mobil Oil Australia Ltd v Lyndell Nominees Pty Ltd (1988), where full court of the Federal Court found that ‘it is a necessary element of the principle that the defendant has created or encouraged an assumption that “a particular legal relationship” of “interest” would arise or be granted’.

A broader view was taken in Austotel Pty Ltd v Franklins Selfserve Pty Ltd (1989) where Priestley JA indicated that it was enough that the assumption was in relation to ‘a promise [would] be performed’. Some cases have held that the plaintiff’s equitable estoppel claim failed because it was not reasonable for the plaintiff to have adopted the assumption: Salienta Pty Ltd v Clancy [1990].

2 - Inducement: The assumption adopted by the promisee must have been induced by the conduct of the promisor - in most cases the conduct will be an express representation or promise.

In Legione v Hateley, it was said that the promise must be clear and unequivocal.

However, Waltons makes clear, in some cases it can be implied; it stresses that it is the assumption that is induced rather than a promise or representation that establishes equitable estoppel. - In Waltons the inaction by Waltons, in the circumstances, induced the Mahers to act on the basis of the assumption they had made.

3 - Reliance: The promise must act or refrain from acting in reliance on the assumption. It is not clear whether the promisee’s action taken on the basis of the assumption has also to be reasonable in the circumstances.

4 - Knowledge or Intention: The promisor must know or intend that the promise will act or refrain from acting in reliance on the assumption or expectation; it can be actual or constructive knowledge.

In cases of assumptions based upon a promise or representation, knowledge is ‘easily inferred’: Waltons

In cases where the assumption arises outside the context of a promise or representation the requirement of knowledge or intention is more difficult to establish: Waltons, however as shown in this case, it can be established.

5 - Detriment: The plaintiff must suffer, or stand to suffer, detriment if the assumption made by the plaintiff is not fulfilled, there must be a link between the detriment and the assumption or expectation.

In Thompson v Palmer (1933), Dixon J said that the plaintiff must suffer detriment in the sense that ‘as a result of adopting [the assumption or expectation] as the basis of action or inaction, [the plaintiff] will have placed himself in a position of material disadvantage if departure from the assumption is permitted’.

The notion of detriment conjures up the idea that the plaintiff will be worse off in some way, it is not enough that the plaintiff acted upon the defendant’s promise.

In Je Maintiendrai Pty Ltd v Quaglia (1980), it held that it was necessary that the promise would ‘result in some detriment and therefore some injustice’ to the plaintiff.

The detriment suffered can’t be minor: Hawker Pacific Pty Ltd v Helicopter Charter Pty Ltd (1991) - it has been variously described as needing to be material or significant or substantial.

In assessing the existence of detriment one must distinguish between expectation and reliance loss. In context of the facts of Waltons, the expectation loss suffered by the Mahers was the loss of rent they expected Waltons to pay during the term of the anticipated lease. The reliance loss was the wasted expenditure incurred in demolishing and rebuilding the premises - it was the reliance loss and not the expectation loss that established detriment in that case.

The significance of establishing detriment is that it is this factor which makes it unconscionable or unjust for the promisor to depart from the assumption.

6 - Failure to avoid detriment: The defendant must have failed to act to avoid the plaintiff suffering detriment. One way in which action could be taken to avoid the detriment is by simply fulfilling the assumption or expectation.

However, the object of equitable estoppel is not to compel the plaintiff to fulfil the assumption or expectation, but rather to avid detriment if the assumption or expectation goes unfulfilled, this might be done by advising the plaintiff, before irreversible detriment is incurred, that the assumption is mistaken.

Similarly the plaintiff may be able to withdraw from the promise and the assumption that it has generated before any irreversible detriment is incurred.

Relief based upon Equitable Estoppel

· Estoppel is not an exception to the requirement of consideration - deeds represent a true exception to estoppel because the promise who has not provided consideration is entitled to sue for the contractual remedy of damages.

· A promisee who has not provided consideration, but is able to establish the elements of promissory estoppel, is not entitled to the contractual remedy of damages - establishing the elements of estoppel means the plaintiff is entitled to some equitable relief, court will enforce this equity but does not enforce the promise.

· Equity is enforced by the court making whatever order it deems to be appropriate to the circumstances - relief available at the discretion of the court. It may be that the only way to enforce the equity is to order the equivalent of what would have been damages assessed on the basis of a breach of contract.

· In exercising this discretion, the courts have generally made it clear that the orders to be granted are based upon avoiding the plaintiff from suffering detriment: Mobil Oil v Lyndell Nominees.

· There have been cases that suggest, in the appropriate case the remedy should be framed on the basis of making good the assumption or expectation relied upon by the plaintiff: Giumelli v Giumelli (1999) - High Court held, there was nothing in earlier cases that precluded a court from granting relief in equitable estoppel cases, on the basis of making good the plaintiff’s assumption or expecatation.

In the case, the court granted the son monetary relief to the value of the property that should have been transferred to him by the parents - High Court did not order a transfer of property to the son, the monetary compensation was a remedy based upon the expectation rather than any reliance loss or actual detriment suffered by the son.

* It appears that the court will initially seek to award a remedy on the detriment suffered basis where that can be readily determined and established - if it cannot, then a remedy based upon making good the plaintiff’s assumption or expectation is more likely.