CONSIDERATION

In contract law consideration is concerned with the bargain of the contract. A contract is based on an exchange of promises. Each party to a contract must be both a promisor and a promisee . They must each receive a benefit and each suffer a detriment . This benefit or detriment is referred to as consideration . Consideration must be something of value in the eyes of the law - ( Thomas v Thomas) (1842) 2 QB 851. This excludes promises of love and affection, gaming and betting etc. A one sided promise which is not supported by consideration is a gift. The law does not enforce gifts unless they are made by deed. Every contract must be supported by consideration. Consideration is the ‘price’ paid by each party to the contract for the other parties promise. Consideration can be defined as some right, interest, profit or benefit accruing to one party or some forbearance, detriment, loss, or responsibility given, suffered or undertaken by the other. Right ⇒forbearance Interest ⇒detriment Profit ⇒loss Benefit ⇒responsibility TYPES OF CONSIDERATION (i) (ii) Executed consideration. Executory consideration.

(i) Executed Consideration i.e. which has already been performed by one or both parties such that nothing is left to be done under the contract. Executed consideration is where one party promises to do something in return for the act of another. E.g. reward cases, “cash on order terms”. Ie, which has already been performed by one or both parties such that nothing is left to be done under the contract.

Promise : £10 reward offer for the return of “lucky” - black and white cat. Ring Mrs. X (215-0230) Act : David sees the advertisement in the local press. He finds the cat, returns it to Mrs. X and claims the reward.
(ii) Executory Consideration is where one or both parties have not yet completed their obligations under the contract. E.g. Credit Sale/Agreement to sell in the future. Executory consideration is where the parties exchange promises to perform acts in the future, e.g. “cash on delivery” terms. And is where one or both parties have not yet completed their obligations under the contract. E.g. Credit Sale/Agreement to sell in the future.

Promise : John & Co. Ltd promises to pay £500 when a new electronic typewriter is delivered. Promise : Fastype Ltd promise to deliver the typewriter within 6 weeks. Rules governing consideration
There are various rules governing the law of consideration: 1. 2. 3. 4. 5. 6. The consideration must not be past. The consideration must be sufficient but need not be adequate. The consideration must move from the promisee. An existing public duty will not amount to valid consideration. An existing contractual duty will not amount to valid consideration. Part payment of a debt is not valid consideration for a promise to forego the balance.

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Consideration must not be in the past

(a) If one party voluntarily performs an act, and the other party then makes a promise, the consideration for the promise is said to be in the past. Past consideration is regarded as no consideration at all.

Case : Re McArdle Fcats: Mr McArdle died leaving a house to his wife for her lifetime and then to his children. While Mrs McArdle was still alive one of the children and his wife moved into the house. The wife made a number of improvements to the house costing £488. After the work had been completed, all the children signed a document in which they promised to reimburse the wife when their father’s estate was finally distributed. Held: The court of Appeal held that this was a case of past consideration. The promise to pay £488 to the wife was made after the improvements had been completed and was, therefore, not binding
(b) Where a contract has been entered into and subsequently a further promise to that transaction is made, no contract will arise.

Case: Roscorla v Thomas Fcats: After that negotiations for the plaintiff to buy defendant’s horse was over the latter informed that the horse was “sound and free from vice.” The horse turned out to be vicious and the plaintiff brought an action on the warranty.
Held: the express promise was made after the sale was over and was unsupported by fresh consideration. The plaintiff could show nothing but ‘past’ consideration and his action failed.

Exceptions to the past consideration rule.
Past consideration may be valid where it was proceeded by a request: Case: Lampleigh v Braithwaite [1615] EWHC KB J17 Facts: The defendant had killed a man and was due to be hung for murder. He asked the claimant to do everything in his power to obtain a pardon from the King. The claimant went to great efforts and managed to get the pardon requested. The defendant then promised to pay him £100 for his efforts but never paid up. Held: Whilst the promise to make payment came after the performance and was thus past consideration, the consideration was proceeded by a request from the defendant which meant the consideration was valid. The defendant was obliged to pay the claimant £100. • There are two statutory exceptions to the rule that past consideration is no consideration. (i) An ‘antecedent debt or liability’, though normally a past consideration, is good consideration to support a bill of exchange (s.27 Bill of Exchange Act 1882). (ii) A debt which is time-barred under the Limitation Act 1980 may be revived by a subsequent written acknowledgment of the debts by the debtor. If a person is asked to perform a service, which he duly carries out, and later a promise to pay is made, the promise will be binding. Consideration must move from the promisee. (i.e. the person to whom the promise was made)

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(a) A person wishing to enforce a contract must show that he personally provided consideration. It is not enough that some-else provided consideration to the party being sued. E.g. A services B’s car in return for B’s promise to pay the agreed charge of $20 to C. If A completes the service C cannot sue for payment of the $20 since, as promisee, he did not personally supply consideration to B. Only A can sue B.

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This means that a person to whom a promise was made can only enforce it if he himself provided the consideration for it. He cannot sue if the consideration for the promise moved from a third party. Case :Tweddle v Atkinson Facts: John Tweddle and William Guy agreed that they would pay a sum of money to Tweddle’s son William, who had married Guy’s daughter. William Guy died without paying his share and William Tweddle sued his late father-in-law’s executor (Atkinson). His action failed because he had not provided any consideration for the promise to pay. Held: T could not sue as he had not provided consideration. Only T’s father was entitled to sue. (b) The doctrine of privity of contract The privity of contract doctrine dictates that only persons who are parties to a contract are entitled to take action to enforce it. A person who stands to gain a benefit from the contract (a third party beneficiary) is not entitled to take any enforcement action if he or she is denied the promised benefit. This states that a person cannot be bound by or take advantage of a contract to which he was not a party. The doctrine of privity in contract law provides that a contract can only impose rights or obligations on persons who are parties to it. Its operation may be seen in Dunlop v Selfridge (1915). Case: Dunlop v Selfridge Facts : D, a tyre manufacturer, supplied tyres to X, a distributor, on terms that X would not re-sell the tyres at less than the prescribed retail price. If X sold the tyres wholesale to trade customers, X must impose a similar condition on those buyers, to observe minimum retail price. X resold tyres on these conditions to S. Under the contract between S and X, S was to pay D a sum of $5 per tyre if S sold tyres to customers at a price below the minimum retail price. S sold two tyres to customers at aprice below the minimum price. D sued S to recover the $5 per tyre. Held: D could not recover damages under the contract between X and S because D was not a party to that contract.

There are a number of ways in which consequences of the application of strict rule of privity may be avoided to allow a third party to enforce a contract. These occur at both common law and under statute.

(i) Common law:
(a) The beneficiary sues in some other capacity. (eg administrator) A person who was not originally a party to a particular contract may, nonetheless, acquire the power to enforce the contract where they are legally appointed to administer the affairs of one of the original parties. Case: Beswick v Beswick (1967) Facts : a coal merchant sold his business to his nephew in return for a consultancy fee of £6·10 shillings (in pre-decimal currency) during his lifetime, and thereafter an annuity of £5 per week payable to his widow. After the uncle died, the nephew stopped paying the widow. When she became administrative of her husband’s estate, she sued the nephew for specific performance of the agreement in that capacity as well as in her personal capacity. Held: although she was not a party to the contract and therefore could not be granted specific performance in her personal capacity, such an order could be awarded to her as the administrative of the deceased person’s estate.

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(b) The situation involves a collateral contract. A collateral contract arises where one party promises something to another party if that other party enters into a contract with a third party, for example, A promises to give B something if B enters into a contract with C. In such a situation, the second party can enforce the original promise, that is, B can insist on A complying with the original promise. Case: Shanklin Pier v Detel Products Ltd (1951), Facts: the plaintiffs contracted to have their pier repainted. On the basis of promises as to its quality, the defendants persuaded the pier company to insist that a particular paint produced by Detel be used. The painters used the paint but it proved unsatisfactory. The plaintiffs sued for breach of the original promise as to the suitability of the paint. The defendants countered that the only contract they had entered into was between them and the painters to whom they had sold the paint, and that as the pier company were not a party to that contract they had no right of action against Detel. The pier company were successful. Held: in addition to the contract for the sale of paint, there was a second collateral contract between the plaintiffs and the defendants by which the latter guaranteed the suitability of the paint in return for the pier company specifying that the painters used it. © There is a valid assignment of the benefit of the contract. A party to a contract can transfer the benefit of that contract to a third party through the formal process of assignment. The assignment must be in writing, and the assignee receives no better rights under the contract than the assignor possessed. The burden of a contract cannot be assigned without the consent of the other party to the contract.
(d) Where it is foreseeable that damage caused by any breach of contract will cause a loss to a third party.

In Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd (1994), the original parties had entered into a contract for work to be carried out on property with the likelihood that it would subsequently be transferred to a third party. The defendant’s poor work, amounting to a breach of contract, only became apparent after the property had been transferred. There had been no assignment of the original contract and, normally, under the doctrine of privity, the new owners would have no contractual rights against the defendants and the original owners of the property would have suffered only a nominal breach as they had sold it at no loss to themselves. Held: the House of Lords held that, under such circumstances, and within a commercial context, the original promisee should be able to claim full damages on behalf of the third party for the breach of contract. (e) One of the parties has entered the contract as a trustee for a third party. There exists the possibility that a party to a contract can create a contract specifically for the benefit of a third party. In such limited circumstances, the promisee is considered as a trustee of the contractual promise for the benefit of the third party. In order to enforce the contract, the third party must act through the promisee by making them a party to any action. The other main exception to the privity rule at common law is agency, where the agent brings about contractual relations between two other parties even where the existence of the agency has not been disclosed.

(ii) Statute
Statutory Exceptions to the Doctrine of Privity

Insurance Contracts Act 1985 (Cth), s. 48

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Bills of Exchange Act 1909 (Cth), ss. 36-43 Cheques Act 1986 (Cth), s. 73 Motor Vehicles (Third Party Insurance) Act 1942 (NSW), s. 10(7)
The first area in which statute has intervened in relation to the doctrine of privity is in relation to motor insurance where third parties claim directly against the insurers of the party against whom they have a claim. The most significant alteration of the operation of the doctrine of privity however, has been made by the Contracts (Rights of Third Parties) Act 1999 which sets out the circumstances in which third parties can enforce terms of contracts. In order for the third party to gain rights of enforcement, the contract in question must, either, expressly confer such a right on them or, alternatively, it must have been clearly made for their benefit (s.1). The contractual agreement must actually identify the third party , either by name, or as a member of a class of persons, or answering a particular description. The third person need not be in existence when the contract was made, so it is possible for parties to make contracts for the benefit of as yet unborn children. This provision should also reduce the difficulties relating to pre-incorporation contracts in relation to registered companies. The third party may exercise the right to any remedy which would have been available had they been a party to the contract. Such rights are, however, subject to the terms and conditions contained in the contract and they can get no better right than the original promisee. Section 2 of the Act provides that, where a third party has rights by virtue of the Act, the original parties to the contract cannot agree to rescind it or vary its terms without the consent of the third party; unless the original contract contained an express term to that effect. Section 3 allows the promisor to make use of any defences or rights of set-off they might have against the promisee in any action by the third party. Additionally, the promisor can also rely on any such rights against the third party. Section 5 removes the possibility of the promisor suffering from double liability in relation to the promisor and the third party. It provides, therefore, that any damages awarded to a third party for a breach of the contract be reduced by the amount recovered by the original promisee in any previous action relating to the contract. The Act does not alter the existing law relating to negotiable instruments, contracts of employment, or contracts for the carriage of goods or the statutory contracts constituted by to companies’ constitutional documents. EXCEPTIONS TO THE RULE OF PRIVITY OF CONTRACT (a) Agency

The rule here is that if one of the contracting parties contracts as an agent, then either the agent or the principal, but not both, can sue to enforce the contract. In our example, if B is C’s agent then either B or C can enforce the contract against A. In these cases it is immaterial as to whether A knew that B was C’s agent. (b) Trusts

The law of trusts can enable a third party beneficiary to initiate action that will enforce the promisor’s obligation. Using the above example, if B had contracted with A in the capacity of trustee for C, C as beneficiary under the trust has enforceable rights. These rights arise because the law of trusts gives a beneficiary certain rights against a trustee. In the context of privity, if C is a beneficiary under a trust, C can bring an action against B, the trustee, that has the effect of compelling B to sue A for breach of contract. In formal procedural terms C sues in an action in which B and A are joined as defendants.

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The use of trust law here does not give rise, in the strict sense, to an exception to the doctrine of privity. In conceptual terms, the action against A is pursued by B, albeit at C’s insistence. (c) Estoppel Following the decision in Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387, a third party may be able to seek relief against a promisor on the basis of promissory estoppel principles. To succeed the third party would need to establish the elements of promissory estoppel. See Trident, at 145, per Deane J. In Trident, Mason CJ, Wilson J, at 123-124, were of the view that it was likely that estoppel could be established on the facts of the case, but it was not necessary for them to determine the issue on the basis that they had decided the case on other grounds. (d) Unjust Enrichment

When we examine the remedy of quantum meruit later in this course, we shall see that the principle of unjust enrichment is the principle that underpins the remedy. The essence of the principle is that it requires a defendant ‘to make fair and just restitution derived at the expense of a plaintiff’ 3 Consideration must not be illegal. The courts will not entertain an action where the consideration is contrary to a rule of law or is immoral.

Case: Pearce v Brooks. Facts: The owner of a cab let it out on hire to a known prostitute for use by her. Held: Pearce could not sue for the cost of the hire since he knew of the nature of the use to which the cab would be put.
4 Consideration must be sufficient but need not be adequate.

Under the doctrine of consideration, a promise has no contractual force unless some value has been given for it. But the courts do not, in general ask whether adequate value has been given, or whether the agreement is harsh or one-sided. The followings are examples of cases where consideration was of little value, but nevertheless, was held to be sufficient. (a) Consideration must have some value, however slight. Case: Thomas v Thomas Facts: After the death of her husband Mrs Thomas agreed to pay rent of £1 a year in order to continue living in the same house. Held: It was held that the payment of £1 was valid consideration. (b) Consideration is sufficient if it has some identifiable value.

Case: Chappel & Co v Nestle Co. Facts: Nestle were running a special offer whereby members of the public could obtain a copy of the record ‘Rockin’ Shoes’ by sending off three wrappers from Nestle 6p chocolate plus a nominal sum. The records had been made by Hardy & Co but the copyright was owned by Chappell who claimed that there had been breaches of their copyright. The case turned round whether the three wrappers were part of the consideration.
Held: The House of Lords held that the defendants had required that wrappers be sent (for obvious commercial reasons). It was immaterial that the wrappers when received were of no economic value to them. The wrappers were part of the consideration as they had commercial value. (c) Forbearance & compromise to sue.

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(i) Forbearance or the promise of it may be sufficient consideration if it has some value or
amounts to giving up something of value

Case: Horton v Horton Facts :Under a separation agreement, defendant agreed to pay his wife £30 per month net of income tax. For 9 months the husband paid it without deduction. He then signed a document agreeing to pay a clear sum of £30. He paid this for three years, then stopped pleading that the latter agreement was not supported by consideration. Held: the later agreement was supported by consideration: the wife could have sued to have the original agreement rectified, but did not. Such an action had some prospect of success and the wife believed in it.
(ii) Consideration must be valuable, i.e. consideration must have some economic worth. Case: White v Bluett . Facts: In a dispute with his father’s executors, the plaintiff said that he had given consideration to his father for a promise of benefits under his will by promising not to complain continually that his father had disinherited him. Held: No consideration had been given for the promise which the plaintiff said he had obtained from his father. (iii) Promise/Performance of existing duty by promisee

A person who promises to carry out a duty which he is already obliged to perform is in reality offering nothing of value. The “consideration” will be insufficient. However, if a person does more than he is bound to do there may be sufficient consideration. Example : (a) Duty imposed by law

Case: Collins v Godefroy Facts: Collins was subpoenaed to give evidence in a case in which Godefroy was a party. Godefroy promised to pay a sum of money for Collin’s loss of time. G refused to pay and C sued G Held: C had not provided consideration, as he was legally obliged to attend under the subpoena. He had done no more than he was legally to do. Collin’s action to recover this money failed because he was already under a legal duty to appear in court. He had not done anything extra.
However, if an act is performed over and above that required by law or public duty, that act is sufficient consideration for any promise to confer a benefit in return. (b) Duty imposed by a contract with promisor If a person is obliged to perform an act under an existing contract and the other party then promises to pay him an additional sum of money to ensure that he finishes the work on time, there will be no new contract I r o the extra sum of money, unless there is some practical benefit to the party offering the extra money. Case: Stilk v Myrick Facts: During the course of a voyage from London to the Baltic and back, two of a ship’s crew deserted. The captain promised to share the wages of the deserters amongst the remaining crew. Held: It was held that this was not binding as the sailors were already contractually bound to meet such emergencies of the voyage. They had not provided consideration.

Case: Williams v Roffey Bros & Nicholls (Contractors) Ltd Facts: The defendant contractors had a contract to refurbish a block of 27 flats. They had sub-contracted the carpentry work to Williams for £20,000. After the contract had been running some months it became apparent that Williams had underestimated the cost of the work. The defendants, concerned that the

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Held:

carpentry work would not be completed on time and that as a result they would fall foul of a penalty clause in their main contract agreed to pay a further £575 per flat. Williams completed 8 more flats but did not receive full payment. He stopped work and brought an action for damages. The court held that Williams was entitled to the extrapayments. Where A promises additional payments to B in return for B’s promise to complete work on time, and by giving this promise A obtains a benefit by avoiding a penalty clause, for example, the B’s promise may constitute sufficient consideration to support A’s promise of extra pay, provided A’s promise had not been obtained as a result of fraud or economic duress.

Obviously if more than the original work was provided, then there is sufficient consideration as shown in the following case.

Case: Hartley v Ponsonby Facts: When almost half of the crew of a ship deserted, the vessel was unseaworthy since it was undermanned. The captain offered those remaining £40 extra to complete the voyage. The rest of the journey had become extremely hazardous. Held: Since the seamen were now working in a dangerous situation not contemplated by their original contractual undertaking, they were discharged from their existing contract and left them free to enter into a new contract for the rest of the voyage.
(c) Duty imposed by contract with third party

Case: Shadwell v Shadwell Facts: Plaintiff was promised by his uncle that if he married E (as he did), the uncle would during their joint lives pay to his nephew £150 p.a. The uncle died after 18 years owing 6 annual payments. Plaintiff claimed for arrears from his uncle’s executors. Held: there was sufficient consideration.

(5) Part payment of a Debt - Part payment of a debt is not valid consideration for a
promise to release the debt in full:

Case: Pinnel's Case
Facts: The claimant was owed £8 10 shillings. The defendant paid £5 2 shillings and 2p. The claimant sued for the amount outstanding. Held: The claimant was entitled to the full amount even if they agreed to accept less. Part payment of a debt is not valid consideration for a promise to forebear the balance unless at the promisor's request part payment is made either: a). before the due date or b). with a chattel or c). to a different destination This rule from Pinnel's case was affirmed by the House of Lords in Foakes v Beer (1883-84)

Case: Foakes v Beer (1883- 84) LR 9 App Cas 605 House of Lords
Facts: Dr Foakes owed Mrs Beer £2,000 after she had obtained judgment against him in an earlier case. Dr Foakes offered to pay £500 immediately and the rest by instalments, Mrs Beer agreed to this and agreed she would not seek enforcement of the payment provided he kept up the instalments. No mention was made in this agreement of interest although judgment debts generally incurred interest. Dr Foakes paid all the instalments as agreed and Mrs Beer then brought an action for the interest.

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Held: Dr Foakes was liable to pay the interest. The agreement reached amounted to part payment of a debt and under the rule in Pinnel's case this was not good consideration for a promise not to enforce the full amount due. Exceptions - There a number of exceptions to the rule. If a smaller payment is made, at the creditor’s request, at an earlier time (Pinnel’s case), at a different place with an additional item or by a different method (e.g. goods instead of cash), then there is introduction of some new element. This introduction of new element is called “accord and satisfaction” . The accord is the agreement to accept less and the satisfaction is the new consideration. EXCEPTIONS TO THE RULES OF ACCORD AND SATISFACTION and Pinnel’s Case 1. Where part payment is made by a third party:

Hirachand Punamchand v Temple [1911] 2 KB 330 Case summary
2. Promissory estoppel Promissory estoppel is an equitable doctrine which in some instances can stop a person going back on a promise which is not supported by consideration. Promissory estoppel was developed by an obiter statement by Denning J (as he then was) in Central London Property Trust Ltd v High Trees Ltd [1947] KB 130. Denning J based the doctrine on the decision in Hughes v Metropolitan Railway (1876-77) L.R. 2 App. Cas. 439 (Case summary). The House of Lords affirmed the existence of promissory estoppel in contract law in Tool Metal Manufacturing v Tungsten [1955] 1 WLR 761 (Case summary).

Tool Metal Manufacturing v Tungsten [1955] 1 WLR 761 House of Lords
Facts: Tungsten had been infringing a patent right held by TMM. When TMM heard of this they waived all infringements in return for Tungsten paying 10% Royalty and also 30% 'compensation' if sales exceeded 50KG in any month. These sums were excessive but Tungsten agreed to pay them otherwise they would be faced with a claim for infringing the copyright. Tungsten struggled to make payments. They got into arrears during the war times and an agreement was reached to waive the 'compensation' payments during the war years. Held: TMM could not enforce the compensation payments during the war years but could enforce them on termination of the war. TMM were estopped from going back on their promise to waive the payments in equity. Generally promissory estoppel will merely suspend legal rights rather than extinguish them. However, where periodic payments are involved and a promise has been made to reduce the payments because of pressing circumstances which are not likely to persist, promissory estoppel can be used to extinguish legal rights. Requirements of promissory estoppel: 1. 2. 3. 4. A pre-existing contract or legal obligation which is then modified There must be a clear an unambiguous promise Change of position It must be inequitable to allow the promisor to go back on their promise 1. A pre-existing contractual or legal obligation which is then modified:

Case: Combe v Combe [1951] 2 KB 215 Court of Appeal
A husband promised to make maintenance payments to his estranged wife but failed to do so. The wife brought an action to enforce the promise invoking promissory estoppel.

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Held: Her action failed. There was no pre-existing agreement which was later modified by a promise. The wife sought to use promissory estoppel as sword and not a shield. 2. A clear and unambiguous promise. This may be implied through conduct: Case: Woodhouse A.C. Israel Cocoa Ltd v Nigerian Product Marketing Co Ltd [1972] AC 741 Facts: A contract for the sale of some coffee beans was agreed to be payable in pound sterling. The sellers mistakenly sent an invoice stating price was payable in Kenyan Shillings. At the time the value of pound sterling and Kenyan shillings was equal. The buyers accepted the delivery and invoice with out objection. Subsequently the value of the pound fell quite dramatically in relation to Kenyan shillings. The buyers then sought to revert to pound sterling as stated in the contract. Held: The buyers conduct in accepting the invoice unquestionably amounted to an implied clear and unambiguous promise to accept on those terms. 3. Change of position:

Case: Alan v El Nasr [1972] 2 WLR 800
Facts: By contract, the sellers agreed to sell 250 tons of coffee beans at 262 Kenyan shillings per cwt to El Nasr payable on credit. At the time of the contract the value of Kenyan shillings and pound sterling were of equal value. Whilst the contract stipulated the price payable in Kenyan shillings, the credit account referred payment in pound sterling. There were a number of other discrepancies between the credit agreement and contract such as date of shipping and the quantity to be shipped. These other discrepancies were rectified in a revised agreement however, the new agreement still referred to payment in pound sterling. The sellers accepted the first instalment of 57,000 in pound sterling without objection, however, the value of the pound dropped quite dramatically resulting in a loss of 165,530.45 shillings. The sellers then sought to revert to Kenyan shillings and demanded the further payment. The buyers raised promissory estoppel in their defence in that in accepting the instalment in pound sterling and redrafting the credit agreement without changing the currency there was an implied promise that they would not revert to Kenyan Shillings. The sellers argued that the buyers had not acted to their detriment in reliance of this promise as they had gained a benefit. Held: Detrimental reliance is not a requirement of promissory estoppel. It only needs to be established that the promisor has changed their position. 4. It must be inequitable to allow the promisor to go back on their promise:

Case: D & C Builders v Rees [1966] 2 WLR 28 Court of Appeal Facts : Mr Rees instructed the claimant to do some building work at his home to the value of £746. Mr Rees paid £250 on account and the claimant reduced the bill by £14 and there was a sum owing of £482. The claimant wrote to the defendant several times pressing for payment but was unsuccessful there had been no complaints as to the workmanship at this time. The claimant at the time was in dire financial need and the business was verging on bankruptcy a fact that Mrs Rees was aware of. The defendant telephoned the home and Mrs Rees answered she made complaints about the work and said she would give them £300 in satisfaction of the whole debt. The defendant refused and said he would take the £300 and give her a year to clear the balance. He called at the house to collect the money but Mrs Rees remained firm that she would only pay £300 and demanded that the defendant wrote on the receipt 'in completion of the account' otherwise she would pay him nothing. The defendant needed the money immediately so reluctantly agreed to write this on the receipt but stated he fully intended to pursue the balance as the money paid did not cover the costs he had incurred.

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He subsequently brought an action to recover the balance. The defendant sought to rely on estoppel relying on the written receipt as demonstrating a promise to accept the lesser sum. Held: The claimants were successful. Mrs Rees could not rely on estoppel as there was no true agreement to accept less and because Mrs Rees had taken advantage of the builder's position and mislead them as to her financial position. Question on Consideration Adam, who operates an accountancy practice, charges £1,000 per year for producing business accounts for tax purposes. Unfortunately he has had some difficulty in recovering his fees from a number of clients as follows: (1) Bob, a car mechanic, told Adam that he could only raise cash to pay half of his fees but that he would service Adam’s car for the coming year. Adam reluctantly agreed to this proposal. (2) Carol, an author of textbooks, told Adam that she could not pay any of the money she owed him. However, her father stepped in and said he would pay Adam but could only manage half of the total amount. Once again Adam reluctantly agreed to accept the father’s proposal. (3) Dawn, a not very successful musician, also told Adam that she could only pay half of the money she owed him as she needed to use the other half to finance her new record. Once again Adam agreed to accept the half payment. Dawn’s record subsequently became a major hit and she made £100,000 profit from it. (4) Eric, a self-employed decorator, without any contact with Adam simply sent a cheque for half of his fees stating that he could not pay any more and that the cheque was in full settlement of his outstanding debt. Adam himself is now in financial difficulty and needs cash to pay his own tax bill. Required: Advise Adam whether he can recover any of the outstanding money from the above clients. (20 marks) Solution English law does not enforce gratuitous promises unless they are made by deed. Consideration has to be provided as the price of a promise. This is equally the case where a party promises to give up some existing rights that they have. Thus, at common law, if A owes B £10, but B agrees to accept £5 in full settlement of the debt, B’s promise to give up existing rights must be supported by consideration on the part of A. This principle, that a payment of a lesser sum cannot be any satisfaction for the whole, was originally stated in Pinnel’s case (1602), and reaffirmed in Foakes v Beer (1884). In the latter case Mrs Beer had obtained a judgement in debt against Dr Foakes for £2091. She had agreed in writing to accept payment of this amount in instalments, but when payment was finished she claimed a further £360 as interest due on the judgement debt. It was held that Beer was entitled to the interest as her promise to accept the bare debt was not supported by any consideration from Foakes. This principle has been reconfirmed in the more recent case of Re Selectmove Ltd (1994). In this latter case, the company owed the Inland Revenue outstanding taxes. After some negotiation, the company agreed to pay off the debt by instalments. The company started paying but, before completion, it received a demand from the Revenue that the total be paid off immediately. The company relied on the authority of Williams v Roffey Bros (1990), which had established that the performance of an existing duty could, under particular circumstance, amount to valid consideration for a new promise. On that basis it was argued that its payment of the tax debt was sufficient consideration for the promise of the Revenue to accept it in instalments. The Court of Appeal held, however, that situations relating to the payment of debt were distinguishable from those relating to the supply of goods and services, and that in the case of the former the court was bound to follow the clear authority of the House of Lords in Foakes v Beer. However, there are a number of situations in which the rule in Pinnel’s case does not apply. The following will operate to fully discharge an outstanding debt:

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(i) payment in kind Consideration can take the form of money or money’s worth. In other words, some thing or action may adequately support a promise, and A may clear an existing debt if B agrees to accept something else instead of money. When it is remembered that, consideration does not have to be adequate, it follows that, with B’s agreement, A can discharge a £10 debt by giving B £5 and a chocolate sweet. It should be noted that payment by cheque is no longer treated as substitute payment in this respect (See D & C Builders Ltd v Rees (1966)). (ii) payment of a lesser sum before the due date of payment The early payment has of course to be acceptable to the party to whom the debt is owed. (iii) payment at a different place As in the previous case this must be at the wish of the creditor. (iv) payment of a lesser sum by a third party Where a third party intervenes to pay off the existing debt, albeit with a lesser sum, then the original creditor is not allowed to break their agreement with that party by taking subsequent action against the original debtor (Welby v Drake (1825)). (v) a composition arrangement This is an agreement between creditors to the effect that they will accept part-payment of their debts. The individual creditors cannot subsequently seek to recover the unpaid element of the debt (Good v Cheesman (1831)). (vi) promissory estoppel The equitable doctrine of promissory estoppel sometimes can be relied upon to prevent promisors from going back on their promises. The doctrine first appeared in Hughes v Metropolitan Railway Co (1877) and was revived by Lord Denning in the High Trees case (Central London Property Trust Ltd v High Trees House Ltd (1947)). Estoppel arise from a promise made by a party to an existing contractual agreement. The promise must have been made with the intention that it be acted upon and must actually have been acted on (W.J. Alan & Co v El Nasr Export & Import Co (1972)). It only varies or discharges rights within a contract. It does not apply to the formation of contract, and therefore it does not avoid the need for consideration to establish a contract in the first instance (Combe v Combe (1951)). It normally only suspends rights, so it is possible for the promisor, with reasonable notice, to retract the promise and revert to the original terms of the contract ( Tool Metal Manufacturing Co v Tungsten Electric Co (1955)). Rights may be extinguished, however, in the case of a non-continuing obligation, or where the parties cannot resume their original positions (D & C Builders v Rees (1966)). It is also essential that the promise relied upon must be given voluntarily. As an equitable remedy the benefit of promissory estoppel will not be extended to those who have behaved in an inequitable manner (D & C Builders v Rees (1966)). Applying the foregoing to the facts of the problem leads to the following results: (1) As Adam agreed to accept Bob’s servicing of his car as part payment of his outstanding debt there is nothing further he can do to recover any more money. By accepting payment in kind his situation is covered by exception (i) above to the rule in Pinnel’s case. (2) By accepting lesser payment from a third party, i.e. Carol’s father, Adam is covered by exception (iv) above to the rule in Pinnel’s case and he can take no further action against Carol.

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(3) Dawn’s case would appear to be an example of promissory estoppel. The only real question is whether Adam could retract his promise and recover the full amount owing to him. On the basis of Tool Metal Manufacturing Co v Tungsten Electric Co and D & C Builders v Rees, it would appear that he could. (4) Eric acted unilaterally and did nothing additional to compensate Adam for his part payment. Consequently Eric is covered by the general rule in Pinnel’s case and remains liable to pay Adam the remaining half of his bill (D & C Builders v Rees and Re Selectmove Ltd).

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