QUESTION 1

“The general rule is that the doctrine of privity prevents third parties from carrying both the
benefit and burden of contract to which they are not parties, inclusive of the exclusion clauses in
them” Discuss, with reference to case law noting the effect the above poses to the limit to third
party transactions.

OVERVIEW OF THE GENERAL RULE

The doctrine of privity of contract is fundamental to the enforcement of contractual obligations

between the parties to a contract. It states that a contract cannot confer or impose obligations
arising under it on any person except the parties to it. In other words, only the parties to a
contract can sue or be sued on the contract. This is similar to the rule of consideration which
states that a person who has not given consideration cannot sue or be sued as established in the
case of TWEDDLE v ATKINSON (1861) 1 B&S 393, where it was held that even though the
plaintiff was named in the agreement, he failed in his claim against the executors because he had
no enforceable third party right as he had given no consideration for the agreement. Hence the
rule, “Consideration must move from the promisee to the promissor”.

Privity of contract is defined as “the relationship between the parties to a contract, allowing
them to sue each other but preventing a third party from doing so.” (Black’s Law Dictionary,
10th Edition @ p1394). At common law, it is an elementary principle of Law of Contract that, as
a general rule, a contract cannot confer rights or impose obligations on strangers to it. There is no
spec of doubt that it has evolved over the years. The modern statement of the rule is found in
Lord Haldane’s judgment in the case of DUNLOP PNEUMATIC TYRE CO. LTD v
SELFRIDGE & CO. LTD (1915) AC 847:

“…Only a person who is a party to a contract can sue on it. Our law knows nothing of a jus
quaesitum tertio1 arising by way of contract. Such a right may be conferred by way of property,
as, for example, under a trust, but it cannot be conferred on a stranger to a contract as a right to
enforce the contract in personam…”

1
It a Latin word meaning rights on account of third parties i.e. a third party has acquired a right.

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This position is also supported in the Sierra Leonean case of YUMKELLA II AND DAVIES v
THOMAS (1867-68) ALR S.L. 307. Here, P.C. Yumkella, (the first appellant) agreed to buy
land from Davies (the second appellant) and promised to meet all the expenses, which he would
then deduct from the purchase price. Both parties engaged the same solicitor, the purchaser to
prepare the conveyance, and the vendor to find and employ a surveyor. The solicitor engaged
Thomas (the respondent) and the purchaser went to the land with him. Thomas’ plan
subsequently proved useless and Davies rejected it, though Thomas was paid Le200 towards his
fees and expenses. He sued for the balance he alleged was owing to him and recovered judgment
in the High Court. On appeal, the 1st appellant argued that there was no contract between him and
the respondent. The ground of appeal raised the question whether there was any privity of
contract between the respondent and the 1 st appellant. The Court of Appeal held that the 1 st
appellant is not liable to the respondent at all because he is not privy to the contract as a third
party, and that the second appellant is liable to the respondent in the sum of Le200 for the survey
of the land.

It is worth noting that Denning LJ in the case of DRIVE YOURSELF HIRE CO. (LONDON)
LTD v STRUTT (1954) 1 QB 250 tried to get around the principle of Privity of Contract by
seeking to have a leeway to water it down. However, in BESWICK v BESWICK (1976) 2 ALL
ER 1197, the House of Lords did not support same as Lord Reid noted that:

“In SMITH v RIVER DOUGLAS CATCHMENT BOARD (1949) 2 KB 500, Denning LJ after
stating his view that a third person can sue on a contract to which he is not a party, referred to
section 56 of the English Law of Property Act, 1925 as a clear statutory recognition of this
principle with the consequence that Miller’s case was wrongly decided. I cannot agree with that.
In DRIVE YOURSELF HIRE CO. (LONDON) LTD v STRUTT (1954) 1 QB 250 Denning LJ
expressed similar views about section 56.”

This is now beyond argument that the principle of privity of contract is part of our corpus juris2.
Furthermore, in some cases, issues have arisen over whether someone who is not a party to the
contract can rely on an exclusion clause contained in it. At Common Law, the doctrine of privity
usually prevents a third party from relying on the terms of a contract. The original position in
relation to exclusion clauses was confirmed by the House of Lords in SCRUTTONS LTD v
2
A comprehensive collection of the law of a judicial system or of a country or jurisdiction.

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MIDLAND SILICONES LTD (1962) AC 446, where the defendant (which supplies work
people to load and unload ships) was sued for damages resulting from its negligent handling of
goods. Lord Reid stated:

“Although I may regret, I find it impossible to deny the existence of the general rule that a
stranger to a contract cannot in a question with either of the contracting parties take advantage
of the provisions of the contract, even where it is clear from the contract that some provision in it
was intended to benefit him.”

Therefore, the defendant could not take advantage of an exclusion clause in the contract between
the owner of the goods and the owner of the ship. Following SCRUTTONS, there were a
number of different devices employed in cases to try and avoid this decision. However, the
passing of the Contracts (Right of Third Parties) Act 1999 means that, in many such cases, third
parties now rely on section 1(6) of this Act. It states that a third party can rely on an exclusion
clause providing the other requirements of the Act are met. The Act followed a Law Commission
Draft Bill. Its major provision is contained in section 1(1) by which:

“… a person who is not a party to a contract (in this Act referred to as the third party) may in
his own right enforce the contract if:

(a) The contract contains an expressed term to that effect; or

(b) Subject to sub-section (2), the contract purports to confer a benefit on a third party.”

The second ground in the above provision, subject to sub-section (2) states that the provision
under (b) will be unavailable to a third party if “on the proper construction of the contract, it
appears that the parties did not intend the contract to be enforceable by a third party…” This
makes it clear that only those rights given to a third party in the contract can be enforced.

EFFECTS OF PRIVITY TO THE LIMITS TO THIRD PARTY TRANSACTIONS

The general rule discussed above that only parties to a contractual agreement can sue to enforce
rights and obligations to that contract is not sacrosanct. The effects of this rule to the limitation
of third party transactions are discussed below:

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1. THE UNAVAILABILITY OF RIGHT OF ACTION BY A THIRD PARTY - As a
general rule, two persons cannot, by any contract into which they may enter, thereby
impose contractual liabilities upon a third party. This principle may be illustrated by
reference to building contracts, where a person engages a contractor to carry out certain
building work. The contractor may frequently sub-contract parts of the work to sub-
contractors. A sub-contractor has no cause of action against the employer for work done
or materials supplied under the sub-contract, since the employer is not a party to that
contract. Even if the employer has nominated the sub-contractor and taken the benefit of
the sub contractor’s work, the employer will not be liable to the sub-contractor for the
price, as there is no privity of contract between them. Conversely, the employer has no
claim in contract against the sub-contractor, since the sub-contractor is not a party to the
main contract between the employer and the contractor. Similarly so, a person receiving
goods as a gift may be unable to sue personally where the goods are defective. So in
effect, the person who has suffered loss cannot sue but the person who has suffered no
loss can sue. This is illustrated in BESWICK v BESWICK (1968) AC 58 where the
widow had suffered actual loss. She could not sue in her personal capacity but the
executors of the will can sue for specific performance of promises made in contracts with
the deceased. The same position can be observed in DUNLOP v SELFRIDGE (1915)
AC 847. Dunlop suffered loss but could not sue Selfridge while Dew had not suffered
loss but had the right to sue Selfridge.

2. It prevents enforcement of services that have already been paid for as seen in PRICE v
EASTON (1833). Here, a builder owed money to Price but did not have the money to
pay what he owed. Easton agreed with the builder that if the builder did some work for
Easton, Easton would pay Price the money that the builder owed to Price. The builder did
the work, but Easton failed to pay Price. There was no point in Price suing the builder for
what the builder owed him because the builder still had no money. The builder had no
reason to enforce the contract against Easton, because Easton had not promised to pay
any money to the builder. Price therefore brought an action against Easton to enforce the
promise that Easton had made to the builder that Easton would pay Price. The question
was whether Price was entitled to enforce Easton's promise to the builder? It was held

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 that Price was not entitled to enforce the promise because he was not a party to the
agreement between Easton and the builder and, under the doctrine of privity of contract,
Price did not acquire legally enforceable rights under that contract.

3. THE RULE MAY ALSO MEAN THAT THE PARTIES’ EXPRESS INTENTIONS
ARE DENIED - the foremost problem with the privity doctrine is the failure to honor the
intention of the parties. This is evident in the case of TWEDDLE v ATKINSON (1861)
1 B&S 393. In this case, the doctrine of privity impeded the contracting parties’ intention
i.e. the agreement was thereby frustrated after the death of one of the parties.

In essence, the privity rule was thought to be controversial because the rule of the doctrine
prevented the third party from having benefit of a contract to which he was not a party. The
intention of the parties to a contract was thought irrelevant and as such although the contract was
entered into for his benefit, the party was not allowed to avail it. In general sense, it seemed
unjust. That is why the reformation of the doctrine has been called for and accordingly the
Contract (Rights of Third Parties Act) 1999 has been brought into existence. Despite the fact that
the 1999 Act introduces some more new and general exceptions to the doctrine rather than
abolish it, it has become easier for the contracting parties to confer right on the third party by
way of inserting a simple clause into their contract. The contracting parties will not face any
substantial difficulties if they make their intention clear in relation to the existence and scope of
the third party right.

EXCEPTIONS TO THE RULE OF PRIVITY

The rule that a third party has no right to enforce a contract to which he is not a party is not
absolute; it has a number of exceptions, arising in both Common Law and Statutes:

STATUTORY EXCEPTIONS

Some of the earliest statutory rights of third party to enforce contractual obligations of parties to
a contract for which he is not a party to can be found in section 56(1) of the Law of Property Act
1925, which was invoked in the case of BESWICK V BESWICK, section 14(2) of the Marine
Insurance Act 1906 and section 2 of the Carriage of Goods by Sea Act 1992 which bestows on a

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holder of a bill of lading with all rights of legal action permissible under the contract of carriage,
notwithstanding that he was not a party to it when originally drafted.

The Contracts (Rights of Third Parties) Act 1999

The most frequently invoked statutory exception lies in the Contracts (Rights of Third Parties)
Act 1999, which came about pursuant to the Law Commission deliberations and report of 1996.
The enactment was devised to remedy the uncertainties and ambiguities surrounding the doctrine
and its exceptions in common law, more particularly, that depriving a third party of such
enforcement right has unwarranted results - (a) eroding the intention of the original contracting
parties; (b) a situation of dichotomy where the person who has suffered loss is left with no
remedy while one who can sue has no damage; (c) the promisee, although can seek redress for
the third party may choose not to do so; (d) injustice to third person interests; and (e) overall
inconvenience to the commercial domain.  

Section 1 of the Act prescribes a two-fold test to allow a third party action or enforcement of
contract:

1. Where the contract expressly provides for it, or

2. Where the contract purports to confer a benefit on such third party.

For either of the conditions, the third person must be clearly identifiable, that is, by name or
class/category of persons.  Notably, such identification must be specific and express, ruling out
any scope for identification by construction or inference as established in the case of
AVRAAMIDES v COLWILL (2006) EWCA CIV 1533.

Furthermore, the Act prevents the variation or rescission of a contract where such third party
right to action is established, except by way of consent of the third person (section 2).  While this
opens up the potential for third person legal suits on one hand, the Act seeks to balance the case
for contracting parties too through provisions on defenses to the promisor (section 3), avoidance
of double liability (section 5), promisee enforcement rights (section 4), and exceptions to third
party action (section 6).

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However, it is important to note that the Act (although an exception) does not abrogate the
doctrine of privity of contract, which continues to remain the predominant overarching rule
governing contractual relations.  Additionally, the Act does not alter the legal position, including
the exceptions, under common law, which continue to be applied by courts alongside (G.H.
Treitel, The Law of Contract - Sweet & Maxwell 2003).

COMMON LAW EXCEPTIONS

COLLATERAL CONTRACTS

This exception is much conflicted as it depends upon the finding of the court of a contract in
existence where the claimant is an actual contracting party, and not a third person.  It was
brought to test in the case of SHANKLIN PIER LTD v DETEL PRODUCTS LTD (1951) 2
KB 854.  In this case, the defendant represented that certain paints were suitable for use in re-
painting of the pier with a life of seven to ten years.  Relying upon this, the plaintiffs re-painted
the pier which paint was found to be unsuitable and having a much lesser life. The court was,
thus, concerned with deciding whether such representation could be reckoned as a warranty
between the plaintiff (owner of the pier) and the defendant (paint manufacturer) where the
original sale and purchase of paint was not undertaken between them.  Such collateral contract
was found to be existing in this case. Whether or not such collateral contract exists depends upon
evidence of the generally applicable constituents of a valid contract, namely: offer, acceptance,
intention to create legal relations and consideration - GRAVY SOLUTIONS LTD v XYZMO
SOFTWARE GMBH (2013) EWHC 2770.  Where any of such elements is absent, the
exception enabling third party action will not be triggered - INDEPENDENT
BROADCASTING AUTHORITY v EMI ELECTRONICS (1980) 14 BUILD LR 1.

TRUST 

Equity developed a more general exception to the doctrine of privity by the use of the concept of
trust. In equity, a person could be a trustee of a promise to pay money not to himself but to a
third party and where such trust was established, the third party could enforce the promise

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against the promisor as was held in PARKER v WILLIAMS (1817) 3 MER 582. The way for
this exception was paved by the ruling in DUNLOP PNEUMATIC TYRE COMPANY LTD v
SELFRIDGE AND COMPANY LTD [1915] AC 847, 959, where it was held that although
privity of contract does not allow third party action, such a “right may be conferred by way of
property, as for example, under a trust”.  This was affirmed in LES AFFRETEURS REUNIS v
WALFORD (1919) AC 801.  In this case, Walford (broker) negotiated a contract between the
charter party and the ship owner, containing a stipulation as regards certain commission payable
to Walford.  Upon failure of such payment, Walford sued the ship owner.  The court found a
trust to have been created owing to Walford receiving benefit under the agreement.

ASSIGNMENT

Except when personal consideration is at its foundation, the benefit of contract may be assigned
or transferred to third party. The assignment is effected through contract between the promisee
under the main contract (that is the assignor) and the third party (that is the assignee). In addition
to assignment by an act of the parties, there exists assignment by operation of law. For e.g., when
a party to a contract is declared bankrupt, rights of action forming part of his estates are deemed
to have been assigned to his trustee in bankruptcy. It is important to note however, that
assignment is subjected to strict equitable rules. If a creditor asks his debtor to pay third party
and the debtor agrees to do so, and he notifies the third party, the third party may be entitled to
sue the debtor.

AGENCY

This exception can be traced from the DUNLOP PNEUMATIC TYRE COMPANY

LTD CASE, i.e., a principal not named in the contract may sue upon it if the promisee really
contracted as his agent, and consideration was directed personally or via the promisee in the
capacity of an agent.  In other words, the real right of action then rests with the principal as the
contracting party, as the agent (promisee) then moves out of the arrangement so as not to sue or
be sued - WAKEFIELD v DUCKWORTH (1915) 1 KB 218.

ACTION IN TORT

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In the event of a breach of duty of care, an independent claim for negligence can be instituted by
the person having suffered the loss, regardless of any contractual arrangement.  This is seen in
the case of DONOGHUE v STEVENSON [1932] AC 562, where despite the claimant having
no contractual relation with the ginger beer manufacturer, a claim in Tort could be successfully
sustained. This was also established in the case of JUNIOR BOOKS LTD v VEITCHI CO.
LTD [1983] 1 AC 520, where a claim against defective construction was allowed by the pursuer
against the sub-contractors (contractually possible only via the main contractor). This was
however much criticized in several cases; including the more recent case of LINKLATERS
BUSINESS SERVICES v SIR ROBERT MCALPINE LTD [2010] EWHC 1145, which
advocated for sequential action owed to immediate contracting party under Contract Law
instead. Nonetheless, an action in Tort continues to be a prime area of third party actions where
contractual remedy may otherwise be barred due to the doctrine of privity, more so when that
renders a situation of lacunae and injustice - WHITE V JONES [1995] 2 AC 207.

RESTRICTIVE COVENANTS

A third party may be able to enforce covenant affecting land made by his predecessor in title
which is also an exception to the privity rule. In some cases, a restrictive agreement may be
enforceable against a third party. In an example of sale and purchase of land, any terms of
conveyance will generally be confined to the seller and the buyer, and not extend to subsequent
buyers/owners.  Having said that, a restrictive or negative covenant such as bar on use of the land
for commercial purposes or on constructing permanent fixtures on the land, may be carried
forward with the land and enforced by the seller against subsequent owners.  This was upheld
in TULK v MOXHAY (1848) 41 ER 1143.

EXCLUSION/LIMITATION CLAUSE

The question whether or not a third party could take benefit of an exclusion or limitation clause
in a contract, more particularly, in a contract of carriage, has been subjected to much judicial
bargain. In the early case of ELDER DEMPSTER v PATERSON ZOCHONIS (1924) AC
522, oil was damaged by bad stowage in relation to a contract between the claimant and the
carrier, the court extended the exclusion in the bill of lading to the ship owner, notwithstanding

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the absence of any direct contract of the ship owner with the claimant. This was so because the
clause expressly mentioned ship owners, reckoned to have operated as the agent of the carrier.
This position was, however, refuted in SCRUTTONS LTD v MIDLAND SILICONES LTD
(1962) AC 446, where requirements were given for such an extension of exclusion clause to a
third party, such as stevedore, namely:

a. Declaration of agency in the clause itself that the carrier had contracted as agent of the
stevedore for the purpose of securing the benefit, and
b. Carrier must have the authority from the stevedore to do so (even if by later ratification).

Notwithstanding the above, the position of ELDER DEMPSTER was once again reiterated in
NEW ZEALAND SHIPPING v AM SATTERTHWAITE LTD (THE EURYMEDON)
(1975) AC 154, where the exclusion clause was held to be capable of protecting third parties.
The case facts were similar to the above cases, concerning liability of stevedore under bill of
lading executed between the shipper and the carrier. The court found a new contract between the
shipper and the stevedore, separate from and collateral to the main contract of carriage. The
above reasoning based on agency and collateral contract were affirmed in the New York Star
case, PORT JACKSON STEVEDORING PTY LTD v SALMOND & SPRAGGON
(AUSTRALIA) PTY LTD (1981) 1 WLR 138.

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 QUESTION 2

Cheatham & Steele wish to expand the productivity and efficiency of their manufacturing
processes. They borrowed £100,000 from Grabbit & Runne, merchant bankers. The agreed
period of loan is five years, £20,000 to be repaid each year with interest at 40% on the capital
outstanding.

After repayment of £20,000 with interest, Cheatham & Steele suffer a lengthy industrial dispute
which makes it impossible for them to pay the next £20,000 due. The difficulties of Cheatham &
Steele are so acute that there is a possibility that the company may become insolvent. Cheatham
& Steele draw the attention of Grabbit & Runne to this and the consequential risk to their
unsecured loan. With this in mind, Grabbit & Runne agreed to the postponement for a year of
payment of the £20,000 due and the waiver of all interest due.

However, four months later, Grabbit & Runne also experienced severe financial problems and
requested Cheatham & Steele to pay the outstanding installment and interest owing without
further delay. Cheatham & Steele refused to do this and suggested that only £10,000 of the loan
could be paid but that this would cause them severe hardship in the circumstances.

Advise Grabbit & Runne.

ANSWER

INTRODUCTION

The legal issue in the scenario revolves around the doctrine of Promissory Estoppel. The doctrine
of Promissory Estoppel is an exception to the doctrine of Consideration. The doctrine refutes this
legal rule and holds in equity that, a promise is enforceable by law even when made without
formal consideration. When a promisor has made a promise to a promisee, who relies on that
promise and changes his financial position, the doctrine estoppes the promisor from going back
on his promise, which is not supported by consideration, as doing so would amount to an
injustice. In other words, in Contract Law, the doctrine of promissory estoppel is an exception to
the requirement of consideration for a contract to be enforceable. Modern Promissory Estoppel
was developed by way of obiter in a statement made by Denning J (as he was then) in the case of

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CENTRAL LONDON PROPERTY TRUST LTD v HIGH TREES LTD (1947) KB 130. He
held estoppel to be applicable if:

“A promise was made which was intended to create legal relations and which, to the knowledge
of the person making the promise, was going to be acted on by the person to whom it was made
and which was in fact so acted on, was enforceable despite a lack of consideration”.

LEGAL ANALYSIS OF THE PROBLEM

As was held in the HIGH TREES CASE (1947) KB 130, the notion of estoppel is that where
party A makes a promise not to insist on his strict legal right under a contract, knowing fully well
that party B would rely on and in fact does rely on that promise, party A would be estopped from
going back on such a promise even though he receives no consideration in return for such
promise, as doing so would amount to injustice on the side of the other party. The application of
promissory estoppel requires the following:

1. The parties to be in a previous legal relationship which results in rights and liabilities
between the parties. It also requires that the promisor makes clear and unambiguous
statement or promise that he does not intend to enforce his legal rights. Such promise
may be express or implied by conduct as was stated in HUGHES v METROPOLITAN
RAILWAY CO (1876-77) LR 2 App Cases 439 HL. In the instant scenario, Grabbit &
Runne certainly have an existing contractual relationship with Cheatham & Steele which
terms Grabbit & Runne have expressly and unequivocally represented or promised to
vary, thereby conferring benefit on Cheatham & Steele without Cheatham providing any
form of consideration. Under the normal rule of consideration, such a promise cannot be
enforced by the promisee as no consideration was given for the promise. Under the
doctrine of estoppel however, the promisor will be estopped from repudiating his promise
where it has been reasonably relied on and acted upon. It must also be noted that it has
been emphasized by Lord Justice Birkett in COMBE v COMBE (1951) 2KB 215 that
promissory estoppel may be used ‘as a shield but not a sword’. This means that the
principle does not provide grounds for a cause of action, it is only available as a weapon
of defense. The fact that Grabbit & Runne are on the defensive here means that they may
rely on and be able to plead this equitable principle.

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2. The second requirement is that promisee must have acted on that promise made by the
promisor. Promissory estoppel often arise where the promisee, in reliance on that
promise, suffered detriment as in AJAYI v BRISCOE (1964) 1 WLR 1326; or where he
alters his position as a result of relying on that promise, even though he suffers no
detriment. In ALAN CO. LTD v El NASR & IMPORT CO. (1972) 2 QB 18, Lord
Denning held that detriment is not an essential element of promissory estoppel. Thus, for
a plea of promissory estoppel to succeed, there must be a change in circumstances of the
promisee. As revealed in the facts provided in the scenario, Cheatham & Steele found
themselves in dire financial hardship and made their situation known to their creditors,
Grabbit & Runne, pointing out to them the consequential risk of a likely insolvency,
which would automatically affect their unsecured debt. This is a genuine proposition by
Cheatham. With this in mind Grabbit and Runne agreed to the postponement, for a year,
of payment of the £20,000 due and the waiver of all interest due. One would reasonably
want to believe that, four months after such representation, the promisee must have relied
on such promise and consequently made some adjustment to his financial dealings. It is
true that Cheatham enjoys a benefit immediately from the postponement of payment of
their debt. Such enjoyment of benefit even though without consideration, does not
provide grounds for the promisor to repudiate his promise. Robert Goff J emphasized in
THE POSTER CHASER (1981) 2 LLOYD’S REP 695, that the promisor will not be
allowed to enforce his original contractual rights “where it would be inequitable, having
regard to the dealings which have thus taken place between the parties” and that even if a
promisee benefited from the promise, it might still be inequitable to revoke it. Thus, the
court would be unwilling to grant Grabbit & Runne any such right of revocation
especially where Cheatham & Steele have shown that a revocation of the promise would
amount to serious hardship on them. Grabbit & Runne may as well rely on the fact that
they too have suffered financial hardship as grounds for their withdrawal from the
promise made, putting the court in a position to weigh the reasonability of Grabbit’s
claim of right to withdraw against Cheatham & Steele’s plea for estoppel. This leads us to
the third limb of estoppel which requires that it must be inequitable for the promisor to
renege on his promise and claim his strict legal rights after the promisee had relied on it.

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 As explained earlier, the facts demonstrate that Cheatham & Steele had relied on
Grabbit’s promise and had varied their financial position as a result of it. Therefore, the
later insistence of Grabbit on their strict legal rights to get their £20,000 plus interest
owed has brought hardship on them. This does prove that this requirement for estoppel to
be applicable in such circumstances is fulfilled.

3. Also, the doctrine requires equity not only from the promisor but equally from the
promisee. Should the promisee’s conduct be found to be inequitable, estoppel will not
favor him. For instance, where the promisee extracts such promise from the promisor by
duress or misrepresentation, it will not be inequitable for the promisor to repudiate such a
promise. In D & C BUILDERS LTD v REES (1966) 2QB 617, where the defendant
took advantage of the plaintiff’s difficult financial situation to secure the plaintiff’s
promise of accepting a lesser sum of £300 in settlement of £482 owed by the defendant,
it was held not to be inequitable for the plaintiff to withdraw the promise. Thus, the
promisee’s conduct must be blameless if he is to be afforded this equitable protection, as
‘he who comes to equity must come with clean hands’. From the facts in the instant
scenario, it is evident nowhere that Cheatham & Steele had conducted themselves
improperly to secure Grabbit & Runne’s promise. Although Cheatham drew the attention
of Grabbit to their financial instability and the possible risk the unsecured loan will face
should they go insolvent, this is very unlikely to amount to duress or misrepresentation
except if it is shown that they lied about their financial position.

In the same vein, it would be significant to consider the question as to the effect of the promise
of deferment of payment of loan and waiver of the yearly interest due. The effect of the principle
of estoppel on rights and obligations is twofold. It may operate to permanently extinguish the
rights of the promisor to claim lump sum after part payment as seen in the case of D & C
BUILDERS v REES (1965) 2 QB 617, where Lord Denning expressed that the “promisor
would not be allowed to revert to his strict legal rights and that the promissory estoppel will be
final if promisee understood the promise to mean final extinguishing of promisor’s strict legal
right” and on the other hand, for periodic payment, promissory estoppel merely suspends the

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right of the promisor to the debt until such time when it becomes equitable to claim the
remainder. Thus, in periodic payments, promissory estoppel may extinguish the right of the
promisor to claim payment for the suspended period but can make claim for subsequent periods
after giving reasonable notice or when the circumstances that gave rise to the situation changes.
In TOOL METAL MANUFACTURING CO LTD v TUNGSTEN ELECTRIC CO LTD
(1955) 1 WLR 761, the court held that:

“On giving reasonable notice to the other party, they could revert to their legal entitlement to
receive the compensation payments”.

As the repayment plan for debt owed by Cheatham is periodic and coupled with the intentions of
the parties as deduced from the deferment arrangement, it is clear that Grabbit’s right to the due
payment has suffered only a temporary suspension for a year’s time. Upon expiry of the stated
period of suspension, Grabbit’s full right to payment will be revived. It is however arguable,
based on the agreement by Grabbit to the ‘postponement for a year of payment of the £20,000
due and the waiver of all interest due’, the right to interest on one year’s payment might be
extinguished.

ADVICE TO GRABBIT & RUNNE

Based on our above legal analysis of the given problem, our advice to Grabbit & Runne is thus:

1. They should consider dropping their demand for immediate payment by suspending their
right to the payment of the due debt as they had made a promise to Cheatham to postpone
time of payment to the following year.
2. They should also consider foregoing the interest by Cheatham & Steele as they had
already waived their right to the said interest due, to be paid that year.

However, should they proceed to court to enforce their demand, Cheatham & Steele are
likely to plead promissory estoppel and their chance of success is overwhelming. Grabbit &
Runne may as well wish to argue their equally difficult financial position as a justification for
revoking their promise. It is however unlikely that the court will view this argument in their
favor. Taking into consideration the above analysis, it would be best in these circumstances

15
 for Grabbit & Runne to consider acceptance of Cheatham & Steele’s suggested offer to pay
only £10,000 of the payment due. They however need to bear in mind two things:

 They must consider the fact that Cheatham has declared that even such a payment
would cause them severe hardship and that their outstanding loan to Cheatham is
unsecured. Thus, they should ensure to avoid any act that would force them into
liquidation.
 Also, it will be in their best interest to consider the rule which states that part
payment of a debt before the due date may amount to discharge of the full debt.
The fact that they had agreed to defer payment till after a year means their debt
will only be due in January of the following year. Therefore, any money received
now from Cheatham would amount to part payment of the full debt made before
the due date. They must, however, ensure that there is an agreement between them
and Cheatham that they are receiving the £10,000 only as advanced payment of
the deferred debt and that the balance must be paid when the time is due. This will
put them in a more secured position to claim the remaining balance of the debt at
the later date.

CONCLUSION

The doctrine of promissory estoppel operates to prevent injustice by denying persons that
promise not to insist on their full legal rights in contractual dealings, knowing fully well that the
other party will rely on such promise and does rely on the promise in determining his next
financial dealings, not to go back on their promise, as to do so would amount to injustice and
hardship on the other party. It must be borne in mind that estoppel operates only as a defense and
not a platform to initiate action against the promisor as stated in COMBE v COMBE (1951)
2KB 215.

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 QUESTION 3

Consideration is often a mere fiction devised to make a promise enforceable and as such, serves
little purpose. It would be advantageous to abolish consideration and leave the more satisfactory
requirement of intention to create legal relations as the test of an agreement’s enforceability.
Discuss the above.

INTRODUCTION

Invariably, consideration and intention to create legal relations are part of the requirements for
the creation of a valid and enforceable contract. Lush J in CURRIE v MISA (1875) LR 10 EX
153, defines consideration as “some right, interest, profit, or benefit accruing to the one party, or
some forbearance, detriment, loss, or responsibility, given, suffered, or undertaken by the other’,
whereas, intention to create legal relations on the other hand, imputes the notion that the parties
to an agreement wished to be legally bound by the promises they have made to each other and
that the enforceability of those promises is predicated on these principles. In a sense, the
provision of consideration and the presence of the requisite mental awareness and readiness to
provide for the corresponding promise are without any doubt, the standard upon which the
principle of pacta sunt servanda exists.

Some schools of thought hold that the purpose of consideration is separate from that of intention
to create legal relations. The latter can be interpreted expansively to deal with the justification of
a contract’s enforceability which is created through consideration. Thus, this implies that both
doctrines, though without their flaws, are essentially valuable to the practicability of the Law of
Contract. The doctrine of consideration which has, through a plethora of case law, been
diminished to the extent of subsuming intention to create legal relations in its place, still
however, maintains its significance in the layman’s understanding of what a contract should be.

ANALYSIS

The giving of consideration signifies reciprocity, as both parties give something in return for
something else. Chen-Wishart argues that it is this reciprocity that later justifies contractual
remedies according to the expectation measured if the contract is unperformed, since the party
has given something to be afforded the benefit of these remedies (Contract Formation and

17
Parties, ch. 5). Meaning, where a party fails to perform his side of a contract as agreed, the other
party can then be entitled to remedies. This is only so because the said party had given something
in return for the benefit which the other party has failed to provide. Atiyah agrees with this
justificatory role of consideration, but he interprets the concept of consideration more broadly as
a reason for enforcing the promise (Essays on Contract, Essay 8). He also includes in those
reasons vitiating factors, which he sees as part of the general rule of consideration and not
merely exceptions to it. Such a broad interpretation of the concept of consideration is undesirable
as it complicates the fact that the questions; whether there was consideration and whether there is
a reason for not enforcing the promise despite the existence of consideration are two different
questions (Treitel (1976) 50 A.L.J. 439). Consideration is therefore to be interpreted in a
narrower perspective, but nonetheless, as serving a justificatory role. In essence, the existence of
consideration is so significant to the Law of Contract that to eliminate it from the field would be
detrimental to normal practice.

However, while the position as established by Chen-Wishart directs that consideration would
normally be something of value to justify its enforcing effect, that seems not to be the case
nowadays as the many exceptions to the rule seem to have withered that effect. In CHAPPELL
& CO. LTD v NESTLE & CO (1960) AC 97, though the bar wrappers were generally of no
economic value, it was held to be adequate and consequently amount to a valid consideration.
Subject to few exceptions: past performance (ROSCORLA V THOMAS [1842] 3 QB 234) and
the principle of part payment (starting with the PINNEL’S CASE [1602] 5 CO REP 117) not
generally constituting consideration, almost anything of little or no actual value amounts to
consideration. Hence the rule, “Consideration need not be adequate but it must be sufficient” as
seen in the case of THOMAS v THOMAS (1842) 2 KB 851. It is unclear why the handing over
of a worthless item should provide you with right of action and not the intention to be legally
bound. Consideration is not necessary for proving intention to be legally bound. Consideration is
even unnecessary for proving intention. There are many other ways to prove the parties’ serious
intention and/or intention to be legally bound. It is an irrebuttable fact that a deed may be legally
enforceable even if there is no consideration. Consider also an instance in which two people
contract for the sale of a prohibited drug, although consideration would have been given by one
party to another, but there will be no intention to create legal relations. This is so because the
enforceability of a contract is largely predicated on the intention of the parties to create legal

18
relations. It is indisputably true also that Contract Law in civil law systems functions well despite
the lack of the concept of consideration. This suggests that consideration is unnecessary for the
enforcement of some agreements. Of utmost importance therefore is the fact that enforceability
of an agreement depends on whether the parties have by their statements or conducts shown their
intention to be legally bound by the agreement. One way in which an intention to be legally
bound is signified in a contract is by inserting a clause that: “this agreement is legally binding” (a
deed, notary republic etc.) or to put the agreement in writing and sign.

Professor Coote points out that “the idea that consideration is essential to the very notion of a
contract is typical common law concept, but it is quite untrue” and “if it were true, common law
countries would be the only ones who knew what a contract was” (Coote, 1995). In fact, Chloros
has further put it that “the civil law system has been able to develop a perfectly adequate Law of
Contract without consideration” (Chloros 1968). In CHWEE KIN KEONG v
DIGILANDMALL.COM PTE LTD. (2004) 2 SLR (R) 59, Rajah JC (as he was then) of the
Singapore High Court in obiter strongly doubted the necessity of consideration in commercial
contracts and upheld the intention test. He stated as follows:

“The modern approach in contract law requires very little to find the existence of
consideration.”

Indeed, in difficult cases, the court in several common law jurisdictions has gone to
extraordinary lengths to conjure up consideration. In the case of WILLIAMS v ROFFEY
BROS & NICHOLLS (CONTRACTORS) LTD. (1990) AER 512, no modern authority was
cited suggesting that an intended commercial transaction as the one in the instant case could ever
fail for want of consideration.

The doctrine of intention to create legal relations seeks to distinguish between domestic or social
agreements from commercial or business contracts. The former does not generally impute any
intention on the parties to be bound by any promise made to each other; this is not the case for
the latter. Where contracts are purely commercial, the notion is that the parties intend to claim on
or be liable to their exchange of promises. It is important to point out that this concept of the Law
of Contract is inferred through the passing of consideration between the parties – where
consideration of an adequate nature is involved, it is only reasonable to think that there is an

19
intention to create legal relations. Cases such as BALFOUR V BALFOUR (1919) 2 KB 571 are
subject to the presumption that there is no intention to create legal relations in family
arrangements. The concept of intention to create legal relations therefore ensures that the court’s
time is not wasted upon disputes that are primarily familiar and not legal disputes, by asking
whether a reasonable person would consider that there was an intention to create legal relations
(CARLILL v CARBOLIC SMOKE BALL CO [1892] EWCA CIV 1).

Deeds apart, the rights of third parties can be enforced without having provided any
consideration. Another case where the doctrine is essentially disregarded is promissory estoppel.
If it would be unconscionable for the promisor to walk away from his promise after the promisee
detrimentally relied on it, the promise may be enforced in the absence of consideration
(COLLIER v P & MJ WRIGHT (HOLDINGS) LTD. [2007] EWCA CIV 1329).

In light of this, since consideration can constitute virtually anything without actual value, it can
be said that its justificatory effect is weakened at best and whatever function it performs can be
accomplished by intention to create legal relations. When we intend to be bound, we intend for
our promises to be enforceable (pacta sunt servanda). This would make consideration merely
reflective of the broadly interpreted concept of intention to create legal relations as was also
suggested in the Singaporean case of GAY CHOON ING V LOH SZE TI TERENCE PETER
(2009) 2 SLR (R) 332.

CONCLUSION

To sum up, although consideration can be seen as a strong evidence to indicate the presence of
the parties’ intention to be bound somehow, but not necessarily to be ‘bound legally’. It is
obviously true that the existence of consideration very often indicates the parties’ seriousness
about undertaking obligations, but unnecessary for a legal one. Therefore, even if we accept that
the existence of consideration (the test of bargain) is sufficient to prove the parties’ serious
intention, consideration is still insufficient to cover the essential function (let alone all the
functions) of the intention to create legal relations test. Given the foregoing, it is our position
therefore, that it would be advantageous to abolish consideration and leave the more satisfactory
requirement of intention to create legal relations as the test of an agreement’s enforceability.

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 QUESTION 4

On 5th May, Sponge borrowed £20,000 from Maxwell and agreed to repay the loan plus interests
of 12% on 1st August. Advise Maxwell of the legal position in the following separate situations:

a. On 5th July, Maxwell accepted £17,500 from Sponge “in full and final settlement” of the
debts. On 1st August, Maxwell decided to claim the full amount of the debts from Sponge.
Would your advice differ if payment of £17,500 was made on 1st August?

b. On 1st August, Maxwell accepted Sponge’s collection of antique Derby porcelain in lieu
of the debts. Maxwell considered that the porcelain was worth £25,000 but has now
discovered its true value to be closer to £15,000. Accordingly, Maxwell has decided to
commence proceedings for £5,000 plus interest on the debt.
Would your advice differ if Sponge knew that the porcelain was worth only £15,000 but
did not disclose that fact to Maxwell?

c. Sponge’s father wrote to Maxwell enclosing a cheque of £18,000. Maxwell cashed the
cheque but has decided to sue Sponge for the remainder of the debt.

As noted above, advise Maxwell accordingly.

ANSWERS

4 (a)

The facts in this scenario relate to the part payment of debt under the doctrine of consideration.
The issue to be resolved pertains to whether acceptance of part payment “in full and final
settlement” of the entire debt is supported by consideration. In other words, if one party has a
contractual obligation to pay the other a sum of money, can that obligation ever be discharged by
the payment of less than the amount due? Does the acceptance by Maxwell of part payment of
£17,500 from Sponge amount to full and final settlement of the debt before the due date and
discharge the contractual obligation of Sponge to pay the full amount of debt owed?

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The general principle of this position of the law was established in STILK v MYRICK (1809)
EWHC KB J58. There the court held that the payment of less than the amount due would
provide no consideration for a promise to discharge the entire debt. This simply means that the
debtor is already contractually bound to repay the entire debt and the acceptance of part payment
by the creditor does not provide consideration in respect of the entire debt. However, one of the
exceptions to this rule states that where the creditor voluntarily agrees to accept part payment of
debt before the due date, then it will be held to be sufficient consideration. It is important to note
that consideration was define in the case of CURRIE v MISA (1875) LR 1 APP CAS 554 as
“...some right, interest, profit, benefit accruing to one party or some forbearance, detriment, loss
or responsibility, given, suffered or undertaken by the other.”

It must be stated at this stage, that the acceptance of the part payment before the due date, in full
and final settlement of the debt, is consideration for the discharge of the entire debt. This
principle can be traced back to the rule in PINNEL’S CASE [1602] 5 CO REP 117 and was in
fact upheld by the House of Lords in the famous case of FOAKES v BEER (1884) 9 APP CAS
605. In the case, Pinnel brought an action against Cole for the payment of £8 10s, due on 11 th
November 1600. The defendant pleaded, that he at the instance of the plaintiff had paid £5 2d on
the 1st October, 1600 and that the plaintiff had accepted this in full satisfaction of the debt. It was
held that payment of a lesser sum on the due date cannot in any way be satisfaction for the whole
debt. On the other hand, part payment before the due date, and acceptance of this by the creditor,
may discharge the whole debt.

From the facts and decision of the case aforementioned, one can easily see the link in the facts in
PINNEL'S CASE and that of the facts given in this scenario. On the 5 th July, Maxwell had
accepted £17,500 from Sponge in full and final settlement of the entire debt. The voluntary
acceptance of the part payment by Maxwell before the due date, which is 1 st August, discharges
the whole debt. Therefore, if he decides to claim for the full amount, his claim will fail at law
because his acceptance of the part payment from Sponge before the due date provides
consideration for the entire debt. Thus, the acceptance by Maxwell of the part payment before
the due date discharges Sponge's obligation to repay the full debt.

It was opined by Sir Edward Coke in PINNEL'S CASE, “...that the payment and acceptance of
parcel before the day in satisfaction of the whole, would be a good satisfaction in regard of

22
circumstance of time, for peradventure parcel of it before the day would be more beneficial to
him than the whole at the day...”

However, where part payment of £17,500 was made by Sponge on the 1 st August, which was the
due date, then that will not discharge his contractual obligations to repay his entire debt because
there will no consideration given in this circumstance. This is because the part payment was
made on the due date, not before the due date. If an action is brought against Sponge by
Maxwell, then Sponge will be bound to repay the entire debt.

ADVICE

In these circumstances, we will advise Maxwell not to bring an action against Sponge in respect
of the entire debt, in that, part payment was made to him before the due date, which he had
voluntarily accepted. Where such action is brought, it will most likely fail as the doctrine of
promissory estoppel will estop him from going back on his word after he has waived his rights
and obligations under the original contractual agreement, by accepting part payment before the
due date. The doctrine of promissory estoppel was established in the case of CENTRAL
LONDON PROPERTY TRUST LTD V HIGH TREES HOUSE LTD (1947) KB 130 (HC).

4(b)

The fundamental issue to be resolved also relates to part payment of debt under the doctrine of
consideration. Does Maxwell's acceptance of Sponge's collection of antique Derby porcelain in
lieu of the debt discharge Sponge from his contractual obligation to repay the full debt?

The legal position is and has always been, that where a creditor or a plaintiff has agreed to accept
a lesser sum other than the amount owed, in satisfaction of the entire debt, then that discharges
the debtor or defendant from his contractual obligation to repay the debt. This principle was
established by Sir Edward Coke in rule in PINNEL'S CASE. His Lordship expressly stated in
his judgement that: “...by no possibility, a lesser sum can be a satisfaction to the plaintiff for a
greater sum: but the gift of a horse, hawk, or robe, etc. in satisfaction is good. For it shall be
intended that a horse, hawk, or robe, etc. might be more beneficial to the (creditor or) plaintiff

23
than the money, in respect of some circumstance, or otherwise the plaintiff would not have
accepted of it in satisfaction.”

From the aforementioned legal authority, one can easily conclude that an action by Maxwell will
most likely fail because he has voluntarily accepted Sponge’s collection of antique Derby
porcelain in lieu of the debts. There is a satisfaction by Maxwell. The doctrine of accord and
satisfaction also come into play. By collecting Sponge’s collection of antique Derby porcelain,
Maxwell accepted a new term in that the original term of the contract was the payment of money
and not any other item. This is where accord comes into play. Maxwell considered that antique
Derby porcelain might be more beneficial to him than the money, since he believed that the
porcelain was worth £25,000 and in fact accepted it on that very basis. This brings out
satisfaction.

That said, where Sponge knew that the porcelain was worth only £15,000 but did not disclose
that fact, it still discharges Sponge’s responsibility under the contractual agreement to repay the
full debt. This is because, it is intended that the porcelain will be more beneficial to Maxwell
than the money and the satisfaction is good. He has voluntarily accepted it and has in fact
enjoyed the satisfaction of it.

ADVICE

In proffering our advice, we will advise Maxwell not to bring a claim against Sponge. Any claim
brought against Sponge will be barred by the doctrine of promissory estoppel. He will be
estopped from going back on his earlier undertakings. This is because there is a valuable
consideration provided by Sponge when he gave the porcelain to him which he voluntarily
accepted regardless of the value of the porcelain. The satisfaction is good. The court is likely to
conclude that the porcelain might be more beneficial to Maxwell than the money.

4(c)

The principal legal issue pertains to whether Maxwell can succeed at law, in suing Sponge for
the remainder of the debt, after he has accepted part payment from a third party (Sponge’s father)
in lieu of the entire debt.

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We have no doubt in our minds that this is clearly a common law exception to the rule in
FOAKES V BEER (1884) 9 APP CAS 605. This exception was established in the celebrated
case of HIRACHAND PUNAMCHAND V TEMPLE [1911] 2 KB 330. The brief facts of the
case are that the plaintiffs were moneylenders, from whom Temple had borrowed money.
Temple's father sent them a draft for less than the full amount, in settlement of the debt. The
plaintiffs cashed the draft, but then sued for the balance. At trial the plaintiffs succeeded. Temple
appealed. It was held on appeal that where part payment was made by third party, and was
accepted by the creditor, the creditor could not then sue the debtor for the balance.

Therefore, from the legal authority cited above, we hold the view and strongly believe that an
action by Maxwell to enforce payment of the remainder, after he has accepted payment from a
third party will most likely fail.

ADVICE

We would advise Maxwell not to bring an action Sponge for payment of the remainder. This is
because any such action will be estopped by the equitable doctrine of promissory estoppel.

25