CONTRACT LAW

LARGE GROUP 4
Student Guide

Consideration in the context of contractual variations

Context

Where contracting parties have an on-going relationship, a change of circumstances

may mean that one, or other, of them seeks to vary the contract. For example, a
contractor who has underestimated his costs may seek to be paid more for what he
has agreed to do, or a debtor who suddenly finds himself in financial difficulties may
ask his lender to temporarily accept reduced repayments on the loan. These are
referred to as upward and downward variations respectively.

For variations of contracts to be binding there must be agreement (offer and

acceptance), consideration and an intention to create legal relations (just the same
as on formation of contracts). Where a party seeks to enforce a contractual variation,
the legal issue will often centre round consideration. What, if anything, did that party
promise, or give, in return for the other party’s agreement to either pay extra money
or to accept less money?

In the absence of consideration a variation will not be enforceable at common law,

although in the case of downward variations(i.e. promises to accept less money) a
debtor may have an equitable defence to enforcement if he can show that in all the
circumstances it would be unfair for the creditor to renege on his promise. This
equitable defence is known as promissory estoppel.

So it is important for lawyers to be able to identify some consideration in the context

of contractual variations; and in the case of downward variations to advise on the
availability of promissory estoppel as a potential defence to enforcement in the
absence of consideration.

Outcomes

By the end of this large group you should be able to:

1. Identify and explain consideration in the context of upward and downward

variations of contracts.

2. Compare and contrast the legal principles governing upward and downward
variations.

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1. Contractual variations

1.1 Introduction

2. ‘Upward’ variations

2.1 Is performance of an existing contractual duty sufficient consideration for

a promise of extra payment? - the “traditional” rules

Activity 1: Case analyses on “existing contractual duty”

Consider the following two cases. Do you think judgment should have been in
favour of the claimant? Yes or no? Why?

Stilk v Myrick (1809)

Hartley v Ponsonby
The claimant, (1857)agreed to sail a ship from London, to Cronstadt, to
a seaman,
Gottenburgh and then back to London. The complement of crew was eleven.
The wages
claimant,
of the
a seaman,
seamenagreed
were totobesail
£5 aper
ship
month.
from Liverpool, to Port Philip in
Australia, to Bombay in the East Indies and back to the United Kingdom. The
The ship sailed
complement of crew
from London
was thirty
to Cronstadt.
six. The wages
Whilstofatthe
Cronstadt,
seamentwo
were
of to
thebe
crew
£3
deserted.
per month.

The ship
master,
sailed
to from
induce
Liverpool
the remaining
to Port Philip.
nine seamen
Whilst attoPort
perform
Philip,the
seventeen
rest of the
of
voyage,
the crew promised
deserted. to split the wages of the two deserters between them, in
addition to their normal wages, provided they continued the voyage. The
The master,
voyage to induce
was then the remaining nineteen seamen (an unreasonably small
completed.
number to sail the ship safely) to sail on to Bombay, promised to pay them a
sum of money refused
The defendant in addition to their
to pay wages to
the claimant thecontinue
additionalto sums
Bombay. The voyage
promised.
was then completed.

The defendant refused to pay the claimant the additional sums promised.

2.2 Public policy - Harris v Watson (1791)

‘If this action was to be supported, it would materially affect the navigation of this
kingdom…. for if sailors were in all events to have their wages, and in times of
danger entitled to insist on an extra charge on such a promise as this, they would in
many cases suffer a ship to sink, unless the captain would pay an extravagant
demand they might think proper to make.’
-per Lord Ellenborough

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 2.3 ‘Practical benefit’ consideration

Williams v Roffey Brothers(1990)

A contract to refurbish a block of flats. The defendants were the main contractors,
and they subcontracted the carpentry work to the claimants for £20,000. Part way
through the work the claimants realised they had underestimated the cost and told
the defendants of their financial difficulty. The defendants (mindful of the fact that if
the work was not completed on time the defendants would be liable to pay
compensation under the main contract) promised to pay the claimants extra money
(i.e. £575 per flat) to complete on time. On this basis the claimants continued to work
on the flats but in the event were not paid the extra money promised by the
defendants and sued.
The main issue before the Court of Appeal was what, if any, consideration the
claimants had given in return for the promise of additional money. Whilst it was
conceded by the defendants that they had secured practical benefits (i.e. avoiding
liability under the compensation clause in the main contract and the cost and
expense of finding other carpenters to finish the job), the defendants argued that
there was no legal benefit.

Decision

 Performance of an existing contractual duty will be good consideration for a

promise of extra payment if it confers a real practical benefit on the promisor;
but
 if the promise to pay extra was only made under economic duress the variation
may be avoided (See Unit 9).

3. ‘Downward’ variations

3.1 Part payment of an undisputed debt

3.2 Common law position

3.2.1 The Rule in Pinnel’s Case

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 In the case of an undisputed debt, at common law, an agreement between
creditor and debtor that the creditor will simply accept part payment in full and
final settlement of the full amount is not binding on the creditor.

Pinnel's Case (1602)

Foakes v Beer (1884)

“…in consideration of the said John Weston Foakes paying to the said Julia
Beer on the signing of this agreement the sum of £500, the receipt whereof she
doth hereby acknowledge in part satisfaction of the said judgment debt of £2090
19s., ......... [and paying the remainder of the sums due in instalments] ........then
she the said Julia Beer hereby undertakes and agrees that she, her executors,
administrators or assigns, will not take any proceedings whatever on the said
judgment…”

3.2.2 Exception to the Rule in Pinnel’s Case

Activity 2: Judgment analysis: the Rule in Pinnel’s Case, and exceptions to the
Rule

Watch the Pinnel’s Case media clip. Identify the circumstance where the creditor is
not bound, and two circumstances where the creditor is bound, by their agreement to
accept less than the full amount due.

Activity 3: Application of the Rule in Pinnel’s Case, and exception to the Rule

Jane Rowley owes the bank £5,000.

1. Can Jane be sued for the balance at common law if the bank agrees to accept
£3,000 and let her off the remaining £2,000?

2. “A horse or a hawk or a robe in satisfaction is good” – can Jane be sued for the
£5,000 if the bank accepts her horse in full and final settlement of its claim?
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3. Can Jane be sued for the £5,000 if she rushes into the bank, stuffs a hawk
under the counter, and rushes back out?

4. What if Jane doesn’t have a horse, hawk or robe – can Jane be sued if the bank
accepts her shares in G4S PLC in full and final settlement?

5. Are the “exceptions” to the Rule in Pinnel’s Case exceptions to the requirement
for consideration?

6. Is it the case that, at common law, if the Bank accepts G4S shares worth
£2,000 in full and final settlement, she cannot be sued for the balance, but if the
Bank accepts £2,000 in full and final settlement, she can be?

3.3 Part payment of a debt – the position in equity

The “High Trees” case and the doctrine of promissory estoppel

Combe v Combe (1951)

“Where one party has, by his words or conduct, made the other a promise or
assurance which was intended to affect legal relations between them …... then once
the other party has taken him at his word and acted on it, the one who gave the
promise or assurance cannot afterwards be allowed to revert to previous legal
relations ...... even though it is not supported in point of law by any consideration...” -
per Denning LJ.

Promissory estoppel. Conditions:

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 

Central London Property Trust v High Trees House (1947)

 Lease entered into in 1937 – annual ground rent of £2,500 (payable quarterly)

 January 1940 – agreement by landlord to accept £1,250 per annum (due to very
low level of letting, arising from wartime conditions)

1) Defendants pay reduced rent throughout the war.

2) By “early 1945” all the flats were fully let.
3) Landlord wanted full rent for the future.

Decision

Activity 4: Analysis of the “High Trees” principle: the doctrine of promissory

estoppel

Watch the Lord Denning on High Trees media clip, on the analysis of the High Trees
case, following the instructions of your tutor.

4. Comparison of upward and downward variations

Rule in Stilk v Myrick Rule in Foakes v Beer

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 A contract between A and B and
A agrees to pay B more money if
B will complete his obligations
Here A is agreeing to pay
more money to B.
The rule in Stilk v Myrick provides
that performance of an existing
contractual duty owed to other
party is not sufficient
consideration for a promise to
pay more.
APPLICATION
First state the rule.
Is B simply performing his
existing obligations or whether he
has done something extra in
return for A’s promise to pay
more?
If he has done something extra
then he can rely on Hartley v
Ponsonby and the extra will
amount to sufficient
consideration.
If not, discuss Williams v Roffey.
Did the promisee confer a
‘practical benefit’ on the
promisor?
Activity 5- Promissory estoppel
To help you remember the issues that need to be considered in relation to
promissory estoppel we suggest you use the mnemonic PRIDES. What do you think
each letter stands for? Put the appropriate word or words next to each letter.
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A contract between A and B and
A has fully performed his
obligations and agrees to accept
a reduced payment from B.
Here A is agreeing to accept
less money from B.
The rule in Foakes v Beer
provides that partial payment of a
debt is not sufficient consideration
for a promise by a creditor to
forgo the balance.
APPLICATION
First state the rule.
Do any of the common law
exceptions apply? For example,
did the debtor pay early? If so, he
can rely on the exception in
Pinnel’s case and he will have
provided sufficient consideration.
If B cannot rely on a common law
exception consider promissory
estoppel in detail.
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S

5. Workshop 4/ Unit 4 Engage

 Overview of preparation.

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