AF2504 Introduction to Business Law

Lecture 3
Consideration, Intention and Capacity
Necessity of consideration
• Consideration – exchange of promises
• An agreement without consideration is not
enforceable at common law
▫ The courts do not want to enforce a free gift -- No free
lunch!
• Consideration must be valuable in the eyes of law
(see. Currie v. Misa). E.g.
▫ Rights, benefit or sth. of economic value, or
▫ Detriment (giving up some rights), loss, etc.
Rules on consideration
• Consideration cannot be in the past;
• Consideration must be sufficient but need not be
adequate;
• Consideration must be real or genuine;
• Consideration must move from the promisee;
• Consideration must be legal;
• Consideration is not required for a
• contract under seal (i.e. a Deed).
Consideration cannot be in the past
• Consideration (promise) can be either:
▫ Executed: perform upon the contract formation
▫ Executory: promise to perform in the future

▫ E.g. Mr. A orders a book from an online bookshop and

pays immediately by credit card. The bookshop will
deliver the book to Mr. A in 3 days.
• Past consideration is no consideration
▫ To use sth. that has already been done as
consideration is not valuable. (i.e. no actual benefit to
the promisee).
Re McArdle [1951]
• A and B were co-owners of a house.
• A had previously made improvements to the house.
• B promised to pay for the amount that A had spent
on the improvements.
• B later refused to pay.
• Could A enforce B’s promise?
Exception
• the past act was done at the request of the
promisor; and
• it was understood between the promisor and the
promisee that payment would be made later; and
• the payment or benefit was legally enforceable when
it was promised in advance.
• See: - Lampleigh v. Braithwait (1615)
• - Pao On v. Lau Yiu Long [1979]
Lampleigh v. Braithwait (1615)
• B killed someone and then asked L to get him a
pardon from the King.
• L got the pardon and gave it to B who then promised
to pay L £100 for his trouble.
• Later, B refused to pay.
• It was held that although L’s consideration was past
(he had got the pardon), it was done at the request
of B.
• It could be implied at the time of the request that L
would be paid.
Example
• Annie takes her car to a garage for some repairs.
• Mike, the mechanic, asks her to come back in the
evening.
• After work, Annie goes to get her car. Her car has
been repaired and she is asked to pay $5,000
(assuming $5,000 is reasonable).
• Annie refuses to pay and argues the consideration by
Mike is in the past.
Consideration must be sufficient but need
not be adequate
• “Sufficiency” means whether there is valuable
consideration or not.
▫ “Stop complaining” ?
▫ Personal relationship ?
• “Adequacy” means whether the consideration
provided by one party has equal economic value to
the consideration provided by the other party.
▫ Pay $1 to buy a house ?
Cases on insufficient consideration
• Performing existing contractual obligation
• Part payment of a debt
• Performing public duty
Performing existing obligation is
insufficient consideration
• Stilk v Myrick (1809)
▫ P, a seaman on a ship headed from London to the Baltic and
back, was to be paid 5 pounds per month.
▫ Two sailors deserted the ship and the captain agreed to
split their wages among the remaining 9 sailors, equally.
▫ The captain later refused to pay.
▫ P filed an action to recover the additional wages.
▫ Held: Before the seamen sailed from London they had
undertaken to do all they could under all the emergencies
of the voyage. They had provided no fresh consideration for
the additional wages.
• Hartley v Ponsonby
▫ Seventeen of the thirty-six seamen deserted, and only six
of the remaining men were competent seamen.
▫ With so many crew members missing it was unsafe for the
remaining crew to continue the voyage, but they agreed to
work after being promised extra pay.
▫ When the ship arrived at the home port D refused to pay
the crewmen the extra money he had promised.
▫ Held: The desertion of so many crewmen (compared to the
desertion of two crewmen in Stilk v Myrick) had made the
voyage dangerous. The seamen did not originally agree to
work on a dangerous ship.
The law has been changed a bit..
• Williams v Roffey Bros [1991]
▫ Roffey Bros was a contractor to refurbish some flats.
▫ They subcontracted the carpentry work to Williams for
£20,000.
▫ Williams realized later he had priced too low. He refused to
continue with the work.
▫ Roffey Bros would be subject to a penalty for late
completion under the main contract.
▫ They promised extra payment to Williams for him to finish
the work on time.
▫ Held: A factual benefit (helping Roffey Bros to avoid
penalty) was fresh consideration.
Part payment of a debt is insufficient
consideration
• Agreement to accept a lesser sum than the originally
agreed amount is not binding unless fresh consideration
is provided. (Pinnel’s case)
• Foakes v. Beer (1884)
▫ Foakes owned Beer a judgment debt.
▫ Beer agreed not to sue Foakes if he repaid by installments.
[Is this promise legally enforceable?]
▫ Beer later realized that he did not charge Foakes interest,
which should be payable on a judgment debt.
▫ Held: Beer’s agreement not to sue Foakes was not binding,
as there was no consideration moving from Foakes to Beer.
Performing public duty / personal legal
duty is insufficient consideration
• Collins v. Godefroy (1831)
▫ P had received a court order to give evidence, but he
agreed with the D to get some money for giving the
evidence in court.
▫ Held: No new consideration
• Harris v. Sheffield United Football Club (1987)
▫ The football club challenged its contractual liability to pay
for the policing of its football ground during home matches.
▫ Held: The number of officers provided was in excess of
those who would have been provided had the police simply
been fulfilling their public obligation to prevent disorder.
Consideration must be real or genuine
• The promise must be valuable
• White v. Bluett (1853)
▫ A father agreed to release his son from the obligation
of paying a promissory note, if the son would cease
from complaining.
▫ Held: The son had no right to complain, hence the
promise was not valuable.
• Consideration must move from the promisee
▫ A 3rd party who does not provide consideration in the
contract cannot enforce the contract.
▫ E.g. A promises to pay B if he cleans C’s house. If B
does not clean C’s house, C cannot sue B.
• Consideration must be legal
Intention
• Contract will only be binding if both parties intend to be bound legally
(assuming other elements are present).
• Social and domestic agreements
▫ An agreement to have lunch between friends
▫ A father agrees to buy a birthday gift for his son
▫ Parents commitment to raise a child
▫  Presumption: presumed not to have any legal effect (Balfour v Balfour
[1919])
• Commercial agreements
▫ Sale and purchase of goods and property
▫ Employment and tenancy
•  Presumption: presumed to have legal effect (Edwards v Skyways Ltd
[1964])
• Presumptions are rebuttable, e.g. “subject to contract” (Rose & Frank Co v
Jr Crompton & Brothers Ltd [1925]; Merritt v Merritt [1970]).
Capacity
• Certain groups of people may not be legally bound
by their promise:
▫ Minors (under 18);
▫ People with mental disabilities.
Minors
• Minors are bound by the following contracts:
▫ Contract for necessaries;
 “Necessaries” means goods suitable for the minor’s
condition in life;
 A minor is required to pay a reasonable price where
necessaries are sold and delivered to him/her.
▫ Contracts of service, apprenticeship, and other
beneficial contracts.
 E.g. education, training etc.
Persons with Mental Disabilities
• Mental disabilities may arise from disease, drugs or
alcohol or otherwise, so long as the person can
prove that at the time the contract is made:
▫ he was incapable of understanding what he was doing;
and
▫ the other party knew of his condition.
• E.g. Jack and Jill are drinking in a bar. Jack becomes
drunk. Knowing this, Jill asks Jack to sign a business
contract. Is this contract binding on Jack?