Research Korner: Legal Framework in Australia

MODULE 4: CONTRACTING PRINCIPLES (PART 2: CONSIDERATION) Introduction We have dealt with the first basic essential elements of a binding simple contract i.e. agreement (offer and acceptance) and intending to create legal relations. This module covers another essential element of any contract namely, consideration. Preview This module deals with another essential element of any contract namely, consideration. Learning objectives On completion of this module, you will be able to: 1. Understand essential elements of consideration and its requirement in contract law Required reading G&F [2005] Ch12 5 4. Consideration Additional readings Griggs & Ors, (2nd edn) Ch 3 (pp72-80) Latimer (23rd edn), ch. 5 pp 279-295 Turner, [24th edn] pp 78-90 Cases Anderson v Glass (1886) 5 WW and A’B 152 Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130 Coulls v Bagot’s Executor and Trustee Co Ltd (1967) 40 ALJR 471 Dunlop Pneumatic Tyre Co Ltd v Selfridge and Co Ltd [1915] AC 847 Foakes v Beer (1884) 9 App Cas 605 Glasbrook Bros v Glamorgan County Council [1925] AC 270 Hartley v Ponsonby (1857) 7 E and B 872 Hughes v Metropolitan Railway Co [1877] 2 AC 439 Lampleigh v Braithwaite (1615) Hob 105; 80 ER 255 Pao On v Lau Yiu Long [1980] AC (PC) 614 5 G & F [2003] Ch 11   58 GSN412: Business Law 1 Pinnel’s case (1602) 77 ER 237 Rann v Hughes (1778) 101 ER 1014 Re Casey’s Patents, Stewart v Casey [1892] 1 Ch 104 Roscorla v Thomas (1842) 3 QB 234 Shadwell v Shadwell (1860) 9 CBNS 159 Stilk v Myrick (1809) 2 Camp 317 Thomas v Thomas (1842) 2 QB 851 Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 80 ALR 574 Waltons Stores (Interstate) Ltd v Maher (1988) 76 ALR 513; 62 ALJR 110 White v Bluett (1853) 23 LJ Ex 36   Module 4: Contracting Principles (Part 2) 59 4.1 How is consideration defined? 4.1 Introduction An act or forbearance to act (or the promise of an act or the promise of a forbearance to act) given by one party is a good consideration in exchange for the act or forbearance to act (or the promise of an act or the promise of a forbearance to act) of the other party. Any one of these four elements is a good consideration and each party to the contract must provide one of these four elements to the other party. (For example, a forbearance to act may be given in exchange for the promise of an act). Unless there is mutual consideration there is no simple contract. 4.2 Rules relating to consideration 4.2.1. Consideration is necessary to the validity of every simple contract In English/Australian law, in order for an agreement to be binding, it must be supported either by consideration or a deed. Merely because an agreement is reduced to writing does not make it binding. See Rann v Hughes (1778) 101 ER 1014. 4.2.2. Consideration may be ‘executed’ or ‘executory’; it must not be ‘past’ The classification of consideration as executed or executory reflects the two different ways in which the plaintiff may buy the defendant’s promise. (a) Executed When the plaintiff has performed an act in exchange for the defendant’s promise (for example, reward situation). (b) Executory Performance of the consideration is to take place at a future time (for example, an agreement for the sale of goods whereby in exchange for a promise to transfer title in the goods at some future time, the other party promises to pay a certain sum of money in the future). At the time when the agreement is made, nothing has yet been done to fulfil the mutual promises of which the bargain is composed. Note that you have consideration right from the time of the making of the promises. You do not have to wait until the promises are performed to say you have valid consideration. All that is executory is the performance of the consideration. It is yet to be performed.   60 GSN412: Business Law 1 (c) Past Consideration is said to be past when the performance of the act relied on as consideration occurs prior to a subsequent promise and independently of it. For example, A voluntarily, with no request from B and no promise of payment by B, cares for B while B is sick for six months. When B is well after the six months, B promises to pay a sum of money for the past services. B’s promise is unenforceable by A (unless made in the form of a deed) since A’s consideration is past and was never given in response to any promise by B. (d) Past consideration is no consideration at all. See Roscorla v Thomas (1842) 3 QB 234 and Anderson v Glass (1886) 5 WW and A’B 152. 4.2.3. Request for services where there would be a reasonable expectation of payment for those services This is an apparent exception to the general rule that past consideration is no consideration at all See Lampleigh v Braithwaite (1615) Hob 105; 80 ER 255; Re Casey’s Patents, Stewart v Casey [1892] 1 Ch 104; Pao On v Lau Yiu Long [1980] AC (PC) 614. From the above cases, the following principles emerge: If the plaintiff’s services are rendered at the defendant’s request and both parties assumed throughout their negotiations that the services were ultimately to be paid for, then the defendant will be liable for the price. 4.2.4. Consideration must move from the person to whom the promise is made, that is the promisee The promisee is the party to the agreement who is seeking to have a promise made to them carried out. (a) Related legal principles (A) Where the promise is made to persons jointly, it can be enforced by any or all of them provided that any of them has provided consideration. Coulls v Bagot’s Executor and Trustee Co. Ltd (1967) 40 ALJR 471. (B) Only a person who is a party to a contract can sue on it. Dunlop Pneumatic Tyre Co Ltd v Selfridge and Co Ltd [1915] AC 847 [that is, person must be privy to the contract]. (C) Only a person who has given consideration may enforce a contract not under seal. Dunlop v Selfridge An example of (a) above is as follows: X and Y are in partnership as house painters. Q contacts the partnership and promises to pay the partnership (X and Y jointly) the sum of $15,000 if they paint his house. X (only) paints Q’s house. Q defaults in paying the $15,000 or any part thereof to X or Y. Y can enforce Q’s promise since any consideration given by either of the joint promisees (viz. X or Y) is   Module 4: Contracting Principles (Part 2) 61 given on behalf of both X and Y. Therefore Y has provided a consideration to Q and can sue Q. An example of (b) above is as follows: X is a house painter. Q contacts X and promises to pay Y the sum of $15,000 if X paints Q’s house. X paints Q’s house but Q defaults in paying any monies to Y. Y cannot sue on Q’s promise since unlike (1) above Q’s promise was not made to X and Y jointly but only to X. Y is not a party to the contract between X and Q. Y has not provided any consideration to Q and therefore cannot enforce Q’s promise. Y could only enforce Q’s promise if Q made the promise by deed, or if s 55 of the Property Law Act (Qld) applied (as discussed below). (D) A principal not named in the contract may sue upon it if the promisee really contracted as his/her agent, but, in order to entitle the principal so to sue, the principal must have given consideration either personally or through the promisee, acting as the principal’s agent in giving it: Dunlop Pneumatic Tyre Co Ltd v Selfridge and Co Ltd [1915] AC 847. (b) Third party benefits Section 55 of the Property Law Act 1974 (Qld) In summary, the section provides that where a party to a contract promises to confer a benefit on a third party: (a) If the third party accepts the benefit of the contract, he/she may enforce it in his/her own name and right. (b) In order to accept the benefit the third party is required to communicate acceptance to the promisor by words or conduct in the manner if any, and within the time stipulated by the promisor or in the absence of such stipulation within a reasonable time. (c) If the third party accepts the benefit of a contract, obligations relating to that benefit may be imposed on him/her. Section 55 applies to all contracts, not just contracts concerning real property. Note also: in Trident General Insurance Co. Ltd v McNiece Bros. Pty. Ltd (1988) 80 ALR 574, a plaintiff was enabled to sue on a contract although not a party to it and not having provided any consideration. A majority of the High Court held that the doctrine of privity of contract does not apply to contracts of insurance. This also reflects the current statutory position — s 48, Insurance Contracts Act 1984 (Cth) effectively abrogates the common law doctrine of privity of contract in its application to insurance contracts to which the act applies. 4.2.5 Consideration need not be adequate to the promise The courts will not seek to measure the comparative value of the promises of both parties to a contract. See Thomas v Thomas (1842) 2 QB 851. Example: Forbearances to sue / Compromise of a legal dispute The agreement to settle a legal dispute whether the original dispute lies in contract, tort or otherwise can amount to good consideration i.e. settlement of a legal dispute is sufficient consideration regardless of whether or not, if the case were litigated, you would have lost it.   62 GSN412: Business Law 1 Qualifications to this rule: 1. The claim must be reasonable and not ‘vexatious or frivolous’. 2. Person bringing claim must have had an honest belief in the chance of its success. 3. He/she must not have concealed any facts from the other party that might affect the validity of the claim. 4.2.6 Consideration must not be of too vague or indefinite a nature White v Bluett (1853) 23 LJ Ex 36. 4.2.7 Consideration must be of some sufficient value in the eyes of the law (i) Moral obligation A moral obligation alone is not good consideration. (ii) Discharge of existing legal obligations. Circumstances in which the performance of existing legal obligations will or will not amount to good consideration to support a subsequent promise made by the person to whom the obligation is owed or by some third party. (iii) Performance of a public duty The discharge of a public duty will not amount to good consideration. But, something more than public duty is good consideration: Glasbrook Brothers v Glamorgan County Council (1925) AC 270. (iv) Performance of an existing contractual duty owed to the promisor The discharge of an existing contractual duty owed to the promisor is not sufficient consideration: Stilk v Myrick (1809) 2 Camp 317. But, something more is good consideration: Hartley v Ponsonby (1857) 7 E and B 872. For example P, under an existing contract with X, is to deliver 20 tonnes of coal to X by 15 August. X is concerned that P will breach the existing contractual obligation to deliver by 15 August and therefore promises to pay P an extra $10,000 over and above the existing contractual price for the coal, to ensure delivery by 15 August. P cannot enforce the promise of the extra $10,000 since that promise is not supported by any consideration moving from P. P must supply some fresh consideration to X, over and above the existing contractual obligation to X, to enforce X’s promise of the $10,000.   Module 4: Contracting Principles (Part 2) 63 (v) Either the performance or the promise of performance of an existing contractual obligation is sufficient consideration to support a promise by a stranger to the original contract. In the previous example under (B) if a stranger (not a party) to the original contract (For example, Z) had offered P an extra $10,000 if P performed (did not breach) the existing contractual obligation to X, namely to deliver the coal by 15th August, then P could enforce Z’s promise of the $10,000 providing P did perform the obligation and delivered by 15th August to X: Shadwell v Shadwell (1860) 9 CBNS 159. The Privy Council has approved this principle in Pao On v Lau Yiu Long [1980] AC (PC) 614. (vi) Payment of a lesser sum of money in full satisfaction of a debt for a greater amount — Compromise of a debt The general rule is that payment of a lesser sum of money in full satisfaction of a debt is not good consideration. In other words, the promise of the creditor to forego the balance of the debt is not supported by any fresh consideration moving from the debtor since all the debtor is giving is something less than the existing contractual obligation. Pinnel’s case (1602) 77 ER 237 and Foakes v Beer (1884) 9 App Cas 605 (HL). (vii) Exceptions to the general rule in (iv) (i) Person who pays the lesser sum does something more than just pay the lesser sum — for example, Pay a day earlier than the due date Pay in a different place ) Money has time and ) space value ) Give something in addition For example, you owe me $100 — I agree to take $50 and a pencil in full satisfaction — good consideration Give something else besides money (payment in kind) For example, you owe me $100 — I agree to take a pencil in full satisfaction — good consideration See Pinnel’s case. For the courts to find fresh consideration in these circumstances, there must be a change from the original contractual obligation to the advantage of the creditor, not simply a change suitable to the debtor, such as payment by instalments. It doesn’t matter who makes the request for the change — that is, the creditor or the debtor, as long as the change is to the advantage of the creditor.   64 GSN412: Business Law 1 (ii) If the agreement to accept the lesser sum is recorded as a deed. (iii) Composition with creditors. That is, part payment of a number of creditors — each creditor undertakes to accept a lesser sum in satisfaction of a greater amount. A party to such an arrangement cannot claim his/her original debt because this would constitute a fraud on the other creditors. This common law rule has been given statutory effect by Part X of the Bankruptcy Act 1966 (Cth). (iv) Part payment by a third party If a creditor agrees to accept a lesser sum (in full satisfaction of a debt) from a third party to the contract, then the payment of the lesser sum constitutes good consideration for the creditor’s promise to forgive the rest of the debt. Proceedings taken to recover the remainder of the debt would constitute a fraud on the third party. (v) Operation of Doctrine of Equitable Estoppel This equitable doctrine prevents a person from departing from an assumption induced by the person’s conduct, representations or promises, where to do so would be unconscionable and would cause detriment to the person who acted upon the assumption. The doctrine enables the court to do what is required to avoid the detriment to the party who has relied on an assumption induced by the other party, but no more. In 1988, the High Court examined the doctrine thoroughly in: Waltons Stores (Interstate) Ltd v Maher (1988) 76 ALR 513; 62 ALJR 110. The pre-existing law was expanded in the following respects: (1) It had previously been thought that there must be an existing contract between the parties or at least there had to be an existing legal relationship of some type. In Waltons Stores v Maher, the doctrine was applied where there was no preexisting legal relationship, only an assumption that a contract would exist. (2) The doctrine of equitable estoppel had never served as a cause of action — it was only a defence (that is, could only be relied upon by a defendant) — it could only be used as a shield and not a sword. However, it is now possible for a plaintiff to rely on the doctrine in certain circumstances. In this unit, we are concentrating on how a defendant may seek to rely on the Doctrine of Equitable Estoppel. Example One person (B), by words or conduct, may promise or represent to another person (A) that they do not intend to exercise the strict legal rights that they have against that other person (A), for example, rights which B may have under a contract with A. If A acts or relies on that promise or representation to their detriment, then B will be estopped from reverting to their original position as if they had never made the promise or representation.   Module 4: Contracting Principles (Part 2) 65 That is, B will be estopped (or prevented) from insisting on their strict legal rights. It is at the point in time when the person (B) is seeking to revert to their original position that the courts will look at the circumstances and see whether the other person (A) has acted to their detriment. The courts would ask: If the person (B) is allowed to withdraw their promise or representation, will the other person (A) be in a worse position than they would have been in if the promise or representation had never been made? That is, is that other person (A) in a position of material disadvantage as a result of relying on B’s promise or representation? If A is in a worse position, then there is reason for the Doctrine of Equitable Estoppel to be applied. For example, a landlord represents or promises a tenant that for the next 12 months of the tenancy, the tenant’s rent will be reduced. At the expiration of the 12 months the landlord sues for the arrears of rent. The tenant may be able to argue equitable estoppel and estop the landlord from recovering the arrears. A detriment may be found in the fact alone that the tenant would now have to meet the arrears in a lump sum rather than as a periodic payment if the landlord had never made the representation. Note: Estoppel is not used only as an exception to the General Rule stated in above but has many varied applications. The representation can be made by conduct. See Hughes v Metropolitan Railway Co. [1877] 2 AC 439. B may be able to revert to the original position by giving reasonable notice to the other party (A) of their intention to do so, thus giving A the opportunity to get back to the position they would have been in if the promise or representation had never been made. Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130 (High Trees House case). 4.3 The Importance of Deeds A deed is a contract deriving its validity from the form in which it is expressed. A deed may also be referred to as a formal contract, a contract under seal or a specialty. A deed is something the law recognises as a substitute for consideration in making a promise binding. That is, a promise (covenant) made in a deed is enforceable in a court by the promisee even though the promisee has not provided any consideration to the promisor. For a document to constitute a deed it must satisfy various requirements as required by Part 6 of the Property Law Act 1974 (Qld): 1. The document must be in writing. 2. A deed must be signed by the person making it, sealed and delivered. Sealing and delivery are not literally required and a statement of intention at the foot of the deed, that it is sealed and delivered is sufficient. 3. The signature of the person whose deed it is must be witnessed in accordance with the requirements of Part 6 of the Act.   66 GSN412: Business Law 1 4. There does not need to be any agreement. • A deed to which there is only one party is known as a deed poll. • Where there is more than one party to a deed, it is called an indenture. • Promises made in the form of a deed are called covenants. Issues for managers Managers need to consider the following when entering into a contract (Adapted from Griggs et al., pp. 25–27): (a) Ensure important contracts are committed to writing and that the contract constitutes the whole of the agreement. (b) Name the contract clearly. (c) Use Plain English. (d) Identify scope and timeframes. (e) Prepare the contract on the basis of forging a long term and not short term relationship. (f) Be careful when trying to exclude liability that may be permitted under normal contracting principles but may fall foul of the Trade Practices Act or other statutory provisions (see Module 6). (g) Apply risk management principles to every contract— identify where risk may arise in forming and carrying out the contract and manage those risks. (h) Clarify the jurisdiction which would regulate any dispute concerning the contract and the method of determining any disputes e.g. by arbitration, alternate dispute resolution. (i) Consider whether the promise should be in the form of a deed or agreement but always seek tax and stamp duty advice before determining a course of action.

CONTRACTING PRINCIPLES : Consideration

MODULE 4: CONTRACTING PRINCIPLES (PART 2: CONSIDERATION) Introduction We have dealt with the first basic essential elements of a b...