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Intention, Capacity, Consideration and Privity
Terms in this set (18)
What is consideration?
o Does NOT mean that the parties have to consider each other's feelings!
o Essential element to show agreement should be legally binding;
o Began to be defined in the 19th century in terms of benefit and detriment;
o E.g. Thomas v Thomas (1842): 'some detriment to the plaintiff or some benefit to the defendant';
Exchange of consideration
- There must be an exchange of consideration. One party to a contract must do something, omit to to do something, in exchange for another party doing, omitting or promising something.
What is executory and executed consideration?
Executed consideration: One party promises to do something in return for the act of another;
Executory consideration: Both parties promise to do something in the future.
What does 'consideration must not be past mean'?
- If a promise is made after an act had been done, it is called past consideration and not usually accepted as consideration in the eyes of the law
Re McArdle (1951)
A son and his wife lived in his mother's house which would be inherited by her children when she died. The son's wife carried out substantial repairs and improvements to the house and the defendants THEN offered to reimburse her.
Held: The work was completed before the agreement to reimburse took place. Therefore, the work was past consideration and the agreement was not legally enforceable.
Exception to the rule 'consideration must not be passed'?
If the act was done in response to a request;
Lampleigh v. Braithwaite (1615)
B asked L to secure him a pardon for murder, L secured the pardon and B was so grateful that he promised him £100, but then refused to pay.
HELD: It might appear that L's consideration was past since he had secured the pardon before the promise to pay was made. In fact, the court upheld L's claim. It reasoned that L had obtained the pardon at B's own request, and this request carried with it the unspoken understanding that the service would be paid for. L obtained the pardon after, and in return for, this implied promise to pay, and so obtaining the pardon was good consideration for the promise to pay. The later promise, specifying that £100 would be paid, was said to be merely confirmation of the original unspoken one.
What is the rule involving 'sufficient' and 'adequate'?
2. Consideration must be sufficient but need not be adequate
Sufficient = must be real, tangible and have some recognisable value;
Adequate = must be of roughly equal value to the other parties' consideration;
Providing something is given in return for a promise, it does not matter that it is not much, or not what the promise would usually be considered worth.
Chappell & Co. Ltd. V. Nestlé Co. Ltd. (1959)
Nestlé had offered to 'give away' a record for 3 chocolate wrappers and 7.5p, usually cost about the equivalent of 35p; the copyright holders weren't happy as they received fewer royalties. Nestle argued that because wrappers were thrown away when received they could not amount to good consideration.
Chappel, a record seller, applied for an injunction to prevent the sale at such a price, as Nestle was not paying the statute-required 6.25% of the purchase price to the copyright holders.
Decision Wrappers could be good consideration.
Reasoning Consideration need not be adequate but must be sufficient. Nestle encouraged sales of chocolates, therefore, the consideration was valuable to them.
Another example of 'consideration must be sufficient but need not be adequate'?
Thomas v Thomas (1842)
The claimant was a widow whose husband had stated that if he died before his wife, she should be allowed to live in his house for the rest of her life, after which it was to pass to his sons.
When the man died, the defendant (who was his executor), agreed that the widow could continue to occupy the house in return for a promise that she would pay £1 a year and keep the house in good repair.
Despite this, sometime later, the defendant tried to evict the widow, so she sued then for breach of contract.
The defendants claimed that their promise was not binding due to lack of consideration.
However, the court held that the widow's promise to pay £1 and keep up the repairs was sufficient consideration to make the executor's promise binding.
Is performing an existing duty good consideration?
3. Performing an existing duty cannot be good consideration
a. Performing a public duty:
Performing an existing public duty cannot be good consideration:
(Collins v. Godefroy (1831));
C was a police officer bound to give evidence in court; G promised him payment for attending court.
HELD: C not entitled to the money as he was already legally bound to appear in court, thus he was not providing any fresh consideration to the agreement with G.
b. Performing a contractual duty:
Not possible to create 2 contracts by giving the same consideration twice:
(Stilk v. Myrick (1809));
Sailor agreed to work as part of 11-man crew for £5 a month. When 2 deserted, captain promised extra wages to complete the journey.
HELD: There was no consideration for the captain's promise. The sailors had already contracted to sail to their destination and back, and that was all they had done.
Exceptions to the rule 'Performing an existing duty cannot be good consideration'?
o UNLESS the party promises to exceed their existing duty:
(Hartley v Ponsonby (1857))
Half the crew deserted a ship, and the rest were promised extra money to carry on working the ship to Bombay.
HELD: The Court held that there was consideration, because the crew had become so small that the remainder of the voyage was more dangerous than it had been when they made their contracts. In agreeing to carry on, the claimant was taking on duties beyond those in his original contract and had therefore provided consideration for the promise to pay extra.
o UNLESS the defendant would receive some extra benefit:
(Williams v. Roffey Bros. Ltd. (1990)).
RB had a contract to refurbish block of flats (contract A). In contract A there was a clause that stated that if the flats were not refurbished in time then a sum of money was payable to the owners. The defendant then subcontracted carpentry work to W (contract B), who later realised he had underestimated the cost of the work and needed more money to finish on time. RB agreed to pay £575 extra per flat as they wanted to avoid the penalty clause in their contract with block owners.
HELD: Although the claimant was not doing anything more that he originally agreed under contract B, the defendant had received a benefit from the claimant continuing with the work.
WHY? RB had obtained an extra practical benefit by avoiding the penalty clause in their contract with the block owners, the cost of the inconvenience of finding another contractor to finish the job and had also benefited from the altered working arrangements. Thus, both parties were providing fresh consideration.
What is the rule surrounding contractual duties to pay debts?
Agreements to accept lower sum is not binding unless supported by fresh consideration:
The Pinnel's Case (1602) rule:
Payment of a smaller sum will not discharge the duty to pay a higher sum.
Example: Ann (the creditor) is owed £100 by Ben (the debtor) and agrees to accept £90 in full settlement. She can later insist on the remaining £10 because there is no new consideration from the debtor for his promise to waive the £10.
Foakes v. Beer (1884)
Dr. F owed Mrs B £2090 in damages after a court judgment against him, she agreed to accept instalments, but later sued him for the £360 interest.
HELD: Beer was legally entitled to the interest of the debt because Foakes had not provided any consideration for her promise to accept less than due to her.
Exceptions to the rule ' to accept lower sum is not binding unless supported by fresh consideration'?
Exceptions to this rule under principle of accord and satisfaction
1. Agreeing to accept lesser sum paid earlier;
2. Agreeing to accept something other than money;
3. Agreeing to pay in a different way.
What is Promissory Estoppel?
- If a debtor is being sued for the remainder of the debt, where a lender had promised not to pursue him, the debtor can ask the court to use its equitable powers to prevent the lender from going back on its promise.
- The rule of promissory estoppel is preventing a promisor from going back on his word, where there has been no consideration by the promisee.
- In order for the principle of promissory estoppel to operate, the following conditions must be fulfilled: - there must have been an obvious and unambiguous promise by the creditor that he will not enforce his full legal rights; - the debtor must have relied on that promise; - it would be inequitable and unconscionable to go back on what was promised.
example of promissory estoppel
5. Promissory Estoppel:
Central London Property Trust Ltd. V. High Trees House Ltd. (1947)
In 1937, HT signed lease on block of flats in London for £2500 a year. During WWII, flats were difficult to rent, so the claimant agreed a reduced rent of £1250 a year. When the war ended, the flats were all sublet again, and the claimant wanted the rent returned to its former amount of £2500 and also requested six months back rent.
HELD: The claimant won the case, but the court held that the claimant would not have been successful if it had sought to recover the full rent for all the war years, when many of the flats were not sublet, because of the doctrine of promissory estoppel. The defendants had relied on the claimant's promise to reduce the rent and it was inequitable (unfair) to allow the claimant to break its promise.
See also: D & C Builders v Rees (1965)
What is capacity?
There are some persons or legal entities that do not have the legal power to make contracts or their powers to make contracts is limited.
Persons or legal entities who may lack legal capacity include drunks, persons with mental disorders, minors, and corporations.
Rules surrounding capacity of a company?
Bodies that have been set up by statute or Royal charter, their capacity to act is stated in the statute or charter.
Companies have a constitution, and the capacity to act may be restricted by their constitution.
A company or body acting outside its powers is said to be acting 'ultra vires' (beyond its powers).
When a company or body enters a contract that has no power to do so, the contract may be rendered void and unenforceable (cannot be enforced by either party, the contract is treated as it never existed).
In order to protect innocent parties contracting with companies, the Companies Act 2006 removes the effect of the ultra vires rule and, therefore, contracts made in good faith with a company are enforceable against the company even if they are outside the company's capacity.
What is the presumption between businesses?
Intention to create legal relations
1. For commercial and business agreements there is a presumption of an intention to create legal relations.
Esso Petroleum Ltd v Commissioners of Custom and Excise (1976)
2. For social, domestic and family arrangements there is a presumption that the parties did not intend to be legally bound by an agreement.
But rebutting the presumption that family and friend arrangements did not intend to create legal relations!
The presumption that parties do not intend to create legal relation can be rebutted by clear evidence of a contrary intention.
Simpkins v Pays (1955)
What is privity of a contract?
Privity of contract means that persons who are not a party to the agreement cannot be bound by its contractual terms or take action if its terms are broken.
In other words, persons who have not contributed to the consideration of a contract cannot sue if the contract is breached, and a contract cannot be enforced against persons to whom no consideration has been promised.
Dunlop Pneumatic Tyres Co. Ltd. V. Selfridge & Co. Ltd. (1915)
Exceptions to the rule of Privity of Contract?
Exceptions to the Rule of Privity of Contract
• Contracts made for the benefit of a group of persons
• Contracts where the benefit is held in trust for a third party
• Contractual rights assigned to a third party
• Contracts made between one party and an agent
• Collateral contracts
• Contracts (Rights of Third Parties) Act 1999
S1- third party can sue on a contract:
1. if the contract expressly provides so (s1(1)(a)), or
2. if the contract intended to confer a benefit on the third party (s1(1)(b)).
1. Right of third party to enforce contractual terms.
(1) Subject to the provisions of this Act, a person who is not a party to a contract (a "third party") may in his own right enforce a term of the contract if—
(a)the contract expressly provides that he may, or (b)subject to subsection (2), the term purports to confer a benefit on him.
In these circumstances, third parties can enforce a contract even though they have provided no consideration.
The third party must be identified by name, as a member of a class of persons or as answering a particular description. A third party needs to not have been in existence at the time the contract is made. Therefore, contracts can be made for the benefit of limited companies not yet registered (you will examine company law in the next semester).
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