MNG 4104- WEEK 3

ELEMENT: CONSIDERATION
CONSIDERATION: OVERVIEW AND DEFINITION.

 Consideration is another essential element of contract formation. In law, an agreement is not usually binding
unless it is supported by what is called consideration. Put simply, this means that each party must give something
in return for what is gained from the other party, so if you wish to enforce someone’s promise to you, you must
prove that you gave something in return for that promise.
CONSIDERATION: OVERVIEW AND DEFINITION

 In Dunlop Pneumatic Tyre Co Ltd v Selfridge Co Ltd (1915) (HL) the Court explained
consideration in terms of purchase and sale – the plaintiff must show that he or she has bought the
defendant’s promise, by doing, giving or promising something in return for it. In other words,
consideration is simply something of value and may take the form of:
 an act for a promise;
 a promise for an act;
 a promise for a promise;
 a promise to forbear (that is, not to do something)
CONSIDERATION: OVERVIEW AND DEFINITION
 Consideration may be a thing or a service – I give you my car and you give me $1,000, or you
clean my windows and I pay you $5. It may also take the form of promises – I promise to work
for you and you promise to pay me a salary. A promise not supported by consideration is called a
gratuitous promise: for example, if I simply say I will give you my car, without requiring
anything in return. This type of promise is not usually enforceable in law. Notably, consideration
is only required to form a simple contract.
 Simple contract- A simple contract may be oral or in writing (or a combination of both). Simple
contracts are made between two or more parties and require consideration.

 Formal contract -A formal contract is wholly in writing, usually in the form of a deed, and does
not require consideration. A promise (or term) of a contract made by deed is called a covenant.
TYPES OF CONSIDERATION

 Executory- Consideration is executory when one party makes a promise in return for a counter-promise
by the other party. In other words, it is a promise to do something in the future after the contract is
formed (for example, an agreement between seller and buyer for the sale of goods for further delivery
on credit). At the time when the agreement is made, nothing has yet been done to fulfil the mutual
promises of which the bargain is composed. The whole transaction remains in futuro.
 Executed -Consideration is executed once the promise has been performed in full. An example is the
offer of a reward for an act. If A offers $5 to anyone who shall return his lost dog, the return of the dog
by B is at once the acceptance of the offer and the performance of the act constituting the required
consideration. B has earned the reward by his services, and only the offeror’s promise remains
outstanding. Executed consideration usually occurs in unilateral contracts.
RULES FOR CONSIDERATION

 Consideration must be present in every simple contract.

 In Rann v Hughes (1778) (KB), the defendant (Hughes) was administrator of

an estate and made a promise to pay a debt owed by the deceased to the
plaintiff (Rann). The court held that, as there was no consideration given by
the plaintiff for the promise made by the defendant, the contract was void.
RULES FOR CONSIDERATION

 Consideration must move from the promisee.

 Apart from the promisor, the only party who can enforce the contract is the other party who has
provided the consideration for the promise. In Dunlop Pneumatic Tyre Co Ltd v Selfridge and
Co Ltd (1915) (HL), the plaintiff (Dunlop) entered into a contract to sell tyres to a dealer (Dew and
Co). The contract provided that the dealer would not sell tyres below the plaintiff’s list price and
would obtain a similar undertaking from any retailer they onsold to. The dealer subsequently sold
tyres to the defendant (Selfridge) who gave the required undertaking. The defendant later sold tyres
to a customer below the plaintiff’s list price and the plaintiff sued for breach of the undertaking. The
court found for the defendant. The plaintiff had not provided any consideration for the defendant’s
promise to the dealer. The plaintiff was not even a party to that subsequent contract.
RULES FOR CONSIDERATION
 Consideration must be sufficient, but need not be adequate

 Although consideration must provide some benefit to the promisor or detriment to the promisee,
these do not have to amount to a great deal. This principle is usually described in the rather
confusing phrase ‘consideration must be sufficient but need not be adequate’, which effectively
means that the courts will not inquire into the adequacy of consideration, so long as there is some.
Objectively, if consideration of some value exists, the court is not concerned with its adequacy.
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 to be worth. So if, for example, A promises to sell B
her 2023 BMW X3 for $100, 000 duty paid, the consideration paid by B clearly provides very little
benefit to A, and amounts to only a small loss to B, but nevertheless, the transaction will be
binding because some consideration has been provided by both sides.
RULES FOR CONSIDERATION
 Consideration must be sufficient, but need not be adequate(cont’d)
 The case of Thomas v Thomas (1842) 2 QB 851 highlights this principle in operation. The plaintiff
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 for breach of contract. The
defendant claimed that the earlier promise was not binding because of 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 owners’ promise binding.

 The case of Chappell & Co Ltd v Nestle Co Ltd [1960] AC 97 is evidence of the courts’
justification for this approach - Lord Somervell stated ‘A contracting party can stipulate for what
consideration he chooses’, implying the courts will not interfere in bad bargains.
RULES FOR CONSIDERATION
 Consideration must be definite and not illusory.

 The consideration must be so certain that a court is able to place a legal value on it, no matter how
inadequate it may actually be.
 In Placer Development Ltd v Commonwealth (1969) (HC), the plaintiff (Placer) entered into a
contract with the defendant (the Australian Government) to establish a timber company in Papua New
Guinea to produce plywood for import to Australia. A clause in the agreement stated that the defendant
would subsidise (at a rate to be determined only by the defendant) the cost of import customs duty into
Australia. The subsidy was paid for some years and then later withdrawn. The Court held that the
clause was not binding on the defendant. The Court highlighted the illusory nature of the promise
made by the defendant. Kitto J stated that ‘a promise of a governmental subsidy is meaningless in the
absence of some amount or some basis of calculation’.
RULES FOR CONSIDERATION

 Consideration must be lawful

 The consideration must not be illegal or unlawful and must not involve a breach of civil law or
public policy.

 In Parkinson v College of Ambulance Ltd and Harrison (1925) (KB), the plaintiff (Parkinson)
gave the defendant charity (College) £3,000 in return for a promise that he would receive a
knighthood. The knighthood did not eventuate and the plaintiff sued for the return of the money. The
court refused to make the order. The consideration was a promise to do something to promote public
corruption and this was illegal as it was against public policy.
RULES FOR CONSIDERATION

 Consideration must be of economic value.

 In White v Bluett (1853), a father promised not to make his son repay money he had borrowed, if
the son promised not to keep boring him with complaints. The court held that the son’s promise
was not sufficient consideration to make his father’s promise binding, because it had no economic
value.
RULES FOR CONSIDERATION

 Consideration must not be past.

 The general rule is that consideration can be present or future, but not past. In Roscorla v
Thomas (1842) (QB), the plaintiff (Roscorla) purchased a horse from the defendant (Thomas).
After the sale had been concluded, the defendant promised the plaintiff that the horse was in good
health and not vicious. The horse was vicious and the plaintiff sued for breach. The court held the
promise was not binding as it was made independently of the sale (that is, after the sale). The
defendant’s subsequent promise was not supported by a return promise from the plaintiff, and
therefore it could not be enforced.
 NOTE: THERE ARE EXCEPTIONS
RULES FOR CONSIDERATION
 Consideration can be a promise not to sue.

 If one party has a possible civil claim against the other, a promise not to enforce that claim is good
consideration for a promise given in return. If, for example, Ann crashes into Ben’s car, Ben might
agree that he will not sue Ann if Ann pays for the damage, and Ben’s promise not to sue will be
consideration for Ann’s promise to pay.

 In Alliance Bank Ltd v Broom (1864) Broom had an overdraft of £22,000 with the bank, and they
asked him to provide some security. Mr Broom promised to do so, but never did, and as a result the
bank sued him. Mr Broom argued that there was no consideration for his promise to provide security,
but the court held that the consideration was provided by the bank’s implied promise not to sue for a
while, giving Mr Broom time to provide security, even though they did sue fairly shortly afterwards.
LIMITS ON CONSIDERATION

The courts have identified particular ways and circumstances in which consideration is ruled to be
insufficient to form a binding contract. These limitations are as follows:

 Performance of an existing duty

 Past consideration
 Part-payment of a debt
LIMITS ON CONSIDERATION

 Performance of an existing duty.

There are three different types of existing obligations which will need to be examined, these all have different rules
and exceptions.

I. Performance of legal obligations which are independent of any contract

II. Performance of a duty already promised in a different contract
III. Performance of a duty owed to a third party
LIMITS ON CONSIDERATION

 Performance of existing legal obligations/ Public Duty which are independent of the contract.

This type of existing duty refers to one which is already owed prior to the creation of a contract. The most
commonly cited example of this is individuals employed to do a public duty, such as policemen or firemen.
Therefore, what happens when Party A promises Party B (a fireman), £100 to save his wife from perishing in
a fire?
 In Collins v Godefroy (1831) the plaintiff had been summoned to give evidence in a court action. The
defendant promised to give him six guineas for doing so, but later refused to pay. The plaintiff tried to
enforce the promise, but it was held that since he was legally obliged to give the evidence, doing so could
not be considered consideration for the promise.
 LIMITS ON CONSIDERATION
 Performance of existing legal obligations/ Public Duty which are independent of the contract (cont’d).
 Exception: The performance of an existing legal obligation can be valid if the contract requires an individual to go
further than their normal existing legal obligation. Take the example of the fireman, who is under a legal obligation
where reasonable to attempt to save humans from perishing in fires. If somebody offered £100 to the fireman in
order to save a pet rabbit from perishing in the fire, this would be going further than their normal existing legal
obligation, and could therefore constitute valid consideration. In Glasbrook Brothers v Glamorgan County
Council (1925) Glasbrook Brothers were the owners of a coal mine in South Wales. Their employees went on
strike and Glasbrook Brothers asked the police to place a guard at the coal mine during the strike. The police
refused to do this as they considered that regular checks by a mobile police patrol would be sufficient to protect the
mine. The mine owners therefore offered to pay the police £2,200 to cover the extra cost of having the police
stationed at the mine full time during the strike. When the strike was over, the mine owners refused to pay. They
argued that the police had an existing duty to protect the mine and therefore had provided no consideration for
their promise to pay. The House of Lords held that the police had provided an extra service which did amount to
consideration.
LIMITS ON CONSIDERATION

 Performance of a duty already promised in a different contract

 The performance of a duty already promised in a different contract is not valid consideration.

The seminal case for this rule comes from Stilk v Myrick (1809). In this case, two sailors deserted a ship
during a voyage and the captain was unable to find replacements for them. The eight remaining crew
members were promised extra wages for sailing the ship back home shorthanded, but when they arrived back
in London, the captain refused to pay the extra money. The sailors sued for it, but the court held that 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.
LIMITS ON CONSIDERATION

 Performance of a duty already promised in a different contract(cont’d)

 Exception - going beyond the existing duty: Similar to the exception of the performance of an
existing legal obligation, if the performance of a duty already promised in a different contract goes
beyond the original duty, it will be held as valid consideration. In 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.
Again, at the end of the voyage the captain refused to pay the extra money and the plaintiff sued. In this
case 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 plaintiff was taking on duties beyond those in his original contract, and had
therefore provided consideration for the promise to pay extra.
 LIMITS ON CONSIDERATION

 Performance of a contractual duty owed to a third party

 In some cases two parties make a contract to provide a benefit to someone who is not a party to the contract, known
as a third party. If one of them (X) makes a further promise to that third party, to provide the benefit they have
already contracted to provide, that further promise can be good consideration for a promise made by the third party
in return – even though nothing more than the contractual duty is being promised by X. In Shadwell v Shadwell
(1860) (CCP), the plaintiff wrote to his uncle informing of his engagement to marry. His uncle then promised to
make certain payments to the plaintiff once the marriage took place. The plaintiff subsequently married and his
uncle made some, but not all, of the agreed payments. When the uncle died, the plaintiff sued the estate to recover
the outstanding payments. The defendant (estate) argued there was no consideration for the promise because the
plaintiff had previously promised to marry his now wife. The court held that a contract to do something which the
promisor is under an existing obligation to a third party to do (that is, marry his fiancée) can be good consideration.
The late uncle obtained a real benefit (that is, having his nephew marry) and the plaintiff had materially altered his
position.
LIMITS ON CONSIDERATION
 Past Considerations
 Past consideration is insufficient to form a legally enforceable agreement. Only consideration which is given at
the time or after the promise for which it is given will be enforceable. A promise given after the consideration
has been completed is unenforceable. Re McArdle [1951] Ch 669 is authority for this point. In this case, a sum
of money was promised for some building work. However, this promise was made subsequent to the building
work being completed; therefore, the building work was ‘past consideration’.
 NOTE: Exceptions to the past consideration rule- Common law exceptions.
 In Lampleigh v Brathwait (1615) (KB), the defendant (Brathwait), who had committed murder, asked the
plaintiff (Lampleigh) to obtain a pardon for him from the King. The plaintiff agreed and in the process incurred
considerable expense. Subsequently, the defendant promised to the plaintiff £100 to cover costs. The defendant
failed to make the payment and the plaintiff sued. The defendant argued that the subsequent promise was
unsupported by consideration. The court disagreed and held that the defendant’s request for assistance included
an implied promise that the plaintiff would ultimately be paid for his services. In other words, the request for
assistance and the promise to pay £100 were part of the same transaction. It is arguable that, where past services
are rendered at the request of the promisor, then a subsequent promise to pay is enforceable.

LIMITS ON CONSIDERATION
Part payment of Debt
 The general rule is that payment of a lesser sum will not discharge the duty to pay a higher sum. In other words,
part payment of a debt is not sufficient consideration for a promise to forgo the balance. In Foakes v Beer (1884)
(HL), the defendant (Foakes) owed the plaintiff (Beer) £2,090. The plaintiff subsequently agreed to allow the
defendant to pay off the debt by an immediate payment of £500 and the balance by instalments, and in return she
gave a promise not to commence debt recovery proceedings against the defendant. The defendant made all the
instalment payments as agreed. The plaintiff later demanded an additional £360 as interest on the debt and the
defendant refused to pay. The court held that the interest was payable. The defendant had a pre-existing obligation
to pay the whole debt and the mere payment by instalments of the debt was not sufficient consideration.
 Exception: Part-payment of a debt is valid if something else is exchange along with/instead of money. For
example, £1 and a mobile phone could be valid consideration for a debt of £1,000. This is because the court can
presume the mobile phone has some value which goes beyond the debt, even if in reality it does not.
 Exception: Payment in a different form or at a different location. If you are required to pay via bank transfer, but
are later asked to pay in person, the part-payment of a debt can be sufficient consideration here, as the effort and
expense of travelling helps to amount to sufficient consideration.
END OF WEEK 3