Problem Question on Offer and Acceptance and the Effects of Promissory Estoppel on Contract Variations

Example Contract Law Problem Question

Scenario

Last year Katie bought a car from Oliver for £3,500 to be paid in two instalments of £1,750. Katie did not pay the second instalment when it was due. She never disputed that she owed Oliver this money.

Oliver felt sorry for Katie, who lost her job not long after buying his car. He told her that if she paid him the half of what she owed him (£875) by the following Wednesday, he would let her off with the rest.

Katie paid him the £875 on the following Tuesday. She also gave him a bottle of wine "in consideration of his kindness".

On the Friday Katie was notified that she had been successful in one of her job applications and would be starting work at a much better salary than her old job on the First of the Month.

Oliver has heard about Katie's new job and realizes that she is likely to be earning more than he is. He now wishes to claim the rest of the money which she had originally agreed to pay for the car.

Advise Oliver.

Answer

In order to advise Oliver, the starting point is to establish that there was a contract between Oliver and Katie for the sale of Oliver's car. This requires that there is an offer (that the car is for sale for £3,500) and an acceptance (that Katie agrees to buy the car) of that offer, and that consideration for the contract moves between the buyer and seller (the £3,500)1.

There is little question that there has been an offer and acceptance of that offer. The usual analysis is from an objective position2, but here it can easily be assumed that there is a subjective agreement on the initial contract terms.

However, while it was agreed that the consideration of £3,500 was to be paid by Katie in two instalments, the second instalment was not paid. At this point, Katie is in breach of the contract, she has not fulfilled her duties under the contract. This she did not dispute.

At this point Oliver would have been entitled to insist on specific performance of the contract, and insist Katie pay the full second instalment. Where a contract provides for a specific price to be paid, the remedy available to the claimant is clear and would not be varied by a court. This being one of the few situations where a promisor can request full performance of the contract as a remedy.

Nevertheless, Oliver then volunteered to accept part payment of the second instalment, rather than the full amount, and let Katie "off with the rest".

Where a seller accepts part payment of the debt owed to them under a contract, the general or common law rule (as found in Pinnel's Case3 and later upheld in Foakes v Beer4) is that there is nothing to prevent the seller claiming the balance due to him at a later date. This applies where the buyer has not provided consideration to enforce the promise of the seller to accept part payment as full satisfaction of the contract. In Pinnel's Case it was held that the agreement to accept part payment would be binding if the buyer, at the seller's request, had provided some fresh consideration.

For example, if the seller agreed to accept part payment on an earlier date than the due date, then that could be construed as sufficient for the purposes of fresh consideration. While Oliver did accept payment of the £875 a day earlier than he had requested (Tuesday, instead of Wednesday), this was nevertheless still later than the original second instalment had been due. The most likely conclusion being that this would not be construed as fresh consideration.

Alternatively, if the seller agrees to accept something instead of money (even if worth less that the debt, since consideration needs to be sufficient but not necessarily adequate, merely the presence of some consideration is enough, see for example Thomas v Thomas5) that might be viewed as appropriate for the purposes here. Could the fact that Katie paid some of the money due, so at least Oliver received something of the second instalment, fall under this proposition? Some cases, for example Foakes v Beer, have ignored a factual benefit gained by the promisor of receiving part payment. Others, have found consideration to exist, even if there was no discernible benefit to the promisor or detriment to the promisee (Cook v Wright6). The decision in Williams v Roffey Bros & Nicholls (Contractors) Ltd7 is an important one in this area and places the emphasis squarely on the promisor obtaining a "practical benefit", rather than a benefit "in the eyes of the law". However, where the issue at hand is one of part-payments of debt, the application of the principle in Williams v Roffey Bros does not apply (see Re Selectmove8). On this basis the rather more strict view of Foakes v Beer would apply and the benefit of receiving part payment itself not suffice as consideration, after all, part payment cannot "be satisfaction of a greater sum owed9". In other words, Oliver gains no more benefit than he was already due under the contract

Here the question may arise whether the wine given to Oliver, by Katie, "in consideration of his kindness", could be sufficient consideration? Perhaps not, it was not requested by Oliver as part of the contract. Oliver did not agree to accept it in any capacity relating the contract that is known of. It could be seen as merely a gift, not of reference to their agreement regarding the payments. As a basic principle, a contract is a bargain, which means that the promisee does something or gives something, as requested by the promisor. Sir Edward Coke, in his judgement in Pinnel's Case, stated that, while a lesser amount than that due under the contract would not be good consideration;

"the gift of a horse, hawk or robe etc. in satisfaction is good. For it shall be intended that a horse, hawk or robe etc. might be more beneficial to the plaintiff than the money"

Certainly, the gift of the wine could carry the same inference. However, given the time at which Pinnel's Case was being decided (1602), it is difficult to see how the usefulness of a horse in that age could be, in anyway, analogous to a bottle of wine in 2015. In the view of Baragwanath J in Antons Trawling Co Ltd v Smith10 "the importance of consideration is as a valuable sign that the parties intend to be bound by their agreement....", would Oliver see accepting the gift of wine as anything more than a gift, or as forming part of his agreement with Katie? Most likely the former.

There are certainly some grounds to say Oliver can claim the balance now he believes Katie's financial position to have changed significantly for the better.

However, could Katie find a defence under the rules of equitable doctrine of promissory estoppel? Promissory estoppel is a means of making a promise binding, in certain circumstances, in the absence of consideration11. If found to be applicable promissory estoppel could mean that Oliver would have to accept part payment of the second instalment as being his complete contractual right, as a result of promising Katie that he would let her "off the rest".

The doctrine of promissory estoppel operates where one party (Oliver) has made a representation that they do not intend to enforce their strict legal rights, made with the intention that the other party (Katie) will rely on the representation, and that party does indeed rely on the representation without providing consideration. Estoppel would prevent Oliver from enforcing his strict legal rights in so far as it is inequitable to do so.

Firstly, Katie must be able to prove that there was a clear and unambiguous statement by Oliver that he would not enforce his strict legal rights. There is no definite information but it would seem clear that Oliver did assure Katie that he would not ask her to pay any more than the half of the second instalment. If he did indeed say he would "let her off the rest", that would sound rather unequivocal to most reasonable people.

Katie must also show that she acted in reliance on this promise. Of her actions it is known that she paid the sum in part and then gave Oliver the wine. Ostensibly then she did act in reliance on Oliver's promise, however she had been bound by the original contract to make some payment (a larger one at that) to Oliver, so this is not a vastly different course of action to that she had originally agreed to undertake.

While it is necessary that Katie committed herself to a different course of action, estoppel cases sometimes also look for an element of detriment incurred by the promisee. This is difficult to find. Katie would need to show that she altered her position in reliance on the representation given by Oliver. But there is some difficulty in how to interpret her actions, she had already agreed in the original contract to pay a full £1,750, but in the end only paid £875. This would appear to be of some benefit to her. Where there is no detriment it is difficult to show that it is inequitable for Oliver to go back on his word, see for example The Post Chaser12. Promissory estoppel works in equity and therefore places emphasis on preventing a party acting "inequitably" or "unconscionably". Arguably, Oliver is not doing so. But Katie did commit to different course of action as a result of Oliver's words, and that might be enough to invoke promissory estoppel.

It has never been conclusively determined in the courts whether promissory estoppel works to permanently extinguish the strict legal rights of the claimant, or whether it merely suspends them until such time as it is equitable to claim the balance. There are some grounds to claim, where payments are due in instalments over time that the creditor may revert to their strict contractual rights, if the circumstances which gave rise to their promise to accept part-payment have changed (Central London Property Trust Ltd v High Trees House Ltd13). It would certainly appear that Katie's circumstances have changed for the better now she has secured a better paid job. Given that Oliver has waited sometime and Katie is, it is to be assumed, in a position to fulfil the contract according to its original terms, he may no longer be estopped from claiming the full amount due (see for example Ajayi v RT Briscoe (Nigeria) Ltd.)14.

Be that as it may, the payment in question is the final instalment, there will not be any more, so Katie may argue that any sum paid under Oliver's promise would be in full and final satisfaction of the whole debt. In the judgement of Arden LJ in Collier v P & M J Wright (Holdings) Ltd15, a fairly clear cut principle as regards the part payment of debts can be found. That is where a debtor offers to part of what is owed, and the creditor voluntarily accepts that offer, if the debtor pays that part amount in full, this will be taken as accepted by the creditor as full and final satisfaction of the debt. For the creditor to go back on this would be inequitable. The judge's comments placed emphasis on the need for "true accord" and for "voluntary acceptance" by the creditor. There can be little doubt accord existed here as the suggestion to take this course of action was actually Oliver's! In his judgement in Collier v Wright Longmore LJ, was more reluctant to view these agreements where the creditor agrees to permanently forego their rights too benevolently. His reservations were based on his doubts that, on the facts of Collier, there ever existed "true accord" between the parties. Despite this, the judgments in Collier add to the weight of modern authorities which indicate that if Foakes v Beer were to be decided by the House of Lords today it would reach a different conclusion and prevent the creditor from recovering the balance of the debt. The upshot being that while the precedent of Foakes would suggest there are some grounds for Oliver to claim the balance of the money due to him, he is likely to be estopped from doing so.

Oliver would be best advised that, on the balance of the facts, Katie does not have to pay the remainder of the final instalment.

Footnotes

1 See for example Carlill v Carbolic Smoke Ball Co. 1893 1 QB 256, Butler v Ex-Cell-O Corp (England) Ltd 1979 1 WLR 401 and generally Chitty on Contracts.

2 Moran v University College Salford (No. 2) 1996 Times, November 23

3 1602 5 Co Rep 117a

4 1884 9 App Cas 605

5 1842 2 QB 851

6 1861 1 B & S 559

7 1991 1 QB 1

8 1995 1 WLR 474

9 Per Sir Edward Coke in Pinnel's Case ibid 3.

10 2003 2 NZLR 23 at 93

11 See J. Cartwright Protecting Legitimate Expectations and Estoppel in English Law, Report to the XVIIth International Congress of Comparative Law, July 2006, EJCL, Vol. 10.3 (December 2006) and generally McKendrick, Contract Law (11th edn, Palgrave, 2015)

12 1981 2 Lloyd's Rep 693

13 1947 KB 130

14 1964 1 WLR 1326 at 1330

15 2007 EWCA Civ 1329