Contract, Consideration, Past Consideration, Economic Duress and Subcontractors
There the plaintiff was a carpenter (hereafter referred to as the subcontractor) who had agreed with the defendant (hereafter called the builder) to execute carpentry work in each of 27 flats being refurbished by the builder. The builder agreed to pay the sum of £20,000 for the work. The trial judge found an implied term that the builder would make interim payments to the subcontractor at reasonable intervals based on the work carried out to that date. The work proceeded to the stage where the subcontractor had completed a substantial part of the work. However, he had already been paid £16,200, a sum well in excess of the contract value of the work completed.
At this point it was clear that the subcontractor was in financial difficulties. The builder's surveyor gave evidence that the original agreed contract price was too low and that the subcontractor could not operate satisfactorily at a profit. Further, the subcontractor had failed to properly supervise the execution of the work.
The builder was concerned that the subcontractor would not complete his work on time rendering the builder liable to liquidated damages under the head contract. The builder then promised to pay the subcontractor an additional £10,300 to be paid at the rate of £575 for each flat in which the work was completed. The subcontractor continued work receiving only one further payment of £1,500. The subcontractor ceased work altogether, presumably, because of sporadic payments and disagreement about the level of performance. The builder completed the work using other labour. The subcontractor claimed a payment of a pro-rata portion of the additional monies promised. He argued the presence of consideration and that it was open for the court to find the earlier agreement terminated by mutual consent and the parties had entered into a new agreement. In response the builder relied on the want of consideration moving from the subcontractor.
Lord Justice Glidewell LJ, in a landmark finding that there was consideration for the second promise, stated the law thus 1991 1 QB at pp15-16:
‘(i) [I]f A has entered into a contract with B to do work for, or to supply goods or services to, B in return for payment by B; and (ii) at some stage before A has completely performed his obligations under the contract B has reason to doubt whether A will, or will not be able to, complete his side of the bargain; and (iii) B thereupon promises A an additional payment in return for A's promise to perform his contractual obligations on time; and (iv) as a result of giving his promise, B obtains in practice a benefit, or obviates a disbenefit; and (v) B's promise is not given as a result of economic duress or fraud on the part of A; then (vi) the benefit to B is capable of being consideration for B's promise, so that the promise will be legally binding.’
Lord Justice Russell stated 1991 1 QB at p17:
‘The Courts nowadays should be more ready to find its [consideration] existence so as to reflect the intention of the parties to the contract where the bargaining powers are not unequal.’
and continued, supporting Glidewell LJ 1991 1 QB at p19:
‘But where, as in this case, a party undertakes to make a payment because by so doing it will gain an advantage arising out of the continuing relationship with the promisee the new bargain will not fail for want of consideration.’
His Lordship continued with a reference to the substitution of an orderly scheme for a ‘haphazard method of payment’.
Lord Justice Purchas said 1991 1 QB at p20:
‘This arrangement was beneficial to both sides. By completing one flat at a time rather than half completing all the flats the subcontractor was able to receive moneys on account and the [builder] was able to direct its other trades to do work in the completed flats which otherwise would have been held up until the subcontractor had completed his work.’
What the decision means
It is suggested that the novel aspect of the case is to be found in the judgment of Glidewell LJ. The significant passage is proposition (iv) to the effect that consideration can amount to conduct that ‘in practice [confers] a benefit or obviates a disbenefit’. As a result of the promise the builder was potentially spared a great deal of inconvenience and this was enough. Had the subcontractor breached the contract the matter of the potential liquidated damages and other losses could have been addressed in an action for damages. The problem was that, as a consequence, the subcontractor was likely to become insolvent and the builder's remedies rendered worthless. Russell LJ found advantage to the builder arising from the rearrangement of the ‘haphazard method of payment’ and Purchas LJ referred to the benefit to the builder inherent in the rearrangement of the schedule. The benefit to the builder was certainly worth more than a peppercorn.
The easy option would have been a decision couched in terms of the subcontractor's second pleading, that is, that the original contract agreement had been terminated by mutual consent and the new agreement.
The Court of Appeal’s reasoning overlooks the fundamental role played by the doctrine of consideration in establishing a contractual obligation between two parties at the time they exchange promises. The reasoning in Williams v. Roffey leaves parties to a transaction in a legal no man's land only knowing for certain if a promise is binding after a court has examined the transaction and found ‘practical benefit’.