The Basic Purpose of Contract Law

5517 words (22 pages) Essay in Contract Law

02/02/18 Contract Law Reference this Law Student

Jurisdiction(s): European Union, United Kingdom

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Introduction.

The basic purpose of contract law is to provide a framework within which individuals can freely contract. The contract can legally bind the contracting parties by the creation of laws which are applicable only to the very individuals that create the contract and its subsequent legally binding laws. English contract law has developed through the ages as a common law which is very heavily based on precedent. Arguably, the pioneers of the common law system must have opted for such a means of dispute resolution, because it is much more amiable and flexible than having a set of codified rules. Yet, this has placed the English common law in quite a detrimental predicament as United Kingdom finds itself surrounded by civil law practicing states in the European Union. Harmonisation is proving to be more conciliation of legal sovereignty for the common law system than the civil law system.

Contemporary developments in the European market place have poised a great challenge to all separate legal jurisdictions within the European Union. ‘Divergent contract laws create problems for the single market of the European Union’. Nevertheless academics like Dr. Martin Doris, now of the School of Law at the University of Glasgow is opposed to solutions based on a European Civil Code. Adherents of Dr.Doris’ argument hold indefatigably to the belief that such an endeavor might be an academic blunder. The common fear is that such a civil code might lead to the destruction of age old traditions. Hence all jurisdictions have experienced an immense inertia to the movement away from older doctrines. One such doctrine that has caused problems for the English is the need for consideration when forming a contract. Especially since consideration has come under attack by the European Union, arguably because it is a doctrine unique to common law and the civil law lawyers of Europe have trouble with the proper comprehension of the doctrine. Even when they do seem to comprehend its practical mechanism properly, they fail to understand the need for it. Perhaps this is because, as a legal academic and leaner, they build their knowledge of contract law without the understanding of consideration as a fundamental element to the existence of a contract. PECL, is a clear indication that they do not understand the fundamental importance of consideration, especially since it impliedly negates the need for consideration and replaces it with the civil law notion of Causa.

Purpose.

This document will take a deep look in the aforementioned doctrine of consideration, look at the difficulty caused by this doctrine, the valiant attempts of certain judicial activists lead by Lord Denning to fill in the intrinsic gap of justice created by consideration. Noting that they relied on an equitable notion of estopple, we shall explore the doctrine termed “promissory estopple”, the limited scope of promissory estopple and the still existing gap of justice in the enforceability of promises in English law.

A comparative mode of analysis comes into play when exploring the approach taken by other jurisdictions, namely, France, America and Australia. We look at the French notion of Causa, and discuss the proposition as impliedly put forward in PECL i.e. whether or not Causa can be a replacement for the doctrine of consideration. If Abolition of the doctrine as implied by PECL, is not the answer, we need to reform the doctrine in order to justify its retention. Thus New York’s radical experiment by the reform of consideration between 1934-1941 would be a good starting point for the discussion of reformed retention. Furthermore, the Australian solution by the Unification of Estopple will be discussed, as another means of reformed retention. Comparisons can be drawn between the English notion of estopple and the Australian notion of estopple in order to discuss whether or not, unification of estopple in the English system would be, if at all, beneficial for the English jurisdiction.

Thesis statement.

Nonetheless the argument is put forward that unconscionability is an underlying principle in English law and if the courts moved towards using the language of unconscionability in the dispute resolution of promises, the intrinsic gap of justice created by consideration will be nullified. The main drawback would be the blurring of certainty and distinction between common law and equity, these discussions will be dwelled upon in much greater detail further down the document.

Finally, PECL, the impending annulment of this discussion is considered. It is reasonable to assume that PECL is where English contract law will wind up, in the day and age of harmonisation of rules and regulations in EU jurisdictions lead by the courts European Court of Justice in Luxembourg. Detailed discussion shall be carried forward as to the impact and practicality of PECL in England and Wales.

And this author seems to align in defence of consideration, as it is one of the most fundamentally important certainties of a contract.

The Certainties Of Contract- The Need For A Legally Remarkable Promise.

If the law suggests that every individual has the freedom to contract, should the law impose restrictions on this liberty by demanding certainties of contract? It is almost absurd to suggest that an individual must be able to enforce every promise made upon him in a court of law. If such a situation were to be imposed upon society, the law governing promises would be cluttered with confusion and ad hoc decisions that leave no room for the practical certainty we need in today’s liberal democratic free-market environment. It is hard to imagine any sort of harmonious rules that would allow all promises to be enforced. This is where the certainties of contract stem from; a need for a promise to be so profound, that when it is misapprehended or mistreated, it gives rise to the relief and remedy for an individual’s detriment in the eyes of the law. For this, the courts needed uniform certainties so that they can police the enforcement of promises. Uniformity in the laws has a further demand from society, so that as a promisee one could ensure that the promise made upon them would fit in the ambit of what the law regards as a legally remarkable promise i.e. typically a contract.

The certainties of contract in English law are:-

1) Offer

2) Acceptance of that particular offer

3) Consideration and;

4) an intention to create legally binding relations.

Out of these certainties, the most academically troublesome doctrine which has witnessed a flood of, both support and critique from academics and judges alike is consideration.

What Is Consideration?- A Botch By Definition?

According to Sutton the origins of the legal systems of the modern world can be classed into two main categories.

1) The system in England, followed by the British common wealth states and the United States of America that have there origins in the tradition of English Common Law.

2) The laws in the States of continental Europe, their former colonies or spheres of influence overseas derived directly or indirectly from the Roman law system into a civil law.

Neither system tries to impose the intolerable burden on society of rendering every promise enforceable. Yet both systems have developed avidly different and unique methods of enforcing promises. ‘The civil law has developed a criterion that is bound up with the doctrine of causa and with the intention of the parties, while in the common law has evolved that “insular and unique phenomenon”, the doctrine of consideration, as the test of enforceability of promises’.

As per Windeyer J. sitting in the High Court of Australia said Coulls v Bagot’s Executor and Trustess Co. Ltd

“The common law develops, but not looking back to an assumed golden age. I have said elsewhere that the “the only reason for going back into the past is to come forward to the present, to help us to see more clearly the shape of the law of today by seeing how it took shape””

Therefore it is important to recognise where, how and why this so-called “insular and unique phenomenon” came about.

Consideration develops historically through the form/formality of a contract. In early deeds a seal was used to emphasize the legal significance of a promise. This would usually be the means to find out whether a deed was significant enough in the Court of King’s Bench. In the Court of Common Pleas, the more practical question arose, whether a party could recover a sum certain promised in return for the services rendered or goods supplied. This form of action was known as a ‘debt’. If the promise was executory then it was known as ‘detinue’. Where as in the Court of King’s Bench, there wasn’t much interest in common law until the slow evolution of the favorite tort action of trespass, trespass on the case, in which it was alleged that something was undertaken- which in Latin meant ‘assumpsit’.This new action brought the lawyers from the Court of common Pleas to the Kings bench and a new action known as ‘indebitatus assumpsit’ evolved. One theory is that consideration is the requirement of a detriment to the promisee necessary to maintain the action of indebitatus assumpsit. There are many arguments to the actual history of the doctrine of consideration. The aforementioned historical analysis seems to be most plausible as it is backed up with historical case reports. The point is taken that these case reports are rather sketchy and a number of years elapse between each report. Hence other theories of its evolution are discussed below.

One school of belief is that doctrine was borrowed by the Chancellors from the Roman law causa and after modification in equity passed into the common, though this has been generally discredited now. The other line of thought is that the seeds of the doctrine lie in the quid pro quo of debt. Whist a fourth view maintains that it is a compound doctrine of many other early doctrines, therefore it is impossible to refer to a single source in order to point out it’s origins. There is no agreement as to the origin of consideration. Unsurprisingly we find that the very nature of the doctrine itself is subject the same fate.

Nevertheless, most English contract law textual commentary books’ omission to discuss the original meaning and very nature of consideration seems to falsely suggest the definition set out by Lush J in Currie v Misa was a definition that reiterated a doctrine set in stone and is sufficiently what a law student needs to know as the earliest point of reference to the meaning of the doctrine. Whereas, agreement to consideration’s origin in reality is hotly debated, hence there is a need to go even further than Currie v Misa to look for an earlier definition of consideration, to understand it’s original meaning. The aforementioned definition by Lush J is:-

“A valuable consideration in the sense of the law may consist either in some right, interest, profit or benefit accruing to the one party, or some forbearance, detriment, loss or responsibility given suffered or undertaken by the other”.

The reason why an analysis of the historical development is emphasized is because this statement originates from a writers opinion published in the Comyn’s Digest. Like Ames points out, this idea goes back to at least 1588 and is explicable by the increase in plaintiffs presenting their cases around the assumpsit and indebitatus assumpsit. Therefore assuming that consideration is bound up in the concept of a bargain inherent in it from its very conception, the definition set out by Lush J, is deficient. Not enough emphasis is given to the significance of the slight alteration that the definition was subject to when Halsbury took to define consideration, inserting the accretion at the end ‘at his (promisor’s) request’. This clearly suggests that the detriment suffered by promisee must have been requested by the promisor. This line of thought takes to theoretically explain consideration, not within the framework of the bargain theory but as an analysis of the benefit and detriment occurring during a promise.

The exclusion of these three words from the definition of consideration was probably unintentional. The accretion in the Halsbury text was intended, but the removal seems to have occurred due to an over emphasis on Lush J’s definition of consideration. Unintentionally this widens the scope consideration and makes consideration a lot more feasible in reality. Almost unavoidably, this increase in feasibility gives rise to more definitional problems.

After the unintended omission, any detriment of the promisee though not foreseen by the promisor still gives rise to a valid consideration. Later developments like the rule in Foakes v Beer and the fierce debate by academics like Ames, Williston and Pollock about the very nature of the doctrine makes the point clear that this very nature of the doctrine is not as certain as usually perceived. Even the theoretical explanations differ to the core, where one explanations fashion its words around a concept of a bargain and other follows the concept of benefit-detriment analysis. Following Lush J’s deficient definition has caused a botch of the precedent. Hence most authors seem to ignore any authority prior to Currie v Misa. Suspiciously, Currie v Misa makes consideration less of a botch if the other older precedents were ignored. Reverting back to the Halsbury definition would definitely make consideration less ambiguous but probably indefensible due to its impracticality. Hence, this author likes the definition in Currie v Misa, yet still believes that thought not a botch by definition, consideration still needs to be amended to increase its practicality, just as it amended itself for practicality as discussed above.

There should be a filling of what the author refers to as “The Gap” in this article.

The Problem With Consideration- “The Gap”.

Assuming the position that a need for the certainties of contract arose from the need for the uniformity of the law and to curb unnecessary litigation over legally unremarkable promises, it can be argued that the need for consideration is having the opposite effect. If we take the recent case of Baird Textile Holdings Limited v Marks & Spencer Plc and alter the facts situation a little, to suppose that the court accepted an implied contract between Baird and M&S by way of necessity as stated by Bingham LJ in The Aramis , it would create an ideal facts situation to expose “the Gap” created by consideration. In English law the lack of consideration moving from Baird to M&S for that specific promise (made by M&S not to terminate their relationship with Baird without reasonable notice) would fail to be legally enforceable. This is ‘the Gap’, though the promise seems prima facie gratuitous, it has induced a particular understanding from Baird and thus induced a particular behavior from Baird, which M&S are able to exploit as there has been no price paid for that promise, though both parties had a mutual understanding of this promise. The gap allows legal technicalities to be used as an engine of fraud.

Whereas in French law we could conclude that there is sufficient Causa to create legally binding relations, and in the Australian jurisdiction the promisee could rely on an estopple claim to prevent the promisor from going back on his promise and in all common law practicing states of the United states of America, since the promise did induce an act on part of the promisee, the claim would not fail for lack of consideration. It is easy to find absurdity in the notion that a gratuitous promise – made outside the scope of the bargain, yet one that played a vital role in inducing the promisee to the contract/ or to act differently, cannot be enforceable. This is not to suggest that every gratuitous promise should be enforceable but at least those made in the context, where parties where already inclined and in general understanding that they were indeed going to have legally binding relations must be enforceable. Since ‘the Gap exists’, many civil law lawyers argue that there is no need for consideration, that it gives rise to unnecessary litigation and illogical outcomes. The common law needs to defend consideration by filling in this gap.

Do We Need Consideration?

The question posed here has been argued for and against by many academics. To truly ascertain a practically plausible answer to the question accurately, one needs to reconcile the need for consideration with the need for the certainties of contract. Henceforth, one needs to ask “Does consideration increase the certainty and uniformity of law. Moreover, does it aid in weeding out the legally unremarkable promises from giving rise to unnecessary litigation in the courts?” In order to answer the question posed the current English position on consideration and estopple need to be examined As the discussions unfolds one can avidly observe that this author is of the stern view that consideration is one of the most remarkable achievements of the common law jurisdiction and is absolutely necessary for English contract law. Yet in order to retain the doctrine, there needs to be a reform. This author finds the most plausible solution by the reformation of estopple and the retention of consideration.

Causa- A French Replacement For Consideration?

Causa is the general requirement for a cause to contract. This may seem far too wide and essentially give rise to every promise being enforced in the courts even without the quid pro quo of debt. For a common law lawyer it seems almost absurd to classify such a broad range of promises as legally remarkable. Nevertheless, this is the standard maintained by most civil law practicing states and is has been speculated that the origin of Causa lies in the Roman law system.

Causa remains entrenched in the civil law systems. Examples of this are Austrian, French, Belgian, Luxembourg, Italian, Spanish jurisdictions.

The Austrian notion of Causa signifies the fiscal or purely economical purpose of a contract, which has to be vividly transparent from the contract or from the circumstances. A promise without any apparent fiscal purpose is considered to be void. For a common law jurisdiction that has unshakable roots stemming from the 19th century notion of laissez faire, this notion of causa is far too narrow and restrictive. Such a regime will be met with antagonism as it infringes the right to the freedom of contract of every English citizen. On the other hand, the French notion seems more interesting, it is universally accepted that there is no set definition for the French notion of Causa.

“Many authors distinguish the “objective and abstract cause” that would apply to all parties to a contract of a particular type (e.g. in a contract of sale, to obtain the property or the money) and the “subjective and concrete cause” or motive (e.g. the seller sells the property to raise money to pay his debts, or the buyer buys property in order to smuggle it out of the country) see. E.g. Terre, Simler & Lequette Nos.312 ff. A contract will not be valid unless it has an objective and abstract cause; the mere intention to incur an obligation is not sufficient. If for example the cause is erroneous, the contract will not be valid. Thus a person who has promised to pay a debt, but who had forgotten that he had already paid it, is not obliged to do so, because his obligation had a false cause, see notes to Article 4 :103 on Mistake as to Facts or Law. Under the second aspect the cause must be legal. Therefore, the sale of an object intended to be used for committing a crime is void.”

This appears to be an objective test of the cause that gives rise to an intention to create legally binding relations. The concept of consideration and the French concept of Causa are two very different ideas. For a commentator to try and compare the two ideas is almost absurd as these two concepts are tests for two separate limbs of a contract. Consideration is more or a less a price of a contract/promise, where as Causa is a cause/reason to contract. This author speculates that, the reason why French law does not have a need for consideration is because of the nature of law practiced in France. The French have a civil code, and in order to ensure that a promise is legally remarkable all an individual has to do is ensure that his promise falls within the ambit of the civil code articles 1103 and 1104. Thus the Causa is a framework for ensuring that the individual had a legally valid reason for making sure that the promise fell within the ambit of the civil code. On the other hand English law tries to accommodate any promise that gives rise to an obligation; hence consideration is still valuable to weed out the legally unremarkable promises made during the everyday realities of life. One major drawback of having a strict doctrine of consideration is that sometimes the result may not produce the most just outcome. Unless consideration gives rise to absurd outcomes, there is no need for reform. Yet, “the Gap”, is definitely an absurdity that needs to be revised.

Over all, it is fitting for a common law practicing jurisdiction such as ours to adopt the civil law idea of Causa, as a replacement for consideration. It is accepted that it may be useful in allowing the courts to negate some legally unremarkable promises. Thus, if adapted alongside the notion of consideration, this could be feasible. The courts have been clever in negating promises without a valid cause by using the terminology of consideration. If Causa is adapted, the courts can use this as a tool to negate promises without a valid cause. Therefore, rather than clinging on to the language of consideration to negate promises without a valid cause, the judgments can be about the new-limb i.e. Causa. Thus the concept of consideration can be straight forwardly about the quid pro quo of a debt/promise and the problems created by using the language of consideration to negate promises without a valid cause can be avoided.

Yet with the impending imminent threat to consideration by the EU i.e Pecl? Art 2.101-discussion- about how civil lawyers need to understand common law’s predicemnet w/o consideration.- common lawyers need to explain.

Current Position In English Law

As the current position has been supported by the judges like lord Steyn writing in an extra-judicial capacity arguing that the doctrine needs no major reform since the current position is not intrinsically defected and that the courts must only lead into a major reform only when there is a major intrinsic defect when the doctrine operates in practice, we must critically analyse the position we are in today. The arguments put forward by the cautious English judiciary tend to mostly be in alignment with the ultra-conservative position. Much adherence is shown to Professor Treitel defence of the doctrine as a counter-attack to Professor Atiyah’s all out offensive attack on the doctrine.

As any contract law text book will be able to more or less guide one through the current requirements, there isn’t much use of reiterating the obvious. Thus there isn’t much necessity for a deep exploration of the current position but this author is of the view that the doctrine does have some basic defect which cannot be exposed without a review of its current operation.Hence a swift overview of the doctrine will be done below.

It is disputed whether there are a set of strict rules governing the doctrine of consideration. Such propositions are strengthened by the arguments like that of Professor Trietel that consideration is very flexible and as he describes it, consideration lives on by practice of ‘inventing’ consideration. A more pessimistic approach to this argument is that such invention of consideration is only necessary because of the insufficient nature of consideration to reflect the reality of the legal remarkableness of a promise in modern society and markets. Nevertheless, there are seven limbs which can be listed from a pick and mix of the legal precedent that exist in this area of law which is still of positive judicial deliberation.

1) Consideration needs to be of some economic value but it is sufficient that it is adequate and does not really matter even if it is trivial.

2) The general rule is that past acts cannot constitute consideration yet previous requests can constitute consideration though exceptions arise in business situations and parliament has intervened to create an exception in cases involving a bill of exchange.

3) Consideration must move from the promisee to the promisor but not necessarily from the promisor to the promisee.

4) A consideration may arise from an actual forbearance and a promise to forbear can also constitute valid consideration. On the other hand the forbearance can’t be only moving from the promisee, it must move from the promisor.

5) A valid consideration cannot arise from performance of a pre-existing (i) public or (ii) contractual duty unless the performance gives rise to a practical benefit for the (i) the promisor or (ii) to a third party.

6) The general rule at common law is that the aforementioned performance doesn’t constitute valid consideration. This is because the payer is already obliged to pay the full amount, an agreement based on the same principle as Stilk v Myrick. It also protects a creditor from the economic duress of his debtor. In Pinnel’s Case the lords held that a free standing part-payment was not valid consideration. However, it was also held that the concurrence to receive part-payment can be binding if the debtor, at the creditor’s request, provided some fresh consideration and that could be in the guise of:

  • Part payment on an earlier date than the due date; or
  • Chattel instead of money that is more beneficial than money; or
  • Part payment in a different place to that originally specified.

In Foakes v Beer the House of Lords held that the creditor was permitted to recover the interest which had accumulated on a debt. They re-enforced that a promise that had no valuable consideration cannot be relied upon to stop the creditor from enforcing his full legal rights.

The rule was recently affirmed by the Court of Appeal In Re Selectmove, and refused to extend the principle in Williams v Roffey Bros & Nicholls (Contractors) Ltd and limited the scope of this rule. Yet clearly this is a conflict of precedents where the courts refuse to accept the part payment of a debt as a practical benefit for the creditor. It was held that a promise to perform an already outstanding contractual obligation was not valid consideration. Secondly they appeared to act in a very ad hoc fashion looking at the particular facts of the situation to conclude that the promise was made without proper authority. Thirdly, they limited the notion of a practical benefit as only giving rise to good consideration only to cases involving the appropriation of goods and services.

7) The exceptions to the rule in Foakes v Beer, other than the abovementioned exception itself. First is arguably an additional limb to the rule in Pinnel’s case(1) A promise to accept a part payment in full satisfaction will be binding on a creditor where the part-payment is made by a third party on the condition that the debtor is released from his contractual obligation. Secondly, the rule does not apply to composition agreements. Thought there is no consideration, the courts will not allow an individual creditor to sue the debtor in full. There are two reasons advanced for this rule is (i) that to allow an individual creditor to sue would be fraudulent on his part and (ii) the percentage set was agreed by all creditors. Thirdly and most importantly promissory estopplethis was the term coined for the equitable doctrine which has as its principal source the obiter dicta of Denning J in Central London Property Trust Ltd v High Trees House Ltd

Estopple

Estoppel in English law today is rather confusing. Estopple has far too many distinctions between types of estoppels with different sets of rules governing it. Though this may be intrinsic in the mode in which equity operates, when such doctrines get incorporated into the common law, as Lord Denning did in High tress with promissory estopple, the mode in which the doctrine operates needs to change. The law demands far more certainty than equity and if English law holds on to the notion that there needs to be a distinction between equity and common law, the reality must reflect this. Though it is acceptable to have vague notions of fairness and equality governing equity, common law needs reasonableness and certainty. Therefore it understandable that English judges have been reluctant to follow in the footsteps of the Australian jurisdiction.

Promissory Estopple

The doctrine provides a means of making a promise binding, in certain circumstances, in the absence of consideration. The basic gist of the principle is that a promisor is estopped from going back on his promise if a promisee acts upon it and it is inequitable to do so. The modern doctrine is largely based on obiter dicta of Denning J in Central London Property Trust Ltd v High Trees House Ltd and on the decision of the House of Lords in Tool Metal Manufacturing Co Ltd v Tungsten Electric Co Ltd

The ratio decidendi of the case stated by Denning J was that plaintiffs could enforce full payment as their promise to accept only half was applicable only under war conditions. He stated in obiter that if the plaintiff tried to enforce full payment for the time between the creation of promise till the end of the war, though consideration was not constituted for the promise to accept a less amount, it was intended to legally bind parties and was in fact acted on. Therefore the plaintiffs were estopped from going back on their promise. Thus if a party promises not to insist on their strict legal rights, and the promise is acted upon, then the law will enforce the promise though consideration is absent.

Requirements

(A) A legal relationship.

Naturally, the cases which followed high trees are cases concerning contracts and one would have a mistaken belief that a contract was necessary for the doctrine of promissory estopple to be apply. However, in Durham Fancy Goods v Michael Jackson (Fancy Goods) “a pre-existing legal relationship which could, in certain circumstances, give rise to liabilities and penalties” was sufficient in the absence of a contract. This notion was re-affirmed in Baird Textile Holdings Limited v Marks & Spencer Plc

(B) A Promise

The Scaptrade suggest that there must be unequivocal representation which amounts to a promise. However, the purported lineage of the doctrine goes beyond high trees and in Hughes v Metropolitan Railway the courts seem to have allowed an implied promise to give rise to promissory estopple.

(C) Reliance

The promisee must have relied to his detriment on the promise. There is some debate as to whether the promisee should have relied on the promise to their detriment or whether a mere alteration of his position would suffice. As in Alan Co Ltd v El Nasr Export & Import Co, Lord Denning says that “he must have been led to act differently from what he otherwise would have done”. This seems to suggest that detriment is not an element of promissory estopple.

(D) Inequitable to go back on promise.

It must be inequitable for the promisor to revert back, unless the promise was made due to duress or undue influence by the promisee.

(E) Only as a defense

In Combe v Combe the court held that Promissory estopple can only be raised “as a shield and not a sword”. Therefore it did not give rise to a cause of action. However, this was n

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