Consideration & Promissory Estoppel Lecture

This chapter will examine and analyse two principles of contract law. The first is consideration, which along with the offer, acceptance and intention to create legal relations, helps form a legally binding contract. Promissory Estoppel can prevent a party from insisting on an existing right after promising not to enforce it, even though the other party has given no consideration for that promise. This chapter will ensure you understand the rules of consideration and when exactly promissory estoppel can operate.

Consideration

What is consideration?

As you will have learnt in chapters one and two, the offer and acceptance are two key components of the contract. However, a valid offer and acceptance only constitutes an agreement. In order for that agreement to be legally enforceable, there must be an intention to create those legal relations (see chapter 3), and the subject of part of this chapter - consideration. The consideration of contract can be described as the ‘badge of enforceability’.

A simple definition of consideration is as follows - something given or promised in exchange for a promise. It may consist of a benefit to the promisor or a detriment undertaken by the promisee. The case of Currie v Misa (1875) LR 10 Ex 153 provides an apt description of this:

“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.”

A practical example of this can be found by examining a simple contract. Party A offers £500 to Party B, who in exchange will fit his car with a new engine. Party A receives the benefit of his car being fixed, whilst Party B incurs the detriment of having to take time, effort, and perhaps expenses to fix the car.

You can also identify from the above contract that there is a parallel detriment to Party A and benefit to Party B; Party A suffers the detriment of having to pay £500, and party B receives the benefit of the £500. It should be noted that this parallel detriment/benefit is not required to form valid consideration, but it is often present. At common law consideration must come from the promisee, although the benefit may go to someone else.

It is worth noting that a promise made by deed is enforceable without consideration.

Does the exchange of the promise to a benefit/detriment constitute valid consideration?

One common misunderstanding with regards to consideration is that consideration is only valid once the benefit/detriment has been transferred between the parties. A promise to undertake a responsibility falls within the definition in Currie v Misa, even before the responsibility is performed.

If we examine our example contract involving the £500 exchange for the replacement car engine, under the assumption that a promise does not amount to valid consideration, the reason behind this will become clear.

After the exchange of the promise, Party B orders the required engine part for the replacement at the cost of £200. Party A is then offered a cheap replacement car, and instead opts to purchase this, and leaves Party B a voicemail to let him know he will no longer need the replacement engine. Party B is then left with an engine part he has no need for, and will no longer receive the £500 from Party A that would have resulted in profit for him. There are two principles clear from this example:

1. If a promise did not constitute valid consideration, it could result in extremely unfair outcomes for some parties
2. If a promise did not constitute valid consideration, it would stifle the economy and business, as parties would be unwilling to deal with each other in fear of circumstances similar to the example

A promise operating as consideration in the above example results in Party B having a remedy as a result of the breach of contract, negating the above issues.

Lord Dunedin confirmed this principle in Dunlop v Selfridge Ltd [1915] AC 847:

“An act or forbearance of one party, or the promise thereof, is the price for which the promise of the other is bought, and the promise thus given for value is enforceable.”

Types of consideration

Executory consideration: This is the kind of consideration which is formed by an exchange of promises by the parties. Most commonly found in a bilateral contract

Executed consideration: This type of consideration is found in unilateral contracts, where one party makes a promise in exchange for an act by the other party (remember the example of the reward for the lost dog in chapter 1 - offer?). Therefore, when the act is completed, the consideration is executed.

Consideration which is promised is called executory consideration

Consideration which has been completed is called executed consideration

The requirements of consideration

Unfortunately, consideration is not just as simple as identifying a benefit/detriment exchange between the parties, as often is the case with legal principles, there are some requirements that must be fulfilled. These rules are as follows:

1. Consideration does not need to be adequate
2. Consideration must be sufficient in law

These rules/requirements should be considered in turn when assessing a contract. This section will examine each in depth with case/practical examples.

Consideration does not need to be adequate

As identified earlier in this module guide, the objectives of the courts in contract law is to help to give effect to contracts in a fair and equitable manner, but the courts will not protect the parties from a bad bargain. This is the basis upon which the first rule of consideration is formed. Consideration must be sufficient in law, but it need not be adequate in value.

The case of Thomas v Thomas (1842) 2 QB 851 highlights this principle in operation. The widow promised to pay £1 a year and keep the house in repair. Those promises were consideration for her right to occupy it. Her late husband’s wish that she should have the house was the executors’ motive.

Chappell & Co Ltd v Nestle Co Ltd [1960] AC 87 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.

Consideration must be sufficient in law

The case discussed above of Thomas v Thomas confirms that although consideration need not be adequate, there must be at least some consideration. There is now the question of what the definition of ‘some’ consideration is. It must be something of value in the eyes of the law. It need not command a market price.

The case of White v Bluett(1853) 23 LJ Ex 36 is an example of the limits of this rule. The son argued that his father had agreed to release him from a debt if he stopped complaining about how his father distributed his property. The court held that forgoing complaints he had no right to make was insufficient consideration.

Something of negligible value can suffice, as seen in Chappell & Co Ltd v Nestle Co Ltd [1960] AC 87, where three chocolate wrappers formed part of the requested price of a record, although Nestlé threw them away. However, the contrasting case of Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548 ruled that the casino gave no valuable consideration for the stolen money. The chips were tokens and the gaming contracts were void under the legislation then in force. Section 335 of the Gambling Act 2005 now provides that a contract is not unenforceable merely because it relates to gambling.

Limitations of consideration

The previous section examined how the courts decide whether something amounts to consideration or not. Unfortunately, there is even more to remember! The courts have identified particular ways and circumstances in which consideration is ruled to be insufficient to form a binding contract. Of course, along with these circumstances come some exceptions for each. Ensure to learn these and be able to identify them in a problem scenario. These limitations are as follows:

1. Performance of an existing duty
2. Past consideration
3. Part-payment of a debt

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.

1. Performance of legal obligations which are independent of any contract
2. Performance of a contractual duty owed to the same party
3. Performance of a duty owed to a third party

Performance of existing legal obligations 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?

As a general rule, performance of an existing legal obligation will not constitute valid consideration. In the example above, the £100 payment would not be enforceable. The case of Collins v Godefroy(1831) 1 B & Ad 950 is good authority for this principle. In that case, a witness was promised payment to give evidence. The promise was not enforceable by virtue of the existing legal obligation the individual had to give evidence.

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. In Ward v Byham [1956] 1 WLR 496, the mother already had a duty to maintain her daughter. The terms on which the father promised to pay included keeping the child happy and allowing her to choose where to live.

The case of Glasbrook Bros v Glamorgan County Council [1925] AC 270 is authority for this exception. The colliery asked for officers to be stationed on its premises during a strike. The police considered mobile patrols sufficient but provided the additional protection for an agreed charge. It was argued the police were under an existing legal obligation to protect members of society, however, the court ruled that the consideration was valid as it required the police to go above and beyond their ordinary duties. The power to charge for special police services is now in section 25 of the Police Act 1996.

Performance of a contractual duty owed to the same party

Merely doing what one already owes the same party under a contract is generally insufficient consideration for a promise to pay more. If in our earlier example of the exchange of £500 for the engine replacement, Party A contacted party B and said he would now pay £600, Party B would ordinarily have given no fresh consideration for the extra £100, as Party B is promising the same performance as they did under the previous contract (to replace the car engine).

The seminal case for this rule comes from Stilk v Myrick (1809) 2 Camp 317, 170 ER 1168. In this case, the contractual duty of the crewmen of a ship was to sail a vessel. Two of the crewmen refused to sail, and the remaining members of the crew were promised a split of the deserting crew’s wages, if they sailed the vessel home. Therefore, similar to our above example, the crewmen were offered extra money to complete their already existing duty (to sail a vessel). The court held that this consideration of performance of an existing duty was not valid consideration, meaning the promise of extra wages was unenforceable.

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) 7 E & B 872, more crewmen had deserted the ship. Therefore, as the sail back was dangerous due to the lack of crew, and the remaining crew had to do a significantly higher amount of work, they had exceeded their contractual duty, meaning the consideration was valid.

Exception - Williams v Roffey: The case of Williams v Roffey [1991] 1 QB 1  provides a specific set of circumstances in which performance of a duty already promised in a different contract can amount to valid consideration. The criteria set out by Glidewell LJ are as follows (See Williams v Roffey at 16):

1. If 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
2. At some stage before A has completely performed his obligations under the contract B has reason to doubt whether A will, or will be able to, complete his side of the bargain; and
3. B thereupon promises A an additional payment in return for A’s promise to perform his contractual obligations on time; and
4. As a result of giving his promise, B obtains a benefit, or obviates a disbenefit; and
5. B’s promise is not given as a result of economic duress or fraud on the part of A.

In Williams v Roffey, these criteria were successfully fulfilled. Party A had a contract to refurbish a number of flats with Party B, a housing association. Party A subcontracted the carpentry to Party C. Party C ran into financial difficulties, and Party A offered extra payment for each flat completed. Following the logic from Stilk v Myrick, this would be an unenforceable contract, because Party C had already promised Party A to do the carpentry. However, if you apply Glidewell LJ’s criteria to the circumstances, the consideration becomes valid. Party A reduced the risk of liability for delay under its contract with the housing association and avoided the trouble of finding another carpenter. These were practical benefits under criterion 4.

We can again examine our example contract. If Party A needed the car engine replaced immediately in order to attend to a lucrative business opportunity, and was unsure Party B would complete this in time, and offered additional payment to do so, this could be valid consideration if the above criteria are met. This is because Party A has obtained the benefit of being able to attend to the business opportunity.

It should be noted that this principle from Williams v Roffey does not overrule Stilk v Myrick. Glidewell LJ explained that the later cases refined and limited the application of the earlier principle.

Limitation: Re Selectmove [1995] 1 WLR 474 was a case in which a company proposed paying its tax arrears by instalments. It was argued that a practical benefit was obtained because the Revenue might recover more by accepting instalments than by winding up the company. The courts confirmed that the rule from Williams v Roffey could not extend to the part-payments of debts. See the part-payment section later in this guide for more information.

Performance of a duty owed to a third party

This limitation of consideration is similar to that of above example, however, in this case, the duty will be owed to a third party, and not the same party.

A basic example of this can be found in Shadwell v Shadwell(1860) 9 CB NS 159, where an uncle promised his nephew a sum of money to marry his fiancée. At the time, the nephew had already agreed to marry his fiancée (which in 1860 created an enforceable legal obligation). A majority held that there was consideration for the uncle’s promise. An engagement to marry is no longer enforceable in England and Wales (section 1 of the Law Reform (Miscellaneous Provisions) Act 1970).

The current law is found in New Zealand Shipping Co Ltd v AM Satterthwaite & Co Ltd (The Eurymedon) [1975] AC 154. This is a notoriously complex and unintuitive decision, so you may have to re-read these facts a few times alongside the decision!

1. Party A, the shippers, had a contract of carriage with Party B, the carriers.
2. The bill of lading extended the carrier’s protections, including a one-year time limit for claims, to those who handled the goods on its behalf.
3. Party B then entered a contract with Party C, the stevedores, to unload the goods.
4. Party C damaged the goods while unloading them. The consignee, who now owned the goods and held the bill of lading, sued after the one-year time limit had expired.

How could Party C rely on the time limit when it had made its unloading contract with Party B? Party B had arranged the protection as Party C’s agent. Party C supplied consideration to Party A by unloading the goods, although it already owed that duty to Party B.

The Privy Council held by a majority that unloading the goods brought a separate contract between Party A and Party C into effect. Party C could therefore rely on the time limit without being a party to the original contract of carriage (see chapter 5).

Therefore, the general rule created is that performance of an existing duty owed to a third party may be valid consideration because the new promisee obtains a direct right against the person performing the duty. Today, sections 1 and 6(5) of the Contracts (Rights of Third Parties) Act 1999 also allow a qualifying third party to rely on an exclusion or limitation of liability in a contract for carriage of goods by sea.

Past consideration

Past consideration is insufficient to form a legally enforceable agreement. An act done independently of a later promise is not given in exchange for it.

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’

Exception - requested performance: The case of Pao On v Lau Yiu Long [1980] AC 614 confirmed and restated the requested performance exception first identified in Lampleigh v Brathwait (1615) Hob 105. The three criteria are as follows:

1. The act must have been done at the promisor’s request.

The case of Lampleigh v Brathwait (1615) Hob 105 highlights this criterion. Party A asked Party B to try to obtain a royal pardon for him. Party B travelled at his own expense and Party A subsequently promised to pay him £100. The later promise fixed the reward for the efforts Party A had requested.

2. There was an understanding there would be the conferment of some kind of reward, payment or benefit for the act

Re Casey’s Patents [1892] 1 Ch 104 is good law for this point. Due to the commercial relationship of the parties, it was presumed payment would eventually be promised despite it not being so at the time of performance of the contractual requirements. A mutual understanding should be identifiable.

3. The payment or other benefit must have been legally enforceable had it been promised in advance.

Ask whether the promised reward could have been enforced if the parties had agreed it before the work began.

Part-payment of debt

It was mentioned earlier in discussions regarding Williams v Roffey and Re Selectmove about part-payments of debt. The general rule is that payment by the debtor of part of an undisputed debt already due is not, by itself, consideration for a promise to discharge the balance.

This rule stems from Pinnel’s Case (1602) 5 Co Rep 117 and was confirmed by the House of Lords in Foakes v Beer (1884) LR 9 App Cas 605. The judicial reasoning for this is rooted in the Stilk v Myrick principle, that performance of an existing duty is not valid consideration. Part-payment of a debt is simply the performance of an existing duty. The prospect of recovering more through instalments does not by itself supply fresh consideration (see Re Selectmove). In Rock Advertising Ltd v MWB Business Exchange Centres Ltd [2018] UKSC 24, the Supreme Court upheld a clause requiring variations to be in writing. It expressly left the consideration question open.

Pinnel’s case illustrates circumstances in which the creditor receives fresh consideration.

Exception: A creditor may agree to take something else along with, or instead of, money in full settlement. For example, £1 and a mobile phone could be valid consideration for a debt of £1,000. The phone is something the creditor was not already entitled to receive. Its value need not equal the balance.

Exception: Payment before the due date, or at a different place, at the creditor’s request can supply fresh consideration for a full settlement. 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 may be something the creditor bargained for. A creditor who accepts a third party’s part-payment on condition that it settles the debt cannot then recover the balance from the debtor (Hirachand Punamchand v Temple [1911] 2 KB 330). The rule in Foakes v Beer also leaves room for a binding composition between several creditors or the compromise of a genuinely disputed claim.

Promissory Estoppel

So far in this module guide we have only examined and analysed forms of common law. As can be identified throughout this chapter, there are many circumstances in which the common law might produce unfair results. Equity, in the form of Promissory Estoppel, can provide a remedy for those unfair circumstances.

Where does promissory estoppel fit in with consideration?

Promissory estoppel may prevent a party from insisting on strict legal rights after clearly promising to relax them. The other party must have relied upon that promise, and it must be inequitable to allow the promisor to go back on it.

How does promissory estoppel operate?

The decision in Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130 is the leading authority on promissory estoppel and also provides a clear example of the principle. The facts are as follows

1. Party A leased a block of flats from Party B, at the cost of £2,500 a year. This lease was signed in September 1937
2. Following the outbreak of World War 2, Party B agreed to reduce the rental cost to £1,250 due to the difficulty in letting all of the flats out.
3. By early 1945 the flats were fully let. Party B sued for the difference between the reduced and full rent for the last two quarters of 1945.

Party B recovered the amount claimed because the conditions that justified the reduction had ended. It did not sue for the shortfall during the earlier period when the flats were difficult to let.

Denning J said that Party B would have been prevented from recovering that earlier shortfall. The reduction was intended to be acted upon and Party A had acted on it. This part of the judgment was obiter because the earlier rent was not claimed.

This principle does not make every promise binding once it has been relied upon. The restrictions on promissory estoppel will be explained in turn:

1. Need for an existing legal relationship between the parties
2. The promisee must have relied on the promise
3. Promissory estoppel can only be used as a defence
4. It must be inequitable to allow the promisor to go back on the promise
5. The doctrine is generally suspensory

There must have been an existing legal relationship between the parties

Generally, promissory estoppel can only operate when there is a pre-existing legal relationship, and will not create new ones. Lord Denning, in the case of Combe v Combe [1951] 2 KB 215, confirmed this.

There must have been a reliance on the promise

The promisee must rely on the promisor’s promise in order for promissory estoppel to operate. In the High Trees case, this was by paying £1,250 rent instead of £2,500, in accordance with the agreed reduction.

It is enough that the promisee altered their position in reliance on the promise and that it would be inequitable to allow the promisor to insist on strict rights. The promisee need not show a separate financial loss. See W J Alan & Co Ltd v El Nasr Export and Import Co [1972] 2 QB 189.

Promissory estoppel can only be used as a defence

This means the promise cannot itself supply a cause of action. A claimant can still rely on an estoppel in support of a right that exists independently. The case of Combe v Combe provides authority for this point, where it was stated that promissory estoppel can only operate as a ‘shield not a sword’.

In Combe v Combe, a wife attempted to sue her former husband for a promise to pay her maintenance, although she had provided no consideration for the promise. She tried to rely upon promissory estoppel, arguing that she had relied on the promise. Therefore, as this was the cause of action, promissory estoppel could not be relied upon.

It must be inequitable to allow the promisor to go back on the promise

The court considers the circumstances in which the promise was obtained and acted upon. In D&C Builders v Rees, for example, the debtor could not rely on a concession obtained by exploiting the builders’ financial difficulty.

A case which provides a good example of this is The Post Chaser [1982] 1 All ER 19, where the sellers presented documents in reliance on the buyers’ request. The buyers rejected them two days later. The sellers had suffered no prejudice that made it inequitable for the buyers to insist on their rights.

The doctrine is generally suspensory

A contractual modification supported by consideration has the effect the parties agreed. Promissory estoppel generally suspends the exercise of existing rights. The promisor may be able to resume them on reasonable notice which gives the promisee an opportunity to adjust (Tool Metal Manufacturing Co Ltd v Tungsten Electric Co Ltd [1955] 1 WLR 761).

The operation of this principle is clear in High Trees. Full rent became payable again once the flats were fully let, but Denning J considered that the landlord could not recover the reduction for the earlier period. In Collier v P & MJ Wright (Holdings) Ltd [2007] EWCA Civ 1329, the Court of Appeal held that a debtor who said he had paid the agreed share of a debt had an arguable estoppel defence to the balance. That was sufficient to set aside the statutory demand.

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