Commercial Law

Formation of a contract
Mr. Miko Mc Intosh – BSoc.Sci Economics, Dip. Banking & Finance, dip. commerce
Email: [email protected]
&
Mr. Shazaad Alli
Email: [email protected]
 CONSIDERATION

• What is Consideration in Contract Law?

• The term consideration is given to the subject that is exchanged in a contract. The most common
and obvious exchange is money for goods or services. Consideration means making an agreement
to pay for goods or services. If an agreement is made to pay for goods and services upon receiving
them, then the contract becomes binding at the point of agreement, not at the point of making
payment, the consideration is then referred to as being executory. If the act has been carried out,
i.e. goods have been exchanged for money, this is referred to as executed. However, contracts may
not always involve exchange for money.
 CONSIDERATION

• What is the legal definition of Consideration?

The key case that gave consideration its definition is Currie v Misa (1875), which states that the
subjects which consideration may consist of are right, interest, profit, benefit, detriment or
forbearance. There are two types of consideration, executed and executory, however, it must be noted
that past consideration can be referred to on certain occasions. Where considerations may be executed,
this is where the consideration has been carried out, so the act has been carried out. The negotiating
aspect of a contract was illustrated in the crucial case Dunlop v Selfridge (1915).
 CONSIDERATION
• Currie v Misa (1875)
• Lizardi & Co. sold a number of bills of exchange to Mr. Misa, drawn from a banking firm owned by Mr. Currie, and
were to be paid on the next day. However, Lizardi was in substantial debt to Mr. Currie’s bank and was being pressed for
payment. A few days later, upon paying in the cheque, Mr. Misa learned of Lizardi’s stopped payments and outstanding
debts, instructing his bankers not to honour the cheque. The question arose as to whether the cheque was payable,
particularly as to whether the sale of an existing debt formed sufficient consideration for a negotiable security, so as to
render the creditor to whom it was paid, Mr. Currie, a holder for the value of the cheque.
• Held: The Court held that consideration must “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.” (p 162). Thus,
there can be no legal contract unless there is consideration in the form of a benefit gained, or detriment suffered
arrangement by the parties. On the facts, the Court held that the title of a creditor to a negotiable security on account of a
pre-existing debt and transferred to him, bona fide, without any notice of infirmity of title by the debtor is indefeasible.
The pre-existing debt did not in and of itself form a sufficient consideration for the negotiable security. Accordingly,
there was an absence of any consideration or the making or payment of the cheque by Mr. Misa.
 CONSIDERATION
• Dunlop v Selfridge (1915)
• Dunlop was a tire manufacturer who agreed with their dealer to not sell the tires below a recommended retail
price (RRP). As part of the agreement, Dunlop also required their dealers to gain the same agreement with their
retailers, who in this instance was Selfridge. The agreement held that if tires were sold below the RRP, they
would be required to pay £5 per tire in damages to Dunlop. This was agreed between the dealer and Selfridges,
which effectively made Dunlop a third-party to that agreement. Sometime after this, Selfridge sold the tires below
the agreed price and Dunlop sued for damages and an injunction to prevent them from continuing this activity. At
the initial trial, the decision was given to Dunlop. This was appealed by Selfridge and the decision was reversed.
Dunlop appealed.
• Held: The court held in a unanimous decision that Dunlop could not claim for damages in the circumstances. The
court found that firstly, only a party to a contract can claim upon it. Secondly, Dunlop had not given any
consideration to Selfridge and therefore there could be no binding contract between the parties. Lastly, Dunlop
was not listed as an agent within the contract and could therefore not be included as a valid third-party who had
rights to claim on the contract.
 CONSIDERATION

• How does consideration become acknowledged by the courts?

• Consideration, in some way, must be acknowledged, and the legal term for this is ‘sufficient’,
therefore the consideration must be sufficient and is usually of monetary value. Another legal term
used here is ‘adequate’, this means fair price. However, the consideration does not need to be
adequate, but needs to be sufficient to form a contract. An example of this occurred in the case of
Thomas v Thomas (1842), where the decision was made that a woman was allowed to reside in a
property for £1 a year.
 CONSIDERATION

• Thomas v Thomas (1842)

• Before he died, Mr. Thomas said he wished for his wife to have the house they lived in for the rest
of her life. However, this was not written into his will. After he died, his executors, ‘in
consideration of such promise’, agreed with Mrs. Thomas that she would pay a peppercorn rent of
£1 per year in return for being allowed to live in the house. They later tried to dispossess her.
• Held: The executors’ statement did not create a contract as it only expressed their motive for
entering into the agreement. However, the £1 rent was recognized as good consideration. Motive is
not the same thing as consideration. Consideration means something which is of some value in the
eye of the law, moving from the plaintiff: Mrs. Thomas had provided consideration, even though it
was not economically adequate or anything like a commercial rent for the building. Therefore, the
contract was enforceable.
 TYPES OF CONSIDERATION

• Executory- where there is an exchange of promises to perform in the future.

• E.g. X promises to deliver goods to Y at a future date and Y promises to pay on delivery of the goods.
• Executed- where one party makes a promise in exchange for an act by the other party, when the act is
completed it is executed consideration.
• E.g. X offers a reward for return of his lost wallet and Y finds the wallet and returns it. Y’s
consideration is executed.
• Past- Consideration is given after performance.
• E.g. A gives B a ride home and on arrival B promises to give a $500. Towards gas. The consideration
is past since
• the act predates the promise.
 RULES GOVERNING CONSIDERATION

• There are various rules governing the law of consideration:

1. The consideration must not be past.
2. The consideration must be sufficient but need not be adequate.
3. The consideration must move from the promisee.
4. An existing public duty will not amount to valid consideration.
5. An existing contractual duty will not amount to valid consideration.
6. Part payment of a debt is not valid consideration for a promise to forego the balance.
 CONSIDERATION

1. The consideration must not be past.

• Lampleigh v Braithwaite [1615] EWHC KB J17
• The defendant had killed a man and was due to be hung for murder. He asked the claimant to do
everything in his power to obtain a pardon from the King. The claimant went to great efforts and
managed to get the pardon requested. The defendant then promised to pay him £100 for his efforts
but never paid up.
• Held: Whilst the promise to make payment came after the performance and was thus past
consideration, the consideration was proceeded by a request from the defendant which meant the
consideration was valid. The defendant was obliged to pay the claimant £100.
 CONSIDERATION

Re McArdle (1951) Ch. 669 Court of Appeal

• Majorie McArdle carried out certain improvements and repairs on a bungalow. The bungalow
formed part of the estate of her husband's father who had died leaving the property to his wife for
life and then on trust for Majorie's husband and his four siblings. After the work had been carried
out the brothers and sisters signed a document stating in consideration of you carrying out the
repairs we agree that the Executors pay you £480 from the proceeds of sale. However, the payment
was never made.
• Held: The promise to make payment came after the consideration had been performed therefore the
promise to make payment was not binding. Past consideration is not valid.
 CONSIDERATION

• 2. Consideration must be sufficient but need not be adequate:

• There is no requirement that the consideration must be market value, providing something of value
is given e.g. £1 given in exchange for a house would be valid. The courts are not concerned with
whether the parties have made a good or bad bargain:
 CONSIDERATION
• Chappel v Nestle [1960] AC 87 House of Lords
• Nestle ran a sales promotion whereby if persons sent in 3 chocolate bar wrappers and a postal order for 1 shilling 6d
they would be sent a record. Chappel owned the copyright in one of the records offered and disputed the right of Nestle
to offer the records and sought an injunction to prevent the sales of the records which normally retailed at 6 shillings 8d.
Under s.8 of the Copyright Act 1956 retailers were protected from breach of copyright if they gave notice to the
copyright holders of the ordinary retail selling price and paid them 6.25% of this. Nestle gave notice stating the ordinary
selling price was the 1 shilling 6d and three chocolate bar wrappers. The question for the court was whether the
chocolate bar wrappers formed part of the consideration. If they did it was impossible to ascertain the value they
represented and therefore Nestle would not have complied with their obligation to give notice of the ordinary retail
selling price. If the wrappers were a mere token or condition of sale rather than constituting consideration, then the
notice would be valid and Nestle could sell the records.
• Held: The wrappers did form part of the consideration as the object was to increase sales and therefore provided value.
The fact that the wrappers were simply to be thrown away did not detract from this. Therefore Chappel were granted the
injunction and Nestle could not sell the records as they had not complied with the notice requirements under s.8.
 CONSIDERATION
3. Consideration must move from the promisee.
• If a person other than the promisee is to provide the consideration, the promisee cannot enforce the
agreement:
Tweddle v Atkinson [1861] EWHC QB J57 Queen's Bench Division
• A couple were getting married. The father of the bride entered an agreement with the father of the groom
that they would each pay the couple a sum of money. The father of the bride died without having paid. The
father of the son also died so was unable to sue on the agreement. The groom made a claim against the
executor of the will.
• Held: The claim failed: The groom was not party to the agreement and the consideration did not move
from him. Therefore he was not entitled to enforce the contract.
 CONSIDERATION
4. An existing public duty will not amount to valid consideration
• Where a party has a public duty to act, this cannot be used as consideration for a new promise:
• Collins v Godefrey (1831) 1 B & Ad 950 King's Bench Division
• The claimant, Collins, had been subpoenaed to attend court as a witness in separate court case involving the
defendant, Godefrey. Godefrey had sued his attorney for malpractice and Collins was required by the court to
attend as an expert witness. In fact Collins never gave evidence but was required to be on standby for six days
in case he was called. After the trial Collins gave Godefrey an invoice to cover his time spent at court and
demanded payment by the next day. Without giving him the full day to pay, Collins commenced an action to
enforce payment.
• Held: - Collins was under a public duty to attend court due to the subpoena. Where there exists an existing
public duty this cannot be used as consideration for a new promise. Godefrey was not required to pay him.
 CONSIDERATION

Unless the promisor goes beyond their duty

• Glasbrook Bros v Glamorgan County Council [1925] AC 270 House of Lords
• The defendant owners of a colliery (coal mine) asked the police to provide protection during a
miner's strike. The police provided the protection as requested and provided the man power as
directed by the defendants although they disputed the level of protection required to keep the
peace. At the end of the strike the police submitted an invoice to cover the extra costs of providing
the protection. The defendants refused to pay arguing that the police were under an existing public
duty to provide protection and keep the peace.
• Held: - In providing additional officers to that required, the police had gone beyond their existing
duty. They were therefore entitled to payment.
 CONSIDERATION

5. An existing contractual duty will not amount to valid consideration

• If a party has an existing contractual duty to do an act, this act cannot be used as consideration for a new
promise:
• Stilk v Myrick [1809] EWHC KB J58 King's Bench Division
• The claimant was a seaman on a voyage from London to the Baltic and back. He was to be paid £5 per
month. During the voyage two of the 12 crew deserted. The captain promised the remaining crew members
that if they worked the ship undermanned as it was back to London he would divide the wages due to the
deserters between them. The claimant agreed. The captain never made the extra payment promised.
• Held: The claimant was under an existing duty to work the ship back to London and undertook to submit
to all the emergencies that entailed. Therefore he had not provided any consideration for the promise for
extra money. Consequently he was entitled to nothing.
 CONSIDERATION

• Unless the party goes beyond their existing duty:

• Hartley v Ponsonby [1857] 7 EB 872
• Half of a ship's crew deserted on a voyage. The captain promised the remaining crew members
extra money if they worked the ship and completed the voyage. The captain then refused to pay up.
• Held: The crew were entitled to the extra payment promised on the grounds that either they had
gone beyond their existing contractual duty or that the voyage had become too dangerous
frustrating the original contract and leaving the crew free to negotiate a new contract.
 CONSIDERATION

• Part payment of a debt

• The general rule established in Pinnel’s case (1602) Have them research it is that part payment of
a debt is not good consideration to forego the balance. The reason is that the promisee/debtor is
already contractually bound to pay the full amount and he would have supplied no consideration
for the fresh promise to forego the balance.
• Notwithstanding Pinnel’s case stated that consideration may be provided if the creditors agree to
accept: part payment on an earlier date than the date due chattel (tangible good) instead of money
part-payment in a different place to that originally stated
 CONSIDERATION
• Pinnel’s case (1602) (Pinnel v Cole)
• The defendant, Cole, owed the plaintiff, Pinnel, the sum of £8 10s. Pinnel sued Cole for recovery of the
debt. Cole had, at Pinnel’s request, paid £5 2s 6d (Pence) one month before the debt was due to be paid
and stated that they had an agreement that this part payment would discharge the entire debt.
• Held: The court confirmed the general rule that part payment of a debt cannot be satisfaction for the
whole. However, since the payment had been made early this was sufficient to discharge he debt. Lord
Coke said (at 1117a): ‘Payment of a lesser sum on the day in satisfaction of a greater sum cannot be
any satisfaction of the whole… but the gift of a horse, hawk, or robe etc. in satisfaction is good. For it
shall be intended that a hawk, horse, or robe, etc. might be more beneficial to the plaintiff than the
money’
• Therefore, by paying some money early the defendant had provided the plaintiff with a further benefit
and had not just repaid the money which he already owed. Consequently, this was good consideration,
and the court found for the defendant.