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12 May 2024

Consideration in Common Law

by Emmanuel Bakare

“Consideration need be sufficient, not adequate” 1

Introduction

Reciprocation is the basis of obligation in the exchange of services, “tit for tat” as it is recited in base metaphor.

In establishing a bilateral contract, four forms of conditions should exist:

  1. A conscionable offer must have been passed across parties
  2. An unambiguous acceptance of such offer must be freely made
  3. An intention to create legal relations must exist across the contracting parties
  4. Consideration must be made to further the acceptance of such offer

After these are established under the doctrine of clean hands 2, other forms of reciprocation through performance can be executed against the obligations set out by all parties from the onset.

Consideration will be the focus of this discussion, we will examine what definess consideration as applied in common law and the basis of its equity in establishing a valid contractual agreement on sufficient consideration and its remedies between contracting parties.

NOTE: case law involving third parties and unilateral contracts are not considered in this article, all referenced material focuses on UK precedence.

Defining Consideration

The legal authority for what defines consideration can be found by Judge LJ in Misa v Currie 3

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: Comyns’s Digest, Action on the Case, Assumpsit, B. 1-15,

Consideration is defined as a benefit and detriment exchange between parties4, one party cannot suffer loss where another party gains something for consideration to be established under existing duty 5. However, consideration can be established where (detrimental) reliance on the representation of a promise and the performance of such promise by one party provides no benefit to another 67.

Lord Dunedin notes further in Dunlop v Selfridge 8 the relationship for a promise in establishing consideration:

My Lords, I am content to adopt from a work of Sir Frederick Pollock, to which I have often been under obligation, the following words as to consideration : “ 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.” (Pollock on Contracts, 8th ed., p. 175.)

The principle of detrimental reliance therefore comes into play in extending the definition of consideration to cover that the offer of forebearance from one party in respect to the acceptance and performance of such forbearance for a promise from another party without inherent benefit to the promisor can pose as sufficient consideration 6. However, the consideration for such promise must move from the person the promise is made to 9, it need not be done to the person who offered the promise 10 or a third party not privy to the contract at its creation 611.

We may then further conclude that what defines consideration is the process of establishing benefit and detriment with sufficient value in the eyes of the law amongst parties under contracting terms.

Doctrine of Consideration

In defining consideration, we have established that there must be benefit and detriment 3. However, we must also come to terms that benefit and detriment are not always of balanced weights. Old times before money brought exchange through barter where value was established through mutual need; If I needed a bat and had a ball, I would seek someone with a ball who needed a bat. In current times, this is sometimes still the same.

I pose the following question to the reader:

For the courts to interfere in establishing “tit-for-tat” in guaranteeing economic value of every exchange would limit the benefits of a free market and the freedom to express value and trade within such markets how it deemed fit. The basis of guaranteeing value is also not simple:

We can find reference to this problem in Thomas v Thomas 1 where a payment of £1 pound and a promise to maintain a house belonging to a widows decreased husband amounted to sufficient consideration for the widow to continue residence in the household of her husband upon his death, despite the motives of his executors who had previously agreed to such payments but later changed their mind.

Such issues are what establish the doctrine of consideration in that 7

Consideration must be sufficient but not adequate

In the process of paying 1£ and maintaining the house, the widow had provided sufficient consideration to stay in the residence. Was 1£ economically reasonable if we consider it “rent” at the time? No, it was not but based on the intention of the agreement, the 1£ no matter the amount bore some effort on the widow to pay and this satisfies the first step of consideration which is “detriment”. On the side of the widows deceased husbands executors, they gained 1£ and maintenance of the household in recurring transactions from this exchange due to the widows continued residence. They had shown no reason to have been forced to accept such condition under duress and offered such condition willingly. The 1£ of payment offered benefit to them despite its amount, this establishes the second basis of consideration for “benefit”. In such, we can see that the 1£ is not of adequate economic value to the housing the widow enjoyed, but it provided sufficient benefit/detriment which the courts held as valuable in exchange and this is what consideration seeks to resolve.

Similar claims for consideration amounting to a note of sufficiency to create legal relations as against fair economic offering is found in Chappell v Nestle 12.
Nestle offered records under management by Chappell & Co Ltd. as promotional rewards to participants who had three wrappers of their chocolate, the wrappers unlike the records had no economic value and the claimants held that the sale under s8 of The Copyright Act 1956 13 provides them with royalties.

Paragraph 1(d) 14 and 2 15 of s8 of the Copyright Act 1956 state as such:

(d)in the case of a record which is sold by retail, the manufacturer pays to the owner of the copyright, in the prescribed manner and at the prescribed time, a royalty of an amount ascertained in accordance with the following provisions of this section.

(2)Subject to the following provisions of this section, the royalty mentioned in paragraph (d) of the preceding subsection shall be of an amount equal to six and one-quarter per cent. of the ordinary retail selling price of the record, calculated in the prescribed manner:Provided that, if the amount so calculated includes a fraction of a farthing, that fraction shall be reckoned as one farthing, and if, apart from this proviso, the amount of the royalty would be less than three-farthings, the amount thereof shall be three-farthings.

The courts held that consideration was made as the wrappers provided reason for the sale of records but since the wrappers themselves had no economic value in exchange, they could not be valued in request for royalties for the claimant resulting from such exchange. Nestle paid nothing due to this concept of consideration.

The doctrine of consideration is such that transactions need to have sufficient exchange/representation/performance/detriment in the eyes of the law for one to consider such transaction valid and hold the conditions under the contract binding such transaction enforceable, consideration holds no fixed form of value in the goings of the contracting party unless expressly agreed and legally tenable 162. In Nestle’s case, the records were at best offered for free and despite the sale of their goods, the wrapper was used for this exchange and that in itself is what the courts considered of fair value for the consumer exchange to receive the records 12.

Is a contract enforceable without sufficient consideration?

Under contract law, we have conditions for a contract that define what MUST be done. Non-performance of such conditions will trigger a breach of contract where the courts may enforce remedy through specific performance on the party. In similar fashion, a warranty which is a form of non-compulsory condition may also not be performed leading to a breach of warranty.

However, these two instances apply once the contract has been established and intention to create legal relations are satisfied. What happens if the conditions leading to such situation do not yield sufficient consideration in the eyes of the law?

To begin, we must firstly note that if a contract is made in a deed, it need not be supported by sufficient consideration 17. With established precedence, we will now consider if sufficient consideration stands as a condition for the enforcement of specific performance.

Treitel, Law of Contracts answers this bluntly 16

In English Law, a promise is not, as a general rule, binding as a contract unless it is either made in a deed or supported by some “consideration”. The purpose of the requirement of consideration is to put some legal limits on the enforceability of agreements even when they are intended to be legally binding and are not vitiated by some factor such as mistake, misrepresentation, duress or illegality.

However, we will consider case law to back this conclusion and uncover how common law has established this precedence of consideration as condition for defining a contract.

Firstly, we will consider what happens when no consideration is made for the benefit offered to one party. As observed in Stilk v Myrick 5, we observe a case of a captain offering his seamen additional salary if they remained on the ship and performed their duties to bring the ship back to the UK. This offer was not performed and the courts held that there was no consideration as they were employed to perform the same duty they were now offered more money to perform. Performance of an existing obligation does not amount to sufficient consideration 18 as shown again in Foakes v Beer. Foakes had borrowed money from Beer which under agreement of her ability to not pay would require a one time sum of 500£ and six monthly payments of 250£. In this agreement, Beer would not seek any legal action against Foakes. Payment was made but Beer still held Foakes had yet to pay interest on the loan. The courts held that Foakes had provided no consideration as he was to pay the loan with interest and failing to do so did not provide any reason for Beer to avoid suing for such sums. In White v Bluett 19, a father lent his son money on the condition he stops complaining about how his estate was spread. Upon the fathers death, his estate sought recovery from the son who refused on the basis that the condition that he was given was performed. The courts ruled that he was free to not complain since the fathers estate was not under his ownership and offered no detriment in doing so. He was liable for payment of the loan.

In all these arguments, we can see that consideration is required for a contract to be enforceable and even under performance of the conditions set out by the parties, it can be difficult to seek remedy where no detriment was offered for a benefit one would enjoy without duress under pre-contracting conditions.

In similar fashion, performance of past consideration is also not sufficient consideration 20 as seen in Eastwood v Kenyon. A man who held as an executor for a girl used his own money in managing the deceased girls fathers estate amongst several other duties. The girl obliged to pay back the man but when required to do so, she did not. The courts held that his actions were performed before both parties agreed to do so, past consideration is not sufficient consideration and the man could not recover his money. Under past consideration however, we may derive sufficient consideration if:

  1. The act was done at the request of the promisor 2122
  2. There was an understanding of a reward for the performance of such request 23
  3. The terms of such reward were legally enforceable at its creation, this is under equity termed the “clean hands doctrine” 24

In all these notes, I must clarify that sufficient consideration does not hold as a means to frustrate a contract and relieve either party of their obligation 2 as such application of consideration would be inequitable.

We conclude that contracts without sufficient consideration are not always enforceable 19 5. The courts will take consideration, other elements of common law, the facts of the case and the intentions of the parties seeking to establish legal relations in arriving at its ratio decidendi.

Establishing equity through consideration

Equity is a concept of law applied in the courts. In tort, we state that equity proves to put the aggrieved party in the position which they stood before the tortious event. In contract law, similar approaches to equity are applied to remedy a wrong done. In common law, this may apply through specific performance, nominal damages and others.

In Treitel, Law of Contracts, it notes the criticisms of consideration as considered in equity 25

The doctrine of consideration has attracted much criticism on general and on particular grounds. It has been said that the doctrine is an historical accident; that foreign systems do without it; and that it can easily be evaded, e.g. by the device of nominal consideration. But these criticisms fail to come to grips with the fundamental question: whether it is desirable to enforce gratuitous promises. So long as the rights and interests of third parties are adequately protected, the enforcement of such promises may do no harm.

Nominal consideration refers to the basis of legal sufficiency that we have established in Thomas v Thomas 1 where the economic value of benefit and detriment do not align reasonably. These criticisms are valid but again strain on the issue of real life economic equivalence and the micromanagement of trade by the courts on free markets and its customs.

Equity through consideration has several instruments which it manages for remedy, in instances of detrimental reliance, an aggrieved party suffering substantial damages may not benefit from nominal damages under implied terms with no cause for liquidated damages expressly noted for revision by the courts. Equity provides promissory estoppel on the basis of consideration for the promise to allow the aggrieved party seek performance of the contract established through the promise 26. This however has open questions as to how such instances may be presented before the court where some substantial performance leaves the promisor in availability of nominal consideration and substantial performance, the inequity of such situation left to the courts to assess at the expense of the promisee holding the burden of proof based on such reliance not being performed 27.

Referring again to Treitel, Law of Contracts, the author concludes on “Proposals for Reform” noting the important questions necessary in this discussion 28

Two central question remain: first, whether the law should protect the promisor and third parties by retaining restrictions on the enforceability of gratuitous promises; and secondly, to what extent the law should protect a promisee who has reasonably acted in reliance on a promise which is not supported by consideration. So far as the second question is concerned, the present law amounts to a compromise solution, giving the promisee some remedy on the ground of such reliance.

This argument is further presented in Hudson v Hathway 29 where Ms Hathaway presenting in a relationship as an unmarried couple was under reliance based off emails from her partner Mr Hudson to split equity. Mr Hudson offered property to Ms Hathaway with definite promise not to seek future expectation in it whilst she manages said property. The property in question had suffered an oil spill leaving responsibility on Ms Hathaway to clean this up at her expense along with now paying the mortgage following Mr Hudsons decision to part from managing the property and other financial responsibility. Mr Hudson later proceeded to try to sell the house as it was in his name and collect his own share based on past contribution with Ms Hathaway, Ms Hathaway disagreed noting past reliance on his promise and the efforts she took in cleaning up the oil spills and maintaining the property and their children which she agreed to as part of their agreement for splitting equity. Consideration was made to Mr Hudsons offer by her contributions to the fact in his absence. Despite the ownership of Mr Hudson, the courts granted that Ms Hathaway be granted full equity based on Mr Hudson’s email to split from having interests in the property and the detrimenal reliance from such promise 30.

“Yes, that’s right. … Under this arrangement, I’ve no interest whatsoever in the house, so whilst I will continue to contribute, I won’t do so forever.”

The courts on review of emails from Mr Hudson upheld an email communication as consideration for the disposition of such equity in the property from Mr Hudson as noted in section 53 (1)(c) of the Law of Property Act 1925 29

(c)a disposition of an equitable interest or trust subsisting at the time of the disposition, must be in writing signed by the person disposing of the same, or by his agent thereunto lawfully authorised in writing or by will.

This case is significant as it opens up a review for how a promise communicated via email can establish an oral contract giving the basis for disposition without the need for detrimental reliance to be fully derived. Despite this, a promise can be sufficient consideration and the courts in their process adequately cater for such evolving conditions.

The courts may also choose to apply recission or variation of the terms of the contract to suit the current situation. This again raises the floodgates argument on what the adequate conditions the courts may apply when deciding if a party is available of these remedies and how applicable they apply in cases where substantial performance is enough as seen in Easton v Kenyon 20.

I conclude on this section noting “pacta sunt servanda” which means that parties in an obligation must do their best to fulfill it. In the event where issues arise around consideration to define a contract being enforceable, this contradicts the maxim which enforces a “strict performance” model. However, the courts have established full precedence to deal with the evolving climate of consideration held by the two questions posed in Treitel 28.

Conclusion

Consideration defines an exchange of benefit and detriment from one party to another. Consideration can be held as having legal value in the eyes of the law, consideration must be sufficient and not adequate 7312. Consideration holds a benefit for the common law in allowing an equitable rule for the conduct of parties in their exchange outside the “value” of the efforts of one party to another in establishing intentions 1. However, it holds criticisms for its loose standards under the application of nominal consideration and substantial performance allowing for inequity 27.

Treitel, Law of Contracts notes two critical questions on the matter of consideration:

  1. whether the law should protect the promisor and third parties by retaining restrictions on the enforceability of gratuitous promises
  2. to what extent the law should protect a promisee who has reasonably acted in reliance on a promise which is not supported by consideration

These two questions are applicable and tested under Hudson v Hathaway 30, Thomas v Thomas 1, Easton v Kenyon 20 and others. Equity under consideration is established through its remedies for promissory estoppel enforcing performance for aggrieved parties under detrimental reliance, where nominal damages (alone) does not provide for equity.

In a future time, the law based on these principles and established UK precedence will continue the requirement of applying consideration as a condition in defining a contract under common law.

References

  1. Thomas v Thomas (1842) 2 QB 851 ↩ ↩2 ↩3 ↩4 ↩5

  2. D & C Builders v Rees [1966] 2 QB 617 ↩ ↩2 ↩3

  3. ibid p10 ↩ ↩2 ↩3

  4. Stilk v Myrick (1809) 170 ER 1168 ↩

  5. Dunlop Pneumatic Tyre Co Ltd v Selfridge Ltd [1915] AC 847 ↩ ↩2 ↩3

  6. Tweddle v Atkinson (1861) 1 B&S 393 ↩ ↩2 ↩3

  7. Williams v Roffey Bros & Nicholls (Contractors) Ltd [1991] 1 QB 1 ↩ ↩2 ↩3

  8. ibid p9 ↩

  9. Edwin Peel, The Law of Contracts (15 edn, Thomson Reuters 2020) p91, para. 3-023 ↩

  10. ibid p92, para. 3-024 ↩

  11. ibid p696, para. 14-005 ↩

  12. Chappell & Co Ltd v Nestle Co Ltd [1960] AC 97 ↩ ↩2 ↩3

  13. Copyright Act 1956 s8 ↩

  14. ibid para. (1)(d) ↩

  15. ibid para. (2) ↩

  16. ibid p78, para. 3-001 ↩ ↩2

  17. Mitchel v Reynolds (1711) 24 ER 347 ↩

  18. Foakes v Beer [1884] 5 WLUK 30 ↩

  19. White v Bluett (1853) LJ Ex 36 ↩ ↩2

  20. Eastwood v Kenyon [1840] 11 Ad & E 438, 113 ER 482. ↩ ↩2 ↩3

  21. Brown v MML Capital Europe VI Equity II SA [2020] EWHC 23 (Ch) ↩

  22. Lampleigh v Braithwaite (1615) Hob 105 ↩

  23. Re Casey’s Patents [1892] 1 Ch 104 ↩

  24. Re Mahmoud and Ispahani [1921] 2 KB 716 ↩

  25. ibid p180, para. 3-176 ↩

  26. Hughes v Metropolitan Railway Co [1877] 2 App Cas 439 ↩

  27. Combe v Combe [1951] 2 KB 215 ↩ ↩2

  28. ibid p181, para. 3-177 ↩ ↩2

  29. Law of Property Act 1925 s53(1)(c) ↩ ↩2

  30. Hudson v Hathway [2022] EWCA Civ 1648 ↩ ↩2

tags: consideration - contract law - equity