58 GSN412: Business Law 1
Pinnel’s case (1602) 77 ER 237
Rann v Hughes (1778) 101 ER 1014
Re Casey’s Patents, Stewart v Casey [1892] 1 Ch 104
Roscorla v Thomas (1842) 3 QB 234
Shadwell v Shadwell (1860) 9 CBNS 159
Stilk v Myrick (1809) 2 Camp 317
Thomas v Thomas (1842) 2 QB 851
Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988)
80 ALR 574
Waltons Stores (Interstate) Ltd v Maher (1988) 76 ALR 513; 62 ALJR 110
White v Bluett (1853) 23 LJ Ex 36
Module 4: Contracting Principles (Part 2) 59
4.1 How is consideration defined?
4.1 Introduction
An act or forbearance to act (or the promise of an act or the promise of a
forbearance to act) given by one party is a good consideration in exchange for
the act or forbearance to act (or the promise of an act or the promise of a
forbearance to act) of the other party.
Any one of these four elements is a good consideration and each party to the
contract must provide one of these four elements to the other party. (For
example, a forbearance to act may be given in exchange for the promise of an
act). Unless there is mutual consideration there is no simple contract.
4.2 Rules relating to consideration
4.2.1. Consideration is necessary to the validity of every simple
contract
In English/Australian law, in order for an agreement to be binding, it must be
supported either by consideration or a deed.
Merely because an agreement is reduced to writing does not make it binding.
See Rann v Hughes (1778) 101 ER 1014.
4.2.2. Consideration may be ‘executed’ or ‘executory’; it must
not be ‘past’
The classification of consideration as executed or executory reflects the two
different ways in which the plaintiff may buy the defendant’s promise.
(a) Executed
When the plaintiff has performed an act in exchange for the defendant’s
promise (for example, reward situation).
(b) Executory
Performance of the consideration is to take place at a future time (for
example, an agreement for the sale of goods whereby in exchange for a
promise to transfer title in the goods at some future time, the other party
promises to pay a certain sum of money in the future). At the time when
the agreement is made, nothing has yet been done to fulfil the mutual
promises of which the bargain is composed.
Note that you have consideration right from the time of the making of the
promises. You do not have to wait until the promises are performed to say
you have valid consideration.
All that is executory is the performance of the consideration. It is yet to be
performed.
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(c) Past
Consideration is said to be past when the performance of the act relied on
as consideration occurs prior to a subsequent promise and independently
of it. For example, A voluntarily, with no request from B and no promise
of payment by B, cares for B while B is sick for six months. When B is
well after the six months, B promises to pay a sum of money for the past
services. B’s promise is unenforceable by A (unless made in the form of a
deed) since A’s consideration is past and was never given in response to
any promise by B.
(d) Past consideration is no consideration at all.
See Roscorla v Thomas (1842) 3 QB 234 and Anderson v Glass (1886)
5 WW and A’B 152.
4.2.3. Request for services where there would be a reasonable
expectation of payment for those services
This is an apparent exception to the general rule that past consideration is no
consideration at all
See Lampleigh v Braithwaite (1615) Hob 105; 80 ER 255; Re Casey’s Patents,
Stewart v Casey [1892] 1 Ch 104; Pao On v Lau Yiu Long [1980] AC (PC) 614.
From the above cases, the following principles emerge:
If the plaintiff’s services are rendered at the defendant’s request and both
parties assumed throughout their negotiations that the services were
ultimately to be paid for, then the defendant will be liable for the price.
4.2.4. Consideration must move from the person to whom the
promise is made, that is the promisee
The promisee is the party to the agreement who is seeking to have a promise
made to them carried out.
(a) Related legal principles
(A) Where the promise is made to persons jointly, it can be enforced by
any or all of them provided that any of them has provided
consideration.
Coulls v Bagot’s Executor and Trustee Co. Ltd (1967) 40 ALJR 471.
(B) Only a person who is a party to a contract can sue on it.
Dunlop Pneumatic Tyre Co Ltd v Selfridge and Co Ltd [1915] AC 847
[that is, person must be privy to the contract].
(C) Only a person who has given consideration may enforce a contract
not under seal.
Dunlop v Selfridge
An example of (a) above is as follows: X and Y are in partnership as
house painters. Q contacts the partnership and promises to pay the
partnership (X and Y jointly) the sum of ,000 if they paint his
house. X (only) paints Q’s house. Q defaults in paying the ,000
or any part thereof to X or Y. Y can enforce Q’s promise since any
consideration given by either of the joint promisees (viz. X or Y) is
Module 4: Contracting Principles (Part 2) 61
given on behalf of both X and Y. Therefore Y has provided a
consideration to Q and can sue Q.
An example of (b) above is as follows: X is a house painter. Q
contacts X and promises to pay Y the sum of ,000 if X paints Q’s
house. X paints Q’s house but Q defaults in paying any monies to Y.
Y cannot sue on Q’s promise since unlike (1) above Q’s promise was
not made to X and Y jointly but only to X. Y is not a party to the
contract between X and Q. Y has not provided any consideration to
Q and therefore cannot enforce Q’s promise. Y could only enforce
Q’s promise if Q made the promise by deed, or if s 55 of the Property
Law Act (Qld) applied (as discussed below).
(D) A principal not named in the contract may sue upon it if the
promisee really contracted as his/her agent, but, in order to entitle
the principal so to sue, the principal must have given consideration
either personally or through the promisee, acting as the principal’s
agent in giving it: Dunlop Pneumatic Tyre Co Ltd v Selfridge and Co
Ltd [1915] AC 847.
(b) Third party benefits
Section 55 of the Property Law Act 1974 (Qld) In summary, the section
provides that where a party to a contract promises to confer a benefit on a
third party:
(a) If the third party accepts the benefit of the contract, he/she may
enforce it in his/her own name and right.
(b) In order to accept the benefit the third party is required to
communicate acceptance to the promisor by words or conduct in the
manner if any, and within the time stipulated by the promisor or in
the absence of such stipulation within a reasonable time.
(c) If the third party accepts the benefit of a contract, obligations
relating to that benefit may be imposed on him/her.
Section 55 applies to all contracts, not just contracts concerning real
property.
Note also: in Trident General Insurance Co. Ltd v McNiece Bros. Pty. Ltd
(1988) 80 ALR 574, a plaintiff was enabled to sue on a contract although
not a party to it and not having provided any consideration. A majority of
the High Court held that the doctrine of privity of contract does not apply
to contracts of insurance. This also reflects the current statutory position
— s 48, Insurance Contracts Act 1984 (Cth) effectively abrogates the
common law doctrine of privity of contract in its application to insurance
contracts to which the act applies.
4.2.5 Consideration need not be adequate to the promise
The courts will not seek to measure the comparative value of the promises of
both parties to a contract.
See Thomas v Thomas (1842) 2 QB 851.
Example: Forbearances to sue / Compromise of a legal dispute
The agreement to settle a legal dispute whether the original dispute lies in
contract, tort or otherwise can amount to good consideration i.e. settlement of a
legal dispute is sufficient consideration regardless of whether or not, if the case
were litigated, you would have lost it.
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Qualifications to this rule:
1. The claim must be reasonable and not ‘vexatious or frivolous’.
2. Person bringing claim must have had an honest belief in the chance of its
success.
3. He/she must not have concealed any facts from the other party that
might affect the validity of the claim.
4.2.6 Consideration must not be of too vague or indefinite a
nature
White v Bluett (1853) 23 LJ Ex 36.
4.2.7 Consideration must be of some sufficient value in the eyes
of the law
(i) Moral obligation
A moral obligation alone is not good consideration.
(ii) Discharge of existing legal obligations.
Circumstances in which the performance of existing legal obligations will
or will not amount to good consideration to support a subsequent promise
made by the person to whom the obligation is owed or by some third
party.
(iii) Performance of a public duty
The discharge of a public duty will not amount to good consideration. But,
something more than public duty is good consideration: Glasbrook
Brothers v Glamorgan County Council (1925) AC 270.
(iv) Performance of an existing contractual duty owed to the promisor
The discharge of an existing contractual duty owed to the promisor is not
sufficient consideration: Stilk v Myrick (1809) 2 Camp 317.
But, something more is good consideration: Hartley v Ponsonby (1857) 7 E
and B 872.
For example P, under an existing contract with X, is to deliver 20 tonnes
of coal to X by 15 August. X is concerned that P will breach the existing
contractual obligation to deliver by 15 August and therefore promises to
pay P an extra ,000 over and above the existing contractual price for
the coal, to ensure delivery by 15 August. P cannot enforce the promise of
the extra ,000 since that promise is not supported by any
consideration moving from P. P must supply some fresh consideration to
X, over and above the existing contractual obligation to X, to enforce X’s
promise of the ,000.
Module 4: Contracting Principles (Part 2) 63
(v) Either the performance or the promise of performance of an
existing contractual obligation is sufficient consideration to
support a promise by a stranger to the original contract.
In the previous example under (B) if a stranger (not a party) to the original
contract (For example, Z) had offered P an extra ,000 if P performed
(did not breach) the existing contractual obligation to X, namely to deliver
the coal by 15th August, then P could enforce Z’s promise of the ,000
providing P did perform the obligation and delivered by 15th August to X:
Shadwell v Shadwell (1860) 9 CBNS 159.
The Privy Council has approved this principle in Pao On v Lau Yiu Long
[1980] AC (PC) 614.
(vi) Payment of a lesser sum of money in full satisfaction of a debt for
a greater amount — Compromise of a debt
The general rule is that payment of a lesser sum of money in full
satisfaction of a debt is not good consideration.
In other words, the promise of the creditor to forego the balance of the
debt is not supported by any fresh consideration moving from the debtor
since all the debtor is giving is something less than the existing
contractual obligation.
Pinnel’s case (1602) 77 ER 237 and Foakes v Beer (1884) 9 App Cas 605
(HL).
(vii) Exceptions to the general rule in (iv)
(i) Person who pays the lesser sum does something more than just
pay the lesser sum — for example,
Pay a day earlier than the due date
Pay in a different place
) Money has time and
) space value
)
Give something in addition For example, you owe me
0 — I agree to take
and a pencil in full
satisfaction — good
consideration
Give something else besides money
(payment in kind)
For example, you owe me
0 — I agree to take a
pencil in full satisfaction —
good consideration
See Pinnel’s case.
For the courts to find fresh consideration in these circumstances,
there must be a change from the original contractual obligation to
the advantage of the creditor, not simply a change suitable to the
debtor, such as payment by instalments.
It doesn’t matter who makes the request for the change — that is,
the creditor or the debtor, as long as the change is to the advantage
of the creditor.
64 GSN412: Business Law 1
(ii) If the agreement to accept the lesser sum is recorded as a deed.
(iii) Composition with creditors.
That is, part payment of a number of creditors — each creditor
undertakes to accept a lesser sum in satisfaction of a greater
amount. A party to such an arrangement cannot claim his/her
original debt because this would constitute a fraud on the other
creditors. This common law rule has been given statutory effect by
Part X of the Bankruptcy Act 1966 (Cth).
(iv) Part payment by a third party
If a creditor agrees to accept a lesser sum (in full satisfaction of a
debt) from a third party to the contract, then the payment of the
lesser sum constitutes good consideration for the creditor’s promise
to forgive the rest of the debt. Proceedings taken to recover the
remainder of the debt would constitute a fraud on the third party.
(v) Operation of Doctrine of Equitable Estoppel
This equitable doctrine prevents a person from departing from an
assumption induced by the person’s conduct, representations or
promises, where to do so would be unconscionable and would cause
detriment to the person who acted upon the assumption. The
doctrine enables the court to do what is required to avoid the
detriment to the party who has relied on an assumption induced by
the other party, but no more.
In 1988, the High Court examined the doctrine thoroughly in:
Waltons Stores (Interstate) Ltd v Maher (1988) 76 ALR 513;
62 ALJR 110.
The pre-existing law was expanded in the following respects:
(1) It had previously been thought that there must be an existing
contract between the parties or at least there had to be an
existing legal relationship of some type. In Waltons Stores v
Maher, the doctrine was applied where there was no preexisting
legal relationship, only an assumption that a contract
would exist.
(2) The doctrine of equitable estoppel had never served as a cause
of action — it was only a defence (that is, could only be relied
upon by a defendant) — it could only be used as a shield and
not a sword.
However, it is now possible for a plaintiff to rely on the doctrine in
certain circumstances. In this unit, we are concentrating on how a
defendant may seek to rely on the Doctrine of Equitable Estoppel.
Example
One person (B), by words or conduct, may promise or represent to another
person (A) that they do not intend to exercise the strict legal rights that they
have against that other person (A), for example, rights which B may have under
a contract with A. If A acts or relies on that promise or representation to their
detriment, then B will be estopped from reverting to their original position as if
they had never made the promise or representation.
Module 4: Contracting Principles (Part 2) 65
That is, B will be estopped (or prevented) from insisting on their strict legal
rights. It is at the point in time when the person (B) is seeking to revert to their
original position that the courts will look at the circumstances and see whether
the other person (A) has acted to their detriment.
The courts would ask:
If the person (B) is allowed to withdraw their promise or
representation, will the other person (A) be in a worse position
than they would have been in if the promise or representation had
never been made? That is, is that other person (A) in a position of
material disadvantage as a result of relying on B’s promise or
representation?
If A is in a worse position, then there is reason for the Doctrine of Equitable
Estoppel to be applied. For example, a landlord represents or promises a tenant
that for the next 12 months of the tenancy, the tenant’s rent will be reduced. At
the expiration of the 12 months the landlord sues for the arrears of rent. The
tenant may be able to argue equitable estoppel and estop the landlord from
recovering the arrears. A detriment may be found in the fact alone that the
tenant would now have to meet the arrears in a lump sum rather than as a
periodic payment if the landlord had never made the representation.
Note: Estoppel is not used only as an exception to the General Rule stated in
above but has many varied applications.
The representation can be made by conduct.
See Hughes v Metropolitan Railway Co. [1877] 2 AC 439.
B may be able to revert to the original position by giving reasonable notice to
the other party (A) of their intention to do so, thus giving A the opportunity to
get back to the position they would have been in if the promise or
representation had never been made.
Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130 (High
Trees House case).
4.3 The Importance of Deeds
A deed is a contract deriving its validity from the form in which it is expressed.
A deed may also be referred to as a formal contract, a contract under seal or
a specialty.
A deed is something the law recognises as a substitute for consideration in
making a promise binding. That is, a promise (covenant) made in a deed is
enforceable in a court by the promisee even though the promisee has not
provided any consideration to the promisor.
For a document to constitute a deed it must satisfy various requirements as
required by Part 6 of the Property Law Act 1974 (Qld):
1. The document must be in writing.
2. A deed must be signed by the person making it, sealed and delivered.
Sealing and delivery are not literally required and a statement of intention
at the foot of the deed, that it is sealed and delivered is sufficient.
3. The signature of the person whose deed it is must be witnessed in
accordance with the requirements of Part 6 of the Act.
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4. There does not need to be any agreement.
• A deed to which there is only one party is known as a deed poll.
• Where there is more than one party to a deed, it is called an
indenture.
• Promises made in the form of a deed are called covenants.
Issues for managers
Managers need to consider the following when entering into a contract (Adapted
from Griggs et al., pp. 25–27):
(a) Ensure important contracts are committed to writing and
that the contract constitutes the whole of the agreement.
(b) Name the contract clearly.
(c) Use Plain English.
(d) Identify scope and timeframes.
(e) Prepare the contract on the basis of forging a long term and
not short term relationship.
(f) Be careful when trying to exclude liability that may be
permitted under normal contracting principles but may fall
foul of the Trade Practices Act or other statutory provisions
(see Module 6).
(g) Apply risk management principles to every contract—
identify where risk may arise in forming and carrying out
the contract and manage those risks.
(h) Clarify the jurisdiction which would regulate any dispute
concerning the contract and the method of determining any
disputes e.g. by arbitration, alternate dispute resolution.
(i) Consider whether the promise should be in the form of a
deed or agreement but always seek tax and stamp duty
advice before determining a course of action.
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