6/20/2022

CONTENTS

1. Consideration
2. Adequacy and sufficiency of consideration
3. Promissory Estoppel
4. Intention to create legal relations
5. Privity of contract
6. The Electronic Contract

1
 6/20/2022

RULES OF CONSIDERATION

What is Consideration?

An agreement must be supported by consideration if it is to be a contract.

Executed Consideration: is what a person DOES.

Executory Consideration is what a person PROMISES to do.

RULES OF CONSIDERATION

Additional Rules for Valid Consideration

Rules that must be met for consideration to be valid:

• Performance must be legal. The courts will not enforce payment for
illegal acts
• Performance must be possible. Agreeing to perform the impossible is
not a basis for a binding contract
• Consideration must pass from the promisee.
• Consideration must be sufficient but not necessarily adequate.

2
 6/20/2022

Past Consideration
PAST CONSIDERATION

Anything which has already been done at the time the promise is made.

Example:

A promise to pay for work already carried out, unless there was an
implied promise to pay a reasonable sum before the work began.

Past consideration is insufficient and therefore is not valid.

It cannot make the promise binding.

PAST CONSIDERATION

If there is an existing contract and one party makes a further promise, no

contract will arise.

Even if the promise is directly related to the previous bargain, it has been
made upon past consideration.

3
 6/20/2022

PAST CONSIDERATION

Bill of exchange:

GOODS
Debtor Creditor
Acceptor Maker
Drawee BOE Drawer
Payer Payee

BUYER A SELLER B
Rs.
PAST CONSIDERATION

Past consideration for a promise is sufficient to make the promise binding in three
instances.

(a) Past consideration is sufficient to create liability on a bill of exchange (such as a

cheque) under The Bills of Exchange Act 1882. Most cheques are issued to pay existing
debts.

(b) After 6 (or, in some cases, 12) years the right to sue for recovery of a debt becomes
statute barred by the Limitation Act 1980. If, after that period, the debtor makes
written acknowledgement of the creditor's claim, the claim is again enforceable at law.

(c) When a request is made for a service this request may imply a promise to pay for it.
If, after the service has been rendered, the person who made the request promises a
specific reward, this is treated as fixing the amount to be paid.

4
 6/20/2022

PAST CONSIDERATION

Both parties must have assumed during their negotiations that the
services were ultimately to be paid for.

Re Casey's Patents 1892

The facts:
A and B, joint owners of patent rights, asked their employee, C, as an
extra task to find licensees to work the patents.
After C had done so, A and B agreed to reward him for his past services
with one-third of the patent rights.
A died and his executors denied that the promise was binding.

Consideration need NOT be Adequate, but Sufficient.

ADEQUACY AND

• Adequate literally means "of equal worth".

SUFFICIENCY

• There is no remedy at law for someone who simply makes a poor

bargain.

• Consideration is sufficient if it is capable of expression in economic

terms (i.e. when it has economic value).

5
 6/20/2022

Adequacy
ADEQUACY AND

It is presumed that each party is capable of serving their own

SUFFICIENCY

interests, and the courts will not seek to weigh up the

comparative value of the promises or acts exchanged.

Sufficiency
Consideration is sufficient if it has some identifiable value.
The law only requires an element of bargain, not necessarily
that it should be a good bargain.

Forbearance or the promise of it may be sufficient consideration

if it has some value, or amounts to giving up something of value.
ADEQUACY AND
SUFFICIENCY

Performance of existing contractual duties

Performance of an existing obligation imposed by statute is no

consideration for a promise of reward.

But if some extra service is given, that is sufficient consideration.

6
 6/20/2022

Promise of additional reward

SUFFICIENCY

If there is already a contract between A and B, and B promises additional

reward to A if they (A) perform their existing duties, there is no
consideration from A to make that promise binding.

If a claimant does more than perform an existing contractual duty, this

may amount to consideration.

Where the party promising the additional reward has received a

'practical' benefit that will be treated as consideration even if, in law,
they have received no more than they were already entitled to under the
contract.

Performance of existing contractual duty to a third party

SUFFICIENCY

If A promises B a reward if B will perform their existing contract with C, there is consideration for A’s
promise since they obtain a benefit to which they previously had no right, and B assumes new
obligations.

REWARD
C
A B

7
 6/20/2022

Waiver
SUFFICIENCY

When a party to a contract has a legal right and chooses not to exercise it

Waiver is not a variation to a contract

Waiver of existing rights

SUFFICIENCY

If X owes Y £100 but Y agrees to accept a lesser sum, say £80, in full settlement of Y's
claim, there is a promise by Y to waive their entitlement to the balance of £20.
The promise should be supported by consideration.

OWES
£100
X Y
Yaar Bus £80 do, full settlement!

It is a Promise by “Y” to Waive £20.

8
 6/20/2022

There are exceptions to the rule that the debtor (X) must give
SUFFICIENCY
consideration if the waiver is to be binding.
Exceptions
Alternative consideration If X offers and Y accepts anything to which Y is not already entitled, the extra thing
Anon 1495 is sufficient consideration for the waiver
Pinnel's Case 1602 • Goods instead of cash
• Early payment
Bargain between the If X arranges with creditors that they will each accept part-payment in full
creditors entitlement, that is bargain between the creditors
Woods v Robarts 1818
X has given no consideration but he can hold the creditors individually to
the agreed terms
Third-party part-payment If a third-party (Z) offers part-payment and Y agrees to release X from Y’s claim to
Welby v Drake 1825 the balance, Y has received consideration from Z against whom they had no
previous claim
Promissory estoppel The principle of promissory estoppel may prevent Y from retracting their promise
with retrospective effect

In relation to consideration, advise Fred if the following agreements are legally

binding:
TEST YOUR
LEARNING

1. He buys a car from Katy worth £100,000 for £1.

2. He accepts his Aunt’s offer of a vase. Fred is not required to pay anything.
3. Without any prior agreement, Fred cleans his friend’s car. Fred is demanding £10
for the work, but his friend is refusing to pay.
4. He is asked by his employer to work late one evening, in return the employer
promises to pay him a £1,000 bonus.
5. He promises a reward to anyone who finds his lost dog. Toby finds the dog.

9
 6/20/2022

1. Legally binding, consideration only needs to be sufficient, £1 is fine.

ANSWER
2. Not legally binding, Fred has not provided any consideration in
return for the vase.
3. Not legally binding, the work done is past consideration as there was
no prior agreement.
4. If Fred is required to work evenings under his employment contract
then the employer would not be legally bound to pay the bonus.
Fred has not provided additional consideration.
5. Legally binding. This is executed consideration, Fred promised a
reward for the act of finding the dog.

The doctrine of promissory estoppel:

PROMISSORY

Based on the principles of FAIRNESS and JUSTICE.

ESTOPPEL

It prevents a person going back on his promise to accept a lesser

amount.

10
 6/20/2022

Central London Property Trust v High Trees House 1947

PROMISSORY ESTOPPEL

The facts:
In September 1939, the claimants let a block of flats to the defendants at an annual
rent of £2,500 pa. It was difficult to let the individual flats in wartime, so in January
1940 the claimants agreed in writing to accept a reduced rent of £1,250 pa. Note, no
consideration passed from the defendants in return for the reduced rent. There was
no time limit set on the arrangement but it was clearly related to wartime conditions.
The reduced rent was paid from 1940 to 1945 and the defendants sublet flats during
the period on the basis of their expected liability to pay rent under the head lease at
£1,250 only. In 1945 the flats were fully let. The claimants demanded a full rent of
£2,500 pa, both retrospectively and for the future.

Decision: The agreement of January 1940 ceased to operate early in 1945. The claim
for full rent after the war was upheld. However, the 1940 agreement had estopped
any claim for the period 1940 to 1945.

If the defendants in the High Trees case had sued on the

promise, they would have failed as they provided no
PROMISSORY

consideration to the 1940 agreement.

ESTOPPEL

Therefore, the principle of promissory estoppel is ‘a shield not a

sword' and cannot become a cause of action in its own right.

Promissory estoppel only applies to a promise of waiver which

is entirely voluntary.

11
 6/20/2022

INTENTION TO CREATE

Where there is no express statement as to whether or not legal relations

LEGAL RELATIONS

are intended, the courts apply one of two rebuttable presumptions to a

case.

• Social, domestic and family arrangements are not usually intended to

be binding.
• Commercial agreements are usually intended by the parties involved
to be legally binding.
INTENTION TO CREATE

The word 'presumption' means that it is assumed that something is the

LEGAL RELATIONS

case, for example it is presumed that social arrangements are not

deemed to be legally binding.

'Rebuttable' means that the presumption can in some cases be negated;

the burden of proof for rebutting the presumption is on the party seeking
to escape liability.

12
 6/20/2022

INTENTION TO CREATE
LEGAL RELATIONS

Intention to create legal relations

An agreement will only become a legally binding contract if the parties

intend this to be so.

Strongly presumed in the case of business agreements

Not presumed if the agreement is of a friendly, social or domestic

nature.
DOMESTIC ARRANGEMENTS

Husband and wife

The fact that the parties are husband and wife does not mean that they
cannot enter into a binding contract with one another.

Where agreements between husband and wife or other relatives relate

to property matters the courts are very ready to impute an intention to
create legal relations.

Relatives
Agreements between other family members may also be examined by
the courts.

13
 6/20/2022

DOMESTIC ARRANGEMENTS

Other domestic arrangements

Domestic arrangements extend to those between people who

are not related but who have a close relationship of some form.

The nature of the agreement itself may lead to the conclusion

that legal relations were intended.

Commercial agreements

When business people enter into commercial agreements

COMMERCIAL
AGREEMENT

Presumed that there is an intention to enter into legal

relations

unless this is expressly disclaimed or the circumstances

indicate otherwise.

14
 6/20/2022

The words relied on by a party to a commercial agreement to

show that legal relations are not intended are not always clear.
COMMERCIAL
AGREEMENT

In such cases, the burden of proof is on the party seeking to

escape liability.

Care needs to be taken during the negotiation stage as to

whether a contract is intended. Use of the words ‘subject to
contract’ amounts to a strong presumption that no immediately
binding contract is intended.
STATUTORY PROVISIONS

Statutory provisions

Procedural agreements between employers and trade unions for the settlement of
disputes are not intended to give rise to legal relations, in spite of their elaborate
content, under the Trade Union and Labour Relations (Consolidation) Act 1992.

15
 6/20/2022

LETTERS OF COMFORT

Letters of comfort

For many years, holding companies have given 'letters of comfort' to

creditors of subsidiaries which purport to give some comfort as to the
ability of the subsidiary to pay its debts.

Such letters have always been presumed in the past not to be legally
binding.
TRANSACTIONS BINDING IN

Transactions binding in honour only

If the parties state that an agreement is 'binding in honour

HONOUR ONLY

only’,

this amounts to an express denial of intention to create legal

relations.

16
 6/20/2022

PRIVITY OF CONTRACT

Consideration must move from the promisee.

Consideration is the price of a promise

Price must be paid by the person who seeks to enforce the

promise.

For example, A promises B that (for a consideration provided by B)

A will confer a benefit on C. Therefore, C cannot as a general rule
enforce A's promise since C has given no consideration for it.
PRIVITY OF CONTRACT

The party to the contract who imposes the condition, or obtains a

promise of a benefit for a third party, can enforce it

But damages cannot be recovered on the third party's behalf, since a

claimant can only recover damages for a loss they have suffered.

17
 6/20/2022

PRIVITY OF CONTRACT

Exceptions

• The third party can sue in another capacity

• Collateral Contracts
• Valid assignment
• Foreseeable loss to the third party
• Implied trusts
• Statutory exceptions
• Agency
• Covenants

Contracts (Rights of Third Parties) Act 1999

CONTRACTS ACT

This Act has a fundamental effect on the rule of privity of

contract

Setting out the circumstances in which a third party has a right to

enforce a contract term or have it varied or rescinded,

and a right to all the remedies that are available for breach of
contract.

18
 6/20/2022

Contracts (Rights of Third Parties) Act 1999

CONTRACTS ACT

There is a two-limbed test for the circumstances in which a

third party may enforce a contract term.

• Whether the contract itself expressly so provides

• Where the term confers a benefit on the third party, unless it

appears that the contracting parties did not intend them to
have the right to enforce it

Contracts (Rights of Third Parties) Act 1999

CONTRACTS ACT

• Damages awarded to the third party will be reduced by the amount of

damages already awarded to the original promisee.

• The Act does not confer third-party rights in relation to a company's

constitution, or employment contracts.

• So, for example, a customer of an employer cannot use this Act to

enforce a term of a contract of employment against an employee.

19
 6/20/2022

It could be said that the case of Byrne v Van Tienhoven, dating from 1880, is an early
example of an electronic contract.
ELECTRONIC
CONTRACTS

In that case, the sending of an acceptance by telegram was an important action in a

chain of events leading to the formation of a contract.

Since then, technology has permitted such actions to become almost instantaneous.

Fax messages, emails and use of the internet may all play a part in the communication
of offers and purported acceptances.

This is a potentially wide-ranging topic and the law is still in its infancy.

20