Tutorial Two

FORMATION AND VARIATION OF

TERMS

Tutorial format:

Students are expected to prepare for the Tutorial in a similar way to the workshop and
tutorial sessions last year – ie preparatory reading and reflections upon the questions
set. In this instance we would like you individually to give thought to the simple
questions relating to contractual formation as it is important to build upon the
foundations of the Law of Obligations reminding yourselves what you already know
and adding depth to your understanding.

The purpose of this tutorial… is to remind ourselves’ of the basic demands of contractual
formation and to consider those circumstances where the parties may enter further discussion
of the terms of a contract, leading to the renegotiation and variation of their obligations under
said contract. In relation to the variation of contractual terms this raises issues of
consideration, and in some circumstances, economic duress, and promissory estoppel. Our
reading in this area also gives us something of an insight into the way that cases might be
argued and how judges/courts craft their judgments and develop the law. It is important to
understand the expectations of the law in relation to contractual variation, but this is also an
interesting area for wider discussions, and one that turns a focus on the wider role of
consideration.

- Arvind is good, but you need to have further reading because you need more detail

Reading:

You are expected to read the chapters on Formation and Variation of Contractual Terms in
your preferred textbook, although this reading may also take you directly to chapters on
Consideration, Promissory Estoppel and Economic Duress which are the focus of our
discussion here. You will also have access to Law Trove and Star plus by which to extend
your reading before and after the tutorial session.
There is an interesting account of the development of the High Trees principle in
Denning, The Discipline of Law, pp 197-223.

Cases:

Stilk v Myrick (1809) 170 ER 1168 – a promise to pay more for the
performance of an existing contractual Obligation is not binding for
want of consideration. Agreements cant be altered without the
provision of consideration to underpin the promise and contractually
bind the parties.
- Facts
o C = a sea-man
o D = Shipmaster
o C contracted with D to sail the baltic back with a wage or
5 per month
o 2 of the crew deserted, and D promised to pay them wages
if they fulfilled their duties
o D though refused to pay the wages thereafter, and C sued
for breach of contract
- Held;
o Claim was dismissed
o Why? There was no consideration for the promise to give
extra pay for those who remained on the ship –
consideration meaning no negotiation = there was not
actually any contract.
 Consideration = each party must give something in
return for the bargain they receive in the contract,
without that the contract will not be valid.

Williams v Roffey Bros & Nicholls [1991] 1QB 1; [1990] 1 All ER

512 – expanded the rules in stilk v myrick
- Facts;
o D = builders
o C = Williams, a carpenter
o D was contracted to refurbish flats
o The contract had a penalty clause for D (a clause in a
contract which forces the wrong party into a penalty / sum
of money for their breach) for late completion
o C was contracted by D, and soon fell behind his work
o D then offered him bonus payments to finish on time, so C
carried on working until the payments stopped.
o C then sued for breach of contract.
- Claims
o D argued that there was no consideration – they would
receive no benefit in return in law, only the practical
benefit that they would be able to avoid the penalty clause.
And, C was only doing what he was already contractually
obligated to do, making the agreement to pay extra for
doing the work on time unenforceable – they relied on
Stilk v Myrick, fort he fact that performance of an existing
duty was not good consideration.
- Held;
o It was held by the CoA that Stilk v Myrick had been
refined since then – a performance of existing duty is
considered if it was not made under duress, and if there
was any practical benefit whatsoever to be received by the
party.
o In this case, D (the head contrctor) had not made the extra
payment offer under duress, as they did it themselves, and
they did evidently receive a practical benefit by avoiding
the penalty clause.
o Therefore, it was held that the promise for extra pay was
enforceable.
 o this case only applies where work was done or goods were
supplied
o both parties knew the activity was underpriced, and thus,
that there might be a renegotiation of money. More so,
when there will be a renegotiation
o The money comes around through the head contractor,
which shows that it wasn’t made under economic duress –
they made that decision – the courts almost said that if
there was economic duress, then it is not sufficient
consideration.
 Practical benefit in this case; avoided the penalty
clause (that the work was done on time) (q. shouldn’t
the original contract have done this) / they did 8
more flats – they altered their way of doing things /
saved the head contractor from having to find
another sub-contractor (but why would they have to
look for another one anyway in the original contract
if they had an intention to create legal relations)
 The courts could’ve therefore accepted that 2/3
should’ve been accepted in the first place
 They went through such effort to show that there
were different practical benefits because they knew
there would be variations in the contract, and the
head contractor provided the bonus payment, not the
subcontractor demanding more money.
 Williams is a lot about the idea that there’s payment
of a lesser sum = consideration

What supports variation

- Consideration
o Economic pressure?
o Practical benefit ?
 - Equity – if no consideration because consideration is the
common law
o Promissory estoppel (only reliable where there is an
existing legal relationship)
 High trees -

??? Collier v Wright [2007] EWCA Civ 1329 – PE can have an

extinctive effect on the original obligation when it relates to the one
off payment of debt.
- Facts
o C = Wright
o D = collier (a debtor)
o D was jointly liable for a debt to C with 2 other business
partners
o C told D to pay 1/3 of the debt, and the others would also
pay their share of 1/3
o On the bankruptcy of the other debtors, C served on D a
statuatory demand for the entire sum (the remaining 2/3) A
statuatory demand is a written warning that states that if
you do not pay your debts, then it is acceptable for the
creditor to take your proceedings to court
o D therefore had to prove that there was a triable issue
(liable or subject to question) for the statuatory demand to
be set aside
- Held;
o There was a triable issue on promissory estoppel – so the
courts held in favour of D.
 PE is the idea that a party may recover proceedings if
the reliance on that promise was reasonable, and the
 party’s attempting to recover detrimentally relied on
the promise.

Re Selectmove Ltd. [1995] 2 All ER 531; [1995] 1 WLR 474

- Facts
o C = inland revenue
o D = a company, Selectmove
o C petitioned the court for a winding up order against
Selectmove, because they believe they had arrears in the
tax they owed under the PAYE system of tax collection
o D appealed on the grounds that they had met w a tax
collector, and agreed that they could pay the arrears in
instalments instead of being wound up
- Issues / claims
o C argued that the tax collector didn’t have the authority to
make an agreement which bound the revenue for D
 Also, there was no consideration for this agreement,
as the company were only paying that they owed
already
o D referred to the case of Wiilliams v Roffey bros and the
fact that where the agreement varied, there would be good
consideration If the other party obtained some sort of
practical benefit from the new arrangement. They did
obtain a practical benefit, as if the company had gone into
liquidation, it might not have received as much tax back.
- Held
o In favour of C
  The tax collector did lack actual authority to bind the
revenue
 They also questioned the use of Williams, since this
case only applied where work was done or goods
were supplied – but they had to follow it anyway
because of the position of the court of appeal having
to abide by the precedent set by the house of lords.
 The agreement was not supported by consideration.

Central London Property Trust v High Trees House [1947] 1 KB 130,

WLR 188
- Facts
o C = high trees, leasers
o D = central London property trust
o Property suffered from falling occupancy rates due to the
war in 1940, so the parties agreed to reduce the rents by
half – the other parties relied on that promise of reduced
rent, which is the important point.
o But, it was not expressly agreed how long this would last
for, so D continued to pay the rates like this
o By 1945, the war ended and the flats were in full
occupancy
o C sued D for the full rent from 1945 onwards
- Issues / claims
o D argued that the agreement to pay the rent at a reduced
price applied to the whole term of the lease
o C was estopped from claiming that the rent should be
higher.
- Held;
 o The court referred to Hughes v met railway co where it
was held that parties should be prevented from going back
on a promise to waive certain rights.
o Cases showed that a promise which the promisor knew
was going to be acted on by the person to who it was
made, was enforceable despite a lack of consideration
o The time had come for this to be recognised as giving rise
to estopppel, and here, C had made a binding promise
o Evidence though only showed that this applied during the
war, and thus, after the war D was liable for the full rent.
o PE will only ever suspend things, it is never permanent,
it’s only temporary / must be with clean hands / is only a
defence / is only reliable where there is an existing legal
relationship.
o This case showed the use of PE in the case where
consideration posed a limitation

Economic duress – something to think about when looking at

variation
- If you want to rely on economic duress, you have to do so
quickly, because it makes the contract voidable – meaning you
have the option to make the contract void or not.
- If you don’t do it quickly, it seems like you are affirming the
contract, and arguably, are not really under duress.

??? Baird Textiles Holdings Ltd. V Marks and Spencer plc [2001]
EWCA Civ 274, [2002] 1 All ER (Comm) 737
- Facts
o C = supplier
 o D = customer
o C had been a supplier of garments to D for 30 years
without a proper contract or formal agreement in place
o D gave notice that they will not be purchasing from C
anymore at the end of the year
o C sued D on 2 grounds
 D is in breach of an implied contract, under which a
longer notice period is required
 Even in absence of a contract, D was estopped from
terminating the relationship on short notice pursuant
to Walton stores v Maher.
- Held;
o Claim failed, both of C’s arguments failed
o PE is not a cause of actIon, and can only be applied where
there is an existing contractual relationship between the
parties
o PE can although assist in cause of action, as was held in
relationship to conventional estoppel in Amalgamated
investments

North Ocean Shipping v Hyundai Construction: The Atlantic Baron

[1979] QB 705
- Facts;
o C = Shipbuilders Hyundai construction
o D = North ocean shipping
o C agreed to build a tanker for D for a fixed price to be paid
within 5 instaallments
o C opened a letter of credit, in case D was not able to pay
the 5 instalments
 o After the first installment, the value of the dollar went
down, so C claimed a 10% increase in the building price in
response.
o D rejected the claim and paid the following 2 installments
based on the original price only, not when the price of the
dollar had gone down
o C returned these payments in rejection
o C also then gave an ultimatum to D, that they either accept
the terms of the payment increase, or they’ll terminate
their contract
- Issues
o At the time, D wanted a very lucrative agreement, and thus
they agreed to the tanker contract because they wanted to
avoid losing this deal, and also agreed to the increase
without prejudice to their rights
 D started a claim for the return of the 10% within a
year after the tankers delivery due to economic
duress
- Held;
o Court found in favour of C
o C increase of the letter of credit = consideration for D’s
increased payments under the original contract
o While C’s increase did = economic pressure, this made the
original contract voidable, and D’s payments without
protest affirmed the contract – D’s claim based on
economic duress thus had to fail.

Pao On v Liu Yau Long [1980] AC 614; [1979] 3 All ER 65; [1979] 3
WLR 435
- Facts
 o C = Owners of shares within a private company
o D = anticipated buyers of a company
o D were majority shareholders in a public company
o C agreed to sell their shares in the private company to D so
that D may acquire the building, and in return, C would get
the public company shares
o But, fearing the drop in share prices, they contracted that C
would not sell their shares for a while
o C realised that D may profit from this though, so wanted to
make a second agreement in which C was indemnified for
any fall in share value, but might also benefit from any rise
in share value.
o D agreed, fearing that if he didn’t, this would delay the
main contract.
o As it happens, the share value did drop, and C sought to
rely on the second contract, but D did not agree and this
case was brought to the council
- Held;
o Relying on Lampleigh v Braithwaite, an act done before a
promise was made was good consideration for that
promise if it was done at the promisors request, and the
parties understood that the act was to be paid for at a later
date, and the payment or benefit would’ve been
enforceable had It been promised in advance.

Compagnie Noga D’Impotation et d’Exportation SA v Abacha [2003]

EWCA Civ 1100, [2003] 2 All ER (Comm) 915
Consideration / PE / Economic duress

TT ARVIND – Promissory estoppel notes

- What; estoppel holds a party to be legally prevented from going back on something
they have said in the past, promised or accepted.
- How; They are triggered by one party’s reliance or representations or assurances
made or given by the other
o Situation 1 – the parties face a contract that has not come into effect, but
they did not comply with a legal formality. As a contract, this promise is
unenforceable as the law does not treat past consideration as being good
consideration
o Situation 2 – renegotiation. This results in one party agreeing to do more, or
accept less – Williams v Roffey
- PE is also used to get around the rule in Foakes v Beer (in this case, an agreement to
accept a lesser sum of money than is due under a contract is not enforceable)
- Requirements for PE
o There must be a promise
 Promisee must’ve relied on this promise by changing his behaviour
 A person who has by her words or conduct given a clear and
unequivocal assurance can also be estopped if that assurance or
representation is in the nature of a promise (meaning that it
represents a choice relating to the future) – Robertson v Minister of
pensions / James v Heim Gallery London Ltd
o Assurance
o Representation which is clear and unequivocal to the effect that the promisor
will not rely upon a particular legal right
 It does not have to be expressly given and can be implied from a
person’s words or conduct, but has to be clear – Hughes v
Metropolitan Railway co
o Must be an existing legal relationship
 High trees and Denning’s judgement, emphasises the intention to
create legal relations rather than the intention to alter existing legal
relations
o The making of the promise and the reliance on it must take place in
circumstances which make it inequitable to permit the promisor to resile
from the promise
 By reliance, we mean that the promise must have been led to alter his
behaviour or conduct by the promise or assurance, otherwise, it will
not apply
  Some authorities go further to speak about detriment – that the
altering of behaviour must’ve been to the party’s detriment. But
generally, the courts do not rely on detriment.
 The courts will not apply PE if there has been impropriety on the part
of the promise – D and C Builders v Rees was a case where the COA
held that they were entitled to recover money
 Courts will also not apply PE if it seems that the promisor had
good reasons for changing his mind – Williams v Stern
 Courts regard the party’s intentions, asking whether the
promise was intended to be binding – Harvey v Dunbar Assets
plc
- Limitations of PE – It can only be used as a defence, and it can only suspend the right
that the ppromisor promises not to enforce. It does not extinguish the right, only
puts the right into abeyance.

Consideration
- A contract must be supported by consideration and must be entered with the
intention to create legal relations
- Rules relating to consideration are grounded in the idea of a contract as a bargain
struck between consenting parties.
- Consideration is the price one party pays for the other party’s promise or
performance – a pprice of some sort must be paid for an agreement to be
enforceable as a contract
- If one party makes a promise, the other must give something in return for it in order
to ‘buy it,’ where the obligations are entirely upon one party, with nothing provided
in return by the other, is a gratuitous promise.

Articles:

O’Sullivan, J, ‘In Defence of Foakes v Beer’ [1996] CLJ 219-28

Austen-Baker, ‘A strange sort of survival for Pinnel’s case: Collier v P & M J Wright
(Holdings) Ltd (2008) 71 (4) MLR 611

Chen-Wishart, M. and Beatson J., (1997) “Consideration: Practical Benefit and the
Emperor’s ew Clothes” from Chen-Wishart, M. ad Beatson, J., Good Faith And Fault in
Contract Law pp123-150, Clarendon Press

Giancaspro, ‘Practical Benefit: An English anomaly or a growing force in contract law?’

(2013) 30 JCL 12
 - Is good for the formative and what we’ll be assessed on

You may also find it useful to look for case notes in relation to some of these significant
cases.

Before you attend the tutorial you should briefly remind yourselves of the following basic
points:

1) Consider the requirements and process of establishing a legally binding contract.

- Offer
- Acceptance
- Consideration
- Intention to create legal relations
- Certainty
- Capacity

2) How might the timing of each stage impact upon the content of the contract?
- Offer
o immediate responses – would see the terms of the contract simple and
straightforward
o Delayed responses – would see the content of the contract to be a lot more
detailed
- Acceptance
o timely acceptance – would see possible reconsideration of the contract terms
- Consideration
o A lot of consideration would see more negotiations and therefore constant
reformation and changes within the contract
- Intention to create legal relations
o Prompt intent - If parties express their intent promptly, the contract
might focus on business-related terms without extensive legal
safeguards.
o Delayed intent - If there's a delay in expressing the intent to create
legal relations, the contract may include more legal formalities and
protective clauses.
 3) At what point is formation of the contract complete and what impact does this have in
relation to any further amendments that either of the parties may wish to make?
- Formation of the contract occurs upon acceptance, and meeting of the minds
- Any further amendments that either parties may wish to make

Non assessed = a question on variation

Problem scenario

Your client is Tony Smith Tony has contracted with Neil for the construction of
Greenacres for a fixed sum of £800,000. Neil has subcontracted the electrical work to
his brother-in-law Jim. Originally, Jim quoted a price of £35,000 for the electrical
work but “in order to help out Neil”, he agreed to do the job for a fixed price of
£30,000.

Before contracting with Neil, Tony obtained several estimates all of which (apart
from Neil’s) were well over £1 million.

As the construction work proceeds, it becomes apparent that Neil has under-priced the
contract. At a crisis meeting, Neil presents Tony with two options: either to use lower
grade materials or to increase the price by £50,000. Tony is reluctant to incorporate
cheaper materials and so he agrees to pay Neil an additional £50,000.
Work continues, but when Jim discovers that Tony has promised Neil an additional
£50,000, Jim demands that Neil should increase the sub-contract price by £5,000 to
bring it into line with the price originally quoted for the work. Neil tells Jim that,
whilst he would like to do this, he simply cannot afford to do so. However, Neil tells
Tony that there is a difficulty with Jim’s sub-contract and that it is in his (Tony’s)
interest to promise Jim a bonus of £5,000 if he wants the electrical work to be
completed on time. After some hesitation, Tony tells Jim that there will be a bonus of
£5,000 for timely completion of the sub-contract work.

When the work at Greenacres has been completed, the final accounts for payment
(including the promised additional sums) are submitted.

Outlining which further facts (if any) you would need to know, advise Tony (i)
whether he is contractually bound by his promise to pay an additional sum of £50,000
to Neil; and (ii) whether he has any contractual liability to Jim (the sub-contractor
electrician) to pay the promised bonus of £5,000.

- i) Is Tony contractually bound by his promise to pay an additional 50,000 to Neil

o Facts
 Tony has contracted w Neil for 800K
  Tony gained several estimates for well over 1 mil.
 Neil underestimated the contract, and tells Tony to either use lower
grade materials or increase the price by 50,000
 He agrees to pay 50,000 extra
 This is a variation that has been given = a need for fresh consideration
– Stilk and Myrick precedent.
o Is this a consideration? Arguably, yes, this was proper consideration. For
consideration to be efficient, there must have been an already established legal
relationship.
o Williams v Rofey expanded and refined the rules in Stilk v Myrick, but said that
Stilk v Myrick still stands, and says that consideration should not be made
under duress, and there should be a practical benefit for the party in order to be
contractually bound
 In this case, Tony was not under duress for his decision, for although
he was hesitant to use cheaper grade materials, he was fine with paying
the extra 50,000
 Moreover, he is receiving a practical benefit by not using cheaper
grade materials, achieving a better-finished product of the construction
(and possibly on time) / not having to find another contractor.
 This is similar to Williams in the fact that a lot of the practical
benefits were supposed to be there in the original contract.
- If there was a set time by which the construction was supposed to be done, and the
ultimatum was also given then, then this would amount more to economic duress,
because it would deem the contract voidable – its now w more money, or never –
economic duress is a very very important line of argument since it has the ability to
make the contract voidable.

- Ii)
o Facts
 Neil also tells Tony that it is in his interest to promise Jim a bonus of
5,000 if he wants the work completed on time – hesitantly, he does so.
o Is tony contractually bound to pay Jim the extra 5,000
o Consideration
 Arguably, there was no proper consideration, since Tony may have
agreed to pay extra, but only did so under the duress of trying to
complete the work on time.
 This means that the contract is now voidable.

PE is a defence for a party to be able to go back on their promise, given the idea that the
alternative party did not rely on the promise wholeheartedly.