For this assignment, I will elaborate on the doctrine of consideration putting into context what purpose the doctrine serves in English contract law. I will additionally expand on its relationship with the other requirements of ‘agreement’ and the ‘intention to create legal relations’. I will also bring into focus ‘the enforceability issue’ and the ‘past-consideration rule’. When relevant I will put forward cases and evaluate the extent to which social policy, economic factors, business realities or other factors have played a part in changing contract law and how the courts have applied and developed established principles.
Purpose of consideration
‘Consideration is the price for which the promise of the other is bought. It must be something of value which is recognised by the courts as amounting to consideration.’ ‘Traditionally consideration has been defined in terms of either a detriment to the promise or a benefit to the promisor.’
To elaborate on consideration, I have looked at the approach in ‘Currie v Misa.’ It states, ‘a valuable consideration may consist either in some right, interest, profit or benefit accruing to one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other.’
This interpretation highlights deficiencies seen in contracts based purely on an exchange of promises. The benefit and detriment theory suggest that consideration must be something of economic value this is outdated for example ‘promises of a reward for not smoking. The promisor may gain something intangible and be content despite no economic value. The promisor has got what they have bargained for therefore that is consideration.
English law has advanced by enforcing bargains rather than promises. Lord Mansfield rightly criticised this theory declaring ‘all written contracts between merchants were binding without consideration and that a moral duty to pay although unenforceable itself, was consideration for a promise to make the payment’. The bargain theory is inconsistent with a mass of case law. Unilateral contracts that are generally accepted as enforceable do not necessarily involve any mutual incentive or true exchange. A promise is made with no assurance that the act will be performed. The doctrine of consideration lacks validity because of such inconsistencies.
Alternatively, P.S. Atiyah takes the approach that ‘lawyers should concentrate on the reasons that make it just or desirable to enforce promises, instead of the formal doctrine of consideration.’ This view provides no guidance as to what ‘reasons ‘are fitting to enforce a contract, it is unrealistic that it could be applied as lawyers’ opinions justifiably vary.
‘Lord Wright takes the position that consideration should no longer be required where a promise was in writing or gave rise to detrimental reliance.’ Most commentators on consideration seem to ‘agree either with Lord Wright’s view or with the alternative test of the 1937 Committee: that reliance on the promise is enough.’
Consideration is not just one principle, therefore, establishing the purpose of the doctrine of consideration is complex. ‘Consideration is an expression of a set of rules or sub-principle. The sub-principles may be executed, occurring when one party has completed their side of the bargain, but the other party’s consideration is still unperformed.’ ‘It may be executory meaning that it is created by the defendant’s promise in return for the claimant’s promise over a future agreement but not past. Consideration must move from the promise but not necessarily to the promisor and Consideration must be sufficient though not necessarily adequate.’ ‘Insufficient consideration amounts with part-payment of debtor or when existing obligations exist such as a public duty unless the promisor goes beyond their duty.’
The rule that consideration needs to be adequate is misleading. We can easily understand the idea of subjective valuation of benefits, but this cannot often explain cases involving an obvious difference between the values exchanged. A contract supported by consideration can still be kept back by a multiple of vitiating factors the contract may contain implied terms or be partially invalidated because of unfairness. In these cases, the presence of serious inadequacy of consideration will usually be a major factor.
‘It has been said that in a bilateral contract the counter promise is an obligation, but not consideration’. We must then put into question what passes as consideration for this counter promise, and to what purpose. If it is the performance of the first promise, then each arises and becomes binding without any consideration, there is merely the contemplation of performance as the basis of the agreement. The only process by which its enforcement could be protected would be by making it a condition precedent to the performance of the obligation contained in the promise for which it is mandatory.
‘Agreement, ‘intention to create legal relations’ and ‘the enforceability issue’
For a contract, there must be firstly a legally binding agreement between the parties. ‘This agreement takes the form of offer an acceptance where one party makes an offer and the other accepts the said offer. The mere fact of agreement alone does not make a contract. Both parties to the contract must provide consideration if they wish to sue on the contract.’ If agreements are being analysed, the courts need to have some rules for establishing when an agreement has been reached.
‘Once an agreement has been made, disputes may arise to what exactly its terms were intended to be. Even If the agreement is in writing, there may be arguments that it is not complete, and that other terms should be read into it, or implied.’ Offer, acceptance, and certainty are the requirements which act as the structure of a contract’s formation while consideration and intent validate it and give it substance.
A contract must contain an element of agreement supported by consideration. The simple presence, however of these elements does not necessarily mean that a legally binding contract has come about. ‘English law has an underlying philosophy based on the will of the participants, and if they do not consent to the creation of a legal relationship, then no contract that is legally enforceable will stem from the relationship between parties.’
The rule appears very simple and straightforward but, ‘serious legal, administrative and economic problems could result if, in every dispute concerning a contract, an intention to create legal relationship had to be proved.’
The general principles to be applied by the courts when determining whether the parties have made an enforceable agreement have been summarised by ‘the Supreme Court in RTS flexible systems Ltd Molkerei Alois Muller GmbH ‘ Lord Clarke said: Whether there is a binding contract between the parties depends not upon their subjective state of mind, but upon a consideration of what was communicated between them by words or conduct, and whether that leads objectively to a conclusion that they intended to create legal relations and had agreed to all the terms which they regarded, the law requires as essential for the formation of legally binding relations.’
‘Even if certain terms of economic or other significance to the parties have not been finalised, an objective appraisal of their words and conduct may lead to the conclusion that they did not intend agreement of such terms to be a precondition to a concluded and legally binding agreement.’ ‘If the agreement is social or domestic it will be presumed intention not to be legally binding. It is possible to overturn both presumptions, but it is easier to do so in relation to social/ domestic agreements, as opposed to commercial agreements. Collective agreements are only binding if in writing and expressed to be so.’ Consideration is now infrequently used to invalidate domestic or social arrangements; instead, the courts directly apply the intent to create legal relations.
Consideration is often a mere fabrication to make a promise enforceable and, as such, serves little purpose. It could be beneficial to abolish consideration and leave the more fitting requirement of intention to create legal relations as the test of an agreement’s enforceability. The intent would simply become the test for the formation of contract’s and the parties would still not intend that most social and domestic gifts become binding contracts.
However, I do realise how new criticisms would arise as Atiyah argues it is ‘nonsensical to talk for the abolition of consideration as the courts would have to begin again on what makes a promise enforceable.’ Intention could become a dominant requirement with consideration elements maintained by adjusting the concept of bargain. ‘If the parties genuinely intended a token bargain It would not cease to be enforceable, yet a freely negotiated part-payment of a debt, for example, would become enforceable provided there was an intention manifested in the mutual benefits received.’ There are several difficulties with using this doctrine in the same manner as consideration, namely the problem concerning the enforcement of gratuitous promises. Replacing consideration with intention would require the courts to begin again deciding what promises are to be enforceable.
Whilst the enforcement of all promises is hypothetically probable, practical limitations demand that the law enforces some limits on their enforceability. ‘For contracts that are not made in the form of a deed, consideration is generally used as the test of enforceability.’ ‘The main alternative is the concept of reasonable reliance. The concept of reliance as the basis for enforceability is that it is actions, and reliance on those actions, that creates obligations, rather than an exchange of promises.’
‘The doctrine of promissory estoppel already functions well with the notions of intent, reliance, and inequity’. It is therefore strongly arguable that intent should become the dominant principle in the formation of a contract. Estoppel is not an effective substitute for contractual enforcement. It does not seek to protect the promisee’s expectations or uphold the promisor’s intention to be bound. Past-consideration
‘There must be a causal link between the two promises for a contract to be enforceable. In English law past consideration is no consideration.’ ‘If a party makes a promise following some action carried out by the other party, then that promise after some action carried out by the other party, can only be regarded as an expression of gratitude, a gift.’
‘Past consideration means past in relation to the promise that the claimant is seeking to enforce and not in relation to the time at which the claimant is seeking to enforce the defendant’s promise.’
In terms of exceptions to the past consideration rule an example would be in the principle in ‘Lampleigh V Braithwait.’ ‘Braithwait had killed another man and asked Lampleigh to secure a pardon from the king. Braithwait subsequently promised to pay Lampleigh £100 for his efforts.’ ‘Braithwait then failed to pay the £100 and was sued on his promise by Lampleigh. The efforts of Lampleigh were in the past in relation to the promise to pay.’
‘The court held that the original request by Braithwait contained an implied promise that he would reward and reimburse Lampleigh for his efforts. Thus, the previous request and the subsequent promise were part of the same transaction and as such were enforceable against Braithwait by Lampleigh once he had secured the pardon for him.’
‘The implication of the promise to pay normally only arises in a commercial relationship between the parties.’ ‘In Re Casey’s patents’ ‘joint owners of certain patent rights who wrote to the plaintiff, in consideration of your services as the practical manager in working our patents, we hereby agree to give you one-third share of the patents.’ ‘The defendants that the promise was made in respect of the plaintiff’s past services and therefore the plaintiff could not enforce the promise against them because of he himself and supplied no consideration for it.’ ‘Bowen LJ found for the plaintiff, stating that there was an implied promise that the plaintiff’s services would be paid for and that the share of the patents would be regarded as such payment, despite a lack of a previous request by the defendants for the plaintiff to supply his services.’
Statutory exceptions apply the ‘Limitation Act 1980, s 27(5)’ providing that ‘if a debtor acknowledges debt it shall be thought to increase, for calculating the commencement of a limitation period, from the date of the acknowledgment and not before.’ ‘Acknowledgment need not necessarily be a promise to pay the debt by the debtor, though if it should take on its form the effect will still be to extend the period, even though the consideration for the promise is the predecessor debt and is thus in the past.’ ‘The provision does not have the effect of renewing the enforceability of a debt that is already statute- barred.’ The second is the ‘Bill of Exchange Act 1882, s 27.’ ‘An antecedent debt, while normally regarded as past consideration, will be good consideration for a bill of exchange.’ Exceptions to the rule weaken it because promises should always occur before exchange, therefore, exceptions are contradictory to consideration.
English law is still far from clear on consideration. Putting into question what purpose the doctrine of consideration has, has been difficult to establish. The courts are inconsistent in their application of the doctrine, partly because they are unwilling to enforce it strictly in all cases but also as they are often obscure in their knowledge and understanding of the subject. Consideration is an inconsistent doctrine and lacks validity. Past consideration exceptions contradict the rule and it is clear some reforms are necessary.
Consideration is being modified gradually until the present technical requirement is likely to be eradicated completely. Consideration focuses too greatly on definitions, simply substituting one question for another and failing adequately to identify the necessity if any it holds.
Replacing consideration has its limitations the doctrine of promissory estoppel is still being debated regarding whether it can be used as a “sword” or it is merely a “shield”. Replacing consideration with intention would simply require the courts to begin again deciding what promises are to be enforceable.