A valid contract must have all the following 4 components:
- Intention
- offer
- acceptance
- consideration
The first three are pretty much self-explanatory, but what is the last one “consideration”. Okay, let’s use a real property transaction to make the example.
- A wants to sell his house, B wants to buy one, and they both have the intention
- B makes an offer of 1 million dollars to A, this is an offer
- A accepts the offer which makes it an acceptance
- A’s house and B’s one million dollars are their consideration respectively
In practice, the concept of consideration is much more complex than it appears on the surface. Here are some examples that illustrate the importance of consideration in contract disputes.
There is an uncle and a nephew. The teenage nephew is a gangster who skips school every day in order to play billiards. The uncle did not like that, so he said to his nephew: If you promise not to smoke, drink, and play billiards every day till your 21st birthday, I will give you $5,000 when you turn 21. The nephew not only agreed but also took action. The uncle died of illness after the nephew was 21 years old, and the nephew claimed the $5,000 from the uncle’s estate administrator. The question now before the court is whether holding back not smoking, drinking, and playing billiards every day amounts to valid consideration. if it can, the contract will be established and binding and the nephew will get $5,000.
The court ruled that valuable consideration may consist either in some right, interest, profit, or benefit accruing to one of the parties or some forbearance, detriment, loss, or responsibility given, suffered or undertaken by the other party. Here, the court found that it is sufficient that the claimant restricted his lawful freedom of action within certain prescribed limits upon the faith of the defendant’s agreement. In summary, forbearance of legal rights (voluntarily abstaining from one’s legal rights) on promises of future benefit made by other parties can constitute valid consideration, hence, the nephew would be entitled to the $5,000. Hamer v. Sidway [1891]
In reality, the upward variation in the consideration is one of the most common causes of contract disputes. For example, at an earlier time this year, a handyman quoted me a price of $10,000 for my kitchen’s renovation, which included labour and all building materials. I agreed and I signed the contract with him. But right after the project began, the price of building materials increased drastically. In light of the evidence of the actual increase in procurement costs, the handyman informed me an additional $1,000 on top of the contract amount. So when there is indeed an upward variation in consideration, should I pay more? Here are 2 real cases to help answer this question.
Case 1: this happened more than 200 years ago. Following an agreement with the crew regarding a salary of £5 per month, the captain embarked on a voyage with 16 crewmen. After the ship docked at Cronstadt two men deserted, and after failing to find replacements the captain promised the crew the wages of those two men divided between them if they fulfilled the duties of the missing crewmen as well as their own. After arriving at their home port the captain refused to pay the crew the money he had promised to them. When the crew members sued the captain, the court held that the original contract bound the crewmen to perform any and all duties on board the ship, including performing the additional work of deserted crewmen, which according to the court, was “to be considered an emergency of the voyage as much as crewmen’s death” and thus did not constitute sufficient consideration. In other words, the crewmen did not perform anything new that they had not already agreed to do under their original agreement before the voyage, so there was no real ‘extra’ work done in exchange for the higher wages. They had already agreed to do all they could in the event of an emergency. In short, the performance of a pre-existing duty is not legally sufficient consideration, the crewmen were therefore not entitled to the extra payment. Stilk v Myrick [1809], also see Equity vs Order.
Case 2: this happened several decades ago. A small construction company has contracted with Shepherds Bush Housing Association to renovate 27 flats in London. The construction company subcontracted a carpenter for £20,000 payable in instalments. The carpenter ran into financial difficulty and needed more money to continue the work. The construction company was going to be liable under a penalty clause for late completion, so they decided that they would make an extra payment to the Carpenter. The carpenter continued with work, but 3500£ was still missing. The construction company hired new contractors and the carpenter brought action against the construction company. The court held that a promise to make bonus payments was enforceable when the promisor obtained a benefit or obviated a disbenefit where the promise had not been obtained by fraud or duress. On the facts, the construction company had obtained a benefit and so there was consideration to support the agreement to make bonus payments to the carpenter. Williams v Roffey Bros [1991]， also see Equity vs Order.
Let’s now talk about the downward variation to consideration in contract performance. A case from decades ago is quite explanatory. A gentleman owed £482 to a small building company, but due to financial difficulty he was unable to pay. Mrs. Rees offered £300 in satisfaction of his debt, she said that this was all that she was going to pay, £300 or nothing. The building company had to accept, as they would have gone bankrupt without the money. They received the £300, signed “satisfied the debt”, but then sued for the remaining balance. The issues are:
- Can a party accept a lesser amount for satisfaction of a debt and then demand payment in full?
- Could the couple claim the defence of promissory estoppel?
The court’s decision was “no consideration in this case”. Lord Denning clears up the law regarding substitute contracts. He says that at common law, they are not allowed unless there is consideration provided. Without consideration, there can be no substitute agreement that is accepted at common law. However, substitute agreements that satisfy the necessary accord can be valid in equity, even if they do not have a consideration, if it would be inequitable to allow the creditor to sue for the money from the original contract. To satisfy this requirement an agreement must have been made, the debtor must have relied upon it, and it must be unfair to allow the creditor to claim more money. D. & C. Builders Ltd. v Rees [1965]
Another century-old authority was also supportive of the idea that “less consideration is no satisfactory”. The appellant, Dr John Weston Foakes, owed the respondent, Julia Beer £2,090. Beer agreed that she would not take any action against Foakes for the amount owed if he would sign an agreement promising to pay an initial sum of £500 and pay £150 twice yearly until the whole amount was paid back. Foakes was in financial difficulty and, with the help of his solicitor, drew up an agreement for Beer to waive any interest on the amount owed. She signed. Foakes paid back the principal but not the interest. Then Beer sued Foakes for the interest. The issue, in this case, is if partial payment of a debt is sufficient consideration for the original contract. It was then held by the court that the payment of a lesser amount could not serve as the satisfaction of a larger amount. Or the payment of a smaller sum of money for a larger sum is not a consideration because paying less is not whole satisfaction. Foakes v Beer [1883]
The above case is still binding although it has been more than a century old, but here there is another 400-year-old authority that seems to contradict somehow?. Well if you take a closer look, you’ll find the difference on the facts. Pinnel sued Cole (in debt) for £8 due on a bond on 11 November 1600. Cole argued that at Pinnel’s request, he had paid him £5 2s 6d a month earlier and that this lesser amount had been accepted by Pinnel in full satisfaction of the debt. The defendant argued that the plaintiff had accepted partial payment of the debt as satisfaction of the whole. The court held that, by paying some money early the defendant had provided the plaintiff with a further benefit and had not just repaid the money which he already owed. Consequently, this was good consideration. So basically the court confirmed the general rule that part payment of a debt cannot be satisfaction for the whole. However, since the payment had been made early this was sufficient to discharge the debt. Pinnel v Cole [1602]
Contract disputes arising from consideration are far more than just the upward and downward considerations, the appearance of the following situations are also quite high:
- When one party makes a promise to the other that they will take certain responsibility in the future, is the promised amount to a valid consideration?
- When one party presents a consideration and claims for a payment, the other party says: I’m not paying because this is what you should do anyway (it’s your job).
- When one party presents a consideration and claims for a payment, the other party says: I’m not paying because you voluntarily did it without me asking.
- A and B have signed a contract, but the beneficiary of the consideration goes to C (a third party). What happens if something goes wrong with the contract?
These topics are worth another thread with sever thousands of words, let’s talk about them next time.
