Law of Contract - Consideration (Part 3)

6. Part Payment of a debt
In Foakes v Beer ((1883-84) L.R. 9 App. Cas. 605, HL ), the House of Lords upheld the ancient rule in Pinnel’s Case ((1602) rep 117a ) that part payment of a debt was not good consideration for the remainder of the debt.

Pinnel’s Case itself contains several exceptions to this rule:

“The gift of a horse, hawk, robe, &c. in satisfaction, is good. Payment of part before the day, and acceptance, may be in satisfaction of the whole; so payment of part at a different place.”

Also: “An acknowledgment of satisfaction by deed is a good bar without any thing received.”

Although the rule against part payment has stood unchanged since Pinnel’s Case, it has been subject to considerable criticism. Even in Foakes v Beer Lord Blackburn seemed to suggest that it was out of touch with commercial reality.

“All men of business....recognise and act on the ground that prompt payment of their demand may be more beneficial to them than it would be to insist on their rights and enforce payment of the whole. Even where the debtor is perfectly solvent, and sure to pay at last, this is often so. Where the credit of the debtor is doubtful it must be more so.”

In Re Selectmove ([1995] 1 WLR 474), it was argued that part payment could be good consideration for the entire debt provided that the creditor obtained a practical benefit from the part-payment.

The court held that the “practical benefit” test did not apply to part payment of a debt. One of the main reasons given for this was that by its very nature, part-payment of a debt would always provide a practical benefit – therefore to extend the Williams v Roffey exception to Part-Payment cases would deprive the rule in Pinnel’s Case of its efficacy.

It is worth pointing out that the court in Re Selectmove pointed out that it was not within its power to overrule Foakes v Beer that was a decision of the House of Lords.

The salient points are covered in the following extract from Re Selectmove. 
 
“When a creditor and a debtor who are at arm’s length reach agreement on the payment of the debt by instalments to cover to accommodate the debtor, the creditor will no doubt always see a practical benefit to himself in so doing. In the absence of authority there would be much to be said for the enforceability of such a contract. But that was a matter expressly considered in Foakes v Beer yet held not to constitute good consideration in law. Foakes v Beer was not even referred to in Williams v Roffey, and it is in my judgment impossible, consistently with the doctrine of precedent, for this court to extend the principle of the Williams case to any circumstances governed by the principles in Foakes v Beer. If that extension is to be made, it must be made by the House of Lords or, perhaps even more appropriately, by Parliament after consideration by the Law Commission.” (Per Peter Gibson LJ ) 

 

Promissory Estoppel 
 
A chapter on consideration would not be complete without some mention of the doctrine of promissory estoppel.

This is probably the most important exception to the rule in Pinnel’s Case.

Lord Denning resurrected this doctrine in the case of Central London Property Trust v High Trees House Ltd. ([1947] KB 130 )

Promissory estoppel can be an exception to the rule that part-payment is not good consideration for the entire debt.

Estoppel refers to the prevention of a party from relying on some legal right. There are various types of estoppels. The two most common are proprietary estoppels (involving land) and promissory estoppels (involving promises).

For estoppel to apply there must be:

A representation made. This must be a clear and unambiguous statement by the creditor that his legal right will not be enforced.

Reliance on that representation by the debtor.

It must be inequitable for the creditor to go back on his promise.

In addition, proprietary estoppel cannot be used to bring an action, only as a defence. “It is a sword not a shield.” (Combe v Combe 2 KB 215)

New Developments

Please note that a recent case appears to have wide ramifications for this whole area of law. In Collier(Collier v P & MJ Wright (Holdings) Ltd), the Court of Appeal considered both the rule in Foakes v Beer and also the doctrine of promissory estoppel. The court took such a liberal view of the doctrine of estoppel that the part-payment rule was effectively by-passed. It remains to be seen whether this approach will be followed.

“The facts of the case demonstrate that, if 1) a debtor offers to pay part only of the amount he owes; (2) the creditor voluntarily accepts the offer, and (3) in reliance on the creditor’s acceptance the debtor pays that part of the money he owes in full, the creditor will, by virtue of the doctrine of promissory estoppel, be bound to accept that sum in full and final satisfaction of the whole debt. For him to resile will of itself be inequitable.”

Law of Contract - Consideration (Part 2)

3. The consideration must not be past

If party “A” voluntarily performs an act, and party “B” makes a promise afterwards, the consideration for the promise is said to be in the past.

Re McArdle ([1951] 1 All ER 905).

A wife and her three grown-up children lived together in a house. The wife of one of the children did some decorating and later the children promised to pay her £488 and they signed a document to this effect.

It was held that the promise was unenforceable, as all the work had been done before the promise was made and was therefore past consideration.

There are several exceptions to this rule. The most memorable exception derives from the ancient case of Lampleigh v Braithwait ((1615) Hob. 105).

Braithwait killed someone and then asked Lampleigh to get him a pardon. Lampleigh got the pardon and gave it to Braithwait who promised to pay Lampleigh £100 for his trouble.

It was held that although Lampleigh's consideration was past (he had got the pardon) Braithwaite's promise to pay could be linked to Braithwaite's earlier request and treated as one agreement, so it could be implied at the time of the request that Lampleigh would be paid.

Treitel derives the following principles from this case:
 

An act done before a promise was made can be consideration for it if three conditions are satisfied:

The act must have been done at the request of the promisor.

It must have been understood that payment would be made.

The payment must have been legally recoverable

4. Consideration must not be the performance of an existing public duty.

Where a party already has an existing duty to perform an act, he will not be able to enforce a promise made to him in return for performing that act.

This sounds complicated – it is best explained by the following example.

Collins v Godefroy ([1831] 1 B & Ad 950)

Godefroy promised to pay Collins if Collins would attend court and give evidence for Godefroy. Collins had been served with a subpoena (a court order telling someone they must attend). Collins sued for payment. It was held that as Collins was under a legal duty to attend court he had not provided consideration. His action therefore failed.

If a party exceeds his public duty, this can be good consideration (Glasbrook Bros. Ltd v Glamorgan C.C. [1921] A.C. 270).

5. Consideration must not be the performance of a pre-existing contractual duty.

This rule originates from the case of Stilk v Myrick ((1809) 2 Camp. 317. also (1809) 6 Esp. 129).
Two sailors deserted from a ship when it docked in a Baltic port. The captain of the ship promised to divide the two sailors’ wages amongst the rest of the crew if they sailed the ship back to London.

It was held that this promise was not binding as the crew were already under a contractual duty to sail the ship home. The crew were unable to claim the extra wages.

Although this case remains good law, a more recent case has brought considerable confusion into this area.

Williams v Roffey Bros. (Ltd [1990] 1 All ER 512)

Roffey had a contract to refurbish a block of flats and had sub-contracted the carpentry work to Williams. After the work had begun, it became apparent that Williams had underestimated the cost of the work and was in financial difficulties. Roffey, concerned that the work would not be completed on time and that as a result they would fall foul of a penalty clause in their main contract with the owner, agreed to pay Williams an extra payment per flat. Williams completed the work on more flats but did not receive full payment. He stopped work and brought an action for damages. In the Court of Appeal, Roffey argued that Williams was only doing what he was contractually bound to do and so had not provided consideration.

It was held that where a party to an existing contract later agrees to pay an extra "bonus" in order to ensure that the other party performs his obligations under the contract, then that agreement is binding if the party agreeing to pay the bonus has thereby obtained some new practical advantage or avoided a disadvantage. In the present case there were benefits to Roffey including (a) making sure Williams continued his work, (b) avoiding payment under a damages clause of the main contract if Williams was late, and (c) avoiding the expense and trouble of getting someone else. Therefore, Williams was entitled to payment.

The principle behind Williams v Roffey is that if a “practical benefit” is conferred, performance of a pre-existing duty can be good consideration.

Please note that although Stilk v Myrick and Williams v Roffey appear to contradict each other, they both remain good law.

Law of Contract - Consideration (Part 1)

Under classical contract law, even if the contracting parties have come to an agreement, this agreement can only be enforced if it is supported by consideration.

The classic definition of consideration was stated by Lush J. in 1875:

“a valuable consideration in the sense of the law, may consist of either in some right, interest, profit or benefit accruing to the one party or some forbearance, detriment, loss or responsibility, given, suffered or undertaken by the other.” ((1875-1876) L.R. 1 App. Cas. 554, HL )

The doctrine of consideration is highly controversial. Many academics believe that the law of contract would operate perfectly well without it. (Not all jurisdictions recognise it.) The doctrine consists of the following highly technical rules.

1. Consideration must be sufficient but need not be adequate

This confusing phrase means that the consideration must be of some value (sufficient). The consideration does not have to be equal (adequate). The courts are not interested in whether the contracting parties have made a good or fair bargain.

The following case demonstrates this principle.

Chappell & Co Ltd v The Nestle Co Ltd [1960] AC 87

As part of a special offer/promotion – Nestle offered to sell at a discount a record of the song called “Rockin’ Boots” to anyone who sent in 3 Nestle chocolate wrappers.

Chappell owned the copyright to “Rockin’ Boots”. Under the Copyright Act 1956 Nestle were required to pay Chappell royalties of 6.25 % of the ordinary retail price. Nestle offered to pay Chappell 6.25% of the money they had received for the records sold. Chappell brought an action, arguing that the chocolate wrappers should also part of the consideration for the sale of the record.

The House of Lords held (in a split decision) that the chocolate wrappers did constitute good consideration.

This case should be compared to Lipkin Gorman v Karpnale ([1989] 1 WLR 1340), where the House of Lords held that gaming chips in a casino were not valid consideration.

2. Consideration must move from the promisee

As a general rule, a person who wishes to enforce the contract must show that they provided consideration. It is not enough to show that someone else provided consideration (Tweddle v Atkinson (1861) 1 B.& S. 393).

Law of Contract - Acceptance (Part 2)

The postal rule

The origin of the postal rule is the case of Adams v Lindsell ((1818) 1 B & Ald 681 (KB)). Where acceptance is made by post, it takes effect the moment the letter is put in the post box. This means that the contract will have been formed before the offeror learns of the acceptance.

The postal rule can apply even if the letter is lost in the post and the offeror never receives the acceptance.

It is important to recognise that the postal rule is not always applied. It will not apply if it has been excluded by the terms of the offer or if its application would be manifestly absurd (Holwell Securities V Hughes). For example, if all the previous negotiations had been carried out using a different mode of communication (such as by telephone), it may be considered absurd to apply the postal rule. In addition if the offeror says “let me know if you accept my offer” – this could be enough to disapply the rule.”

Extending the postal rule?
The courts have not extended the rule to modern, instantaneous forms of communication such as telephone, telex or fax (Entores v Far East Miles – The position regarding Faxes is slightly more complicated.).

Entores v Miles Far East Corp ([1955] 2 QB 327)

The plaintiffs in London made an offer by Telex to the defendants in Holland. The defendant's acceptance was received on the plaintiffs' Telex machine in London. The plaintiffs sought leave to serve notice of a writ on the defendants claiming damages for breach of contract. Service out of the jurisdiction is allowed to enforce a contract made within the jurisdiction. The Court of Appeal had to decide where the contract was made.

Denning L.J. stated that the rule about instantaneous communications between the parties is different from the rule about the post. The contract is only complete when the acceptance is received by the offeror: and the contract is made at the place where the acceptance is received. The contract was made in London where the acceptance was received. Therefore service could be made outside the jurisdiction.

But when exactly does receipt occur?

The Brimnes ([1975] QB 929)

The defendants hired a ship from the plaintiff ship owners. The ship owners complained of a breach of the contract. The ship owners sent a message by Telex, withdrawing the ship from service, between 17.30 and 18.00 on 2 April. It was not until the following morning that the defendants saw the message of withdrawal on the machine.

Edmund-Davies L.J. agreed with the conclusion of the trial judge. The trial judge held that the notice of withdrawal was sent during ordinary business hours, and that he was driven to the conclusion either that the charterers' staff had left the office on April 2 'well before the end of ordinary business hours' or that if they were indeed there, they 'neglected to pay attention to the Telex machine in the way they claimed it was their ordinary practice to do.' He therefore concluded that the withdrawal Telex must be regarded as having been 'received' at 17.45 hours and that the withdrawal was effected at that time.

Note: Although this is a case concerning the termination of a contract, the same rule could apply to the withdrawal and acceptance of an offer.

Silence?
Normally silence cannot be taken for acceptance. In the case of Felthouse v Bindley, Felthouse made an offer to his nephew to buy a horse for £30.15. The letter ended:

“If I hear no more about him, I consider the horse mine at £30 15 s.”

The nephew did not reply. The horse was subsequently sold at auction to a third party. Felthouse brought an action against the auctioneer claiming that he had a valid contract and the horse was his. The court held however that the nephew’s silence meant that he had not accepted Felthouse’s offer.

Acceptance by conduct
A valid acceptance can be made by conduct. This is demonstrated by the following case.

Brogden v Metropolitan Railway Co. ([1877] 2 App Cas 666)

B supplied coal to MRC for many years without an agreement. MRC sent a draft agreement to B who filled in the name of an arbitrator, signed it and returned it to MRC's agent who put it in his desk. Coal was ordered and supplied in accordance with the agreement but after a dispute arose B said there was no binding agreement.

It was held that B's returning of the amended document was not an acceptance but a counter-offer that could be regarded as accepted either when MRC ordered coal or when B actually supplied. By their conduct the parties had indicated their approval of the agreement.

Another, more common exception is the acceptance in a unilateral contract. Essentially this is a “promise for an act.” The case of Carlill v Carbolic Smoke Ball is useful again as an authority here.

Law of Contract - Acceptance (Part 1)

“An acceptance is a final and unqualified expression of assent to the terms of an offer.” - Treitel

As with offers it can sometimes be difficult to distinguish an acceptance from other responses to offers.

Counter offers

If in his reply to an offer, the offeree introduces a new term or varies the terms of the offer, then that reply cannot amount to an acceptance.

A counter-offer destroys the original offer. The following case is the classic authority for this point.

Hyde v Wrench
Mr Wrench offered to sell his farm to Hyde for £1,000. Mr Hyde at first made a counter offer of £950, but then two days later agreed to pay £1,000. Wrench refused to complete the sale and accordingly Hyde brought an action demanding that the contract be enforced. However, the court ruled that the effect of the counter offer was to destroy the original offer (Hyde v Wrench [1880] 5 QBD 346).

Requests for information
In the course of negotiations it is important to distinguish a counter offer from a request for more information. Although such a request will not make an acceptance, unlike a counter offer, it does not destroy the original offer (Stevenson v Mclean (1880)).

Examples
1. Offer:

Will you sell me your car for £500?

Counter offer:

I will take £750 for it.

IN THIS EXAMPLE THE COUNTER OFFER HAS NOW DESTROYED THE ORIGINAL OFFER.

2. Offer:

Will you sell me your car for £500?

Request for information:

Well, I was looking for more – would that be £500 cash?

IN THIS EXAMPLE, THE REQUEST FOR INFORMATION HAS NOT DESTROYED THE ORIGINAL OFFER. IT CAN STILL BE ACCEPTED.

Communication of acceptance

The general rule is that an acceptance must be communicated to the offeror. Until and unless the acceptance is so communicated, no contract comes into existence.

The acceptance must be communicated by a person with authority.

Powell v Lee ([1908] 99 LT 284)

The plaintiff applied for a job as headmaster and the school managers decided to appoint him. One of them, acting without authority, told the plaintiff he had been accepted. Later the managers decided to appoint someone else. The plaintiff brought an action alleging that by breach of a contract to employ him he had suffered damages in loss of salary. The county court judge held that there was no contract as there had been no authorised communication of intention to contract on the part of the body, that is, the managers, alleged to be a party to the contract.

The receipt rule

The general rule is that the acceptance will only take effect when the acceptance has been received by the offeror. This is known as the receipt rule. This rule is subject to a very odd exception where an acceptance is posted.

Law of Contract - Offer (Part 2)

Displays of Goods in Shop Windows & Supermarket Shelves

As a general rule these are both invitations to treat.

The two leading cases in this area are Fisher v Bell ([1961] 1 Q.B. 394) and PSGB v Boots Cash Chemists ([1953] 1 Q.B. 401).

Fisher v Bell involved the attempted prosecution of a shop keeper. The Restriction of Offensive Weapons Act (1959) made it an offence to offer for sale certain knives. The court held that the shopkeeper was not guilty of “offering for sale” a flick knife even though it was displayed in his shop window with a price tag on it.

The following extract explains the courts reasons:

“According to the ordinary law of contract, the display of an article with a price on it in a shop window is merely an invitation to treat.” - Per Lord Parker CJ (Fisher v Bell)

In some ways this is a remarkable decision. The court chose to construe the statute according to the strict literal approach.

PSGB v Boots Cash Chemists

The issue in this case was where exactly in the shop was the contract made. This was significant because statute required medicines to be sold under the supervision of a qualified pharmacist. If the contract was formed when the medicines were picked up the customer from the shelf – there was no supervision. The court held that the contract was formed at the cash till. The display of goods was an invitation to treat; the customer made the offer by taking the medicines to the till and finally; Boots accepted the offer by taking the money for the medicines.

Please note that it is only a presumption that displays of goods are invitations to treat. It is possible that the court will place a different construction if circumstances indicate that the shop owner/advertiser demonstrates an intention to contract.

In the remarkable case of Lefkovitz v Great Minneapolis Stores (86 NW 2d 689 (1957)), Mr Lefkovitz saw an advertisement for a fur coat stating:

“Saturday 9AM sharp, 3 Brand New Fur Coats, worth $100 – First Come First Served”

Mr Lefkovitz was first in line but the store refused to sell him the coat because he was a man! Mr Lefkovitz brought an action for breach of contract. The court held that the advertisement/display of goods was in fact an offer (a unilateral one similar to that in Carlill) that Mr Lefkovitz had accepted. The store was in breach of contract and Mr Lefkovitz was awarded damages.

Auctions

In an auction, the auctioneer's call for bids is an invitation to treat, a request for offers. The bids made by persons at the auction are offers, which the auctioneer can accept or reject as he chooses. Similarly, the bidder may retract his bid before it is accepted (Payne v Cave. Now codified by s.57(2) Sale of Goods Act (1979)).
The situation is different where an auction is held “without reserve” (Barry v Davies (2002) also Warlow v Harrison – this decision however was only obiter). In the case of Warlow v Harrison it was suggested (obiter) that an advertisement for an auction to be held “without reserve” contained a collateral offer to sell to the highest bidder. As the case was decided on different grounds this principle was not binding on later courts. Amazingly it took over 100 years before the courts finally decided this point in Barry v Davies.

Mere Statement of price

A mere statement of the minimum price at which a party is willing to sell does not amount to an offer ([1893] AC 552 also Gibson v Manchester County Council [1979] 1 All ER 972).

An offer should be made on definite terms

Generally speaking, the courts will not enforce offers that are vague and indefinite.

In the case of Loftus v Roberts an actress was offered of a role in a play - the salary was to be “at the West End rate”. The court held that this was too uncertain to be an offer and a valid contract had not been formed.

It must be aware that the courts have demonstrated considerable flexibility in this area.

In Hillas & Co. Ltd v Arcos Ltd ((1932) LT 503), the House of Lords upheld a contract for the sale of a “fair specification” of timber. Although it was argued that this phrase was too vague and imprecise. The court held that the contract was between parties who were experienced in the timber trade and who;

“undoubtedly attributed to the words….. some meaning which was precise or capable of being made precise.” - Per Lord Tomlin

McKendrick excellently sums up this complex area:

“On the one hand, the judges do not wish to be seen to be making the contract for the parties. On the other hand, they are reluctant to deny legal effect to an agreement that the parties have apparently accepted as valid and binding.” (McKendrick, E. Contract Law, Text Cases and Materials 2003 OUP First Edition )

Law of Contract - Offer (Part 1)

What is an Offer?

“An offer is an expression of willingness to contract on certain terms, made with the intention that it shall become binding as soon as it is accepted by the person to whom it is addressed.” - Treitel

Generally speaking, an offer must be definite (Loftus v Roberts, Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256). It can be made to a particular person, to a group of people or to the world at large.

Contracts are usually formed after a certain amount of negotiation. Often, many statements are made prior to the contract being formed. It can be difficult distinguishing the offer from other statements made during the negotiation.

The main difficulty for a lawyer is identifying which statements are offers and which are merely invitations to treat.

It is a vitally important distinction to make. Unlike an offer, an invitation to treat is not legally binding.

How to distinguish between offers and invitations to treat

This is an important area. Real life scenarios often hinge on this distinction.

The general difference between an offer and an invitation to treat is that an offer is a statement by which a person is willing to contract, whereas if a person is merely seeking to start negotiations, then that is deemed to be an invitation to treat.

The most important factor is whether the court decides that one party “intended” to make a legally binding offer. To assess whether there is intention – the courts will use the objective approach (Smith v Hughes). In practice it can sometimes be very difficult to determine whether it is an offer.

The courts employ a number of presumptions to assist their interpretation.

Advertisements

As a general rule, advertisements are invitations to treat (Partridge v Crittenden [1968] 2 All ER 421).

This is possibly the most logical option. Imagine a situation where a shop advertises the sale of coats at £12.00 each. At some point he may run out of coats to sell. If a customer then arrives and asks to buy a coat, the shop will be unable to supply it. If the advertisement were an offer, the customer would be accepting the offer and a contract would have been formed. Because the shop could no longer supply the coat, it would be in breach of contract.

Construing the advertisement as an invitation to treat solves this problem. Under normal conditions, the customer makes the offer when he asks for the coat. In our situation, the shop owner is perfectly at liberty to accept or reject the offer. He has not yet entered into a legally binding agreement.

Although this is the general presumption, it can be rebutted.

It is however, possible for an advert to be an offer. In Carlill v Carbolic Smoke Ball the advertisement was held to be a unilateral offer which was accepted by Mrs Carlill’s conduct.

A unilateral offer is a promise made in exchange for an act. The most obvious example of a unilateral offer is a reward poster.

Carlill is a memorable case mainly due to its unusual facts. It is also a very important case in contract law. It can be cited as an authority for various different principles: An offer must be on definite terms, there must be an intention to create legal relations and also that an advertisement can be an offer.