Sample Notes from our Contract Law chapter – Consideration, Promissory Estoppel and Economic Duress GDL Answered is a comprehensive set of revision notes for the Graduate Diploma in Law. It covers the Contract Law, Tort Law, Criminal Law, Constitutional & Public Law, Land Law, Equity & Trusts Law, and European Union Law modules. Each topic is structured in a step-by-step format for answering problem questions. Please visit www.gdlanswered.com if you wish to purchase a copy. Comprehensive notes for the Legal Practice Course are also available at www.lpcanswered.co.uk
This chapter is provided by way of sample only. It is provided for marketing purposes and does not constitute legal advice. It is intended solely for prospective customers who are students or prospective students of the law of England and Wales. All information contained within is correct to the best of the author’s knowledge. ALL RIGHTS RESERVED. COPYRIGHT © 2014 LAW ANSWERED
www.gdlanswered.com CONSIDERATION, PROMISSORY ESTOPPEL AND ECONOMIC DURESS
STEP 1: Is there a contract? State that there is an issue with a variation to the contract. Briefly establish the following to show that there is a variation contract. Remember that a variation contract is also a new contract.
1. Agreement – have both parties agreed to the same offer? Yes. 2. Intention to Create Legal Relations – did the parties intend that the contract would be legally binding? Yes. 3. Consideration – have both parties provided consideration? Not clear. State that the issue is with consideration. Has each side given consideration for the variation? What is it? In respect of each consideration, establish who the promisor is, and who the promisee is. (Remember that the promisee receives the variation promise. The promisor makes that promise. Be clear about these terms.) For example: “C wants to claim the £x bonus promised to him by D, but the issue is whether C provided consideration for this variation.”
STEP 2: Define consideration
‘An act or forbearance of one party, or the promise thereof, is the price for which the promise of the other is bought’ (Dunlop v Selfridge.) Both the promisor and promisee must provide consideration.
STEP 3: Decide what the issue is. There are only a few potential issues – so identify them and then you can select the correct steps below:
The potential issues with consideration – which one is relevant for each issue? 1) The variation is not good consideration because it does not meet one or more of the criteria in Step 4 (because of Past Consideration or an Existing Contractual Obligation) see Step 4 below; OR 2) The variation is a promise to pay more see Step 5 below; OR 3) The variation is a promise to accept less see Step 5 below.
2
www.gdlanswered.com STEP 4: Go through the rules of consideration – has each party provided good consideration?
1) Consideration must not be past: o Where one party has already acted, a later promise by another party to perform an act in return is not good consideration, as it is for past consideration. In Eastwood v Kenyon, Eastwood had supported his ward through childhood – her husband, Kenyon, later promised to repay him, but as Eastwood’s consideration was rendered in the past, Kenyon’s promise was not enforceable. o
Exception: Pao On v Lau Yiu Long states that if the following conditions are met, then past consideration can still be good consideration:
i.
Was it at the request of the promisor? i.e. did the promise-maker ask for the variation? (Lampleigh v Braithwait)
ii.
Was payment understood to be due? i.e. did both parties assume that payment would be made for the variation? This is more likely in a commercial context (Re Casey’s Patents) than in a domestic one (Re McArdle).
iii.
Would the contract be enforceable apart from this issue? i.e. there are no other consideration, acceptance, or ICLR issues.
2) Consideration must move from the promisee to the promisor: o So, in return for receiving the promise-maker’s promise, the promisee has given consideration in return. Essentially, both parties must provide consideration. A claimant can only claim on a contract if he has provided consideration (Tweddle v Atkinson). o
Note s.1 Contract (Rights of Third Parties) Act 1999: 3rd parties (people who are neither promisor or promisee to the contract) can now enforce a contract between others which benefits that 3rd party, even though the 3rd party has not provided any consideration.
3) Consideration must be sufficient, but need not be adequate: o It must have some value in the eyes of the law (i.e. be sufficient), even if it is inadequate (i.e. far less than the promise is worth.) o Examples of sufficiency: Chappell & Co v Nestle – includes Nestle’s benefit from selling extra chocolate bars (wrappers). White v Bluett – giving up a legal right is sufficient, promising to not enforce one that you do not have is not, so promising not to complain about his father’s properties was not sufficient consideration. Hamer v Sidway –giving up drink and tobacco was giving up a legal right, so was sufficient.
3
www.gdlanswered.com
4) Performance of an existing obligation is not good consideration (an existing obligation is something you already have to do anyway and so cannot be good consideration) SEE STEP 5: Promises to Pay More for an existing obligation. 5) Part payment of a debt is not good consideration (Re Selectmove) SEE STEP 5: Promises to Accept Less.
STEP 5: Is this a promise to pay more, OR a promise to accept less? Do not mix up these two routes.
PROMISES TO PAY MORE Performance of an existing obligation is not good consideration (an existing obligation is something that you are already obliged to do anyway, and so cannot be good consideration) – it must go over and above existing duties to be good consideration. Public duties: o
Harris v Sheffield Utd – policing bill for a football match had to be paid by club that requested it as it went beyond ordinary policing duties.
o
Collins v Godefroy – witness subpoenaed, could not enforce promise to be paid to appear in court as it was his public duty anyway.
Duties owed to third parties: o
Scotson v Pegg – promising to do something that you are already obliged to do through a contract with a third party is good consideration, as the person to whom you make the promise gains a direct right to sue you if you fail to fulfil the promise.
Contractual duties: o
General rule: performance of an existing contractual obligation is not good consideration. Stilk v Myrick – sailors were not paid the extra money they were promised when some deserted and they had to run an undermanned ship, because they were employed to cover ‘all reasonable endeavours’ – always compare Stilk v Myrick with Hartley v Ponsonby:
o
Exception 1: going above and beyond your existing obligations is good consideration. Hartley v Ponsonby – so many of the sailors deserted that the work of the remaining sailors became much more onerous. Do the claimant’s actions go above and beyond what they contracted to do? If so, it can be good consideration. Remember that all the criteria for good consideration must also must be met as well see Step 4.
4
www.gdlanswered.com
o
Exception 2: if the claimant is not going above and beyond, then another possible route is the exception set out in Williams v Roffey Bros. Go through all of the following criteria:
i.
Where A already has a contract with B to supply goods or services; and
ii.
B has reason to doubt that A will complete (A cannot approach B and say this though, as it would be duress – see point (v) below); and
iii.
B approaches A and promises to pay A extra to complete on time; and
iv.
B obtains a ‘practical benefit’ or ‘obviates a disbenefit’ (note this was not defined in Roffey Bros. In this case it was avoidance of the penalty clause – is the example in your question similar? What exactly is the benefit afforded/disbenefit avoided?); and
v.
B’s promise was not given as a result of duress or fraud (see below); then
vi.
The benefit to B is capable of being consideration so B’s promise to pay more for the same will be binding.
Conclude: a promise to pay more will be good consideration if it goes above and beyond, or if it fits the Roffey Bros. criteria. When applying Roffey, you must be certain that the variation did not result from duress (see point v. above), so always go through the criteria for duress: Definition of duress: ‘some form of coercion or threat to the person, property, or to the person’s financial interests’ (Poole). There are three types: 1) Duress of the Person o o
E.g. threats to kill someone if they do not vary the contract. Test for causation: the duress need not be ‘the’ reason for entering into the contract, just ‘a’ reason (Barton v Armstrong).
2) Duress to Goods o o
E.g. threats to burn down your house if you do not sign. Test for causation: the ‘but for’ test, i.e. ‘but for’ the duress, the claimant would not have entered into the contract (The Siboen & The Sibotre).
3) Economic Duress – this will probably be most relevant to the question: o
e.g. I have a contract to drive someone to the airport, when I find out that no other taxis are free. I refuse to fulfil the contract unless I am paid double. This variation of the contract is agreed to under economic duress, and so is voidable by the other party (my passenger).
5
www.gdlanswered.com
o
Use the recent clarification from DSND Subsea v Petroleum Geo to define economic duress: ‘There must be pressure, resulting in (a) a lack of practical choice for the victim, (b) which is illegitimate, and (c) which is a significant cause inducing the claimant to enter into the contract.’
a) Lack of practical choice: did the victim have any realistic practical alternative but to submit to the duress? B&S Contracts & Design Ltd v Victor Green Publications – home show stalls Atlas Express v Kafco – xmas baskets delivery Carillion Construction v Felix – sub-contractors referring to main contractors penalty clause for delaying b) Illegitimate pressure: Do any of the following apply? i. Threatened breach of contract? i.e. an illegitimate threat for an illegitimate purpose. This does not necessarily illegitimate, but is highly likely to be.
Atlas Express v Kafco B&S Contracts v Victor Green Publications Kolmar Group AG v Traxpo Enterprises PVT
ii. Was the pressure applied in good or bad faith? ‘Bad faith’ is an attempt to claim money to which you know that you are not entitled. DSND Subsea v Petroleum Geo – refusing to continue dangerous diving work without insurance was not bad faith. CTN v Gallagher – threat to not contract in future is legitimate and not bad faith – it was based on a genuinely mistaken reading of the contract; compare this with: The Universe Sentinel – whilst it was legitimate for dockers to strike, it was bad faith doing so in order to extort money from ship owners to let it leave port. Alec Lobb v Total Oil – a freely-negotiated hard bargain is not duress iii. Did the victim protest? i.e. at the time that the threat was made DSND Subsea v Petroleum Geo – divers immediately protested the lack of insurance by refusing to work. B&S Contracts & Design v Victor Green – immediately protested. iv. Did the victim affirm? i.e. once the duress had been lifted, did the victim immediately seek redress, or did they affirm the contract by not acting?
The Atlantic Baron – waiting 8 months was too long to wait before going to court. The claimant was taken to have affirmed the contract. Atlas Express v Kafco – even though Atlas submitted, they had protested at the time and sued immediately afterwards.
6
www.gdlanswered.com c) A significant cause: show that the duress induced (i.e. caused) the claimant to enter into the contract (Huyton SA v Peter Cremer). ‘But for’ causation is used (Huyton).
The effect of duress is to render the contract voidable, which means that the contract remains valid until the victim takes the perpetrator to court to get the contract set aside. Remember that if only the variation is the result of duress, and the original contract was freely negotiated, it is the variation which is voidable.
ALTERNATIVELY:
PROMISES TO ACCEPT LESS Part payment of a debt is not good consideration as this is merely fulfilling an existing obligation to pay money. Even where the other party promises to waive that obligation, they can still claim the debt back at any later point (Foakes v Beer). There are three exceptions to this: o
Exception 1 – Pinnel’s Case: a debt can be part paid with either, (1), a different thing (“a hawk, a horse, or a robe”), (2) in a different place, or (3) earlier, and that will count as good consideration.
o
Exception 2 – Welby v Drake: part-payment of a debt by a 3rd party is good consideration.
o
Exception 3 – Promissory Estoppel: this means that the claimant may be obliged to stand by what he has said even where he is not contractually bound to do so. The claimant cannot go back on his word when it would be unjust or inequitable for him to do so (Denning).
Promissory estoppel was established by Denning in Central London Property Trust v High Trees House. In this case the claimant promised to reduce the agreed rent ‘for the duration of the war.’ The property became fully let in 1945, and when the claimant sued for the full rent, it was held that the rent could be claimed in full for the period that it was fully let for, but that the landlord could not claim for the wartime period in which it was not. Promissory Estoppel has 5 requirements – go through them in detail using the cases: 1) A clear and unequivocal promise to suspend or waive existing contractual rights – this can be by words or conduct (Hughes v Metropolitan Railway) but must be sufficiently clear (Woodhouse Cocoa v Nigerian Produce – here it was not clear how payment was affected by currency market changes).
7
www.gdlanswered.com
2) Change of position by the promisee in reliance on the promise (Ajayi v Briscoe – here there was no change of position because the defendant had just carried on his business regardless when the lorries were faulty). ‘Reliance’ was given a wide interpretation in Brikom Investments v Carr. Arden LJ takes this approach even further in Collier v P & MJ Wright (Holdings) Ltd., seemingly dispensing with the need for any meaningful idea of reliance. 3) The reliance need not be detrimental (The Post Chaser) 4) It must be inequitable for promisor to go back on the promise (D&C Builders v Rees – Mrs Rees could not use the equitable remedy of Promissory Estoppel because she had not come to equity with clean hands, as she knew that the builders were in financial trouble so would accept less – Note: this is not a chance to discuss duress – use the equitable maxims instead.) 5) Shield not a sword – can only be used as a defence, not a cause of action (Combe v Combe). Effect of the estoppel: o o
o
Generally suspends rights (CLP Trust v High Trees), which means that rights could be resumed later. Rights can be resumed later on (1) reasonable notice (Tool Metal v Tungsten Electric – the first law suit was reasonable notice) OR (2) when the circumstances giving rise to estoppel cease (in CLP v High Trees the war had not yet ended but the properties were fully let, unlike in 1940). Any past periodic payments are extinguished. If the money is due in instalments (like rent), the claimant cannot recover the money that was waived – he can only resume future payments. This implies that if the money is due as a lump sum (one debt payment), then the payment is merely suspended for the period that the estoppel lasts – afterwards the claimant can resume his rights for the whole sum.
Note: duress is not relevant to promises to accept less – do not discuss it. Interim conclusion: if the claimant has promised to accept less, the defendant will be able to rely on this variation if (1) he pays with a different thing, (2) if a 3rd party pays, or (3) if promissory estoppel applies. STEP 6: Conclude: Is there a valid variation contract? Who can recover what from whom?
8