#7416 - Consideration - Contract Law

Week 4- Consideration

Page 73-78

When do you need consideration?

• A requirement for the enforceability of contracts.

• Something must be given in return for a promise in order to make it binding.

• An agreement not supported by consideration is a nadum pactum or naked agreement.

• It is important if an agreement is totally one sided.

• Consideration must be sufficient and not adequate. Courts do not want to place value judgments on whether a contract is fair. A mere peppercorn would be enough to get over the threshold.

Essential elements of consideration:

• Benefit/detriment requirement:

  • There must be a detriment to the promisee or a benefit to the promisor.

  • Mutual promises provide good consideration. If B suffers a detriment so A can benefit, this is good consideration for B getting paid.

• The bargain requirement:

  • The act relied on as consideration must be performed as the agreed price of the promise.

• A conditional gift is not a bargain and will not create a contract. For example if A promises to pay 1000 pounds to B when they arrive in Sydney, this is a conditional gift. But there would be consideration if A urgently needed to see B and to get them to travel to Sydney, agreed to pay for their travel.

• An act performed on reliance of a promise is different from a bargain and does not constitute consideration. Yet it can give rise to an estoppel.

Consideration must move from the promisee:

• The promisee is the person undertaking the contract.

• Consideration must move from the promisee but not the promisor.

• This means the promisee needs to suffer a detriment. However the courts are rejecting this and judging a benefit to the promisor as sufficient for consideration.

The essential elements of consideration: the bargain requirement

Page 92

Australian Woollen Mills v Commonwealth (1954)

Facts:

• The Commonwealth government introduced a wool subsidy scheme to allow domestic manufacturers to purchase wool more cheaply.

• For two years, AWM purchased the wool.

• The government stopped the scheme in June but promised that each manufacturer would have a certain amount of subsidised wool.

• AWM was over this amount and was forced to repay the excess subsidy.

Remedy sought:

• AWM wants to recover the excess subsidy that they paid.

Prior proceedings:

• AWM lost in the High Court.

• AWM is appealing to the Privy Council.

• Both cases are shown.

Arguments:

• AWM argued that there was a unilateral contract. AWM purchased the wool and stockpiled it and this was consideration for the Commonwealth’s promise.

• The Commonwealth argued that there was no quid pro quo in return for the promise. There was no consideration.

Legal issue:

• Does a performed act have consideration if no agreed price has been bargained to create consideration for the promise?

Outcome:

• AWM lost at Privy Council. Appeal dismissed.

Legal reasoning:

• The High Court (Dixon CJ, Williams, Webb, Fullagar and Kitto JJ) reasoned that there was no quid pro quo. The government had put in place a legislative scheme and was not making a contractual offer. The government made a request. As a result AWM paid nothing for the bargain and without an exchange there is no consideration.

• The Privy Council reasoned that government scheme was administrative and not contractual. The presence of a request does not establish a contract.

Ratio decidendi:

• A contract must have consideration to be legally enforceable based on the bargain requirement.

• An act must be given in return for an agreed price.

An act performed in reliance of a promise does not constitute good consideration

Page 95

Beaton v McDivitt (1987)

Facts:

• The McDivitts subdivided their land into four lots.

• They expected their land to be rezoned in a way that would increase rates to the council.

• To lower the rates, they gave one lot to Beaton to work rent free using permaculture and assisted in the building and maintenance of a road that cost 1000 pounds.

• The McDivitts promised to transfer the land to Beaton when rezoning and subdivision took place.

Remedy sought:

• Beaton wants to own the lot of land.

Prior proceedings:

• Beaton lost.

• Beaton is appealing to the Supreme Court of NSW, Court of Appeal.

Arguments:

• Beaton argued that he relied on the promise and suffered detriment in spending money on the land. In return, the McDivitts got an akin neighbour and lower fees if rezoning took place.

• McDivitt argued that the sole benefiter was Beaton. He received land for seven years, rent free. Any work he did was for his own benefit. There was no consideration. The rezoning of the land did not happen so there was no obligation.

Legal issue:

• Do acts performed in reliance of a promise constitute good consideration for that promise?

Outcome:

• Beaton lost. Kirby P and Mahoney JA were against Beaton. McHugh JA wanted Beaton to win.

Legal reasoning:

• Kirby P reasoned that there was no contract because there was no consideration. The arrangement was all to Beaton’s advantage and he suffered no real detriment. He said that the Dillwyn v Llewely line of cases referred to the enforcement of contracts by way of estoppel and not by way of contract. Beaton was a licensee and this licence was terminated when he was convicted. It would be unconscionable to insist that the McDivitts overlook their legal rights to provide relief for Beaton. The bargain requirement was not fulfilled.

• McHugh JA reasoned that there was a contract and Beaton should receive the land. Beaton relied on the promise to his detriment. The investing of money into the land counts as consideration. This gave rise to a unilateral contract. It was McDivitt’s duty to do all they could do to subdivide the land and transfer the lot to Beaton. The contract was not contingent on rezoning.

• Mahoney JJA agreed with McHugh JA that Beaton had provided consideration but because rezoning had not taken place, the contract had been brought to an end by frustration. It was not up to the McDivitts to make rezoning take place and if it had not happened after seven years, then it was probably not going to happen.

Ratio decidendi:

• Acts performed in reliance of a promise do not constitute consideration for the promise. Rather the reliant person should seek a remedy in estoppel rather than in contracts.

Week 5- Consideration

Page 79-86

What is sufficient consideration?

• Consideration must only be sufficient, not adequate. Consideration must be something that the law regards as valuable.

• The courts do not consider whether the value is equal or even proportionate because a mere peppercorn should be enough.

• This is because courts have no way to assess subjective value based on consideration. They don’t want to judges to unmake contracts. It is also to protect economic freedom and voluntary exchanges.

Can there be consideration if the promisor retains unfettered discretion about whether they will perform?

• If the promisor is not bound to perform, then the promise has illusory consideration.

• For example you have an option whether you will carry out the contract.

Is past consideration good consideration?

• It is not sufficient consideration. Something given before a promise is made cannot constitute good consideration for the promise.

• Roscorla v Thomas.

• E.g. I A gives B a dog and later B promises to pay $100, it is not consideration.

• However a promise to pay for past services is consideration. You know you have to pay.

What is the existing legal duty rule?

• A promise to perform an existing legal duty is not sufficient consideration for a contract.

• One party cannot vary the contract just to benefit themselves without providing any consideration.

• Courts do not want people to pressure the other party into getting something extra just to fulfil the same contractual obligations. It prevents exploitation of another parties dependency and lack of adequate remedies for a breach.

• People are bound by the terms of their original contracts.

• Musumeci v Winadell is an example.

What is the pre-existing legal duty for part payment of debt?

• Does not constitute good consideration to agree to discharge debt.

• The creditor is entitled to recover their remaining money.

• This is the rule of Pinnel’s case applied in Foakes v Beer.

• This does not count if you pay before the due date, several creditors jointly agree to forgo part of their debt (composition), payment is made to the creditor by a third party or if the debtor gives something other than money even if it is an old sandshoe accepted in satisfaction.

What are the exceptions to the pre-existing legal duty rule?

• It will not apply where:

• The beneficiary is providing fresh consideration.

  • Give fresh consideration in return for modifying the contract. For example, work longer hours.

• The beneficiary’s promise to perform has a practical benefit to the modifying party.

  • In Stilk v Myrick, sailors deserted a ship so the captain promised to pay higher wages if the remaining crew sailed back shorthanded. The crew had already signed a contract that they would do everything they could in an emergency. They provided no fresh consideration and did not get the higher wages. The pre-existing legal duty rule was created.

  • Harris v Watson was a similar case but half the crew had deserted. They got higher wages because they were doing more than what their original contract required them to do.

  • E.g. Williams v Roffey Bros and Nicholls (Contractors).

  • This rule is not applied in discharges of debt unless under a deed. It would go too far against Foakes v Beer.

  • Musumeci v Winadell Pty Ltd extends the practical benefit exception.

• A promise to perform an existing contractual duty is...