Tuesday, June 8, 2010

Contracts - Consideration


  • Determines whether an agreement will be binding
    • Offer and acceptance = agreement
    • Agreement without consideration = no enforceability
  • Determines which promises will be enforceable
  • A pivotal is essential to the bargaining/exchange model and only promises that have been bargained and paid for can be enforced.
  • Only becomes an issue when one of the parties does not want to perform the contract.

Purpose of Consideration

  • Concept of Contract as Bargain
    • Each party must give something in exchange for other party’s undertakings (Quid pro quo)

Terminology: Promisee/Promisor

  • Promisee -party seeking to enforce promise / the party to whom the promise is made (enforcing)
  • Promisor-party alleging no consideration / the party who makes the promise (resisting)
  • Always the beneficiary who seeks to enforce the promise

No Consideration= No Enforceable Promise

  • Promises which have no consideration = Bare promises = gratuitous promises = nudum pactum
  • Exceptions:
    • Deeds (formal ritual)
    • Estoppel (detrimental reliance)

Key Requirements for good consideration

  • Exchange between parties (quid pro quo)
    • Each party must have given something to the other.
  • Exchange must be “legally sufficient” in eyes of law

Sufficiency Requirement

  • Parties can provide any consideration they choose as long as its sufficient in the eyes of the law.
  • Consideration can be promise, act or forbearance to act
  • Consideration legally sufficient if promise/act/forbearance
    • involves detriment to promisee.
    • confers benefit on promisor.
    • So the party seeking to enforce the promise can show either that they themselves incurred a detriment or conferred a benefit on promisor
  • So the fact that consideration can be either a promise or an act means that the law can recognise both bilateral and unilateral contracts.

Bilateral Contracts

  • Consideration = exchange of promises
  • Executory, i.e. has not yet performed.
  • However, both parties bound despite fact promises yet to be performed
  • Most commercial agreements are bilateral in nature so it thus follows that consideration is rarely, if ever, an issue in most commercial agreements
  • What happens in case of alteration of terms?
    • This usually the situation where consideration is an issue in a commercial agreement

Unilateral Contracts

    • Promise in exchange for act, not mutual exchange of promises
    • Offeree does not have to take up offer
  • Performance of specified act both:
    • acceptance of offer
    • [executed] consideration for offer
    • No contract unless specified act performed

Consideration must be real but need not be adequate

  • SO courts are reluctant to find fault with an agreed contract unless it’s illegal or illusory. As long as the consideration does not fall foul of these, courts will not review the adequacy of the consideration.
    • C.F. doctrine of unconscionable dealings CBA v Amadio
    • As long as its legally sufficient (within CL) then it doesn’t have to be anything other than nominal consideration.
    • The fact that its trivial or nominal doesn’t matter.
  • This approach reflects two underlying ideologies:
    • Freedom of Contract
      • Recognises that the parties should be free to contract on terms they see fit with whoever they like
      • Courts should be slow to second-guess their decisions, otherwise the enforcement of contracts would be too uncertain.
        • An exception where courts won’t look at adequacy CBA v Amadio
          • Sometimes a gross discrepancy in consideration may be regarded as evidence of unconscionable dealings (recognised excuse for non-performance
    • Sanctity of Contract

Exchange Requirement

  • Must be relationship of quid pro quo between offer and acceptance
  • “Each party must promise to give up, or actually give up, something specified by the other as the price of the reciprocal undertaking” (Collins p. 25)
    • Explains why gratuitous promise will not be enforced

Application of Exchange Requirement

  • Bilateral contracts seldom problematic
  • But cf unilateral contracts
    • Act of acceptance must be in response to offer
  • Action for outstanding payments & restitution (‘action for moneys had and received’ = restitutionary action)
    • Australian Woollen Mills v Commonwealth
      • High Court of Australia found that no offer had been made in order to induce AWM to buy the wool nor had they asked
      • The government was actually just saying, if you buy wool, we’ll pay you the subsidy, so no necessary element of quid pro quo.
      • They also drew a difference between unilateral contracts and conditional gifts.

Contrast Conditional Gifts

  • A in Sydney says: “I will pay you $1000 on your arrival in Sydney
    • without more ≠ contract
  • A in Sydney promises B in Melbourne $1000 in return for B’s coming to Sydney = unilateral contract
  • Need to show act done in response to request

Means for establishing the difference between Unilateral Contracts and Conditional gifts

  • If the promisor has expressly or impliedly asked the promisee to do a specified act
    • The presence of a request to do something is always a good sign.
  • So Inducement is important
    • Ordinarily inferred R v Clarke
      • Failed to recover reward because no quid pro quo
      • So not acting in response to and in exchange for the offer.

The party seeking to enforce the promise must be the one who provided the consideration to the promisor.

  • Consideration must move from Promisee
    • Before you can enforce the promise you must have provided consideration.
  • But need not move to (benefit) promisor
    • Eg-promisor confers benefit on third party at promisee’s request

Contracts of guarantee

Spousal Guarantees

  • Consideration for Guarantee
  • Wife (guarantor) gives guarantee to bank (creditor) in exchange for bank’s promise to make advances to third party company (owned by wife’s husband).
    • So two contracts
      • Bank and Company
      • Bank and Guarantor
    • So consideration is the bank will agree to extend a loan to that company (third party) in exchange for your guarantee of the payments of the loan.

Past Consideration is not Good Consideration

  • Consideration must not have been executed before formation
    • It must be provided at the time of formation and in exchange for the other party’s consideration.
  • Consideration has already flowed from promisor to promisee
    • Promise to pay for “unrequested” services already performed
  • Post-formation promises
    • Roscorla v Thomas
      • One of the parties promises to include a term in the contract after the contract has been formed
        • Another example where the consideration is past consideration
      • The defendant (Roscorla) sold the plaintiff (Thomas) a horse for 30 pounds
      • Later, when asked by the purchaser about the horses wellbeing, the seller guaranteed that the horse was free from vice
      • The horse actually turned out to be uncontrollable, ungovernable and vicious
      • Purchaser brought an action for breach of contract
      • Unsuccessful because the vendors promise was made not in exchange for the purchaser’s agreement to buy the horse but was an add-on made after the contract was formed
      • Thus not enforceable

Requested Services

  • Exception to the rule
  • Request for services with expectation of payment
  • If the promisor later decides to pay for those services, then the past conduct will be considered good consideration
    • Ipex Software v Hosking
      • Involved transfer of a software company owned by Hosking to Ipex
      • It was then agreed that Hosking would receive shares in a re-structured group of companies
      • The problem was that the transfer of the I.T. business occurred prior to the making of the agreement and the terms they arrived at upon agreement were broad and open-ended
      • Ipex tried to wriggle out of paying Hosking by arguing that he had only provided past consideration
      • This argument failed
        • It was always intended that the transfer was to be paid for
        • PRINCIPLE: ‘The transaction was more like the performance of a service on the basis that it would be paid for followed by a promise which fixed the amount of that payment.’

Legal Insufficiency

  • Illusory promises
    • Unenforceable
    • One form is in cases where the contract confers an unfettered discretion on one of the parties whether to perform a particular obligation or not
    • SO a promise to perform an obligation at the promisor’s discretion is illusory
    • Its also possible to analyse illusory promises as an example of legal uncertainty
      • An agreement which contains an illusory promise may also be found to be void for uncertainty (contract is a complete nullity)
      • It may be uncertain because it confers an unfettered discretion or is uncertain in scope
      • Two leading cases,
      • Placer Development v Commonwealth (1969)
        • The commonwealth entered into a joint venture with Placer to set up another company in PNG
        • Purpose was to import timber into Oz
        • Cth. Agreed it would pay Placer a subsidy on any products which incurred customs duty
        • BUT subsidy was to be payed at a rate to be determined by the Commonwealth.
        • Sometimes it didn’t pay
        • So Placer sued
        • Promise found to be Illusory because the amount to be paid was completely at the discretion of the Commonwealth so that promise did not contain any contractual obligation
      • Biotechnology v Pace (1988) 15 NSWLR 130,134-5
        • NSW CA found that a senior research scientist’s salary package was unenforceable because it was too uncertain in its scope
        • It included an option to participate in the Company’s Senior Staff Equity Sharing Scheme
        • Problem was that no such scheme actually existed at the time the company made the offer.
        • Pace was well aware of that fact, and at the time his employment was terminated there still wasn’t any such scheme
        • He brought an action for damages for breach of contract
        • Although the court found it was an inducement, it was too uncertain and depended too much on the unilateral actions of the company.
        • So this part was unenforceable because it was illusory/too uncertain
    • Important Proviso
      • Contrast Biotechnology with Ipex Software
        • A party can still exercise some discretion in the manner in which parties execute the terms of the contract
        • SO Ipex: They actually fixed a proportion of reimbursement
          • So it was possible to provide the required 5%
        • Biotechnology: There was no clear formula.
    • These cases demonstrate that each case needs to be looked at on its facts and the distinction between the two cases demonstrates the Courts efforts to find the higher middle ground.
  • Illegal promises
    • E.g. an agreement to commit murder
  • Promise to perform existing obligation or duty
  • Existing obligation can arise from
      • Public duty
      • An existing duty with third party
      • An existing contract with promisor
      • Public or Other Duties [not addressed in lecture]
      • Contractual Duty Owed to Third Party [not addressed in lecture]
    • Not good consideration unless it confers some additional benefit on the promisor (pre-existing duty rule)
    • Two situations where reliance on this rule may be problematic
      • Where there is a prior public duty
        • E.g. Police Officers and Firefighters
          • So a contract with the police force to provide policing services will not be enforceable because this is what the police are for.
          • So for a contract in this scenario, the Police would be having to do something ‘over and above’
      • Where the party is relying on a pre-existing contractual obligation owed to the promisor
          • Qualification: Where the contractual obligation is owed to a third party
    • A promise to perform a duty already owed to a third party under a separate contract is good consideration Pao On
      • Eg, A agrees with B to build house for $300,000 with completion date of May 18
      • Concerned that house be completed on time, C agrees to pay A $50,000 for timely completion
  • Promise to pay only part of existing debt

Contract Variations

  • The Law of contract applies the same rules to contract variation as it does to contract formation
  • So any modification of terms in favour of one party must be supported by new or additional consideration from that party
    • That may involve an additional benefit or detriment to the promisee
  • Whenever there is a change in the terms of the contract benefit one party, the promisee must show that they gave fresh or additional consideration
    • BUT if all they do is argue that they were already bound to provide that consideration, then the promise will not be enforceable (not good consideration)
  • Pre-existing duty rule provides obstacle to contract variations
  • SO Contract variations in favour of promisee must be supported by fresh consideration from promise
    • Stilk v Myrick (1809)
      • Two crew from a cargo ship went AWOL
      • The captain agreed to pay the remaining crew a bonus at the end of the voyage because he knew he couldn’t replace the two deserters
      • At the end of the trip the Captain reneged on his promise so one of the Sailors sued
      • HELD: The promise was not enforceable because under the original contract the crew had “promised to do all they could under all emergencies of voyage”
      • So the court took the view was just such an emergency, the sailors were agreeing to do what they had already agreed to do.
  • BUT very little consideration is necessary to be consideration. Only has to be something extra, over and above, what is required.

Criticisms of Pre-existing Duty Rule

  • May be in parties’ interests to renegotiate
    • THUS it has been suggested that contract negotiations that have been genuinely negotiated should be enforceable even if there has not been additional consideration provided on either side
  • Consideration not cure-all
  • Token consideration will suffice
  • Modern law of economic duress may obviate need for rule
    • Perhaps a better mean for measuring genuineness of variation than fresh consideration

Variations procured by Duress

  • An excuse for non-performance
  • Duress = Illegitimate threats to life, limb or wellbeing or other unconscionable pressure such as economic duress.
  • If a party is coerced into a variation that variation may be rescinded or set aside at that party’s option
  • This means that courts will not enforce variations procured by duress even if supported by fresh consideration
    • TA Sundell & Sons Pty Ltd v Emm Yannoulatis (Overseas) Pty Ltd

§ There was a contract for the sale and purchase of iron and the seller was importing the iron from France

§ Payment was to be by way of a letter of credit (a special payment option used to pay sellers importing goods)

§ Due to a change in exchange rates, the vendor’s costs increased considerably, so he threatened not to supply the iron unless the purchaser agreed to pay more

§ The problem was that the purchaser had already entered into a whole range of other contracts so he had no option but to agree

§ Later the purchaser was successful in an action for the return of that money, the vendor had not given good consideration for the extension in the credit note because the vendor was already required to supply the iron under the original contract

§ In any event, the compulsion to pay extra on threat of no-import had the effect of vitiating the purchaser’s consent to the variation

§ As a consequence his action for return of the money was successful

Action for monies had and received on total failure of consideration

  • Restitutionary action grounded in unjust enrichment
  • Plaintiff must prove:
    • Enrichment
    • At the expense of plaintiff [ie-benefit subtracted from plaintifff]
    • Retention of enrichment is unjust [within judicially recognised category]
    • Unjust factor “total failure of consideration” or duress

Reform measures in relation to the pre-existing duty rule

Williams v Roffey Bros - Practical Benefit

  • A depart from the traditional rule of contract variation
  • Involved a dispute b/w builder, Roffey and one of its sub-contractors, Williams
  • Builder had contracted with developers to construct 27 units
  • Sub-contracted out carpentry work for 20,000 pounds
  • Williams had massively underestimated his costs and told Williams that he couldn’t do this work for that price
  • At that stage, in order to ensure that the work was completed on time, he agreed to pay additional money
  • It was important to Roffey that the contract be completed on time to avoid liquidated damages (100 quid/day)
  • So he had an incentive to get the work completed and avoided the disbenefit of having to find someone to finish the job
  • At the end Roffey refused to pay so Williams sued
  • In allowing the claim, House of Lords took into account the fact that the builder, Roffey, obtained a practical benefit or obviated a disbenefit.
  • Performance of existing obligation may suffice if:
    • practical benefit to promisor
    • or avoidance of disbenefit
      • Even though no additional work performed by Builder
  • Adopted with some modification in Musumeci.

Musumeci v Windadell (1994) NSW

  • Involved the lease of a shop in a shopping centre which was a fruit shop
  • Landlord then leased Fruit shop in same premises to a competitor which had a dramatic effect on M’s business to such an extent that they were considering walking away
  • In order to keep a shopping centre, the landlord said, if you stay, I will reduce rent
  • Later a dispute arose between the parties and the question arose whether the landlord’s offer to reduce the rent was in fact enforceable
  • Santo J found it was, no distinction can be drawn between a promise to pay more money in exchange for the same (Roffey) and a promise to accept less money in exchange for the same
  • HELD: Practical benefit or detriment principles apply to both:
    • agreements to pay additional sum (“more for same”)
    • agreement to accept reduced sum (“less for same”)
  • Agreement not to be induced by “unfair pressure”.
  • Performance of existing obligation by promisee (M)
  • Must be capable of being regarded by party providing varied contractual performance (W) as more valuable than contractual remedy (eg, damages).

Exception to Pre-existing Duty Rule: Variation to discharge Contract

  • Pre-existing obligation rule does not apply where effect of variation is to discharge contract altogether and substitute new one altogether
    • So it is important to check if the variation is a variation or a new and substituted agreement = the legal effect of the variation

Legal Effect of Variation

  • Variation may have two possible effects:
    • Bring to end original contract and replace it with new contract [novation]
    • Leave original contract intact but subject to modification [variation]
      • Whether variation or substitution depends on intentions of parties

Consideration Requirements

  • Where there is a new contract (novation) - consideration is mutual discharge of original contract so no problem
  • In a new agreement the parties can provide any consideration they like, whether it be more for the same or less for the same.
    • It doesn’t matter if the terms replicate what is in the original contract
    • A good example is when parties in a dispute decide to draw up new terms of agreement which is a completely new agreement.
  • A modification rather than novation, then we need to look at the pre-existing duty rule.
    • So look at whether the variation has contained a complete discharge of the original agreement or whether not it has just substituted some altered terms
  • Also an issue because the dispute is to be resolved where the contract was formed so that means Tallerman (Taylor J,143-144)
    • Leading decision on postal acceptance rule
    • Parties were in dispute over supply of bullets
    • Seller lived in NSW and buyer lived in Melbourne
    • Seller sought a stay of proceedings to say that NSW court didn’t have jurisdiction
    • Seller attempted to argue that there had been a variation that brought about a complete new agreement which was concluded in NSW
  • High Court of Australia said that the place where a contract was formed was where it was posted and we don’t think that there was any variation and even if it was it doesn’t alter the place where the original place is formed.

Bona Fide Settlements of Dispute

  • Second major exception to pre-existing duty rule

What is a Settlement ?

  • When two or more parties in a dispute reach an agreement to resolve their dispute
  • Compromise of a legal dispute
  • Can involve either:
    • Variation of terms of existing contract
    • Substitution of new contract altogether [i.e.-novation]
  • Settlements are extremely important because whatever the nature of the original dispute, a settlement will usually be drawn up in the form of a contract
  • Principles of settlement are the same irrespective of the nature of the dispute.
    • Parties can also reach settlement without ever using that expression.

Where Settlement involves Variation of the terms

  • Where parties vary their contract as part of a bona fide settlement of a dispute, consideration is seldom a problem
    • The surrender of a disputed cause of action or a potential claim is always considered good consideration in the eyes of the law.
  • Bona fide compromise of disputed claim is good consideration for other party’s promises
    • Pre-existing duty rule has no application
      • Because if the variation is brought about for the purpose of settling the claim then there will always be good consideration
      • The corollary of that is that where a dispute is settled in this way the settlement will be enforced according to its terms even if the settlement is that one of the parties will do only what they were required to do under the contract.
    • Settlement upheld even if promisee promises no more than what was already required under original contract Wigan v Edwards
      • Mr and Mrs Edwards agreed to buy a house from a builder
      • Prior to the settlement date they’ve raised concerns over some defects and said they would not pay purchase price until they were remedied
      • They only agreed to settle after the builder agreed to rectify a list of defects and agreed to repair any other major defects in construction that occurred within the next 5 years provided he is notified in writing
      • Not all of the defects were rectified so the Edwards tried to recover damages for breach
      • Builder resisted claim on the basis that the Edwards had not provided good consideration
      • He argued that they were already bound to pay the purchase price and they were doing only what they were already bound to do
      • BUT the court found that the builder’s promise to rectify had been made in exchange for the Edwards offer to give up their claim.
      • So in exchange for repairing the effects, the Edwards offered to give up their claim and pay the balance of the purchase price
      • So this becomes a variation to the terms of the contract and the consideration was their agreement to settle
      • SO they were only providing what they had already agreed to but because they believed they had a bona fide claim because of these defects, agreement to give up that claim constitutes good consideration
      • BUT this is a settlement involving variation
      • Mason J held that the only requirement for a valid settlement is that the dispute being surrendered is a bona fide one
        • It doesn’t have to be legally well-founded as long as the claimant honestly believe that it is.
      • As long as a party to a dispute believes on good faith that they have a cause of action, their decision to give that up in exchange for the other party’s promise, will constitute good consideration
        • The cause of action does not have to be a threat to sue.

Policy Reasons

  • It encourages parties to settle their disputes and assist in the administration of justice
  • Because what is the point in having a settlement if their actual legality needs to be reviewed by the courts

Discharge of previous agreement and substitution of a new one (Novation)

  • Novations are also an exception the pre-existing duty rule
  • Consideration is the mutual discharge of the old agreement.

What happens if Settlement not performed?

  • Depends on how settlement classified, novation or variation
  • Settlement can be:
    • Accord executory
    • Accord and satisfaction
    • Accord and conditional satisfaction
  • Its important because it affects when settlement comes into effect and what innocent party’s remedies are.


  • Accord=agreement to surrender cause of action
    • Where parties in dispute agree to surrender a disputed cause of action
  • Classification as accord and satisfaction or accord executory determines when cause of action is surrendered or “satisfied”
  • Analysis applies to settlements involving variations and novations

Accord and Satisfaction

  • = Party surrenders their potential cause of action in exchange for mere promise of performance (not necessarily the previous contract)
    • So the owners give up their cause of action for a promise by the builder that he will perform
  • Original cause of action immediately “satisfied” or discharged McDermott v Black at 176 per Starke J
  • Settlement takes effect immediately
  • If promise not performed, promisee must sue to enforce terms of settlement [whether part of variation or novation]
    • Because the old cause of action has already been discharged.
  • It is effectively a bilateral promise

Accord Executory

  • Party surrenders cause of action only in exchange for actual performance of promises contained in settlement offer
  • Promise for act - unilateral contract analysis
  • Cause of action remains intact until and unless performance
  • So this is a unilateral contract
  • McDermott v Black
  • No binding contract until specified act performed
    • The advantage is that if the builder defaults, the owners retain their original cause of action
    • But there is no binding contract on builder to carry out repairs
    • So either party can walk away from that settlement which is not reassuring

Accord and Conditional Satisfaction

  • Party surrenders cause of action in exchange for promises contained in settlement provided promises performed
  • So conditional agreement to surrender cause of action
  • Original cause of action only discharged if promise performed
  • Plaintiff must wait for performance but if not forthcoming, plaintiff can enforce original contract Osborn v Mc Dermott [1998] 3 VR 1, 10-11.
    • Party agreed to surrender their cause of action in exchange for a promise to perform
    • BUT the party makes the discharge of their original cause of action conditional upon the performance of the contract
    • The agreement is therefore immediately binding but the party’s obligations are postponed until the outcome of the repairs are known
    • So agreement to surrender cause of action is conditional upon the other party actually performing
      • SO, the contract is immediately binding
      • BUT the owners cannot sue under the original contract unless and until the builder fails to perform his or her promises under the settlement contract so both parties are bound.
    • Advantage over accord executory is that the agreement is binding on both parties

How to Classify?

  • Whether there is promise for promise, promise in exchange for act or conditional contract
  • It’s a matter of construction of contract, and only matters unless one of the parties fails to perform.
    • Tallerman [if a variation - accord executory]
  • Distinction only important where terms of settlement not performed
  • SO
    • A) look to see if one of the parties has agreed to give up their cause of action in exchange for a promise or an act
    • B) If it is a situation in exchange for a promise, is that conditional on the other party’s performance?
      • So take the descriptions of the different categories and find which one it fits.

McDermott v Black

  • Plaintiff (Black) purchased shares under a terms contract (a name for a contract where one of the parties pays a deposit and the balance of the purchase price is paid in instalments)
  • In this instance, Black paid a small deposit and had difficulty finding the balance
  • So if he can’t perform then he is in breach, so he tried to wriggle out of it by alleging that he had been induced to enter into the contract as the result of fraudulent misrepresentations
  • But he actually wanted to honour the contract so he agreed to withdraw all allegations of improper conduct on condition that McDermott gave him a 3-week extension
  • McDermott gave him the extension, he still couldn’t pay so he tried to revive his cause of action
  • High Court of Australia held that he had given up his original cause of action
    • It was accord and satisfaction but promises performed so accord “satisfied” and original cause of action discharged

Tallerman (Actually leading case on Postal Acceptance)

  • If there had been an accord it was an accord executory only
  • The promised acts under that agreement were never carried out
  • No performance by purchaser so original contract intact

Miscellaneous Matters

  • Whether a settlement is a variation or novation, the original rules of contract apply
  • Terms of settlement must be clear and complete
    • Applies to both variations and new agreements
  • Settlements subject to excuses for non-performance
    • Fraud, duress etc TA Sundell
  • Settlement must be interpreted according to its own terms Wigan v Edwards

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