Consideration

NB REFERENCES TO "HPH" OR JUST TO A PAGE NUMBER ARE TO HEFFEY, PATERSON AND HOCKER CONTRACT COMMENTARY AND MATERIALS 8TH ED 1998 (LBC INFORMATION SERVICES) Historical development (HPH 142-145)
We saw in the first few lectures that the early law of contract was relatively unsophisticated. It responded to simple transactions of exchange - for example if I built a house for you, then the courts would make you pay for my work - but was not capable of responding to more complicated exchanges, particularly when performance was projected into the future. As the economy grew and the industrial revolution called for long-term commercial relationships, the law had to adapt and provide ways in which business people could rely on commercial arrangements spread over time. This could be done by making futurecommitments, that is, promises, legally enforceable. One of the major developments was the emergence of the doctrine of consideration. It was necessary to develop a legal criterion for distinguishing those promises which would be legally enforceable from those which would not. Apart from deeds under seal, which required certain strict formalities, the law provided that those promises supported by consideration would be legally enforceable. We saw in the case of Eastwood v Kenyon that a moral obligation to pay was not regarded by the law as sufficient to make a promise legally enforceable. There had to be an exchange.

The notion of exchange - consideration must move from the promisee

This is perhaps the most difficult aspect of the doctrine of consideration to come to terms with. It has certainly attracted a great deal of academic and judicial attention. When dealing with the question: which promises should be legally enforceable? the natural tendency is to look to the person making the promise and ask questions like: Was she serious? Was he sufficiently solemn? Did she put it in writing? - in other words look at the way the promise was made. But the doctrine of consideration does not do this. Instead, it looks to what the other party has done. Hence the expression that a promise, to be enforceable, must be supported by consideration moving from the promisee. In looking to what the other party has done, the law did not regard it as sufficient that the other party had relied on the promise. Certainly this would be a rational basis for making promises enforceable, but the traditional approach was to require something more than reliance. We will see that the traditional approach is being supplemented by a reliance-based doctrine, namely, estoppel. But we will come back to that. For the moment we will confine ourselves to the traditional doctrine of consideration. What was this something which the other party had done which provided the essential ingredient for making a promise legally binding? The answer was a reciprocal act or promise which the law regarded as sufficient. This is what is meant by the expression consideration must move from the promisee. This simple statement involves two elements: 1. An exchange - the idea that the promise in question must be supported by something moving from the other party. 2. That what was provided by the other party was regarded as good in law - it was a good consideration.

Most of the doctrine of consideration is about the second element, namely, what amounts to a good consideration? This where the language of detriment to the promisee and benefit to the promisor comes in.

Quid pro quo

Let us focus on the first element, the exchange. It is this idea which is mystified by the Latin tag quid pro quo. Basically. this means that there must be a reciprocal exchange. This is what is referred to as thebargain theory of consideration. There are many statements of this idea. One useful statement is that of the great American jurist Oliver Wendell Holmes on the top of p 148 of HPH. "The root of the whole matter is the relation of reciprocal conventional inducement, each for the other, between consideration and promise." The usual bilateral contract involves an exchange of promises which is sufficient. And it works both ways. If I offer you a ton of gravel to be delivered to your house next Friday, payment of $50 on delivery and you then agree (you accept my offer), we have exchanged reciprocal promises. I have promised to deliver the ton of gravel and you have promised to pay on delivery. If we ask - what is it that makes my promise to deliver legally binding? - the answer is that it is supported by a good consideration, namely, your promise to pay on delivery. If we ask - what is that makes your promise to pay on delivery legally binding? - the answer is my promise to deliver. In unilateral contracts, consideration is provided for the promise of reward by an act, rather than a promise. But that is quite sufficient. Of course there is only one promise in unilateral contracts. So, the exchange is constitued by a promise in exchange for a counter-promise (bilateral) or an act (unilateral). This incidentally also incorporates the rules of offer and acceptance. They are directed at a somewhat different enquiry, namely, whether an agreement has been made but they tie in with the doctrine of consideration because the exchange inherent in the process of offer and acceptance also provides the consideration. Acceptance is either a promise or an act. We have already looked at

Australian Woollen Mills v Commonwealth

(HPH 47)

You will recall that it was alleged by Australian Woollen Mills that there was a unilateral contract. The High Court discussed this claim in terms of offer, acceptance and consideration, coming to the conclusion that no contractual offer was ever made by the Commonwealth and so any response by Australian Woollen Mills could not amount to an acceptance nor could it be a consideration for the alleged promise of money. Much of the discussion in that case seems somewhat over-elaborate but it is nevertheless regarded as a definitive statement by the High Court of the essential elements of contract formation. We see that the Australian Woollen Mills case is referred to as authoritative in

Beaton v McDivitt

(HPH 146)

This case involved a very vague arrangement between the owner of some land, McDivitt, and Beaton. McDivitt promised Beaton that, if he worked a part of the land (referred to as lot B) using permaculture methods, then McDivitt would give him lot B when the land was rezoned. Beaton moved on to lot B, built a house and did work it for some seven years. Then a dispute arose and McDivitt ordered Beaton to leave. Beaton argued that there was a contract between the parties and that he therefore had a legal right to block B.

The main focus of attention in the extract is the doctrine of consideration. Was this a case of contract? Was Beaton's working the land a consideration for the promise by McDivitt to transfer lot B? Before we examine this contract claim it is necessary to explain that this type of situation has been the subject of a number of cases which are about a particular brand of estoppel - called proprietary estoppel. What proprietary estoppel is about is that equity may order a remedy against someone who has made a promise or representation to another concerning land which is relied on by that other in some material way, such as building a house on the land. The doctrine of proprietary estoppel, like all estoppels, is reliance based. We will return to estoppel because it is now of some importance in the law of contract generally. Now, what happened in Beaton v McDivitt was that the trial judge, Young J, attempted to re-define the doctrine of consideration in terms of reliance theory rather than bargain theory. He said that the line of proprietory estoppel cases were really contract cases, not estoppel cases. In other words, reliance is sufficient to make a contractual promise binding. Young J could draw on respectable academic sources to justify his attempt to redefine the doctrine of consideration in terms of reliance theory. The significance of this on the particular facts was that, on a reliance theory, it was sufficient that Beaton had simply worked the land in reliance on McDivitt's promise. It was not necessary, on this argument, to show that Beaton's acts of working the land were a bargained for exchange which had been expressly or impliedly requested by McDivitt (using the kind of language employed by the High Court in the Australian Woollen Mils case). On this basis Young J was able to hold that there was a contract. He went on, however, to hold that the contract had been frustrated by the fact that the land had never been rezoned. (The effect of frustration is that both parties are relieved of contractual obligations and so there is nothing to enforce. We will discuss the doctrine of frustration in second semester.) In the NSW Court of Appeal, the judges (predictably enough) saw the arrangement in different ways. McHugh JA discusses the attempt by Young J to redefine consideration (see pp 146-148). He rejected this analysis because he felt that the Court was bound by what the High Court had said in Australian Woollen Mills which had reiterated the bargain theory. McHugh JA treated the proprietory estoppel line of cases as being estoppel cases and not contract cases. So he rejected what he called the jurisprudential basis of Young J's conclusion that there was a contract. Nevertheless, McHugh JA came to the conclusion that there was a contract on the basis of the conventional bargain theory of consideration. He deals with this on bottom p 148 to top p 150. Having distinguished between a gift on condition, an estoppel situation and a contract (top p 149), he thought that in this case there was an implied request by McDivitt to Beaton, promising him that if he worked lot B he would be given it. Beaton responded to this by doing what was requested. He saw this, in other words, as a drawn-out unilateral contract. McHugh JA does briefly canvass the withdrawal of offer issue on p 149 last para when he refers to the English case of Errington v Errington where Lord Denning had said that once the promisee in a unilateral contract had started to perform, the offer could not be withdrawn. Of course, the Queensland case of Veivers v Cordingley had not been decided at the time of this case. McHugh JA concluded that the contract was not frustrated and that McDivitt was contractually obliged to do all that was necessary to sub-divide his land so that he could transfer lot B to Beaton. Mahoney JA also came to the conclusion that there was a contract on the conventional bargain theory of consideration. But, on the other hand, he did think that the contract had been frustrated by the fact that the council had not rezoned the land. Kirby P came to the conclusion that there was no contract. See p 151-152. He just could not see what Beaton had done as being a quid pro quo for McDivitt's promise. "If it be relevant to look..."

So the upshot of this case was that a majority of the Court of Appeal for entirely different reasons concluded that there was no enforceable contract. One of the puzzles of the case is that the doctrine of estoppel was not argued as a fall back position. Young J as the trial judge had said that estoppel was not needed because the case was one about contract. But as soon as that argument was rejected, then one would have thought that Beaton would have argued proprietory estoppel.

Consideration must move from the promisee but not necessarily to the promisor
One of the points to note about the exchange element of the doctrine of consideration is that it only requires that consideration move from the promisee. It does not require that consideration move to the promisor. Of course, in almost all contracts, consideration moves between the two parties to the contract. But this does not necessarily have to happen. An illustration of this is a contract of guarantee. Suppose you want to borrow some money from the bank. Being a student, the bank thinks that your credit rating is not too hot. So the bank wants a guarantee from a third party. This is a very common commercial arrangement. So, your parent agrees to go guarantor. What this entails is the parent making a promise to the bank that, in the event of you not paying back the loan, the parent will instead. That is the nature of a guarantee contract. If we then ask: what makes the parent's promise of payment legally binding? - the answer is that the bank has provided consideration by either promising to give you the loan or actually making the loan to you. Consideration moves from the promisee (the bank) but it does not move to the promisor (the parent/guarantor).

What is a good consideration?

We now turn to the second aspect of the doctrine of consideration, that is, what is a good consideration? What is recognised as being a consideration moving from the promisee and what is not given recognition? It is here that the rules are somewhat odd and do not have intuitive appeal. At the most general level it is said that consideration is something, moving from the promisee, which is either a detriment to the promisee or a benefit to the promisor. Usually, in most commercial exchanges the consideration is both a detriment and a benefit. For example, if I promise to pay you money it is a detriment to me and a benefit to you. But consideration can be either a detriment to the promisee or a benefit to the promisor. It does not have to be both. There is a logical conundrum with the doctrine of consideration in the case of bilateral contracts. We start with a promise which is made by A to B. We ask whether this promise is legally binding. It is said that a promise is legally binding if it is supported by a good consideration moving from the promisee, B. If what moves from the promisee, B, is a counter-promise, then the question arises whether the counter-promise is a good consideration. The answer is that it is, if it is a detriment to the promisee, B, or a benefit to the promisor, A. Now a promise is only a detriment or benefit if it is binding. So, we then ask is the promisee's (B's) counter-promise legally binding? The answer is Yes, if it is supported by a good consideration moving from A. Then we ask whether the original promise made by A is a detriment to A or a benefit to B. This depends on whether it is legally binding - the question we first started with. An attempted solution to this conundrum is suggested in a two-part article by Coote in (1988) 1 JCL 91 and 183.

Consideration must be sufficient but need not be adequate

This is explained in the extract from Greig and Davis on p 152. This is obviously a puzzling statement. What it means is that consideration must be sufficient in law but need not be adequate as a matter of commercial exchange. In other words, this is the peppercorn aspect of the doctrine. This part of the doctrine of consideration has a direct link to the 19th century laissez-faire approach. The attitude of the courts was that the law should provide the framework for commercial people to get on with their business. Beyond that it should not go. It was not the job of the courts to exercise a paternalistic oversight of business people. If someone wanted to sell their house for a peppercorn, so be it. That was their business. Further, it would not be conducive to certainty in transactions if every deal could be attacked on the basis that it was not a fair exchange. You will see this kind of approach reflected in the judgments of Justice Kirby . We have seen one example in Biotechnology v Pace. The peppercorn theory is seen in the case of

Chappell & Co Ltd v Nestl Co Ltd

(HPH 153)

The case is in the end not very challenging on the question of consideration. The idea that a consideration could consist of some used chocolate wrappers was not doubted by anyone. The only dispute was whether in this particular case the sending of chocolate wrappers constituted a consideration or merely a condition to be satisfied (like Mrs Carlill having to get flu). The background to this odd enquiry was a promotion by Nestl whereby Nestl agreed to provide a hit record to anyone who sent in 1s 6d plus 3 chocolate wrappers. The particular hit record which was the subject of attention in this case was a well-known ditty called "Rockin' Shoes". The way in which the issue came to court was that under the Copyright Act Nestl was obliged to pay royalties to the copyright owner of "Rockin' Shoes" calculated on the "normal retail selling price". Nestl offered an amount based on the retail selling price of the record being 1s 6d. This was rejected by the copyright owner who then sued to obtain an injunction to stop Nestl from selling the record. The whole issue hinged on what was the "normal retail selling price" of the record. If the selling price was merely 1s 6d then Nestl had complied with the Copyright Act and the copyright owner had no basis for complaint. If, on the other hand, the selling price included the chocolate wrappers, then Nestl had not complied with the Copyright Act and the copyright owner could obtain an injunction to stop Nestl. (What is never revealed in this case is whether Nestl would have complied with the Act if it had offered 6.5% of the chocolate wrappers to the copyright owner. Obviously Nestl just threw them away once they had been sent in.) Anyway, the judges at all levels were divided on the question whether the chocolate wrappers constituted part of the consideration for the record. But none doubted that something as valueless as chocolate wrappers could be a consideration. The majority view in the House of Lords was that the chocolate wrappers were indeed part of the consideration. The alternative view was that the chocolate wrappers were not a consideration but instead were merely a qualification or condition that had to be satisfied before the customer could obtain the record. Thus the consideration was the money but, in addition, there was a condition that had to be satisfied, namely, the sending of 3 wrappers. This was a bit like Carlill's case where Mrs C's using the smoke ball as prescribed was regarded as a consideration and getting flu was a condition which had to be satisfied if she was to get the money. The difference between a gift on a condition and a promise supported by consideration is notoriously difficult to define. This case illustrates this difficulty because there were completely opposite views expressed about whether the wrappers were a consideration or merely a condition. The same difficulty arose in Beaton v McDivitt: was working the land a consideration or merely a condition? If the conclusion is reached that the act or promise was merely a condition to be satisfied and not a consideration, then,

even if the condition is satisfied, the promise in question is not enforceable because it is merely a gift promise not a contractual promise.

Forbearance and compromise

We now turn to a very important aspect of consideration - important in a practical sense because forbearance and compromise is about settling disputes. As you have gathered, most disputes are settled out of court and, if the parties are advised by lawyers, the settlement deal will generally be recorded. This settlement is itself a contract. The consideration moves from each party: usually one agrees to pay money and the other agrees to forbear from pursuing legal proceedings. But a settlement or compromise does not have to conform to this typical pattern and may constitute any kind of exchange where each party is prepared to settle his or her differences with the other. There does not have to be actual or threatened litigation. The courts are very willing to find a settlement contract because, as a matter of policy, the courts want to encourage people to settle their differences out of court. This is illustrated by

Wigan v Edwards

(HPH 159)

In this case Mr and Mrs E entered into a contract with a builder to buy a house which the builder was building. There was no quality guarantee clause in the contract, that is, a clause under which the builder undertook to construct the house properly. Mr and Mrs E noticed a number of defects and said that they would not complete the deal if the defects were not attended to. The builder, Wigan, provided a written undertaking to Mr and Mrs E under which he promised to fix the defects already discovered and, further, that he would remedy any major faults over the next 5 years. A major fault in the concrete slab became evident and Mr and Mrs E sued on the written promise. The issue was whether this promise was legally enforceable. At first blush this promise looks as though it is a bare promise - a gift promise of something extra, unsupported by consideration. Remember that the original contract had no such promise in it and the promise was made by the builder after the deal was done. We will see that this may be said to be supported only by a past consideration, that is, the original deal, or it may be said that Mr and Mrs E did nothing in exchange for the extra promise. For example they did not promise to pay the builder extra money. These possibilities are canvassed by Mason J on p 160 where he talks about the existing duty rule. It is arguable that an extra promise from the builder is supported merely by an existing duty (the obligation to pay for the house in this case) moving from Mr and Mrs E. As we will see, performing an existing contractual duty is not traditionally regarded as a good consideration. But Mason J goes on to point out that there is an important qualification to the existing duty rule. Performing a contract as promised will be a good consideration where the person so promising is in dispute with the other party and agrees to complete the contract in settlement of that dispute. See "An important qualification..." p 160. So here, Mr and Mrs E were threatening not to complete unless the defects were fixed. In the course of settling this problem, the builder made a promise (probably more than what was required) which satisfied Mr and Mrs E. They agreed to complete the contract, having received this promise. This made the builder's promise binding legally because Mr and Mrs E had provided a consideration in the form of dropping their grievances.

Mason J makes the point that it is not essential for the existence of a compromise consideration that a party has threatened to sue - see p 161 "The respondents merely asserted..." It is enough that there is a dispute. In the middle of p 160 Mason J deals with a problem which can arise out of this type of case. Suppose that a settlement of a dispute is reached and it turns out afterwards that the person with a grievance in fact had no basis for complaint. Does this render the settlement contract invalid? It is at least arguable that if someone has, for example, promised money to settle what turns out to be a baseless claim, then that promise should not be binding. The answer to this is that, so long as the person with a grievance is bona fide, it does not matter if the claim turns out to be ill-conceived. The courts, as I have said, encourage out-of-court settlements of disputes and, as a matter of policy, they would not want to see settlement contracts challenged on this basis. It would undermine the effectiveness of settlements if every one could be re-opened by reference to technical points of law. So the general answer is that a compromise or settlement is binding even though it turns out that the original complaint had little or no merit, so long as the complainant was bona fide. Mason J does discuss the possibility that a settlement contract could be set aside or be declared to be not binding if the original complaint was "vexatious or frivolous" even though bona fide. But there has never been such a case before the courts and Mason J is content to say that it is a possibility that such a settlement could be set aside but it would be most unusual. You will see on p 161 an extract from

Butler v Fairclough
where Isaacs J sets out some rules about compromise and forbearance. You will see that, for there to be a consideration of this type, there does not have to a final resolution of the dispute. It is sufficient if someone holds off for a time, for example, promises not to sue for a month in exchange for a promise from the other person. See point (1). Point (4) is of doubtful validity given what was said by Mason J inWigan v Edwards. The other point to note about this summary in Butler is that it only deals with threatened litigation. Remember that a settlement may occur even when there is no threat of litigation, as occurred in Wigan v Edwards.

Past consideration
Another rule about what amounts to a good consideration - or at least, in this case, what does not amount to a good consideration - is the rule that past consideration is no consideration. To illustrate: suppose you did me a favour some time last week and I decide to reward you for your kindness and make a promise. My promise is supported only by a past consideration, namely, what you did last week. This rule follows from the idea of reciprocal exchange which in turn is about consideration moving from the promisee. To make a promise binding, as we know, consideration must move from the promisee. We have seen that this means that consideration must move from the promisee to secure the promise in question which necessarily means that it must be contemporaneous with, and in response to, the promise in question. The case of Eastwood v Kenyon, which I have referred to on a number of occasions, can be explained in terms of the past consideration rule. The promise which was made by the young woman in that case to recompense the guardian who had looked after her when she was growing up was in respect of a past consideration. Such past acts may have imposed a moral obligation but the decision in Eastwood v Kenyonwas that a mere moral obligation was not sufficient to make the promise legally binding.

Another illustration of the past consideration rule is

Roscorla v Thomas

(HPH 162)

Here we have the nineteenth century equivalent of the sale of a used car. The horse was sold by the defendant to the plaintiff for £30. After the sale, the seller warranted that the horse was sound and free from vice. This is equivalent to the used car dealer saying as you drive away from the car yard: "It is a good little runner. I can guarantee that it will give you satisfactory and reliable performance." It turned out that the horse in this case was far from sound and was riddled with vices. It was in fact "very vicious, restive, ungovernable and ferocious." In used car terms, it was a lemon. Is the promise relating to quality legally enforceable? Lord Denman made it clear that the original sale was simply a sale without a promise relating to quality. Such a promise (at that time) could not be implied as part of the original bargain. The express promise of quality was made after the deal. Nothing by way of consideration supported this promise. It was, in essence, a gift promise - an extra promise thrown in by the seller after the deal was made. It was supported only by a past consideration. Contrast Wigan v Edwards where similarly a promise of quality was made after the contract had been made but in that case a consideration could be found because of the brewing dispute between the parties. Of course, the buyer could have secured the promise about the horse's temperament at the time the deal was made but the seller may then have asked for a bit more money. Or, the buyer could have secured the self-same promise after the deal was made by paying a bit more for the benefit of it. This sometimes happens when you buy something like a video and the retailer offers a separate enhanced guarantee for which you have to pay extra. In the judgment of Lord Denman there is mention of a number of cases in which an implied promise was found. This leads us to the next point. Suppose I ring up you, a student, whom I know is desperate for weekend work. I ask you to come and do some gardening work for half a day. You obligingly agree and you turn up the next weekend and duly do the work. I am away that weekend so that you do not actually see me until a few days later. I then promise to pay you $80, not having any cash on me. Is that promise of $80 legally binding? It looks like it is in respect of a past consideration. But obviously it is somewhat different from the past consideration cases we have looked at so far. If we go back to the original conversation where I asked you to do the work and you agreed, there is obviously an implied promise to pay. I know that you will only work for money. So, my later promise to pay a particular sum merely fills a gap which was obviously there in the initial conversation. If I tried to argue that the contract was void for uncertainty because there was no price agreed to, a court would say that, even if this argument were to succeed, I am still obliged to pay. This is because the law of restitution steps in and says that once work has been done it has to be paid for at a reasonable rate, even in the absence of a contract. You will see the Latin expression quantum meruit used in this context. So there is really no basis for me to avoid paying you. If I accept the inevitable and make a promise to pay a particular sum, this fixes what was previously left unfixed and the promise is a contractual one. Uncertainties in a contract can be clarified by subsequent events and this is one example. If I try to avoid paying and make no promise to pay a particular sum, you can take me to the Small Claims Court and sue me on a quantum meruit. All of this is supported by the cases of Lampleigh v Brathwait and In Re Casey's Patents which are referred to in the case, also carrying the name Casey, namely:

Casey v Commissioner of Inland Revenue

(HPH 163)

The facts of the New Zealand case of Casey are a bit peculiar. The case is really about taxation. Back in 1918 Mrs Casey lent Mr Casey £700 plus some other amounts so that the total amounted to £875. The terms of this loan were that Mr Casey would repay the loan when he was in a position to do so, together with interest. So, no time was specified nor was any rate of interest specified, though Mr and Mrs Casey said that it was expected that he would pay a rate similar to the rate which a farmer would have to pay for a stock loan. In 1954 Mr Casey was in a position to repay the loan, having just sold his farm. He paid Mrs Casey £5000, that is, 36 years later he repaid the loan plus interest. The Commissioner for Inland Revenue said that this was really a gift, at least to the extent that the £5000 exceeded the £875, viz £4125. Gift duty was payable on gifts in those days. Mr and Mrs Casey said that this was not a gift but the fulfilment of a contractual promise. The payment of £4125 was the interest component for the loan. You will see on p 163 that the relevant legislation defined a gift to be a disposition of property "without fully adequate consideration in money or money's worth". The first argument used by the Commissioner was that the payment must have been a gift because the wife's right to claim the amount under the alleged contract was statute barred at the time it was paid. That is, the limitation period for the wife's cause of action had run out. This argument starts on p 164 top para. This argument required the judge to examine whether there was a contract at all and what its terms were. The problem, of course, was that the terms of the so-called contract were left undetermined. No argument was mounted that there was no contract because there was no intention to create legal relations, an argument that can be used within the family setting in some cases. We come to this topic soon. So, returning to the problem, was this contract too vague or else an agreement to agree? You will see from the judge's discussion that the courts have for a long time recognised that a contract may leave out an essential element and that later that element is filled in by a promise. This is the same as the example I talked about where the student does some gardening for me. Look at the extract from Re Casey's Patentson p 164: "Now the fact of a past service..." So the subsequent promise which fixes the amount to be paid for the service is a contractual promise not a gift promise unsupported by consideration. So, in this case, Mr Casey's payment of interest of £4125 for a loan of £875 over 36 years was merely fixing the amount for the "service" provided by Mrs Casey in the form of a loan - see p 165 7 lines down where the judge applies In re Casey's Patents to this case. In other words, the payment of interest was something that was agreed to back in 1918. "The bargain later made was only as to the amount of the interest not as to liability to pay." Now, was the liability to pay statute barred? The answer to this was: clearly not because the statutory period only starts to run when there is a breach of contract. Here there was no breach because there was no time within which Mr Casey had to repay - see middle para p 165. So, time had not even started to run, let alone finished running. But there is another, somewhat tricky, argument which supports the view that, even if the statutory period had expired and the debt was statute barred, even so a payment of the full debt would be a contractual payment and not a gift payment. The judge launches into this analysis in 2nd last para p 165. The argument hinges on examining the effect on a contractual obligation of the limitation period having expired. Has the contractual obligation disappeared as if it had never been? The answer to this is that the

contractual obligation is merely unenforceable. What this means is that it cannot be enforced in a court. This does not mean that the obligation no longer exists. This an important concept which you will come across from time to time in your legal studies. It is important to distinguish between a void obligation and an unenforceable obligation. A void obligation is a nothing, in fact a contradiction in terms - an oxymoron. An unenforceable obligation is an obligation but it cannot actually be enforced in a court. (Later we will see that there is a third category - a voidable obligation.) Now if someone chooses to fulfil an unenforceable obligation, this does not mean that they are making a gift. It is still a contractual obligation. So, in this case, even if the limitation period had run (which it had not) and made the debt no longer enforceable, this does not mean that paying the debt was making a gift. It was still the fulfilling of a contractual obligation. See middle p 166 "It is trite law..." where Henry J makes the point that the defect is merely procedural and not substantive. "A statute-barred debt has been held to be 'due'." Suppose that the debt is statute-barred and the debtor does not actually pay it but promises to pay it. In other words, the debtor who does not actually have to pay makes a fresh promise to pay. Is that promise supported by a consideration or is it merely referable to a past consideration? The answer is again that it is supported by a consideration, namely, it is a substantive obligation referable to the original contract under which the loan was made. See p 166 last para "In my opinion, any promise..." So, whether or not the debt was statute barred, its payment was a contractual payment and not a gift. If Mr Casey had promised to pay, that would have been enforceable. Henry J also mentions some special rules to do with limitation of actions and debts. It is possible to extend the period by acknowledging the debt during the 6 years or else paying part of it. Such actions start the period anew. Henry J also mentioned a statutory exception to the past consideration rule which exists in relation to bills of exchange (which include cheques). If someone writes me a cheque for a past service (like I rescued him from the jaws of a crocodile) then the cheque is enforceable because the Bills of Exchange Act 1909 s 32 allows for a past consideration to support a bill of exchange. So, there is quite a lot to digest from the Casey case. The most important point is the In re Casey's Patents point which is illustrated by my example of the student who does some work for me. The other important point is to understand that a statute-barred debt is still a debt but that it has a procedural and not a substantive defect.

The existing duty rules

We move on to another rule of consideration, that is, what does or does not amount to a good consideration in law. Traditionally it has been said that merely performing an existing duty doing what you are obliged to do - cannot be a good consideration. But this rule is subject to exceptions and, in any case, it may now apparently be changing because of recent case law. It is essential that we have a brief overview of the rules. There are three situations to distinguish. The first two involve performing existing contractual duties. 1. Where there are two parties already in a contractual relationship. Traditionally, if one party promises the other something extra during the course of the contract, such as more money, and the other merely finishes the job, it is said that the promise to pay more is not supported by a good consideration because the promisee is merely performing an existing duty. It is this rule which is the subject of recent case law and which is apparently changing. This rule is about making changes to a contract - or contract variation - rather than contract formation (which is

mostly what the consideration rules are about). Exactly the same rules apply to contract variation as apply to contract formation, namely, there must be agreement and consideration. 2. Where there are three parties, two of whom are in a contractual relationship. The third party makes a promise to one of the contracting parties that, if he or she performs the contract, then the third party will pay money (or whatever) to him or her. To illustrate: remember Shadwell v Shadwell where the uncle promised his nephew money if he married Ellen Nicholl. Remember that at that time an engagement was a contract and so the nephew was already bound to marry Ellen Nicholl because he was engaged to her. What consideration did the nephew provide in exchange for the uncle's promise of money? Well, this case is one of the classic authorities for the proposition that performing, or promising to perform, an existing duty owed to a third party is a good consideration. 3. The third situation is where there is some duty owed under the general law rather than because of a contract. If I promise to pay you some money if you do something that you are already obliged to do under the general law, then it is said that you have not provided a good consideration for my promise. For example, if I promise you $100 if you file an income tax return this year, then it is said that you have done nothing more than what you are already obliged to do and so that it is not a good consideration for my promise and therefore my promise is not legally enforceable. If it is concluded that the existing duty rule results in there being no consideration, then it may be possible to argue on the particular facts that the promisee has provided a consideration if it can be shown that he or she did something extra - something more than the existing duty. So, in the last example, if the promisee not only promises to file a tax return but also promises to show me a copy before filing, this would be something extra and would be a good consideration.

Duty owed to the other contracting party - traditional position

Let us turn to the first situation, where there is an existing contractual relationship between two parties. The traditional approach to this kind of case is illustrated by

TA Sundell & Sons Pty Ltd v Emm Yannoulatos (Overseas) Pty Ltd (HPH 167)
Here we have a very straightforward contract for the sale of galvanised iron to be imported from France. The price was £109 15s per ton. The seller notified the buyer before the iron arrived in Australia that there would be an unavoidable price rise because of a rise in the price of zinc in France. Sundell, the buyer, protested but nevertheless increased a letter of credit which was the method for paying for the goods. The seller made it clear that S would not get the iron unless S was prepared to pay the higher price. The goods arrived and were delivered and the seller called on the letter of credit for payment. The seller was paid the higher amount and the buyer brought an action to recover the excess amount paid, that is, the amount paid over the original contract price. The case raised a number of issues, one of which was that the seller was guilty of something called economic duress. We will look at economic duress in 2nd semester. For the moment we are interested in whether there was a consideration for the buyer's payment of extra money. The court held that there was not: the seller merely performed an existing duty, namely, to deliver the iron and this was not a good consideration to support the promise of extra money. Therefore the extra money could be recovered. So, this case illustrates the existing duty rule at work. The rule does not apply if something can be found moving from the promisee. Remember Wigan v Edwards where Mr and Mrs E agreed to drop their

grievances against the builder in exchange for a letter from the builder promising to fix defects. On the face of it, it looked as though Mr and Mrs E were merely undertaking to complete the deal which they were obliged by contract to do. But where they had a bona fide grievance, the existing duty rule is displaced and there is a consideration in a case like that. Nor does the existing duty rule work if the parties have cancelled the original contract and created a new contract in its place. If this happens then the new contract is binding like any other contract, even if it happens to be more favourable to one of the parties than the previous deal. This argument was tried, but without success, in Sundell. The promisee may provide something extra even though it does not match the promise by the other side. If so there is an exchange and the existing duty rule does not apply. So, for example, supposing a builder was asked to finish the job on time in exchange for a promise of extra money. The builder would not have provided any consideration for the promise. But if the builder was asked not just to finish on time but was also asked to do a bit of extra work then there would be a good consideration. It would not matter if the extra work was worth only $5000 and the promise of extra money was for $10,000. This is because of the peppercorn theory whereby a court will not investigate the economic exchange agreed to by the parties. Another example of something extra would be if, in the above example, the builder agreed to finish early in exchange for the promise of extra money. The promise of extra money would then be supported by a good consideration.

Duty owed to the other contracting party - traditional position questioned

As I have already indicated, the existing duty rule as it applies to two parties already in a contractual relationship may be in the process of change. The first indication of this was the English Court of Appeal decision in

Williams v Roffey Bros & Nicholls (Contractors) Ltd (HPH 168)

The facts could not have been more typical to test the rule. Roffey was a contractor who was refurbishing a block of 27 flats. Roffey entered into a lump sum sub-contract with Williams to do the carpentry work. Before Williams completed the work he got into difficulties. He had quoted too low. Roffey agreed to pay Williams more money, namely, £575 per flat completed. Williams continued to work and completed eight more flats. Roffey made a payment but did not pay the full amount agreed to and Williams then stopped work. Some other carpenters completed the work. The action involved a claim by the carpenter, Williams, for money not paid and a claim by the contractor, Roffey, for breach of contract. We are interested in the claim by the carpenter in respect of amounts allegedly owing under the new promise to pay extra, specifically for the eight flats which were completed after that promise was made. You will see that there is an issue about whether Williams had in fact completed the work on the eight flats. He had substantially completed the work which means that there may have been some minor defects to be fixed up. This is sufficient in law to amount to "completion" of the work, as we will see in 2nd semester. On the question of whether there was a consideration in exchange for the promise of extra money to the carpenter, Glidewell LJ looks on p 169 at the classic authority on this issue, Stilk v Meyrick. The case involved a promise to the crew of a ship that the pay of two deserters would be distributed to the rest of the crew. The case is unreliably reported in some of the nominate reports but one interpretation of the case is that there was no consideration for the promise because the sailors were already bound to sail the ship even if it was a bit short-handed.

On p 170 3rd para Glidewell LJ mentions the possibility of estoppel solving this sort of case but this would not be possible in England because the law on estoppel has not developed to that extent. He also mentions economic duress and suggests that it may provide the protection against extortionate demands which the existing duty rule has hitherto provided. But there was no suggestion in this case that the carpenter had made improper demands and so economic duress was never argued. In the end Glidewell LJ chose to follow a couple of more recent cases in which Lord Denning had said that performing an existing duty could be a good consideration in appropriate circumstances. These cases were Ward v Byham and Williams v Williams, mentioned on p 170. So, what consideration does the carpenter provide in exchange for the promise of extra money? If you look at p 169 middle para you will see that there are three practical benefits: (i) ensuring that the carpenter keeps working; (ii) avoiding the penalty for delay which the contractor Roffey faced if it did not get the flats completed on time; (iii) avoiding the trouble and expense of having to find another carpenter to finish the job. Glidewell LJ rejected the argument that these practical benefits did not amount to a benefit in law. He draws it all together on p 170 last para. Both Glidewell LJ and the other judges said that there is still room for the existing duty rule if there is simply a one-way promise, that is, the promisee provides no practical benefit in exchange for the promise of extra money. But it seems that it is enough if the promisee just keeps working. One proposition which is inherent in the new approach is that a consideration may consist of an incidental benefit to the promisor which is not promised by the promisee; nor is it a detriment to the promisee. In a contract for the sale of goods, as in the Sundell case, is promising to deliver a practical benefit? This new development obviously has some uncertainties about it and may cause concern to commercial people. It has attracted a great deal of academic commentary. What is to stop a person tendering for a job and bidding a price which is almost certainly going to win? Then, later, he or she asks for more money to complete the job. I suppose the answer to this is that economic duress will provide the necessary protection. Glidewell LJ also comments that the person considering the bids should know if one bid is too low and therefore should not complain too much if the bidder later says that he or she cannot complete the job. Further, if you ask what is the commercial expectation of the parties if they have renegotiated a contract, the answer is that they expect it to be binding and not to be thwarted by some technical rule of consideration. Williams v Roffey is an English case and so it is, at most, merely persuasive in Australia. And we could say with some confidence that the existing duty rule is still part of Australian law. But now we have a case which has followed Williams v Roffey. The case is

Musumeci v Winadell Pty Ltd (HPH 171)

This case does not appear to raise directly the same issue as in Williams v Roffey. Essentially what the case was about was a promise by a landlord to reduce the rent. The background to this concession by the landlord was that the tenant had a fruit shop in a shopping centre and the landlord allowed a large retailer to rent other space in the shopping centre. This large retailer was also selling fruit and the tenants, Mr and Mrs Musumeci, claimed that they could not compete. The landlord agreed to reduce their rent by a third. There was extensive correspondence in which other issues arose. At one stage the solicitor for Mr and Mrs M was threatening various legal actions against the landlord. In the end, there was a disagreement about exactly what had been reduced by a third. The tenants argued that the landlord had agreed to reduce both the rent and the outgoings whereas the landlord said that it agreed to reduce the rent only. In the end the landlord attempted to evict the tenants but went about it illegally.

Before Santow J there were various issues, some relating to the eviction. For our purposes, the issue of interest was whether the promise by the landlord to reduce the rent was legally binding. This question is more naturally dealt with under the next heading in the reading guide, namely, payment of a lesser sum. One special rule of consideration which relates exclusively to money and nothing else is that, if a particular sum of money is owed, then paying less than what is due, even when the creditor is perfectly happy about this, is not a discharge of the debt. In the context of landlord and tenant, if the landlord agrees to accept rent which is less than what is contractually due, then the difference is still owing. Obviously, this is an unsatisfactory result in some circumstances and the rule, like other consideration rules, has been criticised as not reflecting commercial convenience. One way around this rule is the use ofpromissory estoppel. It can be argued that, even if there is no consideration for the landlord's promise, the landlord is estopped from reneging if the tenant has relied on the promise. We will deal with that later. In Musumeci the judge, Santow J, examined at some length the existing duty rule and the lesser sum rule. He pointed out that it should really make no difference if a party continues to perform a contract in exchange for a promise of something extra or in exchange for a concession, that is, being let off some obligation. In this sense, the two rules are linked and if one is in question, then it is logical to question the other. Santow J discussed three possible objections to the abolition of the existing duty rule (p 172). 1. The existing duty rule protects against extortionate demands (as does the lesser sum rule, too). Santow J on pp 172-3 drew on US authority to support the proposition that the doctrine ofeconomic duress can take care of this problem and that a more practical and liberalised doctrine of consideration would be more suitable to commercial needs. 2. There is no legal benefit or detriment in either performing an existing duty or being relieved of the obligation to make a payment (discussed by Santow J on pp 173-4). Well, this is just begging the question. It is assuming the truth of the very proposition which is now in question. The way to look at it is to examine whether there is a practical benefit or detriment. In particular you have to weigh up the new arrangement - the promise of extra money or the promise to accept less money - against the alternatives which confront the promisor. The promisor can always sue for breach but it will almost always be the case that paying a bit extra or accepting less money will be the cheaper alternative. 3. A mere hoped-for benefit cannot be a consideration (discussed by Santow J on p 1745). This objection goes back to the point that the promisee is not really providing anything. It just happens. It is incidental. But, again, as in point number 2, the question is whether the promisee is in fact providing some practical benefit. Santow J applied the newly formulated consideration to the facts of this case. The landlord, in exchange for the promise of allowing the tenant to pay a reduced rent, received the practical benefit of maintaining a shopping centre which was fully let. He also said that the tenants suffered a detriment in staying on at a reduced rent because they exposed themselves to the risk of competing with the large retailer and they gave up their possibility of walking away from the lease which may not necessarily have cost them for breach because they had some counter arguments to throw at the landlord if it sued for breach. So, we now have an Australian case which questions the conventional application of the existing duty rule and the lesser sum rule. We shall await further developments with interest.

Existing duty and third parties

We have seen that the traditional approach was that performing, or promising to perform, an existing duty did not amount to a good consideration. But you have gathered by now that there are some exceptions to this. A very curious exception is where the promisor promises a benefit (for example, money) to a person to perform a contract which he or she is already obliged to perform for a third party. Why should this be a good consideration? The answer is said to lie in the promisee being twice bound. This would be so if the promisee had promised to perform the existing obligation, but it would not work if the type of contract was unilateral. For example, in Shadwell v Shadwell the promise by the uncle was made to his nephew if he should marry Ellen Nicholl. The nephew presumably did not undertake to the uncle that he would marry Ellen Nicholl. So, in a case like this it is more difficult to find a rationale for the rule. You may remember that the court nevertheless found a consideration moving from the nephew, saying that it was either a benefit to the uncle who was obviously rather keen to see his nephew marry Ellen Nicholl or, alternatively, it was a detriment to the nephew to marry Ellen Nicholl! I wonder if Ellen Nicholl ever saw the judgment. The case is in many respects an unsatisfactory authority, but, as so often happens in the common law, a shaky authority eventually is treated as authoritative and it becomes embedded in the common law tradition because it is followed in subsequent cases. This is illustrated by the modern case of

Pao On v Lau Yiu Long

(HPH 180)

The facts are somewhat complicated. The plaintiffs (Pao) owned all the shares in a company (Shing On) which owned a building in Hong Kong. The defendants (Lau) were the majority shareholders in a publicly listed company (i.e. it was listed on the stock exchange). The company was called Fu Chip. A company is a legal person having an independent existence from its shareholders. The defendants wanted to acquire the building owned by Shing On and the plaintiffs were willing to sell it to the Fu Chip Co. In order to buy the building, the defendants had to buy the Shing On company. They made an agreement under which the plaintiffs (Pao) would sell all their shares in the Shing On company to Fu Chip Co in exchange for 4.2 m shares in Fu Chip. Now there was a very important clause in this agreement. It was clause 4(k) which you will see on p 181 2nd para. The plaintiffs who were to receive this large parcel of Fu Chip shares promised that they would not sell 60% of the shares for 1 year. The reason for this promise was to ensure that the market would not be flooded with Fu Chip shares which would have the effect of depressing their price. Note that this agreement was between the plaintiffs (Pao) and the Fu Chip Co. In order to persuade the plaintiffs to accept this condition, the defendants had to provide some protection against the possibility that the shares might fall in value during the year the plaintiffs were not permitted to sell them. So there was a subsidiary agreement under which the defendants agreed to buy back 60% of the shares at HK$2.50 in one year's time. Note that this agreement was between the plaintiffs (Pao) and the defendants (Lau). This subsidiary agreement was flawed. It protected the plaintiffs from the possibility of a fall in Fu Chip shares but it it did not allow them to take a profit if Fu Chip shares went up. In other words the price of $2.50 was both a floor and a ceiling. So, soon after entering into the subsidiary agreement, the plaintiffs started to agitate to have it re-cast. They said they would not go ahead with the main agreement unless the subsidiary agreement was re-written in the form of a guarantee or indemnity, that is, it just insured the plaintiffs against a loss but did not impose a ceiling. The defendants were very anxious that the deal should go ahead. The market had heard about the deal and if it fell through it would probably mean that Fu Chip shares would fall. So the defendants agreed to

re-write the subsidary agreement in the form of a guarantee, as the plaintiffs requested. The re-cast subsidiary agreement is described on p 181 4th last para ("The guarantee did not require ..."). Remember that this agreement was between the plaintiffs (Pao) and the defendants (Lau). It is in the form of a guarantee given by the defendants. If the defendants were called on to indemnify the plaintiffs under this agreement, they had the option of buying back 60% of the shares at $2.50 per share. Well. it turned out that Fu Chip shares were not blue chip shares. They fell disasterously. The plaintiffs therefore exercised their rights under the subsidiary agreement. The defendants refused to honour the guarantee. The case ended up in the Privy Council. The case involves an issue of economic duress. It also involved some consideration arguments. We will focus on these. The re-cast subsidiary agreement looked like a one-way promise, namely, a promise by the defendants to the plainitffs. What had the plaintiffs provided in exchange? It was said that the re-cast subsidiary agreement was only supported by a past consideration. This argument is dealt with on pp 181-183 (the "first question"). You will see that this argument was not successful because Lord Scarman used the Re Casey's Patents argument. It worked like this. When, in the original agreement, the plaintiffs were asked not to sell 60% of the shares in Fu Chip for 12 months, it was clear that they would have to be provided with some consideration for this promise. They would not agree to do this unless it was worth their while. Some quid pro quo was obviously contemplated. The subsidiary agreement provided it. It filled in what was obviously missing from the main agreement. But, in any case, there was a consideration in the subsidiary agreement in the form of the defendant having the option of taking back the shares rather than simply indemnifying the plaintiffs. This was a benefit to the defendants because they might then get their money back if the shares went up again. This argument was dealt with on p 184 top para. On p 184 Lord Scarman under the heading "the second question" deals with another argument. It is always possible to find a consideration, which an agreement is apparently lacking, by looking to the surrounding circumstances. Extrinsic evidence may show that there really is a consideration. In this case, Lord Scarman said that the subsidiary agreement really contained an implied promise by the plaintiffs not to sell 60% of their Fu Chip shares for one year. In other words, they were making the self-same promise which was in the main agreement again in the subsidiary agreement. It is here that the existing duty rule comes in. It could be said that this is not a consideration because the plaintiffs were already bound to this promise under the main agreement. But, the answer to this was that the promise given in the main agreement by the plaintiffs not to sell 60% of the shares for one year was given to Fu Chip, that is, the company. In the subsidiary agreement the promise was given to the defendants, Lau, that is natural persons. So, this is a 3-party existing duty situation. See p 184 half way down. This shows how the existing duty rule in its traditional application is somewhat arbitrary. It is a good consideration in a 3-party situation but not in a 2-party situation (that is before Williams v Roffey came along). In this case it was only a matter of luck that Fu Chip (the company) happened to be a third party, i.e. a different legal entity from the defendants. So, the move to abolish or at least modify the existing duty rule inWilliams and in Musumeci may be justified on this basis. The third question considered by Lord Scarman was economic duress. We will return to this later in the course.

Existing duty under the general law

Here it is said that to do what you are bound to do under the general law is not a good consideration. The example I gave to illustrate this was me promising you $100 if you lodge your tax return, something you are obliged to do anyway under the taxation laws. Collins v Godefroy (HPH 188) illustrates. There G agreed to pay C his costs if he gave evidence in court on his behalf. In fact C had been subpoenaed to attend the court so he was required by law to attend the court. It was held that G's promise to pay was not supported by a consideration moving from C and so the promise was not binding. This case is contrasted with

Glasbrook Bros Ltd v Glamorgan County Council

(HPH 188)

The manager of a coal mine wanted police services because there was a strike on and things were liable to get out of hand. The manager wanted police to be billeted on the site but the County Council would only agree to this if the expenses were paid. When the CC sought to recover these costs, the company argued that the Council was merely performing its public duty. The House of Lords decided that the Council was doing more than was normally required and that there therefore was a consideration. The other case in this category is

Popiw v Popiw

(HPH 189)

The terms of the alleged contract and the relevant facts in this case are set out in the judgment of Hudson J on p 189 in the 3 numbered paragraphs. The issue was whether Mrs P was entitled to a half-share in the matrimonial home as a result of the alleged transaction. She argued that she had done what he requested, namely, returned to co-habit with her husband, albeit for only about 3 or 4 weeks. You will see that Hudson J mentions the possibility of no intention to create legal relations in the context of this type of agreement (p 189 last para). There is a reference to a case called Balfour v Balfourwhich we come to a little later. But the argument is easily displaced when husband and wife are in a contentious relationship. In this case they had actually visited the family solicitor. Was there a consideration provided by Mrs P? The husband argued that she did no more than what she was already bound to do, namely, live with her husband. Hudson J refers to the case of Ward v Byham which, you may recall, was one of the cases in which Lord Denning had questioned the existing duty rule. So, on this basis Mr P's argument would fail. Even if it could be said that Mrs P was performing an existing duty, this is still a good consideration if Ward v Byham is correct. But Hudson did not rely solely on that argument. Instead he said that in this case Mrs P was not performing an existing duty anyway. See p 190 2nd last para. Even accepting that there is some kind of duty to cohabit, Hudson J points out that there is no remedy to enforce such a duty if it exists. Further, in this case, Mrs P agreed to return to her husband against a background of domestic violence. Hudson J had no difficulty in concluding that she was doing far more than she was required to do. She therefore provided a consideration. The rest of the judgment is concerned with a quite separate point arising from the requirement of writing in contracts involving interests in land. This is something we return to later.

Payment of a lesser sum

We now come to the last of the consideration rules which tell us what does, and what does not, amount to a good consideration. This rule tells what does not amount to a good consideration. Unlike the previous rules which were generally applicable to all promises, this rule is very narrowly confined. It is about money. It is about discharging a debt which is owed. The rule says that payment of a lesser sum is not a discharge of a debt. The word "satisfaction" is used in this context - payment of a lesser sum is no satisfaction of a larger debt. So, if a creditor says to a debtor that the creditor will be quite happy to accept $80 as a discharge of a debt of $100, this promise is not binding. The creditor can turn round a day later and sue for the unpaid $20. Like many of the other rules of consideration, this one has been criticised. Clearly, like the existing duty rule, it goes against the legitimate expectations of commercial people. This has been acknowledged judicially and extra judicially. The rule has nevertheless remained. When I discussed the existing duty rule, I pointed out that the lesser sum rule must surely be in some doubt if the existing duty rule is in some doubt. Santow J in Musumeci certaintly thought so. The rule is sometimes called the rule in Pinnel's case. This was a 1602 case and you will see the famous statement of principle from Pinnel's case on the top of p 177. You will see that the rule is justified by reference to itself "...because it appears...that by no possibility a lesser sum can be a satisfaction to the plaintiff for a greater sum." What I think the judge was saying here is that, when it comes to money, there is no room for saying that less money is good enough. The courts will not generally weigh or compare the exchange values in a contract. The court cannot doubt that $100 may be satisfaction for a peppercorn. But money is different. The court cannot equate $100 with $80. Note that the rule says that payment of a lesser sum "on the day" is no satisfaction. These words refer to the fact that a debt is always due on a particular day. If the creditor asked the debtor to pay a lesser sum earlier than the day on which it was due, then there would be a satisfaction, because it is an advantage to receive money early. Similarly, if the creditor asked for some other benefit from the debtor, such as paying the money in a different place from that where it was due; or the debtor provided something to make up the difference, such as an old chocolate wrapper, so long as the creditor requested it. The rule in Pinnel's case was tested some 280 years later in the House of Lords in

Foakes v Beer

(HPH 175)

Mrs Beer obtained a judgment against Dr Foakes for £2090 19s. Dr Foakes could not pay it all at once and so the parties came to an agreement about payment of the debt over time. An agreement was drawn up by Dr Foakes' solicitor under which Mrs Beer undertook not to take proceedings for enforcement of judgment and Dr Foakes promised to pay the debt by agreed instalments. Dr Foakes then paid the instalments and paid off the debt. The agreement said nothing about interest. It only dealt with the judgment debt itself. Mrs Beer was in fact entitled to interest on a judgment debt. She sued for the interest after Dr Foakes had paid off the capital sum. So, the issue which went to the House of Lords was very straightforward: could she sue for the interest after having agreed to accept the judgment debt without interest?

The House of Lords re-affirmed the rule in Pinnel's case and held that Mrs Beer could sue for the interest. Lord Selborne made the point that, had this agreement been in a deed under seal, then Mrs Beer would have been precluded from suing for the interest. This is because using a deed is an alternative to contract for making a legally enforceable promise. Lord Blackburn would have decided the other way but was just persuaded to go along with his brethren. What Lord Blackburn said was "I assent to the judgment proposed, though it is not that which I had originally thought proper." (at 623 of Report). Lord Blackburn also said (see p 178 of HPH): "...all men of business...do every day recognise and act on the ground that prompt payment of a part 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 often is so. Where the credit of the debtor is doubtful it must be more so." The English Law Revision Committee recommended in 1937 that the rule should be abolished but this recommendation was never implemented. In England the argument that Williams v Roffey Bros must necessarily mean that the lesser sum rule should be abandoned or modified has been rejected in the case of Re Selectmove Ltd which is noted on p 179 note 1. Remember that Santow J in Musumeci considered that the two rules were inextricably linked. The rule, like the existing duty rule, does protect against extortionate demands. The case of D & C Builders v Rees, mentioned on p 179 note 2, was a case where the debtor knew that the creditor was in financial dire straits and said that he would pay a smaller sum which the creditor must accept or the creditor would get nothing. The creditor did take the smaller sum but it was held that he could claim the rest of the debt. However, protection against extortionate demands can now be provided by the doctrine of economic duress. There are exceptions to the lesser sum rule and situations where it does not apply. It does not apply if the amount of money owed is in doubt or there is a dispute about it. If this is the case, then any promise to pay will be treated as a compromise or settlement of the dispute. Of course, the rule will not apply if something can be found which makes up the difference. But this something must be at the request of the creditor. I have already mentioned how paying earlier than the due date, or at a different place, would make up the difference. Santow J in Musumeci found that a practical benefit was sufficient to make up the difference. You will recall that in that case the landlord was bound by a promise to accept less rent because the tenant, by staying on as a tenant, provided a practical benefit to the landlord. One rather curious view has been that if lesser amount is paid by a negotiable instrument such as a cheque, then this makes up the difference. This is mentioned briefly by Lord Selborne in Foakes v Beer on p 176 (reference to "negotiable paper") and by the judge in Budget Rent a Car v Goodman on p 180. But this exception is doubted by Lord Denning in D & C Builders v Rees.

The rule does not apply in what is called a composition of creditors. What this is about is where a debtor is surrounded by a number of creditors, all of whom are looking to be paid. When it becomes clear that none will be paid in full, they all agree to take a percentage, say, 50 cents in the $1. The compostion agreement under which each creditor gets paid 50% of the amount owing is binding and discharges the various debts. There has for many years been a debate about how this can be justified by reference to the doctrine of consideration. What has the debtor provided in exchange for the creditors' promises not to sue for the balance? It is difficult to see that there is a consideration. Nevertheless it has never been doubted that a composition with creditors agreement is binding. One reason which is advanced is that it would be fraud on the other creditors if one of them attempted to sue for the balance. But this justification is not about the doctrine of consideration. The case which supports the legally binding nature of composition agreements is

Couldery v Bartrum

(HPH 179)

In this case, Sir George Jessel MR amusingly sums up the law about lesser sums in the first para of the extract. He then provides a full analysis of the composition agreement and how it is binding on all parties. The rule in Pinnel's case is said not to apply if the lesser sum is paid by a third party and it is accepted as a discharge of the debt by the creditor. The case which is cited for this proposition is Hirachand Punamchand v Temple which is mentioned on p 180. This exception is somewhat obscure and uncertain. That finishes the doctrine of consideration. One related concept, that of privity of contract, still needs to be explored.

The privity rule

The idea that consideration must move from the promisee is very closely linked to what is called the privity rule. This rule says simply that only the parties to a contract can enforce it. It is not possible by a contract between A and B to either confer an enforceable benefit on C or impose an enforceable burden on C. For example, if I promise you that I will give some money to C if you do something for me, C cannot enforce if I break the promise. There is quite a lot of case law which deals with the issue of privity but we do not have time to look at it. It is nevertheless axiomatic in the law of contract and it raises important practical issues. Privity quite frequently arises in commercial dealings. It is not uncommon to see in a contract, drafted by someone who is ignorant of the privity rule, attempts to involve third parties. The privity rule is commercially inconvenient. In some cases it has had to be abolished by statute. For example, when you register your car, you are obliged to enter into a compulsory contract with an insurance company which provides liability insurance in the event of you being negligent and injuring or killing someone. Supposing you lend your car to a friend. Is he or she covered by third party insurance? The answer is Yes because of statutory provisions. (Incidentally the phrase "third party" does not refer here to the privity rule but to the nature of the insurance cover, namely, it insures you against claims by third parties.) So, in the particular case of compulsory third-party motor insurance the privity rule has been abolished. But in other cases it may still be a problem. This was tested in the High Court in

Trident General Insurance Co Ltd v McNiece Bros Ltd

(HPH 286-294)

In this case the same basic problem just outlined in connection with third-party insurance arose. This time the insurance was workers' compensation insurance. The owner of a building site, Blue Circle, took out a policy which covered all workers on the site, including those of contractors and sub-contractors. This was

obviously more efficient than each company taking out cover. McNiece was the principal contractor. A worker was injured and McNiece was legally liable to pay that worker damages. McNiece paid the worker compensation and claimed the amounts paid from the insurance company, Trident. The insurance company then said that it did not have to pay because McNiece was not a party to the original contract of insurance which was between Trident and Blue Circle. This is a nice illustration of the inconvenience of the privity rule. The insurance company, legally speaking, was on firm ground. In fact, this problem had prompted the Australian Law Reform Commission to recommend that in all insurance contracts (not just third-party motor vehicle insurance contracts), the rights of third parties should be enforceable. This recommendation was in fact implemented in the Insurance Contracts Act 1984 (Cth) s 48. At the time the facts in Trident arose, this statutory provision was not in existence although it had been enacted by the time the case got to the High Court. So the High Court had to decide as a matter of common law whether the insurance company could get away with it. The High Court decided that the insurance company must pay. Now, a number of commentators though that this decision was a big break through and that the doctrine of privity had been abolished or at least that the beginning of the demolition had started. But this was an overreaction. What the High Court did in this case was to establish a very specific exception to the privity rule, namely, in connection with insurance contracts and, in any case, statute law had already done that (Insurance Contracts Act 1984 (Cth) s 48). The decision was 5-2 in favour of this specific exception to the privity rule. You will see from the various judgments that the privity rule and the associated rule that consideration must move from the promisee have been the subject of a lively debate over the years. If you read the Trident case carefully you will learn just about everything there is to know about the privity rule. You will see the arguments mounted both in favour of it and against it. I do not intend to go through the judgments in detail. In your reading guide you are asked to read the joint judgment of Mason CJ and Wilson J which represents the majority view. The ball was set rolling by McHugh JA who was then a judge in the NSW Court of Appeal. The extract from his judgment is in the editors' headnote on p 287. He was motivated to change the rule because of commercial necessity. He pointed out that the same sort of thing happened with banker's letters of credit. Just to explain, if a seller of goods wants to sell to an overseas buyer, there is a problem about enforcing payment. It is difficult to enforce payment in an another country. So the seller tells the buyer to line up a bank to pay for the goods. The bank sends a letter to the seller saying that it will pay the seller when the goods have been delivered. This has been arranged by the buyer who, of course, pays the bank. How can the seller enforce the bank's promise to pay? Well, the answer for years has been that such a promise is enforceable despite the privity problem and this is just recognised as an established exception to the privity rule. There are other commercial exceptions to the privity rule. I will merely mention them without further discussion. You may come across them in later courses. Two other exceptions are bills of lading - the contract used for transporting goods which is enforceable against the carrier by both the seller and the buyer of the goods. And bills of exchange - eg cheques - which can be enforced by third parties. McHugh JA thought that insurance should be a similar exception. The joint judgment of Mason CJ and Wilson J canvasses the history of the privity principle, starting on p 287. It was not till 1861 that the privity principle was firmly entrenched in a case called Tweddle v Atkinson. This case was followed in the High Court in Wilson v Darling Island Stevedoring & Lighterage Co Ltd. The debate about whether there are two rules or whether they are really two ways of saying the same thing is discussed on p 288 with Mason and Wilson coming to the conclusion that they are separate rules but for practical purposes it usually makes no difference. See the illustration on p 288 (A promises B and C that he will pay C $1000 if B will erect a gate for him) where there is privity but no consideration moving from the promisee.

The judges then look at the various criticisms which have been made of the two rules, including the 1937 UK Law Revision Committee Report which recommended abolition. This report was never implemented. The courts have developed ways of getting around the rules. One such way, discussed by Mason and Wilson in top para p 289 is the use of a trust. If A makes a promise to B that A will pay C, then it is possible to argue that B is a trustee of the promise holding the promise on trust for C. This means that C can then enforce because a beneficiary under a trust can always enforce the trust obligations. This is obviously a very artificial device and it has met with a mixed reception over the years in decided cases. Suffice it to say it is not a very satisfactory way of dealing with the problem. Mason and Wilson come to this conclusion after further discussion of the trust device on pp 291-292. Mason and Wilson then mention that there are specific statutory exceptions in Western Australia, Queensland and New Zealand. This is discussed in the top para of p 290. The Australian Law Reform Commission Report on Insurance Contracts, which I have already mentioned, is discussed on p 290 2nd para. This was implemented - see now Insurance Contracts Act 1984 (Cth) s 48. On p 290 2nd half Mason and Wilson discuss another possible way around the rule and that is for the promisee to sue either for damages or for specific performance and thereby force the promisor to keep the promise made to the third party. This, again, has problems. If an action for damages is brought, what damages has the promisee suffered if the third party has not been paid? If specific performance is sought, supposing it is not an appropriate case for the specific performance remedy? What if the promisee simply does not want to go to the trouble of enforcing for the benefit of the third party? So, again, this solution is not very satisfactory. Having discussed some of the arguments in favour of the privity rule on p 292 last 3 paras and some of the difficulties of formulating a new rule if privity is to be abolished (see p 293), Mason and Wilson conclude that these problems can be avoided by formulating a very specific exception, namely, for insurance cases (an exception which had in any case been established by the Insurance Contracts Act 1984 (Cth) s 48). That is all we are going to examine in connection with the privity rule. As already indicated it is a central rule in the law of contract and it is has not been abolished by the Trident case. The short examination here should not be taken as diminishing the importance of the rule. Look at any contract text book and see how much space is devoted to discussion of the rule (eg over 50 pages of Cheshire & Fifoot's Law of Contract (7th Aus ed)).