Contractual Intentions: Rethinking Consideration and Enforceability

1. Introduction

Consideration along with offer and acceptance are essential components to make a valid contract. The doctrine of consideration thus requires a practical benefit to be a sufficient consideration. However, the doctrine of consideration is subject to challenges. The existence of concepts of adequacy, sufficiency and reliability model are evidence of such challenges. This may lead to scrutiny about whether parties’ intention will not suffice as a consideration to validate a contract.

This essay will explore the test of consideration by determining whether a transaction or relationship where there is no consideration could or adequate consideration be enforced. It could be determined by exploring whether there is another test, such as parties’ intention or the principle of reliability to test the enforceability of an agreement.

2. Can consideration alone validate a contract?

Currie v Misa established the doctrine of consideration. Consideration is considered as some right, interest, benefit or profit accruing to a party and forbearance, loss, detriment, responsibility of loss suffered by the other party.

Consideration evidences an undertaking and its seriousness. It is not necessary where the parties’ serious intention is proved. It only addresses the issue of determining which undertaking is enforceable. It represents reciprocity that enforces bargains between the parties. The equity principle that it does not assist the volunteer gives authority to the doctrine of consideration. Consideration brings clarity in the exchange of bargains between parties. It makes it easier to measure relief for breach of a contract by determining the extent of expectation, liability, or the value of the promise. However, if consideration is absent in a contract, it will need to determine whether or not the contract is enforceable except for when it is incorporated into a deed under a seal.

2.1. When there is no consideration

There are certain transactions where consideration does not have a role in enforcing an agreement. This does not mean that all such promises without consideration are not enforceable.

One of the examples is that of a gift. There is a unilateral exchange where one party receives benefits and there is no legal detriment suffered. For the gift to become enforceable, it has to fulfil the formalities requirements, such as the provisions under the Will Act 1837. This means that there is no requirement for consideration. For example, the case of Jones v Lock, ruled that an express trust demonstrates the intent to make the gift. Even if the formalities are not complied with, equity principle will enforce the gift like in the case of Pennington and Another v Waine, Crampton and others, which applied the principle of unconscionability. In this case, the settlor executed the transfer by gift of shares but did not register it. The court ruled an existence of a constructive trust and held the transfer held valid.

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1. Ciaran Gallagher, Should the "Doctrine of Consideration" be Abolished? (GRIN Publishing 2016) 2.
2. Currie v Misa [1875] LR Ex 153.
3. Ibid.
4. Mindy Chen-Wishart, Contract Law (Oxford University Press 2007) 125.
5. Ibid, 126.
6. Ciaran Gallagher, Should the "Doctrine of Consideration" be Abolished? (GRIN Publishing 2016) 2.
7. Pamela Tepper, The Law of Contracts and the Uniform Commercial Code (Cengage Learning 2014) 98-99.
8. Ibid.

Another example is that of illusory promises, there is indefinite expression with no obligation or bargained-exchange. Such promise will generally be held invalid in absence on clarity on the promise and the absence of consideration. However, the doctrine of promissory estoppel may make such promises enforceable if the promisee relied on the promise to their detriment. This was seen in the case of Central London Property Trust Ltd v High Trees House Ltd, which concerned a 1940 agreement to reduce rental to half given the peculiar circumstances brought about by war with no time period fixed. The principle of estoppel entitled the complainant to full rental as the peculiar circumstances ended with the war. Denning J held that if a promise was made with the intent to create a legal relations, and the promissor has knowledge that the promisee would act on the promise and in fact acted so, the principle of estoppel will not allow taking the promise back. The doctrine of estoppel supplements doctrine of consideration in this regard.

The absence of consideration has either been ignored or unnoticed. When there is a formal agreement or the concept of constructive trust where equitable principle applies, consideration does not have an essential role to play. What is required are parties’ intention that is clear and the conduct of the parties arising from such intention that could override the necessity of consideration.

2.2 Adequacy and sufficiency of consideration

The doctrine of consideration has got its own problem. There is no assessment of the adequacy. Law has emphasised more on the value in the eyes of law. The adequacy is left to the parties. This is problematic in case where there is a huge disparity between the value exchange. A disproportionate consideration cannot determine validity of a contract. Vitiating factors such as misrepresentation or undue influence can also help invalidate a contract when there is consideration. A serious inadequacy may fall short of enforcing a contract.

It is argued that courts are reluctant to determine adequacy of consideration. Consideration must not be illusory. Even a slightest consideration is sufficient and there must not be fraud or other legal issue. Thus, there is no set formula to determine adequacy. This, however, leaves the definition of consideration wide open as it is subject to the discretion of the parties. As such, consideration seems like an abstract definition of value. The short in defining adequacy of consideration does not favour the doctrine of consideration as a means to validate contract. The issue of adequacy gives rise to the problem of inadequate and/or disproportionate consideration. The court may be inconsistent in determining enforceability in regard to such consideration.

1. Jones v Lock [1865] L.R. 1 Ch. App. 25.
2. Pennington and Another v Waine, Crampton and others [2002] EWCA Civ 227.
3. Mohamed Ramjohn, Unlocking Equity and Trusts (Taylor & Francis 2017).
4. Ibid.
5. Pamela Tepper, The Law of Contracts and the Uniform Commercial Code (Cengage Learning 2014) 96-97.
6. Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130.
7. Ibid.
8. Mindy Chen-Wishart, Contract Law (Oxford University Press 2007) 135-136.
9. Pamela Tepper, The Law of Contracts and the Uniform Commercial Code (Cengage Learning 2014) 94.

In the case of Chappel v Nestle, it was seen that the promise was enforceable without the need for consideration. This case concerns a customer giving a gramophone in exchange for a chocolate wrapper. The court considered the wrapper a valid consideration. This ruling demonstrates the fact that consideration need not be adequate. However, the court resorted to the request conception of value to overcome the absence of factual benefit or detriment. It shows that consideration is not required to enforce a contract.

In opposite, in the case of Lipkin Gorman v Karpnale, the principle of unjust enrichment was applied here and it denied the doctrine of consideration. The case concerns a firm whose money was stolen and lost by an employee in gambling. The court held that the gaming chips given to the employee against the money was a valid consideration. The House of Lords did not agree and held that the chips were worthless and was a convenient means to facilitate gambling. This is unlike the case in Chappel where the wrapper was considered a consideration. However, the court applied the concept of unjust enrichment to protect the victims of the theft.

On one hand, the court is reluctant to determine adequacy and leaves it t o the parties. On the other hand, it intervenes in determining sufficiency of sufficiency of consideration. Even in respect to the latter, the courts seem to have taken similar inconsistent rulings as in the case of Chappel and Lipkin.

In the case of Stilk v Myrick, which concerned an initial contract for consideration and intent, addressed the issue of whether a complainant P can claimed bonus from the defendant for performing an already existing contract. This case dealt with a promise by the captain of voyage to share wages of deserted sailors amongst the remaining sailors if they could get the ship home safely. Courts deal with cases where the consideration is of some value in the eye of law. As such, if a party does something that they are already bound, there is no consideration. In this case, there was nothing more than the contractual duty and hence the consideration was not enforceable.

On the opposite, if the transaction has no elements of duress and the parties received what they desire, there is a possibility that bargain should be enforceable. This is supported by the ruling involving performance of an existing public duty. In the case of Williams v Roffey Bros & Nicholls (Contractors) Ltd, the consideration for extra amount to complete an existing public contract work to refurbish a block of flats could be enforced as the defendants received a real, factual benefit and there was no duress.

1. Mindy Chen-Wishart, Contract Law (Oxford University Press 2007) 135-136.
2. Chappell & Co Ltd v Nestle Co Ltd [1959] UKHL 1.
3. Ibid.
4. Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548.
5. Stilk v Myrick [1809] EWHC KB J58.
6. Adrian Chandler and Ian Brown, Law of Contract 2007 – 2008 (Oxford University Press 2007) 38.
7. Ibid, 39.

In consideration of the case rulings above governing consideration, it might not be wrong to states that the doctrine of consideration is plagued with controversy and may not be fit for purpose. The case rulings themselves present other approaches to determine enforceability of an agreement.

2.3 Tests other than the test of consideration

As seen above, the test of consideration alone is not sufficient to determine enforceability of a contract. This is particularly true when there is no consideration in an agreement.

Lord Denning in the landmark case of Crabb v Arun District Council held that even if a promise may become unenforceable due to lack of consideration, if the promissor makes the promise knowingly or with the intent that the other party may act on it, and the words and conduct of the party led them to do so, equity will not allow the party to retract on the promise made.

This ruling represents the doctrine of reliance as a qualification to the doctrine of consideration. It is an equitable exception. The equitable exception in the reliance principle is a narrow qualification to doctrine of consideration and should not be interpreted in a manner to impose a contract or a consideration that was not in existence. Like in the case of Baird Textile Holdings v Marks and Spencer plc, which concerned a supplier partnership arrangement according to which the transaction between the parties continued for 30 years. Issue arose when the defendant cancelled the arrangement abruptly without notice that allegedly caused detriment to the complainant’s organisation of workforce and manufacturing capacity to meet defendant’s demand. The Court of Appeal held that the arrangements were not a contract as there was no intent on the part of the defendant to enter into a long term relationship and the obligation was not clear. As such, the reliance doctrine or the promissory estoppel cannot be applied in this case.

The doctrine of reliance demonstrates the requirement of a promise, intent to fulfil the promise and the clarity in the obligation arising from an agreement in order to make the agreement enforceable. Consideration alone cannot be the only test for enforceability of a contract. Consideration and intention should be the tests for validating the substance of an agreement. The test may be subject to the intention of the parties representing a serious agreement to make the agreement enforceable. There must be reliance on the promise made to establish a link between the promise and the act on the promise. There must be an exchanged-bargain, a promise for a promise or an actual performance of the undertaking.

1. Williams v Roffey Bros & Nicholls (Contractors) Ltd [1991] 1 QB 1.
2. Crabb v Arun District Council [1976] Ch, [1975] 3 All ER 865, CA.
3. Hugh Collins, The Law of Contract (Butterworths 2003) 76.
4. Baird Textile Holdings v Marks and Spencer plc [2001] EWCA Civ 274, [2002] 1 All ER (Comm) 737.
5. Hugh Collins, The Law of Contract (Butterworths 2003) 77.
6. Hugh Collins, The Law of Contract (Butterworths 2003) 31.

Case ruling have shown that intention instead of consideration is a relevant criterion to enforce a contract. In Wandsworth LBC v D’Silva, that concerned the issue of contractual status of an employment policy that governed the length of permitted sick leave before a review. The court ruled that flexibility and sensitivity are of paramount importance. As such, the existing good industrial practices negate the effects of contract, including the employment policy in question. Here, the court did not consider consideration relevant.

3. Conclusion

Consideration is a proof for parties’ seriousness of a promise. It does not require proof of parties’ intention. There must be reciprocity. However, the existence or enforceability of transaction without consideration challenges this principle. Cases such as Jones, Pennington and Central London Property Trust unnoticed consideration.

This essay has found inconsistent position of the courts in determining enforceability vis-à-vis consideration. It is seen in Chappel against Lipkin rulings or Stilk against Williams rulings, which are proof of such inconsistency. A mixed of equity and contractual principles are applied by courts in which either consideration is upheld or ignored. For these reasons, the tests of reliance and intention instead of consideration are valuable test consideration.

The alternative options against the doctrine of consideration, as observed here, might also be subject to their own specific challenges. The question here is whether the doctrine of consideration must be abolished. If abolished, are the alternatives adequate and sufficient? Whether the doctrine of consideration and the alternatives should be retained as it is? If retained, whether they are coherent? These questions are meant for a different research.

Continue your exploration of Contract Formation and Termination in the Sale of a Violin with our related content.

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1. Barry Hough and Ann Spowart-Taylor, ‘The doctrine of consideration: dead or alive in English employment contracts?’ (2001) 17(3) Journal of Contract Law 193-211.
2. Wandsworth London Borough Council v D Silva [1998] IRLR 193.

Legislation

The Will Act 1837

Cases

• Baird Textile Holdings v Marks and Spencer plc [2001] EWCA Civ 274, [2002] 1 All ER (Comm) 737
• Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130
• Chappell & Co Ltd v Nestle Co Ltd [1959] UKHL 1
• Crabb v Arun District Council [1976] Ch, [1975] 3 All ER 865, CA
• Currie v Misa [1875] LR Ex 153
• Jones v Lock [1865] L.R. 1 Ch. App. 25
• Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548
• Pennington and Another v Waine, Crampton and others [2002] EWCA Civ 227
• Stilk v Myrick [1809] EWHC KB J58
• Wandsworth London Borough Council v D Silva [1998] IRLR 193.
• Williams v Roffey Bros & Nicholls (Contractors) Ltd [1991] 1 QB 1

Bibliography

Books

• Chandler A and Ian Brown, Law of Contract 2007 – 2008 (Oxford University Press 2007)
• Chen-Wishart M, Contract Law (Oxford University Press 2007)
• Collins H, The Law of Contract (Butterworths 2003)
• Gallagher C, Should the "Doctrine of Consideration" be Abolished? (GRIN Publishing 2016)
• Ramjohn M, Unlocking Equity and Trusts (Taylor & Francis 2017).
• Tepper P, The Law of Contracts and the Uniform Commercial Code (Cengage Learning 2014)

Journals

• Hough B and Ann Spowart-Taylor, ‘The doctrine of consideration: dead or alive in English employment contracts?’ (2001) 17(3) Journal of Contract Law 193-211.