Payment of Debts and the Exception for Alternative Consideration

Q1.

Lord Coke in (Pinnel’s Case (1602) 5 Co Rep 117, 1602) held that the payment by the debtor of a lesser sum against a greater sum due cannot be treated to satisfy the debt. This rule holds even when the creditor accepts the payment in full satisfaction of the debt. Lord Coke, at the same, time held that if the creditor accepts something other than the payment such as a “horse, hawk, or robe) with the intention that they will be more beneficial to them than the money, then that would be treated as a good consideration. Given this ruling, this essay will review the rule in Pinnel’s case and any exception if exists.

Following the ruling in Pinnel’s case, even if the debtor pays the creditor less than the full amount and it is presented and agreed as a full and final settlement, such agreement cannot be binding (Jones, 2019). This rule is not free from exception. If the debtor has agreed to do something exceeding the debt owed or to provide a benefit to the creditor against the full satisfaction of the debt, it can be a treated as a full payment of the debt (Foakes v Beer [1884] UKHL 1, 1884). In (Williams v Roffey [1991] 1 QB 1., 1991), it was held that the practical benefit received by the creditor is a sufficient consideration subject to the condition that there is no economic duress or fraud (Arvind, 2019). This means that the practical benefit must be established against the benefit of the promise. At the same time, for the satisfaction of the debt with a consideration other than the money owed, the creditor must request for such consideration (D & C Builders v Rees [1966] 2 QB 617., 1966).

The law of contract provides for sufficiency of consideration and not adequacy of consideration. In that regard, the Pinnel rule is claimed to be illogical. The justification in this case is based on the notion that it is money alone that has a quantifiable monetary value. This seems to not regard the point that the value of any goods varies subject to circumstances (MacIntyre, 2018). According to the rules of consideration, if there were fresh consideration provided in the Pinnel’s case to the full satisfaction of the debt, that would have been a legally binding agreement. This rule regarding fresh consideration was seen in the case of (Hartley v Ponsonby [1857] EngR 605, 1857) where the Court held that it is a fresh and sufficient consideration when the captain of the ship promised the crew to pay extra wages if they continue to with the second leg.

The rule of fresh consideration may include situations where the creditor request for an accelerated payment. Such payment is detrimental to the debtor, but beneficial to the creditor (Andrews, 2015). This is more or less concerning the sufficiency rather than adequacy of the part payment. Similar situation is when the creditor requests a different mode of repayment, in the form of cash different from the promised repayment in cheque. However, merely paying by cheque rather than in cash where the debtor is not doing anything that is financially more onerous cannot be accepted as a sufficient consideration (Andrews, 2015). The requirement is some additional practical benefit to the creditor received upon their request and detrimental to the debtor. For instance, the payment of a lesser sum at another place is a sufficient consideration, as held in Foakes.

Where there is detriment to the debtor and benefit to the creditor in these form of repayment upon request by the latter, it will be a sufficient consideration. This rule applies even when the existence of the validity of the debt cannot be ascertained or is genuinely disputed on reasonable grounds, part-payment can form a full and final settlement to discharge the debt (Andrews, 2015). As long as the creditor agrees to the part payment and there is a practical benefit, as has been observed earlier, the part-payment is a sufficient consideration. Such valid repayment is also applicable to part-payment by a third party that the creditor assents (Andrews, 2015). This was upheld by the Court of Appeal in (Hirachand Punamchand v Temple [1911] 2 KB 330, CA, 1911) where the father of the debtor-son has paid the debt owed by his son and the moneylender cannot claim the balance from the son.

The notion of practical holds prime importance in this current discussion. The debtor, as such, does not need to furnish the creditor with anything additional to the part-payment to make alteration in the contract effective as long as the creditor upon their request is receiving a practical benefit from the alteration arrangements (Andrews, 2015). Thus, in the Williams, the court held that it will be a sufficient consideration when the debtor performs an existing contractual obligation with an additional promise as it confers the creditor with a practical benefit. Once such arrangement is agreed between the parties, the creditor cannot claim the balance as was the situation in the Hirachand case above. This comes to the discussion regarding equitable intervention.

The equitable intervention, as mentioned above, is in the form of promissory estoppel, which provides relief as justice demands where common law cannot provide (Trukhtanov, 2008 ). As such, the estoppel can stop the creditor from enforcing the payment of the balance as it would not be equitable to demand so after having negotiated and agreed to the lesser sum in satisfaction of the debt (Central London Properties Trust Ltd v High Trees House Ltd [1947] KB 130., 1947). Thus, the true voluntary accord between the parties delivers such kind of justice, as what Lord Denning observed in the case of ( D & C Builders v Rees [1966] 2 QB 617, 624, 1966). The voluntary acceptance forms the key to such equitable intervention and creates the reliance that the creditor will be restrained from enforcing the balance. However, this does not mean that such reliance will automatically create an equity as the circumstances of the case and parties’ intention will define the validity of the equity. Thus, the ‘true construction of the promise or representation’ holds the key importance (Collier v P & M J Wright (Holdings) Ltd [2007] EWCA Civ 1329, [2008] 1 WLR 643, 2007, pp. 47-48). The principle of equitable intervention based on the true construction of the promise takes aways the recognition of ‘practical benefit’ as the sufficient consideration. Practical benefit, thus, may not be an appropriate notion to apply as the principle of equitable intervention has questioned its accurate or clear definition and applicability (Collins, 2017).

The case rulings discussed present fundamental issues in the consideration principles. This was recognisable in the case of (re Selectmove Ltd [1993] EWCA Civ 8 i, 1993) where the Court of Appeal provided two principles on part payment as a sufficient consideration. It ruled that the Foakes principle is applicable to cases involving part-payment of debts and the William principle to all cases, primarily the supply of services. A balance approach was adopted by Lord Sumption in the case of (MWB Business Exchange Centres Ltd v Rock Advertising Ltd [2016] EWCA Civ 553., 2016) where it was held that definition of consideration is not expanded to include practical benefits. This reiterates the true construction notion mentioned earlier that focus on parties intention and circumstances of the case.

To conclude, the general rule that part payment of a debt cannot be sufficient is subject to the negotiation and agreement between the parties initiated by the creditor. The full satisfaction of the debt depends on sufficiency rather than the adequacy of the consideration. This depends on the circumstances of the case, the parties, intention and the agreed arrangement and the the ‘true construction of the promise or representation’.

Bibliography

Andrews, N., 2015. Contract Law. s.l.:Cambridge University Press.

Arvind, T. T., 2019. Contract Law. s.l.:Oxford University Press.

Central London Properties Trust Ltd v High Trees House Ltd [1947] KB 130. (1947).

Collins, D. M., 2017. Part-payment of debt: a variation on a theme?. International Company and Commercial Law Review , 28(7), pp. 253-258.

Collier v P & M J Wright (Holdings) Ltd [2007] EWCA Civ 1329, [2008] 1 WLR 643 (2007).

D & C Builders v Rees [1966] 2 QB 617. (1966).

Foakes v Beer [1884] UKHL 1 (1884).

Hartley v Ponsonby [1857] EngR 605 (1857).

Hirachand Punamchand v Temple [1911] 2 KB 330, CA (1911).

MacIntyre, E., 2018. Business Law. s.l.:Pearson Education Limited.

MWB Business Exchange Centres Ltd v Rock Advertising Ltd [2016] EWCA Civ 553. (2016).

Pinnel’s Case (1602) 5 Co Rep 117 (1602).

Williams v Roffey [1991] 1 QB 1. (1991).

re Selectmove Ltd [1993] EWCA Civ 8 i (1993).

Q2

An agreement or a promise is contractually binding if it is supported by a consideration. The statement reflects the prime role that a consideration plays in the bindingness of a contract. This essay will reflect on the extent of this importance.

Consideration in a contract signifies an exchange of promises and corresponding consideration. A valuable consideration comprises a benefit to the promisor or a detriment to the promise. Lush J aptly define a valuable consideration, in the case of (Currie v Misa (1875) LR Ex 153, 162, 1875), as consisting of in “some right, interest, profit, or benefit accruing to the one party, or some forbearance, detriment, loss, or responsibility, given, suffered, or undertaken by the other’. The definition of consideration is subject to the type of contract. For example, in the bilateral contract that is pending performance the consideration is executory and the promise of each party is the consideration for the other party. Similarly, in the unilateral contract, the performance of the promise of the requested act is the consideration for the promise; and the promise will be the consideration for the performance of the requested act (Burrows, 2020, p. 93).

A consideration in an agreement is the evidence to the agreement and its seriousness. It may not need to prove parties’ serious intention. It defines whether or not an undertaking is enforceable. Thus, the doctrine of consideration represents the reciprocity enforcing the bargains between the parties (Chen-Wishart, 2007). The doctrine of consideration can be stated to have derived its authority from the equity principle that equity does not assist the volunteer. It brings clarity to the parties concerning their exchange of bargains, and helps measure the extent of relief in case of a contractual breach based on the level of expectation, liability and/or the value of the promises exchanged (Chen-Wishart, 2007, p. 127).

The general rule is that the promises that do not have any consideration are not enforceable. However, certain exceptions as to transaction not requiring consideration are found (Tepper, 2014). In such cases, the issue is to determine whether or not the transaction or the contract is enforceable (Gallagher, 2016). Two examples are provided for the purpose of discussion. First is transaction involving a gift, which is unmilitary in nature without any legal detriment suffered by the party receiving the gift (benefit) (Tepper, 2014). This gift becomes enforceable after it have completed the formalities requirements like those under Will Act 1837. The second example is that of an illusory promise. Such promise is treated as an indefinite expression that does not impose upon the promise an obligation or does not involved any bargained exchange (Tepper, 2014). This promise is invalid as the promise is not clear and there is no consideration. It becomes valid due to the application of the doctrine of promissory estoppel based on reliance by the promisee upon the promise made and the promise suffered detriment. This means that in such situation the doctrine of promissory estoppel overrides the doctrine of consideration. For example, in (Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130, 1947), the court ruled in favour of the complainant, who relied upon an agreement to reduce the rental to half based on the reasoning that the promise was made with a legal intent to create a legal relation and the other party knew that the complainant would act upon the promise, and the promissor has knowledge that the promisee would act on the promise. The principle of estoppel restraint the promissor from taking back its promise of reducing the rental.

In addition to the cases where the absence of consideration did not affect the enforceability of the undertaking, transaction or the promise, if they are incorporated, they will be enforceable irrespective of the absence of consideration (Gallagher, 2016). This raises the question of whether the doctrine of consideration should be abolished. There are three main points attached with the doctrine of consideration. Firstly, the consideration does not need to be adequate. Secondly, past consideration does not count. The third point is the issue of determining whether or not the performance of or a promise to perform a pre-existing duty is a good consideration (Burrows, 2020). The question of adequacy or sufficiency of consideration and the performance of pre-existing duty as a good consideration has been dealt with in the Question A above. To elaborate, there is no assessment of the adequacy in the doctrine of consideration. There is more emphasis on the value of the consideration in the eyes of law (Chen-Wishart, 2007, pp. 135-136). It is for the parties to determine the adequacy. However, problem may arise in case of disproportionate disparity between the value and the adequacy, which is the value exchange.

Therefore, a disproportionate consideration is not helpful concerning the validity of a contract (Chen-Wishart, 2007). It is only when there is a negotiated arrangement between the parties that consideration determines the validity of the contract, as was seen in the case of Foakes, or D&C Builders (refer Question 1 above).

While determining the sufficiency of the consideration, the presence of vitiating factors, including misrepresentation or undue influence, fraud , illusionary consideration, or other legal issue makes the transaction or agreement invalid. There is a serious inadequacy in such case and hence, the contract becomes unenforceable (Chen-Wishart, 2007; Tepper, 2014). In this regard, the parties’ discretion occupies a major role in determine a valid and sufficient consideration. This also means that there is no clear definition of adequacy, which is unfavourable to the doctrine of consideration (Chen-Wishart, 2007).

The focus of the doctrine of consideration on sufficiency has reduced its level of requirement to validate a contract. For example, the definition of consideration is expanded to include the principle of practice benefit to validate a consideration. As seen earlier (Question 1), performance of an existing contractual obligation with an additional promise conferring the creditor with a practical benefit is a sufficient consideration (refer Williams). Such cases have expanded the meaning of consideration to an extent that consideration may not remain a main component to validate the contract. This can be supported with the ruling in (Chappell & Co Ltd v Nestle Co Ltd [1959] UKHL 1, 1959) where the court held the customer furnishing a gramophone in exchange for a chocolate wrapper a valid consideration. The court focussed on the concept of value over the concept of factual benefit or detriment. While reading this ruling, consideration must also be given to the vitiating factors mentioned above. For example, as was seen in the case of the case of (Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548, 1991), if the transaction involves unjust enrichment, the contract cannot be valid.

The arrangements between parties in the form of an enforceable contract can, thus, removed the requirement of consideration. This was seen in the case of Williams treating an existing contractual obligation with an additional promise as a valid consideration. The agreement between the parties restraint the parties from enforcing a consideration. There are other situations where a contract will be enforceable despite the consideration. This was seen in the case of Central London Property case. Lord Denning, in (Crabb v Arun District Council [1976] Ch, [1975] 3 All ER 865, CA, 1976) ruled that if the promise is made knowingly that the other party will rely on it, the lack of consideration cannot invalidate the promise. This is the doctrine of reliance and is an equitable exception. This requires particularly the legal intention to bind the parties and the obligation must be clear (Collins, 2003, p. 76).

To conclude, consideration evidence the contract and the seriousness of the promise. However, this essay has presented situations where consideration does not play a vital role to validate a contract. The rules of equity and contract are applied by the courts in determining the validity of a promise or a contract. Whether consideration validates a contract or not, thus, depends on the circumstances of the case and the construction of the parties’ intention and arrangements.

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Bibliography

Burrows, A., 2020. A Casebook on Contract. s.l.:Bloomsbury Publishing.

Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130 (1947).

Chappell & Co Ltd v Nestle Co Ltd [1959] UKHL 1 (1959).

Chen-Wishart, M., 2007. Contract Law. s.l.:Oxford University Press.

Collins, H., 2003. The Law of Contract. s.l.:Butterworths.

Crabb v Arun District Council [1976] Ch, [1975] 3 All ER 865, CA (1976).

Currie v Misa (1875) LR Ex 153, 162 (1875).

Gallagher, C., 2016. Should the "Doctrine of Consideration" be Abolished?. s.l.:GRIN Publishing.

Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548 (1991).

Tepper, P., 2014. The Law of Contracts and the Uniform Commercial Code. s.l.:Cengage Learning .