CONTRACT LECTURES TRANSCRIPTS C STRICKLAND
LECTURE 5 Total time = 59 mins and 41 seconds
Track/slide 1 01.07 Introduction
We are continuing with consideration and are now looking at whether it is possible to establish a NEW CONTRACT using consideration from an EXISTING CONTRACT. In other words, can consideration be MULTI-APPLICABLE?
To recap, we said that we can look at this under the traditional 3 headings – is there SUFFICIENT CONSIDERATION to make ANOTHER contract in the:
i. performance of a PUBLIC or STATUTORY duty?
ii. performance of a contractual duty ALREADY OWED to a 3rd
party?
iii. performance of an ALTERATION to an existing contractual duty?
The first two headings have been addressed in lecture 4. We can now continue by discussing the issues that arise under heading number 3.
Track/slide 2 04.14
Here, then, we begin our discussion of the situation
WHERE THERE IS A MAIN CONTRACT AND THEN ONE SIDE SUGGESTS AN 'ALTERATION’
promising either to PAY MORE for the same work under the original contract
or
to ACCEPT LESS PAYMENT than is due under the original contract -
are such alteration promises enforceable as contracts? Is there consideration for them?
We need to look at both possibilities.
Promises to PAY MORE for the same work
Key cases that we need to look at here are:
Stilk v Myrick 1809
Hartley v Ponsonby 1857 and
Williams v Roffey Brothers & Nicholls (contractors) Limited 1991
The leading case here until 1991 was STILK v MYRICK 1809. However, the rule in this case was EFFECTIVELY OVERRULED in 1991 by the extremely important case of WILLIAMS v ROFFEY BROS LTD.
We can now look at these 3 cases.
In STILK v MYRICK it was held that a promise by the master of a ship to pay the crew EXTRA money above that already agreed for sailing the ship home in an emergency was UNENFORCEABLE by the crew as they had provided NO EXTRA CONSIDERATION for the extra money. When the boat had reached Cronstadt, 2 of the sailors deserted and the master had promised the crew that if they sailed the ship back to London he would divide the wages of the deserters between them. He did not do so and one sailor sued.
There are 2 reports of this case, the Espinasse report that says that the case was decided on the issue of duress for public policy reasons, and the Campbell report, that says the case was decided on the basis that ‘legally’ the sailors had not provided consideration because by sailing the boat home in an emergency they were merely doing what they originally were contracted to do.
In Hartley v Ponsonby 1857 the result was different because the sailors provided consideration by doing ‘more’ than they were originally contracted to do. In this case there was an original crew of 36 sailors and 17 deserted leaving only 19, of which only 4 or 5 were able seamen. The master of the ship promised the 19 remaining crew members extra wages if they sailed the ship home. Were they entitled to the extra wages? Yes – when the 17 deserted, the ship was so undermanned that they were not legally obliged to sail her back under the original contract. In effect, the contract was frustrated. Agreeing to sail back for enhanced wages was the consideration for a new contract. They were doing more than they were originally required to do.
Track/slide 3 02.38
In WILLIAMS v ROFFEY the defendant building contractors had entered into a contract with a sub-contractor for the carpentry work on the block of 27 flats for a price of £20,000. After the sub-contractor had completed about 80% of the work and received interim payments for this, it became clear to the main contractor that the sub-contractor was in grave financial difficulties, mainly because he had under-priced his bid for the job, and there was a danger that he might pull out of the work.
The main contractor was under the threat of a penalty clause if he did not complete the whole refurbishment of the 27 flats on time and so he called a meeting with the carpenters and promised to pay them extra money ‘on completion’ of each flat. When the carpenters had completed a further 8 flats they had received only one extra payment from the main contractor and so stopped work and sued for the other payments.
The main contractor said that they were not entitled to any extra money because the ALTERATION to pay this extra money was UNENFORCEABLE AS IT LACKED CONSIDERATION by the carpenters.
It was held in Court of Appeal that the carpenters were entitled to the extra payments because they had provided consideration to the main contractors for their promise in that:
the promise secured completion of the work on time so that the main contractors avoided the penalty clause, and,
the main contractors avoided the need to employ another sub-contractor if the original ones decided to quit.
This is such an important case and you MUST ALL READ IT IN THE LAW REPORTS. It is a relatively short case but very important.
Track/slide 4 02.20
Although the 3 Lords justices of appeal all agreed with the result, they got there by different routes. We can briefly look at the judgments of each of them, starting with
Glidewell LJ:
His lordship provides a good survey of relevant case law and is of the view that the doctrine of PROMISSORY ESTOPPEL (which we look at next) does NOT APPLY in this case.
His lordship further notes that in some cases, the doctrine of ECONOMIC DURESS
might apply though not in this case. This would be where the PLAINTIFF had stopped doing work and WAS DEMANDING extra payment for completing – in the present case the plaintiff, the sub-contractors were not the ones who suggested the extra payment – that idea came from the main contractors so they couldn’t try to use economic duress or fraud as an argument.
His lordship decides the case on the basis of how he sees the law to be as
stated in PAO ON v LAU YIU1979 - basically that the promise by the main contractors to pay extra to avoid a penalty and to get the work done by the original subcontractors gave them a PRACTICAL BENEFIT or avoided a DISBENEFIT to them and this was consideration – so long as economic duress or fraud was absent.
His lordship further said that STILK v MYRICK was NOT OVERRULED by his judgment that he was merely ‘REFINING AND LIMITING’ the application of the case.
Track/slide 5 01.18
We can now look at the judgment of Russel LJ:
His lordship said that he would have been happy to consider the doctrine of PROMISSORY ESTOPPEL in this case HAD counsel for the main contractors raised it – and gives a good
explanation of how it applies.
He then moves on to base his finding of consideration on a PRAGMATIC view of it – he states ‘Consideration there must still be
but in my judgment the courts nowadays should be
more ready to find its existence so as to REFLECT the
INTENTION OF THE PARTIES to the contract where
the bargaining powers are not unequal and where the
finding of consideration reflects the true intention of
the parties’.
His lordship also confirms the point that in no way does his judgment affect the
standing of STILK v MYRICK which is still good law.
Track/slide 6 01.18
We can now look at the judgment of Purchas LJ.
His lordship starts off by saying that STILK v MYRICK is still good law and that his judgment does not effect it.
His lordship expresses the view that the Stilk v Myrick case was in large part decided for POLICY reasons – to protect masters of ships from being held to ransom by crews at sea. And he suggests that the lack of consideration argument was only really used because the duress was not available.
His lordship felt that there was consideration in this case for COMMERCIAL REASONS – as the sub-contractor could have decided to be in deliberate breach of contract in order to ‘cut his losses’. And so if BOTH PARTIES ‘BENEFIT’ from an agreement it is not necessary that both should also suffer a detriment for consideration to exist.
Track/slide 7 02.19
We can consider some commentary on this case:
After the case, commentators wondered to what extent the whole idea of consideration had been NULLIFIED – since there seemed to be no real consideration for the extra payment – so although their lordships stressed that they were not challenging the decision in Stilk v Myrick, in effect they overruled it.
It is interesting to note that all 3 lord justices of appeal stressed the
fact that their judgments only applied to ALTERATION PROMISES and had NO EFFECT AT ALL on the requirement to find consideration in THE FORMATION OF CONTRACTS from scratch.
Thus the requirement for consideration in the formation of contracts seems to be intact after this case – as supported in
RE SELECTMOVE 1995 and RE C(A DEBTOR) 1994.
In addition, the move away from the need for ‘legal’ consideration in Williams v Roffey Brothers Limited 1991 was NOT FOLLOWED in recent cases concerning promises to ACCEPT LESS payment than is due under an original contract. Remember that in Williams v Roffey, the consideration that was said to exist was of a ‘practical’ or ‘factual’ nature as opposed to really ‘legal’ in nature.
As we shall see shortly, Williams v Roffey Bros Limited has made NO IMPACT on the old cases of
PINNEL 1602 and FOAKES v BEER 1884.
Track/slide 8 02.24
We can now move on to consider
PROMISES TO ACCEPT ‘LESS PAYMENT’ THAN IS DUE UNDER AN ORIGINAL CONTRACT
The leading cases here are PINNEL’S CASE 1602 and FOAKES v BEER 1884.
In PINNEL’S CASE it was held that if A made a promise with B to accept LESS PAYMENT for a debt and NOT TO SUE for the balance, then this agreement was UNENFORCEABLE unless B gave some extra consideration for it. The consideration given, however, could be determined by A and B – thus even ‘payment in kind’ could be enough (such as ‘a horse, a hawk or a robe’).
In Pinnel’s case, Pinnel had accepted less money from Cole than he was owed, over a month in advance of the due date – on October 1st instead of on 11th November. Pinnel had accepted this as full satisfaction for the debt. However, Pinnel sued Cole for the remainder of the debt.
Pinnel only succeeded on a technical point of pleading because although it was held that
‘Payment of a lesser sum on the due day for a debt is no satisfaction of the debt’
(and so the creditor can sue for the rest)
payment of a lesser sum may be enough to discharge the debt where the circumstances of paying less can be regarded as creating extra consideration to the benefit of the creditor as follows:
Track/slide 9 02.23
i. payment in kind rather than in money (as the ‘thing in kind’
might be of more use to the creditor than the money)
ii. payment in advance of the due date (in Pinnel’s case, Cole
would have won the case had it not been for the technical
point because by paying in advance there would have been
sufficient consideration – benefit to Pinnel )
iii. payment at a different location to the creditor’s advantage
( such that the debtor has to travel and incur expenses to get to
the new location)
iv. payment of a lesser sum by a third party accepted as full
settlement by the creditor (to avoid fraud against the third
party).
See HIRACHAND PUNAMCHAND v TEMPLE 1911.
In this case, a father wrote to the plaintiffs, his son’s creditors,
offering to pay part of a debt on a promissory note in satisfaction of the whole debt, and he enclosed a draft for that amount. The plaintiffs cashed the draft, and then sued the son for the balance.
The Court of Appeal held that there was sufficient consideration, benefit to the plaintiff, to discharge the whole debt that was owed by the son, a Lieutenant
Temple.
v. agreement by a group of creditors (composition of creditors) that they will
accept less than is actually owed them – should one creditor then try to sue
to get the full amount owed, this could be seen as fraud against the other
creditors.
Track/slide 10 03.00
We can now move on to consider the case of Foakes v Beer 1884.
This case is very important because it confirmed Pinnel’s case in the House of Lords.
In this case Mrs Beer had obtained a judgment against Dr Foakes for £2090 – 19shillings. The key point is that such judgments carry INTEREST from the date of the judgment. In an agreement with Dr Foakes Mrs Beer promised to accept payment by way of a £500 down payment and regular instalments of £150. When all the debt was paid, as scheduled and thus on the due dates, she sued him for the interest.
The House of Lords held that she could claim the interest from Dr Foakes because although in the agreement between her and Dr Foakes she had stated that she WOULD NOT take proceedings to enforce the debt, this agreement LACKED CONSIDERATION by Foakes – he had to pay the debt to her anyway as scheduled and so he gave no additional consideration for her to accept LESS than she was due, which was the DEBT PLUS INTEREST.
This case has been criticised and it is difficult to reconcile it with Williams v Roffey Bros Limited 1991.
In Foakes v Beer, Mrs Beer certainly obtained a benefit from the getting the debt paid in instalments – the option might have been to get no payment at all. So why couldn’t this have been seen as conferring a PRACTICAL BENEFIT to Mrs Beer not only in FACT but also in LAW by acknowledging it as consideration? This is the approach that was taken in Williams v Roffey – the main contractor got a practical benefit, not a ‘legal’ benefit directly, although the net result was that the ‘practical’ or ‘factual’ benefit was recognised as a ‘legal’ benefit.