Consideration

Consideration

Consideration is one of the three basic elements of contract formation in common law,the other two being offer and acceptance. It is not present in other legal systems. Civil law and other international conventions all emphasize the agreement process,and do not include a"considera­tion" requirement. An examination of most commercial transactions will show that there is no re­al issue concerning consideration in most of them. Therefore,this part,weII briefly discuss what a" consideration" is and get a rough understanding about it.

1.Definition of Consideration

There are various definitions to consideration,like;

Consideration is some benefit received by a party who gives a promise or performs an act, or some detriment suffered by a party who receives a promise.

" A valuable consideration, in the sense of the law, may consist either in some right, inter­est , profit of benefit accruing to one party or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other. "

Consideration means some thing which is of some value in the eye of the law, moving from the plaintiff;it may be some detriment to the plaintiff or some benefit to the defendant,but at all events it must be moving from the plaintiff.

Accordingly, consideration is either some detriment to the promisee or some benefits to the promisor. A valid consideration must be executory or executed; it can not be past.

Executory - a promise to do something in the future (e. g. A promises to deliver goods to B and B promises to pay for the goods);

Executed - an act constituting the consideration is wholly performed(e. g. the payment of money for goods;the return of a lost dog,for which a reward has been offered).

Consideration is something bargained for and given in exchange for a promise. That" some­thing" may be an act,a forbearance,or a return promise. It may either be a benefit to the promi­sor or a detriment to the promisee. To constitute consideration, there must be a detriment to the promisee.

Consideration is some benefit received by a party who gives a promise or performs an act, or some detriment suffered by a party who receives a promise. A valid consideration must be ex­ecutory or executed;it can not be past.

2.Characteristics of Consideration

1)It must be real and of some value. It must not be vague, indefinite or abstract.

2)It need not be adequate. This principle is sometimes explained as" consideration need not be equal to the promise" or" consideration may not be adequate but must be sufficient. "

3)It must be legal. An illegal consideration makes the whole contract invalid.

4)It must move from the promisee, i. e. only the person who has paid the price for a promise can sue on it.

5)It must be possible to perform. A promise to do the impossible would not be accepted as consideration.

6)It must not be past. If the act put forward as consideration was performed before any promise of reward was made it is not valid consideration. The general rule is that" past consider­ation is no consideration. "

Performance of an existing contractual duty, or a public duty imposed on the promisee by law,these will not amount to consideration unless the promisee goes beyond what he is re­quired to do.

Exceptions to the Consideration Requirement

A contract without consideration can be invalid or unenforceable unless it is under seal. This doctrine is not suitable to the practice of today; therefore, there are two exceptions to this doctrine. They are;

1.Accord and Satisfaction

The general rule of common law is that a creditor is not bound by an undertaking to accept part payment in full settlement of debt. An accrued debt can be discharged only by accord and satisfaction. The actual part payment is no satisfaction, that is to say, " payment of a lesser sum on the day in satisfaction of a greater sum cannot be any satisfaction for the whole. "

This rule is finally approved by the House of Lords in Foakes v. Beer. For example,if A owes B $1,000,his undertaking to pay,say, $900,is no consideration for B’s promise not to sue for the remaining balance. B may accept the $900 then sue for the balance, despite his promise. In addition, B may insist to claim interest notwithstanding that the principal sum has been setded.

But if the promisee has undertaken to do something different from what he was bound to do,this will amount to consideration. So it has been held that where,at the promisor’s request, the promisee pays a smaller amount, e. g. at an earlier date, or in a different place, there is con­sideration for a promise not to sue for the balance,for he has gone beyond the scope of what he is bound to do. This exception dates back to 1602 in Pinnel’s case.

Therefore,at common law if A owes B $1,000 and wishes to discharge that obligation by paying B $900 he must;(i) obtain the agreement(accord) of B;and(ii)provide B with some

consideration( satisfaction) for giving up his right to $1,000 unless the release is under seal.

2.Doctrine of Equitable (Promissory) Estoppel

A promise made by the promisor intended to create legal relations and intended to be acted upon by the promisee, may be enforced by the promisee (despite that he gave no consideration for it) ,if in fact he relied upon it to his detriment. The promisor is prevented (estopped) from denying his promise.

The operation of this doctrine is suspensory in nature and according to the Privy Council in Ajaye v Briscoe Ltd. [ 1964] , where it was held that the plaintiff could revert to the original a- greement by giving reasonable notice, except in situations where the defendant having relied on the promise cannot resume his original position.

The doctrine is subject to the following qualifications:

a.that the other party has altered his position;

b.that the promisor can withdraw his promise on giving reasonable notice,which need not be formal notice,provided the promisee is able to resume his position;

c.the promise only becomes final and irrevocable if the promisor cannot resume his former position.

The essentials of the traditional version of estoppel were stated by Lord Birkenhead in Ma­claine v Gatty [ 1921 ] :

Where A has by his words or conduct justified B in believing that a certain state of facts exists, and B has acted upon such belief to his prejudice, A is not permitted to affirm against B that a different state of facts existed at the same time.

A classic example of estoppel is if one party represents to another that A has authority to contract on his behalf,when in fact he has not so authorized A. If in reliance on this representa­tion the other party enters a contract with A as agent, the first party (the principal) is estopped from denying that A has authority to act as his agent, and the contract made through A will be binding on him.

4.The Problem of Mutuality

In hundreds of American cases, it has been asserted as a general rule of contract law that both parties must be bound or neither is bound. This motion has usually been called" the princi­ple of mutuality. "

This principle obviously needs more qualification than it usually receives in judicial opin­ions.

First, the principle has no application to a unilateral contract. In a bilateral contract, the parties exchange a promise for a promise. (For example,Seller agrees to sell Buyer a used car for $2,000,delivery in three days,and Buyer agrees to pay $2,000 on delivery. )In a unilat­eral contract,the parties exchange a promise for an act. (For example, A promise to pay B $50 for mowing A’s lawn and makes clear that only B’s act of mowing the lawn, not B’s promise to

do so,will suffice. )In such bargains,the party who exchanges an act for promise may never be bound, because he is not bound to do anything before he chooses to do the act and he may not be bound to do anything after he does the act. Thus suppose, in the last example, that B mows the lawn. B was not bound to mow the lawn before he mowed it, and is not bound to A in any way he mowed it. Nevertheless, A is bound to B.

Second, the principle of mutuality is not to bargains in which both parties have made real promises but one party is not legally bound by this promise. For example, suppose A fraudulent­ly induces B to agree to buy Blackacre. Although B is not legally bound, he can enforce the contract notwithstanding the doctrine of mutuality. The same result follows in many other kinds of cases,such as those in which one but not both parties has a defense under the Statute of Frauds or a defense of incapacity.

Williston took the view that cases holding a plaintiff may enforce a contract by a suit at law for damages even though she could not herself have been sued on the contract (before, for example,she did not sign the memorandum required by the Statute of Frauds) constitute" an exception to the general principle of consideration. "4^th ed. , at §7:13. He pointed out that if the privilege that the law confers in these cases ( on the defrauded party, the minor, or the non­signing party) were spelled out in words in the contract itself, the promise would be held to be" illusory" and therefore insufficient as consideration for the promise of the other party.

Whether these cases are exceptions to the requirement of consideration depends, of course, upon the view taken of the policies that define the requirement. In any event, the exist­ence of these cases shows that under some circumstances a promise by the plaintiff that is not itself binding on him can nevertheless act as consideration for the promise of the defendant, and demonstrates again that the alleged principle of" mutually" requires a good deal of qualifi­cation.

SCOTT v. MORAGUES LUMBER CO.

Supreme Court of Alabama, 1918 202 Ala. 312,80 So. 394.

Suit by the Moragues Lumber Company,a corporation,against J. M. Scott, or damages for breach of an agreement of charter party. Judgment for plaintiff, and defendant appeals. Af­firmed.

Count 2 of the complaint as amended is as follow:

"The plaintiff claims of the defendant $13,000 as damages from breach of an agreement entered into between the plaintiff and the defendant on the 27^th day of June, 1917, consisting of an offer by the defendant that,subject to his buying a certain American vessel, 15 years old, which he was then figuring on and which was of about 1,050 tons and then due in Chile, he would charter said vessel to the plaintiff for the transportation of a cargo of lumber from any port in the Gulf of Mexico to Montevideo or Buenos Aires, for the freight of $65 per thousand feet of lumber,freight to be prepaid,free of discount and of insurance,and the vessel to be furnished to be plaintiff within a reasonable time after its purchase by the defendant, which said offer was accepted by the plaintiff, and the plaintiff avers that although the defendant purchased said ves­sel , and although the plaintiff was at all times ready, willing , and able to comply with all the provisions of said contract on its part, the defendant without notifying the plaintiff of said pur­chase , and before said vessel was delivered to him, chartered said vessel to a third person, and thereby rendered himself unable to comply with the said contract. "

SAYER, J. It is said, in the first place, that the alleged contract between the parties was conditioned upon the will of appellant, defendant and was therefore void for want of considera­tion or mutuality of obligation. A valid contract may be conditional upon the happening of an e- vent,even though the event may depend upon the will of the party,who afterwards seeks to a- void its obligation. This principle is illustrated in McIntyre Lumber Co. v. Jackson Lumber Co. , 165 Ala.268,51 So. 767,138 Am. St. Rep Appellant was not bound to purchase the vessel; but, when he did, the offer—or the contract, if the offer had been accepted—thereafter re­mained as if this condition had never been stipulated, its mutuality or other necessary incidents of obligation depending upon its other provisions and the action of the parties thereunder. Davis v. Williams, 121 Ala.542,25 So.704;3 Page on Contracts, § 1358. See,also,Jones v. Lanier, 198 Ala. 363,73 So. 535.

The effect of appellee’s acceptance, if communicated while the offer was yet open, was to convert it into a binding contract. 6 R. C. L. p. 605 , § 27. In substance,it is alleged in the com­plaint that appellant’s offer was accepted;that appellant purchased the vessel;that appellee was able,ready,and willing to perform the contract on its part;but that appellant disabled himself, or failed and refused to perform on his part. From the order in which the facts are alleged it is to be inferred that appellee accepted appellant’s offer before the latter purchased the vessel, and there is no ground of demurrer questioning the sufficiency of the complaint to that effect. There­upon the offer was converted into a binding contract to be performed, if not otherwise stipula­ted, within a reasonable time; the promise oix either hand constituting the consideration of the promise on the other. Appellant’s purchase of the vessel was a condition precedent to the exist­ence of a binding contract, it is true; but that was alleged, as it was necessary that it should be. And so with respect to appellee’s acceptance of the offer. It was necessary that appellee commu­nicate its acceptance to appellant. But this communication was a part of the acceptance and was covered by the general allegation of acceptance.