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                         North South University

       Course: LAW200, Legal Environment of Business

Assignment No. 01

 “For a promise to be enforceable as a contract some consideration must be given in exchange for the promisee, i.e. the promisor must receive a benefit or the promisee must suffer a detriment.’’__ Illustrate this concept with references to relevant case laws.

Consideration

Consideration is an essential element in a contract. Subject to certain to exceptions, an agreement is not enforceable unless each party to the agreement gets something. This something is called consideration.

According to the English law consideration means some right, interest, profit or benefit accuring to one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other.

Section 2(d) of the Contract Act defines consideration as, “When at the desire of the promisor, the promisee or any other person has done or abstained from doing, , or promises to do or to abstain from doing something such act or abstinence or promise is called a consideration for the promise.”

Promise and Acceptance

“When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal when accepted becomes a promise.”__ Sec. 2(b).

The one who is making the proposal is calledf the promisor and the one who is accepting is called the promisee. Acceptance converts the offer into a promise.

Contract Consideration

In contract law consideration is concerned with the bargain of the contract. A contract is based on an exchange of promises. Each party to a contract must be both a promisor and a promisee. They must each receive a benefit and each suffers a detriment. This benefit or detriment is referred to as consideration.

Consideration must be something of value in the eyes of the law - (Thomas v Thomas) (1842) 2 QB 851. This excludes promises of love and affection, gaming and betting etc. A one sided promise which is not supported by consideration is a gift. The law does not enforce gifts unless they are made by deed.

Whilst the common law strictly adheres to the requirement of consideration (although in some instances the courts seem to go to some lengths to invent consideration eg Ward v Byham [1956] 1 WLR 496, Williams v Roffey Bros [1990] 2 WLR 1153) equity will, in some instances, uphold promises which are not supported by consideration through the doctrine of promissory estoppels.

Elements of consideration

In order to meet consideration`s requirements, a contract must fulfill three elements. First, there must be a bargain regarding terms of an exchange. Second, there must be a mutual exchange. In other words, both parties must get something out of the contract. Third, the exchange must be something of value.

Example: The landlord and tenant come together to discuss the terms of the exchange (most of the time, the leasing is outlined in a contract. Thus, they have fulfilled the first requirement of consideration. To meet the second element, there must be a mutual exchange. In this case, the landlord provides housing, while the tenant provides rent payment. Third, the bargain terms must be of value. The apartment is worth what the tenant hands over each month. Therefore, this contract has met its consideration requirement, because it fits all elements of consideration.

Theories of Consideration

There are two common theories that attempt to explain consideration. The first is "Benefit-detriment theory", in which a contract must be either to the benefit of the promisor or to the detriment of the promisee to constitute consideration (though detriment to the promisee is the essential and invariable test of the existence of a consideration rather than it can be constituted by benefit to the promisor). The second is "bargain theory", in which the parties subjectively view the contract to be the product of an exchange or bargain. Bargain theory has largely replaced benefit-detriment theory in modern contract theory, but judges often cite both and may use both models in their decisions. These theories usually overlap; in standard contracts.

 Example: A contract to buy a car, there will be both an objective benefit and detriment The buyer (promisor) promises money in exchange for the car. The buyer wants the car. The buyer receives the benefit of owning the car. The seller (promisee) promises to deliver the car, the seller experiences a detriment by relinquishing his property rights to the car. Refrain from thinking about the money as a benefit or detriment, this will lead to an erroneous analysis (buyer loses money=detriment. seller gains money=benefit. do not do this.) Stick to analyzing the exchange from the promisor`s perspective. Debtor (promisor) receives the benefit of immediate possession of money, creditor (promisee) undergoes a detriment of crediting the debtor.

A bargained-for exchange involving benefit or detriment to either party or both.

For a promise to be supported by consideration (and therefore enforceable) three elements must concur.

Legal Detriment: Any act of forbearance to act which one was previously not obligated to do or refrain form doing.

1)      The promisee must suffer legal detriment that is do or promise to do what the promisee is not legally obligated to do; or refrain from doing or promise to refrain from doing what the promisee is legally privileged to do.

2)      The detriment must induce the promise. In other words the promisor wishes to exchange the promise at least in part for the detriment to be suffered by the promisee.

3)      The promise must induce the detriment. This means that the promisee must know of the offer and manifest intent to accept.

In order to have a legally enforceable promise, there must be adequate consideration given.

·         Consideration is a legal term defined as a benefit received by a promisor or a detriment incurred by a promisee.

·         The courts infer a legal detriment whenever a party obliges himself through a bargain to perform in a certain manner, even if the performance is not detrimental in the ordinary sense of that term.

·         The fact that a promise is bargained for is generally sufficient to make it enforceable.

 Case study

“C”, a computer engineer, is employed by D. His monthly salary is £ 3,000. Due to an overload of work, C works extra hours between September and December 2008. Just before Christmas 2008, as a reward D promises C a bonus payment of £ 5,000 and a pay rise to £ 3,500, effective from January 2009. In February 2009, D’s company runs into financial difficulties. D therefore tells C that, unfortunately, he can neither afford to pay the bonus nor the extra salary of £ 500 per month.

Can C claim the sum of £ 6,500 at the end of March 2009?

Background

·         Not all gratuitous promises are enforceable (compare in German law §§ 516, 518 BGB).

·         Position of English law: A promise is only binding if made in a deed or if supported by consideration.

·         Deed: Under common law instrument made in writing, sealed and delivered to other party, Law of Property (Miscellaneous Provisions) Act 1989, s. 1: seal no longer required for deeds executed by individual, if document in writing, signed in presence of a witness, delivered to other person.

·         The doctrine of consideration represents one possible test to determine which promises should be enforceable: idea of bargain and exchange.

Price stipulated for the promise

Consideration is the price that is asked by the promisor in exchange for their promise – the price for a promise.The common law requires that, for an agreement to be binding, the promisee (or promisees) must provide consideration (payment of some kind) for the promise that they have received.It is the price stipulated by the promisor for the promise made. Price, in this sense, is used in a broad sense; it need not be monetary or even of monitory value; while it requires some `Detriment` on behalf of the promisee, this detriment can take the form of giving up a freedom otherwise enjoyed  and the promisor need not receive any tangible benefit.

Consideration must move from the promisee but need move to the promisor.

Example: If promisor (A) asks promisee (B) to pay (C) a sum of money as consideration for A`s promise to B, that will be good consideration. However, if promisor (A) asks (C) to provide a payment as consideration for A`s promise to B, that will not constitute good consideration (there is no detriment to B in such as case). In the case of joint promises, it is sufficient if consideration moves from one of the parties: see Coulls v Bagots.

Promises may enforceable without consideration

There are exceptions to the rule that only promises supported by consideration are enforceable. Circumstances in which promises will be enforced despite the lack of what one normally considers legal consideration are as follows:

1)      Promises to pay debts barred by a statute of limitations.

2)       Detrimental reliance or promissory estoppels.

3)      Charitable subscriptions.

Promises to pay debts barred by a statute of limitations:

Statutes of limitations in all states require a creditor to sue within a specified period to recover a debt. If the creditor fails to sue in time, recovery of the debt is barred by the statute of limitations. A debtor who promises to pay a previous debt even though recovery is barred by the statute of limitations makes an enforceable promise. The promise needs no consideration. In effect, the promise extends the limitations period, and the creditor can sue to recover the entire debt, or at least the amount promised. The promise can be implied if the debtor acknowledges the barred debt by making a partial payment.

Detrimental reliances or promissory estoppel:

 Under the doctrine of detrimental reliance (or promissory estoppels), a person who has reasonably and substantially relied on the promise of another may be able to obtain some measure of recovery. This doctrine is applied in a wide variety of contexts in which a promise is otherwise unenforceable, including that of a promise not supported by consideration. Under this doctrine, a court may enforce an otherwise unenforceable promise to avoid the injustice that would otherwise result. For the doctrine to be applied, the following elements are required:

1.      There must be a clear and definite promise.

2.      The promisee must justifiably rely on the promise.

3.       Justice will be better served by enforcement of the promise.

If these requirements are met, a promise may be enforced even though it is not supported by consideration. In essence, the promisor will be estopped (prevented) from asserting the lack of consideration as a defense.

Charitable Subscriptions:

 Subscriptions to religious, educational, and charitable institutions are promises to make gifts and are unenforceable on traditional contract grounds because they are not supported by legally sufficient consideration. A gift, after all, is the opposite of bargained-for consideration.