ABE Principles of Business Law 2008

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C. CLASSIFICATION OF STATEMENTS AND TERMS

All but the very simplest of contracts can be broken down into a number of constituent parts

– promises to do something, or to abstain from doing something else; statements of fact or of opinion; assurances of quality, quantity or performance. These are the usual points; there may be others.

However, it is rare for all the terms of a contract to be actually written down or agreed between the parties. Certain things are too obvious to need mentioning; some are simply forgotten; others are matters to which the parties never gave a thought.

Hence, the first classification is into "express terms" and "implied terms".

Express Terms

These are the terms of the contract which have been specifically agreed between the parties, whether in writing or verbally. Of these, some are, plainly, of greater importance than others.

Fundamental terms are those on which the whole basis of the contract rests, or the "core" of the agreement. What is, or is not, fundamental can be specifically agreed but, if it is not, it is a question of fact for the court to determine.

In Barber v. NWS Bank plc (1996), the claimant, Mr Barber, was interested in purchasing a car apparently owned by a garage in October 1989. He did not have the ready finance to do so: accordingly, the garage sold the car to the defendant bank for cash and Mr Barber entered into a conditional sale agreement with the bank whereby the car was to remain vested in the bank until he had paid all the instalments due under the agreement.

Having continued to remit all the instalment payments until May 1991, Mr Barber decided to sell the car, only to discover that it was the subject of a prior finance agreement, which existed at the date of the agreement with the bank and upon which moneys were outstanding.

HELD: Because of the provision in the conditional sale agreement that the car was to remain vested in the defendant bank until all payments under the agreement had been made, it was an express term and condition that the defendant bank was, at the date of the agreement, the owner of the car. Since this was not in fact so, Mr Barber was entitled to rescind the agreement and recover all the moneys he had paid under it, comprising the deposit and all instalments remitted.

Collateral or ancillary terms are those which support the fundamental terms – or, perhaps, "add flesh to the bones". They are not, in themselves, vital to the validity of the contract.

Implied Terms

Terms which, for one reason or another, have been omitted from the specific agreement often need to be put into the contract in order that it may make sense. The necessity for this was brought out in the leading case on the subject – "The Moorcock" (1889). D owned a wharf on the Thames. P owned a ship, "The Moorcock", and he agreed that she should moor at D's wharf, and be unloaded by him. While this was being done, the tide ebbed, and the ship grounded on a hidden rock, and was damaged. The contract contained no reference to such an event.

HELD: The parties must have intended that it should be a term of the contract that the berth should be safe from hazard to the ship while unloading.

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Lord Justice Bowen said:

"Now an implied warranty, or as it is called, a covenant in law, as distinguished from an express contract or express warranty, really is in all cases founded on the presumed intention of the parties, and upon reason. The implication which the law draws from what must obviously have been the intention of the parties, the law draws with the object of giving efficacy to the transaction and preventing such a failure of consideration as cannot have been within the contemplation of either side; and I believe that if one were to take all the cases, and there are many, of implied warranties or covenants in law, it will be found that in all of them the law is raising an implication from the presumed intention of the parties with the object of giving to the transaction such efficacy as both parties must have intended that at all such events it should have."

That is, perhaps, a rather long-winded way of saying that terms will be implied only if it is necessary to give business efficacy to the contract.

Note that although the courts usually imply terms which are positive (i.e. the party concerned has to do something), negative terms can be implied. Thus, in Fraser v. Thames Television (1983), the members of a group called "Rock Bottom" sued Thames Television for alleged breach of contract concerning a TV series, an implied term of which was that Thames would not use the idea for the series, which was based on the history of the group, unless the members of the group were employed as actors in the series. The court implied this negative term on the grounds that it was necessary to give business efficacy to the agreement between the parties.

Terms will also be implied by custom, by statute, or by course of previous dealing.

By Custom

If a certain thing is customary in the particular trade, it will readily be implied into contracts in respect of that trade. The same applies if a thing is the custom in a particular district or place.

In order to be implied, the custom must be "notorious, certain and reasonable" and "not offend against the intention of any legislative enactment".

However, trade usage may create an implied term (Sabi v. Jetspeed (1977)).

By Statute

Certain statutes provide that, in the absence of specific agreement, terms will automatically be implied into contracts dealing with the subject matter of the statute. The principal ones (see later in the course) are the Sale of Goods Act 1979, the

Supply of Goods (Implied Terms) Act 1973 and the Supply of Goods and Services

Act 1982

By a Course of Previous Dealing

It may be clear (or a matter of dispute!) whether a term can be implied from the same parties having agreed on a previous occasion.

Representations

These are statements of fact made by one or more parties to the agreement. Statements of law or of opinion are not, strictly speaking, "representations".

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Conditions

"Conditions" are terms of the agreement which are of primary importance.

Fundamental terms will, invariably, be conditions – although not all conditions are necessarily fundamental. It can be, and often is, stated in a written contract that certain terms are "conditions". Indeed, in most leases of property, it is stated that all terms are "conditions".

The reason for so stating is that the remedies available in the event of a breach of a condition are more extensive than for breach of a less important term. This will be covered in more detail later in the course.

If the contract does not specifically state which terms are conditions, that is then a question of fact for the court to determine

The breach of a condition, usually, allows the injured party to rescind the contract (rescission), as well as to seek damages for loss he/she has suffered as a result of the breach. Rescission is, in effect, declaring the contract cancelled, and refusing either to carry on with its performance or to be bound by its stipulations.

Warranties

A warranty is a less important term of the contract, the breach of which, normally, allows the injured party to seek only damages. However, in the case of breach of either a condition or a warranty, the "equitable" remedies of "specific performance" or "injunction" (i.e. a court order decreeing "do this" or "do not do that", respectively) may also be available to the party not in breach. These will be dealt with in a later study unit, when we discuss remedies for breach of contract.

Once again, if the parties do not state whether a term is a condition or a warranty, the court's job is to decide for them. In Bettini v. Gye (1876), B contracted with G (who was a director of an opera company) for B's exclusive services as a singer. One of the terms was that B should be available for rehearsals for at least six days before the beginning of the opera season. B turned up in London only two days beforehand and, therefore, G rescinded the contract.

HELD: That, in view of the length of the engagement, and all other circumstances, it could not reasonably be inferred that it was the intention of the parties that six days for rehearsals was a vital ingredient of the agreement. It was, therefore, only a warranty, and G was not entitled to rescind the contract.

Finally, a word of warning: the terms "condition" and "warranty" are not universally applied. For instance, in insurance contracts, the word "warranty" has, from time immemorial, been applied to essential terms. Breach of an insurance warranty usually gives the insurance company grounds for rescission. The House of Lords has railed against this anomaly – but to no avail. It is too entrenched for even such an august body to change!

D. CONSIDERATION

We have seen that "consideration" is an essential element of a valid contract in English law. In certain other jurisdictions, this is not the case; however, historically, the common law of England has always viewed a contract as a bargain. Both sides must give something. The only exception to this rule is in the case of contracts under seal – "specialty" contracts. These do not require to be supported by consideration in order that they may be enforced by the courts.

A number of rules have grown up in the doctrine of consideration and, in practice, in commercial contracts consideration is invariably present. The subject is a favourite

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examination one. There have been repeated proposals for abolishing consideration as a requirement in all – or at least, in written – contracts.

Definitions

There are various types of consideration – "good", "valuable", "nominal", and "bad". In order to be valid, consideration must be both "good" and "valuable". Valuable consideration is where some benefit is given or some detriment suffered. It is only consideration which is valuable in the eyes of the law which is sufficient to support a valid contract – although it must also be good, in the sense that it is not forbidden, or "bad".

A definition given in Currie v. Misa (1875) was as follows.

"A valuable consideration, in the sense of the law, may consist either 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."

A shorter – but less precise – definition given by Sir Frederick Pollock, which has been approved by the House of Lords, is:

"The price for which the promise is bought".

So, the essential feature is that there must be either some benefit accruing to the "promisor" (that is, the person who makes a promise) or some detriment accruing to the "promisee" (the person who receives a promise). Usually, the benefit and the detriment are the same thing, looked at from the different viewpoints of the parties. If I buy a book from you for £1, then £1 is a benefit to you and a detriment to me. On the other hand, the book is a detriment to you (because you no longer have it) and a benefit to me.

Adequacy of Consideration

Although consideration must be of some quantifiable value, it does not have to be adequate. The law does not set out to make the bargain for the parties. So, as long as there is some value, the law is satisfied. It is not uncommon for, say, a property worth millions to be conveyed for a consideration of £1. It is, in reality, of course, a gift – but the £1 satisfies the requirements of the law.

Chappell & Co. Ltd v. Nestlé Co. Ltd (1960)

Nestlé manufactured chocolate. As a promotional gimmick, the company offered to sell a gramophone record to anyone who applied, for the sum of 1s 6d (7½p) plus three of the wrappers from its bars of chocolate. The wrappers themselves were of insignificant value and, on receipt, they were, in fact, thrown away by Nestlé.

HELD: The wrappers formed part of the consideration for the sale of the records.

Where the consideration, although of some value, is insignificant in relation to the transaction, it is called "nominal consideration".

Pitt v. PHH Asset Management Ltd (1994)

A property known as The Cottage was advertised for sale at £205,000. There were two persons interested in purchasing it, Mr Pitt, the claimant, and a Miss Buckle, and they entered into a "contract race" for the property. Mr Pitt made an offer of £200,000, subject to contract, which was refused upon receipt of an improved offer of £210,000 from Miss Buckle. The following day Mr Pitt telephoned the handling estate agent and advised him that he would seek an injunction to prevent the sale to Miss Buckle and that he was able to exchange contracts as soon as the agent wanted.

The agent referred the matter to his principal, the defendant company, who owned the property, and thereafter told Mr Pitt that the sale to him at £200,000 could proceed, subject to contract, and that no other offer would be considered provided contracts were exchanged

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within 14 days. Despite this "lock-out" agreement, the property was sold to Miss Buckle thereafter at £210,000.

HELD: The claimant, Mr Pitt, was entitled to damages for breach of the "lock-out" agreement, even though the sale was subject to contract. The agreement was a contract not to negotiate with anyone except Mr Pitt for 14 days, the consideration being the withdrawal of his threat to seek an injunction and the commitment by Mr Pitt to an exchange of contracts within 14 days to bind the sale.

Reality of Consideration

Although consideration need not be adequate, it must be real. It must be capable of being quantified, and having its value estimated by the law.

Two examples of consideration which is not real – and, therefore, not good – are:

(a)"In consideration of natural love and affection" (Bret v. J S (1600));

(b)A promise by a son that, if his father would release him from a debt, the son would cease to bore his father with his complaints (White v. Bluett (1853)).

Consideration that is impossible to give or perform is also not good; likewise, consideration that is discretionary. If the promisee can perform his side of the bargain "if he likes", or "unless he changes his mind ", consideration is not good.

On the other hand, an undertaking by a manufacturer to sell his entire output to one buyer was held to be binding, notwithstanding the fact that the manufacturer did not bind himself to have any output (Donnell v. Bennett (1883)).

The distinctions can be fine. It is, really, a question of whether the court can find some quantifiable value in terms of money, benefit or detriment in the transaction to justify the desire to give effect to the intentions of the parties, and uphold the contract. Consideration is much easier to imply in commercial contracts than in domestic ones.

However, one type of consideration does not have any value in the eyes of the law, and that is if it is illegal. In point of fact, a contract that is illegal is void. However, whether this is because the consideration is bad or because the enforcement of illegal contracts is "contrary to public policy" is an arguable point.

Past Consideration

As we have seen, consideration must support the promise. Therefore, if the consideration is given before any promise has been made, it cannot be said to support it. This is called "past" consideration, and it is not valid.

For example, if without telling her, a man mows the grass of an elderly bedridden widow, he cannot afterwards go along and demand payment. The act of mowing the grass was not done in return for a promise of payment; therefore, it cannot be consideration for it. On the other hand, if, in the past, the widow had always paid for her grass to be mown, it is probable that a court would find that the "course of dealing" had established an implied promise to pay. In this case, consideration would be found to be present.

The buyer of an article cannot sue on a guarantee given by the seller after the contract of sale has been made. The consideration for the promise of guarantee is past.

In Roscorla v. Thomas (1842) it was held that the seller's guarantee that the horse sold to the buyer was "sound and free from vice" could not be enforced against him since it had been given after the sale had been concluded. In other words, the guarantee did not form part of the consideration for the sale of the horse.

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A similar principle applies where a person agrees to perform some service for another and after the work has been completed the second person agrees to pay for the service. The courts would have little hesitation in saying that since the service had been performed before there had been any mention of payment the consideration was past and the promise unenforceable.

On the other hand, an act performed before the giving of a promise can be consideration, if the act was done at the request of the promisor. The request implies a promise of benefit to follow. In Lampleigh v. Braithwait (1615), Braithwait was languishing in gaol. He requested Lampleigh to try to obtain for him a pardon from the King. In his efforts to achieve this, Lampleigh incurred expense. Braithwait subsequently promised to pay £100 for his trouble. He then refused to pay.

HELD: Although the consideration for the promise to pay was past, nevertheless it was good. A promise of payment could be implied from the request for services.

The determination of whether the consideration is past is a question of fact for the court. It does not slavishly have to follow the strict chronological events. Provided the making of the promise and the consideration for it are substantially one transaction, this will suffice. Nor is the wording of the promise decisive. A promise "in consideration of your having today advanced £750" was binding on proof that the advance had, in reality, been made at the time of the promise (Goldshade v. Swan (1847)).

Consideration Must "Move" from the Promisee

This rule means that a person can enforce a promise only if she can show that she herself gave the consideration for it. However, the consideration in the sense that it is a detriment to the promisee does not have to benefit the promisor. The detriment by itself is sufficient. (Do not confuse this with the doctrine of privity, which we shall meet later.)

Tweddle v. Atkinson (1861)

Two young people got married. Afterwards, their respective fathers entered into an agreement whereby they both would pay a sum of money to the husband, who should have the right to sue for the sums. Both fathers subsequently died. The husband then sued the executors of one of them for the sum due.

HELD: No consideration had moved from the husband – so, the promise to pay was, as far as he was concerned, gratuitous.

Conversely, if the consideration is a benefit to the promisor, this does not mean that the promisee need necessarily suffer a detriment. However, because of the rule that it must move from the promisee, if the benefit to the promisor was, in fact, provided by some third party, then the promisee cannot sue upon it.

Forbearance to Sue as Consideration

A promise to refrain from suing either a debtor or a third person may be sufficient consideration to support a promise of some act or thing by the debtor or the third person, as the case may be. This need not involve a waiver or a compromise of the ultimate right of action against them. A temporary forbearance may suffice.

Alliance Bank v. Broom (1864)

Broom was asked to give security for money advanced to him by the bank. He promised to assign some documents of title to goods but failed to do so. The bank sued for specific performance – i.e. an order compelling Broom to assign the securities.

HELD: The bank was entitled to the order. Although it had not promised that it would not sue for the debt, the act of requesting security did, in effect, give Broom the benefit of some

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measure of forbearance, which he would not otherwise have had. This forbearance, albeit unquantifiable in time, was sufficient consideration for the promise to assign the documents.

However, for forbearance to sue to be consideration, some liability must exist – or, at least, be thought to exist. If the party forbearing to sue knows that his claim is, in fact, invalid, his forbearance to attempt what it is impossible to achieve is not valid consideration (Callisher v. Bischoffsheim (1870)).

Furthermore, the forbearance to sue must be connected with the debtor's promise for it to constitute good consideration. If the creditor refrains from taking legal action in respect of a debt which is already in existence – an antecedent debt – this is not sufficient to support a further promise.

Wigan v. English & Scottish Law Life Assurance Society (1909)

A debtor mortgaged an insurance policy to his creditor to secure a debt. However, he left the executed document with his solicitors. The solicitors managed to get extra time for payment without disclosing to the creditor the existence of the mortgage. Only after the debtor's death did the creditor hear about it.

HELD: The creditor had not given consideration for the interest he acquired (by virtue of the mortgage) in the insurance policy. Thus, he could not reimburse himself out of the proceeds of the policy.

The reasoning for the decision was that, as the existence of the security was unknown to the creditor, it could not be claimed that his forbearance to sue was given in response to the promise of executing the mortgage.

Forbearance to sue can, thus, be good consideration. However, it will not be so if the forbearance itself is forbidden by law, either as being contrary to public policy or to statute. For example, under the Matrimonial Causes Act 1973, a wife cannot bind herself by contract not to apply to the court for maintenance in matrimonial proceedings (that would be ousting the jurisdiction of the court). So, any promise to forbear could not be enforced.

Performance of Existing Duties as Consideration

In certain circumstances only, the performance of an existing duty can be good consideration to support a further promise. In general, if a person has a legal obligation to do a certain thing, the doing of that very thing can neither be a detriment to him/her nor a benefit to a promisor. On the other hand, in reality, the doing of the act by the promisee may be of greater benefit to a promisor than his/her legal remedy for the breach of that act. Hence, the law draws distinctions between the doing of a "public duty", an existing private duty owed to the promisor, and one owed to a third party.

(a)Performance of a Public Duty

If the promisee merely does what he/she is bound to do by law, this cannot constitute valuable consideration.

Collins v. Godefroy (1831)

Collins was subpoenaed to appear as a witness at a trial on behalf of Godefroy. Godefroy promised to pay him "for his trouble".

HELD: There was no consideration. Collins was under a public duty to attend and give evidence.

However, if the promisee does more than he is legally obliged to do, this can be adequate consideration to support a promise.

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carriers subsequently purported to impose higher charges than previously agreed. Because the company was unable to find an alternative carrier and was heavily dependent on the contract, it reluctantly agreed to the new terms but later refused to pay.

HELD: The facts constituted economic duress (see later) but the courts also refused to enforce the new agreement for the higher charges as it lacked any fresh consideration from the purchasers, Atlas. The carriers' claim for additional payment was therefore dismissed.

(c)Performance of a Contractual Duty Owed to a Third Party

As we have seen, the performance of a public duty or a contractual duty owed to the promisor is good consideration only if something extra, over and above the strict duty, is done.

In the case of a duty owed to a third party, the performance of that duty as it stands is, usually, good consideration to support a promise. The reason is that, as the duty is not owed to the promisor or to the state, the promisor can benefit by the due performance of the duty – but he/she has no rights to enforce that duty.

Shadwell v. Shadwell (1860)

A barrister was engaged to be married. His uncle promised an annuity of £150 during his life, or until his income as a barrister reached £600 a year. The nephew duly got married – but his income never reached £600 pa. The annuity fell into arrears.

HELD: That the marriage was a benefit to the uncle, as being "an object of interest to a near relative". Hence, the performance of the contractual promise to marry a third party was good consideration for the promise to pay an annuity.

Discharge or Variation of Existing Duties

The problem here is whether an agreement to accept some different performance of the contract from that originally agreed, or a full release from the contract, constitutes consideration.

If the discharge or variation involves a mutual alteration of rights or obligations, there is no difficulty. The consideration is the giving-up of rights by one party in exchange for the relinquishment of other rights by the second party.

However, if one of the parties has fully performed his obligations, there is, on the face of it, no consideration for his agreeing to release the other party from his outstanding obligations. Where the contract is varied, there are three likely situations – as follows.

The parties may agree to terminate their contract and enter into a fresh one, imposing different rights and duties. As we have seen from Hartley v. Ponsonby (1857), above, this course provides good consideration.

The parties may vary their contract in such a manner that the variation may affect the rights or obligations of either of them, according to how things turn out in practice. In this case, the possible benefit or detriment is the respective consideration for the promises of each of them.

The agreement to vary the contract may confer benefit on one party only. Here, the strict rule must apply, and no consideration be deemed to be present.

There is, however, a possible let-out to this strict application, which has been developed by equity. The principle here is this: if one party has led the other to believe that she will not enforce her strict rights, and the other party has incurred expense or loss in reliance on that promise, then it would be inequitable to permit the first to go back on her promise.

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Hughes v. Metropolitan Railway (1877)

A landlord gave notice requiring his tenant to do repairs within six months. During this period, he negotiated with the tenant for the purchase by the tenant of the lease. The negotiations broke down, whereupon the landlord sought to forfeit the lease, because the repairs had not been done.

HELD: He could not do this, as the tenant had relied on the negotiations and, so, neglected to safeguard his legal position by executing the repairs. The landlord was bound to give a further six months' notice to repair before forfeiting the lease.

Breaking this case down, the variation of the contract was the implied promise by the landlord not to enforce his strict contractual rights to insist on repairs. This benefited one party only – the tenant. There was, therefore, no consideration for the promise. However, the tenant, having relied upon it, did not start doing the necessary repairs until it was too late. The equitable principle of "fair dealing" overrode the strict legal requirement for consideration. Therefore, the landlord was not permitted to break his promise by relying on the technical legal requirement.

The landlord was not permanently prevented from insisting on his rights; he merely had to give the necessary notice again after the equitable disability had disappeared.

Part-payment of a Debt

If a creditor promises to accept part-payment of a debt in settlement of the whole, there is no consideration for the promise. He is, therefore, not bound by it, and can sue for the balance.

This was established as early as 1602, in Pinnel's Case, where it was held that "payment of a lesser sum on the day in satisfaction of a greater sum cannot be any satisfaction for the whole".

The rule in Pinnel's Case was approved by the House of Lords in Foakes v. Beer (1884). Mrs Beer got judgment for a debt from Dr Foakes of about £2,000. Some months later, Dr Foakes asked for time to pay, and Mrs Beer agreed in writing not to enforce the judgment, provided Dr Foakes paid by certain instalments. This, he duly did. After the £2,000 had been repaid, Mrs Beer claimed interest on the judgment debt.

HELD: She was entitled to it. The rule in Pinnel's Case ensured that payment of the lesser sum (i.e. without the interest which a judgment debt always allows) was not a discharge of the whole.

There was no consideration for her promise to accept payment by instalments – so, she was not bound by the fact that the promise did not include the interest.

The apparent harshness of this rule, which can not only cause hardship but also produce absurd results, has been much criticised. In 1881, the then Master of the Rolls had the following to say about the rule in Pinnel's Case.

"According to English Common Law, a creditor might accept anything in satisfaction of his debt except a less amount of money. He might take a horse, or a canary, or a tomtit if he chose, and that was accord and satisfaction; but by a most extraordinary peculiarity of the English Common Law, he could not take 19s 6d [97½p] in the pound."

However, there are various ways around the rule. In the first place, if payment of a lesser sum in discharge of the whole is made at a different time, or in a different manner from that agreed in the original contract, then consideration is present. Say, payment in full was due on 1 March but the parties agree to vary the contract by making payment of a lesser sum one week earlier – all is well. The promisee has suffered a detriment by having to pay early; the promisor gains a benefit by getting his/her money, albeit a smaller amount, sooner than expected. Likewise, if payment is made by cheque instead of in cash.

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