Download Pao On v Lau Yi Long

LAW OF CONTRACT
LPAB – Summer 2016/2017
Week 3
Alex Kuklik
Consideration
Aims and Objectives
• At the end of this lecture students should understand the concepts and
rules relating to the doctrine of consideration.
Consideration
• Consideration
– Radan & Gooley, Chapter 6
– Australian Woollen Mills v The Commonwealth (1954) 92 CLR
424 (R&G(C) [6.2])
– Coulls v Bagot's Executor and Trustee Co (1967) 119 CLR 460
(R&G(C) [6.3])
– *Pao On v Lau Yi Long [1980] AC 614 (R&G(C) [6.4])
– Williams v Roffey Bros and Nicholls (Contractors) [1991] 1 QB 1
(R&G(C) [6.5])
– Foakes v Beer (1884) 9 App Cas 605 (R&G(C) [6.6])
Consideration
• The element of consideration refers to the requirement that a contract
is a bargain in the sense that there is an exchange between the
parties of promises or an exchange of a promise for an act for the
agreement to amount to a contract at law.
• The requirement of consideration is reflected in the major rule that
unless a promisee has given consideration he or she cannot enforce
the promisor’s promise. In such a case the promisee would be held
not to have given consideration.
• The use of a deed allows for the enforcement at common law (but not
in equity) of a promise for which no consideration has been given.
Consideration
• For consideration to exist, the promisee must promise or do something
that is of value in the eyes of the law. If there is no consideration, there is
no contract, only the promise of a gift.
• If A promises to sell a book to B and B promises to pay $10, the
consideration for each promise is the other party’s promise. A and B are
simultaneously promisor and promisee. Contract is formed by the
exchange of promises, even though neither party has performed his/her
promise. This is a bilateral contract. In this case the consideration is
executory.
• If the agreement is an exchange of a promise for an act (e.g. A promises
to pay B $10 if B finds A’s dog) The contract comes into existence when
B finds the dog. A’s promise is only enforceable when B finds the dog.
This is a unilateral contract. B’s consideration is executed.
Consideration
• Consideration must:
– Must bargained for
– Must move from the promisee (or one of them)
– Must not be past consideration
– Can be provided by way of forbearance to sue (giving up a legal
claim in return for promise)
– Must be sufficient (discernible value in the eyes of the law)
Consideration
Consideration must be bargained for
Australian Woollen Mills v The Commonwealth (1954) 92 CLR 424
(R&G(C) [6.2])
• Govt implemented wool subsidy scheme. AWM bought a lot of wool for
the production of garments. Govt refused to pay the subsidy on all of
the wool.
• Was AMW’s purchase (act not promise) consideration for the Govt’s
promise to pay the subsidy (thereby making the promise binding)?
• No. Subsidy scheme is a conditional promise which could not be
legally enforced.
Consideration
Consideration must be bargained for
Australian Woollen Mills v The Commonwealth (1954) 92 CLR 424 (R&G(C)
[6.2])
• This is a case where consideration on the part of the offeree is
completely executed by doing that which constitutes acceptance. (Carlill)
• In such cases the statement relied upon must be really offered as
consideration for the doing of the act and the act must really be done in
consideration of the (potential) promise contained in the statement.
• Was there a quid pro quo?
• Not consideration if offeree was going to do it anyway (see example,
p100)
Consideration
Consideration must be bargained for
Australian Woollen Mills v The Commonwealth (1954) 92 CLR 424
(R&G(C) [6.2])
• Has there been a request from the promisor that the promisee do the
act upon which the promisor relies?
• Here, NO. Nothing indicated that the subsidy was put forward to
induce the manufacturer to purchase wool, or that they were related.
• Cf: Carlill v Carbolic Smokeball
Consideration
Consideration must move from the promisee
• If A and B enter into a contract in which B (the promisor) agrees to mow
A's lawn and in return A (the promisee) agrees to pay $100 to C, A's
promise to pay is consideration that has moved from A, not to B, but to C
who is a third party to the promise.
• As a unanimous High Court recently affirmed, “[c]onsideration must move
from the promisee ([B]);it need not move to the promisor [A]”
– *Pico Holdings Inc v Wave Vistas Pty Ltd (2005) 214 ALR 392 at 407.
• C, who has not provided any consideration, cannot, on that ground alone,
enforce the promise that A made to B - only B can do that because he or
she has provided consideration for A's promise.
• What about of the promisees are joint?..
Consideration
Consideration must move from the promisee
Coulls v Bagot's Executor and Trustee Co (1967) 119 CLR 460 (R&G(C)
[6.3])
• Mr Coulls entered into agreement with O’Neill allowing O’Neill to
quarry stone from Coulls’s land. Royalties to go to Mr and Mrs Coulls
as joint tenants.
• Mr Coulls died. Agreement was vague as to whether it was between
Mr Coulls and O’Neill or both of the Coullses and O’Neill.
• Mrs Coulls wanted to enforce the agreement (and claim the right of
survivorship). Estate of Mr Coulls said that she had not provided
consideration.
Consideration
Consideration must move from the promisee
Coulls v Bagot's Executor and Trustee Co (1967) 119 CLR 460 (R&G(C)
[6.3])
• Majority said that agreement was between Mr Coulls and O’Neill only and
therefore Mrs Coulls could not enforce it.
• Minority said that agreement was between both of them jointly and O’Neill.
She could enforce it even though she had not provided consideration.
Because if one of a number of joint promisees provides consideration, any
other joint promisee can enforce the agreement, even if he/she has not
provided consideration.
• All joint promisees must sue (but one can join another if he/she refuses). If
one has died, the estate must be a party (if it refuses to be a plaintiff, it can
be joined as a defendant), even though (here) the survivor is the only one
to receive judgment.
Consideration
Past consideration is not consideration
• So-called “past consideration” is not consideration.
• What is meant by past consideration is a situation where something is
done before any promise to pay for it is made.
• “An act already done without reference to a promise does not satisfy the
concept of an exchange which underpins the law of consideration.” Thus, if
B gives A a dog and A later promises to pay $50 to B for the dog, B cannot
sue for the $50 because his or her act of giving the dog is past
consideration.
– *Attorney-General for England and Wales v R
But there are exceptions…
Consideration
Past consideration is not consideration
*Pao On v Lau Yi Long [1980] AC 614 (R&G(C) [6.4])
• P agreed with Fu Chip to sell their shares in Shing On in exchange for an
allotment of 4.2 m shares in Fu Chip at $2.50 each. Laus (the majority
holder of Fu Chip) also agreed not to sell 2.5 m of these before 30/4/1974
• In subsidiary agreement, Laus also agreed to buy back 2.5 m shares from
P by 30/4/1974 at $2.50 a share.
• P refused to proceed with transaction unless subsidiary agreement was
replaced. Laus agreed to this: guaranteed to pay $2.50 for the 2.5 m
shares.
• The price of Fu Chip dropped. P wanted to enforce the guaranteed price.
Consideration
Past consideration is not consideration
(R&G [6.31] – [6.34])
*Pao On v Lau Yi Long [1980] AC 614 (R&G(C) [6.4])
Pao On
Agree not to sell
2.5M Fu Chip shares
until Apr 1974.
Sale of Sing On shares
Fu Chip ------- Lau (shareholder)
Allotment of 4.2M Fu Chip shares at $2.50 each
– Subsidiary agreement (No. 2):
– Pao
Sell back 2.5M Fu Chip shares by 30 April 1974, and complete main agreement
Lau
Guarantee to pay minimum of $2.50 per share (is there sufficient consideration,
in May 1973?)
Consideration
Past consideration is not consideration
*Pao On v Lau Yi Long [1980] AC 614 (R&G(C) [6.4])
• Not past consideration because performance of the main agreement still
remained in the future.
• Where there has been performance of an act followed by a promise to pay
for performance, the promise to pay will be supported by consideration if:
– The earlier act was done at the promisor’s request;
– The parties understand at the time when the act was done that it would
attract some payment or remuneration; and
– Payment or remuneration would have been enforceable had it been
made before the performance of the act
Consideration
Past consideration is not consideration
*Pao On v Lau Yi Long [1980] AC 614 (R&G(C) [6.4])
• Here:
– The promise to Fu Chip not to sell the shares for a year under the
original agreement was made at Laus’ request.
– The parties understood at the time of the main agreement that the
restriction on selling must be compensated for by a benefit of the
guarantee of a floor price.
– Such a guarantee would’ve been legally enforceable.
Consideration
Past consideration is not consideration
*Pao On v Lau Yi Long [1980] AC 614 (R&G(C) [6.4])
• Had P provided consideration for the guarantee?
• Was the guarantee obtained under duress exerted by Pao?
• Privy Council: No and No.
Consideration
Existing duty
• Traditionally, promising to perform an existing contractual duty
already owed is not good consideration for an additional benefit.
Consideration
Existing duty
Williams v Roffey Bros and Nicholls (Contractors) [1991] 1 QB 1
(R&G(C) [6.5])
• Roffey entered into building contract and sub-contracted carpentry
with Williams. Williams had difficulty and said he could not complete.
Roffey offered more to Williams to complete on time. He accepted
and did more work, but did not complete it. Other carpenters finished
his work.
• Roffey refused to pay for the work done after the variation, saying that
Williams had not offered to do anything in addition to that which he
promised to do in the first place, therefore the additional promise was
not supported by consideration from Williams.
Consideration
Existing duty
Williams v Roffey Bros and Nicholls (Contractors) [1991] 1 QB 1 (R&G(C)
[6.5])
• Was the incomplete performance of the work by Williams substantial
performance of his obligation?
• Did Williams provide consideration for Roffey’s promise to pay the
additional amount?
• Yes and Yes. See p 108.
Consideration
Existing duty
Williams v Roffey Bros and Nicholls (Contractors) [1991] 1 QB 1 (R&G(C)
[6.5])
– If B has reason to doubt that A will complete his agreement and offers
to pay more for in return for A’s promise to perform his original
obligation on time, and
– As a result of giving his promise B gains a benefit or avoids a
disbenefit; and
– B’s promise is not given under economic duress or fraud by A,
– B’s promise will be enforced
Consideration
Existing duty
Williams v Roffey Bros and Nicholls (Contractors) [1991] 1 QB 1 (R&G(C)
[6.5])
• This decision has been criticised – see p109 – South Caribbean Trading
Ltd v Trafigura Beherr BV [2005] 1 Lloyds Rep 128, 149 – 150.
“But for the fact that Williams v. Roffey Bros Ltd, supra, was a decision of the Court of Appeal, I
would not have followed it. That decision is inconsistent with the long-standing rule that
consideration, being the price of the promise sued upon, must move from the promisee. The
judgment of Glidewell LJ. was substantially based on Pao On v. Lau Yin Long [1980] AC 614 in
which the Judicial Committee of the Privy Council had held a promise by A to B to perform a
contractual obligation owed by A to X could be sufficient consideration as against B. At page 15
Glidewell LJ. regarded Lord Scarman's reasoning in relation to such tripartite relationship as
applicable in principle to a bipartite relationship. But in the former case by the additional promise
to B, consideration has moved from A because he has made himself liable to an additional party,
whereas in the latter case he has not undertaken anything that he was not already obliged to do
for the benefit of the same party. Glidewell LJ substituted for the established rule as to
consideration moving from the promisee a completely different principle - that the promisor must
by his promise have conferred a benefit on the other party.”
Consideration
Rule in Pinnel’s Case
• The rule in Pinnel's Case (1602) 77 ER237 states that part payment of a
debt is not sufficient consideration for a promise to discharge the whole
debt.
• In Pinnel's Case, Pinnel brought an action of debt on a bond of £16 as
against Cole for payment of £ 8, 10s due on 11 November 1600. Cole
pleaded that, at the insistence of Pinnel, he had paid him £5, 2s 2d on1
October 1600 and that Pinnel had accepted this in full satisfaction of the
£8, 10s . The court held that payment of a lesser sum in satisfaction of a
greater sum cannot be any satisfaction for the whole:
“Where the condition is for payment of 20 pounds, the obligor cannot at
the time appointed pay a lesser sum in satisfaction of the whole, because
it is apparent that a lesser sum of money cannot be a satisfaction of a
greater.”
Consideration
Rule in Pinnel’s Case
• If a debtor owes a creditor $100, and the creditor promises to accept $70
in full satisfaction of the debt, the creditor's promise is not enforceable
because the debtor has not provided any consideration for the creditor's
promise to forgo the balance of $30. The consequence is that the creditor
can sue the debtor to recover the balance.
• This has been described as “a most extraordinary peculiarity of the
English Common Law.”
• Why?
Consideration
Rule in Pinnel’s Case
“On the one hand, creditors see in it an important protection against
spurious advancement of defences of accord and satisfaction;….
….on the other hand, it has been seen as an obstruction to giving
effect to the intentions of the parties to such agreements, and as a
hindrance to good commercial practice.”
• R Austen-Baker, 'A Strange Sort of Survival for Pinnel's Case: Collier v P
& M J Wright (Holdings) Limited‘ (2008) 71 Modern Law Review 611, p
616.
• So….
Consideration
Rule in Pinnel’s Case
Foakes v Beer (1884) 9 App Cas 605 (R&G(C) [6.6])
• Beer obtained judgment against Foakes for £2,090 plus interest on
judgment. A year later Beer agreed that if Foakes paid £500
immediately and £150 twice a year until the judgment debt was paid,
she wouldn’t enforce the debt in court.
• Beer paid the £2,090, but Beer sued for the interest on the judgment.
– Was the agreement enforceable?
– Did Foakes have to pay the additional interest?
Consideration
Rule in Pinnel’s Case
Foakes v Beer (1884) 9 App Cas 605 (R&G(C) [6.6])
• H of L held that Beer was entitled to the interest, because this was a
part of the agreement.
• Both the majority and dissenting minority agreed that if the agreement
did not include the interest then the agreement would not have been
enforceable because Foakes did not provide consideration for Beer’s
promise not to sue.
• But Lord Blackburn criticised the underlying decision of Pinnel.
Consideration
Rule in Pinnel’s Case
Foakes v Beer (1884) 9 App Cas 605 (R&G(C) [6.6])
• Principle: part payment of a debt is not sufficient consideration for a
promise to discharge the whole of the debt.
• Beer’s promise not to enforce the debt was not itself enforceable and she
could sue for the whole amount plus the interest.
• So is it a matter of whether there is a promise to pay more or a promise to
pay less than the original debt?
Consideration
Rule in Pinnel’s Case
Exceptions:
1.Where the agreement to accept a part payment of the debt is set out in a
deed.
2.Where the debtor promises something other than the payment of part of
the debt, provided that what is promised amounts to, at least, nominal
consideration:
–Couldery v Bartrum: “the gift of a horse, hawk or robe etc,in satisfaction is
good for these might be more beneficial to the [creditor] than the money.”
3.Where the debtor promises to pay the lesser sum at a time earlier than
originally promised: Pinnel's Case
Consideration
Rule in Pinnel’s Case
Exceptions:
4.Where the debtor promises to pay the lesser sum at a place different to
that originally promised: Pinnel's Case
5.Where the debtor's promise forms part of a composition arrangement
pursuant to the Bankruptcy Act 1966 (Cth), which allows a debtor to make an
arrangement to pay a lesser sum to creditors, the composition arrangement
has the effect of precluding the creditor going behind it and claiming the
balance of the debt as this would amount to a fraud on the other creditors
6.Where the debtor can satisfy the requirements of the principle of equitable
estoppel - the creditor will be precluded from bringing any action to recover
the balance of the debt
Consideration
Rule in Pinnel’s Case
Exceptions:
7.Where the part payment of the debt is paid by someone else to discharge
the full amount of the debt, the creditor cannot then claim the balance from
the debtor.
Consideration
• Additional principles:
– Consideration must not be illusory (R&G [6.5])
• If there is a discretion to perform the act promised as
consideration, then the consideration is illusory as the
promisor is not obliged to do it.
• However, a discretion whether to perform or not is different to
a discretion as to how to perform.
– Consideration must be sufficient, but it need not be adequate
• There is no need for the consideration to be at value: a
promise to pay $100 for a $1M house is sufficient, but the
natural love and affection of the promisee is not.
Consideration
• Additional principles:
– Consideration must be sufficient, but it need not be adequate
• See (R&G [6.38]) p 106 – 109
• Sufficient means a tangible benefit conferred by promisor on
promisee. Can be token value or ‘nominal’.
• Can be behaviour – Dunton v Dunton
• Cannot be public duty
– Exceptions to consideration
• Deeds (at common law).