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Justin Santiago, BAppSc (Hons), MBA, LLB (Hons) comes from a journalism, market research, intellectual property and strategic communications consulting background. Now based in Melbourne he spends his time advising businesses on how to communicate to their customers as well as writing on various subjects of interest in this blog.

Friday, April 3, 2009

Consideration and Promissory Estoppel

"To what extent, if at all, do the principles of consideration and promissory estoppel give the courts the power to enforce, or set aside, promises in the interests of fairness and justice?" - Justin Santiago

The requirement of consideration to support a promise has been debated. This is especially true when parties modify their obligations in the light of changed circumstances. In such cases the courts have invoked the equitable doctrine of promissory estoppel to enforce a promise not supported by consideration. This discussion will focus on whether the use of promissory estoppel is justified in the light of the importance of having a promise supported by consideration.

Consideration as a requirement for a valid contract stems from the idea of reciprocity as expressed by Lush, J in Currie v Missa that each party accrues a right, interest, profit or benefit in return for some forbearance, detriment, loss or responsibility given, suffered or undertaken.

As an example if I were to pay you fifty pounds to you for mowing my front lawn, I would suffer a loss of fifty pounds but gain the benefit of neatly trimmed front lawn. You would on the other hand suffer the loss of a free afternoon of leisure but gain the benefit of having an extra fifty pounds.

The concept of reciprocity works well in contracts without any modifications in the obligations by either party in light of changed circumstances. However this is not the case where obligations have been modified halfway through the contract. Courts were initially very strict with the consideration requirement as in the case of Stilk v Myrick where the sailors failed in their bid to enforce the promise of extra money for doing additional work due to the desertion of some of the crew as it was decided the performance of an existing contractual obligation did not constitute valid consideration. Similiarly in a long line of cases such as Pinnel’s Case and Foakes v Beer, the courts have never recognised part payments of debts as being valid consideration as the payment of a smaller sum that is owed does not constitute valid consideration as there is no added benefit to the creditor.

It is as if in the mowing the front lawn example you suddenly demanded to have an extra 10 pounds in the middle of the job because it started raining and it made the work more difficult and the fact that you get a good soak in the process. The argument for this case would be that you have undertaken the job and have factored in any additional risks that might occur in the process of completing the job and as such are not entitled to any additional benefit since I do not gain any additional benefit.

Courts in later cases have tried to resolve the issue of unfairness by cases by relaxing the consideration requirement in the name of fairness and justice. In Williams v Roffey Brothers the parties to a continuing contract wished to modify their obligations in the light of changed circumstances. The courts allowed the promisee to enforce the promise even though they were performing existing contractual obligations as the promisor had obviated a disbenefit by not having to switch contractors midway through the project.

I would however argue that the decision in this particular case would have the effect of rewarding the promisee for their ineptness and forcing the promisor into a corner otherwise he would not be able to get the work done.

This decision gave birth to the doctrine of promissory estoppel in the case of Central London Property Ltd v High Trees House. In this case a person will not be allowed to go back on his promise even through the promise was not supported by consideration where the promise was unambiguous, the promise was intending to be relied on and it has been relied on. In this case the additional requirements are would act as mechanisms to protect both parties.

Following the mowing the lawn example, if I had agreed to your request for an additional 10 pounds and you went ahead and bought a hat and boots to make your job easier then the courts may invoke the doctrine of promissory estoppel in the name of fairness.

It appears that courts will still rely on consideration for evidential purposes to determine the validity of a contract. In that sense the doctrine of promissory estoppel requires some element of evidence in order to make a decision in the interest of fairness and justice.

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