• DUHAIME'S CONTRACT LAW: Eight chapters of pure, unadulterated contract law love.

1. Contract Law - The Introduction
2. Privity, Consent and the Reasonable Man
3. Consideration & Deeds
4. Offer & Acceptance
5. Mistake, Rectification & Misrepresentation
6. Restraint of Trade, Assignment, Novation & Frustration
7. Interpretation of Contracts
8. Time Limits, Breach & Remedies

Consideration

One of the other important elements of contract law, which is difficult for the non-lawyer to understand, is the requirement of consideration.

One English case, Currie v. Misa, 10 Ex.D. 153 91875), offered a definition of consideration which is still used:

".. 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."

As such, a contract differs from a gift.

This also explains why you sometimes hear of very expensive objects sold for $1; which is done to ensure that what is essentially a gift, comes with the legal protection of contract law.

Under contract law, there is no contract if there is no consideration.

ConsiderationBut consideration does not necessarily have to be quantified or quantifiable in monetary terms. Any discernible detriment to one of the parties could be that party's consideration.

In one case, Hubbs v. Black, 46 D.L.R. 583 (ONCA, 1918), agreeing not to take a certain plot in a cemetery was considered to be sufficient consideration.

Giving a right to sue on a bona fide claim has been deemed to be adequate consideration.

Also, the courts don't really care about the adequacy of the consideration. This is the business of the parties and not a matter for judicial interference.

Some other notes on consideration:

  • The consideration must be reciprocal, each party offering consideration.
  • Motive is different from consideration. Your motive for contracting is your personal reason for contracting. It may not coincide with the consideration you are giving, or receiving, as part of the contract.
  • If a consideration is already "spent" in a prior contract, a new contract using that same consideration would be valid. In the words of one law professor (The Law of Contract in Canada, G. Fridman): "where a contractual duty already exists, it may be possible...to vary the original agreement without necessarily establishing a whole new contract with fresh consideration on both sides." In fact, refreshing a commitment to do something for a third party is consideration under common law.
  • The consideration cannot be something or some act which is illegal, immoral or contrary to public policy (see also the section on Restraint of Trade contracts ). If a certain act is punishable by some law, then it is "illegal". An example would be a work contract to an unlicensed electrician.

Eastwood v. Kenyon, 11 Ad. & E.

Past consideration is not enough to create a valid contract.

Lampleigh v. Brathwait, Hob. 195 (1615)

In this case, the past services (consideration) were done at the request of the subsequent promisor and it was implicit that there would be payment. There was a valid contract.
Thomas v. Thomas, [1842] 2 Q.B. 851; also at 114 E.R. 330

motive is different

The court reviewed a verbal promise made by a dying man, which ran contrary to his will. The executors gave effect to those wishes by putting the spouse of the deceased (the plaintiff) in possession of the home. But was there a valid consideration to make the promise enforceable?

No, said the court:

"A pious respect for the wishes of the testator does not in any way move from the plaintiff. Motive is not the same thing with consideration. Consideration means something which is of some value in the eye of the law, moving from the plaintiff."

Stott v. Merit Investment Corp., 48 DLR (4th) 288 (1988)

forbearance as consideration

$1 coinThis case involved a stock broker that made a professional error and then signed a document promising to pay his employer back for the damages sustained because of that mistake.

The Ontario Court of Appeal upheld the agreement finding that there was an implied agreement on the part of the employer to forbear (i.e. not to sue the stock broker) for as long as he made regular payments towards paying back the loss sustained.

This case reviewed how forbearance can be valid consideration of a contract: the claim must actually exist and constitute a real claim of action, being neither nor frivolous or vexatious; a serious claim, honestly made. actually exist and constitute a real claim of action, being neither nor frivolous or vexatious; a serious claim, honestly made. "But even if the claim is doubtful, forbearance to enforce it can be good consideration. And he same rule applies even if the claim is clearly invalid in law so long as it was in good faith and reasonably believed to be valid by the party forbearing."

Pao On v. Lau Yiu Long, [1980] AC 614

old for new ... not!

An act done before the giving of a promise to make a payment or to confer some other benefit can sometimes be consideration: (1) The act must have been done at the promisor's request; (2) the parties must have understood that the act was to be remunerated either by money or some other benefit; and (3) the money or other benefit, must have been legally enforceable had it been promised in advance. This case was also important because it refused to allow arguments of a "dominating bargaining relationship (undue influence or economic duress) where businessmen are negotiating at arm's length.... There was commercial pressure but no coercion." (Note: but see the D. & C. Builders Ltd. v. Rees case below.)
Gilbert Steel Ltd. v. University Const. Ltd., 36 DLR (3d) 496 (ONCA, 1976)

old for new ... not!

In this case, a verbal agreement, midway through a construction project, to pay more for steel than what was originally agreed upon, was ruled unenforceable for want of consideration.

The court rejected the argument that the new agreement on price replaced the original contract (which, following Morris v. Baron & Co. 1918 AC 1, could have stood as valid consideration) as the evidence did not support the contention that the parties intended to rescind the original contract.

"Consideration for the oral agreement is not to be found in a mutual agreement to abandon the earlier written contract and assume the obligations under the new oral one."

Williams v. Roffey Bros. & Nicholls (Contractors) Ltd., [1990] 1 All ER 512

old for new ... ok!

A carpenter stopped doing his work midway through a construction project. The contractors agreed to give him more money if he honoured his contract. This was valid consideration. The case seems to contradict the principle that fulfilling an existing legal duty is not valid consideration with the following 6-prong test:
  1. If Adam has entered into a contract to do work for, or to supply goods or services, to Bob, in return for $100 by Bob and ...
  2. At some stage before Adam has completely performed his obligations under the contract, Bob has reason to doubt whether Adam will, or will be able to, complete his side of the bargain and
  3. Bob thereupon promises Adam an additional $25 payment in return for Adam's promise to perform his contractual obligations on time and
  4. As a result of giving his promise, Bob obtains in practice a benefit, or obviates a disbenefit, and
  5. Bob's promise of the extra $25 is not given as a result of economic duress or fraud on the part of Adam, then
  6. The benefit to Bob is capable of being consideration for Bob's promise, so that the promise will be legally binding.
Foakes v. Beer, 9 AC 605 (1884)

get your cake and eat it too

Beer held a judgment for £2,000 against Foakes and they agreed that he would pay £500 down and "to give him time in which to pay such judgment," the rest in instalments. Meanwhile, Beer agreed she "will not take any proceedings whatever on the said judgment." When the debt was paid in full, Beer sued for interest.

The court had to decide if the agreement was enforceable against the respondent, for which there had to be found valid consideration.

Accord and satisfaction is when one party buys himself out of a contractual obligation and this "satisfaction" becomes valid consideration for the new contract. In this case, "there could be no complete satisfaction so long as any future instalments remained payable."

The court added that "the payment of a lesser sum in satisfaction of a greater cannot be satisfaction for the whole." The court noted that if the agreement had of been under seal, the result would have been different. Note: Many Canadian provinces have adopted legislation to circumvent the Foakes v. Beer precedent. For example, the 1996 version of the relevant British Columbia law stated: "Part performance of an obligation either before or after a breach of it, when expressly accepted by the creditor in satisfaction or rendered in pursuance of an agreement for that purpose, though without any new consideration, shall be held to extinguish the obligation." The Central London case, below, may have extinguished the effect of this case as a precedent.

Central London Property Trust Ltd. v. High Trees House Ltd., [1947] KB 130

no to Foakes

A landlord agreed to significantly reduced rent because of a high vacancy rate, in apparent amendment of a contract under seal.

The judge writing the decision proposed that the Foakes v. Beer doctrine no longer applied in contemporary law and that "a promise to accept a smaller sum in discharge of a larger sum, if acted upon, is binding notwithstanding the absence of consideration."

In this case, the evidence suggested that the reduction was only for the duration of low vacancy:

"When a creditor and debtor enter on a course of negotiation, which leads the debtor to suppose that, on payment of the lesser sum, the creditor will not enforce payment of the balance, and on the faith thereof the debtor pays the lesser sum and the creditor accepts it as satisfaction: then the creditor will not be allowed to enforce payment of the balance when it would be inequitable to do so."

D. & C. Builders Ltd. v. Rees, [1965] All ER 837

equitable accord & satisfaction

Under the common law, a creditor who accepts partial payment as settlement for a debt can still go after the debtor for the balance.

But equity has intervened and disallowed such action under certain conditions (see the Central London Property Trust case above).

"But we must note the qualification. The creditor is barred from his legal rights only when it would be inequitable for him to insist on them. Where there has been a true accord, under which the creditor voluntarily agrees to accept a lesser sum in satisfaction, and the debtor acts on that accord by paying the lesser sum and the creditor accepts it, then it is inequitable for the creditor afterwards to insist on the balance."

The judge went on to find that there was "undue pressure" and "intimidation" in the case so that there was no true accord.

John Burrows Ltd. v. Subsurface Surveys Ltd., [1968] SCR 607

being nice is not estoppel

A debtor was consistently late in his payments even though the contract allowed the creditor to sue for the entire amount if payments were late. When the personal relationship between the two parties soured, the creditor sued. The debtor argued equitable estoppel.

"(Equitable estoppel) can not be invoked unless there is some kind of evidence that one of the parties entered into a course of negotiation which had the effect of leading the other to suppose that the strict rights under the contract would not be enforced. This implies that there must be evidence from which it can be inferred that the first party intended that the legal relations created by the contract would be altered as a result of the negotiations. It is not enough to show that one party has taken advantage of indulgences granted to him by the other."

Combe v. Combe, [1951] 1 All ER 767

promissory estoppel and forbearance

A promised series of maintenance payments were never made. Seven years later, the wife sued for arrears.

The court reiterated the principle of the High Trees case (see above) as follows: where one party has, by his words or conduct, made to the other a promise or assurance which was intended to affect the legal relations between them and to be acted on accordingly, then, once the other party has taken him at his word and acted on it, the one who gave the promise or assurance cannot afterwards be allowed to revert to the previous legal relations as if no such promise or assurance had been made by him. He must accept their legal relations subject to the qualification which he himself has so introduced, even though it is not supported in point of law by any consideration but only by his word. But the principle never stands alone as giving a cause of action in itself, it can never do away with the necessity of consideration.

In this case, the court could not find any consideration for the promise to pay maintenance. While it may be true that the wife did forbear from suing the husband on the arrears for seven years, this forbearance was not at the request of the husband.

Foot v. Rawlings, [1963] SCR 197

new payment, new contract

horse"The giving of a ... series of post-dated cheques constituted good consideration for the agreement by the respondent to forbear from taking action on the promissory notes so long as the appellant continued to deliver the cheques and the same were paid by the bank on presentation."

The court distinguished this case from others which rejected the payment of a lesser amount due as valid consideration for a new contract because cheques were different from money.

"If you substitute for a sum of money a piece of paper, or a stick of sealing-wax, it is different, and the bargain may be carried out in its full integrity.

"A man may give in satisfaction of a debt of $100, a horse of the value of $5, but not $5. If for money you give a negotiable security, you pay in a different way."

Saskatchewan River Bungalows Ltd. v. Maritime Assurance Co., [1994] 2 SCR 490

waiver/estoppel

A cheque lost in the mail caused an insurance policy to be canceled.

The postal rule was excepted because of an express term in the policy that required that payments be made at Maritime's head office. But Maritime represented to the appellants that payments could be made by mail and in fact encouraged this practice. For this reason,

"Maritime was estopped from terminating the policy for nonpayment of the premium until such time as the appellants were notified that payment had not been received and that it was required forthwith. Thereafter, the appellants had a reasonable time within which to effect payment."

Because the appellants took a further three months after being so notified, the court thought that this was not reasonable.

W. J. Alan & Co. v. El Nasr Export & Import Co., [1972] 2 All ER 127

waiver

Although the contract called for payment in Kenyan currency, the vendor accepted a letter of credit in U.K. currency (sterling) and payments in sterling. When the UK currency was devalued, the vendors invoiced for the difference based on the different exchange rates.

"The sellers ... seek to rely on the analogy of a sale of goods contract where the goods are deliverable by instalments and one instalment falls short. The buyer is not obliged ... to treat the contract as repudiated. That is not ... a true analogy. The relevant transaction here is not one by instalments. It is a once-for-all transaction."Lord Denning

Another judge (Lord Denning, pictured) came to the same conclusion adding:

"One who waives his strict rights cannot afterwards insist on them. His strict rights are at any rate suspended so long as the waiver lasts. He may on occasion be able to revert to his strict legal rights for the future by giving reasonable notice in that behalf, or otherwise making it plain by his conduct that he will thereafter insist on them. But there have been cases where no withdrawal is possible. It may be too late to withdraw; or it cannot be done without injustice to the other party. Instances of these principles are ready to hand in contracts for the sale of goods: a seller may, by requesting delivery, lead the seller to believe that he is not insisting on the contractual time for delivery; a seller may, by his conduct, lead the buyer to believe that he will not insist on a confirmed letter of credit but will accept an unconfirmed one instead; a seller may accept a less sum for his goods than the contractual price, thus inducing him to believe that he will not enforce payment on the balance. In none of these cases does the party who acts on the belief suffer any detriment. He has conducted his affairs on the basis that he has that benefit and it would not be equitable now to deprive him of it."

Société Italo-Belge v. Palm and Vegetable Oils (Malaysia), [1982] 1 All ER 19

equitable estoppel

Sellers of palm oil failed for over a month to submit a "declaration of sailing." When they finally did, the buyers did not initially object and replied asking for more documents. The buyers then sent the declaration down the line to their own sub-purchasers. When the sub-purchasers rejected the overdue declaration, the buyers tried to reject it as well. The seller pleaded equitable estoppel. The court allowed the rejection of the declaration and made two statements of principle on equitable estoppel.

The person having made the representation which gives rise to the claim of estoppel "will not be allowed to enforce his rights where it would be inequitable, having regard to the dealings which have thus far taken place between the parties. To establish "in equity," it is not necessary to show detriment."

But this does not mean, according to the court, that in every case in which the recipient of the representation has acted or failed to act, relying on the representation, it will then be inequitable for the person making the representation to enforce his rights. The nature of the action, or inaction, may be insufficient to give rise to the equity. The Court added that it could see anything which would render it inequitable for the buyers thereafter to enforce their legal right to reject the documents.

Petridis v. Shabinsky, 132 DLR (3d) 430 (1982)

estoppel/waiver

A landlord allowed continued occupancy after the lease expired while negotiations continued with the tenant. When negotiations failed, a plea of promissory estoppel was raised by the tenant. But the judge rejected that argument saying that promissory estoppel had to have a legal basis and, here, the basis would have been the option to renew, said option having expired at the end of the lease. But the court then found that the landlord had waived, by his actions, his option to terminate the lease and, invoking equity, ordered the lease renewed.

Robichaud v. Caisse Populaire de Pokemouche Ltée., 69 DLR (4th) 589 (NBCA, 1990)

sword/shield, doesn't matter

swordThe New Brunswick judge reviewed the principle that "estoppel could be used as a sword but not as a shield" which meant that it could be used by a defendant but not as a plaintiff.

Quoting a well-known Canadian contract law expert (Waddams), the judgment said: "it seems irrational to make enforceability depend on the chance of whether the promisee is plaintiff or defendant." The judge concluded: "if the principle of promissory estoppel could be invoked successfully as grounds of defence ... then ... to refuse its application on the pretext that it is not invoked as grounds of defence is, in my opinion, untenable and contrary to the principles of equity."

Waltons Stores v. Maher, [1988] HCA 7

promissory estoppel

The parties were negotiating a lease when on representations to the effect that "we shall let you know tomorrow if any agreements are not agreed to", the tenant began to demolish the old building on the leased premises and erect a new one.

When the landlord tried then to back out, the court was faced with estoppel by representation arguments pressed by the tenant. The court opined that it was unconscionable for the landlord to watch the demolition and partial construction take place without advising the tenant that their position was not yet decided. "The doctrine of promissory estoppel ... extends to the enforcement of voluntary promises on the footing that a departure from the basic assumptions underlying the transaction between the parties must be unconscionable."

Contracts Under Seal

There is one exception to the requirement of consideration and that is a deed, which is a contract "under seal" or a "specialty contract".

In centuries past, persons contracting would drip a drop of hot wax on the bottom of the contract and press a family ring into the wax, thereby signifying consent to the terms of the document.

Nowadays, deeds are used mostly - if not an outright statutory requirement - in contracts that involve real estate.

In legal theory, if a contract is a deed, then no consideration is required. If charitable donations are made under seal, they are valid contracts even though there is no valid consideration.

sealAbove, it is said that only a party to a contract can sue under it's terms, except for where agents have been employed, this later state of affairs allowing the principal to assume legal rights under the contract.

Not so with contracts under seal. Only signatories to a contract under seal can seek to enforce it even if these signatories were agents. This is a peculiar rule of law. Also, the time limits within which you can enforce contracts (see Time Limits) under seal may be different, depending on which provincial laws govern the contract.

Considering the confused state of common law's contract law component, and the extent of contemporary commercial transactions, the special status of contracts under seal is now so far outdated that it verges on ludicrous.

Judges squirm when faced with arguments based on deeds or "under seal" and have since added that the absence of a seal is not fatal as long as the intention to seal was clear!

There is building pressure in legal circles to eliminate the requirement for consideration entirely from the list of contract requisites (as is the case with civil law).

In the meantime, any seal will do. Many contracts do have red seals, dots or "made under seal" text boxes next to the signature block to show that the contract is under seal.

If this writer may allow himself a political statement: Halleluhah!

• >>> continued  >>> Chapter 4 ...

• DUHAIME'S CONTRACT LAW: Eight chapters of pure, unadulterated contract law love.

1. Contract Law - The Introduction
2. Privity, Consent and the Reasonable Man
3. Consideration & Deeds
4. Offer & Acceptance
5. Mistake, Rectification & Misrepresentation
6. Restraint of Trade, Assignment, Novation & Frustration
7. Interpretation of Contracts
8. Time Limits, Breach & Remedies


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