FORMATION OF CONTRACT II:

Consideration & Intention to

Create Legal Relations

copyright: Assoc Prof Samtani Anil

For a Contract to Exist

Consideration:
D fi i i & Rationale
Definition
R i
l
Consideration not needed for contracts
under seal (deeds)
Benefit-detriment
analysis:
benefit
y p
promisee in return for the
conferred by
promise or detriment suffered by promisee
p
in return for the promise
Idea of reciprocity

A Diagrammatic Example of Consideration:

A promises to pay $700 to B in return for Bs promise to loan his car to A

Flow of Consideration
Must
move
from
promisee but need not
move to promisor:
p
promisee must show that
consideration moved from
him so as to enforce
promise
although promisee must
provide consideration,
consideration the
promisor need not be the
one to benefit

Diagrammatical Example of
E
li Slid
Earlier
Slide

Rules on Consideration
N d nott b
Need
be adequate
d
t but
b t mustt be
b sufficient
ffi i t
Law will not query the fairness or adequacy of consideration
Sufficient Consideration

Insufficient Consideration

-Sufficient
Sufficient = good or
valuable consideration
-- Examples include:
-Provision of money, goods
or services
-Forbearance
F b
and
d
compromise
-Performance
Performance of existing
contractual duty to 3rd party

-Examples
Examples include:
-Vauge promises
-Performance
e o a ce o
of e
existing
st g
contractual duty owed to
promisor
-Part
P t paymentt off existing
i ti debt
d bt
-Performance of existing public
duty
-Past consideration

Sufficient Consideration

Provision of Money, Goods or

Services

If the promisee gives the promisor money or

goods or services in return for his promise,
then he would have given
valid consideration
g
for the promise.

Forbearance and Compromise

p

Consideration can also be

i the
in
th form
f
off forbearance
f b
or compromise by the
p
promisee.
Conditions:

Reasonable claim and not

vexatious or frivolous;
Honest belief that claim had
chance of success; and
N
No
concealment
l
t off facts
f t
which may have affected
claim.

Performance of Existing Contractual

Duty Owed to Third Party

Sufficient consideration
Even though promisee is
already contractually bound
to promisor to perform the
act, it is good consideration
for a separate promise from
a 3rd party:
t The
Th Eurymedon
E
d

Insufficient Consideration

Vague Promises

Not
sufficient
consideration
Examples:

Promise
to
love
someone
To stop complaining
about unfair treatment

Performance of Existing Contractual

Duty Owed to Promisor

Not sufficient consideration

BUT sufficient if performed over & above
contractual duty
True exception in Williams v Roffey Bros?
Position in Williams adopted by Singapore High
Court

Williams v Roffey Bros (1991)

The Roffey Brothers entered into a contract to refurbish a block of flats for a fixed
price of 20,000. They sub-contracted carpentry work to Williams. It became
apparent that Williams was threatened by financial difficulties and would not be able
to complete his work on time. This would have breached a term in the main
contract, incurring a penalty. Roffey Brothers offered to pay Williams an additional
575 for each flat completed. Williams continued to work on this basis, but soon it
became apparent that Roffey Brothers were not going to pay the additional money.
He ceased work and sued Roffey Brothers for the extra money, for the eight flats he
had completed after the promise of additional payment. The Court of Appeal held
that Roffey Brothers must pay Williams the extra money,
money as they had enjoyed
practical benefits from the promise they had made to Williams. The benefits they
received from it include: Having the work completed on time, not having to spend
money and time seeking another carpenter and not having to pay the penalty. In
th circumstances,
the
i
t
th
these
b
benefits
fit were sufficient
ffi i t to
t provide
id consideration
id ti
f the
for
th
promise made to Williams of additional payment. It now seems that the
performance of an existing duty may constitute consideration for a new
promise, in the circumstances where no duress or fraud are found and where
there are practical benefits to the promisor.

Part Payment of Existing Debt

Not sufficient consideration

BUT sufficient if performed something more or different
from existing duty i.e. Rule in Pinnels Case

Debtor A owes Creditor B $1000

B agrees to take only $600 and promises not to sue A for the
balance of $400
A spends the $400 on necessary items
B changes his mind and sues A for the $400

Rule: B is not bound by his promise since A did not provide any
consideration for it UNLESS at Bs request, A paid the $600 (a)
earlier (b) at a different place, or (c) together with something else
that constitutes valuable consideration

Performance of Existing Public Duty

Not sufficient consideration

BUT sufficient if performed over & above public
duty (i
e promisee did something more than
(i.e.
required of him)

Past Consideration

Not sufficient consideration unless:

Act done at promisors request;

Both understand that act would be paid for; and
Contract is otherwise enforceable (Pao On v Lau Yiu
Long)

Promissory Estoppel

Equitable doctrine: once established, a promise can

be enforced even if unsupported by consideration
Can be seen as an exception to Pinnels Case
4 elements must be established:

1) A & B are in an existing legal relationship

2) Clear promise by B that he will not insist on his strict
legal rights
3) A relied
li d on Bs
B promise
i & altered
lt d his
hi position
iti
4) Inequitable for B to go back on his promise

Generallyy suspensive
p
((Bs rights
g
can be revived byy
giving reasonable notice to A) BUT may be
extinctive if A cannot return to his original position
depends on facts
Can only be used as a shield & not as a sword

Privity of Contract
Definition:

O y the
Only
e pa
parties
es to
o a co
contract
ac ca
can sue & be sued o
on it
A 3rd party cannot sue or be sued on a contract
Privity vs Consideration: privity decides who can sue
whilst consideration relates to enforcement of the
contract

Exceptions

Statute (The Contracts (Rights of 3rd Parties) Act)

3rd parties can enforce contractual terms made for their benefit
Reforms privity rule but does not abolish it
Applies to 3rd parties even if they did not give consideration

Common law
e.g. agency

Intention to Create Legal Relations

Objective test of intention

esu pt o o
of intention:
te t o
Presumption

For social or domestic agreements, courts begin with

the presumption that the parties did not intend to
contract
t t
For commercial agreements, the courts begin with the
presumption that the parties intended their agreement
to be legally enforceable
Each presumption is rebuttable if there is evidence
i di i a contrary intention.
indicating
i
i
Th ultimate
The
li
question
i is
i
always whether a reasonable person present at the
g
was
time would have concluded that the arrangement
contractual

I t ti tto create
Intention
t legal
l
l relations
l ti
Intention to create legal
relations

Social and domestic

agreements

Business or
commercial agreements

(Presumption parties do
not intend legal relations)
elations)

(Presumption parties do
intend legal relations)
elations)