BUSINESS LAW

MGMT2021 (MS27B)
SEMESTER 1 ACADEMIC YEAR 2013
WORKSHEET VI

Elements of Contract Formation cont/d:

Consideration & Intention to Create Legal Relations
Learning Objective: On completing this worksheet the student should be able to:
o explain the distinction between adequacy and sufficiency of consideration
o explain the principles of law regarding what constitutes valid consideration
o apply those principles to hypothetical factual situations in order to ascertain whether
valid contracts exist
o explain and apply the doctrine of promissory estoppel
o explain and apply to hypothetical fact situations the rules governing intention to create
legal relations.

Consideration: You may think of consideration as the price for a promise. It is not
always money. In the case law it is described as some benefit or value to the promisor
(the person making the promise) or some detriment to the promisee (the person to
whom the promise is made). Consideration is an important element of contract since
generally, it makes a contract enforceable. A promise that is not supported by
consideration (i.e. a gratuitous promise) is generally not legally enforceable.

The Nature of Consideration: the law requires that consideration must be sufficient
though it need not be adequate. What does this legal principle really mean? The
courts will not be concerned about whether the value of the consideration provided
appears to be fair based on the promise made. Consideration may be very nominal (ie
inadequate) but the law may still regard it as being sufficient: Thomas v Thomas
(1842) consideration of 1 per year for rent and maintaining a house was sufficient
consideration to support a promise to convey the house to the promisee. If the
consideration is not sufficient in the eyes of the law, the contract made will not be
legally binding or enforceable.

When therefore, in the eyes of the law, is consideration not sufficient? Courts have
held that the following are not sufficient consideration:
1. Performance of an existing contractual duty: Stilk v Myrick (1809) but cf Williams
v Roffey Bros (1990)
2. Performance of an existing legal duty: Collins v Godefroy (1831) but cf Glasbrook
Bros Ltd v Glamorgan County Council (1925) (HL)
3. Part payment of a debt on the due date is not sufficient consideration to
discharge the debt: This is the rule in Pinnels case. See too Foakes v Beer. Note
however that payment before the due date or to a third person for example would be
sufficient consideration for satisfaction of the whole debt. (See operation of the doctrine
of promissory estoppel below.)
4. Past consideration ie. an act wholly carried out before the promise is made:
Roscorla v Thomas (1842); Re McArdle (1951) (Distinguish between executed
consideration and past consideration)
BUT note exception or qualification to the past consideration rule: a past act may
be sufficient consideration for a subsequent promise if certain conditions are met:

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 - the act must have been done at the promisors request;
- there was an understanding that payment would have been made;
- payment must be legally recoverable.
Re Caseys Patents, Stewart v Casey (1892) Stewart was granted patents in
respect of his invention. He contracted with Casey to introduce and market the
patents/invention. Casey marketed the invention for 2 years and then Stewart wrote him
promising to give him a one-third share of the patents for his services in promoting the
invention. Subsequently, Stewart died and his executors claimed the patent from Casey
who argued that the consideration was past and accordingly Casey was not entitled to
the patents. Held: that the previous request by Stewart (the promisor) for Caseys
services raised an implied promise to pay. Casey was thus entitled to the one-
third share promised.

The Doctine of Promissory Estoppel

Recall the rule in Pinnels case (above) and the seeming harshness in the outcome of
Foakes v Beer. There seems to be some challenge to this rule in the development of
the common law. The essence of the doctrine is that where A has promised B that he
will not insist on his strict legal rights and B, as a result of that promise, acts on the basis
of As promise, then the courts will prevent A from going back on his promise even if B
did not provide any consideration for the promise. The courts will therefore estop
(preclude) A from reneging on his promise hence the term promissory estoppel. One
of the earliest applications of the doctrine was in Hughes v Metropolitan Railway
Company (1877) (HL): Landlords were prevented from evicting tenants despite a breach
of contract by the tenants to effect repairs after they (the landlords) had implicitly led the
tenants to believe that they would not enforce the notice to effect repairs and the tenants
had relied on this by not carrying out the repairs.
See too Central London Property Trust Ltd v High Trees House Ltd (1947).
Note that the doctrine operates only as a defence which the promisee may raise in the
appropriate circumstances.

Intention to Create Legal Relations

An agreement may be supported by consideration but may still not be legally binding if it
was made without any intention of creating legal relations. The question of whether
there is an intention to create legal relations often arises in social and domestic
agreements. There is a presumption by the courts that these agreements are not
intended to have legal effect. But the courts will look objectively at the language of the
agreement and the circumstances in which it was made in order to make a determination
about the parties intention. See examples of husband and wife agreements in Balfour v
Balfour (1919) (CA) and cf Merrit v Merrit (1970) (CA). The case of Jones v Padvatton
(1969) (CA) involved an agreement between a mother and her daughter.

In commercial agreements, the presumption is that there was an intention to create

legal relations. Like all presumptions in law, this is rebuttable. The presumption may be
rebutted by the existence of:
- honour clauses: Jones v Vernons Pools Ltd (1938)
- comfort letters: Kleinwort Benson Ltd v Malaysia Mining Corporation (1989)(CA)
- agreements made subject to contract ie. agreement not to be binding until formal
contract executed.

Required reading for this worksheet: Abbott, Pendlebury & Wardman, Business Law,
(8th edition) pp.105 111 or (7th edition) pp. 109-114

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