Terms which, for one reason or another, have been omitted from the specific agreement often need to be put into the contract in order that it may make sense. The necessity for this was brought out in the leading case on the subject – "The Moorcock" (1889). D owned a wharf on the Thames. P owned a ship, "The Moorcock", and he agreed that she should moor at D's wharf, and be unloaded by him. While this was being done, the tide ebbed, and the ship grounded on a hidden rock, and was damaged. The contract contained no
reference to such an event.
HELD: The parties must have intended that it should be a term of the contract that the berth
Lord Justice Bowen said:
"Now an implied warranty, or as it is called, a covenant in law, as distinguished from an express contract or express warranty, really is in all cases founded on the presumed intention of the parties, and upon reason. The implication which the law draws from what must obviously have been the intention of the parties, the law draws with the object of giving efficacy to the transaction and preventing such a failure of
consideration as cannot have been within the contemplation of either side; and I believe that if one were to take all the cases, and there are many, of implied warranties or covenants in law, it will be found that in all of them the law is raising an implication from the presumed intention of the parties with the object of giving to the transaction such efficacy as both parties must have intended that at all such events it should have."
That is, perhaps, a rather long-winded way of saying that terms will be implied only if it is necessary to give business efficacy to the contract.
Note that although the courts usually imply terms which are positive (i.e. the party concerned has to do something), negative terms can be implied. Thus, in Fraser v. Thames
Television (1983), the members of a group called "Rock Bottom" sued Thames Television for alleged breach of contract concerning a TV series, an implied term of which was that Thames would not use the idea for the series, which was based on the history of the group, unless the members of the group were employed as actors in the series. The court implied this negative term on the grounds that it was necessary to give business efficacy to the agreement between the parties.
Terms will also be implied by custom, by statute, or by course of previous dealing.
By custom
If a certain thing is customary in the particular trade, it will readily be implied into contracts in respect of that trade. The same applies if a thing is the custom in a particular district or place.
In order to be implied, the custom must be "notorious, certain and reasonable" and "not
offend against the intention of any legislative enactment".
However, trade usage may create an implied term: Sabi v. Jetspeed (1977).
By statute
Certain statutes provide that, in the absence of specific agreement, terms will automatically be implied into contracts dealing with the subject matter of the statute. The principal ones (see later in the course) are the Sale of Goods Act 1979, the Supply of Goods (Implied Terms) Act 1973 and the Supply of Goods and Services Act 1982.
By a course of previous dealing
It may be clear (or a matter of dispute!) whether a term can be implied from the same parties having agreed on a previous occasion.
Representations
These are statements of fact made by one or more parties to the agreement. Statements of law or of opinion are not, strictly speaking, "representations".
Conditions
"Conditions" are terms of the agreement which are of primary importance.
Fundamental terms will, invariably, be conditions – although not all conditions are necessarily fundamental. It can be, and often is, stated in a written contract that certain terms are
"conditions". Indeed, in most leases of property, it is stated that all terms are "conditions". The reason for so stating is that the remedies available in the event of a breach of a
condition are more extensive than for breach of a less important term. This will be covered in more detail later in the course.
If the contract does not specifically state which terms are conditions, that is then a question of fact for the court to determine
The breach of a condition, usually, allows the injured party to rescind the contract (rescission), as well as to seek damages for loss he/she has suffered as a result of the breach. Rescission is, in effect, declaring the contract cancelled, and refusing either to carry on with its performance or to be bound by its stipulations.
Warranties
A warranty is a less important term of the contract, the breach of which, normally, allows the injured party to seek only damages. However, in the case of breach of either a condition or a warranty, the "equitable" remedies of "specific performance" or "injunction" (i.e. a court order decreeing "do this" or "do not do that", respectively) may also be available to the party not in breach. These will be dealt with in a later study unit, when we discuss remedies for breach of contract.
Once again, if the parties do not state whether a term is a condition or a warranty, the court's job is to decide for them. In Bettini v. Gye (1876), B contracted with G (who was a director of an opera company) for B's exclusive services as a singer. One of the terms was that B should be available for rehearsals for at least six days before the beginning of the opera season. B turned up in London only two days beforehand and, therefore, G rescinded the contract.
HELD: That, in view of the length of the engagement, and all other circumstances, it could
not reasonably be inferred that it was the intention of the parties that six days for rehearsals was a vital ingredient of the agreement. It was, therefore, only a warranty, and G was not entitled to rescind the contract.
Finally, a word of warning: the terms "condition" and "warranty" are not universally applied. For instance, in insurance contracts, the word "warranty" has, from time immemorial, been applied to essential terms. Breach of an insurance warranty usually gives the insurance company grounds for rescission. The House of Lords has railed against this anomaly but to no avail. It is too entrenched for even such an august body to change!
D. CONSIDERATION
We have seen that "consideration" is an essential element of a valid contract in English law. In certain other jurisdictions, this is not the case; however, historically, the common law of England has always viewed a contract as a bargain. Both sides must give something. The only exception to this rule is in the case of contracts under seal – "specialty" contracts. These do not require to be supported by consideration in order that they may be enforced by the courts.
A number of rules have grown up in the doctrine of consideration and in practice, in commercial contracts consideration is invariably present. The subject is a favourite
examination one. There have been repeated proposals for abolishing consideration as a requirement in all or at least in written contracts.
Definitions
There are various types of consideration – "good", "valuable", "nominal", and "bad". In order to be valid, consideration must be both "good" and "valuable". Valuable consideration is where some benefit is given or some detriment suffered. It is only consideration which is valuable in the eyes of the law which is sufficient to support a valid contract – although it must also be good, in the sense that it is not forbidden, or "bad".
A definition given in Currie v. Misa (1875) was as follows:
"A valuable consideration, in the sense of the law, may consist either in 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."
A shorter but less precise definition given by Sir Frederick Pollock, which has been approved by the House of Lords, is:
"The price for which the promise is bought".
So, the essential feature is that there must be either some benefit accruing to the "promisor" (that is, the person who makes a promise) or some detriment accruing to the "promisee" (the person who receives a promise). Usually, the benefit and the detriment are the same thing, looked at from the different viewpoints of the parties. If I buy a book from you for £1, then £1 is a benefit to you and a detriment to me. On the other hand, the book is a
detriment to you (because you no longer have it) and a benefit to me.
Types of consideration
There are three types of consideration. (a) Executory consideration
This occurs where the parties exchange promises. For example, "I promise to pay you
£100 provided you promise to service my car". The contract comes into existence
from the moment the promises are exchanged, but its performance remains in the future. To this end, executory literally means 'yet to be done'.
(b) Executed consideration
This type of consideration arises when one party to a contract has performed his side of the deal and the other party has yet to perform his or her side of the deal. For example, acceptance of a unilateral offer to the world at large as in Carlill v. Carbolic Smoke Ball Co. (1893).
(c) Past consideration
Past consideration is not good consideration as demonstrated by Re McArdle (1951). In this case a number of children were entitled to a house on the death of their mother. Whilst the mother was still alive the son and his wife had lived with her, and the wife had made various improvements to the house. The children later promised that they would pay the wife £488 for the work she had done.
It was held that as the work had been completed at the time when the promise was given, it was past consideration. Consequently, the later promise to pay her £488 for the work she had done on their mother's house could not be enforced.
Principles governing consideration
Consideration is governed by three main principles:
(a) Consideration need not be adequate but must have some value.
The courts do not, in general, ask whether 'adequate value' has been given in return for the promise or whether the agreement is harsh or one-sided. This is what is meant by saying that 'consideration need not be adequate'.
In Chappell & Co. Ltd v. Nestlé Co. Ltd (1960), Nestlé manufactured chocolate. As a promotional gimmick, the company offered to sell a gramophone record to anyone who applied, for the sum of 1s 6d (7½p) plus three of the wrappers from its bars of
chocolate. The wrappers themselves were of insignificant value and on receipt they were, in fact, thrown away by Nestlé.
HELD: The wrappers formed part of the consideration for the sale of the records.
Where the consideration, although of some value, is insignificant in relation to the transaction, it is called "nominal consideration".
In Pitt v. PHH Asset Management Ltd (1994), a property known as The Cottage was advertised for sale at £205,000. There were two persons interested in purchasing it, Mr Pitt, the claimant and a Miss Buckle. They entered into a "contract race" for the property. Mr Pitt made an offer of £200,000, subject to contract, which was refused upon receipt of an improved offer of £210,000 from Miss Buckle. The following day Mr Pitt telephoned the handling estate agent and advised him that he would seek an injunction to prevent the sale to Miss Buckle and that he was able to exchange contracts as soon as the agent wanted.
The agent referred the matter to his principal, the defendant company, who owned the property and thereafter told Mr Pitt that the sale to him at £200,000 could proceed, subject to contract and that no other offer would be considered provided contracts were exchanged within 14 days. Despite this "lock-out" agreement, the property was sold to Miss Buckle thereafter at £210,000.
HELD: The claimant, Mr Pitt, was entitled to damages for breach of the "lock-out"
agreement, even though the sale was subject to contract. The agreement was a contract not to negotiate with anyone except Mr Pitt for 14 days, the consideration being the withdrawal of his threat to seek an injunction and the commitment by Mr Pitt to an exchange of contracts within 14 days to bind the sale.
However, it should be noted that, although consideration need not be adequate, it must be real. It must be capable of being quantified and having its value estimated by the law.
Two examples of consideration, which is not real and therefore, not good are:
"In consideration of natural love and affection": Bret v. J S (1600)
A promise by a son that, if his father would release him from a debt, the son
would cease to bore his father with his complaints: White v. Bluett (1853). Consideration that is impossible to give or perform is also not good; likewise, consideration that is discretionary. If the promisee can perform his side of the bargain "if he likes", or "unless he changes his mind ", consideration is not good.
On the other hand, an undertaking by a manufacturer to sell his entire output to one buyer was held to be binding, notwithstanding the fact that the manufacturer did not bind himself to have any output: Donnell v. Bennett (1883).
The distinctions can be fine. It is, really, a question of whether the court can find some
quantifiable value in terms of money, benefit or detriment in the transaction to justify
the desire to give effect to the intentions of the parties, and uphold the contract. Consideration is much easier to imply in commercial contracts than in domestic ones. However, one type of consideration does not have any value in the eyes of the law, and that is if it is illegal. In point of fact, a contract that is illegal is void. However, whether this is because the consideration is bad or because the enforcement of illegal contracts is "contrary to public policy" is an arguable point.
(b) Consideration must not be past
This category does not usually count as valid consideration i.e. it is insufficient to make any agreement which is based on it a legally binding contract. Normally consideration is provided either at the time of the creation of the contract or at a later date. However, in the case of past consideration the action is performed before the promise that it is supposed to be the consideration for. Such action is not sufficient to support a promise, as consideration cannot consist of any action already wholly performed before the promise was made. A party to a contract cannot use a past act as a basis for consideration. Therefore, if one party performs an act for another and only receives a promise of payment after the act is completed, the past act would be past
consideration.
The classic situation involving past consideration is illustrated by the case of Re
McArdle (1951). The buyer of an article cannot sue on a guarantee given by the seller after the contract of sale has been made. The consideration for the promise of
guarantee is past.
In Roscorla v. Thomas (1842) it was held that the seller's guarantee that the horse sold to the buyer was "sound and free from vice" could not be enforced against him since it had been given after the sale had been concluded. In other words, the guarantee did not form part of the consideration for the sale of the horse.
A similar principle applies where a person agrees to perform some service for another and after the work has been completed the second person agrees to pay for the service. The courts would have little hesitation in saying that since the service had been performed before there had been any mention of payment the consideration was past and the promise unenforceable.
On the other hand, an act performed before the giving of a promise can be
consideration, if the act was done at the request of the promisor. The request implies a promise of benefit to follow. In Lampleigh v. Braithwait (1615), Braithwait was languishing in gaol. He requested Lampleigh to try to obtain for him a pardon from the King. In his efforts to achieve this, Lampleigh incurred expense. Braithwait
subsequently promised to pay £100 for his trouble. He then refused to pay.
HELD: Although the consideration for the promise to pay was past, nevertheless it was
good. A promise of payment could be implied from the request for services. The determination of whether the consideration is past is a question of fact for the court. It does not have to follow the strict chronological events. Provided the making of the promise and the consideration for it are substantially one transaction, this will suffice. Nor is the wording of the promise decisive. A promise "in consideration of your
having today advanced £750" was binding on proof that the advance had, in reality,
been made at the time of the promise: Goldshade v. Swan (1847).
However, there are a number of exceptions to the rule that past consideration will not support a valid contract. For example under Section 27 of the Bills of Exchange Act
of the Limitation Act 1980 a time-barred debt becomes enforceable again if it is
acknowledge in writing. Also, where the plaintiff performed the action at the request of the defendant and payment was expected, then any subsequent promise to pay will be enforceable. Thus in Re Casey's Patents (1892) the joint owners of patent rights asked Casey to find licenses to work the patents. After he had done as requested they promised to reward him. When one of the patent holders died his executors denied the enforceability of the promise made to Casey on the basis of past consideration. It was held that the promise made to Casey was enforceable. There had been an implied promise to reward him before he had performed his action and the later promise simply fixed the extent of that reward.
(c) Consideration must be sufficient
The rule is consideration need not be adequate but it must be 'sufficient' i.e. it must have some value in the eyes of the law. It is up to the parties themselves to decide the terms of their contract as the court's will not intervene to require equality in the value exchanged, as long as the agreement concerned has been freely entered into as evidenced by the case of Thomas v. Thomas (1842). In this case the executors of a man's will promised to let his widow live in his house, in return for rent of £1 per year. It was held that £1 per year was 'sufficient consideration' to validate the contract,