Consideration & Promissory Estoppel
This examine and analyse two principles of contract law. The first is consideration,
which along with the offer, acceptance and intention to create legal relations,
helps form a legally binding contract. Promissory Estoppel is a related principle
which can act as the exception to one of the main rules of consideration - that for
consideration to be valid, it must have economic value and involve an exchange
of benefit/detriment between the parties. This chapter will ensure you
understand the rules of consideration and when exactly promissory estoppel can
operate.
Consideration
What is consideration?
As you will have learnt in chapters one and two, the offer and acceptance are two
key components of the contract. However, a valid offer and acceptance only
constitutes an agreement. In order for that agreement to be legally enforceable,
there must be an intention to create those legal relations (see chapter 3), and the
subject of part of this chapter - consideration. The consideration of contract can
be described as the ‘badge of enforceability’.
A simple definition of consideration is as follows - an exchange between the
parties which results in a benefit to one party, and a detriment to the other. The
case of Currie v Misa (1874) LR 10 Ex 153 provides an apt description of this:
“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 practical example of this can be found by examining a simple contract. Party A
offers £500 to Party B, who in exchange will fit his car with a new engine. Party A
receives the benefit of his car being fixed, whilst Party B incurs the detriment of
having to take time, effort, and perhaps expenses to fix the car.
You can also identify from the above contract that there is a parallel detriment to
Party A and benefit to Party B; Party A suffers the detriment of having to pay £500,
and party B receives
, the benefit of the £500. It should be noted that this parallel detriment/benefit is
not required to form valid consideration, but it is often present.
It is worth noting that the only contract where consideration is not required is
when a contract is made via a deed.
Does the exchange of the promise to a benefit/detriment constitute valid
consideration?
One common misunderstanding with regards to consideration is that
consideration is only valid once the benefit/detriment has been transferred
between the parties. This is understandably so, if you take the definition from
Currie v Misa, the promise to do something would surely not constitute valid
consideration. However, it is commonly accepted practice
that a promise can constitute valid consideration.
If we examine our example contract involving the £500 exchange for the
replacement car engine, under the assumption that a promise does not amount
to valid consideration, the reason behind this will become clear.
After the exchange of the promise, Party B orders the required engine part for the
replacement at the cost of £200. Party A is then offered a cheap replacement car,
and instead opts to purchase this, and leaves Party B a voicemail to let him know
he will no longer need
the replacement engine. Party B is then left with an engine part he has no need
for, and will no longer receive the £500 from Party A that would have resulted in
profit for him. There are two principles clear from this example:
1. If a promise did not constitute valid consideration, it could result in
extremely unfair outcomes for some parties
2. If a promise did not constitute valid consideration, it would stifle the
economy and business, as parties would be unwilling to deal with each
other in fear of circumstances similar to the example
A promise operating as consideration in the above example results in Party B
having a remedy as a result of the breach of contract, negating the above issues.
Lord Dunedin confirmed this principle in Dunlop v Selfridge Ltd [1915] AC 847:
