Consideration in Contract

A contractual agreement between two parties cannot be enforced by a party that has not furnished consideration, with the only exception being a contract under seal. Therefore, a binding contract requires an exchange of promises to ensure mutual benefit. Since consideration is a basic feature of contracts, it is important to know what exactly consideration is, and what is not consideration.

According to Lush, J., in Currie v. Misa, a valuable consideration in the eye of the law may consist either in some right, interest, profit or benefit accruing to one party, or some forbearance, detriment, loss or responsibility, given, suffered, or undertaken by the other party. To him, consideration may either be benefit conferred by one party to another or a detriment suffered in furtherance of the contract. It is not necessary for the detriment to confer benefit on the other party, so long as it is suffered as a consequence of the contract. In order for the plaintiff to successfully bring an action against the defendant, the plaintiff must prove that a benefit was conferred upon the defendant by him or on a third party at the instance of the defendant, or that a detriment was suffered by the plaintiff at the instance of the defendant. Such consideration must be something which is of value in the eye of the law. If A enters a contract to buy B’s house, the money paid by A is the consideration which A furnishes while the transfer of title of the house by B to A would be the consideration furnished by B.

There has been a level of conflict over what should constitute consideration in the eye of the law, and what should not. It is settled that material objects like money, a house, a horse, inter alia, constitute consideration. However, there has been dispute over whether immaterial things like love, moral obligation, affection, inter alia, may constitute sufficient consideration. The attempt to equate moral obligation to sufficient consideration was first made by Lord Mansfield after he became Chief Justice in 1756. However, after his death, the ideology came under attack and was eventually demolished in the Eastwood v. Kenyon case in 1840. Eastwood was the guardian of Mrs. Kenyon and while she was an infant, he had spent a considerable amount of his own money to bring her up and improve her estate. When she reached maturity, she promised to repay him for his expenses and her husband independently promised to do the same. Eastwood sued them to court when they failed to fulfill their promises and tried to rely on moral obligation as sufficient consideration. The court held that moral obligation is not consideration as it is not of value in the eye of the law. The court held in Barclays Bank D.C.O. v. Sulaiman that love and affection constitute good consideration, the decision has however been criticized as wrong. Decisions in subsequent cases like Faloughi v. Faloughi have followed the precedent in Eastwood v. Kenyon.

Consideration must move from the promisee

The statement that consideration must move from the promisee means that only a party who has furnished consideration in a contract may bring an action to enforce that contract. The various ways through which there can be a lack of consideration includes the following.

Total failure of consideration when the contract is a gratuitous promise by the defendant: Quite often, people make promises which they fail to fulfill. Ordinarily, a contract is a mutual exchange of promises. When the promise flows from only one party, then this is only a gratuitous promise and cannot be enforced except it is a formal contract. In L.A. Cardoso v. The Executors of the Late J.A. Doherty, the plaintiff had mortgaged his property to the late Doherty in consideration of various loans. Upon failure to repay the loans, the ownership of the properties passed to Doherty who proceeded to sell them. Late Doherty did not sell the one in which Cardoso was living, promising to let him stay there until his death. This promise was reiterated by Doherty’s executors after Doherty’s death. When, contrary to their undertaking, the executors subsequently tried to sell the property, the plaintiff sought a declaration that he was entitled to live on the property for the rest of his life, and an injunction restraining the defendants from selling it. The injunction was refused as the plaintiff had furnished no consideration in exchange for the promise.

Total failure of consideration when there is no performance by the plaintiff: When there is no performance by the plaintiff, or the plaintiff cannot show that he is ready and willing to perform, an action against the defendant shall not succeed. In Bank of West Africa v. Fagboyegun, the defendant signed a contract of guarantee under which he agreed to guarantee a debt owed by one Jalade. The court found that the debt was before the contract was created and no further sum had been loaned to Jalade by the plaintiff. It was found that there was no performance. Other cases to support this are Barclays Bank of Nigeria Ltd. v. Okotie-Eboh and Ikomi v. Bank of West Africa.

Where consideration is furnished by a third party: A party that has not furnished consideration cannot be regarded as a party to the contract in the strict sense. Such a party cannot sue under the doctrine of privity of contract, which allows only parties to contracts to sue to enforce such contracts. A person may not sue on behalf of an organization they are a part of. In Gbadamosi v. Mbadiwe, the plaintiff sued to recover a loan which was given to the defendant and his party by the plaintiff’s party. It was held that he could not sue as the consideration was furnished by a third party.

Claim in excess of benefit provided for in an agreement: Parties may only be entitled to benefit in excess of what a contract provides for if there has been a variation of contractual terms. Such a variation of contractual terms to vary rights and obligations must come with extra consideration furnished by both parties, and not by only one party. An action would therefore fail if the claim is in excess of what was agreed upon in the contract. In U.T.C v. Hauri, the plaintiffs brought an action to enforce an undertaking by the defendant not to set up a motor workshop in competition with the workshop of the plaintiffs, his former employers. It emerged from evidence that the undertaken was obtained under duress and no extra consideration was furnished for the promise, and therefore it was unenforceable.

Executory and Executed Consideration

An executory contract is one in which one party makes a promise to another in exchange for the other’s promise. This is common of bi-lateral contracts. An example is when A promises to buy B’s house for a specific sum and B agrees to sell. The contract is still executory at that stage as it has not been performed and is to be performed at a future date. On the other hand, when an act is performed in exchange for a promise, it shall be an executed contract. One party has already performed in exchange for the other’s promise and this is common with unilateral contracts. An example of this is the earlier cited case of Carlill v. Carbolic Smoke Ball Co. where the plaintiff performed by buying the smoke ball in exchange for the defendant’s promise. The promisee is usually under no obligation all through an executed contract since acceptance is by performance and they can choose to not perform, while both parties are bound by their promises once they have been made in executory contracts.

Past Consideration

Past consideration refers to the use of an act which has already been performed prior to the formation of a contract and independently of it as consideration for a new contract. Such a consideration is not good consideration and any action brought under such consideration shall fail. In the case of Re McArdle, a testator left a house jointly to his children. The wife of one of the children, who was living in the house with her husband, spent a lot of money on making improvements to the house. Later on, the other children jointly signed an agreement to pay her 488 pounds for expenses on improving the house. It was held by the court that the contract was based on past consideration and was therefore not actionable. In Akenzua II, Oba of Benin v. Benin Divisional Council, the plaintiff used his influence to get four forest areas for the defendant. The plaintiff requested that one of the forest areas should be given to him and the council agreed. When the council later went back on its word, the Oba brought an action against the council and the court held that it was past consideration. Other cases of past consideration are Att. Gen. of Bendel State v. Okwunabua and Lampeigh v. Brathwait. There is however an exception to this rule. When it was understood that the action which was agreed upon in the past would be subsequently paid for, then it shall be good consideration. For it to constitute good consideration, the act must have been done at the request of the promisor, the parties must have understood that the action would be paid for subsequently and the payment or conferment of benefit must have been legally enforceable had it been promised in advance. This was the case in Re Casey’s Patents, Stewart v. Casey where the past consideration was good consideration.

Adequacy of Consideration

The courts shall not inquire into the adequacy of consideration once it has been established that the consideration is something of value in the eye of the law. Adequate consideration refers to consideration which is of equal value, or close to equal value, to what it is being exchanged for. The court has decided that it is not its business whether a bargain is fair or not once there is the absence of fraud. Parties have the freedom to contract and to choose terms which suit their purposes. The court stated in Faloughi v. Faloughi that it was within the exclusive domain of the parties to a contract to determine the consideration for the contract and once the consideration is something of value in the eye of the law, even the courts have no jurisdiction to determine whether it is adequate or not. In African Petroleum Ltd. v. Owodunni, the facts revealed that the accommodation which the appellant provided for the respondent, its employee, at Ikoyi was worth 65,000 naira in the market, but that the agreement between the parties had him paying 400 naira per annum only. The court held that it would not inquire into the adequacy of the consideration once the consideration was sufficient, i.e. something of value in the eye of the law. In Thomas v. Thomas, the consideration was held to be sufficient even though it was only a pound each year for a house.

Sufficiency of Consideration

Even though there is no need for consideration to be adequate, it has to be sufficient. Any consideration that is to be admitted by the court as good consideration must not be vague, unascertainable or meaningless or it shall be insufficient. For proper understanding, the sufficiency of consideration shall be discussed under three topics: something of value in the eye of the law, the performance of an existing obligation and variation of contractual rights. It is important to know what exactly is of value in the eye of the law, whether the performance of a preexisting contractual duty constitutes good consideration, and if a party who has accepted less than what he is entitled to can bring an action to recover to rest of his entitlement.

(1) Something of value in the eye of the law

It is obvious that what one person may find valuable may be useless to another person, therefore making value sometimes subjective. The courts, however, have constantly continued to try finding what may be objectively valuable in the eye of the law. Judges and academics alike have had different opinions on what constitutes something of value in the eye of the law. Ames argued that whatever one party accepts from the other as the price for his promise is valid consideration. G.H. Treitel was of the opinion that an act, omission, or promise would only amount to consideration if the law recognizes it as having economic value. J.C. Smith shared Ames’ belief and opposed Treitel’s. Smith was of the belief that consideration need not be something of economic value. If one party gives the other three useless chocolate wrappers which he shall instantly throw away, he believed that it was valid consideration so long as it was what the other party asked for in exchange for his own promise. If it is insisted upon that consideration should be something of economic value, then how is the economic value of walking from Lagos to Ogun state in exchange for a reward to be measured?

G.H. Treitel’s opinion received full support in Faloughi v. Faloughi where the court held that love and affection could not be quantified in terms of monetary value and therefore did not constitute sufficient consideration. However, in some cases, things which have no monetary value have been held to be sufficient consideration. In Bainbridge v. Firmstone, Bainbridge owned two boilers which he allowed Firmstone to take apart to weigh on the condition that he would return it intact. Bainbridge sued Firmstone when he returned it in pieces and Firmstone claimed that Bainbridge had furnished no consideration for his promise. The court held that he had parted with his boiler and suffered detriment and so it was sufficient consideration. In Haigh v. Brooks the plaintiff paid a sum of money to the defendant to give up on a guarantee which he had previously given. The guarantee turned out to be worthless and he brought an action to recover his money back on the claim that the defendant did not furnish consideration. The court held that it was sufficient consideration since the defendant parted with something they might have otherwise held on to.

It has now been decided that a party has furnished good consideration if he surrenders at the instance of the other party what he is entitled to keep or refrains from exercising a right which he is entitled to exercise. Also, consideration does not need to have economic value so long as it is not love and affection, moral obligation, inter alia. Consideration must be definite and not vague.

(2) Performance of existing duty

May a person, who is already to carry out an act, gain extra benefit from the act which they are already obligated to perform? This is the question which arises from the performance of an existing duty as consideration. Whether or not such shall be sufficient consideration depends on the nature of the existing duty. Such pre-existing duty may come in one of three forms.

1. Duty imposed by law
2. Duty imposed by contract with the promisor
3. Duty imposed by contract with a third party

(a) Duty imposed by law: Generally, a pre-existing duty to do what one is already expected to do lawfully is not sufficient consideration. To make it sufficient consideration shall be contrary to public policy as it might help public officers extort people to perform their public duties. In Collins v. Godefroy, the plaintiff was subpoenaed to give evidence in a case on behalf of the defendant. The defendant promised to pay the plaintiff for the work days lost in the process. When the defendant subsequently reneged on the promise and he was sued to court by the plaintiff, the court held that it was not sufficient consideration since he was performing a duty required of him by the law. However, such shall be sufficient consideration when a person is performing more than is lawfully required of such a person. This was the case is Glassbrook Brothers Ltd. v. Glamorgan County Council and Ward v. Byham.

(b) Duty imposed by contract with the promisor: This is a situation whereby the plaintiff is already under an existing contractual duty with the defendant. If the plaintiff has only performed his contractual duty, then it shall not be sufficient consideration for a new promise. This was the case in Stilk v. Myrick where two seamen deserted a ship and the captain who could not find extra crew promised the others extra pay. Since their contracts already said that they would do whatever they could to take the ship to its destination, there was no sufficient consideration for the extra wages. Although it is a different case where the plaintiff performs more than he is contractually bound to perform. In Hartley v. Ponsonby, seamen also deserted the ship, although they were so great in numbers that it significantly altered the terms of the contract. The others were promised extra wages if they continued and so they did. It was held by the court that it was sufficient consideration since they did more than what their contract stipulated.

(c) Duty imposed by contract with a third party: This shall be regarded as sufficient consideration. This is a scenario whereby X owes a duty to Y and then contracts with Z to perform that duty. The reason such would be regarded as sufficient consideration is because X shall be making himself liable not only to Y, but also to Z. Z, which would ordinarily have been unable to bring an action under the contract based on the doctrine of privity, may now bring an action. This was supported by the courts in cases like Scotson v. Pegg, Shadwell v. Shadwell, and the Nigerian case in the Court of Appeal of N.B.N. v. Savol W.A. Ltd.

(3) Variation to contractual rights

The traditional approach is that a person who has contracted should perform their contractual obligations in full. In a case whereby the other party accepts a partial performance, they may still come back to sue for full performance and such shall be granted by the court. The case with which this topic should start is the Pinnel’s case. In the case, Pinnel sued Cole for the balance of a sum owed to him by Cole after Pinnel had earlier on accepted a payment of part of the sum as discharge of the whole debt. The court held that payment of part of a debt does not discharge the debt and Pinnel was entitled to recover the balance. The court also laid down exceptions to the rule it laid down by stating that an item like a horse or a robe or the payment of part of the debt at an earlier date or at a different place would be sufficient to discharge the whole debt. Subsequently, litigants tried to take advantage of the exception by paying in negotiable instruments and not cash. Lord Denning, in D. & C. Builders v. Rees demolished the idea and stated that a negotiable instrument like a cheque became cash once it was cashed and therefore part payment with it would not discharge the debt. Foakes v. Bear followed the same pattern and it was held that Dr. Foakes could not pay part of a debt in discharge for the full debt even though Mrs. Beer had accepted so previously.

The traditional rule is that part of a sum may not discharge the whole thing, promissory estoppel has come to reduce the harshness of the rule. The doctrine of promissory estoppel is one which prevents one party from going back on his word once the other has altered his position in reliance on that promise. Promissory estoppel may also be known as equitable estoppel. The doctrine of promissory estoppel was adopted in the High Trees case. In this case, the plaintiffs leased a block of flats to the defendant for ninety-nine years in 1937. As the war approached, many people left London to the live in the country and thousands of young men were drafted into the army. The result was that the flats were not fully occupied. The parties then decided after negotiation that the defendants should pay half of the rent. By 1945, when the flats were fully let again, a new management had taken over and they sued the defendants to court to claim the outstanding payments previously forgone and for the lease payments to return to normal. The court held that the doctrine of equitable estoppel stopped them from recovering the payments that had been forgone. The doctrine of promissory estoppel was also applied in Tika Tore Press v. Abina.

There has been much debate over the scope of promissory estoppel and when it can be applied. Can a person who does not rely on a promise use promissory estoppel? Can a person bring an action based on promissory estoppel? Is a promise binding on a person for all of eternity once the promise has been made? These are all questions that have been asked under promissory estoppel and the extent of promissory estoppel shall be discussed under five sub-topics.

(a) cause of action: Promissory estoppel has been referred to as a shield and not a sword. It may not be used to begin a fresh cause of action. If A promises to give B his car and reneges on that promise, B cannot bring an action against A to get the car. In Combe v. Combe, an estranged wife brought an action against her husband to enforce a promise to pay her 100 pounds which was unsupported by consideration. The action succeeded at the High Court and failed at the Court of Appeal, and Lord Denning stated that promissory estoppel does not bring a cause of action where none existed. Promissory estoppel should only be used as a defense. If X agrees with Y to sell his car to him for a sum of money and they both later agree for Y to pay a lesser sum, Y can rely on promissory estoppel if X sues if for the rest of the money. If, on the other hand, X refuses to give Y the car and Y brings an action to get the car with X using Y’s lack of complete payment as a defense, Y may also use promissory estoppel as a defense. While promissory estoppel should not be a source of action, this should not be taken to mean that it cannot be used by the plaintiff. It just should not be the reason the first action is being brought against the defendant.

(b) detriment: It has often been stated that promissory estoppel may only be used when it has been relied upon, and thus the party seeking to rely on equitable estoppel must have altered his position and suffered detriment. This was why in Ajayi v. Briscoe, Ajayi was unable to rely on promissory estoppel. However, to require detriment for promissory estoppel shall be defeating the purpose since promissory estoppel is to enforce a promise without consideration and detriment itself is consideration. In cases like the High Trees’ case and Tool Metal Manufacturing Co. Ltd. v. Tungsten Electric Co. Ltd., there was no detriment shown to have been incurred by the parties relying on promissory estoppel. The only conclusion that may be drawn from such is that detriment is not necessary to plead promissory estoppel.

(c) duration: There has been a question over how long a promissory estoppel lasts, whether it is permanent or only temporary. The position is that if it is impossible for a party that has altered his former position in reliance on the promise to return to that position once more, then the promissory estoppel is permanent. If it is however possible for the other party to revert to his former position, then the promissory estoppel expires with adequate notice. This was stated in Ajayi v. Briscoe.

(d) When it is not inequitable to repudiate the promise: A promisor may be allowed to go back on his promise if it is not inequitable to do so. This most obvious example of this is when the conduct of the promisee is morally questionable. In D. & C. Builders v. Rees, the promisee got the promise through duress and therefore it was held that the promisor could go back on his promise. More recently, this principle has been expanded to include when the position of the promisee has not been altered and this position was taken by the court in the Societe Belge case.

(e) composition with creditors and part-payment of the debt by a third party: There are two other cases when the payment of a smaller sum would be sufficient to dispose of a larger debt. One of these is when the debt is paid off by a third party in part with the agreement that it disposes of the entire sum. In this case, it may be taken to mean that there is now a contract between the third party and the creditor where the third party furnishes consideration by payment of a sum in exchange for the creditor’s promise to let go of the debt with the debtor. The other scenario is when a group of creditors agree to collect a lesser sum from a debtor as discharge for an entire debt when for some reason the debtor cannot pay the entire some. If A, B, C and D come together to collect 10,000 naira each instead of 20,000 each because the debtor E only has 40,000 naira, then that shall be a composition of creditors. In the first scenario there is a contract between the creditor and the third party while in the second scenario there is a contract between the creditors, the doctrine of privity of contract prevents the debtor from relying on the contract since he has furnished no consideration. So one has to ask, what if the creditors come together to sue the debtor for the rest of the sum?