Enforceability: consideration, promissory estoppel, formalities

To be enforceable in law, an agreement which meets the requirements of contract formation must satisfy one of the criteria of enforceability, namely: consideration, promissory estoppel or formalities.

Consideration

1. In general, an agreement is made enforceable by consideration; ie each party gives or promises something stipulated by the other as the price for her gift or promise, as where you exchange £100 for some textbooks from the bookshop.

2. The requirements of nexus must be met. Thus: (i) a party cannot enforce a promise unless he has provided consideration for it (although third parties now have a statutory right of action (4.1.3)); (ii) mere reliance on the promise is not good consideration unless it has been requested by the promisor; and (iii) past consideration is usually invalid, since it comes before the promise sought to be enforced and not in response to it.

3. Consideration must be ‘valuable’. However, there is instability in the definition and scope of valuable consideration (factual/legal; requested/invented; tangible/intangible; bargain/good reason for enforcement). This gives courts considerable latitude in determining the enforceability of any promise and has provoked criticisms of the doctrine.

4. The instability of the consideration doctrine is reinforced by the rule that consideration need not be adequate (although it must be sufficient). This allows courts to recognise as valid consideration: (i) trivial and nominal consideration; (ii) certain compromises of claims or forbearances to sue; and (iii) certain intangible benefits. However, consideration must be sufficient, ie of value in ‘the eye of the law’. This allows courts to exclude as invalid consideration: (i) motive; (ii) conditional gifts; (iii) certain intangible benefits; (iv) illusory benefits; and (v) bad faith compromises or forbearance.

5. Traditionally, a party’s performance or promise to perform a pre-existing duty is:

✔ good consideration if the duty is imposed (i) by a contract with a third party, but

✘ not valid consideration if the duty is imposed (ii) by public law or (iii) by a contract with the other party.

6. Much controversy surrounds Williams v Roffey Brothers and MWB Business Exchange Centres Ltd v Rock Advertising Ltd, which qualify 5(iii) by finding valid consideration in the performance or promise to perform an existing contractual duty where it confers ‘practical benefit’ on the promisor:

  • Williams v Roffey Brothers suggested that ‘practical benefit’ only validates one-sided contract modifications involving ‘the same for more’; however
  • MWB Business Exchange Centres Ltd v Rock Advertising Ltd (in contrast to Foakes v Beer, confirmed by Re Selectmove) suggests ‘practical benefit’ may also validate ‘less for the same’ modifications.

7. The main criticisms of the consideration doctrine are that it is: (i) inconsistent with the intentions of the parties; (i) over-inclusive, in enforcing non-bargains; (ii) under-inclusive in failing to enforce some promises worthy of enforcement; and (iii) overly technical, artificial and internally incoherent.

8. Options for reform include: (i) abolishing consideration completely ; (ii) abolishing consideration in contract modifications; (iii) abolishing consideration for certain promises; (iv) redefining consideration as any ‘good reason for enforcement’; (v) retaining the bargain conception of consideration whilst recognising other good reasons for non-contractual enforcement (see below).

Promissory estoppel

1. Undertakings which are not supported by consideration, nor contained in a deed, may nevertheless attract some enforcement through the doctrine of promissory estoppel.

2. The basis of promissory estoppel is the promisor’s unconscionable inducement of the promisee’s reliance; the logical response is to avoid the promisee’s detriment although courts have often enforced the promise.

3. Promissory estoppel applies where:

  1. A makes a clear promise to B;
  2. B acts in reliance on it (it is enough if B changes her position and cannot resume her original position, at least without reasonable notice); and
  3. it would be inequitable for A to renege on her promise (in view of (i), (ii) and all the circumstances, including subsequent events).

4. The effect of promissory estoppel is:

  1. suspensory rather than extinctive of A’s original rights; relief to B may be temporary and terminated by A’s notice where B can resume her original position. If not, A’s original rights are extinguished to the extent necessary to avoid prejudice to B; and
  2. generally restricted to relieving promises in application, ie whereA and B are in an existing contractual or other legal relationship, and A’s promise relieves B from some of B’s previous obligations to A. Promissory estoppel operates defensively to prevent A from full enforcement of A’s previous rights against B, not to confer new or additional rights on B. It acts as a ‘shield but not as a sword’.

5. Promissory estoppel cannot add to or create new rights. This can be criticised for being illogical, unprincipled and unnecessary.

6. Promissory estoppel is aimed at negating the harm caused by the promisor’s unconscionable inducement of the promisee’s reliance. In contrast, consideration is based on the promisee’s payment of a price, and the remedy is full enforcement of the promise.

7. Options for the future development of promissory estoppel  include extending the its operation to:

  1. promises to comply with formalities requirements (where consideration supports the agreements);
  2. adding promises (‘more for the same’ modifications); or
  3. promises creating new causes of action, but anchoring the remedy in the reliance measure.

Formalities

1. Observing formalities requirements serves an evidentiary and cautionary function.

2. A promise is enforceable without consideration if it is contained in a deed.

3. Some agreements supported by consideration (generally important or one-sided) are only enforceable if specified formalities are also satisfied.

4. Formality requirements can be criticised for their inconsistency (regarding the type of contracts affected and the requirements imposed) and the potential for harshness when agreements are rendered unenforceable.