1 FORMATION OF A CONTRACT (2) Objectives: 1. Consideration 2. Capacity 3. Intention to Create Legal Relations

2CONSIDERATION 1. Consideration - Definition i.Price paid for a promise / some benefit to the promisor or detriment to the promisee. ii.Generally English law does not enforce mere promises unless made by deed. iii.HL in Dunlop v Selfridge [1915]. 2. Consideration – Types i.Executory – Promise to perform an action at some future date.

3 ii.Executed – Promise only becomes enforceable when offeree actually performed required act. 3. Consideration – Rules i.Past – Action performed before the promise it is supposed to be consideration for is made. NOT VALID CONSIDERATION. i. Re McArdle [1951]. ii.Performance must be legal - Promise to pay for an illegal act not enforceable.

4 ii.Performance must be possible – Promise to perform an impossible act unenforceable. iii.Consideration must move from the promisee Only those party to the contract can enforce it. Tweddle v Atkinson [1861]. Tweddle v Atkinson [1861]. iv.Consideration must be sufficient but need not be adequate – Courts will not intervene to require equality in consideration exchanged.

5 i. Thomas v Thomas [1842] / Chappell v Nestle [1959]. 4. Performance of Existing Duties i.Public duty – performance of existing public duties cannot constitute valid consideration for a new contract. i. Collins v Godefroy [1831] ii. But note where promisee does more than his duty: i.Glassbrook v Glamorgan CC [1925] ii.Harris v Sheffield United FC [1987]

6 ii.Contractual Duty - performance of existing contractual promises cannot constitute valid consideration for a new contract. i. Stilk v Myrick [1809] ii. But note where promisee does more than his original promise: i.Hartley v Ponsonby [1857] ii.Williams v Roffey Bros [1990] i. Performance of a contractual duty owed to one person can amount to valid consideration for the promise made by another person: Shadwell v Shadwell [1860].

7 5. Part-Payment of Existing Debts i.Part payment does not extinguish whole debt unless supported by additional consideration: i. Pinnel’s Case [1602] ii. Foakes v Beer [1884] ii.But note exceptions (p 130 text book). 6. Promissory Estoppel i.English law will generally not enforce gratuitous promises (promises not supported by consideration). ii.However in certain instances equitable doctrine of promissory estoppel will prevent a promisor from going back on his promise.

8 iii.Central London Pty Trust v High Trees House [1947] – Lord Denning. i. A promise ii. Which was intended to create legal relations iii. Where the promisor knew that the promise would be acted upon by the promisee iv. And it was so acted upon by the promisee

9 But note the following qualifications: It arises from a promise made by a party to an existing contractual agreement Can only vary or discharge contractual rights Usually only suspends certain rights, rather than destroying them. The promise must have been voluntarily given.

10 7. Privity of Contract i.General rule, a contract can only impose rights / obligations on parties to a contract. ii.Exceptions i. Beswick v Beswick [1967] – Sued as administrator of partner’s estate. ii. Situation involves a collateral contract Shanklin Pier v Detel Products [1951] A promises B £500 if B enters into a contract with C. B can insist that A complies with original promise even though contract is with C.

11 iii. There is a valid assignment of the benefit of the contract. iv. Where it is foreseeable that damage caused by breach will make 3 rd party incur loss. Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1994]. Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1994].

12 v.One of the parties has entered the contract as a trustee for a third party. Les Affreteurs Reunis SA v Leopold Walford (London) Ltd [1919] vi.Where an agent brings about contractual relations between two other parties. vii.See also Contracts (Rights of Third Parties) Act 1999 – Textbook p 135

13 CAPACITY 1.A person’s ability to enter into a contract. 2.Generally, all adults of sound mind have full capacity. Capacity of following individuals however is limited: i. Minors. ii. Individuals of unsound mind or under the influence of drink / drugs.

14 3. Minors (Textbook for more detail) i.Person under 18. Contracts with minors subject to the Minors’ Contracts Act ii.Contracts entered into by minors can be classified as follows: i. Valid – Contracts for necessaries. ii. Voidable – Contracts for shares. iii. Void – Contracts for the repayment of loans.

15 4.Mental Incapacity and Intoxication i. A contract made by a party who is of unsound mind or under the influence of drink /drugs is prima facie valid. ii. In order to avoid such a contract party must show: a.That their mind was so affected at the time that they were incapable of understanding the nature of their actions; and b.That the other party either knew or ought to have known of their disability.

16 INTENTION TO CREATE LEGAL RELATIONS 1. Domestic and Social Agreements Presumption that parties do not intend to create legal relations. 2. Commercial Agreements Presumption that parties do intend to create a binding contract.