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Fundamentals of Consideration, Offer, and Acceptance

Discuss about the Business and Corporations Law and Legal Contracts.

  • To find the presence of consideration in the provided case study
  • To determine whether Jane and Jack are bound by an enforceable agreement or not based on the situation given and common law.

Consideration is the indication of the particular price that the promisor has asked to the other party in order to satisfy the promise.  According to the provision of common law, it is imperative for both the parties that consideration should be present if they wish to be legally bound to enter into a valid enforceable contract. A promise which lacks any consideration is known as the gratuitous promise.  In such promises, both the parties would not be considered legally bound into the enforceable contract unless certain specific conditions are met (Carter, 2012). However, if the contract is enacted under promissory estoppel then, it would be considered legally enforceable even without having any consideration (Pendleton & Vickery, 2005).

These are certain imperative rules that must be satisfied in order to form valid consideration which can lead to the enactment of legal contracts (Gibson & Fraser, 2014).

  • Offered consideration must be valid as per the norms available in the common law
  • Any kind of illegal condition would not be considered as consideration
  • Any present consideration could not be in the form of the past consideration as per the verdict of the Re McArdle(1951) Ch 669 case.
  • Under common law, there would not be any comparison in the value between the corresponding consideration for promisor and promisee. This clearly indicates that for contract formation, an essential condition is the presence of consideration which may or may not be adequate.

The statement made by Lord Somervell with regards to adequacy of consideration is quite significant and needs a mention. As per him, a minute object such as a 'peppercorn' shall be considered a valid consideration provided there is free consent on the both sides and the party receiving the lesser consideration has no issue with that. The view expressed above gain wright as ‘peppercorn' will be acceptable as a valid consideration even if the promisor throws away the corn and has a strong disliking for pepper  (Latimer, 2005). Hence, consideration is not linked with the underlying utility of the promisor. One exception to the above rule is when there is presence of unconscionable conduct which would demand that adequacy of consideration be taken into picture (Pathinayake, 2014).

With regards to an agreement, there are two major components namely offer and acceptance. For a valid acceptance, it is imperative that it should be without any conditions as any acceptance with significant conditions would be termed as a counter offer.  Also, it is imperative that the process of offer and acceptance is carried out in a mutually acceptable manner by both parties of sound mind (Davenport & Parker, 2014).

Case 1 Jane has given her car to Jack without any consideration

In this particular case, Jane has offered her Lotus sports car free of cost to Jack which is having a market value of $25,000. In this situation, there is absence of the consideration between both the parties. Jane has made a valid offer and Jack has made a valid acceptance without any further condition. But the given transaction does not have any consideration, hence there would be not any enforceable contract despite the presence of valid offer and acceptance. This is an example of gratuitous promises and hence lacks legal sanctity.

Case Examples

Case 2 Jane has sold her car to Jack in $25,000

In this case, Jane has sold her Lotus sports car to Jack with a valid consideration value of $25,000. Also, Jane has enacted a valid offer while Jack accepted the offer without making any counteroffer. Hence, both the parties have given mutual consent in the case thus all the imperative parameters have been satisfied to enact an enforceable agreement. Therefore, both Jane and Jack are legally bound into an enforcement agreement.

Case 3 Jane has sold her car to Jack in $ 2,500

In this case, Jane knowingly sold her Lotus sports car to Jack for a mere consideration of $2,500. This leads to a lawful consideration of $2,500 for Jane. Further, this valid offer is unconditionally accepted by Jack. The market value of the car is approximately $25,000 but irrespective of this Jane has offered in less considerable value of $ 2,500. It is evident that the consideration for Jane is far lesser than that for Jack but there seems to be no wrong being done here as the sale is being driven by Jane herself. Since consideration adequacy is not imperative and there is a valid offer and agreement in the given case, hence this directly leads to an enforceable agreement between the parties (i.e. Jane and Jack).

Conclusion

The arguments above clearly indicate that there is an enforceable agreement between Jack and Jane in all the case except in the first case when the consideration is not present. For the other two cases consideration is a present although in the third case it is inadequate but adequacy is not imperative.

The main issue in the given question is to ascertain if the excess payment of $ 3 million paid by the tanker buyer could be recovered after nine months have elapsed since the delivery of the tanker.

For the contracts that have been enacted, at times there are certain changes in the contract that may be necessitated due to either initiation from one of the parties of the contract or due to the change in circumstances. In accordance with the common law, modifications or amendments in the contract already signed can be made but the same should be done through the mutual consent process. However, in case of a specified mechanism for the amendment in the contract, then that particular mechanism would be adhered to.  Since the contract originally was enacted with the consent of all the parties, hence any alterations shall also be made only with the free consent of the various parties involved (Carter, 2012). In this regard, it is noteworthy that a unilateral notice of amendment in the contract is not valid unless the same is ratified by the other party. Normally, amendments or modifications that are introduced after the enactment of the contract are done so when mutual consideration is involved due to which both parties agree for the change (Latimer, 2005).

Contract Modification


However, as mentioned above, at times changes are necessitated by the alteration in circumstance which in turn forces the parties to make alterations in the original contract. In such case, it is imperative to consider if the circumstances have rendered the contract to be considered as discharged by frustration (Gibson & Fraser, 2014). For contract discharge by frustration, it is imperative that atleast one of the conditions mentioned below need to be satisfied (Pendleton & Vickery, 2005).

  • There is subject matter destruction as highlighted in the Taylor v Caldwell3 B & S 826 case.
  • The discharging of the contractual obligations becomes illegal as highlighted in the Fibrosa Spolka v Fairbairn[1943] AC 32 case.
  • The performance of the contractual obligations as outlined in the contract become impossible as highlighted in the Nicholl and Knight v Ashton, Eldridge & Co[1901] 2 KB 126
  • The contract becomes deprived of its commercial nature either fully or partially as indicated in the Herne Bay Steam Boat v Hutton[1903] 2 KB 683.

It is noteworthy the frustrated contract does not result when due to alterations in circumstances which are beyond the control of either of the parties, there is an increased cost burden associated with the complying with the contractual obligations.  This is especially the case when the given circumstance termed as frustrating was foreseeable even at the time of execution of the contract as is evident from the judgment in the Peter Cassidy Seed Co Ltd v Osuustukkuk-Auppa Ltd [1957] 1 WLR 273 case (Carter, 2012). This has been highlighted in the arguments rendered during the Davis Contractors v Fareham UDC [1956] AC 696  in which the honorable court opined that the rise in costs due to skills shortage is not a valid reason for terming the contract as frustrated as this does not render that the contractual obligations cannot be discharged (Davenport & Parker, 2014).

In case the contract is not termed as frustrated and then the contract need to be amended, then it must be done in the manner specified above. If one of the party advocates non-fulfillment of contractual obligations in case of non-alteration of the original contract, then it would amount to breach of contract.  If there is a breach of contract by one of the parties, then the other party may assume that the contract is discharged and does not need to fulfill any obligations levied in accordance with the contract (Pathinayake, 2014). Further, any damages caused due to the unilateral breach by the other party would be compensated from the other party through legal proceedings (Latimer, 2005)

As per the case facts, the USD has suffered a sudden devaluation to the tune of 10%. This has an adverse impact on the cost for the shipbuilder who demands an additional payment of $ 3million to continue building the tanker. Any denial to agree to the above payment would have led to the builder stopping work. In that case, the tanker would not be delivered on time and as the buyer already has a charter in place, thus the buyer agreed to make the demanded incremental to the shipbuilder. The buyer of the tanker now desires to recover the excess payment made during the contract period through legal means.

It is evident from the given information that the manufacturer and buyer are not based in same countries due to which it is reasonable to expect that there would be currency fluctuations and these could adversely impact the commercial viability for the manufacturer. As a result, it was wrong on the part of the concerned parties not to have a clause which dealt with these frequent currency fluctuations. In the given case, the changed circumstances triggered by devaluation of the USD does not result in a frustrated contract as it does not render the fulfillment of contractual obligations impractical but only raises the price. Also, this situation could have seen before hand and hence alternative arrangements should have been in place for such a contingency. Thus, the buyer ideally must not have agreed to the hike in the original price and should not have been perturbed by the arm twisting of the manufacturer. In case the manufacturer stopped work, the buyer could have claimed a breach in the contract and either could have demanded fulfillment of obligations and in case that was not possible could claim the losses. Instead the buyer gave consent and hence the contract was eventually discharged by the parties fulfilling their mutual obligations. Hence, after the contract being discharged, any dues cannot be recovered by the buyer.

Conclusion

The discussion above clearly indicates that the tanker buyer would not be able to recover or claim the $ 3 million that was paid as excess payment to the builder of the tanker.

References

Carter, J 2012, Contract Act in Australia, 3rd eds.,  LexisNexis Publications, Sydney

Davenport, S & Parker, D 2014, Business and Law in Australia, 2nd eds., LexisNexis Publications, Sydney

Gibson, A & Fraser, D 2014. Business Law, 8th eds., Pearson Publications, Sydney

Latimer, P 2005.  Australian business law, 24th eds., CCH Australia Ltd. Sydney

Pendleton, W & Vickery, N 2005.  Australian business law:  principles and applications, 5th eds., Pearson , Sydney

Pathinayake, A 2014, Commercial and Corporations Law, 2nd eds., Thomson-Reuters, Sydney

Davis Contractors v Fareham UDC [1956] AC 696 

Fibrosa Spolka v Fairbairn [1943] AC 32

Herne Bay Steam Boat v Hutton [1903] 2 KB 683

Nicholl and Knight v Ashton, Eldridge & Co [1901] 2 KB 126

Peter Cassidy Seed Co Ltd v Osuustukkuk-Auppa Ltd [1957] 1 WLR 273

Re McArdle (1951) Ch 669

Taylor v Caldwell 3 B & S 826

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