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Payment Of The Lesser Amount Through A Third Party

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Question:

Advice to Josie Whether There Is A Binding Contract with Sam?

 

Answer:

Introduction

Formation of an agreement between the transacting parties is one essential part of their transaction. In concern for contracts, English law requires a contract to have consideration so that as one of the key elements. Also, there are some suggestions that a contract may lack its enforceability if it lacks consideration. Nevertheless, there also some exceptions as discussed in this paper. Some of these legal doctrines are the Pinnel’s case rules and promissory estoppels. This paper will be a discussion the extent to which the lack of consideration can invalidate the contract.

The determination whether there was a contract or not take is an examination of three issues. For one, it’s a question of the consequence of a statement made by Josie that he would hold the offer open until the midnight of Tuesday 21 February.  Secondly, whether this statement that the offer will remain open amounted to a valid contract, and lastly, a question whether the message left by Josie on the phone saying that the painting has been sold for $900 was valid notification of the removal of an offer.

The fundamental rule for revoking an offer is that an offeror has the right to revoke the offer anytime before acceptance.[1] In this case, Josie informed Sam that he was going to hold the painting's offer open until 21st midnight but later decided to sell it to Wendy before the promised date. The issue whether such promises are binding were held in Routledge v Grant where the court decided that such promises should not be binding.[2]

As a general rule, a valid contract should have an offer, acceptance, and consideration among other elements.[3] Holding this promise valid will be ignoring the fact that an offer should have a consideration. However, if Sam had paid a little amount to Josie so that Josie would consider keeping the painting offer available, that small payment would have been termed  as consideration and would have made the promise binding.

Up to that point, Josie had every right to revoke the offer that she had made to Sam. On the other hand, there is a need to look at the communication of a revocation. The best case that set the rules of communication when parties are at a distance was set in the case of Byrne v van Tienhoven.[4] This case concerned a revocation of an offer through a telegram. This case held that a revocation contained in a telegram would only have its effect if the offeror received it.

There is a need to look at how the message was sent and delivered to Sam. From the facts available, Sam did not return the call, and he was unable to retrieve any messages due to the machine being faulty for the past few days. The best way to approach this situation is through the comments of Lord Denning.[5] He gave a situation where an acceptance of an offer is coming from the offeree on the other end of the phone. He said that in such a situation, if it happens that the offeror doesn’t get the words of acceptance clearly, he should trouble him/herself to get the words by asking the offeree to repeat them. If the teleprinter’s ink dies at the receiving end, then the receiver should put an effort to get the messages again. So if the person who sent the message reasonably held that the message reached home, the receiver would be estopped from asserting that he/she didn’t receive the message if it was the receiver’s faults.[6] Therefore, it was upon Sam to try and retrieve the messages from the faulty machine since Josie had reasonably believed that Sam got the message. In conclusion, the agreement was not binding since Josie revoked the offer, and the revocation was communicated to Sam.

 


This section would assume that there was already a contract that Josie would sell the painting to Sam on Tuesday 21st. On the assumption that there was a contract, there would only be one thing expected of the parties, which is a discharge of the contract. In this case, there was a discharge through a breach. This happens when one party abandons its promises resulting to an anticipatory breach of repudiation.[7] This breach occurs when one party, before the performance date, expressly notifies the other that performance would be impossible or that party doesn't want to fulfill its contractual promises. In such a case, the non-breaching party can either wait until the other party has actually breached the contract, or terminate the contract and sue for the damages.

 When it comes to recovering damages, the only damages available are those which are the lost benefits that the innocent party suffered due to the breach.[8] The decision of the case of Hochster v De La Tour is an example similar to this situation.[9]  The defendant and the claimant had agreed that the claimant would start working as a courier on 1 June. The defendant then sent a letter to the claimant on 11 May to cancel the contract. After that, the claimant decided to commence suit for breach. The court held that there was a breach despite that fact that the defendant tried to argue that the contract was not breached since there were still some days before the agreed date.

So in assumption that there was a contract, Josie performed an anticipatory breach of repudiation. The damages of Sam would only be the lost benefits. The lost benefits will be the amount above $800 if Sam buys the same picture of sunflowers from someone else.

 Exceptions Of Pinnel’s Case

The Pinnel’s case was an issue of a paying a portion of the owed debt. In particular, it was a question whether the acceptance of a debtor to settle on a certain fraction of the debt was a reasonable consideration to forfeit the entire debt.[10] In short, If C owes P £30 and P admits settling the debt with £15 on the due date, P could still come claiming for the balance in future because the agreement lacks consideration. The background of this rule can be traced in the actual case of Pinnel v Cole.[11]

Cole was in of Pinnel's £8.50, and the amount was due on 11th November.  Pinnel's requested Cole to only pay £5.11 on the deadline and Pinnel would forfeit the rest of the debt. Later on, Pinnel decided to pursue the rest of the debt from Cole. The court found that acceptance of the portion of the debt was not a consideration that would have stopped Pinnel from coming back. Despite criticism, this rule continued to hold its rational effects rational that accepting a smaller amount in exchange for a higher amount was not a valid consideration which was an affirmation in the case of Foakes v Beer.[12] However, some exceptions were set for this case as follows.

In this concern, however small it could be, a new consideration would be an adequate consideration. A new consideration was viewed in three ways.  These are; the payment of the part-payment before the due date, payment at a different place, and payment in the form of goods rather than money. However, all these should happen only when the creditor calls for them.

 

Payment of the Lesser Amount through a Third Party.

Another exception would occur when the creditor promises to settle the debt with a smaller amount on condition that a third party provides the part-payment. In such a case, that agreement would be binding, and the debtor would no longer be in debt. For instance, a money lender was pursuing the debt, but the father paid a lesser amount to release the son from the debt. The money lender accepted the small amount in settlement of the larger debt. When he decided to sue for the remainder, the court held that the small payment was sufficient consideration. This prohibited the money lender from coming back and the court termed it as a fraud.[13]

Composition with Creditors.

This rule gives a chance in which someone that is to be declared a bankrupt by his creditors can make some arrangements with them. The principle provides that each creditor should agree to accept a particular portion the debt to settle in full.  If the debtor manages to have all the creditors to agree, then they’ll be bound by that promise. In short, an agreement between a debtor and creditors would offset the Pinnel rules. That’s to say, all the lenders must agree to take a partial payment so that the agreement would binding, and they should be more than one lender.[14]

 

Compromise of Dispute as To Amount.

If in fact there is a genuine dispute as to the amount of the debt, a compromise of the acceptance of a lesser sum than that claimed will amount to fresh consideration. Notwithstanding the fact that there is no consideration, it would be impossible for the individual creditor to recover the debt balance from the borrower. To clarify, allowing any of the creditors to come back claiming for the remainder would lead to fraud on the part of other creditors who accepted to settle on the said fraction.[15]

Promissory or Equitable Estoppel

An additional exemption to Pinnel's principles rests in the rules of the equitable concept of promissory estoppel. This doctrine presents a way of enforcing a promise even in situations where it lacks consideration.[16] This doctrine asserts that if one party known as the promisor promises the other one know as the promisee, and the promisee changes position in reliance with the given promises, the promisor would be prevented from backing from the deal. This promise would be enforced despite the fact that it doesn't have a consideration. An example of how promissory estoppels works was in the case of ruled by Denning J.[17] In 1937 High Trees House Ltd entered into a lease agreement with CLP for a section of flats at a standard price of £2,500/year. Due to wars, the rental rates had to fall drastically. So in January 1940, both parties entered into another agreement to reduce the price by half, but they didn't agree on the duration of the reduced rent. Within the five years, High Trees continued to pay the reduced rent, and the more tenants began to fill the vacant flats. By 1945, all the units were occupied, and CLP sued High Trees to recover all the rents starting from June 1945. The court concluded that the reduction of the rent was only a temporary solution to cover those times when there was a war. Consequently, the court held that it was lawful that the rent can go back to normal amount since there was no more war and the flats had been reoccupied. The court went on to say that any party that waives a price to affect an executory section of the contract can still withdraw such waiver by reasonably notifying the other party. 

 

Conclusion

Consideration is a crucial component in the creation of a  contract. English law does not give force gratuitous agreements except for those created by the deed. Regarding this, the law will not enforce a deal where someone agrees to provide or undertake an action without receiving something in return.  However, there are also exceptions created by the doctrine of promissory estoppel. This one states that a promise would be enforced even though it doesn't have a consideration provided that the other party acted in reliance on that promise. This paper has examined the effects of consideration, and it has also looked at exceptions to which a promise without a consideration can be enforced.

 

References

Helewitz, Jeffrey A, Basic Contract Law For Paralegals (Wolters Kluwer Law & Business, 6th ed, 2010)

Whittington, O.Ray and Patrick R Delaney, Wiley CPA Exam Review 2009 / (Wiley, 6th ed, 2009)

Klass, Gregory, Contract Law In The USA (Kluwer Law International, 1st ed, 2010)

Roach, Lee, Card & James' Business Law (Oxford University Press, 4th ed, 2016)

Poole, Jill, Casebook On Contract Law (Oxford Univ. Press, 12th ed, 2014)

Bailey, Veronica E., Cape Law: Text And Cases: Contract Law, Tort Law And Real Property (AuthorHouse, 1st ed, 2016)

O'Sullivan, Janet and Jonathan Hilliard, The Law Of Contract (Oxford University Press, 7th ed, 2016)

Cases

Routledge v Grant [1828] 4 Bing 653; 130 ER 920.

Byrne & Co v Leon Van Tien Hoven & Co [1880] 5 CPD 344

Entorres v Miles Far East [1955] 2 QB 327 Court of Appeal

Hochster v De la Tour [1853] 2 E & B 678

Foakes v Beer [1884] UKHL 1

Hirachand Punamchand v Temple [1911] 2 KB 330

Cook v. Lister, [1863] 13 C.B.N.S. 543

Central London Property Trust v High Trees House [1947] KB 130 High Court

West Yorkshire Darracq Agency Ltd v Coleridge [1911] 2 KB 326

Pinnel's Case [1602] 5 Co. Rep. 117a

[1] Jeffrey A Helewitz, Basic Contract Law For Paralegals (Wolters Kluwer Law & Business, 6th ed, 2010).pg 67

[2] Routledge v Grant (1828) 4 Bing 653; 130 ER 920.

[3] O.Ray Whittington and Patrick R Delaney, Wiley CPA Exam Review 2009 / (Wiley, 6th ed, 2009); pg 151

[4] Byrne & Co v Leon Van Tien Hoven & Co [1880] 5 CPD 344

[5] Entorres v Miles Far East [1955] 2 QB 327 Court of Appeal

[6] Lee Roach, Card & James' Business Law (Oxford University Press, 4th ed, 2016).pg 136

[7] Gregory Klass, Contract Law In The USA (Kluwer Law International, 1st ed, 2010); pg 207

[8] Jill Poole, Casebook On Contract Law (Oxford Univ. Press, 12th ed, 2014).pg 394

[9] Hochster v De la Tour (1853) 2 E & B 678

[10] Veronica E. Bailey, Cape Law: Text And Cases: Contract Law, Tort Law And Real Property

(AuthorHouse, 1st ed, 2016).                               

[11] Pinnel's Case [1602] 5 Co. Rep. 117a

[12] Foakes v Beer [1884] UKHL 1

[13] Hirachand Punamchand v Temple [1911] 2 KB 330

[14] West Yorkshire Darracq Agency Ltd v Coleridge [1911] 2 KB 326

[15] Cook v. Lister, 13 C.B.N.S. 543 (1863).

[16] Janet O'Sullivan and Jonathan Hilliard, The Law Of Contract (Oxford University Press, 7th ed, 2016).

[17] Central London Property Trust v High Trees House [1947] KB 130 High Court

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