Contract Law

A-level A2 October/November 2011 pass year question
Question: Upina Flash agreed to build a conservatory for Morris. Measurements incorrectly taken by Upina Flash, poor quality parts and factory delays cause the contract's completion to overrun by six weeks. Consequently, when the work is completed, Morris decides to withhold payment. Upina Flash argue that his complaints are unjustifiable and threaten legal action unless he pays as agreed. However, when Morris offers to pay 80% of the agreed contract price, Upina Flash accept the amount offered and signs a receipt stating that this is in full and final settlement. Upina Flash have now changed their mind and wish to recover the discount allowed. Consider Morris' potential liability towards Upina Flash. (25m)
A valid, binding contract must consist of an agreement of offer and acceptance, intention to create legal relations, certainty of terms, contractual capacity and consideration. In regard to the question above, we are analyse whether or not there is a potential contractual liability owed by the defendant, Morris, towards the claimant, Upina Flash.
An agreement of offer and acceptance exists between both parties when Upina Flash agrees to build a conservatory for Morris. Whether or not the agreement should be legally enforceable, the courts have to apply the doctrine of consideration. As per Ewan Mckendrick, "the role played by doctrine of consideration is to give an agreement a badge of enforceability." The distinction between an enforceable promise and a bare promise is based on the presence of consideration, where it is also an important that the parties intended their agreement to be legally binding as contract.
A promise can be enforceable when it fulfils the three requirements of doctrine of consideration. Consideration must first move from the promise, per Carlill v Carbolic Smokeball Co. Besides, past consideration is not a good consideration as per Re Casey's Patent. It is essential then to analyse the requirement that consideration need not to be adequate but sufficient, per Chappell v Nestle. In Currie v Misa, Lush J stated that: "A valuable consideration, in the sense of law, may consists of either some right, interest, profit or benefit accruing to one party, or some forbearance, detriment, loss or responsibility, given, suffered or undertaken by the other." Consideration can be sufficient as long as it consists of any benefit or loss as stated above. This is where we must examine as to whether part payment of a debt is sufficient to the full amount of the debt. Because of the incorrect measurements made by Upina Flash, the competition of construction is overrun by six weeks as consequences to poor quality parts and factory delays. Morris then withholds payment. Can he withhold payment? We can examine the case of Williams v Roffey Bros, where Williams was able to finish his work on time as agreed for Roffey who promised to pay extra. The Court of Appeal held that the promise was supported by valuable consideration as Roffey would have benefited from the extra effort by Williams to finish work in time. This rule is unlikely to be applied into the case study in question. Morris has not provide any extra consideration through detriment or loss and Upina Flash has not gain extra benefit either. Hence they were only bound by a normal contractual duty, where in Stilk v Myrick, performance of an existing contractual duty owed to promisor is not sufficient as consideration. Hence, Morris is liable if he does not pay Upina Flash at all when legal action is taken here. We must analyse further that whether an 80% payment is allowed.
We can then examine as to what can then by sufficient consideration. Can part payment of a debt be a good consideration? We must consider that -- is Morris allowed to pay 80% of the agreed contract price, as a part payment, to forgo the balance? As per Sir Edward Coke in Pinnel's case (1602). "Payment of a lesser sum on the day in satisfaction of a greater, cannot be a satisfaction to the plaintiff for a greater sum." Hence, Upina Flash can claim a full payment of the debt from Morris by applying the rule in Pinnel's case (1602). This can be further supported by the case of Foaks v Beer.
There are a few exceptions to the rule in Pinnel's case. This is because this particular rule can be unfair, as ridiculed by Sir George Jessel in Couldery v Bartram, where a creditor may accept anything in satisfaction of his debt except a lesser amount of money." Hence, if Morris has given something other the part payment, Upina Flash will have no choice but to accept it. The rule will not apply to disputed claim as in Cooper v Parker, unliquidated claims, composition agreements, payment by a third party as per Hirachand Punamchard v Temple. Besides these, the promissory estoppel is another exception to the general rule of part payment, which Morris will probably invoke. As per Lord Denning in Central London Property Trust Ltd v High Trees House Ltd, "when a man, by his words or conduct, has led another to believe in a particular state of affairs, he will not be allowed to go back on it when it would be unjust or inequitable for him to do so." It can be explained that even without consideration, when one has promise to so or not to do something, one has waive one's rights to enforce legal strict rights under the contract, per Charles Rickards v Oppenheim. The doctrine that upheld equity can be illustrated in the case of Hughes v Metropolitan Railway, where the House of Lords held that the claimant (landlord), had conducted in a way that implied promise to defendants (tenants) that he would not enforce forfeiture on the lease at the end of notice period and in not doing the repairs as promised by Upina Flash to forgo the balance of payment, prima facie Morris can invoke the doctrine of promissory estoppel.
However, to fully apply the doctrine, there are several conditions that must be fulfilled by Morris. The requirements and limitations of the doctrine include a pre-existing contractual relationship, per Michael Jackson v Durham Fancy Goods, as the one existing between Morris and Upina Flash when an agreement to pay for the construction of a conservatory was drawn up. The promise to forgo balance of payments by Upina Flash was also clear and unequivocal as per Alan v El Nasr where Morris would have relied on the promise as in Hughes v Metropolitan Railway. The doctrine of promissory estoppel cannot extinguish but can only suspend rights, per Tool Manufacturing Co Ltd v Tungsten Electric Co Ltd. Rights can be revived for the future but not claimed back for the past, although the doctrine can also have extinctive effect per Birmingham District Land Co v London North Western Railway Co. Hence, the doctrine will be applied in Morris's case through its extinctive effect to make it impossible for Upina Flash to demand Morris's obligations in the past (pay full amount) and it suspends Upina Flash's rights where it can be revived in the future by giving reasonable notice. In contrast with proprietary estoppel as per Crabb v Arun, the doctrine of promissory estoppel cannot act as a course of action per Combe v Combe where it is often expressed as 'a shield and not a sword'. Hence, Morris can only invoke the estoppel as a defence to bar Upina Flash from going back on his promise and not to order (by the court) to ask for compensation or other appropriate remedies. Besides, the estoppel must not be prohibited by legislation, per Evans v Amicus Healthcare. To apply the doctrine, Morris has also 'come with clean hands' as per D&C Builders v Rees, where it can be assumed that he offered 80% of the agreed contract price because Upina Flash has not done his work completely by delaying the completion of construction of conservatory by six weeks.
Another exception to the general rule that part payment of a debt is not allowed is where there is fresh consideration given by the debtor (Morris). The fresh consideration mentioned can be either paying the debt at an earlier time, at a more convenient place or giving something else aside from the payment as full settlement as stated in Pinnel's case. The fresh consideration can also be a promise not to sue and enforce the claim where it is a good consideration as per Alliance Bank v Broom. Since Morris has finally pay Upina Flash, albeit a lesser sum, only when Upina Flash Threaten legal action towards Morris, it can be reasonably assumed that Upina Flash has agreed not to enforce legal claim upon payment by Morris. This is supported even more when Upina Flash signs a receipt stating that he will accept the part payment as a full and final settlement. It can then be submitted that although a valid contract exists between Upina Flash and Morris. Morris is not liable by paying a lesser amount as agreed, because he has been promised to. This is where promissory estoppel is applied. However, there rises a different conclusion if Upina Flash has been under duress to accept a part payment or nothing through threats by Morris. Promissory estoppel can then not be revoked as there is the requirement of the maxim 'he who comes to equity must come with clean hands', as per D&C Builders v Rees. Then, a mandatory injunction can be issued by the court to compel Morris to pay full settlement as agreed during the formation of contract in the beginning. However, if it is not so, it can be submitted that Morris does not owe a contractual liability towards Upina Flash.