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Business And Corporations Law : Good Faith In Contract

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Business And Corporations Law : Good Faith In Contract

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Meaning of consideration A consideration is the price which is stipulated by a promisor in exchange of his promise. A contract is considered to be valid only when there is a proper consideration in the contract (Johnstone2013).
In the case of Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd, Lord Dunedin defined consideration as follows:
“An act or forbearance of one party, or the promise thereof, is the price for which the promise of the other is bought, and the promise thusgiven for value is enforceable.” (Turner2014).
A promise which lacks consideration is not considered as a valid promise. 4 Thus, consideration is essential to an agreement and an agreement without a consideration is void. However, in certain circumstances, a contract may be considered to be valid even in the absence of a proper consideration. Such details need not be stated here in this present assignment (Taskar 2015).
1 a) In the instant case, Jack has accepted to buy a Lotus Super 7 sports car from Jane. The agreement has however been entered into without any consideration.
Case law:
Milroy vs Lord In this case, Mr Medley has executed a deed for transferring certain bank shares in favour of a trust. However, there was no consideration mentioned in the deed and the name of the trust had also been registered in the register of the bank.4 Mr Medley died afterwards. The personal representative of Mr Medley argued that the deed could not be enforced because it lacked a proper consideration. According to him, the transaction was an uncompleted gift and therefore the same should not be allowed to be enforced. The contention of the personal representative of Mr Medley was accepted in the Court and it was held that the deed was void due to lack of proper consideration (Siu2015).
Thus, a promise with an intention to do a gratuitous act was cannot be enforced in a Court of law (Hoand Lee2013) In the instant case also, the agreement between Jane and Jack for the sale of the car lacks a proper consideration. Though, there has been an offer and acceptance in the instant case, but the agreement cannot be enforced due to want of a proper consideration. 4 It means if Jane denies to sell the car to Jack in future, Jack will have no legal right to move the Court and enforce the agreement.
Therefore, in the present case, the agreement does not bind the parties legally.
b) In the instant case Jack has accepted an offer made by Jane for the sale of her Lotus Super 7 sports car. The amount for which the car is purported to be sold is $25000.  The question to be determined in the case is whether the amount of $25,000 is a good consideration and whether it binds the parties legally.
It is imperative to look into the nature and requirement of consideration to determine whether the consideration is a good consideration or not.
Now, consideration may be anything stipulated by the promisor. 7 Consideration may or may not be in a monetary form.4 It may also be in the form of an act done by the promisee or in the form of an abstinence on the part of the promisee. 1 As for example, a consideration which requires a promisee to quit going to night clubs will be considered to be a good consideration. This is an example where a promisee is required to abstain from doing something. Similarly a consideration which requires a promisee to study every Sunday evening shall be considered to be a good consideration. This is an example where the promisee is required to do an act as a consideration for the promise (Hoand Lee2013) In the case of Dunton vs Dunton, it was held that giving up a freedom would constitute good consideration (McKendrick2014).
In the case of Wigan vs Edwards, it was held that giving up a legal right would constitute good consideration (Carter 2014) In the case of Carlill v Carbolic Smoke Ball Co, a carbolic smoke ball was produced by the company for the purpose of preventing persons from contracting diseases like influenza. The company announced that it would give an amount of 100 pounds to anyone who catches flu even after using the smoke ball. Mrs Carill used such ball produced by the company according to the direction given by the company but still caught the flu (Mahdi et al., 2013).
It was held that the inconvenience suffered by Mrs Carill in using the smoke ball was a good consideration and therefore the company was liable to pay the reward to Mrs Carill (Strong2014).
In the instant case, the consideration stipulated by Jane for the sale of her car is $25000. 8 The market value of the car is also $25000. 3 It means that Jane would get the same amount if she chooses to sell the car to anyone else other than Jack. Thus, the consideration fixed under the contract in the instant case is in term of money and has been stipulated by the seller. Such amount has also been agreed to be paid by the purchaser. Hence, it will be considered to be good consideration and the parties will be legally bound by the terms of the contract.
Thus, jack has a legal right to enforce the contract if Jane refuses to sell the car to him in future.
1 c) In the instant case, Jack has accepted an offer made by Jane for selling her Lotus Super 7 sports car. The consideration amount fixed by Jane for the sale of the car is $2500. The case involves the determination of the question whether the consideration of $2500 is valid for the purpose of binding the parties legally into the contract.
Now, an agreement in order to be a good consideration need to be certain and not illusory.
Case law:
Biotechnology Australia Pty Ltd v Pace
In this case, Pace entered into an employment contract with Biotechnology. Under the terms of the employment contract, Jane was allowed to participate in the equity sharing scheme of the senior staff of the company. However, no such scheme was in existence at the time when the contract has been entered into between the parties (Goldberger2012).
It was held that the consideration stipulated in the contract was illusory and uncertain and as a result the agreement was not allowed to be enforced (Carter2013).
1 A consideration need not be adequate in order to be a good consideration. A consideration may be of minimal value and still it may bind the parties in a legal agreement.
In the case of Mountford vs Scott, a consideration amount of £1for the purchase of a land was considered to be a good consideration and the agreement was considered to be a valid agreement (Furmston et al. 2012).
The idea of validating a contract with a minimal consideration is to give freedom to the parties to determine the value of consideration. 1 It is not a required that the consideration should be fixed according to the market value of the product (Hillman2012).
In cases where the consideration is inadequate or insufficient, the factor which the Court may take into consideration is whether the parties were in the same bargaining position when the contract has been entered into. If the Court finds out that there has been an unconscionable bargain in a contract, the Court may set aside such contract.
In the instant case, the consideration is merely $2500 where as the market value of the car is $25000. 3 The consideration has been stipulated by the seller and it has been voluntarily accepted by the buyer. None of the parties has exerted pressure or influence on the other to accept the terms of the agreement. Voluntary consent has been given by both the parties and hence the agreement shall be valid and the parties will be legally bound by the terms of the agreement.
In the instant case, North Ocean Tankers entered into a contract with a shipbuilder, who was required to construct a tanker. A charter agreement with a third has already been entered into by North Ocean Tankers and hence the tanker needs to be delivered on time. The consideration amount fixed for the work is in US $. The contract did not provide for any fluctuation in the currency. The construction work was started by the shipbuilder and as it was being constructed, suddenly a devaluation of US $ by 10% took place.
The shipbuilder demanded an extra amount of US $3 million for completion of the work. The demand of the shipbuilder was accepted by the North Ocean Tankers reluctantly under protest as there was no other option left for the North Ocean Tankers.
The North Ocean Tanker seeks to recover the excess amount paid nine months after the delivery of the tanker.
The facts of the instant case is somewhat similar to that of North Ocean Shipping Co Ltd. vs. Hyundai Construction Co and another.In this case also an agreement was entered into between Hyundai & another (defendants) and North Ocean Shipping Co Ltd (plaintiffs) for the construction of a tanker. 10 The defendants were required to construct a tanker under the agreement. 3The consideration fixed under the contract was in US $ and it was to be paid in five instalments. The defendants opened a letter of credit to secure the payment of the instalments in case of any default. 1 As soon as the first instalment was paid, the US $ was devalued by 10%. A threat was given by the defendants that they would abstain from continuing with the work if their demand is not fulfilled. Meanwhile, an advantageous agreement had been entered into by the plaintiffs for chartering the tanker. The demand was accepted by the plaintiffs and the defendants were requested to increase the letter of credit.
The plaintiffs brought an action against the defendants for the recovery of the excess amount paid eight months after the delivery of the tanker (Burrows2015).
The plaintiffs argued in the Court that the agreement should be declared void on the ground that the agreement lacked a proper consideration or the agreement should be declared voidable on the ground that the agreement has been entered into during economic duress (O’Sullivanand Hilliard2016).
The first contention of the plaintiff was rejected by the Court as the defendant’s promise to increase the letter of credit constituted a good consideration under the agreement. As a result, the agreement was held to be valid. With respect to the second contention of the plaintiffs, the Court observed that the agreement had indeed been entered into during economic duress but the acceptance of the agreement by the plaintiffs has given rise to an obligation for the plaintiffs to pay the extra amount as demanded by the defendants. Therefore, the Court did not provide any relief to the plaintiffs (Chen2012).
The instant case are however a bit different from the above mentioned case with respect to the fact that the North Ocean Tankers has already chartered the tanker prior to the beginning of the construction work. When the shipbuilder demanded the extra US $3 million, the North Ocean Tankers had no other option but to accept the demand as the tanker had to be delivered on time. 3The North Ocean tankers had accepted the demand reluctantly under protest. Moreover, there is no consideration under such agreement and therefore the agreement cannot be considered to be a valid agreement.
The circumstances of the instant case also fulfils the requirement of economic duress. 1 Firstly, there was already an existing agreement between the parties. Secondly, the North Ocean Tankers was in a way compelled to enter into the agreement as the shipbuilder threatened to stop the work in case of default of payment of the extra amount by the plaintiff. Thirdly, the terms of the agreement as proposed by the defendants have been accepted by the plaintiffs. Therefore, the present agreement falls within the purview of an agreement being entered into under economic duress. Thus, the agreement is either void for lack of consideration or it is voidable for being entered into under economic duress.
The period of nine months fall well within the limitation period as provide under various statutes enacted by different states of Australia. 1 Thus, in the present case, the North Ocean Tankers is entitled to recover the extra amount which it has paid to the shipbuilder under economic duress. The shipbuilder has taken advantage of the situation and has in a way forced the North Ocean Tankers to accept their demand and therefore, they should pay back the excess amount under the agreement.
List Burrows, A., 2015. Understanding the Law of Contract in Myanmar. Available at SSRN 2689548.
11 Carter, J., 2014. Good Faith in Contract: Why Australian Law is Incoherent. Sydney Law School Research Paper, (14/38).
Carter, J.W., 2013. The construction of commercial contracts. Bloomsbury Publishing.
1 Chen-Wishart, M., 2012. Contract law. 1 Oxford University Press.
Furmston, M.P., Cheshire, G.C. and Fifoot, C.H.S., 2012. Cheshire, Fifoot and Furmston’s law of contract. Oxford University Press.
Goldberger, J., 2012. Australian contract law: A case law update. Commercial Law Quarterly: The Journal of the Commercial Law Association of Australia, 26(4), p.8.
Hillman, R.A., 2012. 4 The richness of contract law: An analysis and critique of contemporary theories of contract law (Vol. 28). Springer Science & Business Media.
Ho, L. and Lee, R., 2013. Trust Law in Asian Civil Law Jurisdictions: A Comparative Analysis. 4 Cambridge University Press.
Johnstone, R.L., 2013. H. Beale et al., Cases, materials and texts on contract law, (Oxford: Hart Publishing, 2010); and TK Graziano, Comparative contract law: cases, materials and exercises (Basingstoke: 12 Palgrave MacMillan, 2009).
Mahdi, N.M.N., Anuar, N.I.M., Razmin, N.H. and Yusoff, N.D.M., 2013. Enforceable contracts: 8 intention to create legal relations.
4 McKendrick, E., 2014. Contract law: 4 text, cases, and materials. Oxford University Press (UK).
O’Sullivan, J. 4 and Hilliard, J., 2016. The law of contract. 1 Oxford University Press.
Siu, H., 2015. Keeping Secrets: A Critical Analysis of the Justifications for the Doctrine of Secret Trusts. NEL Rev., 3, p.75.
Strong, S.I., 2014. Anti-Arbitration Injunctions in Cases Involving Investor-State Arbitration: British Caribbean Bank Ltd. v. The Government of Belize. The Journal of World Investment & Trade, 15(1-2), pp.324-332.
Taskar, B.D., 2015. 1 The Doctrine of Consideration.
10 Turner, C., 2014. Key Cases: Contract Law. Routledge.

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