BRIEF FACTS
Lizardi
& Co which was in good credit sold four bills of exchange to Mr Misa, the Defendant.
The bills were drawn from a bank owned by Mr Currie, the Claimant. The bills were
sold on February 11th, but could only be used on the 25th, therefore, Lizardi
& Co were to receive payments on February 14th. Lizardi & Co owed a significant
amount of debt to the Claimant’ bank, and in an effort to reduce the balance,
gave a draft or order on the Defendant for the amount of the four bills demanding
that payments be made to the Claimant’s bank instead. Although the order was dated
on the 14th, it was written on the 13th and then delivered to the banker.
However,
on 13th February Lizardi & Co passed on to the Claimant the payment that
the Defendant owed them as security on their debts as they had absconded and
was declared bankrupt. On the 14th the Claimant’s bank contacted the Defendant
reminding them to pay their debt but the Defendants leant of Lizardi & Co’
bankruptcy and ordered their bankers to stop payment and not honour the cheques
to the Claimant’ bank.
The
Claimant sued the Defendant demanding that they pay off the debt previously
owed to Lizardi & Co.
LEGAL ISSUES
1.
Whether consideration is necessary for the formation of a valid contract
2.
Whether there was valid consideration given by both parties
PARTIES ARGUMENTS
The
Defendant, argued that no consideration had passed to them from Lizardi &
Co. for the bills of exchange because they were unable to use them till the
25th which they did not. While the Claimant, argued that consideration had
constituted the moment the defendant agreed to pay for the bills of exchange.
The
Defendant argued that their debt had not been transferred to the Claimant; the bank
was merely acting as Lizardi’s agent when asking for payment of the bills and
therefore had no right to sue for the debt themselves. While the Claimant
argued that the debt had been transferred to them by Lizardi as payment for
their debts and they could therefore, legally request the payment from the
Defendant.
HOLDING
1. The
House of Lords affirmed the decision in the Court of Exchequer, it held that consideration
is necessary for the formation of a valid contract. The House of Lords therefore
stated that for a promise to be legally binding corresponding consideration must
be provided to that effect by the other party. House of Lords also affirmed the
definition of Consideration as propounded by Lush J where they stated;
A
valuable consideration, in the sense of the law, may consist either in some
right, interest, profit, or benefit accruing to the one party, or some
forbearance, detriment, loss or responsibility, given, suffered, or undertaken
by the other.
2.
The House of Lords held in favour of
the Claimant. Lizardi & Co. had given consideration by providing the bills
of exchange. The fact that they later turned out to be worthless because
Lizardi & Co. became bankrupt was irrelevant, because at the time the bills
were drawn Lizardi & Co. was in credit. Meanwhile, the Defendant had given
consideration by promising to pay for the bills.
SIGNIFICANCE & APPLICATION
1. DEFINITION
OF COSNIDERATION
This
case is important as it provides an exquisite definition of Consideration, Lush
J (as he was then) defines consideration as “some
right, interest, profit, or benefit accruing to the one party, or some
forbearance, detriment, loss or responsibility, given, suffered, or undertaken
by the other [party]”
From
this definition, in establishing consideration it must be shown that both
parties suffered a detriment or suffered some loss by contracting, and one
party’ loss or detriment must work to the benefit of the other.
For
instance, if A promises to give B 2 trays of Eggs and in return B shall pay A k150.
Both A and B have suffered a detriment because while A will lose their K150, B
will also lose their 2 trays of eggs, however, B gains a K150 that serves as A’
loss and A gains 2 trays of eggs which serves as B’ loss. This demonstrates
that Consideration dictates that both parties must lose something but both
parties must gain from one party’ loss.
Consideration
can also be defined as the price paid for a promise or a promise, performance,
or forbearance bargained by a promisor in exchange for their promise.
2. A
MERE PROMISE IS ONY BINDING IF CONSIDERATION IS PROVIDED IN RETURN
Another
key principle to draw from this case is that a promise is generally not legally
binding, unless something of value (Consideration) is provided in return by the
other party. To bring this into context, there is no valid contract where A
simply promises to pay B k500 this is because B does not provide something of
value (Consideration) to A in return for the K500. But there is a valid contract
where B in return for the K500 promises to clean A’ backyard, because B’
service of cleaning the backyard is something of value that shall benefit A
thus sufficing as good Consideration.
3. COSNIDERATION
IS DETERMINED AT THE POINT OF CONTRACTING
Another
key principle to draw from this case is that the existence of consideration is assessed
at the time the parties entered into the contract. The fact that the
consideration later turns out to be worthless is not relevant. As a general
rule, where a party provides consideration which is of value and worth at the
time of contracting, it shall therefore be irrelevant that later on the
consideration turns out to be of non-value or worthless, this shall not
exonerate the other party from fulfilling their obligations.
In
this case, the defendant argued that the fact that they did not use the bills
of exchange they promised to pay for and because lizardi & Co. had gone
bankrupt rendered they the claimants consideration worthless. However, the
House of Lords rightly stated that the fact that Lizardi & Co. was
operational and not bankrupt at the time they offered the defendant the bills
of exchange rendered at good consideration up until the performance of the
contracted.
CONCLUSION
This
case is fundamental in understanding the general overview of consideration as
one of the elements of formation of a contract. However, the paramount
principle that this case propounds is the definition(s) od consideration, to
that regard, this case may be used as authority for defining Consideration.
LEGAL AID INITIATIVE
(Access to Knowledge )
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