It is rare for a contract to be found to lack consideration. However, in a recent jurisdiction challenge, the High Court held that there was no good arguable case that a security letter was supported by consideration.
Claim for the repayment of a loan
Denning lent USD 1 million to Arcem under a loan agreement, with repayment obligations guaranteed by Main. The loan agreement was governed by English law but did not contain a jurisdiction clause. Following non-repayment by the borrower of the loan, Denning served proceedings on Arcem and Main abroad. He relied on an exclusive jurisdiction clause in a security letter that referenced the loan agreement.
To serve abroad under the civil procedure rules, the court found that Denning had to show the security letter amounted to an enforceable contract. Arcem argued the security letter was not a binding contract and could not support Denning’s service.
The court held Denning did not have a good arguable case that the security letter was supported by consideration.
A lack of consideration
The court rejected Denning’s arguments for consideration as follows:
- Denning argued that his decision not to sue Arcem for the outstanding loan amounted to valid consideration. The judge accepted that forbearance can be consideration but there must be a causal link between the borrower’s promise and the lender’s decision not to sue. A decision not to sue on its own (“bare forbearance”) does not amount to consideration. Denning’s evidence did not cover the topic of forbearance and therefore did not support his argument. In addition, Denning had not commenced proceedings before the security letter was sent, suggesting that the security letter may not have been the reason for the forbearance.
- Denning further argued that a jurisdiction clause, comprising mutual promises to sue in England, could be consideration. The judge rejected this, stating that a dispute resolution clause cannot constitute consideration for a contract that otherwise lacks it.
Judgment: Denning v Arcem Resources
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
[View Source]