Contract Law

Chappell & Co. Ltd. v. Nestle Co. Ltd.

[1960] AC 87

Facts

Nestlé ran a promotional scheme for its chocolate products.
It offered gramophone records to members of the public who sent:
a small sum of money; and
three wrappers from Nestlé chocolate bars.
Chappell & Co. owned the copyright in one of the songs recorded on the records.
Under copyright law, Nestlé was required to pay royalty calculated on the “ordinary retail selling price” of each record.
Nestlé argued that the price of the record was only the money paid by the customer.
Chappell argued that the chocolate wrappers were also part of the consideration and therefore part of the price.
Nestlé replied that the wrappers had no real economic value because they were discarded after receipt.

Whether the three chocolate wrappers formed part of the consideration for the record.
Whether consideration must have economic or monetary value.

Consideration must be sufficient, but it need not be adequate.
The court does not ordinarily examine whether the consideration is economically equivalent to the promise received.
An act, object or promise can amount to consideration if:
it is required by the promisor;
it forms part of the agreed exchange; and
it has some value in the eyes of the law.
Consideration may include a commercial or promotional benefit even if the physical object supplied has little intrinsic value.

The House of Lords examined the promotion as a whole.
Nestlé did not merely ask customers to pay money.
It expressly required three wrappers as a condition for obtaining the record.
A customer who sent only the money, without the wrappers, would not be entitled to the record.
Therefore, the wrappers were not incidental or accidental.
They formed part of the act requested by Nestlé in exchange for its promise to supply the record.
The wrappers also served an obvious commercial purpose:
customers had to buy Nestlé chocolate to obtain them;
this increased product sales;
the scheme promoted the Nestlé brand.
The fact that Nestlé later threw the wrappers away did not remove their contractual significance.
Consideration is determined by asking what the promisor requested, not whether the item was later retained or used.
Lord Somervell famously explained that even a peppercorn can be good consideration if that is what the promisor asks for.
The law does not require the wrappers to have substantial market value.
It was enough that Nestlé regarded their production as part of the price of participating in the scheme.
The case therefore illustrates the difference between:
adequacy, meaning whether the exchange was economically equal; and
sufficiency, meaning whether something legally recognisable was given in exchange.
The court was concerned only with sufficiency.

The House of Lords held that the wrappers formed part of the consideration.
The price of the record was not limited to the money paid.
The case established that consideration need not be economically adequate.
Even an item of negligible intrinsic value may amount to consideration where it is required as part of the bargain.
Use this case for: consideration must be sufficient but need not be adequate.