Professional Documents
Culture Documents
Contract
2 (Consideration)
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Identify the importance of consideration in contracts;
2. Explain the exceptions available to the rule of consideration;
3. Discuss the principle relating to the adequacy of consideration;
and
4. Compare the difference in principle of consideration under the
Malaysian law and the English law.
INTRODUCTION
Consideration is another important element of a contract and any agreement
made without consideration is a void agreement. Section 26, Contracts Act 1950,
provides that an agreement made without consideration is void. According to
Section 2(d), Contracts Act 1950, when, at the desire of the promisor, the
promisee or any other person has done or abstained from doing, or does or
abstains from doing, or promises to do or to abstain from doing, something, such
act or abstinence or promise is called a consideration of the promise.
some acts according to the promisors (person making the proposal) desire,
that act or abstinence or promise is called consideration.
Therefore, consideration is a price that you pay to buy the promise or act of the
other person.
For example, you lost your mobile phone while travelling on a train and you
offered a RM100 reward to anyone who found and returned the mobile phone to
you. Later, A found and returned the phone to you. In such a case, you promised
to pay RM100 and A paid the price for your promise by performing the act. Thus,
the act of returning the mobile phone to you is the consideration for the promise.
The case of Osman bin Abdul Ghani & Ors v. United Asian Bank Bhd [1987] 1
MLJ 27 is a case on consideration, where the court held that forbearance to sue
could be a valid consideration.
Consideration may be executory when one promise is made in return for another
promise. For example, you (Refer to Figure 2.1) agree to sell a fax machine to B
for RM2,000. Here, Bs promise to pay RM2,000 is the consideration for your
promise to sell the fax machine, and your promise to sell the fax machine is the
consideration for Bs promise to pay RM2,000. These are lawful consideration.
Promises which form the consideration for each other are called reciprocal
promise and every promise and sets of promises forming the consideration for
each other, is an agreement.
Next, consideration may be executed when one promise is made in return for the
performance of an act. For instance, you advertise a reward of RM100 to anyone
who finds and returns your lost watch. C finds and returns the watch to you in
response to the offer. Cs consideration for your promise is executed. Only your
liability remains outstanding, that is to pay C the RM100 reward. Figure 2.1
demonstrates the difference between these two considerations.
22 TOPIC 2 LAW OF CONTRACT (CONSIDERATION)
Under the English law, past consideration will not support a claim in contract
because the act which was performed before the promise of reward was made, is
regarded as gratuitous. However, under the Malaysian Contracts Act 1950, past
consideration is sufficient to support a promise because Section 2(d) and Section
26 (b) apply to past consideration. The words has done or abstained from
doing referred to an act which has been performed before the promise is made.
Thus, the position in Malaysia is that, even though the consideration is past, it is
valid if it is done at the desire of the promisor.
TOPIC 2 LAW OF CONTRACT (CONSIDERATION) ! 23
The Malaysian case which applied the principle of past consideration is the case of:
Kepong Prospecting Ltd. & S.K. Jagatheesan & Ors v. A.E. Schmidt &
Marjorie Schmidt [1968] 1 MLJ 170
Later, an issue arose in this case, whether the services rendered by Schmidt
after the incorporation of the company but before the agreement was made,
were sufficient to constitute a valid consideration, even though they were
past.
The Privy Council ruled that: it was a valid consideration and Schmidt was
entitled to claim the amount.
SELF-CHECK 2.1
(a) What are the differences between executed, executory and past
consideration?
(b) Can past consideration support a claim in contract?
24 TOPIC 2 LAW OF CONTRACT (CONSIDERATION)
ACTIVITY 2.1
Discuss the following problem by applying the principle of law on
consideration:
(a) Intan and Berlian were neighbours. Intan had to go abroad for business
arrangements and before she left, she told Berlian, Please look after
my house. After four weeks of Intan was away abroad, Intans house
was caught by fire and Berlian could only save Intans wedding album.
When Intan returned home, she thanked Berlian for saving her
wedding album which she treasured so much and promised Berlian
that she would pay RM100 for what Berlian had done. Now Intan
refused to pay what she has promised. Advise Berlian.
This means the agreement that is not supported by any consideration is valid if it
fulfils the following conditions:
For example: A, for natural love and affection, promises to give his son, B,
RMl,000. A puts his promise to B into writing and registers it under a law for
the time being in force for the registration of such documents. This is a
contract.
Under the exception, there is a phrase near relation that is attached to the
position of the parties in the agreement. What is meant by near relation? It is not
defined in the Act, but an example of case in which an attempt was made to
define the term, is the case of :
The court granted that: Chinese adopted children are related to the adoptive
parents and brothers, but they were not nearly related to the family of their
adoptive mother. Thus, the uncles and aunties of the adoptive mother did
not stand in near relation to their nephews and nieces. In such a case, there
was no natural love and affection between the signatories and the donees.
The agreement was void.
26 TOPIC 2 LAW OF CONTRACT (CONSIDERATION)
Therefore, in order to enforce the agreement made on account of natural love and
affection, the court must be satisfied that the parties who enter into the
agreement must stand in near relation to each other besides having natural love
and affection. The term near relation is not defined in the Act. Thus, what
signifies near relation may be different for every social group, depending on the
ethnic groups and their customs. This is because the personal law relating to the
family matters are applicable to the groups.
It means, if the promisee has done some act voluntarily on his own will, for the
promisor (without being requested by the promisor), and subsequently the
promisor promises to compensate the promisee for such act, then that promise is
enforceable. Similarly, if the promisee has done some act (an act which the
promisor is compellable to do in law, for example, paying tax to the government)
voluntarily on his own will for the promisor, the promise made by the promisor
to compensate the act is also enforceable.
For example: A supports B's infant son. B promises to pay A's expenses in
doing so. This is a contract and A can enforce Bs promise.
Similar to Section 2(d), this exception covers the principle on past consideration
which has been explained above. If section 2(d) covers an act which has been
done at the request of the promisor, Section 26(b) covers an act which has been
done voluntarily by the promisee (before the promise to compensate the
promisee is made by the promisor). What is meant by voluntarily is not defined
in the Act but an example of case that considered the term is the case of:
TOPIC 2 LAW OF CONTRACT (CONSIDERATION) ! 27
J.M. Wotherspoon & Co. Ltd. v. Henry Agency House [1962] MLJ 86
The court found that: there were promises of compensation made by the
defendant firm to the plaintiff, but these promises were not supported by
consideration. Therefore, the promises cannot be legally enforceable, unless it
falls under Section 26(b); a promise to compensate, wholly or in part, a
person who has already voluntarily done something for the promisor.
The question was whether the plaintiff had already voluntarily done
something for the defendant. It was found that the plaintiff had acted on the
suggestion of the defendant, so that the action could not be said to have been
done voluntarily. Therefore, the promise made by the defendant firm to
compensate the plaintiff was not enforceable.
Thus, in order to enforce the promise made for past consideration under Section
26(b), the promisee must have acted voluntarily for the promisor in that
particular action.
What it means under this exception is that, the promisor is liable to pay a
previous debt (which the creditor cannot recover through legal action because
the time within which the creditor must commence legal action is limited by
statute) if the following conditions arise:
28 TOPIC 2 LAW OF CONTRACT (CONSIDERATION)
The debtor makes a fresh promise to pay the statute-barred debt; and
The promise is made in writing and signed by the person to be charged or
his authorised agent.
For example: A owes B RM1,000, but the debt is barred by limitation. A signs a
written promise to pay B RM500 on account of the debt. This is a contract.
SELF-CHECK 2.2
ACTIVITY 2.2
Discuss the following problems by applying the principle of law on the
exception to consideration:
(a) Mr Ajay was a successful business man. One day, he promised
his eldest son, Suresh that he wishes to transfer one of his
bungalows to Suresh to show how much he loved him. Mr Ajay
made his promise in writing and registered it. A few years later,
when Suresh married Salwath, Suresh requested from Mr Ajay
the possession of the bungalow for him to start his matrimonial
life. However, Mr Ajay was reluctant to accept Salwath as his
daughter-in-law and refused to give Suresh the bungalow.
Advise Suresh.
(b) Azrai, a bank manager left for his hometown in haste as his
mother passed away. He left his briefcase containing important
documents on his table. Unfortunately, a fire broke out at the
bank. Baini, the secretary of the bank manager, saw the briefcase
and realising that the briefcase was so important to her boss,
dashed into the room and took the briefcase with her. Azrai
reported back to work for the subsequent week and felt so
relieved that the briefcase was not destroyed in the fire. Azrai
promised to give Baini a reward in the sum of RM1,000 in return
for Bainis act. Several weeks passed and there was no sign of
Azrai giving Baini the reward. Baini came to see Azrai for the
reward but Azrai refused to pay her on the basis that it was
Bainis duty as his secretary to do so. Advise Baini.
the promise even though he personally does not give any consideration. Such
consideration can come from some other persons. The authority for this principle
is in Section 2(d), Contracts Act which provides the words any other person, in
the following part of the provision:
........the promisee or any other person has done or abstained from doing......
Therefore, even though the promisee does not give any consideration for a
promise made by the promisor, he can still claim for the promise if the
consideration is given by some other persons.
The case was about a sister who agreed to pay an annuity of Rs 653 to her
brothers who provided no consideration for the promise. On the same day,
their mother gave the sister some land with the requirement that the sister
must pay the annuity to her brothers. Later, the sister failed to fulfil her
promise to pay the annuity and her brothers sued her on the promise.
The court ruled that: The sister was liable to pay the brothers. Even though the
consideration did not move from the brothers, there was a valid consideration
that was given by their mother.
need not be adequate as long as the agreement has been entered into by the
parties with free consent. Free consent means the parties do not enter into such
contract under fraud, oppression, misrepresentation, suppression of the value of
property, urgent necessity for money, weakness of understanding or ignorance.
For example: A agrees to sell a horse worth RMl,000 for RMl0. A's consent to
the agreement was freely given. The agreement is a contract notwithstanding
the inadequacy of the consideration.
Thus, if you agree to sell your house that worth RM100,000 to Mr. Man for only
RM100, this agreement is a contract, provided that your consent to sell at that
amount is freely given. You are not under fraud or oppression, etc. to sell at that
price.
For example: A agrees to sell a horse worth RM1,000 for RMl0. A denies that
consent to the agreement was freely given. The inadequacy of the
consideration is a fact which the court should take into account in considering
whether or not A's consent was freely given.
means the court will consider the adequacy of consideration, only when the issue
of free consent is raised by the contracting party.
This case involved the respondent who agreed to transfer a parcel of land to
the appellant on payment of $500 when the land was subdivided. At that time,
the land was worth much more than the price. Subsequently, the respondent
refused to honour the promise and claimed that the promise was
unenforceable. The trial judge in the case held that the agreement was void
because of inadequacy of consideration. However, on appeal, the Federal
Court reversed the decision and applied the principle in Explanation 2 of
Section 26.
Hence, the agreement to transfer the land to the appellant for the $500 payment
was valid and the promise was enforceable because the consent was freely given
by the respondent although the consideration was inadequate.
32 TOPIC 2 LAW OF CONTRACT (CONSIDERATION)
SELF-CHECK 2.3
(a) Can the promisee enforce the promise made by the promisor if
the consideration is given by some other persons?
(b) Would the principle on the above situation (para (a) above) be the
same under the English common law?
(c) What is meant by adequacy of consideration?
(d) Why is the free consent of the promisor important in considering
the adequacy of consideration?
ACTIVITY 2.3
Text Books:
Harlina Mohamed On & Rozanah Ab. Rahman. (2007). Undang-Undang
Perniagaan Malaysia. Selangor: Kumpulan Usahawan Muslim Sdn. Bhd.
34 TOPIC 2 LAW OF CONTRACT (CONSIDERATION)
Keenan, D. (2006). Smith and Keenans Law for Business (13th ed.). UK:
Pearson and Longman.
Wu, M. A. & Vohrah, B. (2000). The Commercial Law of Malaysia (2nd ed.).
Selangor: Pearson and Longman.
Cases:
J.M.Wotherspoon & Co. Ltd. v. Henry Agency House [1962] MLJ 86.
Kepong Prospecting Ltd. & S.K. Jagatheesan & Ors v. A.E. Schmidt &
Marjorie Schmidt [1968] 1 MLJ 170.
Lampleigh v. Braithwait (1615) 80 ER 255.
Osman bin Abdul Ghani & Ors v. United Asian Bank Bhd [1987] 1 MLJ 27.
Phang Swee Kim v. Beh I Hock [1964] MLJ 383.
Re Tan Soh Sim [1951] MLJ 21.
Venkata Chinnaya v. Verikataramaya (1881) I.L.R. 4 Mad. 137.