LAW 2220 –BUSINESS LAW

Chapter 5: LAW OF CONTRACT (Consideration)

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Contents

1. Introduction2. Definition3. General Rule4. Types of consideration5. Rules governing consideration6. Exceptions to general rule

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Objectives

Students will be able to explain:1. Explain the definition of consideration2. Describe the relevant principles of law which

are relevant to consideration3. Apply the principles of law to the given

situations.

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1. Introduction• An agreement is formed when one party accepts the

offer of another. Nevertheless, not all agreements can be enforced by the courts. The presence of offer and acceptance alone does not make a contract.

• A transaction must be supported by consideration in order for it to be a contract.

• The common law does not recognize bare promises. It emphasizes the element of ‘bargain’ in commercial transactions and hence, the need for ‘something in exchange for something’.

• The element of exchange is known as “CONSIDERATION”.

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2. Definition

• Broadly stated, consideration is the price of a promise or an exchange of promises.

• Legal definition– s. 2 (d) of CA 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 for the promise”.

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• Broadly stated, consideration is the price of a promise or an exchange of promises.

• Traditional definition which is slightly confined to benefit and detriment.

• Curie & Ors v Misa (1875) :– 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.

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1. Executory considerationK Murugesu v Nadarajah [1980] 2 MLJ 82

The R was the tenant of the appellant. The R had asked the A to sell him the house he was living in. The A finally wrote on a piece of paper an agreement to sell to the R the said house for $26K within 3 months from the date of agreement.

Later, the A refused to sell and the R sued for specific performance.

The A contended that there was no consideration for the offer to sell and the agreement was void for being without consideration.

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Court’s decision

• The Federal Court:• The agreement must be seen to be a case of

executory consideration. A promise is made by one party in return for a promise made by the other.

• The court further stated that where there was a promise against a promise, one promise was consideration for the other because each may have his action against the other for non-performance.

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Think about Balfour v Balfour!

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2. Definition (cont)

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2. Definition (cont)

• Therefore, consideration may be viewed as the price which one party pays to buy the promise or act of the other i.e. when the promisor promises to do or to abstain from doing something, the promisee must pay a price for it.

• Consideration can involve an exchange of benefits between two parties – Lim and Tan.

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Example:• Lim promises Tan RM50 if he cuts the grass in

Lim’s garden. If Tan agrees and cuts the grass in the garden, Lim is contractually bound to pay Tan RM50.

– The cutting of the grass in the garden is the consideration for Lim’s promise.

– It is also the price that Tan pays for Lim’s promise.

– LIM?

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UNILATERAL CONTRACT

• A promise in return of an act as between Lim and Tan– LIM – promises to pay RM50– Tan – to perform the act requested by LIM

(promisor)

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BILATERAL CONTRACTS

• A promise in return of a promise

• Rihanna agrees to buy a car for RM1m from a distributor– Rihanna’s consideration - the promise to pay

RM1m

– Distributor’s consideration - to pass ownership to Rihanna

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• S. 2 (c) of CA 1950 – the person making the offer is called the promisor while the person to whom it is made is referred to as the promisee.

• However, inasmuch as parties to a contract exchange promises, in reality each is at once a promisor as well as a promisee.

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3. General rule• s. 26 of CA – “an agreement made without

consideration is void…”.

• Illustration (a) of s. 26 CA, 1950A promises, for no consideration, to give to B RM1,000. This is a void agreement.

Why?B does not give anything in return of A’s promise.Only 1 party gives some consideration here i.e. A

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4. Types of consideration

3 types

Executory Executed Past

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1. Executory consideration• in which is yet to be given or performed. • This is good in law.

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1. Executory consideration (cont) Promise to sell - 1

S B = CONTRACT

Promise to buy - 2

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valid

1. Executory considerationK Murugesu v Nadarajah [1980] 2 MLJ 82

The R was the tenant of the appellant. The R had asked the A to sell him the house he was living in. The A finally wrote on a piece of paper an agreement to sell to the R the said house for $26K within 3 months from the date of agreement.

Later, the A refused to sell and the R sued for specific performance.

The A contended that there was no consideration for the offer to sell and the agreement was void for being without consideration.

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Court’s decision• The Federal Court:• The agreement must be seen to be a case of

executory consideration. A promise is made by one party in return for a promise made by the other.

• The court further stated that where there was a promise against a promise, one promise was consideration for the other because each may have his action against the other for non-performance.

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1. Executory consideration (cont)

– Examples:• S offers to sell B his car for RM50,000 and B accepts. S is yet to deliver the

car to B and B is yet to pay the price. • Hence, the consideration on both sides is said to be executory, still

outstanding and to be performed in the future.

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2. Executed consideration

• consideration which has been completed by a party at the time of the contract.

• This is good in law.

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ii) Executed consideration (cont)

promise to pay - 1

A VALID B = CONTRACT

act performed - 2

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ii) Executed consideration (cont)– Examples:

• S offers to sell B his car for RM50,000 and B accepts. S delivers the car to B and B is to pay the purchase price a week later. Under this arrangement, S has nothing more to do, the consideration on his part, the car, has already been delivered. His consideration is executed.

• A offers RM200 to anyone who finds and returns his digital camera which he has earlier lost. B finds and returns his digital camera in response to the offer. B’s consideration for A’s promise is executed, and only A’s liability remains outstanding.

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Think of Carlill v Carbolic Smoke Ball Co.’s case

• Mrs Carlill’s consideration… – was executed

• WHY? She did not promise to use a smoke ball and catch flu, she just did it.

• Smoke Ball’s consideration…– was executory being a promise i.e. to give the

reward

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iii) Past consideration

• when a promise is made subsequent to and in return for an act that has already been performed. Consequently, the promise and the act in question are not in response to each other.

• This is however generally good consideration in Malaysia.

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iii) Past consideration (cont)Promise after an act

act performed – 1

A VALID B = CONTRACT

promise to pay - 2

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iii) Past consideration (cont)

– Example:

• A finds and returns B’s digital camera and in gratitude, B promises to reward him with RM200. Here B made a promise in return for A prior act i.e. return his digital camera. The return of the camera was an act in the past done independently of B’s promise and will be past consideration.

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5. Rules governing consideration

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1. Consideration need not be adequate

• The rule has emerged that consideration must be sufficient (acceptable) in law, but it needs not be adequate.

• Sufficient consideration means some consideration that is recognized by the law, – however small

• Adequate consideration means something which is equal in value to what is being given by the other party.

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Sufficient

• A shop and I have agreed that I could have the a new flat screen TV for RM10.

• My consideration would have been sufficient but would not have been adequate.

• WHY not adequate?– because RM10 is not the same value as the shop’s

consideration.

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1. Consideration need not be adequate (cont)

• Both under common law and under the Contracts Act, the law does not concern itself with values, unless a party alleges duress, fraud or some such vitiating element.

• Example: If A is minded to sell his bungalow worth RM1 million to B for only RM50,000, it will be a valid contract, unless A later alleges and proves that some element vitiating his free consent.

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1. Consideration need not be adequate (cont)

• Explanation 2 of s. 26 of CA, 1950.– An agreement to which the consent of the

promisor is freely given is not void merely because the consideration is inadequate…

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1. Consideration need not be adequate (cont)

• Illustration (f) of s. 26 of CA, 1950– A agrees to sell a horse worth RM1,000 for RM10.

A’s consent to the agreement was freely given. The agreement is a contract notwithstanding the inadequacy of the consideration.

• The sum of money obviously not adequate for his promise but the court will not assess whether a promisor has received adequate consideration. It appears that the adequacy of consideration is immaterial.

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1. Consideration need not be adequate (cont)

• However, Explanation 2 of s. 26 CA, 1950 further provides:-

– … but the inadequacy of the consideration may be taken into account by the court in determining the question whether the consent of the promisor was freely given.

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Bolton v. Madden (1873) LR 9 QB 55

• Held: The adequacy of consideration is for the

parties to consider at the time of making the arrangement and not for the court when it is sought to be enforced.

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Phang Swee Kim v. Beh I Hock (1964) MLJ 383

• Facts: In 1944, by a memorandum of transfer and in consideration of $20,000 in Japanese currency, the respondent transferred his half share of the land to the appellant’s husband, now deceased. The transfer was not registered but the deceased obtained possession of the land.

• The appellant, the widow of the deceased continued to be in possession after his death. In 1963 the land was sub-divided and the respondent became the sole proprietor of the lot occupied by the appellant.

• Subsequently, the respondent’s solicitors notified the appellant that she had trespassed on the land and asked for vacant possession. At the hearing the appellant claimed that there was an oral agreement made between her and the respondent in which the respondent agreed to transfer the land to her on payment of $500.

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Phang Swee Kim v. Beh I Hock (1964) MLJ 383

• Held: The learned trial judge decided that the agreement was void due to inadequacy of consideration.

• However on appeal, the Federal Court held that by virtue of explanation 2 to s. 26, the inadequacy of the consideration was immaterial. Thus, the transfer of land for RM500 is valid as there was no evidence of fraud or duress.

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2. Consideration may move from the promisee or any other person

• Authority– s. 2 (d) of CA, 1950 states that:-– “…the promisee or any other person…”– i.e. consideration can move from third party.

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Case: Venkata Chinnaya v. Verikatara Ma’ya

• Facts: A sister agreed to pay an annuity of Rs653 to her brothers who provided no consideration for the promise. But on the same day, their mother had given the sister, her estate subsequently failed to fulfill her promise to pay the annuity, her brother sued her on the promise.

• Held: She was liable on the promise on the ground that there was a valid consideration for the promise even though it did not move from the brothers.

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3. Past consideration is good consideration

• Something which wholly performed before the promise was made. It was made or given not in response to the promise. Promise is subsequent to the act and independent of it.

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Legal position of past consideration

• Malaysian law: Past consideration is a good consideration.

• Authority: s. 2 (d) of CA, 1950 : “…has done or abstained from doing”.– The use of the words implies that even if the act is prior to the

promise, such an act would constitute consideration so long it is done at the desire of the promisor.

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Kepong Prospecting Ltd. V. Schmidt [1968] 1 MLJ 170

• Facts: Schmidt, a consulting engineer has assisted another in obtaining a permit for mining iron ore in the state of Johore. He also helped in the subsequent formation of the company, Kepong Prospecting Ltd., and was appointed Managing Director.

• After the company was formed, an agreement was entered into between them under which the company undertook to pay him 1% of the value of all ore sold from the mining land. This was in consideration of the services rendered by the consulting engineer for and on behalf of the company prior to its formation, after incorporation and for future services.

• The services prior to the company’s formation could not amount to consideration as they could not be rendered to a non-existent company, nor could the company bind itself to pay for services claimed to have been rendered before its incorporation.

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Kepong Prospecting Ltd. V. Schmidt [1968] 1 MLJ 170 (cont)

• Issue: Whether services rendered after incorporation but before the agreement, were insufficient to constitute a valid consideration even though they were clearly past.

• Held:– Past consideration did constitute a valid

consideration. So Schmidt was entitled to his claim on the amount.

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English law: Past consideration is not a good consideration.

• Case: Roscorla V Thomas [1842]Facts: Roscorla purchased a horse from Thomas. After the sale was completed, Thomas promised him that the horse was in good condition and not vicious. In fact the horse was vicious.

Issue: Was there consideration to support the promise that the horse was not vicious.

Decision: The seller’s promise was not binding. It was made after the sale had been completed and the buyer had given nothing in return for it. The buyer could not rely on the prior sale to support the new promise as it was past consideration.

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Exceptions:-

• It means that past consideration is good in the following circumstances:-• Case: Lampleigh v Braithwait (1615)

D killed a man and asked P to obtain for him a royal pardon. P did so and D then promised to pay him £100. D broke this promise and P sued him. P succeeded in this action because D’s request was regarded as containing an implied promise to pay, and the subsequent promise to pay £100 was merely fixing the amount.

• Case: Pao On v Lau Yiu Ling (1980)Lord Scarman gave several requirements for past consideration to be good, namely:

– a service has been rendered– at the request of the promisor– on the understanding that a payment will be

made.

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Past consideration – act voluntarily done?

• Illustration (c) of s. 26 of CA, 1950

– A finds B’s purse and gives it to him. B promises to give A RM50. This is a contract.

• VALID consideration

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4. Part payment may discharge an obligation

• s. 64 of CA, 1950– “Every promise may dispense with or remit, wholly or

in part, the performance of the promise made to him, or may extend the time for such performance, or may accept instead of it any satisfaction which he thinks fit”.

• General rule is that payment of a smaller sum is a satisfaction of an obligation to pay a larger sum.

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4. Part payment may discharge an obligation (cont)

• Illustration (b) to s. 64 of CA, 1950– A owes B RM5000. A pays to B and B accepts in

satisfaction of the whole debt, RM2000 paid at time and place which the RM5000 were payable. The whole debt is discharged.

• Illustration (c) to s. 64 of CA, 1950– A owes B RM5000. C pays to B RM1000 and B

accepts them, in satisfaction of his claim on A. This payment is a discharge of the whole claim.

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Kerpa Singh v. Bariam Singh [1966] 1 MLJ 38

• Facts: Bariam Singh owed Kerpa Singh RM8.869.94 under the judgement debt. The debtor’s son wrote a letter to Kerpa Singh, offering RM4000 in full satisfaction of his father’s debt and endorsed a cheque for the amount, stipulating that should Kerpa Singh refuse to accept his proposal, he must return the cheque. Kerpa Singh’s legal advisor having cashed the cheque and retained the money, proceeded to secure the balance of the debt by issuing a bankruptcy notice to the debtor.

• Held: The acceptance of cheque from the debtor’s son in full satisfaction precluded them from claiming the balance.

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• English law – in Pinnel’s case established that payment of a smaller sum is not a satisfaction of an obligation to pay a large sum.

• Pinnel’s case (1602) • Facts: D owed P certain sum of money, which was due in November. P

asked D to pay a lesser sum before the due date, i.e. October, because he was in need of money and promised not to sue for the balance. D paid the sum but P sued for the balance.

• Plaintiff won on technical point. The court stated that payment of a lesser sum could not be any satisfaction for the whole. This is because by no possibility a lesser sum can be satisfaction to the creditor for a greater sum.

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6. Exceptions to general rule

• What is the general rule?– ????

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EXCEPTIONS

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1. An agreement on account of natural love and affection

• s. 26 (a) of CA, 1950• The validity of this agreement is dependent upon the

following condition:-a) it is expressed in writing;b) it is registered (if applicable);c) it is made on account of natural love and affection

between parties standing in near relation to each other.

• (near relation is varies from one social group to another as it depends on customs and practices of such group)

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1. An agreement on account of natural love and affection

• Case: Re Tan Soh Sim [1951] 1 MLJ 21– On the facts of the case the court held that a

Chinese adopted son is related to the family of his adoptive father.

• English law does not recognize natural love and affection as valid consideration.

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2. An agreement to compensate for something voluntarily done

• s. 26 (b) of CA, 1950

– There are two (2) limbs to this exception:-• it is promise to compensate either wholly or in part the other

person (promisee)• the promisee has voluntarily done something for the promisor.

• So, the act that has been performed by the promisee prior to the agreement must have been performed voluntarily.

• Illustration (c) of s. 26 of CA, 1950

– A finds B’s purse and gives it to him. B promises to give A RM50. This is a contract.

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3. An agreement to compensate something which promisor was legally compellable to do

• s. 26 (b) of CA 1950– The necessary ingredients are as follows:-

a) the promisee has voluntarily done an actb) the act is one which the promisor was legally compellable to

doc) an agreement to compensate, wholly or in part the promise

for the act.

• Illustration (d) of s. 26 CA 1950– A supports B’s infant son. B promises to pay A’s expenses in so doing. This is a

contract.

• Example:– If X pays a fine imposed by the court on Y who promises to compensate him, that

promise is binding under this provision.

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4. A promise to pay a statute-barred debt

• s. 26 (c) of CA 1950

– A statute-barred debt refers to a debt which cannot be recovered through legal action because lapse of time fixed by law i.e. under the Limitation Act 1953 the time limit is 6 years from the time of cause if action arises.

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4. A promise to pay a statute-barred debt (cont)

• General rule is that where more 6 years have elapsed from the cause of action the aggrieved party cannot sue.

• s. 26 (c) CA, 1950 creates an exception to this rule but subject to several conditions namely:-

a) the debtor made fresh promise to pay the statute-barred;b) the promise is in writing and signed by the person to be charged

or is authorised agent in that behalf.

• Illustration (e) of s. 26 CA 1950– A owes B RM1000, 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.

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TUTORIAL QUESTIONS

1. Define consideration and discuss TWO (2) rules of governing consideration.

2. Give the different types of consideration and their legal position.

3. Identify the general rule governs the consideration and its exceptions.

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TUTORIAL QUESTIONS (cont)

4. Mamat was swimming in the river and got into difficulty. Muthu, who was passing by heard Mamat’s cries for help took off his coat and dived into the river and saved Mamat from drowning. Mamat later promised to give RM2000 to Muthu for saving his life. Advise Muthu whether he can enforce the promise made by Mamat. (10 marks)

5. Sharifah sold her diamond earring to Zeti for RM50. Discuss the validity of the contract. (15 marks)

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6. Are the following promises legally binding or merely gratuitous?i) Roy returned Brown’s lost cat. Brown promised him RM200.ii) John agreed to sell his Ford sport car to David for RM10.iii) Mary promises her employee, Peter that she will give him a RM100 bonus if he is able to exceed sales target for 3 consecutive months.

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