Consideration

General Rule

Section 26 CA – an agreement made without consideration is void.

This is because the law only enforces bargains, not gratuitous promises which are not
supported by consideration.

Definition – what is consideration?

Statutory definition:

Section 2(d) Contracts Act 1950 – defined ‘consideration’ to mean:

i. At the desire of the promisor.

ii. the promisee or any other person
iii. has done/abstained from doing, or does/abstains from doing or promises to
do / abstain from doing, something,
iv. such act/abstinence/promise is called consideration for the promise.

Therefore, consideration refers to something of a legal value given in exchange for a

promise

Common type of consideration: Tangible payment(money @ property)

Example: Zarina has lost her cat. She promises to pay a reward of RM500/- to anyone
who finds her cat and returns it safely to her. Zuraini finds the cat. She has knowledge of
the reward. She is entitled to the reward. Zuraini’s act of finding the cat and returning it
to Zarina is the consideration for Zarina's promise to pay RM500/

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 TYPES OF CONSIDERATION

CONSIDERATION
Executory
Consideration
TYPES OF

Executed
Consideration

Past
Consideration

EXECUTORY CONSIDERATION

Consideration is executory when there is an exchange of promises to perform acts in the

future.

• For example, A promises to deliver goods to B at some future date and B

promises to pay A for the goods when he receives the shipment.
If A does not deliver the widgets to B, B can sue A for breach of contract.

EXECUTED CONSIDERATION

If one party makes a promise in exchange for an act by the other party, when that act is
completed, it is executed consideration.

Example: In a unilateral contract where A offers £50 reward for the return of her lost
handbag, if B finds the bag and returns it, B's consideration is executed.

PAST CONSIDERATION

If one party voluntarily performs an act, and the other party then makes a promise, the
consideration for the promise is said to be in the past. Under English law, the rule is that
past consideration is no consideration, so it is not valid and cannot be used to sue on a
contract. Act is completed before the promise is made.

Example

Abu is drowning. Ali who was passing by heard Abu’s cries for help. Ali dived into the river
and saved Abu from drowning. Abu promised to give RM 1000 to Ali. The act of saving Abu
was performed before the promise was made and the promise was made after the act.
.

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 • Under Malaysian contract law, past consideration is valid consideration
• Under S2(d), The words “has done or abstained from doing” implies that even if
the act done was prior to the promise, such an act would constitute
consideration as long as it was done at the desire of the promisor.

Kepong Prospecting Ltd & S.K Jagatheesan & Ors v A.E Schmidt & Marjorie Schmidt [1968]

S a consultant engineer has assisted another in obtaining a prospecting permit for mining
iron ore. He also helped in the subsequent formation of Kepong Prospecting Ltd and was
appointed as its MD.

After the company was formed they entered into an agreement whereby the company
undertook to pay 1% of the value of all ore sold from the mining land being the
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 issue to be determined was whether services rendered after incorporation but before
the agreement (before the promises was made), were sufficient to constitute a valid
consideration even though they were clearly past.

Decision
These services rendered after incorporation but before the agreement (before the
promises was made), did constitute a valid consideration so that Schmidt was entitled to
his claim on the amount since S2(d) expressly provides for this.

• ENGLISH LAW- PAST CONSIDERATION IS NOT GOOD CONSIDERATION

Roscorla v Thomas (1842)

The claimant bought a horse from the defendant. After the sale finished the defendant
told the claimant that it was a sound horse and did not have any vice such as bad
temper. The truth however was quite different from what the claimant had been told.
The horse had very bad temper and was ferocious. The claimant sued the defendant.

The court decided that the claimant could not sue because the statement about
the horse (promise) had taken place after the sale was completed (after the
act)whereby past consideration is not good consideration

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RULES RELATING TO CONSIDERATION IN MALAYSIA

PAST CONSIDERATION IS
GOOD CONSIDERATION
IN MALAYSIA
CONSIDERATION MUST
BE SUFFICEINT AND IT
NEED NOT BE
ADEQUATE. IT MUST
HAVE A VALUE.

CONSIDERATION NEED A PAYMENT OF A

NOT MOVE FROM THE SMALLER SUM IS A
PROMISEE. IT CAN SATISFACTION OF AN
MOVE FROM A THIRD OBLIGATION TO PAY A
PARTY LARGER SUM

CONSIDERATION MUST BE SUFFICIENT AND NEED NOT BE ADEQUATE

• CONSIDERATION MUST HAVE VALUE IN THE EYES OF THE LAW. There is no

requirement that the consideration must be at market value, as long as the
promisee provides something in value i.e. £1 for an exchange of a car would be
valid.

The courts are not concerned the adequacy.

Chappell & Co v Nestle (1960)

Facts

Nestle ran a promotion whereby it sold a record to the public in return for money and
three chocolate wrappers.

Chappel, a record seller, applied for an injunction to prevent the sale at such a price, as
Nestle was not paying the statute-required 6.25% of the purchase price to the copyright
holders

Decision

Here the wrappers formed part of the consideration for they evidenced purchase of
three chocolates manufactured by Nestle and hence were of economic value to them;

Sweet wrappers could be good consideration. Consideration must be sufficient and need
not be adequate.

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 • Explanation 2 to Section 26 of Contracts Act 1950

(An agreement cannot be declared void just because of inadequacy of consideration but
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)

Inadequacy of consideration can be taken into account to determine whether consent

was freely given. However, an agreement cannot be void due to inadequate
consideration.

• The illustration (f) to Section 26 of Contracts Act 1950 clearly states the
application of the rule:

“A agrees to sell a horse worth RM 1,000 for RM 10. A's consent to the agreement was
freely given. The agreement is a contract notwithstanding the inadequacy of the
consideration”.

• case: Phang Swee Kim v Beh I Hock

There was an oral agreement made between A and R in which R agreed to transfer the
land to A on payment of $500. Upon payment of $500, A possessed the land. Later, R
claimed that the A had trespassed on his land and he bought an action claiming for
possession of the land from A.

held: Consent given by R was free. Undervalued price of land was considered as
sufficient consideration

Consideration Need Not Move From The Promisee

• Under English law, consideration must move from the promisee and any person
who provides consideration other than the promisee will not be able to enforce
the contract.

Dunlop Pneumatic Tyre Co v Selfridge

Dunlop sold tyres to a distributor, under the agreement that they would not be
sold to consumers at a price below their list price

A retailer, who purchased from the distributor, sold the tyres at a price below the
list price. Could Dunlop enforce the selling at or above the list price with the
retailer?

It was decided that Dunlop was a third party to the contract between the
retailer and the distributor, therefore there could be no enforcement

• However, under Malaysian law, a promisee or third party may provide

consideration.

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 • Section 2(d) provides that “…when…the promise or any other person has
done…something, such act…is called a consideration for the promise…”

Venkata Chinnaya v Verikatara Ma'ya (1881)

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
some land, stipulating that she must pay the annuity to her brothers. The sister
subsequently failed to pay the annuity and was sued by her brothers.

The court held she was liable to pay the annuity. There was good consideration for the
promise even though it did not move from her brothers.

Part Payment Of Debt

Under English law, a payment of a smaller sum is not a satisfaction of an obligation to

pay a larger sum.

The rule was affirmed in Pinnel’s case and also in Foakes v Beer (1884)

Facts

Foakes owed Beer a £2000 debt following a court order

Foakes negotiated with Beer that he could pay £500 immediately then the rest in
instalments

Once payment was complete, Beer bought an action for the interest owed

Issue

Could Foakes be liable for interest?

Decision

Claim was allowed. As per Pinnel’s Case [1602], part payment of a debt is not
satisfaction of the whole. As such, interest was owed because there had been only part
payment

In Malaysia, Sec 64 Contracts Act 1950 provides that, a payment of a smaller sum is a
satisfaction of an obligation to pay a larger sum

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Kerpa Singh v Bariam Singh –

Mr B owed monies to Mr K. Mr B’s son made out a cheque for the value of less than half
the sum owed and sent it to Mr. K, with the stipulation that if Mr K doesn’t return the
cheque, it will be taken that the payment was in full settlement of the whole debt. Mr. K,
cashed the cheque and demanded for the rest of the sum owed. The Federal Court held
that the acceptance of the cheque in full settlement precluded him from claiming for the
balance.

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EXCEPTIONS TO THE LAW ON CONSIDERATION

FIRST EXCEPTION

Under s.26 Contracts Act 1950, the general rule on consideration is that an
agreement made without consideration is void.

However, there are exceptions to the above rule. In any of these situations, an
agreement will be valid even if no consideration is given

Promise made in consideration of Natural Love And Affection

At common law, promise made in consideration of natural love and affection is void.

However, Malaysia recognises natural love and affection as Section 26(a) Contracts
Act 1950 illustrated that an agreement without consideration is void unless it is

• expressed in writing,
• registered,
• It must be made on account of natural love and affection
• and the parties stand in near relation to each other

Re Tan Soh Sim; Chan Lain Keong & Ors v Tan Saw Keow & Ors [1951 & Ors (1951),

The court held that the validity of consideration depended on natural love and affection
between near relations, relationship and nearness depended on the mores of the group to
which the parties belong and the circumstances of the particular family.

Mores- customs and behavior’s

In the case of Re Tan Soh Sim [1951] 1 MLJ Chinese adopted children could not be
regarded as being 'in near relation' to the uncles and aunts of the adoptive mother.

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 SECOND EXCEPTION

Section 26 (b)

An agreement without consideration is void unless

• it is a promise to compensate, wholly or in part, a person who has already
voluntarily done something for the promisor,
• or something which the promisor was legally compellable to do;

(Contrast this with S2(d) where the act of the promisee is at the desire (request) of
the promisor.)

Section 26 illustration (c):

A finds B’s purse and give it to him. B (later) promises to give A RM50.00. This is
a contract.

In illustration (c), the act of finding and returning the purse has already been
performed or done, and voluntarily, before the promise to compensate RM50
was made. B is now legally compelled to do his part. Such act constitutes good
consideration for the promise subsequently made.

Note: Here there was no request by the promissor i.e. ‘at the desire of the
promisor’. B did not request A to find the purse. The promise of reward was not
because B has asked A to find the purse.

Section 26 illustration (d):

A supports B’s infant son. B promises to pay A’s expenses in so doing. This is a
contract.

In illustration (d), since A is supporting B’s infant son and B promises to pay A’s
expenses in doing so, there is a contract because the Act by B is one which he is
legally compellable to do.

THIRD EXCEPTION

Section 26(c) of the Contracts Act states that a promise to pay a debt barred by limitation
law should be in writing and signed by the debtor.

Example: A owes B RM1,000, but the debt is barred by limitation. A signed a written promise
to pay B RM500 on account of the debt. This is a contract.

Debt barred by limitation is a debt which cannot be recovered through legal action because
of the lapse of time fixed by law.
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Intention to Create Legal Relations
INTENTION TO
CREATE LEGAL
RELATIONS

DOMESTIC/SOCIAL
AGREEMENTS COMMERCIAL
AGREEMENTS
(General rule :
(There is ITCLR)
No ITCLR)

Balfour v Balfour Meritt v Meritt

Edwards v Skyways
(No ITCLR) (There was ITCLR)

An agreement reached between an offeror and an offeree will be a legally binding

contract only if the parties intended that they should be legally bound. In other words
both parties should agree that there are legal consequences if the promise is broken.

Social or domestic agreements

In social or domestic agreements, the presumption is that both do not intend to create
legal relations.

Balfour v Balfour

The husband in this case was about to travel for work to Ceylon. Before leaving he
agreed to pay his wife a monthly allowance but failed to do so. The wife sued for the
sum but the courts held that this was a domestic agreement and therefore the parties
didn’t intend to create legal relations.

However, this presumption can be rebutted based on the facts of the case.

Meritt v Meritt

The husband agreed to pay the wife a monthly maintenance and in return for the wife
paying for the charges to their matrimonial home he wrote and signed a document that
he would transfer the said property to her. He later failed to transfer the property to the
wife.

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It was held that there was a valid agreement because the parties had the intention to
create a legal relation when the matter was put in writing and the wife had provided
consideration by agreeing to pay for the mortgage to the house.

Business or commercial agreements

Since such agreements are generally formal in nature, the presumption is that there is
intention to create legal relations. This means that, any such agreements would prima
facie raise the presumption of intention to create legal relations unless proven
otherwise.

Edwards v Skyways

The plaintiff in this case was a pilot who was made redundant by the defendant. The
defendant had informed the Pilots Association that ex gratia would be paid but failed to
do so. When sued by the pilot, the defendant argued that as an ex gratia payment is a gift
there was no intentions to create legal relations.

The courts held that such an agreement was a business agreement and therefore, the
presumption was that there was intention to create legal relations unless there is
evidence to rebut the presumption. This means that the Defendant was legally bound to
fulfil his promise.

Privity of Contract.

✓ The common law doctrine of privity of contract dictates that only persons who
are parties to a contract are entitled to take action to enforce it.
✓ It means that only those who are parties to the contract or privy to the contract
can sue or be sued on it .
✓ A contract generally, cannot confer rights or impose obligations arising under it
on any person except the parties to it.
✓ A person who is not a party to a contract may not enforce a contract even though
he stands to gain a benefit from the contract (a third party beneficiary).

Examples

✓ If A enters into a contract with B, only A and B can sue on the contract, C who is
not a party to the contract cannot do so.
✓ A buys a car from B and gives it to his wife C. The car was faulty. C cannot take an
action in contract against B because she is not a party to the contract between A
and B.

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Since the Contracts Act 1950 is silent on this matter, the English law is applied pursuant
to the Civil Law Act 1956.

In Kepong Prospecting Ltd v Schmidt (1968), it was held that the English principle of
privity of contract, namely that only a party to a contract can sue or be sued, is also
applicable in Malaysia.

DEFINITIONS

CONSIDERATION
Section 2(d) Contracts Act 1950 – defined ‘consideration’ to mean:

i. At the desire of the promisor.

ii. the promisee or any other person
iii. has done/abstained from doing, or does/abstains from doing or promises to
do / abstain from doing, something,
iv. such act/abstinence/promise is called consideration for the promise.

Curie v Misa

Consideration means ‘some right, interest, profit or benefit to one party or some
forbearance, detriment, loss or responsibility given, suffered or undertaken by the other
(the promisee).

TYPES OF CONSIDERATION

EXECUTORY CONSIDERATION

Consideration is executory when there is an exchange of promises to perform acts in the

future.

EXECUTED CONSIDERATION

If one party makes a promise in exchange for an act by the other party, when that act is
completed, it is executed consideration.

PAST CONSIDERATION

If one party voluntarily performs an act, and the other party then makes a promise, the
consideration for the promise is said to be in the past. Under English law, the rule is that
past consideration is no consideration, so it is not valid and cannot be used to sue on a
contract. Act is completed before the promise is made

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 Kepong Prospecting Ltd & S.K • Past consideration is good consideration
Jagatheesan & Ors v A.E Schmidt
& Marjorie Schmidt [1968]

• Past consideration is not valid consideration

Roscorla v Thomas

Chappell & Co V Nestle • Consideration must be sufficient and need not

be adequate
Phang Swee Kim v Beh I Hock

• A promisee or third party may provide

Venkata Chinnaya v Verikatara consideration.
Ma'ya

• Consideration must move from the promisee.

Dunlop Pneumatic Tyre Co v
Selfridge

Pinnel’s case • a payment of a smaller sum IS NOT a satisfaction

of an obligation to pay a larger sum
Foakes v Beer

• a payment of a smaller sum IS A satisfaction of

Kerpa Singh v Bariam SIngh an obligation to pay a larger sum

• In social or domestic agreements, the

Balfour v Balfour presumption is that both do not intend to create
legal relations.

• In business or commercial agreements, the

Edwards v Skyways presumption is that there is intention to create
legal relations

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