Chapter 2D: Formation

of Contract-
Consideration
 Consideration (Definition)
1. Consideration as defined in Currie v. Misa (1875):
 A right, interest, profit or benefit accruing to one party, or
 A forbearance, detriment, loss or responsibility given, suffered
or undertaken by the other

2. Simplified definition: A benefit provided or a responsibility accepted

in relation to a contract

3. In contract law consideration is concerned with the bargain of the

contract. A contract is based on an exchange of promises. Each party
to a contract must be both a promisor and a promisee. They must
each receive a benefit and each suffer a detriment. This benefit or
detriment is referred to as consideration.
 Consideration (Definition)
3. Section 2(d), Contracts Act 1950 defines consideration
as follows: An act, abstinence, promise undertaken at
the desire of a party to a contract
 Act - Something done (E.g., Payment of premium/claim)
 Abstinence – Something not to be done (E.g., Non-
cancellation of policy)
 Promise (E.g., Payment of future insured losses, provision
of future policy loan, declaration of bonus)
 Consideration may be provided by another person (E.g., a
father paying the price of the computer for his son)
 Consideration may benefit another person (E.g., a
boyfriend buying flowers for his girlfriend)
 Consideration (Sale & Purchase)
1. Payment of money (price) is consideration
 For seller – It is a benefit provided in relation to the sale
 For buyer – It is a liability accepted in relation to the purchase
 It is an act undertaken at the desire of the seller
2. Delivery of goods (Conferment of ownership) and
provision of warranty, etc are considerations
 For buyer – They are benefits provided in relation to the
purchase
 For seller – They are liabilities accepted in relation to the sale
 They are acts/promises undertaken at the desire of the buyer
 Consideration (Insurance)
1. Premium(s) payment is consideration
 For insurer – It is a benefit provided under the insurance
 For policyholder – It is a liability accepted under the
insurance
 It is an act undertaken at the desire of the insurer
2. Claim(s) payment is consideration
 For policyholder – It is a benefit provided under the
insurance
 For insurer – It is a liability accepted under the insurance
 It is an act (or promise) undertaken at the desire of the
policyholder
 Consideration (Insurance)
3. Other instances of consideration in insurance
 Motor insurance – NCB or premium refund, towing of
vehicles.
 Engineering insurance – Inspection services
 Misc. insurance – Premium refund
 Life insurance
− Bonus payment

− Paid up policy

− Surrender sum

− Policy loan

− Policy upgrade

− Guaranteed renewal
 Consideration (Legal Recognition)
1. Any legally recognised act, abstinence or promise
(though insignificant) can be consideration
 Bainbridge v. Firmstone – Opportunity to weigh boilers
 Haigh v. Brooks – Possession of document with doubtful
validity
 Chappell v. Nestle – “Rockin’ Shoes” records sold for 1s
6d plus 3 Nestle sweet wrappers
Consideration (Legal Recognition)

 Chappel v Nestle [1960] AC 87 House of Lords

Nestle ran a sales promotion whereby if persons sent in 3 chocolate bar wrappers and a postal
order for 1 shilling 6d they would be sent a record. Chappel owned the copyright in one of the
records offered and disputed the right of Nestle to offer the records and sought an injunction to
prevent the sales of the records which normally retailed at 6 shillings 8d. Under s.8 of the
Copyright Act 1956 retailers were protected from breach of copyright if they gave notice to the
copyright holders of the ordinary retail selling price and paid them 6.25% of this. Nestle gave
notice stating the ordinary selling price was the 1 shilling 6d and three chocolate bar wrappers.
The question for the court was whether the chocolate bar wrappers formed part of the
consideration. If they did it was impossible to ascertain the value they represented and
therefore Nestle would not have complied with their obligation to give notice of the ordinary
retail selling price. If the wrappers were a mere token or condition of sale rather than
constituting consideration, then the notice would be valid and Nestle could sell the records.

Held:
The wrappers did form part of the consideration as the object was to increase sales and
therefore provided value. The fact that the wrappers were simply to be thrown away did not
detract from this. Therefore Chappel were granted the injunction and Nestle could not sell the
records as they had not complied with the notice requirements under s.8.
 Consideration (Legal Recognition)
2. Consideration does not have to be adequate – Explanation 2, Section
26, CA ’50
“An agreement is not void merely because the consideration is
inadequate”

 There is no requirement that the consideration must be market

value, providing something of value is given eg £1 given in
exchange for a house would be valid. The courts are not
concerned with whether the parties have made a good or bad
bargain
 An item may be validly sold at a 90% discount
 A RM10 million bungalow may be sold for RM1
 Consideration (Legal Recognition)
3. Any act, abstinence or promise without legal
recognition is NOT consideration; examples include
 Friendship and other relationship
 Natural love and affection
 Good behaviour – White v. Bluett
 Past acts – re McArdle
 Legal duty – Stilk v. Myrick; Collins v. Godefroy
 i. Friendship
 In the view of society, good friends are always
highly regarded and friendship is often treated
as invaluable.
 But from legal point of view, friendship is not any
consideration capable of supporting a contract
(Note: this must not be taken to mean that
anything done by a person as a friend is not
accepted as consideration)
 ii. Love and affection
 Ordinarily, love and affection is something we
seek and value.

 Like friendship, the law does not regard love and

affection as consideration.

(Note: this is not to say that an agreement based

on love and affection can never be a contract)
 iii. Good behavior
 The promise to improve ones behavior is not
legally capable of being a consideration in so far
as contract is concerned
(See White v. Bluett)
 White v. Bluett
a son sued his father’s executors, claiming
that the father had agreed to pay him
money in exchange for a promise “to cease
complaining that he was not as well treated
as his brother”.

HELD: insufficient consideration and no

more than a promise “not to bore” his
father.
 iv. Past Act
 Re McArdle (1951) CH 669
 Majorie McArdle carried out certain improvements and repairs on a
bungalow. The bungalow formed part of the estate of her husband's
father who had died leaving the property to his wife for life and then on
trust for Majorie's husband and his four siblings. After the work had been
carried out the brothers and sisters signed a document stating in
consideration of you carrying out the repairs we agree that the executors
pay you £480 from the proceeds of sale. However, the payment was
never made.

Held:

The promise to make payment came after the consideration had been
performed therefore the promise to make payment was not binding. Past
consideration is not valid.

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(Take note: In Malaysia, consideration can be past)
 v. Legal duty
An existing public duty will not amount to valid consideration
 Where a party has a public duty to act, this can not be used as
consideration for a new promise
 Glasbrook Bros v Glamorgan County Council (1925)
The defendant owners of a colliery asked the police to provide

protection during a miner's strike. The police provided the protection

as requested and provided the man power as directed by the
defendants although they disputed the level of protection required to
keep the peace. At the end of the strike the police submitted an
invoice to cover the extra costs of providing the protection. The
defendants refused to pay arguing that the police were under an
existing public duty to provide protection and keep the peace.

Held:
In providing additional officers to that required, the police had gone
beyond their existing duty. They were therefore entitled to payment.
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 v. Legal duty
An existing contractual duty will not amount to valid
consideration

 If a party has an existing contractual duty to do an act,

this act can not be used as consideration for a new
promise
 Stilk v Myrick (1809)
 ‘A sailor claimed additional wages which he had been
promised for working a ship when two crew had
deserted. He was unsuccessful. He was only fulfilling his
existing contract, the loss of two crews did not amount to
additional work outside the original contract.
 Consideration (The General Rule)
4. Section 26, Contracts Act 1950 - Agreements
without consideration are VOID
 Without consideration – Two way flow of
benefits is absent
 Void
 The agreement is not legally valid

 Parties do not enjoy any right and consequently

do not suffer any liability

 Parties cannot take remedial action to make the

contract valid
 CONSIDERATION (THE FOUR
(4) EXCEPTIONS)
Although the general rule has stated that agreement without consideration is
void, but there are exception into it. Agreement enter with these FOUR
exceptions is valid.

1. NATURAL LOVE
Section 26(a) CA 1950 – Agreement
(a) based on natural love
(b) between close relations
(c) in writing
(d) duly registered, where required by law.
 Such agreements are only valid for contracts between

parties standing in near relationship to each other. It

applies to members of a family who are considered near
relations to each other. 19
1. NATURAL LOVE

Example:
 Khan agreed to pay Rs 5000 to his younger brother out of

natural love. This promise is in writing and registered. If

Khan refuses to pay Rs 5,000 to his younger brother, the
latter can enforce the promise in the Court and Khan
cannot refuse payment on the ground of absence of
consideration. It should be noted that all the four conditions
must be satisfied only then it will be valid without
consideration, otherwise not.
CONSIDERATION (THE FOUR
(4) EXCEPTIONS)
2. PAST ACT

 Section 26(b) CA 1950 – Agreement to reward

someone for a past act.
 To be valid, the agreement must

(i) be a promise to compensate wholly or in part and

(ii) the promisee must have voluntarily done
something for the promisor.
- A promise by an employer to pay bonuses to
employees based on their previous job performance.

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 CONSIDERATION (THE FOUR
(4) EXCEPTIONS)
3. AGREEMENT TO PAY A BARRED DEBT
 Section 26(c) CA 1950 – Agreement to pay a barred
debt, where (a) the agreement is in writing and (b)
signed by the promisor.
 A debt which cannot be recovered through legal

action because of lapse of time.

 This is provided under the Limitation Ordinance 1953

applicable to West Malaysia which the time limit is 6

years from the time the cause of action accrued.
 An agreement to pay a statute barred debt can be

made possible without consideration if:

(i) the debtor made a fresh promise to pay the
statute barred debt and
(ii) in writing and signed by the debtor or his agent.
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 CONSIDERATION (THE
FOUR (4) EXCEPTIONS)
4. AGREEMENT TO DISPENSE (GIVE OUT) OR
REMIT PERFORMANCE OF A PROMISE

 Section 64 CA 1950 – Agreement to dispense or

remit performance of a promise.
 Illustrations provided in the CA 1950

 (b) A owes B RM5,000. A pays to B, and B

accepts, in satisfaction of the whole debt,

RM2,000 paid at the time and place at which the
RM5,000 were payable. The whole debt is
discharged.
 (c) A owes B RM5,000. C pays to B RM1,000 and

B accepts them, in satisfaction of his claim on A.

This payment is a discharge of the whole claim. 23
 REFERENCES
 Legal principle (2015), The
Malaysian Insurance Institute, 1st
Edition.