Topic 6: Law of Contract: Consideration

• LEARNING OBJECTIVES :

The aim of this topic is to enable students to:

• Show an understanding of what amounts to consideration
• Its relation and importance to the previous topic (offer & acceptance)

2. LEARNING OUTCOME

A successful student will be able to;

• Define a consideration
• Describe the relevant principles of law relating to consideration.
• Apply the principles of law to the given situation.
Introduction

• An agreement will not be enforced by the courts unless the plaintiff can show that
at the time of the agreement, the parties had agreed to exchange benefits. The
agreement which will be enforced in courts of law are bargains.
• Courts will not enforce agreements where the promises are made for free
(gratuitous promises). Promises made for free occur when a party promises to give
a benefit, without expectation of receiving a benefit in return.
• Consideration therefore, is the price paid for the benefit received.
• Not only that, sometimes consideration can involve exchange of promises
• Lets see the case of K Murugesu v Nadarajah [1980] 2 MLJ 82
Consideration

Definition of consideration

Section 2(d) Contracts Act 1950

• Consideration is what the parties are willing to give in return for a benefit they
want to receive.
• Consideration can be an act or a promise to do an act in the future.
• Consideration can also be an abstinence or a promise to abstain from an act.

General rule

Section 26 Contracts Act 1950:

• As a general rule, an agreement without consideration is void.
• Illustration (a) of s. 26 CA, 1950
A 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.
 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 valid B = CONTRACT

Promise to buy - 2

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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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 1. Executory consideration
K 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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 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

4 rules

Consideration may
Consideration need move from the Past consideration is Part payment may
not be adequate promisee or any other good consideration discharge an
person obligation

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1. Consideration must be sufficient but
not be adequate
• Explanation 2 to s. 26
• 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.
• Consideration to be sufficient, therefore:
- must be of some economic value to the other person;
- must be legal.

• The courts will not stop a contract based on inadequacy of the

consideration.

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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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 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 $500
is valid as there was no evidence of fraud or
duress.

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 I will not do
that-we
agreed that I
can stay with Transferred land to A’s
payment of husband. Not registered
$500

$500-you may
Appellant stay Respondent

I am sole owner-
vacate this land
Court: $500 = agreement to otherwise u trespass
transfer = valid contract my land
 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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 Venkata Chinnaya v Verikata Ma’ya
Promise to pay an annuity of Rs653

Sister valid Brothers

Nothing in return
Mother

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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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 1% = service before incorporation of company

Invalid under the company law

1%=service during the period of time when the company was incorporated but had not made the promise

Past consideration=valid because service rendered asked by the company

1%= for future service (after promise made)

Valid. Why? Identify the type of consideration

 4. Part payment may discharge an
obligation

• s. 64 of CA, 1950
• 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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 You owed me
RM8.869.94

Kerpa Singh
Bariam Singh

Kerpa’s lawyer-cashed the cheque and Bariam’s son- We pay you

proceeded legal action – asked the RM4000 as full and final
balance settlement. Please find
attached a cheque. If you
disagree kindly return the
cheque.
 6. Exceptions to general rule
• What is the general rule?
– ????
– GENERAL RULE: S. 26 – AN AGREEMENT WITHOUT
CONSIDERATION IS VOID.

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 EXCEPTIONS
NO CONSIDERATION = VALID
CONTRACT

4 exceptions

2. An agreement to 3. An agreement to
1. An agreement on
compensate for compensate something 4. A promise to pay a
account of natural love
something voluntarily which promisor was statute-barred debt
and affection
done legally compellable to do

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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 A PAST
VOLUNTARY ACT
• s. 26 (b) of CA, 1950 = PAST CONSIDERATION
An agreement to compensate for a past voluntary act
• When an act is performed voluntarily by another person, a later
promise to pay for it is enforceable.

Voluntary means performed of one’s own free will and not suggested or
prompted by another.

• 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 act
b) the act is one which the promisor was legally compellable to do
c) an agreement to compensate, wholly or in part the promise for the act.
COMPELLABLE = MADE COMPULSORY TO BE DONE BY LAW
• 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 QUESTION
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.

4. Ali owes Abu RM20,000. Aminah, Ali’s sister offers to pay RM15,000 as payment in full in order to
discharge her brother from a debt. Abu accepts that offer. Two weeks later, Abu claims the balance from
Ali. Advise Ali. (10 marks)

5. 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.

6. Sharifah sold her diamond earring to Zeti for RM50. Discuss the validity of the contract. (10 marks)