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Topic Law of

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.

It means, if the promisee (person accepting the proposal):


Has done or abstained from doing; or
Does or abstains from doing; or
Promises to do or to abstain from doing,
TOPIC 2 LAW OF CONTRACT (CONSIDERATION) ! 21

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.

2.1 EXECUTORY, EXECUTED AND PAST


CONSIDERATION
Consideration can be classified as:
(i) executory;
(ii) executed and;
(iii) past 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)

Figure 2.1: Executory and Executed Consideration

Apart from the executory and executed consideration, if a promise is made in


return for an act that has already been performed, that act is regarded as past
consideration. For example, D found and returned your lost chain, and in
gratitude, you promise to reward D RM100. Your promise to reward D is made
in return for Ds consideration that is past.

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

Schmidt, a consulting engineer, had assisted another in obtaining a


prospecting permit for mining iron ore in the State of Johore. He also helped
in the formation of the company (Kepong Prospecting Ltd.) and was
appointed as the Managing Director. Subsequently, Schmidt entered into an
agreement with the company. In the agreement, the company agreed to pay
him one per cent of the value of all ore sold from the mining land. This was
in consideration of the services rendered by Schmidt on behalf of the
company before its formation, after incorporation and for future services....

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.

2.2 EXCEPTIONS TO THE RULE OF


CONSIDERATION
The general rule of consideration under Section 26, Contracts Act 1950, provides
that an agreement without consideration is void. However, there are exceptions
to this general rule. With these exceptions, even though the agreement is made
without consideration, the agreement is still valid and will be enforceable. The
exceptions include the following:

2.2.1 Agreement made on account of Natural Love


and Affection
This exception is provided in Section 26(a), Contracts Act 1950. The rule provides
that any agreement which is made without consideration is still valid if it is
expressed in writing and registered under the law (if any) for the time being in
force for the registration of such documents, and is made on account of natural
love and affection between parties standing in a near relation to each other.
TOPIC 2 LAW OF CONTRACT (CONSIDERATION) ! 25

This means the agreement that is not supported by any consideration is valid if it
fulfils the following conditions:

1. The agreement is made in writing;


2. The agreement is registered under the existing law which requires its
registration; and
3. The agreement is made on account of natural love and affection between
the parties standing in near relation to each other.

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 :

Re Tan Soh Sim [1951] MLJ 21

In this case, there was an agreement made between members of a Chinese


family, governed by their personal laws. The deceased Tan Soh Sim (in her
illness) had made a wish that her estate should be divided among her two
adopted sons and two adopted daughters. The legal next-of-kin drew up an
agreement renouncing all rights in favour of the four adopted children (who
were their nephews and nieces). The issues to be resolved in this case were
whether:

An agreement was made on account of natural love and affection; and


Three sisters and seven half-sisters and brothers stood in near
relationship to their adopted nephews and nieces.

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.

2.2.2 Agreement to Compensate a Past Voluntary Act


This is the exception provided in Section 26(b), Contracts Act 1950. The rule
provides that an agreement without consideration is valid if 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.

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

In this case, there were arrangements between a Malaysian and an English


firm. The arrangements were that the Malaysian firm would find buyers and
inform the English firm, who would then find the sellers. When a sale had
been arranged, a commission would be paid to the Malaysian firm. The
dispute arose in this case was that after the Malaysian firm arranged a buyer
for confectionery and the English firm found a seller, things went wrong. The
English firm then sued the Malaysian firm for the loss it suffered because of
non-payment by the buyer.

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.

2.2.3 Agreement to Pay a Statute-barred Debt


This is another exception provided in Section 26(c), Contracts Act 1950. The rule
provides that an agreement without consideration is valid if it is a promise,
made in writing and signed by the person to be charged therewith, or by his
agent generally or specially authorised in that behalf, to pay wholly or in part a
debt of which the creditor might have enforced payment but for the law for the
limitation of suits.

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.

What is meant by a statute-barred debt? It is a debt which cannot be recovered


because the time allowed to a party to enforce his legal rights is limited by the
Limitation Act 1953. The Limitation Act provides six years as the time limit for
any party to take legal action in contract. The six years run from the time the
cause of action arises (usually from the time of the breach of contract by the
contracting party). Therefore, the promise to pay a statute-barred debt under this
exception will form a new cause of action although without consideration, and
the fresh promise is valid. This is provided in section 26(2) of the Limitation Act
1953.

SELF-CHECK 2.2

(a) What is the general rule of consideration?


(b) Is there any exception available to the general rule of
consideration?
(c) What was the decision of the court in the case of J.M.
Wotherspoon & Co. Ltd. v. Henry Agency House [1962] MLJ 86?
(d) What are the important conditions required in an agreement to
pay a statute-barred debt?
TOPIC 2 LAW OF CONTRACT (CONSIDERATION) ! 29

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.

2.3 MUST CONSIDERATION MOVE FROM THE


PROMISEE?
After understanding the general rule of consideration and the exceptions, it is
important to know from whom the consideration can come? Must the
consideration come from the promisee only or can the consideration come from
some other persons (who is not the party in the contract?).

The principle relating to who should furnish a consideration is different in the


Malaysian Contracts Act and the common law of England. Under common law,
consideration must move from the promisee. This means, the person who gets
the promise must personally give something in return as the consideration for
the promise. The idea is that, if a person furnishes no consideration, he takes no
part in the contract. Under the Malaysian Contracts Act, the promisee can enforce
30 TOPIC 2 LAW OF CONTRACT (CONSIDERATION)

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.

For example: A promises to pay B RM1,000 when C paints As house. As soon


as C completes the work (paints As house), B can claim the amount of
RM1,000 from A although B does not personally give any consideration for
As promise. This is because the consideration has moved from C.

A case to illustrate this principle is:

Venkata Chinnaya v. Verikataramaya (1881) I.L.R. 4 Mad. 137.

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.

2.4 ADEQUACY OF CONSIDERATION


Another important principle is the adequacy of consideration. The question is:
must consideration be adequate? Can you sell your house worth of RM100,000
for only RM100 to Mr. Man? Is the amount of RM100 sufficient as consideration
for your promise?

According to Explanation 2 of Section 26, Contracts Act 1950, an agreement to


which the consent of the promisor is freely given is not void merely because the
consideration is inadequate...... What is meant by the provision is that, the
adequacy of consideration is immaterial. The consideration given for the promise
TOPIC 2 LAW OF CONTRACT (CONSIDERATION) ! 31

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.

However, Explanation 2 of Section 26 further reads, ......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. This clause

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.

A case to illustrate this principle is:

Phang Swee Kim v. Beh I Hock [1964] MLJ 383.

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

Discuss the following problems by referring to the relevant principle


of law on consideration:

(a) Mr J, who decided to make a home improvement to his cottage,


had requested K to paint his cottage and to build up certain
fences around the cottage. He promised to pay K double of the
usual payment charged by any other contractors for that purpose
and the arrangement was agreed by K. The next day, K sent his
nephew, M to start the work. M managed to complete the said
improvement work within two weeks and upon the completion
of the work, K came to see Mr J for the payment. However, Mr J
refused to pay K because he got to know that it was M who had
performed the work and not K. Advise K whether he could claim
for the payment from Mr J.

(b) Zaitun, a local trader in the town offered Hana a sale of a


slimming apparatus which is worth RM10,000 in the market for
only RM1,000, as she decided to clear the stock of that model (SE-
101). Hana agreed to buy the apparatus and to collect it from
Zaituns office. On the day of collection, Zaitun changed her
mind and told Hana that she had wrongly decided to sell the
apparatus at that price. Advise Hana as regard to the validity of
the contract.
TOPIC 2 LAW OF CONTRACT (CONSIDERATION) ! 33

An agreement made without consideration is a void agreement.


When one promise is made in return for another promise, it is known as
executory consideration.
Executed consideration is when one promise is made in return for the
performance of an act.
An agreement made on account of natural love and affection is valid without
consideration if it is made in writing, registered under the law (if any) and
made between parties standing in near relation.
Past consideration is valid under the Malaysian Contracts Act 1950 but not
under the English common law.
The exception under Section 26(b), Contracts Act 1950, requires the promisee
to have done an act voluntarily, before the promise to compensate the act is
made by the promisor.
An agreement to pay a statute-barred debt is valid without consideration,
provided the debtor makes a fresh promise to pay, in writing and signed by
him or his authorised agent.
Consideration can move from the promisee or any other person under the
Malaysian Contracts Act 1950.
Consideration need not be adequate so long as the promisor has freely given
his consent to the agreement.

Adequate consideration Past consideration


Executed consideration Promisee
Executory consideration Promisor
Free consent Voluntary act

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.