LAW 416 BUSINESS LAW
CONSIDERATION
Definition
Section 2(d) CA 1950 : ‘when at the desire of the promisor, the promisee or any other
person has done or abstained from doing something, or does or abstain from doing
something, such act or abstinence or promise is called a consideration for the promise’.
Consideration is the price of which one party pays to buy the promise or act of the other
person.
The price can be an act or a promise to perform an act or abstinence.
Classifications of consideration
1. Executory (present)
A promise made in return of a promise. It is the promise to perform an action at
some future time.
Example : Z promises to sell his laptop to Y for RM3000 and Y promise to pay Z
in 10 days time. A contract was created and if Z refuses to sell the laptop, he will
be in breach of contract.
K. Murugesu v Nadarajah
Facts: The appellant agreed to sell, and the respondent agreed to buy, a house from
the appellant. The agreement was written on a piece of paper. Later, the appellant
refused to perform the contract and argued that there was no consideration in the
agreement and therefore the contract is void.
Held: The agreement must be seen to be a case of executory consideration. A
promise is made by one party in return by a promise made by the other.
2. Executed (future)
Executed consideration consists of doing an act. Consideration is executed when
a promise is made in return for the performance of an act. Sometimes, there is no
obligation to pay unless or until the performance is completed.
( promise + act )
Example : there is an offer of a reward of RM500 made by Puteri in return for a
lost diamond ring. The reward only becomes enforceable once it has been found
and returned to Puteri.
Carlill v Carbolic Smoke Ball Company
Held : Advertisement for reward was an offer to the whole world. Mrs Carlill had
accepted by her conduct when she used the medicine according to the
instructions. Her conduct makes the promise enforceable.
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3. Past consideration
A promise made subsequent to and in return for an act that has already been
performed. (the past act was done + promise)
Example : Ally lost her watch. Bibi found it and returns it to Ally. Ally promises to
give Bibi RM100. This is a contract and Ally is liable to pay to Bibi.
Kepong Prospecting Ltd v Schmidt(1969)
Facts : Schmidt, a consulting engineer, had assisted another in obtaining a
prospecting permit for mining iron in the state of Johore. He also helped in the
formation of the company, Kepong Prospecting Ltd., and was appointed as a
Managing director. After the company was formed, an agreement was entered into
between them and the company agreed to pay 1% of the value from the mining
land. This was in consideration of the services rendered by the consulting engineer
for and on behalf of the company before its formation, after incorporation, and for
future services. Schmidt claimed on the amount. The company refused to pay and
Schmidt sued the company.
Held : There was a valid consideration. Schmidt was entitled to his claim on the
amount.
Rules of consideration
1. Consideration must be sufficient
Performance of an existing duty is not a valid consideration.
Stilk v Myrick
Facts : The captain of a ship promised his crew that if they shared between them
the work of 2 seamen who had deserted, the wages of the deserters would be
shared out between them.
Held : the promise was not binding because the seamen gave no consideration.
They were already contractually bound to do any extra work to complete the
voyage.
However, the above case should be distinguished from the following case where there
was a totally new duty to be carried out in a dangerous situation (more than he is obliged
to do).
Hartley V Ponsonby
Facts : A ship’s crew had been seriously depleted by a number of desertions. The
captain promised to the remaining crews to pay 40 pounds extra if they would
complete the voyage.
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Held : The promise was binding because they did more than is obliged to do in
dangerous situation.
2. Consideration need not be adequate but it must have some value
S.26 Explanation 2 CA: An agreement to which the consent of the promisor is
freely given is not void merely because the consideration is inadequate.
The court will not intervene to require equality in the value exchanged as long as
the agreement has been freely entered into.
Phang Swee Kim v Beh I Hock
Facts : The promisor offered to sell his land at a price of $500 although the land
worth much more. Later the promisor changed his mind and refused to transfer the
land.
Held : There was a binding contract even though the consideration was
inadequate as being to evidence of fraud.
TAC Construction & Trading V Bannes Engineering Bhd (1999)
Held: the law is not concerned with the adequacy of the consideration and the court
would enforce the agreement so long as some value for it has been give.
3. Consideration need not move from the offeree (promisee)
Anybody can provide consideration. This is based on the provision in section 2(d).
The words ‘any other person’ shows that any person can give consideration.
Venkata Chinnaya v Verikatara Ma’ya
Facts : A sister made a promise to pay 653 rupees as an annuity to her brother.
Their mother, in return for the promise made by her daughter to her son, agreed
to transfer a piece of land to her daughter. Later, the sister refused to give the
annuity arguing that there was no consideration from the brother. The brother
sued.
Held : there was a valid consideration because consideration may move from any
persons other than the promisee.
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Agreement Without Consideration.
GENERAL RULE : Section 26 provides that agreement without consideration is
void.
Exceptions to the General Rule : in certain situations, there is still a valid contract even
when the promisee did not provide any consideration.
1. Section 26(a)CA 1950 : An agreement made on account of natural love and
affection between parties standing in near relation to each other.
Requirements :
a) The promise must be made in writing
b) The promised must be registered, if required.
c) The agreement must be made between parties in ‘near relation’ with each
other.
S.26 Illustration (b) CA: A, for natural love and affection, promises to give his son,
B, $1000. A puts his promise to B into writing and registers it under a law. This is
a contract.
‘Near relation’ means immediate family members and it depends on social group.
Krishnan V Lashmi Amal
Held: parents and children are near relation to each other.
Re Tan Soh Sim (1951) MLJ 21
Facts : The deceased (Tan Soh Sim) in her last illness had expressed a wish that
her estate should be divided amongst the 2 adopted sons and 2 adopted
daughters. The legal next-of-kin, respecting this wish and drew up an agreement
renouncing all rights in favour of the 4 adopted children who were their nephews
and nieces. The question was whether the agreement valid or void because no
consideration.
Held : According to Chinese custom the adopted children are only related to their
adopted parents and adopted brothers and sisters. They are not in near relation to
the relatives or family to their adopted mother. Hence, uncles and unties do not
stand in near relation to their nephews and nieces. Furthermore, the will made by
Tan Soh Sim was not in writing.
2. Section 26(b) : An agreement to compensate for the past voluntary act.
It can be divided into 2 :
a. it can be a promise to compensate either wholly or in part a person who has
voluntarily done something for the promisor.
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S.26 Illustration (c) CA: A finds B’s purse and gives it to him. B promises to give
A $50. This is a contract.
J.M Wotherspoon v Henry Agency House
It was held by the court that if the party had done the act on suggestion of the other
party, it cannot be said to have been done voluntarily.
b. An agreement to compensate either wholly or in part an act, which the promisor
was legally compellable to do so.
S.26 Illustration (d) CA: A support B’s infant son. B promises to pay A’s
expenses in so doing. This is a contract.
3. Section 26(c) : An agreement to pay a statute-barred debt.
Under the Limitation Act 1953, there is a limit to 6 years to enforce legal rights, for
example, to claim payment of a debt. If it is more than 6 years the action is statute-
barred.
Conditions :
a. There is a fresh promise to pay debt
b. The debt must be barred by statute
c. The agreement must be in writing
d. Must be signed by the promisor or his agent.
S.26 Illustration (e) CA: A owes B $1000, but the debt is barred by limitation. A
signs a written promise to pay B $500 on account of the debt. This is a contract.
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