LAW OF CONTRACT

Table of Contents: Chapter 2

Learning Objectives 17

1. Definition of consideration 18

2. Classification of consideration 18

3. Rules on consideration 20

4. Exception for consideration 22

5. Waiver of performance 24

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 LAW OF CONTRACT

Chapter 2
Consideration

Learning Objectives:

1. To define “consideration”.

2. To identify the types of consideration.

3. To identify the rules of consideration.

4. To explain the exceptions for consideration.

5. To explain the effect of waiver of performance on consideration.

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 LAW OF CONTRACT

CONSIDERATION

Definition of General rule:

consideration
Agreement made without consideration is void. [s.26, CA 1950]

S.2 (d), CA 1950:

Consideration is the price of which one party pays to buy the promise or act of
the other.
ƒ Literally, it means something that is given in return for something else. For
example, RM2 for a plate of fried rice.
ƒ Forms: act, abstinence, or promise to perform a future act/abstinence

Osman bin Abdul Ghani & Ors. v. United Asian Bank Bhd (1987) 1 MLJ 27

Forbearance to sue could be a valid consideration.

Classification of Classification:
consideration
1. Executory consideration, i.e. a promise for a promise

Illustration (a), S.24, CA 1950

A agrees to sell his house to B for $10000. Here, B’s promise to pay
the sum of $10000 is the consideration for A’s promise to sell the
house, and A’s promise to sell the house is the consideration for B’s
promise to pay the $10000. These are lawful considerations.

K. Murugesu v. Nadarajah (1980) 2 MLJ 82

Facts: The respondent was the tenant of the appellant. The respondent has
pestered the appellant to sell to him the house he was leaving in. The
appellant finally agreed to sell the house to the respondent for $26000
within three months from the date of the agreement. The agreement
was written on a scrap paper. Later the appellant refused to sell the
house because it was contended that there was no consideration
leading to a valid agreement. The respondent sued for specific
performance. The trial judge granted the respondent specific
performance and the appellant appealed.

Held: Federal Court rejected the appellant’s appeal and gave affect to
Illustration (a) of section 24 of the Contracts Act 1950. The agreement
was a case of executory consideration, i.e. a promise is made by one
party in return for a promise made by the other. Therefore, in this
case each promise was the consideration for the other.

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Wong Hon Leong David v. Noorazman bin Adnan (1995) 3 MLJ 283

Facts: The appellant promised to pay respondent RM268888 in return for the
respondent’s application to convert and subdivide certain land to be
developed into a housing estate.

Held: The exchange of mutual promise, though it is executory

consideration, was good consideration. Therefore, there was a
binding agreement between them and the respondent’s claim for the
fee succeeded.

2. Executed consideration, i.e. a promise for an act

3. Past consideration, i.e. a promise subsequent to and in return for an act that
has already been performed.
ƒ S.2(d) and S.26(b) – past consideration is sufficient provided it is the
“desire of the promisor”
ƒ However, in the English Contract Law, past consideration is not sufficient

South East Asia Insurance Bhd v. Nasir Ibrahim (1992) 2 MLJ 355

The essence of consideration (past) is that the promise has taken upon itself
some kind of burden or detriment.

Kepong Prospecting Ltd & S.K. Jagatheesan & Ors. v. A.E. Schmidt &
Marjorie Schmidt (1968) 1 MLJ 170

Issue: Whether services, rendered after incorporation but before the

agreement, were sufficient to constitute a valid consideration even
though they were clearly past.

Facts: Schmidt, a consulting engineer, has assisted another in obtaining a

prospecting 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….”

Held: It did constitute a valid consideration. Therefore, Schmidt was entitled

to his claim on the amount. (*This is subject to a few requirements
under s.26 (b), CA 1950 – see below)

Past consideration is no consideration with regards to bills of exchange, e.g.

cheque. [s.27 (1)(b) of the Bills of Exchange Act.

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Rules on Rules on consideration:

consideration
1. Consideration must have some value.
An act or a promise to do something which one is bound to do will not be a
valid consideration.

Collins v. Godefroy (1831) 109 ER 1040

Facts: A promise had been made to pay a witness, who was under an order
to attend the court as subpoena, 6 guineas for his trouble.

Held: The promise was unenforceable because there was no consideration

for it. The duty to attend was “a duty imposed by law”.

Stilk v. Myrick (1809) 170 ER 851

Facts: The captain of a ship promised his crew that if they shared between
them the work of two 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:

Hartley v. Ponsonby (1857) 26 LJQB 322

Facts: A ship’s crew had been seriously depleted by a number of desertions.

The captain promised the remaining crew members £40 extra pay if
they would complete the voyage.

Held: The promise was binding. It was dangerous to put to sea in a ship so
undermanned. The seamen were not obliged to do this under their
contracts of service and were, therefore, free to enter into a fresh
contract for the remaining part of the voyage.

2. Consideration need not be adequate.

ƒ Consideration need not be adequate but sufficient
ƒ Sufficient means it is freely given without fraud, misrepresentation, and
other vitiating factors

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Thomas v. Thomas (1842) 114 ER 330

Rent payment of £1 made by the plaintiff to defendant was a valuable

consideration even though it was not adequate.

Macon Works & Trading Sdn Bhd v. Phang Hon Chin & Anor (1976)
2 MLJ 177

Nominal consideration in option agreements may constitute valid

consideration.

Chappell & Co. v. Nestle Co. (1960) 2 All ER 701

Issue: Whether chocolate wrappers were part of the consideration.

Facts: The Nestle Company offered to the public gramophone records of a

certain dance tune for 1s 6d each together with three chocolate bar
wrappers. The wrappers were thrown away on receipt by the
company.

Held: The wrappers were part of the consideration even though they were
of no further value once received by the company.

Phang Swee Kim v. Beh I Hock (1964) MLJ 383

Facts: The respondent agreed to transfer to the appellant a parcel of land on

payment of $500 when the land was subdivided although the land
was worth much more. The respondent later refused to honour the
promise contending that the promise was unenforceable.

Held: The trial judge ruled that the agreement was void due to inadequacy
of consideration. However, on appeal the Federal Court reversed the
decision and applied Explanation 2 and Illustration (f) of section 26 of
the Contracts Act 1950.

Explanation 2, S.26, CA 1950

“An agreement to which the consent of the promisor is freely given is

not void merely because the consideration is inadequate….”

Illustration (f), S.26, CA 1950

“A agrees to sell a horse worth $1000 for $10. A’s consent to the
agreement was freely given. The agreement is a contract
notwithstanding the inadequacy of the consideration.”

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3. Consideration can move from the promisee or other person. [s.2 (d), CA
1950]
ƒ This is a divergence from English Contract Law

Venkata Chinnaya v. Verikatara’ma’ya (1881) 1 LR 4

Facts: A sister agreed to pay an annuity of Rs653 to her brothers who

provided no consideration for the promise. On the same day, their
mother had given the sister some land stipulating that she must pay
the annuity to her brothers. When the sister subsequently failed to
fulfill the promise, her brothers sued her.

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.

4. Consideration must not be illegal.

5. Consideration must not be vague.

Scammell & Nephew v. Ouston (1941) 1 All ER 14

Facts: The defendant ordered a motor van from the plaintiff “on the
understanding that the balance of the purchase price can be had on
hire purchase terms over a period of two years”.

Held: The order (i.e. offer) was so vague that it had no definite meaning.
Further negotiations would be required before agreement could be
reached.

6. Consideration must be possible of performance.

Exceptions for Exceptions under S.26:

consideration
Even without consideration, the following agreements are not void:

1. An agreement made on account of natural love and affection between parties

standing in near relation to each other. [S.26(a)]
ƒ Requirements:
a) expressed in writing (any reasonable form)
b) must be registered if required by any law
c) made on account of natural love and affection between parties
standing in near relation to each other
ƒ Near relation = immediate family members (depends on social
group)

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Re Tan Soh Sim (1951) MLJ 21

Issue: Whether an agreement was made on account of natural love and

affection and the three sisters and seven half sisters and brothers
stood in near relationship to their adopted nephews and nieces?

Facts: The deceased (Tan Soh Sim) in her last illness had expressed a wish
that her estate should be divided amongst the two adopted sons and
two adopted daughters. The legal next-of-kin, respecting this wish,
drew up an agreement renouncing all rights in favour of the four
adopted children who were their nephews and nieces. The question
emerged was this agreement valid or invalid?

Held: The question as to “relationship” and “near” must be applied and

interpreted in each case according to the mores of the group to which
the parties belong and with regard to the circumstances of the family
concerned. Thus, Chinese adoptive children are related to the
adoptive parents and brothers but they are not nearly related to the
family of their adoptive mother. Hence, uncles and aunties do not
stand in near relation to their nephews and nieces. In this case, there
was no natural love and affection between the signatories and
donees.

ƒ English Contract Law does not recognize “natural love and affection”

2. An agreement to compensate for a past voluntary act. [S.26(b)]

ƒ Requirements:
a) a promise to compensate either wholly or partly to promisee
b) promisee did the act voluntarily

J.M. Wotherspoon & Co. Ltd. v. Henry Agency House (1962)

MLJ 86

Facts: A dispute arose between a Malaysian and an English firm resulting

from an arrangement. Both had acted as agents for various products.
The Malaysian firm would find buyers and inform the English firm who
would then find sellers. Things went wrong and the English firm sued
the Malaysian firm for the loss it suffered through non-payment by the
buyer.

Held: There were promises of compensation made by the defendant’s firm

to the plaintiff in respect of the consignment but these promises were
not supported by consideration so that they could only be enforceable
if the words of section 26 (b) of the Contracts Act applied.

Thus, question as to whether plaintiff was a person who had already

“voluntarily” done something for the defendant depends on the
plaintiff’s action. Plaintiff had acted on the suggestion of defendant so
that its action could not be said to have been done voluntarily.
Therefore, the promise made by defendant’s firm to compensate
plaintiff was not an enforceable contract.

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ƒ S.2(d) covers a situation where the act was done voluntarily having
suggested by another person

3. An agreement to compensate a person who did an act which the promisor

was legally compellable to do. [S.26(b)]
ƒ Requirements:
a) Promisee has done the act voluntarily
b) The act is one which the promisor was legally compellable to do, and
c) An agreement to compensate, wholly or partly, the promisee for the
act.
ƒ E.g. A support’s B infant. B promises A to pay A’s expenses in doing so.

4. An agreement to pay a statute-barred debt. [S.26(c)]

ƒ A statute-barred debt = debt that cannot be recovered through legal
action because lapse of time fixed by law.
ƒ Limit is 6 years from the time of course of action (Limitation Ordinance,
1953)
ƒ Exceptions to statute-barred debt general rule:
a) fresh promise made by the debtor to pay for the statute-barred debt
b) promise is in writing and signed by the person to be charged or his
authorized agent in that behalf.
ƒ Effect: promisor only be liable according to the terms and
conditions of the fresh promise.

Waiver of Waiver of performance:

performance
S.64, CA 1650:
“Every promisee may dispense with or remit, wholly or in part, the performance
of the promise made to him, or may extend the time for such performance, or
may accept instead of it any satisfaction he thinks fit.”

Examples:
Illustration (b) - payment of smaller sum in discharge of a larger sum
Illustration (c) – part payment by third party in discharge of a debt.
Illustration (d) – where the amount owing under a contract is unascertained,
and a person accepts an agreed sum in satisfaction, the debt
is discharged.
Illustration (e) – a composition of creditors for the payment of a smaller sum,
an arrangement whereby each creditor agrees to accept a
stated sum/ a percentage of his debt in full satisfaction.

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Kerpa Singh v. Bariam Singh (1966) 1 MLJ 38

Facts: The defendant owed plaintiff $8869.94 under a judgment debt. The
debtor’s son wrote a letter to the plaintiff, a creditor, offering $4000 in
full satisfaction of his father’s debt and endorsed a cheque for the
amount, stipulating that should the plaintiff refuse to accept his
proposal, he must return the cheque. The plaintiff’s legal advisers,
having cash the cheque and retained the money, proceeded to
secure the balance of the debt by issuing a bankruptcy notice on the
debtor.

Held: The acceptance of the cheque from the debtor’s son in full
satisfaction precluded them from claiming the balance. [Illustration (c)
of section 64 applied]

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