ABBL3033 Business Law – Chapter 4: Consideration, ITCLR & Privity

A. CONSIDERATION

A4. GENERAL RULE

Consideration is one of the fundamental elements that must be present in an agreement
without which the agreement is void, and this is stated in:

Section 26 - that ‘an agreement made without consideration is void’.

This is because the law enforces bargains to which both parties contributes, not gratuitous
(got or given free) promises given by one party.

E.g. Ali promises to give Bala his Proton Saga. Bala gives nothing in return for Ali’s
promise. There is no contract between Ali and Bala because Bala did not provide
“something” i.e., consideration, in return. Ali’s promise to give the Proton Saga to Bala is
merely a gratuitous promise and the promise is not enforceable as contract.

Therefore the courts will not enforce a contract unless there is evidence of consideration.

A4.1 DEFINITION - WHAT IS CONSIDERATION?

A4.1.1 Statutory definition:

Section 2(d) - 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 for the promise;

In short, the promisee must give something in return for the promise made by the
promisor. The something can be an act already done in the past or present, or abstinence
or a promise to do an act.

Under contract law consideration can be viewed as a type of bargain i.e. a price for which
one party is willing to pay or to buy, for the promise or act of the other.

A4.1.2 Common Law definition:

Curie v Misa
The court defines consideration as ‘some right, interest, profit or benefit to other party, or
some forbearance, detriment, loss or responsibility given, suffered or undertaken by the
other (the promisee)’.

The above definition revolves the idea of ‘benefit’ to promisor and ‘detriment’ suffered by
promisee.

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- Simply put consideration is the benefit that each party gets or expects to get from the contractual
deal.
- Consideration is usually in the form of money, property, or services.

E.g.: Ali promises Bala RM10 if he cuts the grass in Ali’s garden. Bala’s promise to cut the
grass is the ‘benefit’ that Ali get and is a ‘detriment’ or burden that Bala undertakes.

Examples of consideration:

1. X receives RM50 for which he promises to deliver goods to Y; the RM50 is the
consideration for the promise to deliver the goods.

Who is the promisor? = Y - if you deliver the goods for me, I will pay you RM50.

Who is the promisee? = X - if I deliver the goods I get RM50

2. For example if A has misplaced his laptop and he offers a reward of RM1000 to
anyone who can find and return the laptop to him. If B finds the laptop and returns it
to A, A is contractually bound to pay B the RM1000.

Here, B is not getting the money for free; he had to perform the act of finding and
returning the laptop to A. B is therefore putting consideration in return for the
promise i.e. the money.

A4.1.3 An agreement made without consideration is void

Section 26 provides that an agreement made without consideration is void unless it comes
under of its exceptions (further explained in 4.3)

E.g.: Anna promise, for no consideration, to give to Ben RM1000. This is a void contract

This illustration showed that the promisee (Ben) did not give something in return for the
promise made by the promisor (Anna).

A4.2 CATEGORIES OF CONSIDERATION

Consideration can be classified into 3 categories:-

A4.2.1 Executory consideration

Executory consideration is when one promise is made in return for another promise in the
future. There is an exchange of promise to do an act between 2 parties.

E.g.: X agrees to sell to Y a bicycle and Y’s promise to pay RM200 for the bicycle in
return.

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Case: K. Murugesu v Nadarajah – the appellant agreed to sell his house to the
respondent and the agreement was written on a piece of scrap paper which read:

“I agree to sell my house No. ..(address)… held under ……..to Mr. Nadarajah, the present
tenant of the house at RM26k within 3 months from date.
Signed by the registered owner”

The Federal Court said: “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,
in such a case each promise is the consideration for the other’.

A4.2.2 Executed consideration

Executed consideration is when one party (offerror) makes a promise in return for the
performance of an act by the other party. When that act is performed by the offeree, the
consideration is executed. Then it is the offeror’s to perform his promise.

Example:
X offers RM100 to anyone (open to the public) who finds and returns his camera
which he has earlier lost. = Offeror make a promise for a performance of an act

Y search and found the camera and Y returns the camera back to X. = Y (offeree)
has perform the search, i.e., executed the consideration.

X’s liability remains outstanding = X need to perform his promise by rewarding RM100 to
Y.

A4.2.3 Past Consideration

- Past consideration is found in the definition of consideration in Section 2(d) Contracts Act 1950,
where the words “has done or abstained from doing” clearly shows that past consideration is a
good consideration under Malaysian contract law.

Past consideration consist of something performed before the making of promise. The
past act was done or omitted not in response to the promise. It was an independent
promise where the promise was made subsequent to the act or omission.

E.g.: Ah Yam was swimming in the river and got into difficulty. Ee Tek, who was passing
by, saw Ah Yam in difficulty and dived into the river and saved Ah Yam from drowning.
Later Ah Yam promised to give Ee Tek RM500 for saving his life.

The act of Ee Tek in saving Ah Yam was performed before the promise was made. It was
not an act done in return for the promise. It was independent promise as the promise
made by Ah Yam was subsequent to the act of Ee Tek saving him. The act of Ee Tek in
saving Ah Yam is past consideration.

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Generally, such past acts or omission does not amount to consideration and it does not
have binding effect.

a) Can past consideration be a valid consideration?:

However, if the past act or omission done was at the desire of the promisor, then it is
good consideration.

In the above example, if Ah Yam who was having difficulty cried for help, then Ee
Tek’s help will be consider as done at the desire of Ah Yam. Ee Tek’s help will be a
good consideration for Ah Yam’s promise to pay him RM500.

This exception can be referred to the case of Kepong Prospecting Ltd v Schmidt.
Schmidt, a consulting engineer, had assisted in obtaining a permit for mining iron ore
in the State of Johore. After obtaining the permit, Tan wrote to Schmidt promising to
pay him 1% of the value of all iron ore sold for the work Schmidt had done in the
mining operations. Then, T and S set up a company called Kepong Prospecting Ltd
and entered into an agreement where the company will pay to S the 1% value of iron
ore sold. The court held that it was sufficient to constitute a valid consideration even
though the promise was clearly past i.e., before the agreement. Hence, S was entitled
to the 1% amount.

Note: English law does not recognised past consideration, but Malaysian law under Section 2
(d) recognised past consideration as good consideration.

A4.3 EXCEPTION WHERE AGREEMENTS ARE VALID WITHOUT CONSIDERATON

- General rule is agreement without consideration is void as stated in S.26 CA 1950.

Section 26 CA provides for three exceptions where an agreement can be made without
the need for consideration. These exceptions are:
a) Agreements on account of natural love and affection – S.26(a)
b) A promise made to compensate someone for an act voluntarily done – S.26(b)
c) A promise to pay a debt barred by law – S.26(c)

i. It is an agreement on account of natural love and affection:

- General rule is agreement without consideration is void as stated in S.26 CA 1950.

Section 26 (a) provides that an agreement made on account of natural love and affection
is valid if it has the following:
- it is express in writing and registered (if applicable), and
- there must be natural love and affection between parties standing in near relations
to each other.

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Illustration (b) to Section 26 CA 1950: A, for natural love and affection, promises to give his
son B, RM1000. A puts his promise to B into writing and registers it under the law for the
time being in force for the registration of such documents. This is a contract.

What is meant by ‘standing in near relations to each other’?

In RE Tan Soh Sim (1951), the principal issue was whether an agreement made on
account of natural love and affection for three sisters and seven half-sisters and brothers
stood in near relationship to their adopted nephews and nieces.

The court held that adopted children did not fall under the category of ‘near relation’ to
each other. (Note: today adopted children is part of the family – see s7(11) Civil Law Act
1956)

Section 7(11) Civil Law Act 1956 – ‘in…any relationship referred to in this subsection any
illegitimate person or any person who has been adopted, or whose adoption has been
registered, in accordance with any written law shall be treated as being or as having been
the legitimate offspring of his mother and reputed father or, as the case may be, of his
adopters.

ii. A promise made to compensate someone for an act voluntarily done: Section 26 (b)
which provides that a promise to compensate for something done, wholly or in part, to a
person who had already voluntarily done that something for the promisor is a valid
contract.

Examples:
A finds B’s purse and give it to B. B (later) promises to give A RM50.00. This is a
contract.

The act of finding and returning the purse has already been done voluntarily before the
promise to compensate RM50 was made. There was no request by the promissor i.e. ‘at
the desire of the promissor’. B did not request A to find the purse. The promise of reward
was not because B has asked A to find the purse.

B is now legally compelled to do his part. Such act constitutes good consideration for
the promise made.

iii. A promise to pay a debt barred by law:

Section 26(c) provides that a promise to pay a debt barred by law is valid even though
there was no consideration. Such promise much be in writing and signed by promisee or
his agent, who is authorized in behalf.

E. g.: A owes B RM1000, but the debt is barred by law. A signs a written promise to
pay B RM500 for the debt owe. This is a contract.

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A4.4 ADEQUACY OF CONSIDERATION

A4.4.1 Consideration need not be adequate but must be of some value

It is immaterial that the promisor gets more valuable than the price he asked for.
Adequacy of consideration is a matter for the parties in the agreement to decide. It is
sufficient if the consideration has some value in the eyes of law.

E.g. If X agrees to sell his car worth RM30k for only RM1.00 – The agreement is a
contract notwithstanding the inadequacy of the consideration.

This is explained in Explanation 2 of Section 26 - An agreement to which the consent of

the promisor is freely given is not void merely because consideration is inadequate; 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 is supported by Section 26, illustration (f):

A agree to sell a horse worth RM1000.00 for RM10. A’s consent to the agreement was
freely given. The agreement is a contract notwithstanding the inadequacy of the
consideration.

Is the amount RM1.00 sufficient consideration?

The sum of RM1.00 would seem unfair for his promise but the court will not assess
whether the promisor has received adequate consideration as long as both parties enter
into the bargain freely.

It is immaterial if his promise is far more valuable than the price asked for. The legal view
is that parties to a contract are capable of appreciating their own interest as long as it is
freely given and there is no fraud, misrepresentation or other vitiating factors.

In the case of Phang Swee Kim V Beh I Hock:

Respondent orally agreed to transfer to the appellant a parcel of land on payment of
RM500 although the land was worth much more. The respondent later refused to honour
the promise, contending that the consideration was inadequate.
The court held that inadequacy of consideration was immaterial and gave judgement in
favour of the appellant.

A4.5 PART PAYMENT / PAYMENT OF LESSER SUM

A4.5.1 Does part payment/ pay lessor is good consideration?

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If A owes B RM1000, can A and B agree that if A pays B RM500, this would discharge in
full the whole debt of RM1000? Can A’s promise to pay part of the debt amount to
sufficient consideration?

CA 1950
Yes! Section 64 provides that a creditor may accept a lesser sum paid by the debtor in
satisfaction of the whole debt.

‘Every promise 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 which he thinks fit.’

Examples:
1) A owes B RM500. A pays B RM200 in satisfaction of the whole debt and B
accepts. The payment is a discharge of the whole claim. – S.64 Illustration (b)
2) A owes B RM5000, C (a 3rd party) pays to B RM1000 and B accepts them, in
satisfaction of his claim on A. This payment is a discharge of the whole claim. – S.64
Illustration (c)

Kerpa Singh v Bariam Singh – an illustration (c)

BS owed KS RM8869.94. BS’s son wrote a letter to KS, offering RM4000 in full
satisfaction of his father’s debt and endorsed a cheque for the amount, stipulating that
should KS refuse to accept his proposal, he must return the cheque. KS’s legal advisors
cashed the cheque and, proceeded by issuing a bankruptcy notice to BS for the balance
of the debt of RM4869.94. The court held that the acceptance of the cheque from the
debtor’s son in full satisfaction precluded them from claiming the balance.
English Law
No! The English law differs from Malaysian law.

The general rule under English law is provided in the case of Pinnels case (1602) and
reaffirmed in Foakes v Beers (1884), the English common law rule is that the payment of
a lesser sum cannot be accepted as satisfaction of the legal obligation to pay the whole
sum.

E.g. X owed Y RM50. Y asks X to return RM30.00 in full settlement. The waiver is not
binding on Y who may later change his mind and claim for the balance RM20 still owing.

A4.6 CONSIDERATION NEED NOT MOVE FROM THE PROMISEE

A4.6.1 Consideration may move from the promisee or any other person

English Law

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Under English law - consideration must move from the promisee i.e. the person who
receives must himself give something in return.

Contracts Act
This is contrast with our Contracts Act – where Section 2(d) states that consideration may
move from the promisee or ‘any other person’, as follow:

‘when, at the desire of the promisor, the promisee or any other person has done or
abstained from doing such act or abstinence or promise is called a consideration for the
promise’

In short, consideration may be given by any other person even though he is not the
promisee.

Venkata Chinnaya v Verikatara Ma’ya [1881] – the sister agreed to pay an annuity of Rs
653 to her brothers who provided no consideration for the promise. But on the same day,
their mother had given the sister some land stipulating that she must pay the annuity to
her brothers. The sister later failed to fulfill her promise. The brothers sued her on the
promise. The court held that she was liable on the promise on the ground that there was a
valid consideration for the promise even though it did not move (comes) from her
brothers.

B. INTENTION TO CREATE LEGAL RELATIONS

B4. INTRODUCTION

The existence of an agreement does not mean there is a legally binding contract. The law
requires evidence that the parties to an agreement intend it to be legally enforceable.

Though the Contracts Act 1950 is silent on intention to create legal relations but there is
no doubt that the vital requirement of a valid contract is the parties must have the intention
to enter into such a relationship.

Intention to create legal relations can be expressed or implied

An agreement between the offeror and the offeree will only be a legally binding contract if
the parties intended that they should be legally bound.

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Where the intention is expressed, this would not be an issue. But if the intention is implied,
there are certain presumptions in law that should be considered.

The general presumption of intention to create legal relations can be categorized into 2
types of area:
(1) Commercial or business agreements
(2) Non-commercial or domestic, family and social agreements

B4.1 CLASSES OF AREAS OF INTENTION TO CREATE LEGAL RELATIONS

B4.1.1 Commercial / Business agreements:

In commercial agreement, there is a presumption that the parties do intend to make a
legally binding contract.

Esso Petroleum Co. Ltd v Customs and Excise Commissioner.

The general rule is that in commercial or business agreements the presumption is that
there is always the presence of intention to create legal relations.

However, this rule can be rebutted if the transaction is “Subject to Contract”:

Daiman Development S/B v Mathew Lui Chin Teck & Anor.

The use of the phrase “subject to contract” in an agreement infers that the parties do not
intend to enter into a contractual relationship yet. The presumption is that there is no
intention to create legal relations until the condition is satisfied.

B4.1.2 Non- Commercial / Domestic, Family and Social agreements:

There is a presumption that there is no intention to create legal relations where the parties
are involved in an agreement concerning family, domestic or social matters unless it can
be proven otherwise.
E.g. A group of friends agree to share the cost of travelling to a holiday resort in a car.
Here it is unlikely that they have in mind a legal relation in the arrangement.

a) Agreement between husband and wife

Generally, the law presumes that an agreement made between husband and wife is not
intended to create legal relations.
Balfour v Balfour – (agreement between spouses not made in writing)
D was a civil servant in Ceylon (Sri Lanka) and before he leave to Ceylon, he promised to
pay his wife a monthly allowance of £30 until he returned. The wife was unable to
accompany her husband due to poor health. D defaulted and the wife sued for breach of
contract. The court held it was not a contract because the parties did not intend that the
agreement should be attended by legal consequences.

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In contrast:
Meritt v Meritt - (agreement between spouses made in writing)
The husband left his wife and went off to live with another women. The wife pressed the
husband to make arrangements for future. They met and talked the matter over and the
he also wrote out and signed a document in which he stated that in consideration of the
wife paying all the charges to the matrimonial home, he would agree to transfer the
property to her. The husband later refused to transfer the property to the wife. The
husband argued that the agreement was of a family nature and that it was not intended to
create legal relations.

The court held that there was intention to create legal relations and the agreement was
enforceable because -
a. It was made when the parties were not living together under ordinary circumstance
and,

b. The wife was paying the mortgage for the property, had given ample consideration.
(She had honoured the promise of the husband. She was not getting the property for
free; she was paying a price for it).

b) Agreement between family & friends

Choo Tiong Hin & Ors v Choo Hock Swee

Husband and wife lived in a house on a farm in Singapore in 1916. They had 2 daughters,
5 adopted sons. Most of the family members, including their grand children lived together
on the premises. Those who were old enough worked in the farm and in other business
enterprises and the family prospered.

In 1953 the wife died. In 1955, following numerous family quarrels, the husband remarried
and left the family home. He later sued 3 of his adopted sons and 2 of his grand sons for
possession of the farm and the family house and as well as damages for trespass.
His adopted sons contended that there were contracts between the man and them
whereby they agreed to work at the farm. They claimed that having helped in the farm
there was an intention to create legal relations.

The court held that the agreements between the husband and his adopted sons were not
intended to create legal relations and were therefore not binding in law as contracts.

In contrast,
Simpkins v Pays – agreement between friends where intention to create legal relations is
present. Here, P had been living for over 4 years with the D, an elderly woman, and her
grand-daughter as a lodger. The three of them bought some tickets and entered the
contest, which was taken out in the D’s name. All expenses towards the entry were
shared among them. One of the entries won a prize of £750, but the D refused to share it
with the other two. P brought an action over her share of £250.

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Court held that this was a joint enterprise which each of them had contributed in the
expectation of sharing any prize that was won. Therefore there was an intention to create
legal relation.

C. PRIVITY OF CONTRACT
The doctrine of privity of contract means a non-party cannot bring an action on the
contract. The law has laid down the principle that only those who are parties to the
contract or privy to the contract can sue or be sued on it.

A person who is not a party to a contract may not enforce the contract even though it was
made for his benefit. Similarly, the parties to a contract cannot impose liabilities upon a
third party who is stranger to the original contract.

Our CA 1950 does not expressly provide for privity of contract and the doctrine has been
transplanted as part of our law in Malaysia.

Example:
1) If A enters into a contract with B, only A and B can sue on the contract, C who is
not a party to the contract cannot do so.

2) A buys a car from B and gives it to his wife C. The car was faulty. C cannot take an
action in contract against B because she is not a party to the contract between A
and B.

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