LAW OF CONTRACT

CONSIDERATION

CONSIDERATION• Section 26 of the Contract Act 1950 provides

that, as a general rule, an agreement without consideration is void

• The word ‘consideration’ is defined in section 2(d) of CA 1950.

• In simple, consideration is the price of which one party pays to buy the promise or act of the other

• Literally, it means something that is given in return for something else. For example, rm3 for a can of beer.

• S.2 (e) also stated that every promise and every set of promises, forming the consideration for each other, is an agreement.

Classification of Consideration

1. Executory consideration• It is executory when one promise is made in

return for another promise.• For example, A agrees to sell his house to B for

rm10k. Here, B’s promise to pay the sum of rm10k 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 rm10k. (Illustration (a), S.24 CA 1950)

Wong Hon Leong David v Noorazman bin Adnan (1995)

F: The appellant promised to pay the respondentRm268,888 in return that the respondent would assist him in obtaining the approval for the application to convert and subdivide certain land to be developed into a housing estate.

H: the exchange of mutual promise, though it is executory consideration, is a good consideration. Therefore there was a binding agreement between them and the respondent’s claim for the fee succeeded

2. Executed Consideration- a promise for an act- for example, if A promises that A will give a reward of RM100 to anyone who finds his lost dog, the consideration for the person claiming the reward would be the act of searching for the dog and finding it.

CASE: Carlill v Carbolic Smoke Ball Co Limited (1893)

3. Past Consideration- means a promise subsequent to and in return for an act that has already been performed- for example A finds B’s purse and gives it to him. B promise to give A RM50. this is a contract.

Case : Kepong Prospecting Ltd & Ors v Schimdt (1968)F : Schimdt, a consulting engineer, has assisted another in

obtaining a prospecting permit for mining 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.” Dispute arose between the members of the company and Schimdt claim all which is due to him under the agreement.

H: it did constitute a valid consideration. Therefore, Schimdt was entitled to his claim on the amount.

Rules on Consideration1. Consideration must have some value

- an act or promise to do something which one is bound to do will not be a valid consideration

Case : Stilk v Myrick (1809)F: The captain of the 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.

H: 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.

• 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.

Case : Hartley v Ponsonby (1857)F: a ship’s crew had been seriously depleted due to half of them

had deserted on the voyage. The captain promised the remaining crew members 40 pound extra pay if they would complete the voyage

H: the promise was binding because it was too dangerous to put to sea in a ship so undermanned. The seamen were not obliged to do this under their contracts of service because the situation had gone beyond their existing contractual duty and therefore they are free to enter into a fresh contract for the remaining part of the voyage.

2. Consideration need not be adequate- consideration need not be adequate but sufficient.- sufficient means it is freely given without fraud or misrepresentation.- for example, 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. (illustration (f) s.26 of CA)

Case : Thomas v Thomas (1842)H: rent payment of 1 pound made by the plaintiff to

the defendant was a valuable consideration even though it was not adequate

3. Consideration can move from the promisee or any other person. (s.2 (d) CA)- different from English Law. (consideration must move from promisee)- i.e the person who receives the promise must himself give something in return

CASE: Venkata Chinnaya v Verikatara’ma’ya(1881)F: a sister agreed to pay an annuity of Rs653 to her brotpiohers

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

H: 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= s 24 CA 1950 (a) – (e)- for example, A promises B that A will pay B $10,000, if B will kill C, is an agreement which is unenforceable as the consideration is unlawful.

5. Consideration must not be vagueCase : Scammell & Nephew v Ouston (1941)F: The defendant ordered a motor van from the Pf “on the understanding that the balance of the purchase price can be had on hire purchase terms over a period of two years”H: the order (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 under S.26 of CA 1950 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))

- English contract law does not recognize “natural love and affection” as a valid consideration.Requirements:i. Expressed in writing (any reasonable form)ii. Must be registered if required by the lawiii. Made on account of natural love and affection between

parties standing in near relation to each other- Near relation = immediate family members

Illustration

• A agreed to pay. RM5000 to his younger brother out of natural love. This promise is in writing and registered. If A refuses to pay RM5,000 to his younger brother, the brother can enforce the promise in the Court and A cannot refuse payment on the ground of absence of consideration.

Case : Re Tan Soh SimF: the deceased (Tan Soh Sim) in her deathbed

expressed a wish that her estate should be divided amongst her 4 adopted children. The legal next-of-kin of TSS, respecting the wish, drew up an agreement to give up all their rights in favor of the 4 adopted children. The question emerged was this agreement valid or invalid?

H:. The court held that the claims of the adopted children were not effective as it was contrary to Section 26(a) because it was not made in writing and that there was no natural love and affection between them as the legal next-of-kin does not stand in near relation with their nephew and nieces (adopted children).

2. An agreement to compensate for a past voluntary act (s26(b))- There are two situations under section 26(b)A. Contract to compensate past voluntary actB. Contract to compensate an act which the promisor is

legally compellable to do so.A. Requirements:

i. it is a promise to compensate the promisee; wholly or partlyii. The promisee has voluntarily done something for the promisor.

- The word voluntary is not defined under the contract act but it is defined in the case of: J.M Wotherspoon & Co. Ltd v Henry Agency House (1962)

H: Voluntarily means the acts performed or done by one’s own free will, wish or choice and not constrained or suggested by another.

B. Requirementsi. Promisee has done the act voluntarilyii. The act is one which the promisor was legally

compellable to do, andiii. An agreement to compensate, wholly or partly,

the promisee for the act/- For example. A support’s B infant. B promises A

to pay A’s expenses in doing so. (illustration (d) s.26)

- if X pays a fine imposed by the court on Y who promises to compensate him, that promise is binding under this provision

WAIVER OF PERFORMANCE(S.64 CONTRACT ACT 1950)

• In legal terms, waiver means the voluntary surrender of a known right

• For example, A owes B RM10. A only pays RM2 and if B accepts it in satisfaction of the whole debt. Then B has waived his right to make you pay him the balance of RM8 and the debt will be discharge.

• 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.

CASE: Kerpa Singh v Bariam Singh (1966)F: Bariam owed Kerpa $8869.94 under a judgment debt.

Bariam’s son wrote a letter to Kerpa, a creditor, offering $4000 in full satisfaction of his father’s debt and endorsed a cheque for the amount, stipulating that should Kerpa refuse to accept his proposal, he must return the cheque. Kerpa’s legal advisers, cash the cheque and retained the money. The legal advisers later on proceeded to secure the balance of the debt by issuing bankruptcy notice on Bariam.

H: the acceptance of the cheque from the debtor’s son in full satisfaction precluded them claiming the balance. S. 64 applied.