LAW 2220

BUSINESS LAW
Chapter 5: LAW OF
CONTRACT
(Consideration)
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Contents
1.Introduction
2.Definition
3.General Rule
4.Types of consideration
5.Rules governing consideration
6.Exceptions to general rule

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Objectives
Students will be able to explain:
1. Explain the definition of
consideration
2. Describe the relevant principles of
law which are relevant to
consideration
3. Apply the principles of law to the
given situations.
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1. Introduction
An agreement is formed when one party accepts
the offer of another. Nevertheless, not all
agreements can be enforced by the courts. The
presence of offer and acceptance alone does not
make a contract.
A
transaction
must
be
supported
by
consideration in order for it to be a contract.
The common law does not recognize bare
promises. It emphasizes the element of bargain
in commercial transactions and hence, the need
for something in exchange for something.
The element of exchange is known as
CONSIDERATION.
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2. Definition
Broadly stated, consideration is the
price of a promise or an exchange of
promises.
Legal definition
s. 2 (d) of CA 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 for
the promise.
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 Broadly stated, consideration is the price of a

promise or an exchange of promises.
Traditional definition which is slightly confined to
benefit and detriment.
Curie & Ors v Misa (1875) :
A valuable consideration in the sense of the
law, may consist either in some right,
interest, profit or benefit accruing to the one
party, or some forbearance, detriment, loss or
responsibility, given, suffered or undertaken
by the other.
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1. Executory
consideration
K Murugesu v Nadarajah [1980] 2 MLJ 82
The R was the tenant of the appellant. The R had asked the A
to sell him the house he was living in. The A finally wrote on
a piece of paper an agreement to sell to the R the said
house for $26K within 3 months from the date of
agreement.
Later, the A refused to sell and the R sued for specific
performance.
The A contended that there was no consideration for the offer
to sell and the agreement was void for being without
consideration.

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Courts decision
The Federal Court:
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.
The court further stated that where
there was a promise against a promise,
one promise was consideration for the
other because each may have his action
against the other for non-performance.
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Think about Balfour v

Balfour!

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2. Definition (cont)

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2. Definition (cont)
Therefore, consideration may be viewed
as the price which one party pays to
buy the promise or act of the other i.e.
when the promisor promises to do or to
abstain from doing something, the
promisee must pay a price for it.
Consideration can involve an exchange
of benefits between two parties Lim
and Tan.
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Example:
Lim promises Tan RM50 if he cuts the
grass in Lims garden. If Tan agrees and
cuts the grass in the garden, Lim is
contractually bound to pay Tan RM50.
The cutting of the grass in the garden is the
consideration for Lims promise.
It is also the price that Tan pays for Lims
promise.
LIM?
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UNILATERAL CONTRACT
A promise in return of an act as
between Lim and Tan
LIM promises to pay RM50
Tan to perform the act requested by
LIM (promisor)

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BILATERAL CONTRACTS
A promise in return of a promise
Rihanna agrees to buy a car for
RM1m from a distributor
Rihannas consideration - the promise
to pay RM1m
Distributors consideration - to pass
ownership to Rihanna
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 S. 2 (c) of CA 1950 the person

making the offer is called the promisor
while the person to whom it is made is
referred to as the promisee.
However, inasmuch as parties to a
contract exchange promises, in reality
each is at once a promisor as well as a
promisee.
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3. General rule
s. 26 of CA an agreement made without
consideration is void.
Illustration (a) of s. 26 CA, 1950
A promises, for no consideration, to give to B
RM1,000. This is a void agreement.
Why?
B does not give anything in return of As
promise.
Only 1 party gives some consideration here i.e. A
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4. Types of consideration
3 types

Executory

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Executed

Past

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1. Executory
consideration

in which is yet to be given or performed.

This is good in law.

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1. Executory
consideration (cont)
Promise to sell - 1

B = CONTRACT
valid

Promise to buy - 2
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1. Executory
consideration
K Murugesu v Nadarajah [1980] 2 MLJ 82
The R was the tenant of the appellant. The R had asked the A
to sell him the house he was living in. The A finally wrote on
a piece of paper an agreement to sell to the R the said
house for $26K within 3 months from the date of
agreement.
Later, the A refused to sell and the R sued for specific
performance.
The A contended that there was no consideration for the offer
to sell and the agreement was void for being without
consideration.

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Courts decision
The Federal Court:
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.
The court further stated that where
there was a promise against a promise,
one promise was consideration for the
other because each may have his action
against the other for non-performance.
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1. Executory
consideration (cont)
Examples:

S offers to sell B his car for RM50,000 and B accepts. S is

yet to deliver the car to B and B is yet to pay the price.
Hence, the consideration on both sides is said to be
executory, still outstanding and to be performed in the
future.

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2. Executed consideration
consideration which has been
completed by a party at the time of
the contract.
This is good in law.

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ii) Executed consideration

(cont)
promise to pay - 1

VALID

B = CONTRACT

act performed - 2
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ii) Executed consideration

(cont)
Examples:

S offers to sell B his car for RM50,000 and B

accepts. S delivers the car to B and B is to pay
the purchase price a week later. Under this
arrangement, S has nothing more to do, the
consideration on his part, the car, has already
been delivered. His consideration is executed.
A offers RM200 to anyone who finds and returns
his digital camera which he has earlier lost. B
finds and returns his digital camera in response
to the offer. Bs consideration for As promise is
executed, and only As liability remains
outstanding.
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Think of Carlill v Carbolic

Smoke Ball Co.s case
Mrs Carlills consideration
was executed

WHY? She did not promise to use a

smoke ball and catch flu, she just did it.
Smoke Balls consideration
was executory being a promise i.e. to give
the reward
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iii) Past consideration

when a promise is made subsequent to
and in return for an act that has
already been performed.
Consequently, the promise and the act
in question are not in response to each
other.
This is however generally good
consideration in Malaysia.
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iii) Past consideration

(cont)
Promise after an act
act performed 1

VALID

= CONTRACT

promise to pay - 2

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iii) Past consideration

(cont)
Example:

A finds and returns Bs digital camera

and in gratitude, B promises to reward
him with RM200. Here B made a
promise in return for A prior act i.e.
return his digital camera. The return of
the camera was an act in the past done
independently of Bs promise and will
be past consideration.
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5. Rules governing
consideration

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1. Consideration need not be

adequate
The rule has emerged that consideration
must be sufficient (acceptable) in law, but
it needs not be adequate.
Sufficient consideration means some
consideration that is recognized by the
law,
however small

Adequate consideration means something

which is equal in value to what is being
given by the other party.
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Sufficient
A shop and I have agreed that I could
have the a new flat screen TV for RM10.
My consideration would have been
sufficient but would not have been
adequate.
WHY not adequate?
because RM10 is not the same value as
the shops consideration.
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1. Consideration need not be

adequate (cont)
Both under common law and under the
Contracts Act, the law does not concern
itself with values, unless a party alleges
duress, fraud or some such vitiating
element.
Example: If A is minded to sell his
bungalow worth RM1 million to B for only
RM50,000, it will be a valid contract, unless
A later alleges and proves that some
element vitiating his free consent.
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1. Consideration need not be

adequate (cont)
Explanation 2 of s. 26 of CA,
1950.
An agreement to which the consent of
the promisor is freely given is not void
merely because the consideration is
inadequate

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1. Consideration need not be

adequate (cont)
Illustration (f) of s. 26 of CA, 1950
A agrees to sell a horse worth RM1,000
for RM10. As consent to the agreement
was freely given. The agreement is a
contract notwithstanding the inadequacy
of the consideration.
The sum of money obviously not adequate
for his promise but the court will not assess
whether a promisor has received adequate
consideration. It appears that the adequacy
of consideration is immaterial.
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1. Consideration need not be

adequate (cont)
However, Explanation 2 of s. 26
CA, 1950 further provides: 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.

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Bolton v. Madden (1873) LR

9 QB 55

Held: The adequacy of consideration

is for the parties to consider at the
time of making the arrangement and
not for the court when it is sought to
be enforced.

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Phang Swee Kim v. Beh I

Hock (1964) MLJ 383
Facts: In 1944, by a memorandum of transfer and in
consideration of $20,000 in Japanese currency, the respondent
transferred his half share of the land to the appellants husband,
now deceased. The transfer was not registered but the
deceased obtained possession of the land.
The appellant, the widow of the deceased continued to be in
possession after his death. In 1963 the land was sub-divided
and the respondent became the sole proprietor of the lot
occupied by the appellant.
Subsequently, the respondents solicitors notified the appellant
that she had trespassed on the land and asked for vacant
possession. At the hearing the appellant claimed that there was
an oral agreement made between her and the respondent in
which the respondent agreed to transfer the land to her on
payment of $500.
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Phang Swee Kim v. Beh I

Hock (1964) MLJ 383
Held: The learned trial judge decided
that the agreement was void due to
inadequacy of consideration.
However on appeal, the Federal Court
held that by virtue of explanation 2 to
s. 26, the inadequacy of the
consideration was immaterial. Thus,
the transfer of land for RM500 is valid
as there was no evidence of fraud or
duress.
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2. Consideration may move from the

promisee or any other person
Authority
s. 2 (d) of CA, 1950 states that: the promisee or any other person
i.e. consideration can move from third
party.

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Case: Venkata Chinnaya v.

Verikatara Maya
Facts: A sister agreed to pay an annuity of
Rs653 to her brothers who provided no
consideration for the promise. But on the
same day, their mother had given the
sister, her estate subsequently failed to
fulfill her promise to pay the annuity, her
brother sued her on the promise.
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.
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3. Past consideration is good

consideration
Something which wholly performed
before the promise was made. It was
made or given not in response to the
promise. Promise is subsequent to
the act and independent of it.

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Legal position of past

consideration
Malaysian law: Past consideration is a
good consideration.
Authority: s. 2 (d) of CA, 1950 :
has done or abstained from doing.
The use of the words implies that even if the act is
prior to the promise, such an act would constitute
consideration so long it is done at the desire of the
promisor.
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Kepong Prospecting Ltd. V.

Schmidt [1968] 1 MLJ 170
Facts: Schmidt, a consulting engineer has assisted another in
obtaining a 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.
The services prior to the companys formation could not amount
to consideration as they could not be rendered to a non-existent
company, nor could the company bind itself to pay for services
claimed to have been rendered before its incorporation.

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Kepong Prospecting Ltd. V.

Schmidt [1968] 1 MLJ 170
(cont)

Issue: Whether services rendered after

incorporation but before the
agreement, were insufficient to
constitute a valid consideration even
though they were clearly past.
Held:
Past consideration did constitute a valid
consideration. So Schmidt was entitled to
his claim on the amount.
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English law: Past consideration is not a

good consideration.
Case: Roscorla V Thomas [1842]
Facts: Roscorla purchased a horse from
Thomas. After the sale was completed,
Thomas promised him that the horse was
in good condition and not vicious. In fact
the horse was vicious.
Issue: Was there consideration to support
the promise that the horse was not vicious.
Decision: The sellers promise was not
binding. It was made after the sale had
been completed and the buyer had given
nothing in return for it. The buyer could
not rely on the prior sale to support the
new promise as it was past consideration.
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Exceptions: It means that past consideration is good in the following

circumstances: Case: Lampleigh v Braithwait (1615)
D killed a man and asked P to obtain for him a royal pardon. P did
so and D then promised to pay him 100. D broke this promise
and P sued him. P succeeded in this action because Ds request
was regarded as containing an implied promise to pay, and the
subsequent promise to pay 100 was merely fixing the amount.
Case: Pao On v Lau Yiu Ling (1980)
Lord Scarman gave several requirements for past consideration
to be good, namely:

a service has been rendered

at the request of the promisor
on the understanding that a payment will be
made.
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Past consideration act

voluntarily done?

Illustration (c) of s. 26 of CA, 1950

A finds Bs purse and gives it to him. B

promises to give A RM50. This is a
contract.

VALID consideration

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4. Part payment may discharge

an obligation
s. 64 of CA, 1950
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.

General rule is that payment of a smaller

sum is a satisfaction of an obligation to
pay a larger sum.
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4. Part payment may discharge

an obligation (cont)
Illustration (b) to s. 64 of CA, 1950
A owes B RM5000. A pays to B and B accepts
in satisfaction of the whole debt, RM2000
paid at time and place which the RM5000
were payable. The whole debt is discharged.

Illustration (c) to s. 64 of CA, 1950

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.
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Kerpa Singh v. Bariam

Singh [1966] 1 MLJ 38

Facts: Bariam Singh owed Kerpa Singh RM8.869.94 under

the judgement debt. The debtors son wrote a letter to
Kerpa Singh, offering RM4000 in full satisfaction of his
fathers debt and endorsed a cheque for the amount,
stipulating that should Kerpa Singh refuse to accept his
proposal, he must return the cheque. Kerpa Singhs legal
advisor having cashed the cheque and retained the money,
proceeded to secure the balance of the debt by issuing a
bankruptcy notice to the debtor.

Held: The acceptance of cheque from the debtors son in

full satisfaction precluded them from claiming the balance.

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English law in Pinnels case established that payment of a

smaller sum is not a satisfaction of an obligation to pay a
large sum.

Pinnels case (1602)

Facts: D owed P certain sum of money, which was due in
November. P asked D to pay a lesser sum before the due
date, i.e. October, because he was in need of money and
promised not to sue for the balance. D paid the sum but P
sued for the balance.
Plaintiff won on technical point. The court stated that
payment of a lesser sum could not be any satisfaction for
the whole. This is because by no possibility a lesser sum
can be satisfaction to the creditor for a greater sum.

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6. Exceptions to general
rule
What is the general rule?
????

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EXCEPTIONS

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1. An agreement on account of natural

love and affection
s. 26 (a) of CA, 1950
The validity of this agreement is dependent
upon the following condition:a) it is expressed in writing;
b) it is registered (if applicable);
c) it is made on account of natural love and affection
between parties standing in near relation to each
other.

(near relation is varies from one social group to

another as it depends on customs and practices
of such group)
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1. An agreement on account of natural

love and affection
Case: Re Tan Soh Sim [1951] 1
MLJ 21
On the facts of the case the court held
that a Chinese adopted son is related to
the family of his adoptive father.

English law does not recognize

natural love and affection as valid
consideration.
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2. An agreement to compensate for

something voluntarily done
s. 26 (b) of CA, 1950

There are two (2) limbs to this exception: it is promise to compensate either wholly or in part the
other person (promisee)
the promisee has voluntarily done something for the
promisor.
So, the act that has been performed by the promisee prior to the
agreement must have been performed voluntarily.
Illustration (c) of s. 26 of CA, 1950

A finds Bs purse and gives it to him. B

promises to give A RM50. This is a contract.
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3. An agreement to compensate
something which promisor was legally
compellable to do

s. 26 (b) of CA 1950
The necessary ingredients are as follows:-

a) the promisee has voluntarily done an act

b) the act is one which the promisor was legally
compellable to do
c) an agreement to compensate, wholly or in part
the promise for the act.

Illustration (d) of s. 26 CA 1950

A supports Bs infant son. B promises to pay As expenses in so
doing. This is a contract.

Example:
If X pays a fine imposed by the court on Y who promises to
compensate him, that promise is binding under this provision.

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4. A promise to pay a statutebarred debt

s. 26 (c) of CA 1950
A statute-barred debt refers to a debt
which cannot be recovered through legal
action because lapse of time fixed by
law i.e. under the Limitation Act 1953
the time limit is 6 years from the time of
cause if action arises.

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4. A promise to pay a statute-barred

debt (cont)
General rule is that where more 6 years have elapsed from the
cause of action the aggrieved party cannot sue.
s. 26 (c) CA, 1950 creates an exception to this rule but
subject to several conditions namely:a) the debtor made fresh promise to pay the statutebarred;
b) the promise is in writing and signed by the person to be
charged or is authorised agent in that behalf.
Illustration (e) of s. 26 CA 1950
A owes B RM1000, 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.
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TUTORIAL QUESTIONS
1. Define consideration and discuss TWO
(2) rules of governing consideration.
2. Give the different types of
consideration and their legal position.
3. Identify the general rule governs the
consideration and its exceptions.
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TUTORIAL QUESTIONS
(cont)
4. Mamat was swimming in the river and got into difficulty.
Muthu, who was passing by heard Mamats cries for help
took off his coat and dived into the river and saved Mamat
from drowning. Mamat later promised to give RM2000 to
Muthu for saving his life. Advise Muthu whether he can
enforce the promise made by Mamat. (10 marks)
5. Sharifah sold her diamond earring to Zeti for RM50. Discuss
the validity of the contract. (15 marks)

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6. Are the following promises legally

binding or merely gratuitous?
i) Roy returned Browns lost cat. Brown
promised him RM200.
ii) John agreed to sell his Ford sport car to
David for RM10.
iii) Mary promises her employee, Peter
that she will give him a RM100 bonus if
he is able to exceed sales target for 3
consecutive months.
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