LAW3201 Foundations of Business LawTopic 5: LAW OF CONTRACT (Consideration)Readings:Lee Mei Ping, General Principles of Malaysian Law, 5th Edition, 2005, Oxford Fajar Sdn Bhd Abdul Majid, Krishnan Arjunan, Business Law in Malaysia, 2005, Lexis Nexis Malayan Law JournalBeatrix Vohrah, Wu Min Aun, The Commercial Law of Malaysia, 2nd ed., Longman, 2000Malaysian Contracts Act 1950 (.my/) law of Malaysia/numerical table of laws/Act 136Contents:1.Introduction2.Definition3.General Rule4.Types of consideration5.Rules governing consideration6.Exceptions to general ruleObjectives:Successful students should be able to:-1. Explain the definition of consideration2. Describe the relevant principles of law which are relevant to consideration3. Apply the principles of law to the given situations.1. IntroductionA transaction must be supported by consideration in order for it to be a contract. The common law does not recognize bare promises. It emph asizes the element of ‘bargain’ in commercial transactions and hence, the need for ‘something in exchange for something’.2. DefinitionBroadly stated, consideration is the price of a promise or an exchange of promises.Legal definitions. 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”.There are four (4) points to be noted:-(a)at the desire of the promisor;(b)the promisee or any other person;(c)has done or abstained from doing or promises to do or abstains from doingsomething; and(d)such act or abstinence or promise is called a consideration for the promise.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.3. General rules. 26 of CA–“an agreem ent made without consideration is void…”.Illustration (a) of s. 26 CA, 1950A promises, for no consideration, to give toB RM1,000. This is a void agreement,4. Types of considerationThere are THREE (3) types of consideration.1.Executory – consideration in which is yet to be given or performed. This is good in law.Example: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.2.Executed–consideration which has been completed by a party at the time of the contract. This is good in law.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. B’s consideration for A’s promise is executed, and only A’s liability remains outstanding.3.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.Example:A finds and returns B’s 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 B’s promise and will be past consideration.5. Rules governing consideration1.Consideration need not be adequateThe rule has emerged that consideration must be sufficient (acceptable) in law, but it need not be adequate.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.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…Illustration (f) of s. 26 of CA, 1950A agrees to sell a horse worth RM1,000 for RM10. A’s 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.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.Cases: Bolton v. Madden (1873) LR 9 QB 55Held: 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.Phang Swee Kim v. Beh I Hock (1964) MLJ 383In 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 a ppellant’s 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 respondent’s 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.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.2.Consideration may move from the promisee or any other personAuthoritys. 2 (d) of CA, 1950 states that:-“…the promisee or any other person…”i.e. consideration can move from third party.Case: Venkata Chinnaya v. Verikatara Ma’yaFacts: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.3.Past consideration is good considerationSomething 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. English law: Past consideration is not a good 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.Case: Kepong Prospecting Ltd. V. Schmidt [1968] 1 MLJ 170Facts: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 company’s 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.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.4.Part payment may discharge an obligations. 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.Illustration (b) to s. 64 of CA, 1950A owesB 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, 1950A owesB 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] 1 MLJ 38Facts:Bariam Singh owed Kerpa Singh RM8.869.94 under the judgement debt. The debtor’s son wrote a letter to Kerpa Singh, of fering RM4000 in full satisfaction of his father’s debt and endorsed a cheque for the amount, stipulating that should Kerpa Singh refuse to accept his proposal, he must return the cheque. Kerpa Singh’s 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 debtor’s son in full satisfaction precluded them from claiming the balance.English law –in Pinnel’s case establis hed that payment of a smaller sum is not a satisfaction of an obligation to pay a large sum.Pinnel’s 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.6. Exceptions to general rule1.An agreement on account of natural love and affections. 26 (a) of CA, 1950The 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 nearrelation to each other.(near relation is varies from one social group to another as it depends on customs and practices of such group)Case: Re Tan Soh Sim [1951] 1 MLJ 21On 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.2.An agreement to compensate for something voluntarily dones. 26 (b) of CA, 1950There are two (2) limbs to this exception:-a)it is promise to compensate either wholly or in part the other person (promisee)b)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, 1950A finds B’s purse and gives it to him.B promises to give A RM50. This is a contract.3.An agreement to compensate something which promisor was legally compellable todos. 26 (b) of CA 1950The necessary ingredients are as follows:-a)the promisee has voluntarily done an actb)the act is one which the promisor was legally compellable to doc)an agreement to compensate, wholly or in part the promise for the act.Illustration (d) of s. 26 CA 1950A supports B’s infant son.B promises to pay A’s 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.4. A promise to pay a statute-barred debts. 26 (c) of CA 1950A 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.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 statute-barred;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 1950A owesB 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.TUTORIAL QUESTIONS1.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.4.Ali owes Abu RM20,000. Aminah, Ali’s sister offers to pay RM15,000 as payment infull in order to discharge her brother from adebt. Abu accepts that offer. Two weeks later, Abu claims the balance fromAli. Advise Ali.5.Mamat was swimming in the river and got into difficulty. Muthu, who was passing byheard Ma mat’s cries for help took off his coat and dived into the river a nd 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.6.Sharifah sold her diamond earring to Zeti for RM50. Discuss the validity of thecontract.。