Tuesday, July 13, 2010

Consideration

CONSIDERATION

An agreement without a valid consideration is void unless they belong to one of those categories of agreement listed in the same section as being exempted from the rule.

Section 2(d) Contact Act 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 so or to abstain from doing something, such act or abstinence or promise is called consideration of the promise”

Consideration may be viewed as a sort of bargain, or price which one party pays to buy the promise or act of the other. When the promisor promises to do or to abstain from doing something, the promisee must pay a price for it. This price to be paid may be an act or abstinence or a price to perform a future act or abstinence.

Example

A lost his cat and offered a reward of RM 1000/- to anyone who finds it and returns it to A. B finds the cat and returns it to A. Here B pays the price for A promise by performing the act which by Sec 2(d) is the consideration of the promise.



TYPES OF CONSIDERATION

Consideration can be classified as: -
1. Executory
2. Executed
3. Past

1. Executory Consideration

It is when one promise is made in return for another or a promise in return of promise.

Example: -

M promised to sell his mobile phone to K for RM550/- and K promised to pay the price upon delivery by M. Here, the promise to sell is in return to promise to buy.

See Murugesu v Nadarajah [1980] 2 MLJ 82

M agreed to sell his house to N. An agreement was written on a scrap paper and says as follows: -

I agree to sell my house No. (address) held under…. to Mr. N, the present tenant of the house at $26,000/- within three months from the date.

M later refused to sell the house and a specific performance was ordered at the trial and the appellant took the matter to Federal Court. The appeal was dismissed, gave effect to Illustration of Section 24. Chang Min Tat F.J held:

“The agreement must be seen to be a case of Executory consideration. A promisee 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”

Example

A agrees to sell his car for RM20,000/- to B. B promise to pay the sum of RM 20,000/- in consideration for A’s promise to sell the car, and A’s promise to sell the car is the consideration for B’s promise to pay the RM20,000/-. These are lawful considerations.



2. Executed Consideration

It is when a promise is made in return for the performance of an act.

Example

M lost his pen and offered RM 200/- to anyone who finds and returns the documents to him. K found M’s pen in response to the offer and returns them to M. By returning the pen, K has given consideration to M’s promise to pay. Should M refuse to pay, K may take an legal action against him.

3. Past Consideration

Where a promise is made subsequent to and in return for an act that has already been performed, the promise is made on account of a past consideration.

Example

If K finds and returns M’s pen and in gratitude, M promise to pay K RM200/- the promise is made in return for a prior act.

Under English law the general rule is that past consideration is insufficient to support a contract

Section 2(d) by the words “ has done or abstained from doing”

suggests that an act prior to the promise is sufficient to constitute consideration even though it is clearly past provided it is done at the desire of the promisor

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

S a consultant engineer has assisted another in obtaining a prospecting permit for mining iron ore, he helped in the subsequent formation of Kepong Prospecting Ltd and was appointed as its MD. After the company was formed they entered into an agreement whereby the company undertook to pay 1% of the value of all ore sold from the mining land.

This being ‘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…….

Were the services rendered after the incorporation but before the agreement sufficient consideration? This was clearly past consideration. The Privy Council ruled that it did constitute a valid consideration so that Schmidt was entitled to his claim on the amount.

EXCEPTIONS TO GENERAL RULE

Section 26 Contract Act 1950:

An agreement made without consideration is void unless:-

a. it is in writing and registered – Section 26 (a) (love and affection)

it must be expressed in writing and registered under the law (if any) for the time being in force for the registration of such documents and is made on account of natural love and affection between parties standing in near relation to each other.


** under English law natural love and affection are not recognized as a valid consideration as was decided in Brett v JS & his Wife(1600) 79 ER 9 & 7

see. Re Tan Soh Sim & Ors v Tan Saw Keow [1951] MLJ 21

A woman on her deathbed expressed her intention to leave all her properties to her four adopted children. The court held that the claims of the adopted children were not effective as it was contrary to Section 26(a) i.e. it was not in writing and there was no natural love and affection between parties standing in near relation to each other

b. or is a promise to compensate for something done Section 26 (b)

It is a promise to compensate wholly or in part a person who has already voluntarily done something for the promised or something which the provision was legally compellable to do

There are three limbs to the exception

i. it is a promise to compensate either wholly or in part the other person
ii. the promisee has voluntarily done something for the promisor. The act must be performed voluntarily. Voluntarily was defined in the case of J.M. Wotherspoon & Co Ltd v Henry Agency House [1962] MLJ
iii. An agreement to compensate for an act the promisor was legally compellable to do.

The necessary ingredients are :-
a. 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 promisee for the act

Example.

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

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


c. or is a promise to pay debt barred by limitation law. Section 26 (c)

A statute barred debt refers to a debt, which cannot be recovered through legal action because of a lapse of time fixed by the law.
Section 26(c) creates an exception to this rule but subject to several conditions:-

1. The debtor made a fresh promise to pay the statute barred debt.
2. The promise is in writing and signed by the person to be charged or his authorized agent in his/her behalf

Example

A owes B RM1000/-, but the debt is barred by limitation. A signs a written promise to pay B 500 on account of the debt. This is a contract

ADEQUACY OF CONSIDERATION

Does it matter that M sells his house worth RM1million for RM5/- to N. Is the amount of RM5/- sufficient consideration? Legally, it appears that the adequacy of consideration is immaterial.

An agreement to which the consent of the promisor is freely given is not void merely because the consideration is inadequate, but the adequacy of the consideration may be taken into account by the court in determining the question whether the consent of the promisor was freely given.

Illustration (f)
A agrees to sell his horse worth RM1000/- for RM10/-. A’s consent to the agreement was freely given. The agreement is a contract notwithstanding the inadequacy of the consideration.

See. Phang Swee Kim v Beh I Hock [1964] MLJ 383

Sale of a land for $500/- when it was worth more than that. Seller refused to honour promise citing that the price was inadequate for a consideration.
The trail court judge held that the agreement was void due to inadequacy of consideration. However upon appeal to the Federal Court, the decision of the Trail judge was reversed and applied explanation 2 and illustration (f) of Section 26.

See Kedari bin Ranu v Atmarambhat (1965 – 67) 3 BCHR 11.18,19
Thomas v Thomas (1842) 2 QB 851[1]

CONSIDERATION NEED NOT MOVE FROM THE PROMISEE

In English Law consideration must move from the promisee i.e. the person who receives the promise must himself give something in return. In Malaysia a party to an agreement can enforce a promise even though he has given no consideration, so long as somebody else has done so – Section 2(d).

Example
Assume that there are 3 parties to an agreement. A,B, & C. C promises to pay A RM1000/- if B will repair C’s car. B repairs C’s car and C does not pay A anything. Although A has given no consideration for C’s promise he may institute legal proceeding against C

WAIVER OF PERFORMANCE

The general rule in English law is that waiver of a right that is not supported by consideration void.

Example
A owes B RM1000/- which is due, B asks A to return RM100/- in full settlement. The waiver is not binding on B who may later change his mind and claim the balance owing, because the promise to forgo the balance is not supported by consideration.

A person who does no more than what he is already legally obliged to perform or under a public duty to perform cannot hold the other party to his promise. Payment of a smaller sum is not a satisfaction of a legal obligation to pay a larger sum. – Pinnel’s case (1602) 77 ER 237



See Section 64 Contract Act 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.

Illustration (b)

A owes B $5000/-. A pays to B $200/-, and B accepts in satisfaction of the whole debt, $2000/- paid at the time and place at which the $5000/- were payable. The whole debt is discharged.

See. Kerpa Singh v Bariam Singh [1966] 1 MLJ 38

BS owed $8,869.94 under a judgment debt. BS’s son wrote to KS offering $4000/- in full settlement of his father’s debt and endorsed a cheque for the amount. He stipulated that should KS refuse to accept, he must return the cheque. KS’s legal advisers, having cashed the cheque and retain the money proceeded to secure the balance of the debt by issuing bankruptcy notice on the debtor. The Federal Court ruled that the acceptance of the cheque from the debtor’s son in full satisfaction precluded them from claiming the balance.

see PEMBINAAN PURCON V ENTERTAINMENT VILLAGE (M) SDN BHD [2004] 1 MLJ 545




[1] A rental of $1.00 is a good consideration even though it is obviously inadequate.

10 comments:

  1. How do you do?

    I see you are teaching at my alma mater... please send my regards to Mr. Rajesh, Mr. Lingam, and Dr. Zaiton if they are still there :)

    It is nice to see another law lecturer setting up a knowledge-based blog for the benefit of law students and legal practitioners.

    ReplyDelete
  2. Hi Mr.Raguraman Gurusamy
    Can you elaborate more detail about this part?
    Section 26 (a) (love and affection)
    1)It is expressed in writing
    2)It is registered (if applicable); and
    3)The parties stand in a near relation to each other

    ReplyDelete
  3. Hi, would appreciate if you could help me with this issue.

    Can there be a transfer of property out of love and affection between father and daughter in law?

    ReplyDelete
  4. HI may u hlp me of tis case?
    i cant find it at google
    Pls argent
    PEMBINAAN PURCON V ENTERTAINMENT VILLAGE (M) SDN BHD [2004] 1 MLJ 545

    ReplyDelete
  5. Thank you for the information. This helps in alot especially nw that I'm preparing for my final. :D

    ReplyDelete
  6. Hi. May i know how if the promisee suddenly disappeared? I give an example:

    The promisor ask for promisee's help and in return, promisor agreed to pay 10% from the amount to the promisee after the job voluntarily done.But the issue is the promisee suddenly disappear after done helping the promisor and later died. Then his beneficiaries claimed for the right, but no documents proved about their family relationship.

    ReplyDelete