Foundations of Business Law: Importance of Consideration in Contract Formation

This article discusses the importance of consideration in contract formation under the Contract Act 1950 of Malaysia. It explains the essential elements of a valid contract and emphasizes the role of consideration. It also examines the three basic rules of consideration and their exceptions.

Running head: FOUNDATONS OF BUSINESS LAW
Foundations of Business Law
Name of the Student
Name of the University
Author Note

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Introduction:
It is evident that, from the very beginning, the provisions of the Contract Act 1950
govern the functioning of the law of contract of Malaysia. In this regard, mention can be made
about the law of England which can be efficiently applied in cases where the legislative bodies
do not have appropriate provisions for the purpose of dealing with the present situation. A
contract can be defined as an agreement taking place between two or more parties in regard to
matters which are recognized by the law. In this regard, the parties are at the obligation to
provide an undertaking in regard to which the promise will be performed by them under the
specified contract. It is worth mentioning that, in order to make a valid contract, the essential
elements must be present. In this regard, it is noteworthy to mention here that, the essential
elements of forming a valid contract can be categorized as offer, consideration, acceptance,
capacity and intention. Therefore, it is worthwhile to mention here that, if any one of the
elements then such contract cannot be considered to be legally binding upon the parties involved.
In this regard, the paper intends to emphasize upon the formation of a valid contract by primarily
focusing upon the element of consideration. The intention of the paper is to provide in-depth
knowledge regarding the fact that why consideration forms an important part of contract and
without its presence why a contract is not equally recognized by the law. Lastly, the paper is
commissioned to examine the three basic rules of consideration.
Discussion:
According to the provisions of Section 2(d) of the Contract Act 1950, a valid
consideration takes place when there is a promise on the part of the promisor to the promisee or
to any third party in regard to the payment of a certain amount of sum wholly or partly. It is
worth noting that, if there is no consideration, then the nature of the consideration is such that, it
cannot be considered to be valid. According to the provisions of Section 26 of the Contract Act
1950, a contract is considered to be void without the presence of a valid consideration. In the
case of Guthrie Waugh Bhd V Malaippan Muthucumaru (1972), it was observed that there was
no valid consideration in regard to the deed agreement. Therefore, it was held by the court that as
the deed was executed by the defendant without relying upon any past or future consideration,
thee shall be no cause of action. In this context, it can be stated that for a contract to be valid,

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there must be a valid consideration which can take place with the help of reasonable bargain or
promise.
In case of Dunlop v Selfridge (1915), the definition of consideration was rightly
emphasized. The court defined the term consideration as an interest, profit or benefit gained by
one of the party to the contract from the other party. In this regard, the court also emphasized on
the part that, consideration under the law of contract is something which causes benefit to one
party and on the other hand detriment or loss to the other party. It is important to emphasize upon
the three kinds of consideration applicable under the Malaysian law of contract that are past
consideration, executor consideration and executed consideration. It is worthwhile to refer here
that; a past consideration is a good consideration which was held in the case of Kepong
Prospecting Ltd & Ors v Schmidt (1968). In this case it was held by the Court that, the services
rendered previously in the process of the formation of the company cannot be regarded as a valid
consideration. The Court was of the opinion that, a past consideration takes place when there is a
promise on the part of an individual regarding the payment of a sum after the completion of the
offer. However, in the case of Kepong Prospecting Ltd & Ors v Schmidt (1968), it was observed
that Schmidt being a construction engineer efficiently supported a company for the purpose of
receiving a mining permit in order to involve in the formation of the company. however, after the
incorporation of the company, there existed a prior agreement between Schmidt and the company
that he shall be entitled to 1% of the total share of ore for the services he provided.
Executor consideration can be defined as the consideration that has been provided by the
parties to the contract by way of promise. However, the nature of the contract must be such that
it can only be performed by the party who has provided the future consideration. In such process,
the law will held the consideration as enforceable, even when the contract has not come to an
end. Similarly, in K Murugesu v Nadarajah, the case involved was in regard to tenancy. It was
observed that the house belonged to Y and X was his tenant. In such process, an agreement was
made by Y to sell the house to X for an amount of RM 26000 within a stipulated period of three
months from the day in which such agreement to sale was formulated. There was refusal on the
part of Y regarding the sale of house by claiming that the consideration was not valid as it was
not supported by any payment on the part of the purchaser. However, the Court held that, the
nature of the promise was such that it was regarded to be a valid consideration.

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The concept of executed consideration can be explained with the help of the case Wong
Hon Leong v Noorazman Adnan. It was observed in this case that, the consideration was
executed by the defendant when the plaintiff formed an application for the conversion of land.
After the successful approval of the application, the plaintiff refused to pay any amount to the
defendant. In this regard, the Court held that, the nature of the consideration can be held to be
valid.
From the above mentioned facts, it can be stated that the term consideration is a value
that is provided by one party to the other party (Knapp, Crystal. and Prince 2016). Therefore,
when there is no consideration in an agreement, it will be considered to be void. Hence, it is
regarded as one of the major primary rules of consideration. There are a few exceptions when the
matter is related to the rule of consideration. The exceptions have been provided under the
provisions of 26(a) to 26(c). It has an agreement that is based on natural love and fondness. The
purpose is to provide compensation for the voluntary acts that were committed previously. If
compensation is provided to an individual who had carried out those actions where the promisor
was held liable to commit it legally and an agreement for the payment of statute escaped debt.
Hence, the conclusion is that even if the consideration is needed by all the agreements, which is
valid at law, there will still be a few agreements that are not required for consideration to be
valid legally. Thus, there exists a few constituents that are needed for an agreement that is
formed with affection and adore as per the sections of 26(s) of the CA 1950. According to the
above mentioned section, the agreement must be in a written format. Secondly, this agreement
should be registered and near relation should exist between the parties forming. In the matter of
Jalinan Sdn Bhd v TIPCO Asphalt Company Ltd, it was noticed that the concept of near
relations were discussed where the near relation was not determined between the adoptive
mother and the children who were adopted (Taylor and Taylor 2017).
There is another rule of consideration that explains and defines that the role of a
consideration should be produced by the parties for the purpose of determining a valid contract
that can be enforced by law. This rule states that there is no extent where the parties have
produced a consideration where it was significant for forming the contract. However, there was
no relevance, which was provided for complying the consideration as per the market value of the
promise. It is not the duty of the Court to make a decision based on the fact whether the

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consideration is adequate or not after it has been provided to the promise and the promissory for
a good bargain. It is therefore, the job of the Court to check out whether the consideration is
properly presented for sufficing the creation of a valid contract (Poole, Devenney and Shaw-
Mellors 2017). The purpose of the rule was to incorporate it into the CA 1950 with the help of
section 26(f). This mentioned provision illuminates the situation with the help of an example. For
instance, if an agreement has been formed by X for selling the car to Y for a price of RM100.
This amount was worth RM1000 and free consent, which X had given. The purpose of it was to
consider the sale that would be treated to be a valid one despite of the high degree of discrepancy
for the value of the market. Pembinaan LCL Sdn Bhd v SK Styrofoam Sdn Bhd
3AMR124 [2007] have discussed the provisions that have been mentioned above. It was
observed in this case that there was a contract, which was entered by the parties as the purpose of
it was to sell a house that had a value of $100,000 for a price of $1000. It was considered to be a
valid contract. Therefore, in this particular case, the rule stated by the Court explained that there
the parties had a duty of considering the adequacy of consideration during the time the Courts
were not formed but the contracts were. However, in the case of CMS Energy Sdn Bhd v
Poscon Corp [2008], The rule involved was observed. The case stated that the contract which
was entered into by the parties focused on transferring the land as a valid consideration despite
the amount being low as compared to the value of the market (McKendrick 2014).
Lastly, the rule of consideration stated that in the process of consideration, the promise
can be provided by either the third party or the promisee. These sections were hence produced in
the section of 2(d) of the CA, 1950. Thereafter, it was stated that the consideration can be moved
by any other person or the promisee. Damansara Realty Berhad v Bungsar Hill Holdings Sdn
Bhd 2011 had therefore applied this particular rule. The case discussed the relation of a sister
who had a made a promise to produce a particular amount of money to a brother. The sister had
failed to produce the money. Therefore, the Court stated that there was a breach of contract. This
is due to the consideration, which provided a valid consideration even though it was transferred
from a third party. Thus, there are a few particular rules that are linked to the consideration that
was provided by the English Law. Among the rules, one rule stated that a consideration that
already has a contractual duty is not generally treated to be a valid consideration. The second
rule state that a consideration that is already a public duty and is not a valid consideration.
Additionally, the part payment of debt will not be treated to be a valid consideration at law.

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Conclusion
It can be concluded stating that the consideration is defined as some kind of benefit,
profit and right a party to the contract formed by another party obtains that. The promisor or any
other individual as the third party or the promisee has carried out the activities that is treated to
be a consideration for a contract. Thereafter, the legislation provided that a contract will not be
enforceable unless it is supported by a valid consideration. However, there are few exceptions in
relation to consideration as it has been mentioned above. The different values of consideration
produce the fact that consideration will not be able to go through these particular circumstances.
Therefore, it does not have to be accurate and hence it can be sufficient for the creation if the
valid contract can be transferred to any other promise.

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References:
Cases
CMS Energy Sdn Bhd v Poscon Corp [2008]
Damansara Realty Berhad v Bungsar Hill Holdings Sdn Bhd 2011
Dunlop v Selfridge (1915).
Dunlop v Selfridge (1915).
Guthrie Waugh Bhd V Malaippan Muthucumaru (1972).
K Murugesu v Nadarajah.
Kepong Prospecting Ltd & Ors v Schmidt (1968).
Pembinaan LCL Sdn Bhd v SK Styrofoam Sdn Bhd 3AMR124 [2007]
Wong Hon Leong v Noorazman Adnan.
Guthrie Waugh Bhd V Malaippan Muthucumaru (1972).
Journals
Knapp, C.L., Crystal, N.M. and Prince, H.G., 2016. Problems in Contract Law: cases and
materials. Wolters Kluwer Law & Business.
McKendrick, E., 2014. Contract law: text, cases, and materials. Oxford University Press (UK).
O'Sullivan, J. and Hilliard, J., 2016. The law of contract. Oxford University Press.
Poole, J., Devenney, J. and Shaw-Mellors, A., 2017. Contract law concentrate: law revision and
study guide. Oxford University Press.
Taylor, D. and Taylor, R., 2017. Contract Law Directions. oxford university press.