Foundations of Business Law: Importance of Consideration in Contract Formation

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

1FOUNDATIONS OF BUSINESS LAW
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,

2FOUNDATIONS OF BUSINESS LAW
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.