Importance of Consideration in Contract Law

This article discusses the importance of consideration in contract law and why it is necessary for a contract to be legally binding. It also covers the three basic rules of consideration and exceptions to the rule.

Running Head: BUSINESS LAW
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Introduction
The law of contract in Malaysia is governed through the provisions of Contract Act 1950.
However, at certain situations law of England is applicable where the legislation does not have
provisions to deal with the situation. McKendrick (2014) has defined contract as an agreement
between parties on matters which are permissible by law. An undertaking is provided by the
parties that they will perform the promise under the contract. There are various elements which
makes up a contract at law. As provided above these elements are contained in both the CA1950
as well as the provisions of common law. The main elements which are essential for forming a
valid contract in Malaysia are Offer, Acceptance, Consideration, Intention and Capacity. The
absence of any of the element form an agreement does not make it legally binding upon the
parties to the agreement. However in this paper emphasis is laid on one of the most important
element for the formation of a valid contract which is that of a consideration. The paper provides
a description in relation to the element of consideration and critically discusses why a
consideration is an important element of contract and without a consideration a contract is nudum
pactum and cannot be enforced by law. The paper also discusses the three basic rules of
consideration.
Body
As provided by the provisions of section 2(d) of the CA 1950 when upon the wish of the
promisor, any other person known as the promisee or a third party has also done an act or
omission such act or omission is known as a consideration for a contract. It is further provided by
the legislation that a contract would not be enforceable unless a valid consideration supports it.
According to O'Sullivan and Hilliard (2016) consideration is a valid bargain or promise which the

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parties provide to each other before they get into a contract. It is expected by both parties to
continue a bargain or a promise. It has been specifically stated via the provisions of section 26 of
the CA 1950 that without a valid consideration a contract is void. In the case of South East Asia
Insurance Bhd v Nasir Ibrahim [1992] 2 MLJ 355 it had been stated by the judge that essence of
consideration is when some kind of burden or detriment has been taken by the promisee upon
himself (Arvind 2017). These principles had also been discussed by the court in the English case of
Williams v Roffey Bros [1990] 2 WLR 1153 (Davies 2016).
In the case of Curie v Misa the definition of consideration had been ruled by the judges.
The court defined consideration as some right, profit, interest or benefit which is gained by a
party to the contract via the other party. For instance a person X had agreed to sale his truck for a
price of RM 60000 and there has been an agreement on the party of Y to pay RM 60000 for the
truck. In this situation where all other elements of a contract are satisfied the contract will be
enforceable as X has made an agreement to hand over his car to Y when Y has made the
payment. There are three types of consideration which are present in Malaysia namely, executor
consideration, Executed consideration and Past consideration. When consideration is provided by
the parties through a promise it will be considered as a executor consideration (Chandler 2015).
The contract will only be performed by the person who provides promise as a consideration for
the future. Even where anything has not taken place when the contract is concluded the law will
still consider the promise to be enforceable and valid. In the case of K Murugesu v Nadarajah the
facts provided that X was Y’s Tenant. Y had made an agreement to sell a house to X for RM
26000 in three months form the day in which the agreement was made. However Y refused to
sell the house latter claiming that there is no valid consideration as there has been no payment

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made by the purchaser. In this case it was held by the court that the promise which had been
made by the purchaser was a valid consideration in form an executory consideration.
When doing of a certain act is the consideration it is regarded as an executed
consideration. These provisions had been discussed in the Wong Hon Leong v Noorazman
Adnan. In this case the respondent had executed its consideration when the appellant had been
assisted in application for land conversion (Davidson, Forsythe and Knowles 2015). There was an
agreement between the appellant and the respondent whereby service fee had to be provided in
relation to the assistance. However after the application had been approved the applicant refused
to pay the respondent. It was held by the court that the support provided by the respondent was a
valid consideration.
A past consideration arises when the person to who a promise is made had done an act
and in return of such act which is already performed an offer had been made by the promisor.
For instance X saved Y from an accident on the road. Y’s mother made a promise to pay X a
reward of RM 2000. Here the consideration is to be considered as a past consideration. The
provisions had been discussed in the case of Kepong Prospecting & SK Jegatheesan v AE
Schmidt & Marjorie Schmidt. Here Schmidt who has a construction engineer provided support to
a company to get a miming permit as well as in the incorporation of the company. After the
company had been formed there was an agreement between the company and Mr Schmidt that it
would provide him with 1% of the total sale value of ore as a consideration for the services
provided by him. The court held that it was a valid consideration.
From the above discussion it can be derived that consideration is anything of value which
is provided by one party to another and an agreement without consideration is void and thus it is

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one of the primary rules of consideration. However this rule of consideration is subjected to a
few exceptions as provided under section 26(a) – 26 (c). These include agreement which is based
on affection and natural love, agreement to compensate voluntary acts done in the past, a
agreement of providing compensation to person who did an act which the promisor was liable to
do legally and an agreement for the payment of a statue barred debt. Thus it can be concluded
that although consideration is required by almost all agreements to be valid at law, there are
certain agreements which are not in need for consideration to be legally valid. However there are
certain elements which are required for an agreement which is based in love and affection under
the provisions of section 26(a) of the CA 1950. As per the section the agreement has to be in
writing, the agreement has to be registered and there must be near relations between the parties.
In the case of Re Tan Soh Sim the meaning of near relation was discussed where near relation
was not established between adopted children and adoptive mother.
Another rule of consideration states that a consideration has to be provided by the parties
for the purpose of establishing a valid contract at law which can be enforced. The rule stipulates
that to an extent there is a consideration provided by the parties it is sufficient for the formation
of valid contract. No relevance is provided to the compliance of the consideration with the
market value of the promise. It is not the look out of the courts to decide that whether the
consideration to be which has been provided by the promisor to the promisee is a adequate
consideration or a good bargain. The court will only see whether or not a consideration is
sufficiently present to suffice the formation of a valid contract. The rule is incorporated into the
CA 1950 via the provisions of section 26(f). This section clarifies through an illustration that if X
has made an agreement to sell a car to Y for a price of RM100 which is actually worth RM
10000 and free consent had been provided by X in relation to the sale the consideration would be

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considered as a valid consideration irrespective of its high degree of divergence for the market
value. These provisions had also been discussed in the case of Bolton v Madden. In this case it
had been stated by the court that a contract which had been entered for the purpose of selling a
house valued at $100,000 for a price of $1000 was a valid contract. In this case it had been ruled
by the court that the parties have the duty of considering the adequacy of consideration at the
time when the contract was formed and not the courts. The court in the case of Phang Swee Kim
v Beh I Hock also discussed and analyzed this rule. In this case, a contract had been entered into
by the parties for the purpose of transferring of a land which had a consideration of RM 500. It
had been decided by the court that this is to be considered as a valid consideration irrespective of
the price being very law from compared to the market value.
The third and final rule of consideration is that the consideration can be provided by the
promise or any other third party. These provisions have been provided via section 2(d) of the CA
1950 which states the consideration can move via the promise of any other person. The case of
Venkata Chinnaya v Verikatara Ma’ya had also discussed and applied this rule. The case was in
relation to a sister who had made a promise to provide a certain amount of money to a brother.
Nothing has been provided by her brother as a consideration however some land had been
provided by the mother to the sister for giving the money to her brother. There was a failure on
the part of the sister to provide the money. The court held that this was a breach of contract. This
is because the consideration which had been provided was a valid consideration even where it
has moved from a third party. There are certain other rules also related to consideration which
have been provided via English law. One of such rules say that a consideration which is an
already existing contractual duty is not a valid consideration. Another rule states that a
consideration which is an already existing public duty is a not a valid consideration. In addition

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part payment of debt is also not considered as a valid consideration at law (Stone and Devenney
2014).
Conclusion
Consideration is some right, profit, interest or benefit which is gained by a party to the
contract via the other party. When upon the wish of the promisor, any other person known as the
promisee or a third party has also done an act or omission such act or omission is known as a
consideration for a contract. It is further provided by the legislation that a contract would not be
enforceable unless a valid consideration supports it. However this rule of consideration is
subjected to a few exceptions. These include agreement which is based on affection and natural
love, agreement to compensate voluntary acts done in the past, a agreement of providing
compensation to person who did an act which the promisor was liable to do legally and an
agreement for the payment of a statue barred debt. Therefore form the above discussion it can be
concluded that although consideration is required by almost all agreements to be valid at law,
there are certain agreements which are not in need for consideration to be legally valid. The
various rules of consideration provides that consideration cannot be past in certain situations, it
does not have to be adequate and it can merely be sufficient for the formation if valid contract
and it can be moved from the promisee or any third party.

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References
Arvind, T.T., 2017. Contract Law. Oxford University Press.
Chandler, A., 2015. Questions and Answers Law of Contract. Oxford University Press, USA.
Davidson, D.V., Forsythe, L.M. and Knowles, B.E., 2015. Business law: Principles and cases in the legal
environment. Wolters Kluwer Law & Business.
Davies, P.S., 2016. JC Smith's the Law of Contract. Oxford University Press.
McKendrick, E., 2014. Contract law: text, cases, and materials. Oxford University Press (UK).
Miller, R.L., 2015. Business Law Today, Standard: Text & Summarized Cases. Nelson Education.
O'Sullivan, J. and Hilliard, J., 2016. The law of contract. Oxford University Press.
Skelton, A., 2017. Restitution and contract. Taylor & Francis.
Stone, R. and Devenney, J., 2014. Text, cases and materials on contract law. Routledge.