Definition of Consideration in Contract Law

Discuss about the Consideration for Capacity and Intention of the Parties.

The main issue of the question is to explain the definition of consideration and three principles of the consideration.

The main subject matter of the question is based on one of the essentials of the Contract Law and three principles of the essential. A contract is a legal document that has been agreed by the parties and the terms and conditions of the contract are mandatorily imposed on them. However, not every agreement is contract. There are certain essentials that must be followed in case of contract. The essentials of contract are offer, acceptance, capacity, intention of the parties and consideration. According to the common law of contract, consideration is the bargaining process of a contract. The formation of a contract is based on certain promises where the promise maker makes certain promise and the other party accepts the terms of the promise. It is obvious to state that there should be certain benefit, which will be received by the parties through this contractual agreement. The word “consideration” denotes these benefits. According to Thomas v Thomas (1842) 2 QB 851, there must be certain value in the form of consideration before the legal perception. However, not all promises are consideration. There are certain promises where there is no consideration such as promises of love and affection and gambling. The term consideration has been defined by the court in case of Dunlop v Selfridge (1915) AC 847. where it has been stated that an act of one party is the price for which the promise of the other party has been bought and all the values relating to the promise. According to section 2(d) of the Contract Act 1950, a contract will be formed when one party to the contract will do or abstains from doing anything proposed by the other party. Such acts or abstinence is called consideration. This provision has been widely applicable in section 26 of the Contracts Act 1950. This principle has been followed in the case of Guthrie Waugh Bhd V Malaippan Muthucumaru (1972). Further, this principle has been maintained in the case of South East Asia Insurance Bhd. v Nasir Ibrahim {1992] 2 MLJ 355, where court stated that the parties to the contract should have to take certain burden upon him. for an example, it can be stated that a contract will be formed when any party to an agreement accepts to buy or sell something in return to certain other benefits, the agreement will be treated as contract and those benefits are known as consideration.

The Essentials of Contract Law

A consideration can be divided into three types according to Contract Act 1950 such as executory consideration, executed consideration and past consideration. Executory consideration takes place when the parties provide consideration through promises. In this case, the nature of the promise is reciprocal. Such consideration can be observed in case of bilateral contracts where a contract has been made in between the buyer and seller for certain future transaction on credit. The principle of executor consideration has been established in K. Murugesu v Nadarajah [1980] 2 MLJ 82. Executed consideration takes place when one party to the contract do all the necessary things leaving any outstanding liability for other party. Such kind of consideration is common in unilateral contract. This principle has been established in Wong Hon Leaong v Noorazman Adnan (1995) 4 CLJ 155. In case of past consideration, promise has been given after the commencement of the act. In case of Roscorla v Thomas [1842] 3 QB 234, it has been observed that the defendant has promised to the claimant, after bought a horse that the horse is sound and free from any vice. In case of Kepong Prospecting & SK Jegatheesan  v AE Schmidt & Marjorie Schmidt [1968] 1 MLJ 170, the court has considered past consideration as a good consideration.

There are certain differences present regarding the past consideration in between the English law and Malaysian law. In case of English law, past consideration has been regarded as negative consideration as parties may not follow the terms of the promise most of the time. in Malaysian consideration, the court has regarded the consideration as good consideration.

Therefore, it can be stated that consideration comprised of certain promises. However, considering the definition and application of consideration, it can be stated that not every promises are consideration and there are certain exceptions to this rule that are stated below:

• Any promise that has been made in natural love and affection;
• Any agreement made to compensate past voluntary act;
• Any agreement to pay statute barred debt.

In case of Re Tan Soh Sim [1951] MLJ 21, that the agreement regarding natural love and affection should follow all the elements made under section 26 (a) of the Contracts Act 1950. According to this section, the agreement must be in writing and should be got registered. Further, the parties must be closely related. According to the Malaysian Law of Contract, following things are required to make a consideration valid. This can be considered as the elements of consideration:

• The consideration made against a contract that is enforceable by law;
• A consideration should not based on the market value;
• The person accepts the promise should not be guided in coercive way;
• No specific value has been specified for a consideration.

From the above-mentioned points, it can be stated that there are certain principle laid down under consideration. According to the Contracts Act 1950, a consideration should be sufficient and adequacy of a consideration is not necessary. It has not been mentioned anywhere that the nature of the contract should be based on the market value of the thing against which consideration has been made. The rule of this principle has been maintained in case of Chappell v Nestle [1960] AC 87. In this case, Nestle was running a sales business and delivered certain products in the form of three records of which Chappell has owned one. Chappell has made an allegation for the infringement of Copyright Act and prayed for an injunction against the same. Court has find out that such claim is valid, as Nestle has failed to offer any sufficient consideration in this case and therefore, injunction has been granted to Chappell.

Types of Consideration

The second principle regarding the consideration is that the consideration should move from promise and no third party interest will be regarded in this case. In Tweddle v Atkinson [1861] EWHC QB J57, it has been observed that a contract has been made in between both the fathers of bride and groom. There were certain considerations in that contract. However, both the parents were died before execution of the contract and groom has filed a case against the executor of the will. It has been stated by the court that in that contract groom was not a party and therefore, he could not make any claim for the enforcement of the contract.  

The third principle regarding the consideration is that an existing contractual duty could not be a part of the new promise and therefore, could not be amounted as a valid consideration. In Stilk v Myrick [1809] EWHC KB J58, it has been observed that the claimant had an existing contractual liability regarding a voyage and he had made an additional claim against that existing contractual duty. Court has observed that the claimant is restricted to make any additional claim against the existing duty, as no extra consideration has been made in this case. However, in Hartley v Ponsonby [1857] 7 EB 872, the court has held that in case the claimant has done any work beyond his or her previously existing duty, it can be a valid ground of consideration. In another case related to Williams v Roffey Bros [1990] 2 WLR 1153, it has been mentioned by the court that if any party applies any practical knowledge and conferred a practical advantage, they can make a claim for additional consideration.

The Malaysian Contracts Act 1950 has mentioned consideration as one of the most essential elements of contract. According to the Act, the terms of the consideration should be expressly mentioned in the contract or the terms could be identified from the implied valuation of the contract. However, the Act has made certain restrictions upon the validity of consideration. An accidental or potential benefit has not been regarded as valid consideration. The nature of the consideration should be explicit and ought to be sufficient. The rule of consideration has been applied in case of conditional promises and legal blindness of the consideration over the parties are not sufficient under the Malaysian law. Unlike certain application of English law, Malaysian law regarded the terms of the consideration as bonafide in nature.

Reference:

Chappell v Nestle [1960] AC 87

Dunlop v Selfridge (1915) AC 847

Guthrie Waugh Bhd V Malaippan Muthucumaru (1972)

Hartley v Ponsonby [1857] 7 EB 872

1. Murugesu v Nadarajah [1980] 2 MLJ 82

Kepong Prospecting & SK Jegatheesan  v AE Schmidt & Marjorie Schmidt [1968] 1 MLJ 170

Re Tan Soh Sim [1951] MLJ 21

Roscorla v Thomas [1842] 3 QB 234

South East Asia Insurance Bhd. v Nasir Ibrahim {1992] 2 MLJ 355

Stilk v Myrick [1809] EWHC KB J58

Thomas v Thomas (1842) 2 QB 851

Tweddle v Atkinson [1861] EWHC QB J57

Williams v Roffey Bros [1990] 2 WLR 1153

Wong Hon Leaong v Noorazman Adnan (1995) 4 CLJ 155