Consideration in Contract Law

Consideration

• Consideration is a crucial element in a contract
• It's something of value exchanged between parties to create a legally binding agreement
• A valuable consideration, in legal terms, may consist either in some right, interest, profit, or benefit accruing to one party, or some forbearance, detriment, loss, or responsibility given, suffered, or undertaken by the other.

Definition of Consideration

• In short: One party gives something, and the other party gives something in return.
• This is usually in the form of a promise for a promise, or an act for a promise.
• Section 2(d) of the Contracts Act 1950 defines consideration: 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 or to abstain from doing, something, such act or abstinence or promise is called consideration for the promise.

Requirements of Consideration

• At the desire of the promisor: The act or promise must be done at the request or with the expressed or implied desire of the person to whom the promise is made. If there was no desire, there is no consideration

• Promisee or any other person: The consideration may come from either the promisee himself or any third party at the promisor's desire

Types of Consideration

• Executed: An act performed at the request of the promisor. (e.g., A completes house repairs at the request of B who promises payment).

• Executory: A promise given in return for a promise— a future promise in exchange for a future promise (e.g., A promises to deliver goods next week in exchange for B promising to pay next week)

• Past consideration: It is something that has already been completed before the promise was made - not a valid consideration (e.g., A does work for X and later X promises to pay - not valid consideration unless the work was done and the promise was made in the desire of X)

• Forbearance to sue: Agreeing not to exercise a legal right. (e.g., A agrees not to sue B for past damages in exchange for B's promise to compensate)

Exceptions to Consideration

• Exceptions in Malaysian law: Certain situations do not require consideration, as per the Contracts Act 1950, specifically section 26(a),(b), (c)

• s.26(a): Valid if the agreement is in writing and registered.

• s.26(b): Valid if the agreement is a promise to compensate for certain things - past actions done at the desire of the promisor.

• s.26(c): Valid if the agreement is for the payment of a debt barred by time bar. This means if a debt was discharged due to a period of limitation, and a promise to pay is made in writing, a valid contract may be formed.

Privity of Contract

• Only parties to a contract have rights and obligations under that contract. Third parties cannot sue or be sued.

Adequacy of Consideration:

• Sufficient, not necessarily adequate: If consideration exists, its amount isn't usually considered by courts. The adequacy of the consideration is not relevant to the formation of a contract.
• Exceptions: If the inadequacy of the consideration is egregious or raises questions about the free consent of one of the contracting parties, it can be relevant