Consideration Notes PDF

Definition What is consideration? Currie v Misa (1875) LR 10Ex 153 – “A valuable consideration in the sense of the law may consist either in some right, interest, profit or benefit accruing to one party, or some forbearance, detriment, loss or responsibility given, suffered or...

Definition What is consideration? Currie v Misa (1875) LR 10Ex 153 – “A valuable consideration in the sense of the law 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.” 2  Section2(d) of Contract Act 1950-when at the desire of the promisor,the promisee/any of the person has done/abstains from doing / does / promises to do something; Section 26 of Contract Act1950: If there is no consideration,then the contract would be void unless it falls within the exceptions in s.26 itself  Consideration is the price for which the promise of a party is brought Eg: Fattah agrees to sell his factory to Amin for RM450,000. Here, for Fattah’s promise, the consideration is the price of his factory i.e. rm450,000 and for Amin’s promise, the consideration is Fattah’s factory  s.2(d) When, at the desire of the promisor,1 the promisee or any other person2 has done or abstained3 from doing, or does or abstain from doing, or promises to do or to abstain from doing, something4, such act or abstinence or promise is called consideration for the promise. Consideration 5  1. Desire of the promisor The act / abstinence must be at the desire of the promisor If it was never initiated / desire of promisor – Then it is not consideration Consideration 6  2. Promisee or any other person Thus, consideration need not be from the promisee only Kepong Prospecting Ltd v Schmidt – Mr Tan applied to State Government for a prospecting permit for iron ore. Assisted by Mr. Schmidt. 1954 Contract: between Mr Tan and Kepong i.e. Kepong would prospect and work the land in the mining permit and take over Tan’s obligation to pay Schmidt 1% of the selling price of all ore sold from the land. – Consideration: provided for (essentially) by Schmidt but contract between Mr. Tan and Kepong Prospecting Consideration 7 Note: Privity of Contract Third party to the contract cannot sue 1954 Contract: – Contract between Mr. Tan and Kepong Prospecting. Consideration essentially provided by Schmidt. – Court ruled: Contract valid BUT Schmidt cannot sue because he is the third party to the contract Note: – Under common law, third party that receives benefit may have the right to bring an action – Contracts (Rights of Third Party Acts) 1999 Consideration 8  3. Done / Abstained It may be an act or an abstinence from doing something What about forbearance to sue? – i.e. agreeing not to exercise a legal right – The right to sue is something of value – Ira owes Samsul a debt, but Ira disputes the amount. In exchange for Samsul’s agreement not to sue her over the disputed amount, Ira agrees to pay Samsul a portion of the debt immediately. This is not the same as being forbidden to sue Consideration 9  4. Has Done/does/going to do has done or abstained from doing – past does or abstain from doing, – present promises to do or to abstain from doing, something, – Future Consideration 10  TYPES OF CONSIDERATION 3 types of consideration: 1. Executory 2. Executed 3. Past  1. Executory consideration It is when one promise is made in return for another or a promise in return of promise. – One party makes a promise in return for a promise – Eg: Seller promises to deliver goods in return for buyers promise to pay Example: - 1) Fazurah promised to sell her mobile phone to Fatta for RM550/- and Fatta promised to pay the price upon delivery by Fazurah. Here, the promise to sell is in return to promise to buy. 2) Ina agrees to sell her car for RM20,000/- to Naim. Naim promise to pay the sum of RM 20,000/- in consideration for Ina’s promise to sell the car. Ina’s promise to sell the car is the consideration for Naims’s promise to pay the RM20,000/-. These are lawful considerations.  Murugesu v Nadarajah 2 MLJ 82 M agreed to sell his house to N. An agreement was written on a scrap paper and says as follows: - I agree to sell my house No. (address) held under…. to Mr. N, the present tenant of the house at $26,000/- within three months from the date. M later refused to sell the house and a specific performance was ordered at the trial and the appellant took the matter to Federal Court. The appeal was dismissed, gave effect to Illustration of Section 24. Chang Min Tat F.J held: “The agreement must be seen to be a case of Executory consideration. A promise is made by one party in return for a promise made by the other; in such a case each promise is the consideration for the other”  2. Executed consideration Consideration which is already actually done. It is done in response to some promise by the promisee. In this, one party has already performed his part of the promise, while the other party has to perform his part of the promise. Executed consideration – One party makes a promise in return for the performance of an act – Eg: Vivvi promises to pay once Yusu completes the act. Once Yusu completes the act, the consideration has been executed i.e Carlill v Carbolic Smoke Ball  Example Edi lost his pen and offered RM 200/- to anyone who finds and returns the pen to him. Aqashah found Edi’s pen in response to the offer and returns it to Edi. By returning the pen, Aqashah has given consideration to Edi’s promise to pay. Should Edi refuse to pay, Aqashah may take a legal action against Edi.  3. Past consideration Where a promise is made subsequent to and in return for an act that has already been performed, the promise is made on account of a past consideration. Example If Aqashah finds and returns Edi’s pen and in gratitude, Edi promise to pay Aqashah RM200/- the promise is made in return for a prior act. A past consideration is something that is wholly done by the promisee even before making of the agreement. It is always supported by the future promise.  Under English law the general rule is that past consideration is insufficient to support a contract Section 2(d) by the words “ has done or abstained from doing” suggests that an act prior to the promise is sufficient to constitute consideration even though it is clearly past provided it is done at the desire of the promisor  English law Past consideration is not good consideration ReMcArdle Plaintiff paid for the repairs of the house. She was then promised by the others to be paid £488. Court of Appeal: As the repairs had been carried out before the agreement to pay had been made, it was past consideration and therefore not good consideration Consideration 19  Exception: Lampleigh v Braithwait D committed murder. Asked P to obtain for him a royal pardon, which P managed to do. D then promised to pay him £100. Held Consideration was good as the act carried out at D’s request. Consideration 20  Malaysian position S.2(d) When, at the desire of the promisor, the promisee... has done … something … such act is called consideration for the promise Reflects the common law position in Lampleigh v Braithwait Consideration 21  Past Consideration When a person makes a promise to pay after the act has been completed – Person A has completed the act – THEN Person B says “Since you’ve done [__], I’ll pay you” Key: when was the promise made? – before act or after? Be careful – position in Malaysia and under common law is different. Consideration 22  Kepong Prospecting Ltd & S.K Jagatheesan & Ors v A.E Schmidt & Marjorie Schmidt 1 MLJ 170. S a consultant engineer has assisted another in obtaining a prospecting permit for mining iron ore, he helped in the subsequent formation of Kepong Prospecting Ltd and was appointed as its MD. After the company was formed they entered into an agreement whereby the company undertook to pay 1% of the value of all ore sold from the mining land. This being ‘in consideration of the services rendered by the consulting engineer for and on behalf of the company prior to its formation, after incorporation and for future services…….  Were the services rendered after the incorporation but before the agreement sufficient consideration? This was clearly past consideration. The Privy Council ruled that it did constitute a valid consideration so that Schmidt was entitled to his claim on the amount. Exceptions to the Rule of Consideration  No consideration no contract….. A promise without consideration is a gratuitous undertaking and cannot create a legal obligation. Chia Foon Tau v Lim Pey Lin 7 MLJ 762 Exceptions (S.26 of CA 1950): There are exceptional cases where a contract is enforceable even though there is no consideration. They are as follows :  1. Natural love and affection: An agreement without consideration is valid only if the following requirements are complied with: (i) The agreement is made by a written document. (ii) The document is to be registered (if any) (iii) The agreement is made on account of natural love and affection. Ex: Han Daon for natural love and affection, promises to give his daughter Bitna, RM1, 000. Han Daon puts his promise to Bitna in writing and registered it. This is a contract. (iv)The parties to the agreement stand in a near relation to each other.  Under English law natural love and affection are not recognized as a valid consideration as was decided in Brett v JS & his Wife(1600) 79 ER 9 & 7  QUECK POH GUAN (AS ADMINISTRATOR OF THE ESTATE OF SIT KIM BOO,DECEASED) V QUECK AWANG 3 MLJ 388 High Court: it is not disputed that the parties stand in a near relation to each other; the deceased(the transferor) being the mother of the defendant (the transferee)…..whether or not there exists any element of love and affection can be gathered from the evidence adduced by both parties and the surrounding circumstances. Held: The transfer of the land was a gift from the deceased mother to the defendant on account of natural love and affection.  Re Tan Soh Sim & Ors v Tan Saw Keow MLJ 21: A woman on her deathbed expressed her intention to leave all her properties to her four adopted children. The court held that the claims of the adopted children were not effective as it was contrary to Section 26(a) i.e. it was not in writing and there was no natural love and affection between parties standing in near relation to each other  COA: Where the validity of an agreement depended on natural love and affection between near relations, relationship and nearness depended on the mores of the group to which the parties belong and the circumstances of the particular family. On the facts of the case, the court held that a Chinese adopted son was related to the family of his adoptive father but a son, whether natural or adopted, was not nearly related within the scope of the CA 1950, to the family of the adoptive mother  2. Voluntary Compensation : Ratu finds Ali's purse and gives it to him. Ali promises to give Ratu RM50. This is a contract. Apple supports Liam's infant son. Liam promises to pay Apple's expenses in so doing. This is a contract. It is a promise to compensate wholly or in part a person who has already voluntarily done something for the promised or something which the promissor was legally compellable to do – s26(b)  The necessary requirements are :- a. promisee has voluntarily done an act; or b. the act is one which the promisor was legally compellable to do c. an agreement to compensate, wholly or in part, the promisee for the act  The act must be performed voluntarily. Voluntarily was defined in the case of J.M. Wotherspoon & Co Ltd v Henry Agency House MLJ – the word ‘voluntarily’ means ‘otherwise than at the desire of the promisor’. Held: As the plaintiff in this case had acted on the suggestion of the defendant,it shows that the plaintiff’s act was not voluntarily done, therefore the contract is void.  3. a promise to pay debt barred by limitation law Puteri owes Najwa RM1000/-, but default in payment for over six years. (So the debt considered as statute- barred debt). Puteri then decides to repay Najwa the debt and signs a written promise to pay Najwa 500 on account of the debt. This is a contract. (revives the enforceability of the debt) A statute barred debt refers to a debt, which cannot be recovered through legal action because of a lapse of time fixed by the law.  Section 26(c) creates an exception to this rule but subject to several conditions:- 1. The debtor made a fresh promise to pay the statute barred debt. 2. The promise is in writing and signed by the person to be charged or his authorized agent in his/her behalf  Adequacy of Consideration A Court will not question the fairness of the bargain if legally sufficient. - Law does not protect a person for entering into an unwise contract. - Consideration must be sufficient but need not be adequate Does it matter that M sells his house worth RM1million for RM5/- to N. Is the amount of RM5/- sufficient consideration? Legally, it appears that the adequacy of consideration is immaterial.  Illustration (f) A agrees to sell his horse worth RM1000/- for RM10/-. A’s consent to the agreement was freely given. The agreement is a contract notwithstanding the inadequacy of the consideration.  Phang Swee Kim v Beh I Hock MLJ 383 Sale of a land for $500/- when it was worth more than that. Seller refused to honour promise citing that the price was inadequate for a consideration. The trail court judge held that the agreement was void due to inadequacy of consideration. However upon appeal to the Federal Court, the decision of the Trail judge was reversed and applied explanation 2 and illustration (f) of Section 26.  Chappell & Co Ltd v Nestle Co Ltd Nestle offered a record to customers who sent a certain number of chocolate bar wrappers. Although the wrappers were simply thrown away, it was sufficient consideration to support the agreement.  “Sufficiency” of consideration All contracts require consideration As long as there is consideration, its adequacy is not questioned Tan Chiw Thoo v Tee Kim Kuay 2 MLJ 221, FC – In law, ‘sufficiency’ of consideration is different from ‘adequacy’ of consideration – ‘sufficiency’ is synonymous with ‘validity’ in regard to consideration Consideration 41  Just because consideration may be inadequate does not mean it is insufficient – S.26 illustration (f): A agrees to sell a horse worth $1,000 for $10. A’s consent to the agreement was freely given. The agreement is a contract notwithstanding the inadequacy of the consideration. However An inadequate consideration may be taken into account as the contract not being entered into with free will – S.26 Explanation 2 – S.26 illustration (g): A agrees to sell a horse worth $1,000 for $10. A denies that consent to the consent to the agreement was freely given. The inadequacy of the consideration is a fact which the court should take into account in considering whether or not A’s consent was freely given. Consideration 42 Consideration need not move from the promisee In English Law consideration must move from the promisee i.e. the person who receives the promise must himself give something in return. In Malaysia a party to an agreement can enforce a promise even though he has given no consideration, so long as somebody else has done so – Section 2(d).  Example Assume that there are 3 parties to an agreement. A,B, & C. C promises to pay A RM1000/- if B will repair C’s car. B repairs C’s car and C does not pay A anything. Although A has given no consideration for C’s promise he may institute legal proceeding against C  Waiver of performance The general rule in English law is that waiver of a right that is not supported by consideration void. Example A owes B RM1000/- which is due, B asks A to return RM100/- in full settlement. The waiver is not binding on B who may later change his mind and claim the balance owing, because the promise to forgo the balance is not supported by consideration.  A person who does no more than what he is already legally obliged to perform or under a public duty to perform cannot hold the other party to his promise. Payment of a smaller sum is not a satisfaction of a legal obligation to pay a larger sum. – Pinnel’s case (1602) 77 ER 237  In Pinnel's Case (1602), Cole owed Pinnel £8-10s- 0d (£8.50) which was due on 11 November. At Pinnel's request, Cole payed £5-2s-2d (£5.11) on 1 October, which Pinnel accepted in full settlement of the debt. Pinnel sued Cole for the amount owed. It was held that part-payment in itself was not consideration. However, the agreement to accept part-payment would be binding if the debtor, at the creditor's request, provided some fresh consideration.  Section 64 Contract Act 1950:- “ Every promise may dispense with or remit, wholly or in part, the performance of the promise made to him, or may extend the time for such performance, or may accept instead of it any satisfaction which he thinks fit.  Kerpa Singh v Bariam Singh 1 MLJ 38 BS owed $8,869.94 under a judgment debt. BS’s son wrote to KS offering $4000/- in full settlement of his father’s debt and endorsed a cheque for the amount. He stipulated that should KS refuse to accept, he must return the cheque. KS’s legal advisers, having cashed the cheque and retain the money proceeded to secure the balance of the debt by issuing bankruptcy notice on the debtor. The Federal Court ruled that the acceptance of the cheque from the debtor’s son in full satisfaction precluded them from claiming the balance.  Associated Pan Malaysia Cement Sdn Bhd v Syarikat Teknikal & Kejuruteraan Sdn Bhd 3 MLJ 287 : Gunn Chit Tuan SCJ - s 64 of our Contracts Act 1950 … represents a departure from the common law in England. Our law on waiver in s 64 …, is similar to the Indian law on the general principles of waiver under which it is open to a promisee to dispense with or remit wholly or in part the performance of the promise made to him or he can accept any promise which he thinks fit. Under our law neither consideration nor an agreement will be necessary  Seal Incorporated Bhd v Norsechem Resins Sdn Bhd COA – Respondant is prevented from claiming the balance of RM535,781 and the interest thereon after having accepted and cashed the cheque for a lesser but agreed amount as ‘full and final payment of a larger judgment sum’ without any protest.  PEMBINAAN PURCON V ENTERTAINMENT VILLAGE (M) SDN BHD 1 MLJ 545  Promissory Estoppel Promissory estoppel basically prevents a party to a contract from acting in a certain way because the first party promised not to act in that way, and the other party to the contract relied on that promise and acted upon it. Provides a means of making a promise binding, in certain circumstances, in the absence of consideration. The doctrine was established in the case of Hughes v. Metropolitan Railway Co. (1877)  Hughes v. Metropolitan Railway Co. (1877) Lord Cairns: “It is the first principle upon which all Courts of Equity proceed, that if parties who have entered into definite and distinct terms involving certain legal results – certain penalties or legal forfeiture – afterwards by their own act or with their own consent enter upon a course of negotiation which has the effect of leading one of the parties to suppose that the strict rights arising under the contract will not be enforced, or will be kept in suspense, or held in abeyance, the person who otherwise might have enforced those rights will not be allowed to enforce them where it would be inequitable having regard to the dealings which have thus taken place between the parties”.  This doctrine was developed by Lord Daning in Central London Property Trust Ltd v High Trees House Ltd KB 130 In this case,the landlord promised to receive from the tenant half of the ground rent because of the difficulty of finding tenants during wartime period. After the war, the flats became occupied and the landlord sued for outstanding arrears during the wartime. The court evolving the principle of promissory estoppel held that the full rent was payable from the time that the flats vecame fully occupied in early 1945 but that Central London could not go back on their promise to reduced rent for the preriod of the war because High Trees relied on the promise made to claim the full rent.  Read also: Birmingham & District Land Co v London & North Western Railway Co (1888) D40 Ch D 268  How does the doctrine operate? The doctrine operates where there has been a representation by one party (the promisor) that he/she does not intend to enforce his/her strict legal rights, made with the intention that the other party (the promisee) will rely on the representation, and the other party does in fact rely upon the representation without providing consideration. The party making the rerpresentation will be estopped from enforcing his/her strict legal rights, in so far as it is inequitable to do so.  Requirements of promissory estoppel: 1) the promisor must give clear and unambiguous statement that he does not intend to enforce his legal rights. The promise may be express or implied. 2) promisee must have acted on that promise made by the promisor. Thus, for a plea of promissory estoppel to succeed, there must be a change in circumstances of the promisee (not necessarily to his detriment). 3) it would be inequitable for the promisor to renege on his promise and claim his strict legal rights after the promisee had relied on it. 4) it cannot not be enforce against the promissor. Thus it can be used only as a defence and thus cannot be used as a sword  Estoppel may be used as a shield but not a sword The doctrine can only be used where there is preexisting contractual relationship (or other relationship creating legal rights), for which consideration will have been required. It cannot be used where one party promises to do more than what contract requires or to pay more than required.  Combe v Combe 2 K.B. 215 (CA) Fact: A husband, upon divorce promised his wife $100 a year as a permanent allowance. In reliance upon this promise, the wife forbore to apply to the courts for maintenance. The husband failed to make the payments, the wife sued him on the promise, on the basis of promissory estoppel.  COA: There was no consideration for the promise as the wife’s forbearance had not been requested and was not in return for the promise made to her, nor could the wife rely on PE which did not give rise to a cause of action.  A plaintiff may rely on estoppel if he has an independent cause of action. Estoppel may be part of a cause of action but not cause of action in itself Case: Hong Leong Leasing Sdn Bhd v. Tan Kim Cheong 1 MLJ 177 Fact: Def bought some machines from a dealer who requested the pl to provide hire purchase facilities to the def. Dealer forwarded the hire purchase agreement and delivery receipt to the def. Def signed. Machines did not in fact exist.  The pl claimed that it was entitled for the arrears under the HP agreement, the def is estopped from denying that the machines do not exist especially by signing the delivery receipt and the payment of some installments. High Ct: The mere fact that the def has signed the delivery receipt, with no intention on his part to make any representation to the pl, and with no evidence that the pl had acted upon the representation, was not sufficient to raise an estoppel against the def.  Read also: Cheng Hang Guan v. Perumahan Farlim (Penang) Sdn Bhd 3 MLJ 352 Boustead Trading (1985) Sdn Bhd v Arab Malaysian Merchant Bank 3 MLJ 331  Scope of the Doctrine Does PE extinguishes or merely suspends the estopped party’s rights? It suspends but does not fully extinguish the existing obligation. The promisor, may, on giving reasonable notice resume the right which has been waived and revert to the original terms of the contract. Q: What amounts to reasonable notice?  Tool Metal Manufacturing Co. Ltd. v. Tungsten Electric Co. Ltd.(1955) The appellants (app) were the owners of certain patents, who licensed the respondents (resp) to deal in the protected products subject to the payment of certain royalties. The resp were to pay compensation if the amount sold exceeded a certain quota. In 1939, when war broke out, the app agreed to suspend their rights to compensation. In 1945, after the war, the app claimed to have revoled its suspension and to be entitled to compensation from 1st June 1945.  The claim failed on the ground that the agreement was premature as no adequate notice had been given to the resp. In 1950, the app brought the present action claiming compensation from 1 January 1947 at which date the resp was fully aware that the app was determined to revert to the original agreement. HOL: The app had effectively revoked its promise to suspend its legal right, and that it was entitled to the compensation claimed.  Read also: - Sim Siok Eng v Government of Malaysia 1 MLJ 15 - Bank Negara Indonesia v Philip Hoalim 2 MLJ 3  Is detriment an element in estoppel? Detriment – damage, loss, harm Hong Leong Leasing Sdn Bhd v Tan Kim Cheong 1 MLJ 177 High Court: In order to successfully raise an estoppel, one has to prove that he has acted on the other’s representation to his detriment. Boustead Trading Sdn Bhd v Arab Malaysian Merchant Bank Bhd 3 MLJ 331 Federal Ct: The detriment element does not form part of the doctrine of estoppel.  Performance of an existing duty The performance of an existing public or contractual duty cannot normally be offered as consideration. Deemed insufficient because by merely repeating an existing obligation, the courts deem that the pl has not given anything to the bargain. The consideration must be something more than that what the promisee is already bound to do under by law.  3 situations: 1. Performance of an existing public duty 2. Performance of an existing contractual duty owed to the promisor 3. Performance of an existing imposed by a contract with a third party Performance of an existing public duty Collins v Godefroy (1831) 109 ER 1040, KB The pl attended court for six days under subpoena to give evidence for the def. Def subsequently promised to pay him a fee of six guineas [£6.30] for his time, but did not do so, and pl sued. Lord Tenterden CJ: The pl’s attendance in court was insufficient consideration that could support D's promise as he did not do anything over and above his existing public duty.  Glasbrook v Glamorgan CC AC 270, HL The appellants were the owners of a colliery affected by a strike, and feared that the strikers would bring out the safety men, which would result in flooding. They asked the police to provide them with extra protection; the local inspector said he thought the existing mobile force was sufficient, but eventually agreed to provide 70 men in exchange for a written promise to pay for the services provided. The extra police were sent to the mine, and remained until the end of the strike. The appellants then refused to pay, and counterclaimed for the cost of feeding and housing the police at the colliery. Affirming the decision of Bailhache J and the Court of Appeal, the House of Lords said the police undoubtedly have a general duty to do what they think necessary to keep the peace and prevent crime, and no one can be made to pay extra for that. But the undertaking to provide more protection than when the police thought necessary was something over and above their duties and therefore is good consideration for the promise of the reward.  Harris v Sheffield United 2 All ER 838, CA A police authority claimed for the expense of providing officers to supervise football matches; the club contended that the police were merely fulfilling their existing duty to enforce the law. The Court of Appeal upheld the judge's decision in favour of the police, and said that in deciding whether police services are "special" and chargeable the court should consider whether the officers are required to be in a private place (making it something "extra"), whether violence has already occurred or is thought to be imminent (making it a public duty), the nature of the event (elections are clearly public, weddings clearly "extra", and football matches in between) and whether officers must be brought in who would otherwise be off duty or engaged elsewhere. Performance of an existing contractual duty owed to the promisor Stilk v Myrick (1809) 170 ER 1168, KB Following the desertion of two seamen and great difficulty in finding replacements, the remaining members of a ship's crew were promised extra wages if they would work the ship home. When the ship reached London the seamen sought to enforce this promise, but the court found against them. By staying at their work they did no more than their existing duty, and so had given no new consideration for the new promise. They were entitled to their wages originally agreed at the start of the voyage, but occasional desertions were among the normal hazards of the sea and they could not demand any extra payment ( they were doing no more than their contractual duty.  Hartley v Ponsonby (1857) 119 ER 1471, QB A ship left England with a crew of 36, but as a result of desertions these were reduced to only 19, including just five able seamen, who were promised extra pay if they would help to sail the ship back to England. The court said this promise was enforceable: the crew was so reduced that it was dangerous to sail on and that the seamen were no longer bound to serve under the original. The original contract had come to an end, and the seamen were free to make a new contract on whatever terms might be agreed.  Performance of an existing duty imposed by a contract with a third party Shadwell v shadwell 9 CB (NS) 159 The pl’s uncle congratulated him on his engagement to marry a certain girl and promised that, if he marries the girl, he will give him $150 a year during his (uncle’s) lifetime and until the pl’s annual fee as a barrister ammounts to 600 guiness. The pl married the girl and received the sums as promised. When the uncle died, his executors refused to pay certain instalments that were unpaid during the uncle’s lifetime.  Held: There was a good consideration – the uncle received a benefit because the marriage was an object of interest of a near relative, and that the pl suffered a detriment because he may have made certain changes in his financial liabilities in the hope of receiving the amount promised by the uncle.