Consideration in contract law in Malaysia refers to something of value that is given or promised in exchange for a contract or agreement. Along with the elements of offer, acceptance, and the intention to create legal relations, it is a necessary requirement for a contract to be deemed valid under Malaysian law.
What Is Consideration in Contract Law Malaysia
Under Section 2(d) of the Contracts Act 1950, Malaysia defines “consideration” as an act of doing or abstaining from doing something, or making a promise, at the request of the promisor, promisee, or any other person.
Consideration involves a promisee performing an act or pledging to do something at the request of the promisor. It is the duty of the promisor to provide payment or benefit for the consideration provided by the promisee.
“Consideration Need Not be Adequate“
Consideration may take the form of money or money’s worth (cash, goods, services, promises to perform an action in the future, or a combination of these). The value of the consideration need not be equal to the promise or performance of the other party. However, it must be sufficient, meaning that it must have some value.
For example, a seller may agree to sell a car to a buyer for RM10,000, even if it’s worth more. As long as both parties agree to the terms, the consideration should be sufficient.
In the case of Phang Swee Kim v Beh I Hock, Phang Swee Kim entered into a contract with Beh I Hock to sell a sub-divided land for RM500. The actual value of the land was found to be higher than expected, and Beh I Hock refused to honour the contract when he found out. As a result, Phang Swee Kim sued him. In the case, the Federal Court ruled that the contract was valid by virtue of Explanation 2 to Section 26.
“Consideration Must be Real“
It is important to note that consideration must be real and not imaginary. In other words, the consideration must have actual value, and it cannot be a promise to do something that is impossible or already required by law.
Consideration can also take the form of forbearance. This refers to the act of refraining from doing something that one has a legal right to do. For example, if a creditor agrees to accept a lower amount of payment from a debtor in exchange for the debtor agreeing not to file for bankruptcy. In that case, the forbearance can be considered a sufficient consideration.
“Consideration Must be Voluntary“
Additionally, consideration must be given voluntarily and without duress or undue influence. The absence of consideration can render a contract voidable, thereby releasing parties from their obligations.
Types of Consideration in Contract Law Malaysia
There are three types of consideration recognised in Malaysia:
1. Executory Consideration
The term “executory consideration” describes a situation where one party makes a promise in exchange for another party’s promise. For instance, A promises to sell their bicycle to B for RM100, and B promises to pay the RM100.
In K Murugesu v Nadarajah, the appellant had previously agreed to sell a house to the respondent for $26,000 but later refused. The respondent obtained a court order of specific performance, but the appellant decided to challenge the order by appealing the case.
The appeal was not successful, and the court applied the example provided in Section 24’s illustration. The judge, 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
Executed consideration refers to a situation where a promise is made in exchange for an act’s completion or performance. Here, one party has already completed their obligations under the agreement and has received something of value in return.
This type of consideration relates to past acts that have been fulfilled and benefits that have already been received. For example, if A pays B for repairing their car, the payment is considered executed consideration as B has already completed the repair work.
In the Indian case SK DAS Union of Inda v Charman Lal Loona, Dass J stated, “An executed consideration consists of an act for a promise. It is the act which forms the consideration. No contract is formed unless and until the act is performed”.
3. Past Consideration
Past consideration is a promise one makes in return for a previously completed or performed action. This means that the promised benefits have already been received in exchange for the past act, and the promise is made subsequent to the completion of the act.
It’s pertinent to note that past consideration is enforceable only if the act was performed at the request of the promisor and with the expectation of receiving some form of compensation or benefit.
For instance, if A helps B move to a new house and B promises to pay A after completing the move, this promise is considered past consideration. However, B can be held legally accountable for fulfilling the promise only if it was made at the time of the request for help or if A had a reasonable expectation of receiving compensation for their help.
Can a Consideration Move from a Person Who is Not the Promisee?
Yes, consideration can move from any person. A party to an agreement could enforce a promise even if they did not provide the consideration, as long as someone else did. Section 2(d) of the Contract Act 1950 states that “when the promisee or any other person has done something, such act is called a consideration for the promise”.
In the Indian case of Venkata Chinnaya v. Verikatara Ma’ya, a sister promised to pay an annuity to her brothers in exchange for nothing in return. On the same day, their mother gave the sister some land. As part of her promise to her brother, she was required to pay the annuity but failed to do so. Subsequently, she was sued by her brother. Moreover, the court found her liable to pay as there was consideration for the promise, even though it did not come from her brother.
Exceptions of Consideration in Contract Law Malaysia
Typically, an agreement or promise made without consideration is invalid, meaning that no contract exists if there is no consideration. However, Section 26 provides exceptions to this rule, where contracts without consideration are still considered valid. These exceptions include Section 26(a), Section 26(b), and Section 26(c).
I. Section 26(a): A Promise Between Parties with Ties of Natural Love and Affection
In Malaysia, a contract made between parties who share close relations and have a natural love and affection towards each other is legally enforceable even without any consideration. However, it is subject to strict interpretation and requirements.
The case Re Tan Soh Sim & Ors v Tan Saw Keow judicially construed the definition of ‘natural love and affection’ in Malaysia. Here, a dying woman expressed her desire to leave all her assets to her four adopted children. However, the court ruled that the claims of the adopted children were not valid as they violated Section 26(a) of the Contracts Act.
Section 26(a) requires a contract to be in writing and signed by the parties involved for there to be natural love and affection between parties with close relations. As the children were adopted and did not have natural (blood) relations with the woman, there was no natural love and affection between them.
II. Section 26(b): A Promise to Compensate Wholly or in Part a Person Who Has Already Voluntarily Done Something for the Promisor
This promise is a form of valid consideration in contract law. It can be legally enforceable even if the act was done voluntarily without any prior agreement or expectation of compensation.
For instance, A finds B’s wallet and gives it to B. The latter promises to A RM50. This is regarded as a valid contract.
III. Section 26(b): A Promise to Compensate Wholly or in Part a Person Who Has Done Something which the Promisor was Legally Compellable to do
This refers to a promise made by the promisor to compensate, either partially or wholly, a person who has done something which the promisor was legally obligated to do.
For instance, if A is legally required to provide financial support to B’s child, and C voluntarily provides such support on A’s behalf, A may promise to compensate C for their efforts. This promise would be considered legally enforceable, as A was legally required to provide the support that C provided voluntarily.
IV. Section 26(c): A Promise to Pay Wholly or in Part a Statue-Barred Debt
Here, the debtor promises to pay a debt that is no longer enforceable in court due to the expiration of the statute of limitations.
Essentially, a promise to pay a statute-barred debt is legally binding in Malaysia under certain circumstances. This is provided that it is made in writing and signed by the person making the promise. However, such promises are generally not considered as valid considerations for a new contract. This is because the original debt is no longer enforceable in court.
Resolving Contract Issues with Expertise
In conclusion, consideration is a fundamental principle in contract law in Malaysia. It requires careful attention to ensure all contractual obligations are met.
To do so, engage a professional contract lawyer to ensure that your contracts are prepared efficiently. At Sabrina Hashim & Co, we offer reliable and high-quality legal services to efficiently protect your business interests by drafting, managing, and executing agreements.