CONSIDERATION

INTENTION
CERTAINTY
LEGALITY OF OBJECT
FORMALITIES

Noorimah Misnan
Learning Outcomes:
At the end of this chapter, students should be able to:
1. Define consideration and explain types of consideration
2. Distinguish between commercial agreement and social agreement
to create a valid intention.
3. Explain formation to create a valid contract
4. Discuss certainty of contract.
5. Explain how legality of object can affect the validity of contract.

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CONSIDERATION

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DEFINITION
• SECTION 2 (d) Contracts Act 1950 states that “when the promisee or any other person
has done something, such act is called a consideration for the promise”.
• Consideration is something of value exchanged between the parties to a contract.
Consideration can be many things such as money, property, service, work performance,
or a promise to not do something.
• As long as the parties to the contract exchange something of value between each other,
there is consideration.
• SECTION 26: An agreement without consideration is VOID.
• The promise amounts to a gift, not a contract. Ali promises, for no consideration, to
give to Bob RM1,000. This is a void that is a promise to make a gift.

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 What is Consideration in Contract Law?

• Consideration is the price of which one party pays to buy the promise or act
of the other person.
• Consideration also can be an act or a promise to perform an act or
abstinence.
• Consideration can be:
1. a promise to do something
2. a promise not to do something, and
3. a promise to pay money.
• There are three types of consideration
1. Executory
2. Executed
3. Past Consideration 5
 i) Executory (Future)
• A promise made in return of a promise. It is the promise to perform an action at some
future time.

• Z offers to sell his smart watch to B for RM100. B agrees to pay Z RM100 in 10 days' time. Z
promise to sell is the consideration. B promise to pay RM100 is the consideration – executory

• Case : K. Murugesu v Nadarajah

Facts: The appellant agreed to sell a house to the respondent for RM26,000 within three
months from the date of the written agreement. Later, the appellant refused to perform
the contract and argued that there was no consideration and therefore the contract is void.
Held: The agreement was an executory consideration. Where there is a promise against a
promise, each promise is the consideration for the other. A promise is made by one party in
return by a promise made by the other.

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 ii) Executed (Present)

• Executed consideration consists of doing an act. Consideration is executed when

a promise is made in return for the performance of an act. Sometimes, there is no
obligation to pay unless or until the performance is completed.
(promise + act)
• Example : Ali offers RM100 to anyone who finds and returns his camera. B found
the camera and returns to Ali. B’s act is a consideration – reward situation as
executed
• Case: Carlill v Carbolic Smoke Ball Company
• Held : Advertisement for reward was an offer to the whole world. Mrs Carlill had
accepted her conduct when she used the medicine according to the instructions.
Her conduct (act) makes the promise enforceable.

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 iii) Past consideration

• A promise made subsequent to and in return for an act that has already been performed.
(the past act was done + promise)
• Example : Ally lost her watch. Bibi found it and returned it to Ally. Ally promises to give
Bibi RM100. This is a valid contract and Ally is liable to pay Bibi.
• Case : Kepong Prospecting Ltd v Schmidt
Facts : Schmidt, a consulting engineer, had assisted another in obtaining a prospecting
permit for mining iron in the state of Johor. He also helped in the formation of the
company, Kepong Prospecting Ltd., and was appointed as a Managing director. After the
company was formed, an agreement was entered into between them and the company
agreed to pay 1% of the value from the mining land. This was in consideration of the
services rendered by the consulting engineer for and on behalf of the company before its
formation, after incorporation, and for future services. Schmidt claimed the amount. The
company refused to pay and Schmidt sued the company.
• Held (COA) : There was a valid consideration. Schmidt was entitled to his claim on the
amount.

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Rules of consideration
1. Consideration must be sufficient or must have some value in term
of money
2. Consideration need not be adequate
3. Consideration need not move from the offeree/promisee
[consideration from third party is valid]

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 1. Consideration must be sufficient or must have
some value in term of money. TIONCONSIDERATION
 If money consideration, it is able to be minimal, such as RM1.00
 If act, the act must be sufficient – this means that it must have some legal
worth.
 Performance of an existing duty is not a valid consideration. For example, a
police officer - cannot claim the reward for capturing a wanted suspect,
because the officer is already legally obligated to capture and arrest people
who break the law.
 To create a valid consideration, the act must be beyond the duty and
obligation.

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Case : Stilk V Myrick (no consideration)
• The defendant was the captain of a ship. During the course of a sea voyage, several of the defendant’s
sailor’s deserted (left the ship). The defendant was unable to find replacements. He promised the
remaining sailors that if they stayed, he would share the wages intended for the deserters with them.
The remaining sailors agreed. However, when the voyage was complete, the defendant refused to pay
the extra money.
• Held: the promise was not binding because the sailor gave no consideration. The sailors were already
under a contractual obligation to work the duration of the voyage. They could not use a promise to
perform their existing contractual duty as consideration. Since they had not provided anything else,
there was no consideration and no contractual variation.
Case : Hartley V Ponsonby ( valid consideration)
• Half of a ship's crew deserted on a voyage and only six of the remaining men were competent sailors.
The captain promised the remaining crew members extra money if they completed the voyage. The
captain then refused to pay up.
• Held: The crew were entitled to the extra payment on the grounds that it was dangerous for the ship to
proceed with so few sailors and they had performed beyond their existing contractual duty to complete
the voyage.

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 2. Consideration need not be
adequate
S.26 Explanation 2 CA: An agreement to which the consent of the promisor is freely given
is not void merely because the consideration is inadequate.
It means - Inadequate consideration is valid. An agreement is not void merely because
the consideration is not of equal value/ inadequate.
Example : A promises to sell a hand phone worth RM 1,000 for RM 10 to B. There is a valid contract here despite the
inadequate amount paid for the hand phone.
There is no requirement that the consideration must be at market value, as long as the promisee provides
something in value.
Case : Phang Swee Kim v Beh I Hock
Facts :The promisor offered to sell his land at a price of RM500 although the land worth
much more. Later the promisor changed his mind and refused to transfer the land.
Held :There was a binding contract even though the consideration
was inadequate and there was no evidence of misrepresentation or fraud.
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3.Consideration may move from
promisee or from any other person
• Anybody can provide consideration. This is based on the provision in section 2(d). The words ‘any other
person’ shows that any person can give consideration.
Example : Ali promise to sell his phone to Boy for RM500. The contract is between Ali ( the promisor)
and Boy (the promisee). The consideration (RM500) can be from Boy or any other person. [Boy’s
girlfriend /Boy’s father can pay on behalf of Boy and contract valid].
Case : Venkata Chinnaya v Verikataramaya
Facts: The defendant promised to pay an annuity of 653 rupees to her aunt, the plaintiff. In exchange, the
defendant's mother transferred her property and land to her. Subsequently, the defendant declined to pay
the annuity, arguing lack of consideration from the aunt. The aunt sued.
Held: The court ruled that there was valid consideration because consideration can be provided by persons
other than the promisee. There was a valid contract, and the defendant was liable to pay the annuity to
the plaintiff.
[The contract was between Verikataramaya (promisor) and Venkata Chinnaya (promisee). The
consideration was provided by the promisor's mother, not by the promisee. The contract is valid.]

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• GENERAL RULE : Section 26 provides “that agreement without
consideration is void.”
• Exceptions to the General Rule : in certain situations, there is still a valid
contract even when the promisee did not provide any consideration.
• The exceptions is according to section 26(a), (b) & (c).

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 1. Section 26(a) : An agreement made on account of natural love and
affection between parties standing in near relation to each other.

Requirements :
1. The promise must be made in writing
2. The promised must be registered, if required.
3. The agreement must be made between parties
in ‘near relation’ with each other
*Case : Krishnan V Lashmi Amal - ‘Near relation’ means immediate family
members and it depends on social group.
• Parents and children are near relation to each other because of blood ties /
genetics relationship.
Eg: Ali promises to give his son,Boy,RM1000. Ali puts his promise to Boy into
writing. This is a contract.
Ali promises, in writing to give his daughter, Sherry, 2 acres of land. He registered
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the transfer at the land office. This is a contract.
**CASE: RE TAN SOH SIM.

In this case, a woman on her deathbed

expressed her intention to leave 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) - that it was not in writing. The
agreement was void.

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RE TAN SOH SIM, DECEASED: CHAN LAM KEONG & OTHERS VS TAN SAW KEOW & 3
OTHERS[1951] 1 MLJ 21.
Facts:
In her last illness, Tan Soh Sim expressed a wish that she wanted to give her estate to her 2
adopted sons and 2 adopted daughters. She was on her death-bed and too ill to make a
will. Tan Soh Sim's sibling, respected this will and they signed a document drawn up by a
solicitor renouncing all rights in favor of the 4 adopted children who were their nephews
and nieces. The question was whether the agreement was valid or void because no
consideration from 4 adopted children?
Held:
According to Chinese custom the adopted children are only related to their adoptive
parents and adopted brothers and sisters (true love between them). They are not in near
relation to the relatives or family to their adopted mother. Hence, uncles and aunts do not
stand in near relation to their nephews and nieces. Furthermore, the wish made by Tan Soh
Sim was not in writing . Therefore, the agreement was void.

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2. Section 26(b) : An agreement to
compensate for the past voluntary
act
It can be divided into 2 :
i) it can be a promise to compensate either wholly or in part a person who has
voluntarily done something for the promisor.(past consideration)
Case : J.M Wotherspoon v Henry Agency House
It was held by the court that if the party had done the act on suggestion of
the other party, it cannot be said to have been done voluntarily.
ii) An agreement to compensate either wholly or in part an act, which the promisor
was legally compellable to do so.
• Example : A pays a fine imposed by the court on B. B promise to compensate A. This
promise is binding.

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3. Section 26(c) : An agreement to pay a statute-barred debt.

• Under the Limitation Act 1953, there is a limit to 6 years to enforce

legal rights, for example, to claim payment of a debt. If it is more than
6 years the action is statute-barred (Time-barred debt / old debt)
Conditions :
1. There is a fresh promise to pay debt
2. The debt must be barred by statute
3. The agreement must be in writing
4. Must be signed by the promisor or his agent.

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LEGALLITY OF
OBJECTS

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 The object / consideration
Section 24 provides that a consideration or object of an agreement must
be lawfully or legal. It is unlawful if :
1. It is forbidden by law – promise to give money as a bribe
2. If permitted, it would defeat any law - A promises B to drop a
prosecution which he has instituted against B for robbery, and B
promises to restore the value of the things taken.
3. It is fraudulent – cheating
4. It involved or implies injury to the person or property of another –
An agreement to burn A’s house / to kidnap A’s wife
5. The court regards it as immoral, or opposed to public policy –
prostitution 21
INTENTION TO
CREATE LEGAL
RELATIONS

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 Intention ( niat) is one of the element to create a valid contract
 It is important to show that the parties (promisor and promisee) do
intend to enter into a contract.
 BUT, the Contracts Act 1950 is silent on the issue of intention (no
definition, no provisions on intention)

 So, For the purpose of determining intention of the parties, the court
look at the types of the agreements.
i) Social, family or other domestic agreement
ii) Commercial and business agreement

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Presumption of Law

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 Social, family or other domestic agreement
• There is a presumption that the parties do not
intend to create legal relation.
• Means, no intention, the contract void and the
parties cannot claim.
• Example of the agreement – husband and wife /
mother and daughter / friends
• However, this presumption may be rebuttable, means the
agreement valid and enforceable, if the party can prove the
intention. For example if the agreement is made in writing or
have consideration (this is evidence/proof) 25
• Case :Balfour v Balfour
• Facts :Mr. Balfour who was working in India, promised to pay to his wife £30 a month until he
returned to London. The wife could not accompany him abroad because of her poor health.
Later on, Mr Balfour wrote a letter to Mrs Balfour saying that it was better they be apart. Mrs
Balfour divorced Mr Balfour and claimed for the monthly payment.
• Held: The agreement was void because it was a domestic agreement between husband and
wife. There was no consideration by the wife and no evidence to show the intention to
create a valid contract.
• Case : Merrit v Merrit
• Facts : The husband left his wife and lived with another woman. The husband agreed in
writing that he would transfer the matrimonial house which was in the joint name of
husband and wife to his wife if she can pay up the entire outstanding mortgage. But, upon
completion of the payment, the husband refused to transfer the house.
• Held : The written agreement and the consideration by Mrs. Merritt were sufficient evidence
to rebut the presumption of law.
• There was an intention to create a valid agreement.
• The court ordered that the house be transferred to the wife. 26
 Commercial / Business agreements
• There is a presumption that the parties have an intention to
create a valid contract and
• must be rebutted by the party seeking to deny it.

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Case : Edward v Skyways
• Facts :The employer promised to pay an ex-gratia payment to the retrenched employees.
• Held : The term ex-gratia payment was enough to show the intention. Thus, there was a
valid contract the employees were entitled to the payment.

• IT MAY BE POSSIBLE TO REBUT (DENY) THE PRESUMPTION WHERE THE PARTIES EXPRESSLY PROVIDE NO
LEGAL RELATIONS ARE TO ARISE. THE DEFENDANT MAY REBUT BY REFERENCE TO THE WORDS USED IN THE
AGREEMENT.

Case : Rose & Frank Co v Crompton Bros Ltd

• Facts : A business agreement by British and American firm which contained a clause “this
agreement is not entered into as a formal or legal agreement and shall not be subject to
legal jurisdiction in the law court...”. The British firm ended the agreement without notice
and the American firm sued.
• Held : The business agreement was not binding and void. From the wording used, it shows
no intention to create a valid contract.
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 TUTORIAL
• Which of the following situations would rise to an intention to create
a valid contract? Identify the type of the agreement.
a) Husband promised to buy his wife a car for a birthday present.
b) Boyfriend promised to buy a diamond ring for girlfriend
c) Farmer promised to sell fruits to the fruit seller
d) Harris promised his parents to celebrate their anniversary at KLCC.
e) A mother promised to buy a dress for daughter.

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CERTAINTY

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Certainty
• Certainty means the agreement must not be vague. It must be
possible to ascertain the meaning of the agreement, or otherwise it
void and cannot be enforced.
• Section 30 : if the terms of the agreement are uncertain, the
agreement is void.
Case : Karuppan Chetty V Suah Tian
• The parties agreed to a lease of Rm35 per month ‘for as long as he
likes’. The contract was held to be void for uncertainty.

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FORMALITIES

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• Contract can be made orally, in writing or by conduct. Some
legislation requires certain formalities in various contracts. The Hire
Purchase Act 1967 requires hire purchase agreement to be in writing
and signed by the hirer and the owner or his agent.

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• TO BE CONTINUED WITH:

LEGAL CAPACITY
FREE CONSENT

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