Without consideration a valid contract?

Q.
What is consideration in a contract? Consideration is part of the necessity to basic element of a valid contract. Comment and contrast this view to the Malaysian Contract Act 1950.

A.
Section 2(d) of the Contract Act 1950 (hereafter CA 50), specifies:

"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 abstain from doing something, such act or abstinence or promise is called a consideration for the promise."

Consideration is what distinguishes a bargain or contract from gift. Consideration may be seen as the reason for the promise. Thus, it is generally taken as an essential element of a valid contract.

Under Section 26, CA 50:

[Another condition that without condition is a norm is Agency Contract as in Part X Agency of CA 50.]

Section 138 Consideration not necessary. No consideration is necessary to create an agency.

[Another area of contract which is in between full consideration and part consideration is discussed below. This part of the law varies between English Law and the Malaysian Law.

Part or delayed payment of consideration is common in property transactions. This is usually called 'conditional contract'.]

The SPA is a contract, but the consideration is not fully paid at time of signing of SPA as the loan has yet to be dispersed. It is a promise to pay the contract price at some later date agreed between the parties (executory consideration). Hence, when a promisee (buyer) enters into a sale and purchase agreement, the contract is legally binding, although he has not paid for it. The consideration given by the promisee (buyer) is the promise to pay the price of the goods when required by the contract to do so. The consideration given by the promisor (seller) is the promise that the goods are available.

Arrangement where a buyer takes possession of an item, but its title and right of repossession remains with the seller until the buyer pays the full purchase price (usually in installments stretched over months or years). Common type of agreement used in the financing of machinery and equipment, and real estate. Also called conditional sale contract.

D04 Tax 2014 Q5 touched on this - Conditional Contract & No Gain No Loss Q5

Wikipedia has the definition of conditional contract as below:

Conditional Sale in Real Estate

A conditional sale is a real estate transaction where the parties have set conditions.

A standard real estate transaction usually begins when a prospective purchaser submits an offer to purchase to the vendor of a property. As in a standard offer, a conditional offer sets out the terms of the sale such as the purchase price, the date of closing, the names of the parties, and the amount of any required deposit, but it also stipulates various conditions which must be met in order for the contract to be binding on the parties.

These conditions may include approval by a co-purchaser, financing acceptable to the purchaser, the receipt and review of a survey showing that the buildings on the property comply with local zoning regulations, a title search showing no unacceptable liens or encumbrances, confirmation from the current mortgagee that the property is not in foreclosure, and the like. If the offer is accepted by the vendor, the offer to purchase will become a contract binding on the parties when all conditions are satisfied.

An alternative to a conditional sale is an invitation to treat. Unlike a conditional sale, an invitation to treat does not become binding upon satisfaction of any conditions. Issues arise as to the distinction between actions which constitute an offer or an invitation to treat, especially when the intentions of the parties are not clearly specified at the time.

Various variations of CA 50 with English Law are illustrated below:-

A. Consideration does not need to be full

Refer MIA QE 2011/3 Q1 (a)(i) Consideration need not be adequate here.

1. Under the Malaysian Law, CA 50, consideration need not be adequate. Explanation 2 of the CA 50, Section 26 as below:

An agreement to which the consent of the promisor is freely given is not void merely because the consideration is inadequate; but the inadequacy of of the consideration may be taken into account by the court in determining the question whether the consent of the promisor was freely given.

As a general rule, consideration must be sufficient, i.e. recognized as an acceptable form of consideration by the law. The law is not concerned with the fairness of the bargain. Hence, one can contract to buy a car for RM100 if one can agree to such terms with the promisor (seller).

Phang Swee Kim v Beh I Hock (1964) where transfer of land for RM500 was valid as there was no evidence of fraud or duress.

B. Consideration does not need to be from promisee

2. Section 2 (d) of the CA 50 provides that consideration may move from a person who is not a promisee (buyer), i.e. buyer or anybody else can pay for the consideration. This is not so in English Law, where only the promisee (buyer who made payment of consideration) may sue on it.

This is illustrated from the Indian case of Venkata Chinnaya v Verikatara Ma'ya (1881).

In this case, a sister agreed (promisor) to pay an annuity to her brothers (promisee) who provided no consideration for the promise (a property). But on the same day, the mother gave the sister some land, stipulating that she must pay the annuity to the brothers (promisee).

[The mother was probably worried that if she were to give the land to the brothers, they would have
sold the lands. So, instead, she gave to the sister who 'watch over it' but have to pay annuity to the brothers.

The sister subsequently failed to pay the annuity, and the brothers sued. The court held that there was a contract, although consideration (land) was paid by third party - the mother.]

C. Past Consideration is good consideration

[Like above - Section 26 (b) or is a promise to compensate for something done;]

Past consideration consists of something wholly performed before the promise was made. [It is like voluntarily wanting to compensate for some effort (not a contract at earlier stage) done. This is different from English Law.]

Under the English Law, past consideration is not good consideration. However, in Malaysia, past consideration is good consideration. [Section 26 (b) CA 50.]

[Example: when you found someone's wallet which was lost and found. The owner wants to compensate you but did not have the money with him. He promised to give you RM200 for the effort of finding his wallet (with IC and important cards inside). This is a contract, although there was past consideration (you already found the wallet).]

Another example is Ali was swimming and got into trouble. You took off your cloth and dived into to save him. Later Ali promised to give you RM2,000 for saving his life. The act of rescue him was wholly performed before the promise was made. [The consideration (rescue) has passed when a promise (agreement to give RM2,000) was made.]

Under this Section, the requirement is that the act is done at the desire of the promisor (Ali, or one who lost wallet), not by the promisee (receiver).

A case for past consideration is good consideration is by:

Kepong Prospecting Ltd v Schmidt (1968). Refer here for further reading.

D. A promise to pay debt barred by Limitation Act, 1953

Background of Limitation Act
The Limitation Act 1980 (c. 58)[1] is a British Act of Parliament applicable only to England and Wales. It is a statute of limitations which provides timescales within which action may be taken (by issuing a claim form) for breaches of the law. For example it provides that breaches of an ordinary contract are actionable for six years after the event[2]whereas breaches of a deed are actionable for twelve years after the event.[3] In most cases, after the expiry of the time periods specified in the Act the remedies available for breaches are extinguished and no action may be taken in the courts in respect of those breaches.