Consideration in Contract Formation

Topics: Contract, Consideration, Common law Pages: 9 (3322 words) Published: May 10, 2013
Consideration in contract formation
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Consideration is essential to the formation of any contract made without deed. It distinguishes a bargain or contract from a gift. Lush J in the case of Currie v Misa (1875) referred consideration consist of a benefit to the promisor or a detriment to the promisee as: “Some right, interest, profit or benefit accruing to one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by other”. Lord Dunedin in Dunlop v Selfridge (1915) defined consideration as:

“An act or forbearance of one party, or the promise thereof, is the price for which the promise of the other is bought, and the promise thus given for value is enforceable”. However, it is much wider in Section 26 of the Contracts Act 1950; the general rule of an agreement without consideration is void and is defined in Section 2(d) of the Contracts act 1950 as follows: “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 a consideration for the promise”. Guthrie Waugh Bhd V Malaippan Muthucumaru (1972)

The court held that as far as the defendant was concerned, the deed was executed by him neither for any past consideration, nor in respect of forbearance to sue him for the supplies made to the estates, nor in consideration of any promise to supply him goods on credit in future. Therefore, there was no cause of action as the claim based on deed agreement for which there was no consideration and the defendant could be said to have undertaken was a moral obligation. (Lee Mei Pheng, 2005)

There are few elements governing the law of consideration in Malaysian law: 1. Consideration Need Not Be Adequate , But Must Be Sufficient There is no requirement that the consideration must be at market value, as long as the promisee provides something in value i.e. £2 for an exchange of a car would be valid. The courts are not concerned the adequacy. Chappell & Co V Nestle (1960)

Nestle had a special offer involving if customers sent in 1s6d and three chocolate bars wrappers, they would get a record of a song called ‘Rockin Shoes'. Chappell & Co who owned the copyright of the song has brought an action for breaches of copyright and claimed royalties. Nestle willing to pay the royalties at 6.25% of 1s6d however Chappell & Co argued that it should include the chocolate wrappers although Nestle thrown it away after they received it. The court held that consideration must be sufficient but need not be adequate; hence, the chocolate wrappers were part of consideration as it was part to increase sales and provided value. Therefore, Chappell & Co were granted the injunction and Nestle could not sell the records. Under the Malaysian Law, explanation 2 to Section 26 of Contracts Act 1950 provides that an agreement to which the consent of the promisor is not void merely because the consideration is inadequate; but the inadequacy will be question by the court whether the consent of the promisor is freely given. The illustration (f) to Section 26 of Contracts Act 1950 clearly states the application of the rule: “A agrees to sell a horse worth RM 1,000 for RM 10. A's consent to the agreement was freely given. The agreement is a contract notwithstanding the inadequacy of the consideration”. This was illustrated in the case of Phang Swee Kim v Beh I Hock (1964), the respondent's solicitor notified the appellant that she had trespassed on the said land and claimed for vacant possession and for an account of all income received by her from the land. In May 1963, the respondent instituted an action against her claiming the relief stated. The appellant counter-claimed for a declaration that she was entitled to the said land. At the hearing, the appellant contended that...
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