Wednesday, April 9, 2008

CONTRACT LAW-[CONSIDERATION]

Under Malaysia law, “consideration need not be adequate”.
What do you understand by the said statement?


What mean by consideration in legal terms? Consideration is a benefit which must be bargained for between the parties, and is the essential reason for a party entering into a contract. Consideration must be of value (at least to the parties), and is exchanged for the performance or promise of performance by the other party (such performance itself is consideration). In a contract, one consideration (thing given) is exchanged for another consideration. Not doing an act (forbearance) can be consideration, such as "I will pay you $1,000 not to build a road next to my fence." Sometimes consideration is "nominal," meaning it is stated for form only, such as "$10 as consideration for conveyance of title," which is used to hide the true amount being paid. Contracts may become unenforceable or rescindable (undone by rescission) for "failure of consideration" when the intended consideration is found to worth less than expected, is damaged or destroyed, or performance is not made properly (as when the mechanic does not make the car run properly). Acts which are illegal or so immoral that they are against established public policy cannot serve as consideration for enforceable contracts such as prostitution, gambling where outlawed, hiring someone to break a skater's knee or inducing someone to breach an agreement (talk someone into backing out of a promise.)

If the promisor gets what he asks for in return for his promise, he has received sufficient consideration and his bound. It is immaterial that his promise is far more valuable than the price he asked for. The courts are generally concerned only with the question whether the promisor has made a bargain, not with whether he has made a good bargain.

There are certain acts or promises which, as a matter of policy, are not recognized by the courts as being of any value in law and which are therefore an insufficient consideration. But if the alleged consideration is not within this category, then the courts will not inquire whether the consideration is adequate. So long has the consideration has some value in the eyes of the law, that is enough. Hence, the said consideration must be sufficient (or real) but need not be adequate.

Explanation 2 to section 26 of Contracts Act 1950 provides that an agreement to which the consent of the promisor is freely given is not void merely because the consideration is inadequate; but the inadequacy may be taken into account by the court in determining the question whether the consent of the promisor is freely given. The illustration to section 26 of Contracts Act 1950 clearly shows the application of the rule:-

"...(f) A agrees to sell a horse worth $1000 for $10. A’s consent to the agreement was freely given. The agreement is a contract notwithstanding the inadequacy of the consideration..."

In the case of Bolton v Madden (1873) LR 9 QB 55 the court stated that “the adequacy of the consideration is for the parties to consider at the time of making the agreement, not for the court when it is sought to be enforced”. Therefore, a contract to sell a $100,000 house for $1,000 is perfectly valid and enforceable, despite the imbalance of the benefit accruing to each party.

Thus in Malaysia the case of Phang Swee Kim v Beh I Hock [1964] MLJ 383 the respondent alleged that the appellant has trespassed on his land and he instituted an action claiming for possession and also for an account of all income received by the appellant from the land. The appellant counterclaimed for a declaration that she was entitled to the said land. At the hearing, the appellant contended that there was an oral agreement made between her and the respondent in which the respondent agree to transfer the land to her on payment of $500. The learned trial judge accepted her evidence but held that the agreement is void due to inadequacy of consideration. However on appeal, the Federal Court held that by virtue of explanation 2 to section 26 of the Contracts Acts 1950, the inadequacy of the consideration was immaterial. There was good consideration under Section 2(d) of the Contracts (Malay States) Ordinance 1950 and judgment was made in favour of the appellant. In addition there was no evidence of suppression of the value of the property, misrepesentation, or fraud.

However, where one party denies that his consent is freely given; where he alleges, that the other party has committed or exercised undue influence, then the court will take into account the inadequacy of the consideration to determine whether or not the party’s consent was freely given as per in the illustration (g) to Section 26 of Contracts Act 1950.

Similarly, Section 27(a) of the Specific Relief Act 1950 provides that “specific performance of a contract cannot be enforced against a party thereto if the consideration to be received by him, is so grossly inadequate, with reference to the state of things existing at the date of the contract, as to be either by itself or coupled with other circumstances, evidence of fraud or undue advantage taken by the plaintiff”.

So long as the consideration has some economic value, such as value in terms of money, then the consideration is said to be valid. It does not matter even if that the value cannot be precisely quantified.

In the Court of Appeal case of De La Bere v Pearson [1908] 1 KB 280 the appellant were publishers of a financial newspaper. They published a column to advice on investments and invited readers to write in for such advice. The respondent wrote and asked for advice and also the name of a good stockbroker so as to be able to invest his money. The appellant gave the name of a stockbroker who was actually an undischarged bankrupt. The money sent to the stockbroker was misappropriated. The respondent sued the newspaper for breach of contract to exercise due care in giving him financial advice. The Court of Appeal held that there was a contract between the parties. The publication of the letter in the newspapers had the tendency to increase the circulation of the newspapers and thus benefited the appellants. Therefore it was decided that there was sufficient consideration.

In the Chappel & Co Ltd v Nestle Co Ltd [1960] AC 87 the plaintiff owned the copyright in a dance tune called “Rockin Shoes”. The defendant bought the records at 4d each and as a publicity stunt sold the records to the public for 1s 6d each plus 3 Nestle chocolate wrappers from Nestle 6d milk chocolate bars. The wrappers received were thrown away. The defendant (Nestle) willing to pay royalties to the plaintiff at 6.25% if the ordinary retail selling price of the above said to be fixed at 1s 6d. The plaintiff refused, contending that the said price was only part of the consideration and that the balance was represented by the three chocolate wrappers. The question was, “does the chocolate wrapper have any economic value?” The House of Lords held that it was unrealistic to hold that the wrappers were not part of the consideration. The offer to sell the records was not to return simply 1s 6d, but also included the wrappers. The whole object of selling the records was to increase the sales of chocolate. Thus the acquiring and delivering of the wrappers was certainly part of the consideration.

As the conclusion with reference to the above arranged cases we are of the understanding that, providing consideration has some value, the Malaysian Courts will not investigate its adequacy. Where consideration is recognized by the Malaysian law as having some value, it is described as "real" or "sufficient" consideration. Further the courts will not investigate contracts to see if the parties have got equal value as long the is a consideration for the base contracts between parties.

Pak Ali wants to give his land to his daughter Kamariah, for her 21st birthday. As Kamariah will not be paying any money to her father. Her father is worried that since there is no consideration for the transfer of his land to Kamariah, the transfer may be void by virtue of section 26 of the Contracts Act 1950. Advise Pak Ali.
Consideration itself is defined in Section 2(d) of the Contracts Act as when, at the desire of the promisor, the promisee or any other person has done or abstained from doing, ordoes or abstains from doing, or promise to do or to abstain from doing, something,such act or abstinence or promise is called a consideration of the promise.

Therefore on the above facts we would like to advise Pak Ali that he may be able to argue that the above transfer of land from him to her daughter named Kamariah would fall under exception (a) to Section 26 of the Contacts Act. Although the said Act does not define “near relation”, yet the courts by decided cases had actually accept members of immediate family will ordinarily constitute as “near relation”.

Even though, English law does not recognize natural love and affection as valid consideration. However, the position under the Contracts Act 1950 is differing by virtue of Section 26(a) of Contracts Acts which said as follows:-

“...An agreement made without consideration is void, unless it is expressed in writing and registered under the law (if any) for the time being in force for the registration of such documents, and is made on account of natural love and affection between parties standing in a near relation to each other...”

As such Illustration (b) to section 26 of Contracts Act provides an example which as follows:-

“...A, for natural love and affection, promises to give his son, B, $1,000. A puts his promise to B in writing and registers it under a law for the time being in force for the registration of such documents. This is a contract...”

Therefore, an agreement made on the ground of natural love and affection would be binding in Malaysia if the requirements of Section 26 (a) of the Contracts Act are present, if it is full filled the condition as follows:-

i) It is expressed in writing;
ii) It is registered (if applicable); and
iii) The parties stand in a near relation to each other.

The requirement that the document be registered appears unnecessary as there is no law in force in Malaysia requiring registration of agreements made on account of natural love and affection.

In the case of Re Tan Soh Sim [1951] MLJ 21 the deceased, Tan Soh Sim, had three sisters. Their mother was firstly married to one Tan Ah Thai and had four children. When Tan Ah Thai died, she married one Khoo Kim Huat and had seven children. The Tan and Khoo children maintained social and friendly relations with one another. Tan Soh Sim married, but having no issue, adopted four children. Her husband, one Chan, married a second wife, Tan Boey Kee.

When Tan Soh Sim was on her death-bed, too ill to make a will, all the Khoo and Tan children signed a document drawn up by a solicitor renouncing all claims to Tan’s estate in favour of the four adopted children and Tan Boey Kee. They were told by Tan Boey Kee that this was the testamentary intentions of Tan Soh Sim. Tan Soh Sim died without having recovered consciousness. The question arose in the distribution of Tan’s estate, whether the instrument signed was valid. It was contended that he instrument was a contract under Section 26(a) of the Contracts (Malay States) Ordinance 1950.

This raised the further question what exactly was meant by “near relations” under section 26 (a) of the Ordinance. The Court of Appeal stated that the words ‘relationship’ and ‘near’ must applied and interpreted in each case according to the mores of the group to which the parties belong and with regard to the circumstances of the family concerned. A person who has been adopted according to Chinese custom therefore is a relation and the answer to the question whether he is a “near” relation within the scope of section 26 of the Contracts Ordinance depends on the position of the other person in regard to whom the question arise. It can hardly be doubted that agreements between an adopted child and his adoptive parents or brothers would be supported on the ground of affection existing between them. But here, according to Chinese custom, the Khoo and Tans children are related to the four adopted children of Tan Soh Sim only in a special and limited way which is not near. Tan Boey Kee’s relationship to them is certainly more remote than that of the children, if indeed any relationship existed. Accordingly, the court held that the instrument did not fulfill section 26(a) of the Contracts Act.

The court further stated that in the phrase “natural love and affection”, full effect must be given to the world “natural”, and that it means not only “reasonably to be expected”, but “reasonably to be expected, having regard to the normal emotional feelings of human beings”. This immediately establishes the connection of these words with the latter phrase “standing in a near relation”. That phrase indicates that the “emotional feelings” required are of a special type, that is to say, they are such feelings as may ordinarily be expected to spring from the fact of the “near relation”. “If either the feelings or the relation are lacking the section does not apply.”

The court further mentioned that it would take a liberal view on the question what type of relation could in law be near, and the answer to that question might be affected by the circumstances of the individual case. For example, if an orphan was brought up by comparatively remote relations, who were nevertheless his nearest, the court, might hold them to be “near” in the special circumstances, though ordinarily they would not be “near”. In the present case, the court found that both these factors, feelings (natural love and affection) and nearness were lacking and held that the document was not a contract.

In contrary, in the case of Pak Ali he is entitle to transfer his land to his daughter Kamariah as the remoteness of the blood relations are too close as a father and daughter which might validate the transfer of the land without any monetary consideration in conjunction with his daughter’s 21st birthday as a gift. Further it is evident that, if an agreement and/or transfer made between Pak Ali and his daughter as per the condition precedent of Section 26 (a) of the Contracts Act been fulfilled at first then the transfer of the property made between both of them deem to be valid in accordance with Malaysian Law.

Beside that, the strong and close proximity of relationship between Pak Ali and Kamariah as father and daughter is adequate to maintain that no consideration to be deposited by Kamariah Pak Ali’s daughter to entitle her to receive the land from Pak Ali as her 21st birthday gift which is in accordance with provision of Malaysian Contracts Act and case law precedents decided therein.

Therefore, as a conclusion Pak Ali without any fear and in view of the case laws decided in favour of his position may transfer his land to his daughter without any consideration from his daughter, Kamariah based on the sole consideration of “natural love and affection” as per stipulated by virtue of Section 26 of Contracts Act 1950.

6 comments:

Anonymous said...

How "love and affection" being consider? Among siblings #brother to sister or brother to brother can? Any stamp duty need to be pay by the acquirer/transferee if the transfer of properties #i.e house/land# is between brother-sister or brother to brother as a gift?

jassy J said...

which was the first marriage? Khoo Kim Huat or Tan Ah Tai?

Anonymous said...

the first marriage is tan ah tai . after tan died, second marriage khoo kim huat.

Anonymous said...

good...=)
but can i know,what is the decision of the case: re tan soh sim?? thx.

Mr Bharath said...

In simplicity, the court held that the document is not a contract it is therefore the appeal is dismissed. To read the case law please look for this citation:-
RE TAN SOH SIM, DECEASED; CHAN LAM KEONG AND 4 ORS v. TAN SAW KEOW AND 3 ORS [1951] 1 LNS 77

Anonymous said...

for the case of phang swee kim v beh i hock that have another defendant or appellant