The Skeletal Structure of a Contracts

Assignment Question

The principles of consideration are somewhat confusing and complicated. Should this legal principle be removed as one of the elements in the formation of a valid contract and the courts to solely rely on the principles of intention to create legal relations?

Discuss. Your answer should be supported by sound legal reasoning and examples.

The skeletal structure of a contract’s formation includes offer, acceptance, certainty and capacity while consideration and intention to create legal relation are its body and substance (Brown and Chandler, 2003). Any legal system may adopt one of a variety options as a requirement for the enforceability of contracts. Pollock J stated consideration in the case of Dunlop Pneumatic Tyre Company Ltd v Selfridge (1915) is “an act or forbearance of one party, or the promise thereof, is the price for which the promise is brought, and the promise thus given for value is enforceable”. Patterson J held that “Consideration means something which is of some value in the eye of the law, moving from the plaintiff; it may be some detriment to the plaintiff or some benefit to the defendant…” in the case of Thomas v Thomas (1842). Consideration can be defined by Lush J in the celebrated case of Currie v Misa (1875) as “some right, interest, profit or benefit accruing to the one party or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other”. In other words, consideration has several meanings; to simplify the meaning is a benefit to one party or a detriment to the other. Other definitions in the perspective of promisor and promise, both parties will be bound as the promisor who makes promises and the promise who receipt the promise. In an action, the claimant is the promise and the defendant is the promisor. For a contract to be formed, transactions must be supported by consideration. The main purpose of consideration is to protect the right of the buyer and this will ensure the buyer is not allowed to buy from someone else but to buy from the original seller.

Past consideration is acceptable in Malaysia whereas in common law past consideration is no consideration. If one party voluntarily performs an act, and the other party then makes a promise, the consideration for the promise is said to be in the past. Generally, this requires reciprocity of consideration in a simultaneous exchange of promises where at least within an offer and acceptance in a reasonable period. In the case of Casey’s Patents (1892), where A and B owned a patent and C was the manager who had worked on it for two years. A and B then promised C a one-third share in the invention for his help in developing it. The patents were transferred to C but A and B then claimed their return. It was held that C could rely on the agreement. Even though C’s consideration was in the past, it had been done in a business situation, at the req uest of A and B and it was understood by both sides that C would be paid and the subsequent promise to pay merely fixed the amount. In the case of Pao On v Lau Yiu Long (1980) Lord Scarman stated “An act done before the giving of a promise to make a payment or to confer some other benefit can sometimes be consideration for the promise. The act must have been done at the promisors’ request: the parties must have understood that the act was to be remunerated either by a payment or the conferment of some other benefit: and payment, or the conferment of a benefit, must have been legally enforceable had it been promised in advance.” In the Malaysia position, past consideration can be good consideration where this was based on the interpretation of section 2(d) of the Contract Act 1950 and with section 26 (b). It provides that if the act was done at the desire of the promisor, then such an act would comprise consideration. The phrase “has done or abstained from doing” implied that even if the act was done prior to the promise, such an act would comprise consideration as long as it was done at the desire of the promisor. For example, if A finds B’s purse and gives it to him. B promises to give A RM50. This is a contract. In the case of Kepong Prospecting Ltd & Ors v Schmidt (1968) where the court held that services prior to the company’s formation could not amount to consideration as they could be rendered to a non-existent company, nor could the company bind itself to pay for services claimed to have been rendered before its incorporation. However because of the inclusion of Clause 1 in the 1955 contract which read, “The company shall in consideration of the services rendered by the consulting engineer for and on behalf of the company prior to its formation after incorporation and for future services pay to the consulting engineer one percent…”

Brown and Chandler (2003) state that many of the difficulties of consideration derived from the fact that is has been elevated as a ‘doctrine’ with concomitant mystification and rigidity. Consideration has been following the traditional doctrine and yet it caused many confusions and inflexibilities such as language which are obscure. For instance, ‘sufficiency’ and ‘adequacy’ both contains the meaning of enough but these words have different meaning in the eyes of law. Majid and Arjunan (2005) state that consideration must be sufficient (acceptable) in law, but it need not be adequate. Consideration must have some ‘economic’ value, though, as the Nestle case shown below, economic value may be negligible. The law does not concern itself with relative values, unless a party alleges duress, fraud or some such vitiating elements might lie at the root of such an arrangement. For example, if A agrees to sell a house worth RM 2 million for RM 1000. A’s consent to the agreement is perfectly valid contract. The agreement is a contract notwithstanding the inadequacy of the consideration. In the case of Chappel & Co Ltd v Nestle Co Ltd (1959) the House of Lords held that the wrappers did form part of the consideration. Chappel & Co Ltd had value to the company because the requirement that they be sent in promoted Nestles’ products. The value was not in the wrapper itself, but was to be found in the increased sales and public relations that were generated. In the other case of Phang Swee Kim v Beh I Hock (1964), there was adequate consideration where there were no evidence of fraud and duress because the respondent agreed to transfer the land to the appellant on payment of $500 when the land was sub-divided. The appellant was entitled to the declaration sought by her. Therefore, according to Barakbah C.J. (Malaya), “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 the consideration may be taken into account by the court in determining the question whether the consent of the promisor was freely given”.

Consideration must move from the promise, at common law, the person who wishes to enforce the contract must show that they provided consideration. In the case of Price v Easton (1833) where Easton made a contract with X that in return for X doing work for him, Easton would pay Price £19. X did the work but Easton did not pay, so Price sued. It was held that Price’s claim must fail, as he had not provided consideration. Whereas in the Malaysian law of contract it is possible for consideration to move from a third party as seen in section 2(d) of the Contracts Act 1950. In the case of Venkata Chinnaya v Verikatara Ma’ya (1881), the court held she was liable to pay the annuity. There was good consideration for the promise even though it did not move from her brothers. Under the Contract Act 1950 a party to an agreement can enforce the promise even if he himself has given no consideration as long as somebody has done so. The relevant part of Section 2(d) Contracts Act 1950 states, “…when…the promise or any other person has done…something, such act…is called a consideration for the promise…”

In Malaysia, natural love and affection is considered as a valid consideration accordance to Section 26(a) of the Contract Act 1950 states “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 near relation to each other”. In the other hand, English law does not recognise natural love and affection as a valid consideration. This is because natural love and affection cannot be quantify or defined by the courts. For example, one person’s measurement of natural love and affection and the other person’s measurement of natural love and affection would not be the same as human beings have different measurement of love and affection. Moreover, near relation is difficult to define as it has different meaning of closeness between human beings. Therefore, it is hard to pass judgment on cases which involve natural love and affection.

When a payment of a lesser sum paid on the day or before the due date for the satisfaction of the whole amount is not considered as full settlement of the debt. When the payment of the whole amount paid, then it will a good satisfaction. This is known as ‘the rule in Pinnel’s Case (1602) which derived that part-payment of a debt is not good consideration for a promise to forgo the balance. For example, if A owes B RM5000 and B accepts RM3500 in full settlement on the due date, there is nothing to prevent B from claiming the balance at a later date, since there is no consideration proceeding from A to enforce the promise of B to accept part-payment. This is because A is already bound to pay the full amount to B, an agreement based on the same principle as Stilk v Myrick (1809). It also protects a creditor from the economic duress of his debtor. In the Malaysian’s perspective, Section 64 of the Contracts Act 1950 states that “Every promise may dispense with or remit, wholly or in part, the performance of the promise made to him….” This clearly explains that part payment of debts will take the effect of dismissing the entire debt. For example, A owes B RM500, and B accepts RM300 as full settlement. Later on, B cannot sue for the remaining balance from A as stated in Section 64. In Kerpa Singh v Bariam Singh (1966) where the debtor took loan from the creditor. The debtor made an arrangement to settle lump sum payment by paying a lesser amount. After the creditor cashed the cheque he demanded for the balance. Federal court held that creditor cannot demand for the balance. Part payment as full settlement will be an unfair situation for creditors to collect back the remaining sum loaned where creditors will face unfair financial loses.

Promissory estoppel is a legal doctrine which allows a party to recover on a promise even though that promise was made without consideration. Essentially it prevents, or estops a person from arguing that his or her promise should not be upheld. It also requires that reliance on the promise was reasonable, and that the person trying to enforce the promise actually relied on the promise to his or her detriment. For example in Stilk v Myrick (1809), where A promises B that he would not put into effect on his legal rights and B acted and relied on the promise without giving any consideration, justice would not allow A to go back on his promise to B. Promissory estoppel has four requirements where there must have an existing contract at the time the promise was made, an obvious and unambiguous promise, reliance of the promise and it must be unfair for the promisor to enforce strict legal rights either because the promisee cannot be restored to their original position, or because the promisor acted in such a way that it would be unfair for them to take advantage of this. In the case of D & C Builders v Rees (1966), estoppels cannot be used to take advantage of the promissory estoppels. In this case a wife who was to pay builders for work completed was aware that the builders had financial problems. She tried to exploit this by offering part payment in return for forgoing the remainder of the debt. There for estoppels work as a defense where it is often said to be a “shield not a sword” as said in Combe v Combe (1951).

There is no specific definition of intention to create legal relations in the Contract Act 1950, it helps judges to look at the ‘outward appearances’ or in a totality aspect to decide as whether the parties intended to conclude a valid contract (Majid and Arjunan, 2005). It is difficult for the courts to ascertain intention where parties have made the agreement ‘subject to contract’; in such cases it does not conclude that whether the contract is valid. Therefore, the courts need to decide whether the contract is valid or not is based on the facts and evidence of a particular case. In Attorney-General & Anor v Humphrey’s Estate (Queen’s Gardens) Ltd (1987), considering that the negotiations were set out in a document which was ‘subject to contract’ either party could withdraw, and there was no binding contract. And in the case of Kwong Kum Sun (S) Pte Ltd v Lian Soon Siew & Ors (1984) where the acceptance indicated on the offeror’s letter of offer was held to be sufficient for an inference to be drawn that both parties have an agreement and to be bound immediately. Therefore, to make things clear for the court to decide can be based on two presumptions which are whether the transaction is categorised as social agreement or commercial agreement.

The first category is social or domestic agreement where it is presumed that the parties do not intend to create legal relations. Therefore, agreements between friends and family members are presumed to have no legal consequences. In Balfour v Balfour (1919), where the husband promised to pay the plaintiff £30 per month for maintenance when they are still in England, but he failed to keep up the payments when the marriage broke up. The wife sued. It was held that the wife could not succeed because she had provided no consideration for the promise to pay £30 and the agreements between husbands and wives are not contracts because the parties do not have the intention to create legal relation at that time. On the other hand, if an agreement were made in black and white. Then the courts will hold that there were a binding contract and intention was present. In the case of Merit v Merit (1970) where Mrs. Merritt wrote an agreement on a piece and signed by her ex-husband. Stating that, Mrs. Merritt will pay off the mortgage and Mr. Merritt will transfer the house title to her possession until she had paid up all. Mr. Merritt claimed there was no intention and there was no contract. The court held that Mrs. Merritt was entitled to the transfer and the agreement was contractually binding. In the case of Jones v Padavatton (1967), where the agreement was made between mother and daughter which comprised that the daughter would come to England to study to be a Barrister at the mothers request in return for an allowance, and one that the mother would buy a property that the daughter could rent instead of receiving the allowance. They later argued and the mother sought to sell the property. The court held that neither agreement was enforceable since they were simply family arrangements.

The second category is business or commercial agreement where the parties do intend to create legal relations, unless there is very clear contrary evidence, the presumption will not be rebutted. Edwards v Skyways (1964) an ex-employee was promised an “ex gratia payment” This “ex gratia” did not negate agreement as the employer had admitted that the employee had given consideration of some sort. The fact that this was in essence of a commercial agreement would prevent the employer going back on what they considered to be a bad deal.

In conclusion, to abolish consideration would not be necessary as it has it pros and cons. It would be better that consideration could be amended and making the terms in consideration to be much clearer and easy to be understood by others. Consideration should not be based on natural love and affection as it is difficult to quantify, part payment as full settlement of debts will be unfair to creditors in obtaining their debts and consideration to move from a third party. These examples are difficult to judge by courts and these will cause the innocents to be guilty and the guilty to be not guilty. That is the reason where consideration should be amended as soon as possible in turn to obtain justice and fairness in any legal system which is facing the same problems. Therefore, it is to be hoped that intention to create legal relation becomes the dominant principle in the formation of contract with the real meaning of consideration preserved in a re-amended perspective where it is clear, practical and not confusing to all as to cultivate a peaceful and harmonious Malaysia.

References

Brown, I. and Chandler, A. (2003) Q & A Questions & Answers Law of contract. 4th ed. Great Britain: Oxford University Press

Majid, A. and Arjunan, K. (2005) Business Law in Malaysia. 5th ed. Shah Alam: Oxford Fajar Sdn. Bhd.

https://www.lawteacher.net/contract-law/cases/consideration-cases.php

http://tenconsultancy.co.uk/law/index.php?option=com_content&view=article&id=91:part-payment-of-debts-position-at-common-law&catid=61:part-payment-of-debts&Itemid=53