Schmidt entered into an agreement with the company

Discuss the enforceability of an agreement which lacks consideration. Using legal authorities (relevant statutes and cases) to support your discussion. Answer: A valid contract is an agreement made between two or more parties that creates rights and obligations that are enforced by law. What does the consideration mean? And what does it effect to the agreement? Consideration is something of value exchanged for the promise. It is something given by a promisee in return for something given by the promisor. According section 2(d), Contract Act provides “when at the desire of the promisor, the promise or any other person has done or abstained from doing or to abstain from doing something such act or abstinence or promise is called a consideration of promises” Consideration is another important element of a contract and any agreement made without consideration is a void agreement.

Section 26, contract act 1950 provides that “ an agreement made without consideration is avoid”. The Malaysian case which applied the principle of past consideration is the case of: Kepong Prospecting Ltd. & S.K. Jagatheesan & Ors v. A.E. Schmidt & Marjorie Schmidt [1968] 1 MLJ 170 Schmidt, a consulting engineer, had assisted another in obtaining a prospecting permit for mining iron ore in the State of Johore. He also helped in the formation of the company (Kepong Prospecting Ltd.) and was appointed as the Managing Director. Subsequently, Schmidt entered into an agreement with the company.

In the agreement, the company agreed to pay him one per cent of the value of all ore sold from the mining land. consideration of the services rendered by Schmidt on behalf of the company before its formation, after incorporation and for future services...” Later, an issue arose in this case, whether the services rendered by Schmidt after the incorporation of the company but before the agreement was made, were sufficient to constitute a valid consideration, even though they were past.

The Privy Council ruled that: it was valid consideration and Schmidt was entitled to claim the amount. However, there are exceptions to this general rule. With these exceptions, even though the agreement is made without consideration, the agreement still valid and will be enforceable. The exceptions include the followings: + agreement made on account of natural love and affection. + agreement to compensate a past voluntary act. + agreement to pay a statue- barred debt. 1.

Agreement made on account of natural love and affection. This exception is provides in Section 26(a) , contract Act 1950. The rule provides that any agreement which is made without consideration is still valid if “ it is expressed in writing and registered under the law ( if any) for the time being in force or 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.” This means the agreement that is not supported by any consideration is valid if it fulfils the following conditions: +The agreement is made in writing. +The agreement is registered under the existing law which requires its registration ;and +The agreement is made on account of natural love and affection between the parties standing in near relation to each other. Page 2 of 10


Ex: Mr.A has an estate about 300 sqm. He wants to give 2 his daughter. He talk to their in the family meeting with their husbands in law. This is not a contract until Mr.A puts his promise to his daughters in writing and registers it under a law for the time being in force for the registration of such documents. Until this time, it is become a contract. 2. Agreement to compensate a past voluntary act. This is the exception provided in Section 26(b), contract Act 1950. The rule provides that an agreement without consideration is valid if “ it is a promise to compensate, wholly or in part, a person who has already voluntarily done something for the promisor, or something which the promisor was legally compellable to do”. Ex: Ms.Ann is the neighbor of Mr. Clive and Ms.Ann support Mr.Clive to take care his son during he has having a meeting. Mr.Clive promise to pay Ms.Ann for this work.This is a contract and Ms.Ann can enforce Mr.Clive’s promise. 3. Agreement to pay a statue- barred debt.

This is another exception provide in section 26(c), Contract Act 1950. The rule provides that an agreement without consideration is valid if “ it is a promise, made in writing and signed by the person to be charged therewith, or by his agent generally or specially authorized in that behalf, to pay wholly or in part a debt of which the creditor might have enforced payment but for the law for the limitation of suits. Means the debtor makes a fresh promise to pay the statute-barred debt and the promise is made in writing and signed by the person to be charged or his authorized agent. Ex:The Imperial group owes GTDV Company a debt is 130,000 USD for scope of work of so many contract. But the debt is barred by limitation. GTDV made summarize of debt and The Imperial representative signed a written promise to pay GTDV 100,000 USD. This promise is fresh and valid. This is a contract.

Question 2 Analyze characteristics of a partnership and discuss the circumstances in which a partner is liable for the other partner’s acts or omissions to act. Compare and contrast the relationship among partners (in a partnership) and relationship between a principal and its agent. Answer: Part A: Characteristics and circumstance: Base on Section 3(1) of the Partnership Act 1961 defines partnership as “the relation which subsists between persons carrying on a business in common with a view of profit”. But partnership does not include clubs, societies, mutual benefit organizations and building societies. - The relation between parties: in order to form a partnership, there must be a minimum of two persons.

Therefore, there is usually an agreement to be made by the parties which lay down certain terms and conditions relating to the partnership business, and duties and responsibilities of partners involved. This agreement will be binding upon every partner and enforceable in law. - The agreement is for business purpose: Section 2 of the Partnership Act 1961 defines ‘business’ as includes every trade, occupation or profession. Thus, the person must have an agreement to have a business in common. - The business is for purpose of gaining profit: this means the partners agree to carry on business for profit.

Thus, if a person is excluded from sharing any profit in a partnership, then he is not a partner. Similarly, the relationship between person to do voluntary or welfare works is not a partnership. With Characteristics are: Minimum of two persons; There is an agreement for business purpose among partners; Partnership agreement is binding upon every partner and enforceable in law; And the business is for purpose if gaining profit.

Section 3(2) of the Partnership Act 1961 therefore excludes the following list from the definition of partnership: - The relation between members of a company or association which is registered as a company under the Companies Act 1965 or a co-operative society under any written law relating to co-operative societies; or - The relation between members of a company or association which is formed or incorporated by or in pursuance of any other law having effect in Malaysia or letters patent, Royal Charter or Act of Parliament of the UK Where a partnership agreement does not exist, Section 4 of the Partnership Act 1961 provides a number of tests in determining the existence of a partnership: - Section 4(a): Joint tenancy, tenancy in common, joint property, or part ownership does not of itself form a partnership. Partnership does not exist between tenants whether they share or not the profit gained through the use of the land. In the case Davis v. Davis (1894) 70 LT 265, it does not of itself form a partnership between the owners. - Section 4(b):

The sharing of gross returns does not of itself establish a partnership, whether the parties who share the returns have or do not have a joint right or interest in the property from which or from the use of which the returns are derived. Cox v. Coulson (1916) 114 LT 599 apply for this section. - Section 4(c) Sharing of business profit by a person is prima facie evidence of partnership. However, the presumption may be rebutted if the sharing is for some other reasons: i).Payment of a debt out of profits of the business to a creditor by instalments does not make the creditor a partner in the business. ii).Remuneration to a servant or an agent of the business from the profit of their employer’s business. iii).Payment of an annuity or a portion of the profits to a widow or child of a deceased partner in the business. iv).

Payment of interest which varies with the profits on a loan advanced for use in the business under a written contract. v).Payment to a seller of the goodwill of a business in the form of a share of the profits of the business. About the liability of partners, under the Partnership Act 1961, there are several types of liabilities such as: contractual liability, tortious liability, liability for improper use of trust property and for holding out, criminal liability and liability of incoming and retiring partners. About the Contractual Liability, Section 11 of the Partnership Act 1961, “every partner in a firm is liable jointly with the other partners for all debts and obligations of the firm incurred while he is a partner; and after his death his estate is also severally, liable in a due course of Administrator for such debts and obligations, so far as they remain unsatisfied but subject to the prior payment of his separate debts.”

About the Tortious Liability, Section 12 of the Partnership Act 1961 provides for liability of firm for wrongs or tortious liability of partners: “Where, by any wrongful act or omission of any partner acting in the ordinary course of the business of the firm or with the authority of his co-partner, loss or injury is caused to any person not being a partner in the firm, or any penalty is incurred, the firm is liable therefore to the same extent as the partner so acting or omitting to act.”. The case Hamlyn v. Houston & Co [1903] 2 KB 82 illustrated this liability. About The Liability for improper use of trust property is provided under Section 15 of the Partnership Act 1961. It provides that: “If a partner, being a trustee, improperly employs trust property in the business or on the account of the partnership, no other partner is liable for the trust property to the persons beneficially interested therein: The case Ex parte Heaton (1819) Buck 386 illustrated this liability.

About The Liability for holding out is that the person who is not a partner of a firm may become liable for the firms debt if he represents himself or allow himself to be represented as a partner in the firm. He will therefore be liable like a partner to the persons who give credit to the firm. About The liability for criminal offences is that any partner who commits criminal offences shall be personally liable. Other partners shall not be liable unless there is evidence to prove their participation in the commission of the crime. The case Chung Shin Kian & Anor v. Pendakwaraya illustrated this. About The liability of incoming and outgoing (retiring) partners is that a person who is admitted as a partner into a firm is not liable for liabilities incurred before he became a partner.

According to Section 19(1) of the Partnership Act 1961, “a person who is liable to the creditors of the firm for anything done before he became a partner.” The case Duke v. Brewer (1848) 2 Car. & Ker. 828 illustrated this liability. Part B: the compare and contrast the relationship between partners ; principal and it’s agent 1. Partners relationships: Who can be a Partners? Any person who has legal capacity.

A minor can become a partner What is the purpose/duties of this relationship? Equal share of capital and profits of the business, and must contribute equally to losses. Partner who made any payment and incurred personal liabilities in the course of the firm’s business is entitled to be indemnified by the firm. Partner who made any advance for the purpose pf the firm business, beyond the capital amount he subscribed is entitled to 8% interest per annum from the date of the payment of the advance. No partner is entitled to interest on capital before the ascertainment of profits Every partner may participate in the management of the firm. Page 7 of 10


No partner is entitled to remuneration for acting in the partnership business. No partner may introduce another partner without the consent of other existing partners. The majority partner may decide any differences as to ordinary matters connected with the firm’s business but the changes in the nature of the firm’s business must be made with consent of all the existing partners. The partnership books are to be kept at the place of partnership business, or at the principal place if there is more than one place of business. What is the obligations of Partners? Every partner must act honestly because the relationship between partners is based on the principle of uberrimae fidei (utmost good faith). Every partner is obliged to render true accounts and full information on all things affecting the partnership.

Every partner who uses the partnership property, name or business connection, or involve in any transaction concerning the partnership, without the consent of other partners, must account to the firm for any secret or benefit derived by him The obligation of a partner not to compete with the firm in business of the same nature without consent of the other partners. Thus, if a partner opens a competing business without the consent of other partners, he must account for and render all profits made by him to the firm.. 2. Principal-Agent Relationship: Who can be a Principal? Any person who has the legal to perform an act may be a principal and empower an agent to carry out that act. Persons, corporations, partnerships, not-for-profit organizations, and government agencies may all be principals and appoint agents. Who can be an Agent? Any individual capable of comprehending the act to be undertaken is qualified to serve as an agent.

What is the purpose of this relationship (called “Agency”)? A contract to be made by an agent on behalf of a principal is considered to be the contract of the principal and not that of the agent. It allows the principal to authorize somebody to carry out her duties, either for a specific purpose (i.e., purchasing a house) or generally (i.e., to conduct many transactions). The agency relationship is usually entered into by informal agreement, but also can occur by formal agreement (in certain cases, the agency relationship must be specified in writing). The acts must be legal . What is the basis of the Agency relationship? An agency is the creation of a contract entered into by mutual consent between a principal and an agent. By agency, a principal grants authority to an agent to act on behalf of and under the control of the principal.

The relation between a principal and an agent is fiduciary and an agent’s actions bind the principal. The law of agency thus governs the legal relationship in which an agent deals with a third party for his/her principal.An agent is liable to a principal when he/she acts without actual authority, but with apparent authority. An agent is liable to indemnify a principal for loss or damage resulting from his/her act. What is the obligations ?

He terms of the agreement between the parties; and Extent of the authority conferred and the obligations of loyalty to the interests of the principal.

Act on behalf of and be subject to the control of the principal; Act within the scope of authority or power delegated by the principal; Discharge his/her duties with appropriate care and diligence; and Avoid conflict between his/her personal interests Not to acquire any material benefit from a third party in connection with transactions conducted or through the use of his/her positions as an agent;

To act with the care, competence, and diligence normally exercised by agents in similar circumstances;

  To take action only within the scope of the his/her actual authority; To comply with all lawful instructions received from the principal and persons designated by the principal concerning agent’s actions on behalf of the principal;

 To act reasonably and to refrain from conduct that is likely to damage the principal’s enterprise;

A principal has a duty to act in accordance with the express and implied terms of any contract between a principal and an agent. A principal owes certain contractual duties to his/her agent. Correlative with the duties of an agent to serve a principal loyally and obediently, a principal’s primary duties to his/her agent include:  

To compensate the agent as agreed; and To indemnify and protect the agent against claims, liabilities, and expenses incurred in discharging the duties assigned by the principal.