INTRODUCTION

• The law of contract is the basic law that governs and relates to most aspects of human life. It governs human daily activities in almost all aspects, which may vary from simple contracts entered by individuals in order to get daily supplies to contracts of marriage, etc. Contracts provide the means for individuals and businesses to sell or transfer property, services and other rights. • The common law of contracts developed in England around the thirteenth century. Malaysian contract law evolved from the English common law. In Malaysia, the Contracts Act 1950 governs the law of contract. However, the Contracts Act 1950 “ … is modelled on the Indian Contracts Act 1872”, per Lord Brightman in Ooi Boon Leong & Ors. v. Citibank NA [1984] 1 MLJ 222.

DEFINITION

• Basically a contract is a promise or set of promises which the law will enforce. Section 2(h) of the Contracts Act, 1950 provides that an agreement enforceable by law is a contract.

• This definition has two elements. First there must be agreement.

Offer + Acceptance = Agreement

• Section 2(e) of the Contracts Act provides that “every promise and every set of promises, forming the consideration for each other, is an agreement”. A promise is formed when a proposal is accepted

DEFINITION

• A promise is formed when a proposal is accepted. Therefore, there is an agreement if A’s offers to B to sell his books for RM350 is accepted by B. • Secondly, the agreement must be enforceable by law. This implies that not all agreements are contracts although all contracts must be based on agreement. Any agreements, which are not enforceable by law, are not considered as valid contracts. • Therefore, if A promises B RM5,000 for murdering C, to which B has agreed, the agreement is void and not enforceable by law.

PARTIES TO CONTRACT

• Every contract must involve at least two parties that is the person who proposes the contract, who is known as the offeror, and the parties to whom the proposal is made, who is known as the offeree.

• Hence, if A makes an offer to sell his books for RM350 to B, A is the offeror, being the person who proposes a contract; and B is the offeree, being the person to whom the proposal is made. offeree offeror

Makes offer to B

ELEMENTS OF CONTRACT

Agreement Intention to create Formalities legal relations

Consideration Capacity & Lawful Object & Free Consent

Offer

Acceptance

Certainty of Terms (s. 30)

OFFER

• Offer or proposal is an expression of willingness to do or to abstain from doing anything with a view to obtaining the assent of that other to the act or abstinence (s. 2(a) of the Contracts Act, 1950).

• It can be made either orally or in writing or implied by the conduct of the person making the offer.• An offer is made orally when a person uses verbal communication in making his proposal. When he puts such proposal in written form (including by sending such offer through e-mail) then he is making offer in writing. When a person takes an item from the shop-shelf, brings it to the cashier and gives his money to pay for the items’ price, his conduct indicates that he is making an offer.

Types of Offer

1. Bilateral Offer, ie, the offer that is made to a specific person or group of persons

2. Unilateral Offer Carlill v. Carbolic Smoke Ball, ie, the offer that is made to the world at large

• Generally an offer cannot be made to the world at large. (Hence advertisement is not an offer)

• However, if the offer is conditional, then there is effective offer and this can be accepted when the offeree performs the act in question.

OFFER

Offer must be distinguished from:

1. Invitation to Treat

2. Mere answer to a request for Information

Invitation to Treat

1. Display of Goods in shops(Pharmaceutical Society of GB v. Boots)

(Fisher v. Bell)

2. Advertisements(Partridge v. Crittenden )

(Mazumder v. AG of Sarawak)

c/f Carlill v. Carbolic S.B.)

3. Auctions (Payne v. Cave)

Answer to a Request for Information

Hence in Harvey v. Facey where the appellant sent a

telegram to the respondent asking the price of Bumper

Hall Pen to which the respondent replied “Lowest cash

price for Bumper Hall Pen $900.” It was held that the

respondent was not bound by the subsequent

telegram from the appellant, stating that “we agree to

buy Bumper Hall Pen for $900 asked by you” because

the respondent’s telegram was merely a supply of

information and not an offer.

Cross Offer

There is no contract when A sends a letter to B

offering to sell his handphone for RM500 and B,

not knowing about this letter has sent an e-

mail, asking if A would sell his handphone for

RM500 to him.

Cross-offers are actually two offers, neither

party knowing of the other’s offer when he

makes his own. There is no acceptance hence

there can’t be any contract (Tinn v. Hoffman)

Termination of Offer

1. Revocationmay be done

anytime before the offeree

accepts the offer, provided the revocation is

communicated to the offeree

Revocation may be communicated by a reliable third party Dickinson v.

Dodds

2. Rejectioneither express or

implied, ie by attempting to

modify the terms of offer

Hyde v. Wrench

c/f Stevenson v. McLean, where the

court held that further enquiry of

an offer is not rejection of the

offer

3. Lapse of Time

4. Lost of capacity

5. Failure to meet conditions

Stevenson v. Mclean

The D offered to sell to the P 3,800 tons of iron “…40s nett cash per ton.” The P telegraphed the D “Please wire whether you would accept 40 for delivery over two months, or if not, the longest time you would give.” the D did not reply. The P, on the same day, accepted the offer to sell at 40s cash. The D, in the mean time, had already sold the iron to a third party.

Held: The court found in favour of the P as the original offer was still open.

Stevenson v. Mclean

A request for further and better information, unlike counter offer, does not indicate the original offer is not acceptable. Rather, it is a situation where the offeree is merely postponing his decision until more information is received to clarify certain points.

ACCEPTANCE

• Acceptance is a final and unqualified assent to the terms of the offer, made in the manner specified or indicated by the offeror.

• Section 7 of the Contracts Act, 1950 requires the following conditions to be met:

a. acceptance must be absolute and unqualified.

b. acceptance must be communicated to the offeror.

c. be expressed in some usual and reasonable manner,

unless the proposal prescribes the manner in which it

is to be accepted.

Types of Acceptance

Types of Acceptance: 1. By Conduct 2. Oral Acceptance

3. Acceptance in writing

Silence is not acceptance (Felthouse v. Bindley)

Exceptions:

1. The offeree assumed the duty to do positive act to reject the offer;

2. Unilateral contract, where the offeror has waived the need of communication of acceptance;

3. Previous course of dealing.

Conditions of Acceptance

1. Acceptance must be absolute and unqualified. Any attempt to modify the contents of an offer will operate as implied rejection to the offer; if the parties are still negotiating, the agreement is not yet formed- Hyde v. Wrench

2. When there are conditions stated in the offer as to how the acceptance shall be communicated, these shall be complied with;

3. Acceptance must be communicated to the offeror.

Case: Hyde v. Wrench

• Facts: The defendant on 6 June offered to sell his farm to the plaintiff for £1000 and on 8 June the plaintiff replied that he was willing to buy the farm for £950. The defendant refused to sell the farm for £950. Then on 29 June the plaintiff was willing to buy the farm for £1000.

• Held: No contract was made between them because the plaintiff made a counter-offer

Communication of Acceptance

1. By Instantaneous Modes of Communication

(there must be actual communication. S. 4(1))

( Entores v. Miles Far East Corporation)

2. Postal Acceptance Rule (Ignatius v. Bell)(Communication is presumed by properly

sending the letter. See illustration b to s. 4)

3. Internet Communication(whether Instantaneous or postal?)

CERTAINTY OF TERMS

• It is very important that the terms of an agreement must be certain because section 30 of the Contracts Act provides that any ‘agreements, the meaning of which is not certain, or capable of being made certain, are void’

•An agreement between A and B to sell ‘a hundred tons of oil’ without any indication as to the kind of oil was intended is void for uncertainty. However if there is any indication that specifies the kind of oil, then the agreement is valid.

•A lease term “ as long as the leasee likes” is void as it is vague. ( Karuppan Chetty v. Suah Thian)

CONSIDERATION

• Section 2 (d) defines consideration as the act of the promisee or his abstinence from doing either in past or present or even his promise to act or to abstain from doing something, at the desire of the promisor.

• In Currie v. Misa, the word consideration is defined as ‘some right, interest, profit or benefit accruing to one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by other.’

Types of Consideration

1. Executed: in return for promise, the other party performs an act (Carlill v. Carbollic SM)

2. Executory: in return for a promise, the other party gives promise to do something in future

3. Past: promise given in returned for an act done (this type of consideration is not generally considered as a good consideration Roscorla v. Thomas. Exception --> if done with request, understood to be rewarded and it’s legal)

Past Consideration

• The above is the principle as enunciated by the common law of England. However in Malaysia, the principle has been modified. S. 2(d) of the Contracts Act, 1950 recognises past consideration where there has been a desire expressed first by the promisor (Kepong Prospecting Ltd. & Others v. Schmidt)

• However, an exception to the general doctrine of consideration is provided in s. 26 and s. 26(2) provides: “An agreement made, without consideration is void unless it is a promise to compensate… a person which has already voluntarily done something for the promisor, or something which the promisor was legally compellable to do.”

• Hence, in Malaysia, past consideration is a good consideration

Conditions of Consideration

• Consideration must be lawful: ss. 24 and 25

• Consideration must move from the promisee in order for the promise to promisee to enforce the contract (Tweddle v. Atkinson) - this principle is not applicable in Malaysia since section 2(d) that defines that word ‘consideration’ expressly allows the consideration to be given by the promisee or any other person

• Consideration must be sufficient but need not be adequate (Chapple v. Nestle) - There are situations where consideration may be considered as insufficient. Two of those include the situation where there is a performance of an existing obligation, and where there is part payment of a debt.

Performance of Existing Obligation

• Performance of existing obligation can essentially be divided into two categories:

1. The performance of public duty imposed by law;

2. The performance of an existing contractual obligation owed to the defendant.

• The two categories are not considered as sufficient consideration

Part Payment of Debt

• Generally, English law regards part payment of debt is not a sufficient consideration unless if, at the creditor’s request, it is made in a different form, or at a different place or time: Pinnels’ case

• Similarly, part payment of debt is sufficient when the payment is made by a third party: Hirachand Punamchand v. Temple

• In Malaysia, this principle is governed by section 64 of the Contracts Act that provides: “every promisee may dispense with or remit, wholly or in part, the performance of the promise made to him, or may extend the time for such performance, of may accept instead of it any satisfaction which he thinks fit.”

Necessity for Consideration

• Section 26 provides that an agreement made without consideration is void.

• There are exceptions to this. These exceptions include

1. an agreement in writing and registered (when applicable) made on account of natural love and affection between parties standing in a near relation to each other;

2. a promise to compensate a past voluntary act or to compensate a person who had done something which the promisor was legally compellable to do; or

3. a promise to pay a debt bared by limitation law.

LAWFUL OBJECT

• Section 24 of the Contracts Act provides that the object or an agreement is lawful unless: (a) it is forbidden by a law; (b) it is of such nature that, if permitted, it would defeat any law; (c) it is fraudulent; (d) it involves or implies injury to the person or property of another; or (e) the court regards it as immoral, or opposed to public policy.

• The object of an agreement must be lawful because if any part of the object is unlawful, the agreement is void: s. 25.

INTENTION TO CREATE LEGAL RELATIONS

• Some agreements are not intended to be legally enforceable. There is this presumption in domestic and social arrangements (Balfour v. Balfour)

• The above presumption may be rebutted if contrary conclusion is reached by the court after examining the words used and surrounding circumstances (Merrit v. Merrit)

• In cases involving commercial dealings, the mere fact that an agreement is supported by the consideration raises a presumption that the parties intended the agreement to be legally binding

INTENTION TO CREATE LEGAL RELATIONS

• In order to determine whether there is any intention to create legal relations, it is necessary to ask the following questions and adopt this approach:

1. Is the agreement social/domestic or commercial in nature?

2. * If it is domestic/social arrangements the presumption is; there is no intention to create legal relations.

** However if it is commercial agreement, it is presumed that the parties intended to bind one another legally.

3. Is there any evidence to rebut the above presumption?

4. * If the answer is ‘no’, then the presumption shall stand. ** However if there’s any evidence to show the contrary, the presumption is rebutted and the result shall be contrary to the presumption. (See the case of Jones v. Vernon’s Pools Ltd)

CAPACITY

Natural Persons Corporations

Age SanitySubject to the provision of Companies Act, 1965 & the doctrine of ultra

vires

Must be at least 18 (the Age of majority Act 1971)

Minors’ contract is void (s. 11 of the Contract Act)

• Exception is provided in s. 69 of the Contract Act as applied in Government of Malaysia v. Gurcharan Singh & ors. See s. 4 of the Contracts (Amendment) Act 1976

Ss 11 & 12

Case: Mohori Bibee v. Dharmodas Ghose

• Fact: Privy Council held that an infant could not make any valid contracts. - Exceptions a) Contracts for necessariesb) Contracts of Scholarshipc) Contracts of Insurance

• Contracts for Necessaries: Under section 69 of the Contracts Act 1950 (Malaysia) a person may supply to a mentally disordered person or a minor necessaries suited to their condition in life and that person is entitled to be reimbursed from the property of such incapable persons.

Case: Government of Malaysia v. Gurcharan

Singh

Fact: Government spent RM 11,500 for the defendant for his education purpose when he was a minor student. So, a contract was made

with the defendant. Later the defendant refused to pay back the money.

Held: The court held that the money given for education came under necessaries and therefore

the defendant was bound to pay back.

FREE CONSENT

• Section 13 of the Contracts Act provide that ‘two or more persons are said to consent when they agree upon the same thing in the same sense.’

• Consent is said to be freely given if it is not caused by coercion, undue influence, fraud, misrepresentation, and mistake: s. 14

Coercion, Fraud & Misrepresentation

• Section 15 defines ‘coercion’ as the committing, or threatening to commit any act forbidden by the Penal Code, or the unlawful detaining or threatening to detain, any property, to the prejudice of any person whatever, whit the intention of causing any person to enter into an agreement.( Kesarmal v. Valiappa Chettiar)

• Section 17 defines ‘fraud’ so as to include any suggestion, as to a fact, of that which is not true by one who does not believe it to be true; or the active concealment of a fact by one having knowledge of belief of the fact; or a promise made without any intention of performing it; or any other act fitted to deceive; or any such act or omission as the law specially declares to be fraudulent—committed by a party to a contract…with intent to induce him to enter into the contract.

(Kheng Chwee Lian v. Wong Tak Thong)

Coercion, Fraud & Misrepresentation

• Section 18 of the Contracts Act defines ‘misrepresentation’ so as to include the positive assertion, in a manner not warranted by the information of the person making it, of that which is not true, though he believes it to be true; or any breach of duty which, without an intent to deceive, gives an advantage to the person committing it, or anyone claiming under him, by misleading another to his prejudice, or to the prejudice of anyone claiming under him; or causing, however innocently, a party to an agreement to make a mistake as to the substance of the thing which is the subject of the agreement.

• When consent to an agreement is caused by coercion, fraud, or misrepresentation, the contract is voidable: s. 19(1). Voidable contract has been defined as an agreement enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others: s. 2(i). Therefore the person, whose consent has been impaired either by coercion or fraud or misrepresentation, has the right to choose either to terminate the agreement or otherwise.

Undue Influence

• Section 16 of the Contracts Act provides that a contract is said to be induced by ‘undue influence’ where the relationship subsisting between the parties are such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other. (section 16(1). There is the presumption that a person is in position to dominate the will of another if he holds a real or apparent authority over the other or he stands in a fiduciary relation to the other (section 16(2)(a)); or he makes a contract with a person whose mental capacity is temporarily or permanently affected by reason of age, illness or mental of bodily distress: s. 16(2)(b).

• Cases law suggest that ‘undue influence’ can be categorised into two categories. In Allcard v. Skinner (1887) 36 Ch D 145, the Court of Appeal stated that the doctrine of undue influence may be divided into two classes; namely actual undue influence and presumed undue influence.

Undue Influence

• For cases falling within the class of actual undue influence, the claimant has to prove that the wrongdoer exerted undue influence on the complainant to enter into the transaction.

• However in cases involving parties with relationship where undue influence may be presumed, the claimant does not have to prove that actual undue influence was exerted in relation to the transaction he entered into. He only has to show that there was a relationship of trust and confidence between the complainant and the wrongdoer and it can be presumed from such relationship that the wrongdoer had abused this to procure the complainant to enter into unconscionable contract. Once this is done, the burden will be shifted to the wrongdoer to rebut the presumption of undue influence.

• When a contract has been entered into as a result of undue influence, such contract is voidable at the option of the party whose consent was so caused. The contract may be set aside absolutely or if the complainant has received any benefit thereunder, then it may be set aside upon such terms and conditions as the court may think just: s. 20.

Mistake

• Section 21 of the Contracts Act provides that an agreement is void where both parties are under mistake as to matter of fact.

• However if a contract caused by mistake of fact of only one party, then the contract does not, by itself, become voidable: s. 23.

• A contract does not become voidable on the basis of mistake of law: s. 22.

• If the mistake is of foreign law, which is not in force in Malaysia, this will have the same consequence as mistake of fact, that is to say, the contract is void if there is common mistake, but the contract is valid if the mistake is unilateral.

FORMALITIES

• Section 10(2) provides that the provisions of the Contract Act will not affect any formalities requirement that may be required by other statutes.

• Hence in Sabah & Serawak, transfer of land or any interest therein must be made in writing (as required by the Statute of Frauds.

• Similarly, The Hire-Purchase Act, 1967 requires that a hire-purchase agreement must be made in writing and must be signed (ss. 4A & 4B). Hence unless the formalities are observed, a hire-purchase agreement is not legally enforceable by the owner.

Terms of the Contract

• There are two terms:

- Condition

- Warranty

Condition: A condition is a stipulation essential to the main purpose of the contract and the breach of which entitles the injured party to repudiate the contract.

Warranty: a warranty is a stipulation collateral to the main purpose of the contract, the breach of which

gives rise to a claim for damages but not a right to repudiate the contract.

Case: Associated Metal Smelters Ltd. v. Tham Chew Toh

Fact: The defendant had agreed to sell a metal melting furnace to the plaintiff and the plaintiff

stipulated that the temperature should not be lower than 2, 600 degree F. The defendant supplied the

furnace with lower than 2,600 degree F.Held: The stipulation was a condition.

Exclusion Clauses

• Standard contracts include exclusion clauses.• Exclusion clauses exclude the liabilities of a

contracting party. • Bus, train and air travel companies, banking and

insurance companies usually include exclusion clauses in their contract with the customers.

• Exclusion clauses are normally held valid and operative by the court unless there is no fundamental breach of obligation in the contract.

Case: Port Swettenham Authority v. T.W. Wu and Company

Fact: Ninety-three cases of pharmaceutical goods were unloaded at Port Klang and kept in the custody of the Port Authority. Sixty-four cases of pharmaceutical goods were stolen due to the negligence of the Port Authority. By-law 91(1) of the Port Sweetenham Authority By-laws 1965 excluded the liability of the Port authority for any loss or damage of the goods.

Held: The exclusion clause was invalid as it excluded the fundamental obligation of the port authority.

Discharge of contracts

• 3 ways in which a contract may be discharged:

a) Discharge by performance

b) Discharge by frustration

c) Discharge by breach of contract

Discharge by performance

• If the parties perform their respective promises in accordance with the terms of the agreement, then it is said that the contract has been discharged by performance.

Discharge by frustration

• A contract is frustrated if the contract legally or physically becomes impossible to perform for subsequent change of circumstances.

Discharge by Breach of contract

• If one of the parties in a contract refuses to perform his promise it is said that the contract has been discharged by breach.

• Example: A agrees to sell his apartment to B for RM120,000 but after some days A refuses to sell the apartment. Here A has breached the contract.

Remedies for Breach of Contracts

• There are four remedies for breach of contract. They are as follows:

a) Damages

b) Specific Performance

c) Injunction

d) Quantum Meruit

Damages

• If one of the parties breaks the contract made between them, then the party affected by the breach may claim damages from the party who has breached the contract.

• Case: Associated Metal Smelters Ltd. v. Tham Chew Toh

• Fact: The defendants had agreed to sell the furnace to the plaintiff and had given an undertaking that the melting furnace would have temperature not lower than 2,600 degrees F.

The furnace supplied by the defendants did not in fact reach the required temperature.

Held: The court held that the defendant has breached the condition in the contract. Therefore, the plaintiff could treat the condition as warranty and could claim

damages.

Specific Performance

• In specific performance, the court orders the party which breaks the contract to perform his promise.

• Example: A promised to sell his house to B and B promised to buy it for RM 100,000. However, later A refused to fulfil the contract. Here if B sues A for specific performance the court may order A to fulfil the contract.

Specific performance is a discretionary remedy. The court may refuse to grant specific performance if the injured party may get damages and that damages can

provide an adequate remedy.Case: Yeo Long Seng v. Lucky Park (Pty.) Ltd.,

Held: the court refused to grant specific performance because the damages could provide adequate

remedies.

Injunction

• If one of the parties breaches the contract then the other party may apply for interlocutory injunction to maintain status quo of the subject-matter in a pending suit.

• Example: A has made a contract to sell his land to B. However, after few days A made another contract with C to sell the same land. Here the court can grant interlocutory injunction requiring A not to transfer the ownership of the land to C.

Injunction may be mandatory or prohibitory in nature.

In Neoh Siew Eng case the court granted an injunction requiring the landlord to keep the

water supply open for his tenants.

Quantum Merit

• In the event of a breach of contract, the injured party may have a claim other than that for damages. In particular he may claim payment for what he has done under the contract.

• Case: Planche v. Cloburn (1831)• Fact: P agreed with C to write a volume on ancient

armour for a periodical called The Juvenile Library for 100 pounds.

After P had written part of his work the defendant C abandoned the periodical. The Contract could not, therefore, be completely performed, and P sued.

Held: The court held that the defendant had repudiated the contract and P was entitled to treat it as discharged and recover on a quantum meruit for

the work he had already done.