CONTRACT LAW

INTRODUCTION

A contract may be defined simply as ‘a legally binding agreement between two parties’.

Contracts are essential to commercial life.

Generally in Malaysia, the law of contracts is regulated by the Contracts Act 1950.

If a particular subject concerning the law of contract is not dealt with sufficiently or not at all by the Contracts Act or Malaysian decided cases, then the English law may be applied.

 

ESSENTIAL ELEMENTS

The essential elements or pre-requisites of a valid contract are:

i) offer

ii) acceptance

iii) genuine intention to create legal relations

iv) consideration

v) capacity

OFFER & ACCEPTANCE

an agreement is the presence of offer and acceptance. Section 2(a) of the Contracts Act states: ‘when one person

signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal’.

‘proposal’ has the same meaning as ‘offer’. Note that only ‘the person to whom the proposal is made’ can accept the proposal. Other persons cannot purport to accept the proposal

CONT… A ‘promisor’ is also known as a ‘proposer’ or an ‘offeror’. A

‘promisee’ is also referred to as an ‘acceptor’ or ‘offeree’.

Generally, an offer (or acceptance) will be either oral or written.

However, in a number of cases, an offer (or acceptance) may be implied from the conduct (behaviour) of the parties or from the circumstances concerned.

Section 9 states that:‘So far as the proposal or acceptance of any promise is made in words, the promise is said to be express. So far as the proposal or acceptance is made otherwise than in words, the promise is said to be implied.’

an offer or acceptance can be express or implied.

CERTAIN FEATURES OF AN OFFER

An offer may be made to an individual or to a large number of people :

Carlill v Carbolic Smoke Ball Co. (1892) Carbolic smoke Ball Co. Ltd., in its newspaper advertisement, promised

to give £100 to anyone who purchased their smoke ball remedy for influenza, and caught illness within 14 days. To show good faith, the company deposited £1000 with a bank to meet any claims. Mr. Carlill bought the remedy, caught influenza and claimed £100. The court held that the advertisement was an offer to the world at large, and Mrs. Carlill had accepted the offer by purchasing and taking the remedy.

An offer must be a definite promise by which the offeror intends to be legally bound by the terms stated.

In Carlill v Carbolic Smoke Ball Co., the fact that £1000 had been deposited with a bank showed that it was a firm offer and the company intended to be legally bound.

DIFFERENCES BETWEEN AN OFFER AND AN INVITATION TO TREAT

It is important to know which party makes the offer and which accepts.

In the case of goods on display in a shop or supermarket, the law has decided that it is the customer who makes the offer by taking the goods and placing them on the shopkeeper’s or cashier’s counter, and the shopkeeper or cashier accepts the offer by accepting the customer’s money.

The price displayed on the goods is not the offer, it is only an invitation for the customer to make an offer; it is only an invitation to treat.

The law gives the shopkeeper or cashier the right to accept or reject a customer’s offer.

DIFFERENCES BETWEEN AN OFFER AND AN INVITATION TO TREAT

Pharmaceutical Society of Great Britain v Boots Cash chemist Ltd. [1953]

The law requires that the sale of certain pharmaceuticals must be carried out under the supervision of a qualified pharmacist. Boots operated a store where the drugs were displayed on a self-service basis and the customers paid at a cash desk for the goods they has selected. A pharmacist was present at the cash desk but not at the shelves where the goods were displayed with a price tag. The Pharmaceutical society claimed that the law was contravened. The court held that the display of goods in the store was not an offer but an invitation to treat. It was the customer who made the offer and Boots could either accept or reject this offer at the cash desk (in the presence of the qualified pharmacist). The act of constituting the acceptance is the ringing up of the price on the till by the cashier and at that moment a binding contract of sale is made.

RELATED CASES

Partridge v Crittenden

Harvela Investments v Royal Trust Co of Canada (1985)

Blackpool Aero Club v Blackpool Borough Council (1990)

Harvey v Facey (1893)

Fisher v Bell (1959)

ACCEPTANCE Section 2(b) of the Contracts Act states: ‘when the person to whom the proposal is made signifies his

assent thereto, the proposal is said to be accepted; a proposal, when accepted, becomes a promise.’

It is the unconditional consent to the terms of the offer. In other words, it is a final and unqualified acceptance of the terms of an offer.

It is important to note that if an ‘acceptance contains any reservations, any variations to the terms of the offer, etc, then the ‘acceptance’ will be conditional. Since it will not be an unconditional consent to the terms of the offer, it will not be an acceptance.

CONT…. Conditional accept condisider as a new offer or

COUNTER_OFFER.

The general rule is that an acceptance must be communicated to the offeror.

Entores v Miles Far East Corp [1955] 2 All ER 493- where Lord Denning stated that acceptance must be communicated by the offeree or someone authorised by the offeree. If someone accepts on behalf of the offeree, without authorisation, this will not be a valid acceptance.

CONT….• The general rule is that an acceptance must be communicated to

the offeror.

• Until and unless the acceptance is so communicated, no contract comes into existence. (See the case of Entores v Miles Far East Corp [1955] 2 All ER 493- where Lord Denning stated that acceptance must be communicated by the offeree or someone authorised by the offeree.

• If someone accepts on behalf of the offeree, without authorisation, this will not be a valid acceptance.

• Since the acceptance must be communicated to the offeror, merely remaining silent cannot amount to acceptance, unless it is absolute clear acceptance was intended. (See the case of Powell v Lee-where the court stated that the offeror cannot impose a contract on the offeree against his wishes by deeming that his silence should amount to an acceptance)

THE POSTAL RULE The postal rules ONLY apply when the ‘acceptance’ is sent by post. Acceptance here takes effect when the letter is posted. In other words,

where acceptance by post has been requested or where it is an appropriate and reasonable means of communication between the parties, then acceptance is complete as soon as the letter is posted, even if the letter is delayed, destroyed or lost in the post so that it never reaches the offeror.

See the case of Adams v Lindsell- where Lindsell wrote to Adams on Tuesday 2 Sept 1817. Lindsell misdirected the letter and as a result it was not received by Adams till 7.00pm on Friday 5th Sept. On that evening Adams posted a letter accepting Lindsell’s offer. The letter of acceptance was not received by Lindsell till Tuesday 9th Sept. On Monday 8th Sept, Lindsell not having received the answer on Sunday 7th Sept, as they expected, sold the wools to another person. The issue before the court was as to when acceptance took effect. The court held that acceptance took effect when the letter was posted i.e. 5th Sept.

REVOCATION OF OFFER/ACCEPTANCE

Section 5 provides that:A proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer, but not afterwards.

an offer may be withdrawn at any time before acceptance is complete, under section 6(a).

 In general, an offer terminates:

i) When rejected by the offeree.

ii) When the offeree made a counter-offer.

iii) On the death of either the offeror or the offeree before acceptance.

iv) By non-acceptance within the time stipulated for acceptance, or within a reasonable time.

V) When revoked before acceptance. 

GENUINE INTENTION TO CREATE LEGAL RELATIONS

Although every contract is an agreement, there are many agreements which are not contracts.

For example, if A and B agree to meet at 8 o’clock to have dinner together, the agreement is made without intending that there will be legal consequences if either A or B in the end, does not turn up. It is merely a social agreement, and not a contract.

In order that an agreement becomes a contract, there must be a genuine intention to create legal relations which has legal implications. For the parties to be bound, they must have finished reaching an agreement, so that it is possible to infer an intention on the part of both of them to be bound immediately: Kwong Kum Sun(s) Pte Ltd v Lian Soon Siew & Ors. [1984].

RELATED CASES

In Rose and Frank Co. v Crompton (1925), a written agreement between the parties stipulated that it was not a formal or legal document and should not be subject to the legal jurisdiction of the court. The House of Lords held that the agreement had no legal effect.

Parties usually engage in a process of negotiation before they settle into an agreement. During this process of negotiation, they do not intend to be legally bound yet. Likewise, when the parties include the words ‘subject to contract’, it usually means that whatever agreement that seems to have been reached still needs further deliberation, which shows that the parties are not ready to be legally bound. In all these circumstances, there is no contract yet.

In Balfour v Balfour (1919), the husband went to work in Ceylon and agreed to pay his wife £30 per month. E did not pay the money and the wife sued. It was held that there was no contract because the parties did not intend to create a legal relationship.

CONSIDERATION Section 26 provides that an agreement without consideration is

void. . The word ‘consideration’ is defined in section 2(d). It means

merely the price in a bargain. The price need not be money, but must have a monetary value.

Examples: If A enters a shop and buys a packet of groundnuts, the ‘consideration’ which A provide is the money, whereas the ‘consideration’ moving from the shopkeeper is the packet of groundnuts. They have each provided ‘consideration’ for the business transaction.

Section 25 states that if the consideration or any part of it is unlawful, the agreement is void.

CONSIDERATION NEED NOT BE ADEQUATE

In order for consideration to be valid, it must be measurable in terms of some economic gain or loss. In legal language, the consideration must be sufficient, but need not be adequate.

In Phang Swee Kim v Beh I Hock [1964], the Federal court held that: an agreement to which the consent of the promisor is freely given is not void merely because the consideration is inadequate.

So, if A told B that he would sell his new Mercedes to her for RM5, and B agreed, there is a binding contract between A and B for the sale of A’s new Mercedes. The RM is sufficient consideration, although not adequate.

However, if A said to B that she could have his new Mercedes in return for her praying for him, wishing him good health, there would not be sufficient consideration if B actually carried out the praying and wishing.

CAPACITY

Generally, any person may make a contract, but the law sometimes protects certain classes of persons such as minors and mental patients who, because of an inherent weakness or disability, cannot be expected to manage their own affairs adequately.

 Section 11 states that: Every person is competent to contract who is of the age of

majority according to the law to which he is subject, and who is of sound mind, and is not disqualified from contracting by any law to which he is subject.

 MINORS- UNSOUND MINDS – DISQUALIFIED BY LAW

RELATED CASES

Nash v Inman (1908) : A tailor supplied high-class clothing to an undergraduate at

Cambridge University. The clothes include 11 fancy waistcoats. The undergraduate’s father was a wealthy architect. The clothes could be said to be suitable to the undergraduate’s ‘station in life’. However, his father proved that the infant was already amply supplied with such clothes when the tailor supplied the clothes concerned. The court held that the goods supplied were not necessaries.

 In Government of Malaysia v Gurcharan Singh & Ors [1971], it was held that education was included under necessaries. ..Under the Contracts [Amendment] Act 1976, for scholarships or loans given by the government or a statutory body or an educational institution, the scholarship agreement entered into by an infant is valid.

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