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LAW OF CONTRACT

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Table of contents1. What is contract?2. Elements of contracts:

i) Offer/Proposalii) Acceptanceiii) Consideration

iv) Intention to create legal relationv) Certainty

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Table of contents

3. Termination of contract4. Remedies of Contract

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WHAT IS A CONTRACT?

Section 2(h) of the Contract Act:

A contract is an agreement enforceable by law.

It means a contract is an agreement which is legally binding between the parties

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All contracts are agreement, but not all agreement are contract. In order for an agreement to become a contract, there are certain elements to be fulfilled:-

1. Proposal/ Offer 2. Acceptance 3.Consideration 4. Intention to create legal relations

5. Certainty 6. Legal capacity

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OFFER/PROPOSAL

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PROPOSAL/OFFER

Section 2 (a) of the Contract Act:

Proposal is made when one 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.

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•The person who making the proposal is called “promisor” or also referred as the “proposer”

•Example :

•A wants to sell his book to B for RM100.•What A is doing is he offers to sell his book to B. A’s message to B is called ‘offer.’•B has an option whether he wants the book at RM100 or not.•Promisor/Offeror – person making the offer.•Promisee/Offeree – person accepting the offer.

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COMMUNICATION OF PROPOSAL

A proposal must be communicated to the acceptor before it can be accepted.

The communication of offer is complete when it comes to the knowledge of the person to whom it is made. (Sec 4(1) )

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A proposal is said to have been communicated only if the party who accepts it knew about the proposal.

If a party accepting the proposal is not aware about the proposal, then there is no contract.

FORM OF PROPOSAL Writing; or Orally; or combination

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To whom can a proposal be made?

Proposal can be made either to :- particular person general public (Carlil v Carbolic Smoke Ball)

• The offer is made and anyone who can satisfy the conditions stipulated by the promisor is eligible to accept the offer.

• Case: Carlill v Carbolic Smoke Ball Co - In this case, the D was advertising its product. They also offered a sum of money to those who purchased and used the smoke ball, but still suffered influenza. The COA held that the act of purchasing the product is acceptance because the act of offering a sum of money for those who falls ill after using their product amount to an offer made to the world at large.

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The Difference Between Invitation to treat and Offer

Sometimes, when a person offers something to you, it may not always mean that it is a proposal/ an offer.

This may happen when the offer is actually inviting you to make the proposal.

When this situation happen, it is known as invitation to treat.

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INVITATION TO TREAT An invitation to treat is not a proposal,

but a sort of preliminary communication which passes between the parties at the stage of negotiation.

An offer should be contrasted with an invitation to treat.

Contracts Act 1950 is silent on the definition of invitation to treat, therefore principles of English law is applicable.

Invitation is an attempt to induce offer.

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An invitation to treat must be distinguished from proposal. This is because when there is a proposal and

the proposal is accepted , it constitutes an agreement.

On the other hand, when there is an invitation to treat, it is not yet a proposal. The person who accepts the invitation to treat is actually the person making the proposal. When the person who is making the invitation to treat , accepts the proposal, there is an agreement.

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Examples of invitation to treat

a price list, a display of goods with price tags in

a supermarket, an advertisement an auctioneer inviting bids for a

particular article. Tenders,

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Display of goods in supermarket

Pharmaceutical Society of Great Britain v Boots Cash Chemist limited [1953] 1QB 401

Facts:-

Boots cash Chemist ltd (Defendants) were charged under the Pharmacy and Poison Act 1933 UK which provides that it was unlawful to sell certain poison unless such sale was supervised by a registered pharmacist.

Issue: whether the display of goods on the shelves constituted

an offer?

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The court ruled that the goods displayed was only an invitation to treat.

A proposal to buy made when the customer placed the article in the basket. Acceptance of this sale is only made when the cashier receives the money from the customer.

That being the principle, since there was a registered pharmacist at the cashier, the shop owners was not liable.

TERMINATION OF PROPOSAL

1. Rejection2. Lapse of time3. Failure to fulfill a condition precedent to

acceptance4. Death of a party5. revocation

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1) Rejection Made before the acceptance is made Once it is rejected, the proposal is

terminated.

* aproposal is not rejected merely by seeking or requesting for further information

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2) Lapse of time May lapse by passage of time. The proposal which expressly stated to

last for a period of time cannot be accepted after that time.

If not, it shall lapse within reasonable time.

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3) Failure of acceptor to fulfill a condition precedent to acceptance PYM v CAMPBELL- Parties negotiated for the sale of certain

invention on the condition that a 3rd party approves the invention. Held , since there is no 3rd party approved, so there was no agreement.

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4) Death Section 6(d), Contracts act,- A proposal is revoked by the death or

mental disorder…….. If the fact of his death comes to the knowledge of the acceptor before accepting.

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5) Revocation Must be communicated Complete when the promisee received the

revocation Section 5(1), CA, a proposal may be

terminated or withdrawn by the proposer by giving notice of revocation to the other party before acceptance.

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ACCEPTANCE

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2. ACCEPTANCE Section 2 (b) of the Contract Act:

when the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted.

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General Rule of Acceptance

Acceptance of a proposal must be communicated to the proposer in order to create a binding contract between parties.

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Elements of Acceptance 1. The acceptance must be absolute

and unqualified (Sec 7(a) ).

If the parties are still negotiating, an agreement is not yet formed.

The acceptor must accept to the exact terms proposed by the offeror/proposer without any modifications or variation.

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if he introduces a new term, he is making a counter-offer.

the effect of counter-offer is it destroys the original offer.

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Case: Hyde v Wrench [1804]

Facts: Defendant offered to sell his estate to the Plaintiff for $1000.In

reply the Plaintiff made a counter proposal to purchase at $950.

Held: there was no contract exist

between them.

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Elements of acceptance2. Acceptance may be expressed in some

usual and reasonable manner unless proposal prescribes a manner in which it is to be accepted.

3. An acceptance must be made within a reasonable period (Section 6 (b) )

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Communication of an acceptance

Acceptance only effective when it has been communicated. The communication can be by word of mouth (eg: telephone), letters, telex, facsimile or by recorded message.

The law recognizes that acceptance may be implied from conduct .

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Case: Carbill v carbolic Smoke Ball co (1893) 1QB 256(Acceptance by conduct/performance)

Facts: The Defendant made an advertisement in the newspaper that they would offer a sum of money to anyone who would still suffer from flu after using their product, according to the instructions.

The Plaintiff used the product according to the instructions but still became ill.

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The Plaintiff asked for the sum of money that the Defendant has promised but the Defendant refused to pay.

Defendant argued that there is no valid contract because the Plaintiff did not communicate his acceptance to them.

Court held: The Plaintiff had accepted the offer the company made to the world at large by performance (by using the Defendant’s product). Therefore he is entitled to the money.

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ACCEPTANCE THROUGH POST (POSTAL RULE)

S. 4(2) - exception to the general rule.

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The Postal Rule. S. 4(2) (a) - the communication of

acceptance is complete as against:

proposer: when it is put in a course of transmission to him, so as to be out of the power of the acceptor;

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S. 4(2) b : the communication of acceptance is complete as against:

acceptor: when it comes to the knowledge of the proposer.

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EXAMPLE:You accepts Mr X’s proposal by a letter sentby post. In this situation, the communication of the

acceptance is complete: As against Mr X, when the letter is

posted; As against you, when the letter is

received by Mr X.

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Case: Ignatius v Bell [1913]

In this case, the letter of acceptance was not delivered by the postman but remained in the post office. The court held that acceptance was complete upon posting.

Here acceptance is complete in case of acceptance through post upon posting.

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However, postal rule does not apply to instantaneous circumstances such as telephone, telex and telefax.

An acceptance made by these modes must actually come to the knowledge of the offeror/proposer to be effective and form a binding contract.

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REVOCATION OF OFFER/

PROPOSALAND

REVOCATION OF ACCEPTANCE

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REVOCATION

Revocation of proposal/offer

Section 5 (1) of the Contract Act:-A proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer, but not afterwards.

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Revocation of Acceptance

Section 5(2) of the Contract Acts An acceptance may be revoked at any time

before the communication of the acceptance is complete as against the acceptor, but not afterwards.

Example:- Mr A propose by letter sent by post to sell his

lap top to Mr B . Mr B accepts the proposal by letter sent by post. Mr B may revoke his acceptance at any time before or at the moment when the letter communicating it reaches Mr A, but not afterwards.

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CONSIDERATION

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Consideration is a price paid by each party for the promise of the other.

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As a general rule under Section 26: “Agreement without consideration is void.”

This means that if it is only the promisor who give something to the promise, but the promisee does not give something in return, therefore the agreement is void.

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For instance:-

A agree to sell his house to B for RM100,000.00. Here, B’s promise to pay the sum of RM100,000.00 IS THE CONSIDERATION for A’s promise to sell the house and A’s promise to sell the house is the consideration for B’s promise to pay RM100,000.00. These are lawful consideration.

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ELEMENTS OF CONSIDERATION1) Consideration Need not be Adequate As a general rule, consideration must be

sufficient.

Section 26 Explanation 2: An Agreement is not void merely because the consideration is inadequate.

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Phang Swee Kim v Beh I Hock (1964) MLJ 383

Facts: Appellant agreed to buy a land from the

respondent for the price of RM500.00 although the land was worth more.

Respondent later refused to honor the promise arguing that the promise was unenforceable because of the inadequacy of consideration.

Fed Court held: The consideration was adequate because the Respondent has agreed to transfer the Land to the Appellant for RM500.00. There was a valid contract.

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2)Past consideration is a good consideration

Kepong Prospecting Ltd v Schmidt [1968] 1 MLJ 170

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EXCEPTIONS TO THE GENERAL RULE THAT A CONTRACT MUST EXIST WITH CONSIDERATION

There are 4 exceptions to this general rule. Under this exception, absence of consideration will not make the agreement void. They are:-

1. CONTRACTS RELATED TO NATURAL LOVE AND AFFECTION.

2. AN AGREEMENT TO COMPENSATE FOR A PAST VOLUNTARY ACT.

3. AN AGREEMENT TO COMPENSATE A PERSON WHO DID AN ACT WHICH THE PROMISOR WAS LEGALLY COMPELLABLE TO DO.

4. AN AGREEMENT TO PAY A STATUTE-BARRED DEBT.

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1) An agreement that is made out of love & affection (s.26(a)

Under this exception an agreement is valid although there is no consideration being exchange between the parties of the contract.

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For agreement to be valid under this exception, it must be made according to the following conditions:-

1) The agreement must be made in writing 2) The agreement must be registered3) It must be made because of natural love

and affection between parties standing in near relation to each other.

Eg: members of your immediate family i.e your mother, father, son, sister.

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ii) An agreement to compensate for a past voluntary Act (S 26(b)

Under this exception the promisor promised to give the promisee something because the promisee has done something voluntarily before the promise was made.

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When this happens, the promise made by the promisor is valid although there was no consideration on the promisee’s part. In the event the promisor did not do what he had promised, the promise can sue him for breach of promise.

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Eg: Ali, your neighbour had watered your garden while you were holiday in Bahamas. When you returned, you promised Ali to give him RM100.00 for his trouble. In the event you failed to give him RM100.00, he can bring action against you because the promise you made is valid although Ali did not give any consideration AFTER you have made the promise.

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iii) Agreement to compensate an act the Promisor was legally compelled to do (S26(b))

In order to use this exception, there are three conditions to be fulfilled:-

i) The promisee has voluntarily done an act

ii)The act that was done by the promiseewas actually an act that the promisor himself was legally bound to do; and

iii) The agreement must be to compensate the promise either wholly or partly, for what the promisee had done.

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For instance: You have look after your neighbour’s

infant son while he was away on a holiday. When they came back, the promised to compensate you for the expenses that you have incurred. In this situation, if they failed to give you compensation , you can take an action against them for breach of promise.

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iv) An agreement to pay a statute Barred debt (Section 26 (c).What is statute Barred debt?

A debt which can’t be recovered through legal action because of a lapse of time fixed by law.

e.g. for contract, you cant take matter to court after 6 years from the time the cause of action arise.

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However, although a debt cannot be recovered if it is statute barred, a creditor can do so if it falls under these 2 conditions:-

a) FRESH PROMISE- There is a promise made by the debtor to pay the statute barred debt, after the lapse of 6 years, either wholly or in part of the debt.

b) PROMISE MUST BE IN WRITING AND SIGNED.

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INTENTION TO CREATE LEGAL RELATIONS

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INTENTION TO CREATE A LEGAL RELATION

POINTS:Mere fact of an agreement does not itself create a binding legal contract.

Intention is needed to prove a binding legal contract.

For an agreement to be a contract, there must be intention between the parties that they want to enter into a legal relationship between them.

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PRESUMPTIONS: BUSINESS AGREEMENT – Intend legal

consequences

2) DOMESTIC, SOCIAL OR FAMILY AGREEMENT – implied – no legal relations are contemplated but may be rebuttable.

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(1) Business/Commercial Agreement

Under the agreement made in business transaction, it is always presume that the parties have the intention to create legal relation, unless proved otherwise.

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(2) Domestic Agreement

Domestic agreement normally does not constitute a legally binding agreement.

This is because the parties have no intention to create legal relation.

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Balfour v Balfour (1919) 2 KB 571

Fact: The Defendant husband was a civil servant stationed in Sri Lanka. When he was in England, he had promised his wife that he will pay her a monthly allowance as maintenance. The wife was unable to accompany the husband to Sri Lanka due to ill health.

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The Defendant did not give the Plaintiff the monthly allowance as maintenance. The wife (Plaintiff) brings an action against the Defendant for breach of contract.

The court held: The agreement entered into between Plaintiff and

Defendant was not legally enforced agreement because the parties did not intend to be a legally binding agreement.

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However, not all social, domestic or family agreement are not legally enforceable.

In the case of Merit v Merit [1970],

Facts:The husband left matrimonial home . The house was under joint name between Plaintiff and Defendant and subjected to mortgage.

Husband and wife had discussion and decided that the husband agreed to pay the wife 40 pounds a month for the purpose of paying the outstanding mortgage payments. When the payment is completed, the husband would transfer the property to her.

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The agreement was made in writing on a paper and the husband signed it. After the payment is completed, the husband refused to transfer the property to the wife.

The court held:In the light of all the surrounding circumstances, the parties had the intention to create legal relations. Therefore the court ordered that the house be transferred to the wife.

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CERTAINTY OF CONTRACT

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CERTAINTY OF CONTRACT The terms of a contract must be certain

and not vague. An agreement which is not certain or is not capable of being made certain is void. (S.30 of C.A)

KARUPPAN CHETTY V. SUAH THIAN The parties agreed to lease of RM35

per month “for as long as he likes.” Held: the contract was void.

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LEGAL CAPACITY

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LEGAL CAPACITY

Section 10 (1) of Contract Act:- All agreements are contract if they are

made by the free consent of the parties competent to contract , for a lawful consideration and with a lawful object and are not hereby expressly declared void

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Who are competent to contract?

Section 11 of Contract Act:-

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

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Age of majority The age of majority is 18 years old. This is

provided by the age of Majority Act 1971.

Those below 18 known as the minor.

The general rule is that all contracts entered by a minor are void.

The contractual incapacity of a minor is regarded as a protection of the minor against the consequences of its own actions and presumed lack of judgment in such a case.

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CASE: TAN HEE JUAN V. TEH BOON KIAT Issue: whether the contract between Tan and

Teh was void because Tan was a minor?

Held: the contract between them was void.

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Although only those who are 18 years and above can enter into a contract, there are situations when minor are bound by the contract they have entered into:-

1) Necessaries2) Beneficial contract of employment and

education3) Scholarship

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4) Insurance5) Apprenticeship

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NECESSARIES

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POINTS:

UNDER THE COMMON LAW, A MINOR IS LIABLE ON CONTRACTS FOR ‘NECESSARIES’.

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Necessaries- include food, shelter, clothing, medical service, education.

Section 69 of the Contract Act: If a person incapable of entering into a contract

or anyone whom he is legally bound to support, is supplied by another person with necessaries suited to his condition in life, the person who has furnished such supplies is entitled to reimbursed from the property of such incapable person.

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It is an obligation the law imposes on the infant to make a fair payment in respect of needs satisfied.

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CASE: NASH V. INMAN ISSUE: Whether the Plaintiff can sue the

Defendant for the price of the waistcoats? Held: The Court of Appeal held that, because

evidence showed that the Defendant already had an adequate number Of clothes fit for his station in life, the waistcoats were not necessaries and therefore the tailor could not succeed.

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BENEFICIAL CONTRACTS OF EMPLOYMENT AND

EDUCATION.

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BENEFICIAL CONTRACTS OF EMPLOYMENT AND EDUCATION.

1) THE GOVERNMENT OF MALAYSIA V. GURCHARAN SINGH & ORS.

2) ROBERTS V. GRAY

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1) THE GOVERNMENT OF MALAYSIA V. GURCHARAN SINGH & ORS.

ISSUE: Whether the contract between the parties

was void because the defendant was a minor at the time the contract was entered?

Held: It was a void contract, but since education

was necessaries, the first Defendant was liable for the repayment of the monies spent on him.

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2) ROBERTS V. GRAY

ISSUE: whether the Defendant bound with the

contract entered into since he was a minor?

Held:The Defendant was bound by his contract, because the teaching and experience he would receive from the Plaintiff would be for his benefit and there were no terms which were harsh or unreasonable to the defendant. the Defendant could not repudiate any part of the contract as it was binding on him.

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(iii) Scholarship

Section 4 (a) of Contract (Amendment)Act 1976:-

“No scholarship agreements shall be invalidated on the ground that the scholar entering the agreement is not of the age of majority …”

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OTHER BINDING CONTRACTS

There are other legislation that allowminors to enter into valid agreements.a) insuranceb) apprenticeship

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A) INSURANCE Under the Insurance Act 1963, (revised

1972), a minor over the age of 10 may enter into a contract of insurance.

a minor of 10-16 years may enter into a contract of insurance with the written consent of the parents or guardians.

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B) APPRENTICESHIP S.13 of the Children and Young

Persons (Employment) Act 1966 says that:

“any child or young person shall be competent to enter into a contract of service under this act otherwise than as an employer and may sue as Plaintiff without his next friend or defend any action without a guardian ad litem.”

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CONT. This section means that a child is

defined as any person below the age of 14 and a young person as one between the ages of 14 and 16.

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REMEDIES FOR BREACH OF CONTRACTS

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REMEDIES FOR BREACH OF CONTRACT

When there is a breach of contract, the injured party may claim one or more of these remedies:-1.Damages2.Specific performance3.Injunction

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1. Damages

Damages are granted to a party as compensation for the damage, loss or injury he has suffered through a breach.

Law relating to damages arising from the breach of contract is found in Section 74 to 76 of the Contract Act.

The award of damages aims to put the Plaintiff in the position he would have been if the contract had been performed.

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Brown v Hilton Hotels Corp (1974)

Facts: the Hotel failed to honour Plaintiff’sconfirmed reservations. The Plaintiff wereunable to find other accomodations and sowere forced to fly home.

The Plaintiff received damages for breach ofcontract.

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2. Specific Performance

This is when the court directs the party to the contract to do exactly what he has promised in the terms of contract.

It is given at the discretion of the court. It is governed by the Specific Relief Act

1950.

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3. Injunctions

Injunction Is a court order requiring something to be done (mandatory injunction) or stopping something from being done (prohibitory injunction)

Two types of injunctions:- (1) Temporary/Interlocutory (2) Perpetual or permanent

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Neoh Siew Eng v Too Chee Kwang[1963] MLJ 272

In this case, the court granted a perpetual injunction requiring the landlord to keep water supply open for his tenants.

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Pertama Cabaret Nite Club Sdn Bhd v Roman Tam (1981) 1 MLJ 149

A singer has signed a contract to appear and sing at the Appellant’s night club for a number of days. The contract provided that in the event of breach, the respondent should not perform in Kuala Lumpur during the fixed period of the contract.

The Respondent declined to honour the contract and attempted to sing in a rival club.

Federal Court granted an interlocutory injunction.

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