TOPIC 2: LAW OF CONTRACT

(LAW 416 BUSINESS LAW)

Table of contents
1. 2.

Definition Elements of contract: i) Offer/Proposal ii) Acceptance iii) Intention to create legal relation iv) Consideration v) Certainty vi) Capacity vii) Free Consent Discharge of contract Remedies of contract

3. 4.

1. DEFINITION OF CONTRACT

Section 2(h) of the Contracts Act:

A contract is an agreement enforceable by law. It means a contract is an agreement which is legally binding between the parties

2. ELEMENTS OF CONTRACT

All contracts are agreement, agreement are contract.

but

not

all

In order for an agreement to become a contract, there are certain elements to be fulfilled:Proposal/ Offer Acceptance Intention to create legal relations Consideration Certainty Legal capacity Free Consent

1. 2. 3. 4. 5. 6. 7.

2.1 OFFER/PROPOSAL
Sec 2 (a) of the Contracts 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

Sec 2(c): the one making the offer is called a promisor.

Affin Credit (Msia) Sdn Bhd v Yap Yuen Fui

Lack of offer in the hire-purchase agreement had rendered the agreement void ab inition.

COMMUNICATION OF PROPOSAL

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

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

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.

R v Clarke (1940) 40 CLR 227

The Australian Govt offered a reward for information regarding murder of police officers. X and Clarke were later arrested- Clarke gave information to the police, resulting in the arrest of Y. Clarke released, not guilty. Clarke then knew about the reward and claimed. Held: Clarkes claim failed; the offer was not present in his mind when he gave the information to the police. Ignorance of offer is akin to never hearing it or forgetting the offer after hearing it.

To whom can a proposal be made?

Proposal can be made either to :

particular person general public

Carlill v Carblic Smoke Ball Co Ltd [1893]1 QB

Df advertised that they would offer to pay $1000 to anyone who still suffer from influenza after using their medicine. Pt used it an still caught influenza. Pt sued Df. Held: Pt was entitled to the $1000, she had accepted the offer made to the world at large (general public).

INVITATION TO TREAT (ITT)

An invitation to treat is not a proposal, but a sort of preliminary communication which passes between the parties at the stage of negotiation.

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.

An invitation to treat must be distinguished from proposal.

This is because when there is a proposal and the proposal is accepted , it constitutes a contract. On the other hand, when there is an ITT, it is not yet a proposal. The person who accepts the ITT is actually the person making the proposal. When the person who is making the ITT , accepts the proposal, there is an agreement. Basically, ITT is an offer to consider an offer.

Examples of invitation to treat

a price list/ catalogues display of goods with price tags in a supermarket, an advertisement, auction.

Display of goods in supermarket

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

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. Plaintiff claimed that the sale was unlawful since no pharmacist was seen.

Issue: whether the display constituted an offer?

of

goods on

the

shelves

The court ruled that the goods displayed was only an ITT. A proposal to buy was 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.

Advertisement
Majumder v A-G of Sarawak An advertisement in the newspaper for the post of doctor was just an ITT.

Auction
Only when bidder makes bid to buy does it constitute an offer.

2.2 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.

Sec 2(c): the one accepting the offer is called a promisee.

General Rule of Acceptance

Acceptance of a proposal must be communicated to the promisor in order to create a binding contract between parties. Once proposal is accepted, it becomes a promise.

Elements of Acceptance
1.

Sec 7(a) The acceptance absolute and unqualified.

must

be

If the parties are still negotiating, an agreement is not yet formed. There must be complete consensus. The promisee must accept to the exact terms proposed by the promisor without any modifications or variation.

Lau Bros v China Pacific Navigation Ltd [1965]

The parties were negotiating through several letters and telegrams on the delivery of logs. While still in the midst of negotiation, the Df withdrew. Pt unsatisfied, sued the Df.

Held: There was no contract to begin with, only negotiation.

When is acceptance not absolute?

if the promisee introduces a new term, he is making a counter-offer. the effect of counter-offer destroys the original offer. is it

Hyde v Wrench [1804]

6 June: Df offer to sell his estate to the Pt for $1000. 8 June: In reply, Pt made a counter offer to buy at $950. 27 June:Pt wrote letter, said agree to buy at the original price $1000. Held: There was no contract between them as the Pt had rejected the original offer of $1000 by making the counter-offer.

Elements of acceptance

Sec 6(b) An acceptance must be made within a reasonable time. Sec 7(b) Acceptance may be expressed in some usual and reasonable manner unless proposal prescribes a manner in which it is to be accepted.

Communication of an acceptance

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

The law recognizes that acceptance may be implied from conduct .

Felthouse n Bindley (1862) 142 ER 1037

Pt wrote a letter to his nephew-offered to buy nephews horse at $40. Pt wrote If I hear no more from you, I shall consider the horse as mine. Nephew actually intended to sell but did not reply the letter. Nephew arranged for auction and told the Df(assistant) not to auction off the horse as the horse is sold. Df accidentally sold the horse, Pt sued the Df. Held: Acceptance was never expressed nor communicated. It was also not implied from the nephews conduct.

Acceptance by post POSTAL RULE

S. 4(2) (a) - the communication of acceptance is complete as against the: proposer- when it is put in a course of transmission to him, so as to be out of the power of the acceptor; S. 4(2) b : the communication of acceptance is complete as against: acceptor: when it comes to the knowledge of the proposer.

EXAMPLE:
You accept Mr Xs proposal by a letter sent by 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 of your acceptance is received by Mr X.

Entores v Miles far East Corporation [1955]2

When an offer is made by post, it is clear law that acceptance is complete as soon as the letter of acceptance is put into the post box. That is the place where contract is made.

Ignatius v Bell [1913]

Pt sued for specific performance over his rights to purchase Dfs land. The option was to be exercised on or before 20th August 1912. The parties had contemplated the use of post as means of communication. Pt sent a notice of acceptance by registered post in Klang on 16th August 1912, but was not delivered until 25th August 1912. The letter was at the Post Office until picked up by Df. Held: The court applied Sec 4 (communication of acceptance). The option was duly exercised by the Pt when the letter was posted on 16th August 1912. There was a valid contract.

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.

REVOCATION
(a)

Revocation of proposal/offer General Rule: When acceptance is complete, contract if made. No more revocation. However, a proposal, once communicated, remains open until it lapses or is withdrawn. The promisor may revoke it at any time before acceptance. Sec 5(1)- A proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer, but not afterwards.

Sec 6- A proposal is revoked:

a. by the communication of notice of revocation by the proposer to the other party. b. By the lapse of the time prescribed in the proposal for its acceptance, or , if no time is prescribed, by the lapse of reasonable time, without the communication of the acceptance. c. By the failure of the acceptor to fulfill a condition precedent to acceptance, or d. By the death or mental disorder of the proposer. If the fact of his death or mental disorder comes to the knowledge of the acceptor before acceptance.

(b) Revocation of acceptance

Sec 5(2)- An acceptance may be revoked at any time before the communication of the acceptance is complete as against the acceptor, but not afterwards.

Example:

A offer by post- sell house to B- B accepts the offer and posted letter of acceptance. A may revoke the offer before or at the time B posted the letter of acceptance and not afterwards. B may revoke the acceptance before or at the moment A receive the letter of acceptance and not afterwards.

To be continued

ELEMENTS OF CONTRACT
2.3

INTENTION TO CREATE LEGAL RELATION

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

Two types of relationship:

a. BUSINESS/COMMERCIAL AGREEMENT Intend legal consequences b. DOMESTIC, SOCIAL OR FAMILY AGREEMENT implied no legal relations are contemplated but may be rebuttable.

a.

Business/Commercial agreement
Under this type of agreement, it is always presumed that the parties have the intention to create legal relation, unless proven otherwise. Lim Keng Siong v. Yeo Ah Tee (1983) Few letters have been exchanged to negotiate on sale- Appellant said sale was subject to contract, had informed lawyer that he did not wish to proceed with the sale.

Held: Contract. It was the intention of the parties to come to a definite agreement, eventhough a written contract is yet to be drawn up.

b. Domestic Agreement

Domestic agreement normally does not constitute a legally binding agreement. This is because the parties have no intention to create legal relation.

Balfour v Balfour (1919) 2 KB 571 The Df(husband) was a civil servant stationed in Sri Lanka. When he was in England, he had promised the Pt(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. But Df did not pay allowance. Pt sued; but there was no legally enforced agreement.

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

Merit v Merit [1970]

The Df(husband) left matrimonial home . The house was under joint name between Pt and Df, and subjected to mortgage. Pt and Df had discussion- Df agreed to pay pounds a month for the purpose of outstanding mortgage payments. When the completed, the Df would transfer the property the wife 40 paying the payment is to her.

Agreement made in writing, both signed it. After payment completed, Df refused to transfer the house. Held: The parties had the intention of creating legal relations. House to be transferred to Pt (wife).

2.4

CONSIDERATION

An agreement without a valid consideration is void. Consideration may be viewed as a sort of bargain, or price which one party pays to buy the promise or act of the other. Sec. 26 Agreement without consideration is void. Sec. 2(d)- When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do so or to abstain from doing something, such act or abstinence or promise is called consideration of the promise. Promisor gives something to promisee, promisee must reciprocate.

2.4.1 Elements of Consideration

a) Consideration need not be adequate Sec. 26 Explanation 2: An agreement to which the consent of the promisor is freely given is not void merely because the consideration is inadequate, but the adequacy of the consideration may be taken into account by the court in determining the question whether the consent of the promisor was freely given. Illustration(f) A agrees to sell his horse worth RM1000 for RM10. As consent to the agreement was freely given. The agreement is a contract notwithstanding th inadequacy of consideration.

Phang Swee Kim v Beh I Hock [1964] MLJ 383

Sale of a land for $500 when it was worth more than that. Seller refused to honour promise citing that the price was inadequate for a consideration. The trial court judge held that the agreement was void due to inadequacy of consideration. However upon appeal to the Federal Court, the decision was reversed. The seller had agreed to transfer the land for $500.

b) Past Consideration is a good consideration.

Lampleigh v Brathwait [1615] An act originally done at the request of the promisor, a promise made subsequent to the doing of an act, was deemed binding since the act constituted consideration.

2.4.2

Exception to the general rule of consideration.

Under these situations, absence of consideration will not make the agreement void:Sec. 26(a) Agreements related to natural love & affection Re Tan Soh Sim & Ors v Tan Saw Keow [1951] MLJ 21 A woman on her deathbed expressed her intention to leave all her properties to her four adopted children. The court held that the claims of the adopted children were not effective as it was contrary to Section 26(a) i.e. it was not in writing and there was no natural love and affection between parties standing in near relation to each other

i)

ii) Sec. 26(b) Agreement to compensate for a past

voluntary act. Illustration: Ali, your neighbour had taken care of your cat while you were away. When you returned, you promised to give Ali RM200. In the event that you fail to give Ali RM200, Ali can bring an action against you. The promise that you gave is valid, eventhough Ali did not give any consideration after you have made the promise.

iii) Sec. 26 (b) Agreement to compensate for an act the promisor was legally compelled to do.

Promisee voluntarily done an act The act done was actually an act that the promisor himself was legally bound to do; and The agreement must be to compensate the promisee wholly or partly for what the promisee had done.

Illustration: Looking after your bestfriends infant son.

iv) Sec. 26(c) Agreement to pay a Statute Barred debt. A debt that cannot be recovered through legal action as the time has lapsed i.e. 6 years. There is a contract if there is a fresh promise by the debtor and it is made in writing & signed by both parties.

2.5 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. There was no certainty as to the time frame of the lease.

2.6

LEGAL CAPACITY
Sec. 11- age of majority according to the law, who is of sound mind and is not disqualified from contracting by any law. 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. Exceptions- Minors are bound by these contract that they have entered into.

i) Necessaries food, shelter, medical services ii) Scholarship Any contract or agreement between the appropriate authority and any person, with respect to any scholarship, award, loan, sponsorship etc.

The Govt. of Msia v Gurcharan Singh & Ors.

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.

2.7

FREE CONSENT

Sec. 10 - All agreements are contract if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void. Sec. 13- Two or more persons are said to consent when they agree upon the same thing in the same sense.

Sec. 14- Consent is said to be free when it is not caused by:-

a) Coercion, as defined in Section 15 b) Undue influence as defined in Section c) Fraud as defined in Section 17 d) Misrepresentation as defined in Section 18 e) Mistake as defined in Section 21,22 and 23

Sec 19:When consent to an agreement is caused by coercion, fraud or misrepresentation and undue influence, the agreement is a contract is voidable at the option of the party whose consent was so caused. If the contract is under mistake of fact essential to agreement, the agreement is void. Void- no right and obligation created Voidable - agreement which gives the aggrieved party the choice of either affirming or rejecting it.

a)

COERCION

Sect 15:Coercion is the committing, or threatening to commit any act forbidden by the Penal Code, or unlawful detaining or threatening to detain, any property to the prejudice of any person whatever, with the intention of causing any person to enter into an agreement.

Coercion refers to an unlawful act done with the intention of causing the person to enter into an agreement Eg: You went to Petaling Street. You see a fake Gucci watch. You asked the seller for the price. Petaling street seller said that watch cost about RM50.00.You didnt want to buy the watch because it is expensive. The seller threatened you with a knife and ask you to buy the watch. You then paid for the price and took the watch.

Q: Whether your consent is free? No, because there is coercion by the watch seller.

What is the effect of the contract? VOIDABLE; means you can either accept the contract or terminate it.

(b)

Undue influence

A party may rescind a transaction on the ground that he was pressured to enter into it by the influence of the other who was able to exercise against him. Sec 16:A contract is said to be induced by undue influence where the relations subsisting between the parties are such one of the parties is in a position to dominate the will of the other and uses that position to obtain unfair advantage over the other.

There are 2 ingredients:(i)

the domination of the will of the other obtaining an unfair advantage over the other.

(ii)

Effect of contract Section 20: the contract is voidable at the option of the party whose consent was so caused.

Sec 16(2) provides dominating the will:-

three(3) such circumstances of

(i) when one party holds a real /apparent authority over another Eg: a parents authority over a child (ii) where one party stands in a fiduciary relation to the other. Eg: in the case of the confidential relationship between a solicitor & client, trustee and beneficiary, religious advisor & follower Eg: Ayah Pin advise one of his follower to transfer his land to him for RM100.00 if he want to go to heaven. (iii) Where a party makes a contract with a person whose mental capacity is temporarily or permanently affected by reason of age, illness or mental or bodily distress.

(c) Mistake

i)

Sec 21- mistake of fact essential to agreement When both parties to an agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is void.

For eg: Mrs Daisy own two hotels. She offers to sell one of them to Jeffry. Mrs Daisy thought that she will be selling her hotel in JB while Jeffry thinks that he is purchasing the hotel in Melaka. Both parties make a mutual mistake as to an important fact i.e identity of the hotel. Therefore, either party will be able to terminate the contract.

We must distinguish mistake of fact essential to agreement and a mere mistake of fact. Freeman v Kiamesha Concord Inc (1974)
A guest at a resort hotel misread an advertisement concerning memorial day weekend entertainment and so believed that a popular entertainer would be performing for three nights during the weekend rather than one. Upon learning the truth, he sought to cancel part of his three days reservation. The court held that his mistake was a mere mistake of fact and it was unilateral. Therefore, although he departed the resort before the end of three days weekend, he remained obliged to pay his hotel bill in full.

d)

Misrepresentation and Fraud

Misrepresentation: certain false statement made by a representing party (A), which induces the other party (B) to enter into contract. Sec 18: Misrepresentation is confined to innocent misrepresentation. Innocent misrepresentation is an untrue statement that the speaker believe is accurate.

For eg: Mr Lim arrived at a hotel on a hot day and found that the temperature at the hotel is uncomfortably warm. He asked the manager if the aircond is working properly. The technician had worked on it that afternoon and informed the manager that it was working properly.

Based on that statement, the manager, believing the aircond is working properly, informed Mr Lim who then contracted for a room. Later, Mr Lim discovered that the temperature failed to cool.

This is a situation whereby the manager had made an innocent misrepresentation which will then enable Mr Lim to terminate the contract.

Fraud - wherever a person causes another to act on a false representation which the maker himself does not believe to be true, he is said to have committed a fraud. Sec 17 - fraud within the meaning of this section requires the doing of an act by a party to a contract with the necessary intention to deceive the other contracting party. Fraud also refers to deceitful acts intended to induce the other party to enter into contract.

Letchemy Arumugan v Annamalay [1982] 2 MLJ 198

The Defendant had made a fraudulent misrepresentation to the Plaintiff, an illiterate Indian woman rubber tapper and induced her to enter into a sale purchase agreement. The Defendant had fraudulently represented to the Plaintiff that the document she was required to sign was for a loan she took for her land. In fact the documents she signed included a sale agreement relating to the land, a transfer of the land. The court found the agreement was voidable at the option of the Plaintiff and must be rescinded.

The basic difference between misrepresentation and fraud is that in fraud the person making the representation does not himself believe in its truth whereas in cases of misrepresentation, he may believe the representation to be true.

4.

DISCHARGE OF CONTRACT

It means that the contract is terminated. There are four ways in which a contract can be discharged:By performance By consent/agreement between parties Frustration Breach of contract

a)

Discharge By performance

A contract is said to be discharged by performance when the parties to contract has performed what they have agreed to do in the contract. Sec 38(1) parties to a contract must either perform or offer to perform their respective promises.

b)

Discharge By Agreement

A contract is said to be discharged by agreement if the parties to contract agrees that the contract will be discharged. This agreement can be made during the contract or after the contract has been made.
Eg: You entered into contract with Siti. In the contract both of you agree that the contract will be put to an end if the profit of your business is less than RM1 million a year. If the profit is less, then the contract is said to be discharged by agreement.

c)

Discharge by frustration

A contract is terminated if the terms that the parties agreed to do is impossible to perform. It can either be at the time the contract was made or when the contract has been made that the obligation became impossible to perform.
Taylor v Caldwell (1863)

The Pt hired the Dfs hall for the purpose of performing concerts. Unfortunately, the hall was accidentally burnt down before the date of concert. The court held that the contract may be discharged by frustration.

Declaration of war would as general rule frustrate all contracts with enemy aliens Iraq v US

Consequences of frustrations Frustration terminates the contract automatically and the contract is void.

d) Discharge by breach of contract

A contract can be put to an end if a party to the contract did not do what they have promised to do in the contract.

Sec 40: When a party to a contract has refused to perform or disabled himself from performing his promise in its entirely, the promise may put to an end to the contract unless he has signified, by word or conduct, his acquiescence in its continuance.

The party who is not in breach of the contract has two (2) options:i) ii)

to continue with the contract and claim damages, or repudiate the contract

Effect:- Contract is voidable

Effect of breach of contract Sec 65:- If the party who is not in breach terminated the contract, he must restore any benefits which he may have received from the other party.

Eg: Mah Wi, a singer entered into a contract with Ajai (manager of Planet Hollywood) to sing at the Planet Hollywood for two nights, every week during the next two months. Ajai agrees to pay Mah Wi RM10,000.00 for each night. On the sixth night, Mahwi willfully absented himself from the show. Consequently, Ajai rescinds the contract. Ajai must pay Mah Wi for the five nights on which he had sung.

5. REMEDIES FOR BREACH OF CONTRACT

When there is a breach of contract, the injured party may claim one or more of these remedies:-

1.Damages 2.Specific performance 3.Injunction

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.

Brown v Hilton Hotels Corp (1974)

The Hotel failed to honour the Plaintiffs confirmed reservations. The Plaintiff were unable to find other accomodations and so were forced to fly home. The Plaintiff received damages for breach of contract.

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.

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:Temporary/Interlocutory Perpetual or permanent 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.

(i) (ii)

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 Appellants 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.

THE END

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