THE LAW OF CONTRACT

The legislation in Malaysia governing contracts is the Contract Act, 1950 (Act 136) (Revised 1974).

However, when there are provisions in the Contracts Act to deal

with a particular subject concerning the law of contract or if a particular subject is covered the Act but the provisions relating to that subject are not exhaustive, English law applies by virtue of the Civil Law Act, 1956.

Where the Contracts Act makes certain provisions which differ from English law, the provisions of the Contracts Act must prevail- Song Bok Yoong v. Ho Kim Poui.[196811 M.L.J. 56.

DEFINITIONSSection 2 (h) Contract Act, 1950• An agreement enforceable by law is a contract

Section 10(1) Contract Act, 1950• All agreements are contracts 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.

Note: All contracts are agreements but not all agreements are contracts

Section 10(2) Contract Act, 1950Contract need not be:- In writing- In presence of witnesses- registered

TYPES OF

CONTRACTS

UnilateralContract

BilateralContract

CollateralContract

UNILATERAL CONTRACTA unilateral contract is a one-sided contract, in

the sense that one party binds himself by a conditional promise leaving the other party free to perform the condition or not, as he pleases.

In a unilateral contract the offeror will not know whether the contract is “on” until the other party has performed his part.

See Case: Carlill v. Carbolic Smoke Ball co. Ltd(1892) 2 QB 484; (1893) 1 QB 256

Errington v. Errington (1952) 1 KB 290,CA

Bilateral Contract

Bilateral contract usually is formed by an exchange of agreements between parties which resulted in reciprocal undertakings.

Example:

Ali promised to pay RM 150.00 to Baba if Baba repair his car. Baba then promised to repair Ali’s car. The exchange of agreements between Ali and Baba creates a Bilateral Contract.

Collateral ContractIn cases where the courts have found difficulty in allowing any evidence to vary

a written contract, the courts have held that any such assurance given by one party may amount to a collateral contract.

Where the courts have felt that the parties had intended an assurance given by one of them to be binding, the courts have treated such assurance as a separate contract, collateral to the main contract.

Courts have usually found the existence of a collateral contract in situations where it is clear that one party enters into or refuses to enter into a contract unless the other party gives an assurance as to an important term of the contract.

Case: Tan Swee Hoe Co Ltd v Ali Hussain Bros. (1980) 2 MLJ 16 (FC)Appellant had orally agreed to allow the respondent to occupy certain premises for so

long as they wished on payment of $14,000 as tea money. Subsequent to this, the parties entered into two agreements. Both agreements made provisions for increase in rental and no mention about earlier oral assurance. Dispute arose and appellant served on the respondent a notice to quit.

Held: In consideration of the oral undertaking, respondent could occupy the premises for as long as they wish provided they pay the rent regularly.

PRIVITY OF CONTRACT

It is a fundamental principle of common law that, apart from special circumstances (cases of agency trusts, assignments or by statues), a person who is not a party to a contract has no right to sue on the contract.

Thus, if A enters into a contract with B, only A and B can enforce or sue on the contract. C, who is not a party to the contract, cannot do so.

FORMATION OF A CONTRACT

The main Elements of a Contract

ELEMENTS OF A CONTRACT

Offer

Acceptance of the offer

Intention to create

legal relations

Capacity Certainty

Considerations

Free Consent

ELEMENTS OF A CONTRACT

• The basic elements constituting a contract are as follows:

• 1. Offer • 2. Acceptance of the offer • 3. Intention to create legal relations • 4 Considerations • 5. Certainty • 6. Capacity.• 7. Free Consent

1. OFFER

Section 2(a) of the Contracts Act 1950, states that '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 the act or abstinence, he is said to make a proposal'.

• The first limb of Section 2(c) of the Contracts Act 1950, calls the person making the proposal 'promisor'.

• Under the Contracts Act and English law, a proposal or offer is something which is capable of being converted into an agreement upon its acceptance.

• A proposal must be a definite promise to be bound provided certain specified terms are accepted.

• The promisor (some times also known as 'offeror') must have declared his readiness undertake an obligation upon certain terms, leaving the option of its acceptance or refusal to the offeree.

In the Federal Court case of Affin Credit (Malaysia) Sdn. Bhd. v. Yap Yuen Fui [1984]1 M.L.J. 169 where there was a lack of offer and acceptance, purported hire-purchase agreement was declared void ab initio, that is, the agreement was void from the beginning.

The communication of an offer or a proposal is deemed to have been made by any act or omission of the party proposing by which he intends to communicate the proposal or which has the effect of communicating it.

- Section 3, Contracts Act 1950.

The communication of a proposal is complete when it comes to the knowledge of the person to whom it is made.

- Section 4(1), Contracts Act 1950.

This means that an offer or proposal is effective once it is communicated to the offeree by the offeror.

A proposal made in words (oral or written) is said to be expressed.

If a proposal is made other than in words (example, by conduct), it is said to be implied

-Section 9, Contracts Act, 1950.Example of implied proposal:

See: Thornton v. Shoe Lane Parking (1971) 1 All ER 686

An offer should be contrasted with an option and an advertisement.

An option is merely an undertaking to keep the offer open for a certain period of time while an advertisement is an attempt to induce offers

-Coelho v. The Public Services Commission [1964] M.L.J. 12. and Guha Majumder v. Donough. [1974]2M.L.J. 114

Whether an advertisement is an offer or an invitation to treat depends on the intention of the parties in each case.

The courts have held that advertisements of bilateral contracts are not offers whereas advertisements of unilateral contracts are construed to be offers.

-Carlill v. Carbolic Smoke Ball Co. Ltd. [1893]1 Q.B. 256

In the case of Majumder v. Attorney-General of Sarawak [1967]1 M.L.J. 101, the Federal Court held that an advertisement in the newspaper for the post of a doctor was an invitation to treat.

The display of goods in a shop is an invitation to treat. An offer to buy is made when the customer puts the articles in a basket or take the item off the shelf. The contract is only made at the cashier's desk when the customer pays for the items-

Pharmaceutical Society of Great Britain v. Boots Cash Chemist Ltd. [1953]1 Q.B. 401. The defendants were charged under the Pharmacy and Poisons Act 1933 which made it unlawful to sell certain poisons unless such sale was supervised by a registered pharmacist.

The court held that the display was only an invitation to treat. A proposal to buy was made when the customer put the articles in the basket. Hence the contract would only be made at the cashier's desk. As such, the shop owners had not made an unlawful sale.

In the English cases of Partridge v. Crittenden [1968]1 W.L.R. 1204, advertisements of bilateral contracts are held not to be offers.

In this case, Mr Partridge was charged with unlawfully offering for sale a certain wildlife bird contrary to section 6(1) of the Protection of Birds Act 1954.He had inserted in a periodical an advertisement which read “Bramblefinch cocks, Bramblefinch hens, 25s. each”

Court held that the advertisement was an invitation to treat, not an offer for sale, and therefore the offence charged was not established.

See also: Fisher v. Bell (1961) 1 QB 394

When an auctioneer invites bids, he is merely making an 'invitation to treat', and when a bidder makes a bid, he is making an offer. The contract, i.e. the sale, is only made when the auction announces its completion by the fall of the hammer.

In Harris v Nickerson (1873) L.R 8 Q.B.286, court held that the advertising of an auction sale to be held at a particular time and place is not an offer.

But in an advertisement that a sale will be held “without reserve” is a definite offer, if once the sale starts, that the auctioneer will accept the highest bid. See: Warlow v Harrison (1859) 1E.&E. 309 where the auctioneer in such circumstances makes a contract with each bidder that he will sell to the higest bidder.

How about Tenders and Negotiations for sale of land?

Are they offers?

If X ask a number of tradesmen to put in tenders for supplying him with some particular goods or services he is not, in so doing, making an offer.

Consequently, he is not bound to accept the lowest, or any other, tender.

The position is similar where X asks one tradesman to put in an estimate for supplying particular goods or services.

It is not X who makes the offer; the offer comes from the tradesman in the form of the tender or estimate.

See: Spencer v. Harding (1970) L.R. 5 C.P.561

In Harvey v. Facey (1893) A.C. 552, P.C., The plaintiffs telegraphed to the defendants: “Will you sell us Bumper Hall Pen? Telegraphed lowest lowest cash price.” The defendents replied by telegraph: “Lowest price for Bumper Hall Pen 900 pounds.” The plaintiffs telegraphed: “We agree to buy Bumper Hall Pen for 900 pounds asked by you. Please sen us your title deed…”

It was held by the privy council that there was no contract. The second telegram was not an offer but merely an indication of the price the defendants would want if they eventually decided to sell.

Revocation of the Offer An offer is revoked :

1. Notice of revocation by the offerer to the offeree. Section 6(a) Contract Act 1950Section 4(3) Contract Act 1950Illustration (c) Section 4 Contract Act 1950Section 5(1) Contract Act 1950See Illustration (c) of section 4 and Illustration of section 5 contract Act 1950.Routledge v Grant (1828)130 ER 920 Offer can be withdrawn (revoked) even if the offeror has promised to keep the offer open for a specified time. Revocation is only effective when it has been communicated to a third party and may be communicated by a third party as in Dickinson v Dodds 1876 2 ChD 463, where sale of house offered to Dickinson was told to him by a third party.

2. Lapse of time Section 6(b) Contract Act 1950Ramsgate Victoria Hotel v Montefiore (1866)LR 1 Ex 109

3. Failure of the acceptor to fulfil a condition. Section 6(c) Contract Act 1950Rejection terminates offer as does a counter offer. See Hyde v Wrench (1840) 3 Beav 334. Also Jones v Daniel 1893 where the acceptance contained new terms it was held to be a rejection

4. Death or mental disorder of the offeror. Section 6(d) Contract Act 1950Bradbury v. Morgan (1862) 1 H&C 259

2. ACCEPTANCESection 2(b), Contracts Act provides that

when the person to whom the proposal is made signifies his assent thereto, the proposal is said to have been accepted. A proposal, when accepted, be comes a promise.

Section 2(c), Contracts Act calls the person accepting the proposal the 'promisee'.

ACCEPTANCE DISTINGUISH

COUNTER OFFER

CROSS OFFER

REQUEST FOR EXPLAINATION

COUNTER OFFERAcceptance is distinguish from a counter offer.

Counter Offer is a rejection made by the offeree towards the original proposal by the offeror. If the offeree create any qualification in the original proposal, therefore the offeree has created a Counter Offer to the offeror and subsequently gives the authority of acceptance to the offeror.

See: Hyde v. Wrench (1840) 3 Beav 334

Tan Geok Khoon & Gerard Francis Robless v. Paya Terubong Estate Sdn Bhd (1988) 2 MLJ 672

CROSS OFFERCross Offer is distinguish with acceptance.

Cross Offer is a situation where the offeror makes proposal to the offeree without the knowledge that at the same the offeree too has made the same proposal to the offeror. Therefore both parties requires the acceptance to their proposal, but this acceptance only created a cross offer in between them and not an acceptance.

See: Tinn v. Hoffman (1988) 2 MLJ 672

REQUEST FOR CLARIFICATIONWhen a proposal has been made, if the offeree

requested for a clarification about the proposal before an absolute acceptance is made, this request for clarification is not an acceptance nor a rejection towards the proposal. It is a request for clarification which has not yet formed a contract that bind both parties. However, it only will be an acceptance if the request for clarification has been answered by the offeror and subsequently the offeree accept the clarification.

See: Stevenson v. Mc Lean (1880) 5 QBD 346

Section 9 of the Contract Act 1950 provides that so far as the acceptance of any promise is made in words, the acceptance is said to be expressed.

If the acceptance is made other than in words, the acceptance is said to be implied.

METHODS OF ACCEPTANCE

• The acceptance of that proposal must be absolute and unqualified

• The way the acceptance is made.

• Acceptance must be made within the time stated in the proposal, if not, based on reasonable time.

• The communication of the acceptance.

(A) For a proposal to be converted into a promise, the acceptance of that proposal must be absolute and unqualified.

- Section 7(a), Contracts Act 1950

Acceptance must be absolute and unqualified so that there is complete consensus. If the parties are still negotiating, an agreement is not yet formed-

See: Lau Brothers & Co. v. China Pacific Navigation Co. Ltd. [1965]1 M.L.J. 1.

Jones v. Daniel (1894) 2 CH 332

Tan Geok Khoon & Gerard Francis Robless v. Paya Terubong Estate Sdn Bhd (1988) 2 MLJ 672

(B) Where acceptance is qualified by words such as 'subject to contract' or 'subject to a formal contract being drawn up by our solicitors', the courts would be inclined to hold in the absence of strong and exceptional circumstances to the contrary that there is, but a mere conditional contract.

It must be noted that the mere use of the words 'subject to contract' does not necessarily mean that the contract is not yet binding. Whether the parties contemplated a binding contract to take immediate effect or whether they were postponing their rights and obligations under the proposed contract until formalization is a question of fact and depends on the circumstances of each case.

See: Low Kar Yit & Ors. v. Mohd Isa & Anor. (1963) M.L.J. 165, Tai Tong Realty Co. (Pte.) Ltd. v. Galstaun & Anor.[1973]2 M.L.J. 95, Tan Yew Lai v. S. Shadique [1978] 1 M.L.J. 139, Esso Standard Malaya Bhd. v. Southern Cross Airways (M’sia) Bhd[1972]1 MLJ 168.Air Hitam Tin Dredging Malaysia Sdn Bhd v. YC Chin Enterprises Sdn Bhd (1994) 2 SCR 90Daiman Development v. Mathew Lui Chin Teck (1981) 1 MLJ 56

See also:Ng Bros Construction v. Kaolin (M) Sdn Bhd (1985) 1MLJ 245Kam Mah Theatre Sdn Bhd v. Tan Lay Soon (1994) 1 SCR 113New Selangor Plantations Sdn Bhd v. Talam Management Services Sdn Bhd (1996) 4 CLJ 94

(C) Acceptance made without knowing the proposal may cause the acceptance to be void.

See: R v. Clarke(1927) 40 CLR 227

William v. Carwardine (1833) 4 B & Ald. 621

The way the acceptance is made.• Acceptance must be expressed in some usual and reasonable

manner – Section 7(b) Contracts Acts 1950

• The proposal may prescribes the manner in which it is to be accepted, and the acceptance is not made in that manner, the proposal may, within a reasonable time after the acceptance is communicated to him, insist that his proposal shall be accepted in the prescribed manner, and not otherwise; but if he fails to do so, he accepts the acceptance - Section 7(b) Contracts Acts 1950; Weatherby v. Banham (1832) 5 C & P 228; Fraser v. Everett [1889]4 Ky. 512

• The proposer cannot prescribe silence as a manner of acceptance - Weatherby v. Banham (1832) 5 C & P 228 Fraser v. Everett [1889]4 Ky. 512; Felthouse v. Bindley [1862] 11 C.B.N.S. 869, 142 E.R. 1037.

Acceptance must be made within a reasonable time

Section 6(b) Contract Act 1950: A proposal is revoked by the lapse of the time prescribed in the proposal for its acceptance, or, if no time is so prescribed, by the lapse of a reasonable time, without communication of the acceptance

See: Macon Works & Trading Sdn. Bhd. v. Phang Hon Chin & Anor.[1976]2 M.L.J. 177

The communication of the acceptanceSection 3 of the Contracts Act 1950 provides inter alia

that the acceptance of proposals is deemed to be made by any act or omission of the party accepting by which he intends to communicate the acceptance or which has the effect of communicating it.

Section 4(2) of the Contracts Act 1950 provides that the communication of an acceptance is complete-(a) 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, and(b) as against the acceptor, when it comes to the knowledge of the proposer.

See: Madam Loh Sai Nyah v. American International Assurance Co Ltd (1988) 2 CLJ 327

General rule to the Communication of Acceptance

Section 4(2)(a) of the Contract Act 1950 provide that Acceptance shall be communicated by post or telegram. See Illustration (a) and (b) of Section 4 contract Act 1950.

Section 4(2)(b) of the Contract Act 1950 provide that Acceptance shall be communicated by other means than post or telegram.

For Acceptance by other means than post or telegram, it is considered complete against the proposer if the acceptance comes to the knowledge of the of the proposer. This principle is applicable for acceptance made in any means agreeable by both parties in the contract.

Exception to the General rule to the Communication of Acceptance by Post

Acceptance by post or telegram: Acceptance by post is known as “postal rule”. in cases of acceptance through post, acceptance is complete upon posting. See Illustration (b) of Section 4 contract Act 1950.

However, this rule that acceptance is complete upon posting may be excluded by the express terms of the offer. This is illustrated in the case of Holiwell Securities Ltd. v. Hughes [1974] 1 W.L.R. 155 where the offer prescribed that the acceptance must be by notice in writing to the intending vendor. Thus it was held that in such a case, the mere posting of the letter of acceptance was not sufficient.

when the acceptance does not reach the proposer, e.g. where the acceptance is contained in a letter which goes astray? This issue is dealt with in the case of Ignatius v. Bell [1913]2 F.M.S.L.R. 115 where it was held that there can still be an agreement because the offeror, though having no knowledge of the acceptance , is bound whilst the acceptor, because his acceptance had not come to the knowledge of the proposer, is not bound

See also:Adam v. Lindsell (1818) 1 B & Ald 681Household Fire Insurance Co v Grant (1879) 4 Exh D 216Henthorn v Fraser (1892) 2 Ch 27Lee Seng Heng & Ors v Gurdian Assurance Co Ltd (1932) MLJ 17

Communication of Acceptance by Telex, Telephone and Email

Another exception to the aforesaid rule as regards acceptance through the post lies in cases of instantaneous circumstances, e.g. telephone, telex, telefax – In Entores, court held that the situation is the same if both parties communicate face to face or via telephone, there is no binding contract between both parties until the acceptance has reached the plaintiff.

See:

Entores Ltd. v. Miles Far East Corporation [1955]2 QB. 327

Tenax Steamship Ltd. v. The Brimmes [1973]1 All E.R. 769

Brinkibon v. Stahlund Stahl Mbh (1982) 1 All ER 293

Bhagwandass v Girdhari Lal (1966) AIR SC 543

Question.: How about email? The acceptance via Email is sent trough the internet via some service providers or texts messaging agents before it reached its destinations. Should the “postal rule” be applicable?

Revocation of AcceptanceSection 5(2) Contract Act 1950 provides that an acceptance my

be revoke at any time before the communication of the acceptance is complete as against the acceptor, but not afterwards.

Section 4(2)(b) Contract Act 1950 provides that the communication of an acceptance is complete as against the acceptor, when it comes to the knowledge of the proposer.

Sections 4(3)(a) and 4(3)(b) Contract Act 1950 provides that the communication of a revocation is complete –(a) as against the person who makes it, when it is put into a course of transmission to the person to whom it is made, so as to be out of the power of the person who makes it; and(b) as against the person to whom it is made, when it comes to his knowledge.

See: Illustration (d) of section 4 Contract Act 1950.