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subtopic:1. elements of contract
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COMMERCIAL LAW
Chapter 2:
Law of contract
Copyright lecture notes prepared by Miss Fadhilah binti Abdul Ghani
LEARNING OBJECTIVE
• By the end of this chapter, students should be able to describe the basic principles of the law governing contracts.
Copyright lecture notes prepared by Miss Fadhilah binti Abdul Ghani
SUBTOPICS
1. What is contract?
2. Elements of contract
3. Parties to contract
4. Voidable contracts
5. Void and illegal contracts
6. Discharge and remedies
Copyright lecture notes prepared by Miss Fadhilah binti Abdul Ghani
CHAPTER 2:LAW OF CONTRACT
Subtopic 1:
What is contract?
Copyright lecture notes prepared by Miss Fadhilah binti Abdul Ghani
WHAT IS CONTRACT?
• Contracts are govern by Contract Act 1950
• Section 2 (b) Contract Act 1950: ‘A contract means that there is an agreement between two parties which is enforceable by law’.
• A contract is an agreement but not all agreements are contract. Why? Because a contract must have some elements
• Example: agreement to have dinner- not contract- because no intention to create legal relations
Source: Syed Ahmad Alsagoff, Principles of the law of contract in Malaysia, Lexis Nexis, 2005.Copyright lecture notes prepared by Miss Fadhilah binti Abdul Ghani.
Cont.
• A contract may be made: wholly by word of mouth (oral contract) or wholly in writing (written contract) or partly by word of mouth and partly in writing
Source: Syed Ahmad Alsagoff, Principles of the law of contract in Malaysia, Lexis Nexis, 2005.Copyright lecture notes prepared by Miss Fadhilah binti Abdul Ghani.
Contract
CHAPTER 2:LAW OF CONTRACT
Subtopic 2:
Elements of contract
Copyright lecture notes prepared by Miss Fadhilah binti Abdul Ghani
ELEMENTS OF CONTRACT
An agreement which can be enforceable by law must have some essential elements:
1. Offer2. Acceptance3. Consideration4. Intention to create legal relations5. Certainty6. Legal capacity
Copyright lecture notes prepared by Miss Fadhilah binti Abdul Ghani
FIRST ELEMENT OF CONTRACT: OFFER
1.1 Definition of offer1.2 Types of offer1.3 To whom offer can be made1.4 Communication of offer1.5 Revocation of offer1.6 Issues:
- Counter offer- Invitation to treat- Automatic vending machines/ticket machines
Copyright lecture notes prepared by Miss Fadhilah binti Abdul Ghani
1.1 DEFINITION OF OFFER
• S. 2(a) CA 1950: “when one person signifies to another his willingness to do/abstain from doing anything, with a view to obtaining the assent of that other to the act/abstinence, he is said to make a proposal”.
• E.g.
A offers to buy B’s car for RM 15,000 with a hope that B will accept
Source: Contract Act 1950
Copyright lecture notes prepared by Miss Fadhilah binti Abdul Ghani
1.2 TYPES OF OFFER
• S. 9 CA 1950:
There are 2 types offer:-1.Express offer:
Oral writing
2.Implied Offer: Conduct
Source: Contract Act 1950Copyright lecture notes prepared by Miss Fadhilah binti Abdul Ghani
1.3 TO WHOM OFFER CAN BE MADE
• :
Source: Syed Ahmad Alsagoff, Principles of the law of contract in Malaysia, Lexis Nexis, 2005.Copyright lecture notes prepared by Miss Fadhilah binti Abdul Ghani.
To Whom Offer
Can Be Made?
To Whom Offer
Can Be Made?
To general/public:Anyone
who meets all
the terms of
offer can
accept it
To individual:If A offers to B to
buy B’s car- only B
can accept A’ offer.
Cont.
Carlill v. Carbolic Smoke Ball Co. Ltd [1983]
Facts: Defendant advertised their products & offered money to anyone who would still suffer from influenza after using the products according to instructions for a fixed period (guarantee that the user will be OK after using the products). Plaintiff used the product but still ill- claim the money. Defendant refused.
Held: Plaintiff has accepted the offer made to the world (public), thus entitled to the money.
Source: Syed Ahmad Alsagoff, Principles of the law of contract in Malaysia, Lexis Nexis, 2005.Copyright lecture notes prepared by Miss Fadhilah binti Abdul Ghani.
1.4 COMMUNICATION OF OFFER
• S. 4(1) CA 1950:
complete when offeree knows about the offer
Source: Contract Act 1950
Copyright lecture notes prepared by Miss Fadhilah binti Abdul Ghani.
1.5 REVOCATION OF OFFER
• S. 5(1) CA 1950: anytime before communication of acceptance is complete
• Example: Ali telephones Abu and proposes to sell his car.Ali may revoke his offer at any time before Abu communicates his acceptance. (before Abu reply)
Sources: Contract Act 1950Copyright lecture notes prepared by
Miss Fadhilah binti Abdul Ghani.
Cont.
• How to revoke?1. S. 6(a) – by notice of revocation2. S. 6(b) – by lapse of time prescribed in the
proposal for its acceptance, or if no time prescribed, by the lapse of a
reasonable time, without communication of the acceptance.3. S. 6(c) – by failure to fulfill conditions4. S. 6(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.
Sources: Contract Act 1950Copyright lecture notes prepared by Miss Fadhilah binti Abdul Ghani.
1.6 ISSUES
1. Counter offer: - modification of the original offer- the acceptor change a
vital terms of a contract- counter offer operates as a rejection of the original offer. Thus, the original offer is destroyed and it can no longer be accepted.
Source: Syed Ahmad Alsagoff, Principles of the law of contract in Malaysia, Lexis Nexis, 2005.
Copyright lecture notes prepared by Miss Fadhilah binti Abdul Ghani.
Cont.2. Invitation to treat:
- invitation to treat is a sort of a preliminary
communication at the stage of negotiation.- it is not an offer, it is mere
an invitation by one party to the other party to make an offer.
• Examples of invitation to treat:1. display of goods in a shop
window/shelves2. price lists3. an advertisement4. an auction
Source: Syed Ahmad Alsagoff, Principles of the law of contract in Malaysia, Lexis Nexis, 2005.
Copyright lecture notes prepared by Miss Fadhilah binti Abdul Ghani.
Advertisement
Cont.Pharmaceutical Society of Great Britain v. Boots Cash Chemists
(Southern) Ltd [1952] Facts: The defendant adapted one of their shops into a self-service shop. A customer on entering was given a basket and can select items displayed on the shelves, put them in the basket and take the to the cash counter. At the counter, there was a registered pharmacist who was authorized if necessary to stop a customer from removing any drug from the shop. The defendant was charged for selling a poison without the supervision of a registered pharmacist. The vital question in this case was when the contract was made and this in turn depended on whether the display of the goods on the shelves was an offer or an invitation to treat. Held: the display of goods on shelf was only an invitation to treat. Proposal was made by the buyer when she placed the item into the basket. Thus, the contract would only be made at the cashier’s desk. The defendants had not made an unlawful sale.
Source: Syed Ahmad Alsagoff, Principles of the law of contract in Malaysia, Lexis Nexis, 2005.Copyright lecture notes prepared by Miss Fadhilah binti Abdul Ghani.
Cont.
Fisher v. Bell [1961]Facts: Defendant displayed in his shop window a flick knife and was charged with offering for sale a flick knife contrary to the provisions of the Restriction of Offensive Act.Held: the displaying of the flick was merely an invitation to treat. Hence there was no offer for sale and defendant could not be guilty of an offence.
Source: Syed Ahmad Alsagoff, Principles of the law of contract in Malaysia, Lexis Nexis, 2005.Copyright lecture notes prepared by Miss Fadhilah binti Abdul Ghani.
Cont.
3. Automatic vending machines/ticket machines:
Automatic vending machines/ticket machines – contract exists when customer inserts his money into the slot.
Thorton v. Shoe Lane Parking Ltd [1971]
“The offer is made when the proprietor of the machine holds it out as being ready to
receive money. The acceptance takes place when the customer puts his money into the slot. The terms of the offer are contained in the notice placed on or near the machine stating what is sufficiently brought to his
notice before hand”.Source: Syed Ahmad Alsagoff, Principles of the law of contract in Malaysia, Lexis Nexis, 2005.
Copyright lecture notes prepared by Miss Fadhilah binti Abdul Ghani.
SECOND ELEMENT OF CONTRACT: ACCEPTANCE
2.1 Definition of acceptance2.2 Types of acceptance2.3 Communication of acceptance2.4 Conditions of acceptance
Copyright lecture notes prepared by Miss Fadhilah binti Abdul Ghani
2.1 DEFINITION OF ACCEPTANCE
• S. 2(b) CA 1950:“when the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted”
Copyright lecture notes prepared by Miss Fadhilah binti Abdul Ghani
2.2 TYPES OF ACCEPTANCE
• S. 9 CA 1950:
1. Express - oral, writing2. Implied - conduct, sign
Copyright lecture notes prepared by Miss Fadhilah binti Abdul Ghani
2.3 COMMUNICATION OF ACCEPTANCE
• S. 4 CA 1950: complete when it comes to the offeror’s attention• If posted, occurs on the date posted, if by phone, fax, or email, it
occurs when received.• Example: Ali proposes by letter to sell a house to Abu at certain
price. The communication of the proposal is complete when Abu receives the letter.
Entores v. Miles Far East Corp [1955] :- Oral acceptance is drawn out by an overflying aircraft that
the offeror cannot hear the acceptance- no contract- unless the acceptor repeats his acceptance one the aircraft has passed over
• How to express acceptance? - S. 7(b) CA 1950:1.Usual/reasonable way or2.Prescribed by offeror
Sources: Syed Ahmad Alsagoff, Principles of the law of contract in Malaysia, Lexis Nexis, 2005; Law of contract 1950Copyright lecture notes prepared by Miss Fadhilah binti Abdul Ghani
Cont.
• Issue: Whether “silence” shall amount to acceptance?
• The offeror cannot without the offeree’s consent, put a condition in his proposal that the offeree’s silence shall amount to acceptance.
Felthouse v. Bindley [1826]
The plaintiff had discussed with his nephew on the purchase of the nephew’s horse and wrote to him offering to buy the horse and added “If I hear no more about him, I consider the horse is mine at £30 15s." The nephew did not reply. Six week later, whilst selling his farming stock, the nephew told the auctioneer to keep the horse out of sale. The auctioneer sold it by mistake and the plaintiff sued the auctioneer. The court held that there was no acceptance of the plaintiff’s proposal by the nephew and that the plaintiff had no right to impose upon his new a sale of his horse by silence.
Source: Syed Ahmad Alsagoff, Principles of the law of contract in Malaysia, Lexis Nexis, 2005.
Copyright lecture notes prepared by Miss Fadhilah binti Abdul Ghani
2.4 CONDITIONS OF ACCEPTANCE
- Acceptance must be while offer still in force - not terminated yet
- Made by offeree
- An acceptance must be absolute and unqualified (exactly match the term of offer) - S. 7(a) CA 1950. For example, if A makes a proposal to B on terms x, y and z. B accepts on terms x and y only or on terms x and y only or on terms w,x,y, and z. In this situation, B’s purported acceptance to A’s proposal is not absolute.
Sources: Syed Ahmad Alsagoff, Principles of the law of contract in Malaysia, Lexis Nexis, 2005.Contract Act 1950
Copyright lecture notes prepared by Miss Fadhilah binti Abdul Ghani
THIRD ELEMENT OF CONTRACT:CONSIDERATION
3.1 Meaning of consideration3.2 Functions of consideration3.3 Types of consideration3.4 Exceptions to invalidity of
agreement without consideration3.5 Issues:
- Past Consideration- Adequacy- Need not move from promisee or other
Copyright lecture notes prepared by Miss Fadhilah binti Abdul Ghani
3.1 MEANING OF CONSIDERATION
• S. 2(d) CA 1950
• In short, consideration means that the offeree must give something in return for the promise made by the offeror.
Macon Works & Trading Sdn Bhd v. Phang Hon Chin [1976]
“ A valuable consideration in the sense of the law may consist either in some right, interest, profit or benefit accruing to one party or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other”.
Sources: Syed Ahmad Alsagoff, Principles of the law of contract in Malaysia, Lexis Nexis, 2005; Law of Contract 1950Copyright lecture notes prepared by Miss Fadhilah binti Abdul Ghani
Cont.
• Consideration must be valuable. • Something must be supplied in return for the promise
made by the offeror, e.g. money.• Must not be unlawful or gratuitous.
Sources: Syed Ahmad Alsagoff, Principles of the law of contract in Malaysia, Lexis Nexis, 2005.Copyright lecture notes prepared by Miss Fadhilah binti Abdul Ghani
Cont.
Example: RM10
Ali Abu cut grass
• Consideration provides by Abu - Cutting of grass
• Consideration provides by Ali - pay RM 10
Copyright lecture notes prepared by Miss Fadhilah binti Abdul Ghani
3.2 FUNCTIONS OF CONSIDERATION
• A badge of enforceability• A basis for enforcing a promise
- only promise which has a valid consideration can be enforced
• Courts will not enforce a contract unless it is supported by consideration
• Both parties have consideration • If not, will become gratuitous promise
Copyright lecture notes prepared by Miss Fadhilah binti Abdul Ghani
3.3 TYPES OF CONSIDERATION
1. EXECUTORY:– A promise to do or to abstain from doing something
in the future.2. EXECUTED:
– Consideration executed by doing an act3. PAST:
– A promise made after an act is done wholly
Source: Syed Ahmad Alsagoff, Principles of the law of contract in Malaysia, Lexis Nexis, 2005Copyright lecture notes prepared by Miss Fadhilah binti Abdul Ghani
Cont.
1. Executory consideration:
Example:A promises to supply books in the future to B who agrees to pay.
• A promise for a promise in the futureK. Murugesu v. Nadarajah [1980]
Appellant promised to sell house to respondent within 3 months from the date of the agreement - but later refused to sell and the respondent sued for specific performance. The appellant contended agreement was void because no consideration. The former Federal Court held that the agreement was a case of executory consideration.
Source: Syed Ahmad Alsagoff, Principles of the law of contract in Malaysia, Lexis Nexis, 2005Copyright lecture notes prepared by Miss Fadhilah binti Abdul Ghani
Cont.
2. Executed Consideration:
• Consideration is executed by an act of an individual• E.g.
- Ali offers to give RM10 to anyone who find his lost cat
- Abu found the cat- Ali’s consideration is executed by Abu’s act
# Refer case Carlill v. Carbolic Smoke Ball
Source: Syed Ahmad Alsagoff, Principles of the law of contract in Malaysia, Lexis Nexis, 2005.Copyright lecture notes prepared by Miss Fadhilah binti Abdul Ghani.
Cont.3. Past Consideration:• Promise made after an act is wholly done• Generally, past consideration is not good consideration.• However, if the act done was at desire of the promisor,
then it is good consideration.• E.g.
- Ali is drowning & crying for help- Bala hears & saves Ali- Ali promises to give RM100 for saving his life
Roscorla v. Thomas [1842]– Plaintiff bought Defendant’s horse– After sale, Defendant promised that horse free from vice– But the horse was vicious– Held: D’s promise was made after sale
not supported by fresh consideration Plaintiff failed in claim
Source: Syed Ahmad Alsagoff, Principles of the law of contract in Malaysia, Lexis Nexis, 2005.Copyright lecture notes prepared by Miss Fadhilah binti Abdul Ghani.
EXCEPTION TO INVALIDITY OF AGREEMENT WITHOUT CNSIDERATION
General Rule: Agreement without consideration = void
Exceptions:
(a) Natural love & affection:- it is expressed in writing- it is registered (if applicable)- the parties stand in a near relation to each other
E.g. Father promises to give his son RM 10000. Father puts his promise to his son in writing and registers it under a law for the time being in force for the registration of such documents. This is a contract.
Source: Syed Ahmad Alsagoff, Principles of the law of contract in Malaysia, Lexis Nexis, 2005; Law of contract 1950Copyright lecture notes prepared by Miss Fadhilah binti Abdul Ghani.
(b) Debt barred by limitation of law:
- A promise to pay a debt barred by law is valid eventhough there was no consideration, provided that the promise is in writing and signed by the promisee or his agent who is generally or specially authorized in that behalf.
- E.g. Ali owes Abu RM 1000 but the debt is barred by limitation. Ali signs a written promise to pay RM 500 on account of the debt. This is a contract.
Cont.
Source: Syed Ahmad Alsagoff, Principles of the law of contract in Malaysia, Lexis Nexis, 2005; Law of contract 1950Copyright lecture notes prepared by Miss Fadhilah binti Abdul Ghani.
FOURTH ELEMENT OF CONTRACT:INTENTION TO CREATE LEGAL RELATION
• Not all agreement can be enforceable
• The parties must intend to be bound by the contract • Requires parties to have intention to create legal relation• Legal relation?
Source: Syed Ahmad Alsagoff, Principles of the law of contract in Malaysia, Lexis Nexis, 2005.Copyright lecture notes prepared by Miss Fadhilah binti Abdul Ghani.
Cont.
Legal relations divided into two classes:-
1. Commercial & Business agreement:– Intention to create legal relation is presumed– Intention can be rebutted by one who seeks to deny
it2. Social & Domestic Agreement: - where the presence or absence of an intention
to create legal relations depends upon the inference to be drawn by the court from the language used by the parties and the circumstances in which they use it.
Source: Syed Ahmad Alsagoff, Principles of the law of contract in Malaysia, Lexis Nexis, 2005.Copyright lecture notes prepared by Miss Fadhilah binti Abdul Ghani.
Cont.
Commercial & business agreement:
Example:
Carlill v. Carbolic Smoke Ball• Defendant claimed that product can prevent influenza• Support claim with promise to pay £100 to whom using it & yet
caught influenza within a given time• To show sincerity, they deposited £1,000 in bank• Defendant contended that advertisement not intended to create
legal relation• Held:The bank deposit was strong evidence that defendant had
contemplated legal liability when they issued their advertisement.
Source: Syed Ahmad Alsagoff, Principles of the law of contract in Malaysia, Lexis Nexis, 2005.Copyright lecture notes prepared by Miss Fadhilah binti Abdul Ghani.
Cont.Social & Domestic Agreement:
i. Agreement between husband and wife:
Balfour v. Balfour– Husband promised £30 a month– Later separated. Wife sued on the promise– Held: not contract- because they have no intention
that agreement should have legal consequence.Merritt v. Merritt
– Agreement made while about to separate– Held: agreement as a bargain with intention of
being legally enforceable.
Source: Syed Ahmad Alsagoff, Principles of the law of contract in Malaysia, Lexis Nexis, 2005.Copyright lecture notes prepared by Miss Fadhilah binti Abdul Ghani.
Cont.ii. Agreement between parent and child:
Jones v. Padavaton- Mrs Jones offered monthly allowance if her daughter come to
England & study law. Her daughter agreed.- A little later, Mrs Jones offered n addition to provide a house
for her daughter.– Her daughter then became so uncooperative > Mrs Jones
claimed possession of the house.– Her daughter resisted on the round that her mother was
contractually bound to the agreement.– Held - agreement motivated by mum’s desire for
daughter to succeed.- no intention to enter into contractual
arrangement.
Source: Syed Ahmad Alsagoff, Principles of the law of contract in Malaysia, Lexis Nexis, 2005.Copyright lecture notes prepared by Miss Fadhilah binti Abdul Ghani.
Cont.
iii. Other close relations:
Uncle & Niece:
Parker v. Clarke– Mr. Clarke and Mrs. Carke invited Parker (niece) to stay with
them.– Promised her if she sold her house & live with them, their
house will be hers on their death– After 2 years, asked her to leave– Parker sued & succeeded– Held: had intention to create a contract, particularly cogent
evidence of which was that the Clarkes’ promises had induced Parker to sell her house and move with them.
Source: Syed Ahmad Alsagoff, Principles of the law of contract in Malaysia, Lexis Nexis, 2005.Copyright lecture notes prepared by Miss Fadhilah binti Abdul Ghani.
FIFTH ELEMENT OF CONTRACT:CERTAINTY
• There must be certainty as to the parties, subject matter, and price.
• An agreement which is uncertain or is not capable of being made certain is void.
• Wording of the agreement must be clear and not uncertain or vague.
• Example:
Suppose Ali agrees to sell 500 tones of oil to Mail. But, what kind of oil is not mentioned clearly. So on the ground of uncertainty, this agreement stands void.
Source: Syed Ahmad Alsagoff, Principles of the law of contract in Malaysia, Lexis Nexis, 2005.Copyright lecture notes prepared by Miss Fadhilah binti Abdul Ghani.
SIXTH ELEMENT OF CONTRACT:LEGAL CAPACITY
• The parties entering into a contract should also be competent to contract, i.e. they must have the legal capacity to do so.
• S. 11 CA 1950: Who is competent?• Age of majority• Sound mind• not disqualified e.g. bankrupt
Cont.
Age majority:
• Person attaining age of Majority can affect a valid contract
• S. 2 of Age of Majority Act 1971: 18 yrs • Below 18 = Minor• Contract made by minor is void
Cont.
Sound mind:
• S.12 CA 1950: defines sound mind – Can understand the nature & effects of contract – at the time of contract
• Temporary sound mind can make contract
Cont.Issue of minor:
General Rule: Contracts made by minor are void
• Mohori Bibee v. Dhurmodas Ghose (1903)– Minor X make a valid contract
• Tan Hee Juan v. The Boon Keat (1934)– Transfer of land by minor was void
Exceptions:1. Contracts for Necessaries 2. Contract of scholarship3. Contract of Insurance
Source: Syed Ahmad Alsagoff, Principles of the law of contract in Malaysia, Lexis Nexis, 2005.Copyright lecture notes prepared by Miss Fadhilah binti Abdul Ghani.
QUESTIONS
1. The basic elements of a contract are:• a) Offer, acceptance, consideration, and intention to
create legal relations.• b) Offer, acceptance, certainty, practicality, and intention
to create legal relations.• c) Offer, acceptance, certainty, consideration, and
reasonableness.• d) Offer, acceptance, certainty, consideration, capacity
and intention to create legal relations.
2. The word ‘contract’ may be defined as ‘an agreement enforceable by law’ (True/False)
Copyright lecture notes prepared by Miss Fadhilah binti Abdul Ghani
Cont.
3. Which ONE of the following usually amounts to an offer?
a) Goods sold through a machine.
b) Advertisements.
c) Displays of goods.
d) An auction.
4. The legislation in Malaysia governing contracts is the Contracts Act 1950 (True/False)
5. Invitation to treat is an offer (True/False)
Copyright lecture notes prepared by Miss Fadhilah binti Abdul Ghani
Cont.
6. All agreements are contract (True/False)
7. An offer can be terminated in a number of ways. Which ONE of the following is NOT an effective way to terminate an offer?
a) Rejection by the offeree.
b) Failure of a condition precedent.
c) Revoking the offer following acceptance.
d) Lapse of a reasonable time.
8. An agreement without consideration is void (True/False)
Copyright lecture notes prepared by Miss Fadhilah binti Abdul Ghani
Cont.
9. Which ONE of the following statements regarding acceptance is true?
a) Silence does not constitute valid acceptance.
b) An offeree can accept an offer of which he was not aware.
c) Generally, there is no need for an offeree to communicate his acceptance to the offeror.
d) Generally, acceptance need not precisely match the terms of the offer.
10. Besides being of the age of majority, a person competent to contract must be mentally sound mind (True/False)
Copyright lecture notes prepared by Miss Fadhilah binti Abdul Ghani