EUT 440 ENGINEERS IN SOCIETY

TOPIC 2: CONTRACT LAW

CONTRACT LAW IN MALAYSIA: BACKGROUND

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English law (common law, equity & statute) forms part ofthe laws in Malaysia and still applicable

Section 3(1)(a) Civil Law Act 1956 states that courtsshould apply Common Law and the Law of Equity asadministered in England:

� in Peninsular Malaysia: 7 April 1956.

� in Sabah: 1 December 1951.

� in Sarawak: 12 December 1949

Section 5(1) Civil Law Act 1956 states that the principlesof English commercial law apply in Peninsular Malaysiaexcept Penang and Malacca in absence of locallegislations.

…BACKGROUND

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The case law related to the boundaries ofapplication.

Jamil Bin Harun v. Yang Kamsiah & Anor [1984] 1 MLJ 217.

It was decided that courts have the authority to decidewhether to follow English Law (common law and law ofequity) or Federal law, considering the circumstances andthe scope the written law permits to do so.

Smith Kline & French Laboratories Ltd. v. Salim (Malaysia) Sdn. Bhd.[1989] 2 CLJ. 228.

It was held that the courts have the authority to put asideany Common Law or Law of Equity which cannot be appliedin Malaysia.

CONTRACT LAW IN MALAYSIA

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Contract law is governed by the Contracts Act (CA) 1950.

� The Act is a re-enactment of the Contracts (MalayStates) Ordinance 1950.

� Principles of contract originated from England, but theoriginal Ordinance was a reproduction of the IndianContract Act of 1872.

The functions of the contract law-� establishes what kinds of promises will be legally

binding.

� supplies procedures for enforcing legally bindingpromises, or agreement.

WHAT IS CONTRACT?

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An agreement between two or more parties that createsan obligation to perform (or not perform) a particularduty.

S.2(h) CA 1950 – “an agreement enforceable by law is acontract”.

S.10(1) CA 1950 – „All agreements are contracts if theyare made by the free consent of parties competent tocontract, for a lawful consideration and with lawfulobject, and are not hereby expressly declared to bevoid‟.

All contracts must be built upon an agreement althoughnot all agreements are automatically contracts e.g:social agreements & domestic agreements.

TYPES OF CONTRACT

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Formal vs Informal Contracts.

�Formal, need a seal v informal, simple & without seal.

Unilateral vs Bilateral Contracts.

v bilateral,� Unilateral, a promise on 1 side promises on both sides.

� Unilateral: Carbolic Smoke Ball case

Forms of Contract

� Oral

� Written

ELEMENTS OF CONTRACT

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constitutes the A legally enforceable contract elements of contract -

(1) Offer/proposal (I‟ll fix your sink this weekend, if you pay me RM50)

(2) Acceptance (You‟ve got a deal)

(3) Consideration (The value received and given –the money and the sink fixed)

(4) Intention to create legal relations

(5) Certainty

(6) Legal Capacity

(7) Free Consent

ESTABLISHING OFFER AND ACCEPTANCE

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S.2(a) CA 1950: Proposal – “when one person

signifies to another his willingness to do or to

abstain from doing anything, with a view to

obtaining the assent of that other to such act or

abstinence”.

S.2(b) CA 1950: Acceptance – “when the person to

whom the proposal is made signifies his assent

thereto, the proposal is said to be accepted: a

proposal, when accepted, becomes a promise”.

�A legally recognized offer and an acceptance creates a“meeting of the minds‟, or mutual assent, between theparties.

EXAMPLE

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Ali wants to sell his car. He makes an offer to sell hiscar to Rahim for RM25,00.00. If Rahim say yes, theoffer is said to be accepted.

A person who make an offer is now referred aspromisor (offeror) and the party accepting theproposal as promisee (offeree).

Once the offer has been made and accepted, itbecomes a promise or an agreement.

TYPES OF OFFER

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Specific: the offer only can be accepted by a person who has been offered.

�Boulton v Jones (1857) 2 H & N 564.Jones used to have business dealings with Brockle Hurst. He sent anorder (offer) to Brockle Hurst for the purchase of certain goods. Bythe time the order reached Brockle Hurst, he had sold his business toBoulton. Boulton receiving the order sent all the goods to Jones asper the order without informing Jones of the changing of the handsof the business. When Jones learnt that the goods were not suppliedby Brockle Hurst, he refused to pay for the goods. His contentionwas that he had never placed an order to Boulton, the offer beingmade to Brockle Hurst, and therefore had no intention to make acontract with Boulton. Held: Jones was not liable to pay.

…TYPES OF OFFER

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General: the offer is general as it is made to the public.

�Carlill v Carbolic Smoke Ball Co.[1892] EWCA Civ 1The defendant company advertised that a reward of £ 100 would bepaid to any person who contracted influenza, cold, or any otherdisease associated with cold even after using the smoke balls of thecompany – a preventive remedy, 3 times a day, for 2 weeks inaccordance with the printed directions. The plaintiff had seen theadvertisement, used the smoke balls according to the printeddirections and for a period as specified, but still contractedinfluenza. She sued the defendant company to claim the reward.Held: that the advertisement constituted the offer to the wholeworld at large ( – general offer) which was accepted by the plaintiffby conduct. ( – by using smoke balls).

WHEN IS AN OFFER EFFECTIVE?

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S.4(1) CA 1950 – A proposal/offer is only effective if it is communicated to the acceptor.

3 elements are necessary for an offer to be effective(mutual assent):

� Intention: There must be serious, objective intention by the offeror to become bound by the offer.

Non-offer situations include: expressions of opinion,statements of intention, preliminary negotiations &advertisements, catalogues and circulars.

� Definiteness: The terms of the offer must be reasonably certain + definite.

� Communication: The offer must be communicated to the offeree.

OFFER V INVITATION TO TREAT

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„Invitation to treat’ - a sort of preliminarycommunication which passes between the parties atthe stage of negotiation.

� Advertisement in newspapers, catalogues, circulars & display of goods in self-service mall.

� Auction sale.

Invitations to make offers rather than offers, thus,the „advertisor‟ would have several offers to choose fromand could accept the best one without incurring anyliability for the rest he/she rejected.

TERMINATION OF THE OFFER

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S.6 CA 1950: 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 so prescribed, by thelapse of a reasonable time, without communication ofthe acceptance;

(c)by the failure of the acceptor to fulfil 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 theknowledge of the acceptor before acceptance.

ACCEPTANCE

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To establish a contract, the acceptance must becommunicated to the offeror/promisor.

�Only offeree/agent may accept the offer.

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: a proposal,

when accepted, becomes a promise”.

REQUIREMENTS OF ACCEPTANCE

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(absolute and(1) Acceptance must be unequivocalunqualified).

�S.7(a) CA 1950: any modification or variation of the proposal doesnot constitute an acceptance but amounts to a counter-proposalby the party to whom the original proposal was made).

Case: HYDE v. WRENCH [1840] 3 Beav. 344 ER 132

6 June: Def. offered to sell his estate to the Plf. for £100.

8 June: Plf. replied and made a counter offer to purchase at £950 (counter-offer), but the Def. refused.

27 June: Plf. wrote to Def. saying he was prepared to pay theoriginal sum demanded.

Held: no contract existed between them since Plf. had rejected theoriginal proposal on 8 June so that he was no longer capable ofaccepting it later.

…REQUIREMENTS OF ACCEPTANCE

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(2)Acceptance must be expressed in some usual and reasonable manner-

�S.7(b) CA 1950: acceptance must be expressed in someusual and reasonable manner, unless the proposalprescribes the manner in which it is to be accepted. Ifthe proposal prescribes a manner in which it is to beaccepted, and the acceptance is not made in thatmanner, the proposer may, within a reasonable timeafter the acceptance is communicated to him, insistthat his proposal shall be accepted in the prescribedmanner, and not otherwise; but, if he fails to do so, heaccepts the acceptance.

COMMUNICATION OF ACCEPTANCE

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General rule: acceptance of a proposal must be communicated to the proposer/promisor.

Exception: Postal rule (parties involved are not dealing face to face).� S.4(2) CA 1950: the communication of an acceptance is

complete –

(a) As against the proposer, when it is put in a courseof transmission to him, so as to be out of the powerof the acceptor; and

(b) As against the acceptor, when it comes to theknowledge of the proposer.

CONSIDERATION

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S.2(d) CA 1950: “when, at the desire of the promisor,the promisee or any other person has done orabstained from doing, or does or abstains fromdoing, or promises to do or to abstain from doing,something, such act or abstinence or promise iscalled a consideration for the promise”.� Consideration is defined as the value given in return

for a promise.

Sufficiency & adequacy of consideration.� Something of legally sufficient value must be given in

exchange for the promise; and

� Must be a bargained-for exchange.

CONTRACTUAL CAPACITY

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into a contractual The legal ability to enterrelationship.

S.11 CA 1950: Capacity – “every person is competentto contract who is of the age of majority… , andwho is of sound mind, ….”

� Age of Majority Act 1971: the age of majority (adult) inMalaysia is18 years.

� S.12(1) CA 1950: „a person is said to be of sound mindfor the purpose of making a contract if, at the timewhen he makes it, he is capable of understanding itand of forming a rational judgment as to its effectupon his interest‟.

…CONTRACTUAL CAPACITY

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3 types of people who do not have the capacity to entera contract are minors, intoxicated persons and mentallyincompetent persons.

Exception of contract by minors: Contracts for necessity;scholarship; insurance, and relating to marriage, divorceand dower.

Sound mind:

(a) A patient in a mental hospital, who is at intervals of sound

mind, may contract during those intervals.

(b) A sane man, who is delirious from fever, or who is so drunk

that he cannot understand the terms of a contract, cannotcontract whilst such delirium or drunkenness lasts.

INTENTION

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2 assumptions of intention-

– are not�Social @ domestic agreements

intended to create legal relations unlessproven otherwise.

�Commercial agreements – are intended to create legal relations unless proven otherwise.

CERTAINTY

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The terms of an agreement cannot be vague but must be certain.

�A agrees to sell to Mary a hundred crates of toys without

specifying what kind they are; such an agreement is

void.

S.30 CA 1950: An agreement which is uncertain isvoid.

� In Karuppan Chetty v. Suah Thian (1916) 1 F.M.S.L.R. 300,the contract was held void for uncertainty because theparties agreed to lease of $35 per month „for as long ashe likes‟. The terms are uncertain as the duration of thelease is not specified or capable of being made certain.

FREE CONSENT

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S.10(1) CA 1950: “agreements are contracts if they are

made by the free consent of parties competent to

contract …”

What constitutes consent?� S.13 CA 1950: Two or more persons are said to consent

when they agree upon the same thing in the same sense”.

� S.14 CA 1950 : Consent is said to be free when it is notcaused by:

(a)Coercion, as defined in s.15

(b)Undue influence, as defined in s.16

(c)Fraud, as defined in section 17

(d)Misrepresentation, as defined in s.18

(e)Mistake, subject to sections 21,22-23.

VOID AND ILLEGAL CONTRACTS

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For a contract to be valid and enforceable, it must be formed for a legal purpose.� Contracts contrary to public policy?

− Contracts in restraint of trade

− Unconscionable clauses

− Exculpatory clauses – “once broken considered sold”?

�Contract to commit an immoral act & contract that prohibits marriage.

− A offers a young man RM3000 if he refrains frommarrying A’s daughter. If the young man accepts, nocontract is formed (the contract is void) because it iscontrary to public policy.

…VOID AND ILLEGAL CONTRACTS

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Not enforceable by law

� S.24 CA 1950: the consideration or object of an agreement is lawful unless:

− forbidden by law

− if permitted, would defeat any law

− fraudulent

− implies injury to a person or property of another

− court regards it as immoral or opposed to public policy

DISCHARGE OF CONTRACT

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Contract that is otherwise VALID may beunenforceable if the parties have not genuinelyassented to the terms or the contract is not in theproper form.

Contract discharge-

� Discharge by agreement of the parties ~ byrescission, novation or accord and satisfaction;

� Discharge based on impossibility of performance~by complete performance or inadequateperformance (constitutes a material breach ofcontract).

BREACH OF CONTRACT

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Breach of contract is a legal cause of action in whicha binding agreement is not honored by one or moreof the parties to the contract by non-performance orinterference with the other party's performance.

If the party does not fulfill his contractual promise,or has given information to the other party that hewill not perform his duty as mentioned in thecontract or if by his action and conduct he seems tobe unable to perform the contract, he is said tobreach the contract.

Breach of contract is a type of civil wrong.

REMEDIES

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S.66 CA 1950: When an agreement is discovered to bevoid, or when a contract becomes void, any person whohas received any advantage under the agreement orcontract is bound to restore it, or to make compensationfor it, to the person from whom he received it.

� A contracts with B to deliver to him 250 gantangs of rice

before the 1st of May. A delivers 130 gantangs only before

that day, and none later. B retains the 130 gantangs afterthe 1st of May. He is bound to pay A for them.

� A contracts to sing for B at a concert for RM1,000, which

are paid in advance. A is too ill to sing. A is not bound to

make compensation to B for the loss of the profits which B

would have made if A had been able to sing, but must

refund to B the RM1,000 paid in advance.

…REMEDIES

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Remedies from the court:�Damages - to compensate the innocent party for losses suffered as

result of the contract being breached by the party in breach.

− Compensatory, consequential, punitive, nominal, liquidated.

� Rescission and restitution

� Specific performance - a decree directing a contract orcertain act should be performed specifically according to itsoriginal terms

� Injunction - An order of court refrain the party to whom it is

addressed from doing a specified act.

Election of remedies: A common law doctrine under whicha non-breaching party must choose ONE remedy fromthose available to prevent double recovery.