Académique Documents
Professionnel Documents
Culture Documents
Introduction
and Elements
of a Contract
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1.
2.
3.
4.
X INTRODUCTION
In this topic, you will be introduced to the laws which govern the formation of a
contract in Malaysia. You should understand the definition of a contract and each
basic element in the formation of a contract, which are made up of offer,
acceptance, consideration, capacity, intention and certainty. Students will not
only find Malaysian Acts and cases applied in the discussions, but also those
from England, India and Singapore. These are facts neces sary to support your
answers during the examination. With a clear understanding of all the points
above, you should be able to complete all the exercises given in this topic.
X TOPIC 1
1.1
In Malaysia, the Contracts Act 1950 (hereafter referred to as CA 1950) governs the
formation of a contract. The Sale of Goods Act 1957 governs contracts for the sale
of goods, whereas hire-purchase contracts are governed by the Hire-Purchase Act
1967. Apart from these Acts, students will also study English cases and statutes
which are accepted as authority based on the provisions of Sections 3 and 5 of the
Civil Laws Act 1956.
However, it must be noted that these English laws are only adopted as persuasive
authority and does not bind the decisions of the Malaysian courts. Furthermore,
the application of English Laws shall only be made if there is a lacunae in the local
laws and insofar as it suits the circumstances and situation prevailing in Malaysia
(as far as it does not contradict the local circumstances). For further understanding,
you need to refer to Sections 3 and 5 of the Civil Laws Act 1956.
Besides English Law, Indian cases should also be referred to in certain topics. In
certain cases, the Malaysian Courts had referred to the Indian Contracts Act as the
Malaysian CA 1950 was taken from the Indian CA 1950. There are thus many
similar provisions in both the Indian and our Contracts Act of 1950. In interpreting
the provisions of the CA 1950, the Malaysian Courts had referred to Indian cases.
1.1.1
Definition of a Contract
You might think that it is hard to form a contract due to the many elements that
must be complied with, that it can only be made formally, and that a person must
sign it in front of a lawyer or a witness.
Actually, a person goes around with a binding contract almost daily without
her/him realising it. For example, when you goes to a shop to buy something,
you make a contract with the shopkeeper, or when you board a bus or park car at
the parking lot, you make a contract with the bus company or the car park
operator.
The definition of contract in the CA 1950 as set down below may help you
understand the term better.
Definition
Section 2(h) : an agreement enforceable by law is a contract
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You need to ensure that any agreement made is valid for it to be enforceable in
law as a binding contract. If any agreement made is not enforceable, the parties
involved will not obtain any redress from the court for any damages suffered.
This is based on Section 2(g) which states that an agreement not enforceable by
law is said to be void.
Which agreement is a contract?
Definition
You have to refer to Section 10(1) which states that all agreements are
contracts if they were 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.
SELF-CHECK 1.1
You must have heard of the word contract in your daily life. What is
contract under the law?
1.1.2
Table 1.1 shows the basic elements needed for the formation of a contract. The
elements shown in Table 1.1 are necessary for a valid and enforceable contract
under the law. We will study further each element in detail.
Table 1.1: Basic Elements in the Formation of a Contract
Element
Explanation
1.
Offer
2.
Acceptance
3.
Consideration
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4.
Capacity
5.
Intention
Each party which enters into a contract must have the intention to
create legal relations that is that they are to be bound by the
obligations under the contract.
6.
Free Consent
7.
Certainty
8.
Valid Object
A contract made must be for matters which are not against the law.
These will be discussed in detail in Topic 3, i.e. Void Contracts.
There is no need to memorise the entire words in the definition. You only have to
know the meaning of the section. It defines that an offer can only exist when an
offeror/promiser, by his act or words, stated his willingness to be bound by the
contract as soon as the other person to whom he made the proposal accepts it.
Example: Ahmad told Bakar that he is willing to sell his computer to Bakar for
RM2,000. In this situation, Ahmad has made an offer to Bakar.
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1.2.1
(b)
(c)
The public at large One has to differentiate between an offer made to the
public at large and an invitation to treat. An offer made to the public at
large can be accepted by anyone as long as he performs the conditions
stated in the said offer. As soon as someone fulfilled the said conditions, the
offeror can no longer withdraw from the contract. Example: Ben advertised
in the newspaper offering a reward to anyone who finds and returns his
wallet. In this case, the offer was made to the world at large, and anyone who
finds his wallet and returns it to him is considered as making an acceptance
to the said offer. Ben is therefore bound to his promise to give a reward.
Do try to distinguish the example shown in (c) from the following scenario. Bob
advertised in the newspaper to find a skilled worker to work as a sales manager
in his company. In this context, Bob does not intend to be bound with each
application received for the said job, even if each applicant has fulfilled the
criteria listed by him. Bob is only said to make an invitation to treat as the real
offer comes from the applicants.
Any statement made for the purpose of giving information cannot be deemed as
an offer. This is clarified in the case of Harvey V. Facey [1893].
In this case, A telegraphed B Will you sell us Bumper Hall Pen? Telegraph lowest
cash price. B replied by telegram Lowest price for Bumper Hall Pen is of 900. A
telegraph B We agree to buy Bumper Hall Pen for a price of 900 as you wish.
A claimed that a contract existed because there was an offer and an acceptance.
But the Court decided that in the telegram, B only supplied information and did
not make an offer. A however in his second telegraph had made the offer. It
therefore did not constitute a contract.
SELF-CHECK 1.2
You have learned the difference between an offer and an invitation
to treat. Just look at body slimming products advertised in the
television. Differentiate between the body slimming products sold
in shops with advertisement of body slimming products which
guarantees a refund within 30 days. Is it an offer or only an
invitation to treat? Discuss this point with your classmates.
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1.2.2
Invitation to Treat
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(a)
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In this case there was also an intention by the defendant to be bound by the
contract upon acceptance by their act of depositing 1000 with their bankers
to be paid to any party making a claim. Indirectly, this act indicates their
intention to be bound by the contract.
As a general rule, an advertisement for appointments or tender invitations
made to the public is deemed to be an invitation to treat because it is still at
the negotiation and selection stage. On the other hand it is deemed to be an
offer if the advertisement offers a reward to any person who finds and
returns it, or an advertisement which shows an intention on the part of the
advertiser to be bound by the contract if what is specified in the
advertisement is fulfilled as in the case of Carlill.
(b)
(c)
Auctions
In a public auction the auctioneer invites the public to make an offer, that is
to offer the highest bid. When those who attend makes an offer, it is up to
the auctioneer whether to accept it or not. An acceptance is considered
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made at the fall of the hammer. Section 10 of the Auction Sales Enactment
[Chap. 81 of the Federated Malay State] states that;
A sale by public auction shall be complete when the auctioneer
announces its completion by the fall of the hammer.
1.2.3
Revocation of Offer
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January 2002. In this case, the communication of the proposal is only completed
on the 10th of January 2002, that is, when Bala received the letter.
A proposal will only be effective if it is communicated. It means that, the
intended promisee should have knowledge of the existence of the said proposal.
This is because before an acceptance can occur, a proposal must be
communicated.
Illustration (a) of Section 4 of the CA 1950 can be referred to for a further
understanding of the position of a communication of proposal by post. A
proposed, by letter, to sell a house to B at a certain price. The communication of
the proposal is complete when B receives the letter.
1.2.4
Revocation of an Offer
If a proposer wishes to revoke his proposal, he has to satisfy Section 5(1) of the
CA 1950, which provides:
Provision
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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Definition
It means, if a proposer wishes to withdraw his proposal, he must
communicate his revocation of the proposal to the promisee. If he fails to do
so before an acceptance is made, his revocation of the proposal is then
ineffective.
When the communication of revocation is complete and effective? If the
proposer communicates by post, the communication of revocation of a
proposal is effective when it fulfills all the conditions stipulated in Section
4(3) of the CA 1950.
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Provision
Section 4(3) provides that 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.
Section 4(3) refers to the two different parties involved. Paragraph (a) refers
to the proposer while paragraph (b) refers to the promisee. In order to
completely revoke a proposal, both paragraph (a) and (b) of Section 4(3)
must be satisfied. Refer to Illustration (c) of Section 4 of the CA 1950 for a
clearer picture of this section.
You should be able to distinguish between communication of revocation
and communication of acceptance. Bryne v. Van Tienhoven (1880) is an
important case for reference on communication of revocation of a proposal.
The defendant made a proposal by letter to sell 1000 boxes of tinplates to
the plaintiff on the 1st of October. On the 8th of October however, the
defendant posted a revocation letter. The plaintiff received the offer letter
on the 11th of October and telegraphed their acceptance.
The plaintiff only received defendants letter of revocation of the proposal
on the 20th of October.
The issues which the court must decide were:
(i)
Was the revocation of the proposal effective even though it was not
communicated?
(ii)
The court held that the revocation of the proposal was inoperative as
against the plaintiff until it comes to his knowledge. The posting of the
letter of revocation by the defendant was not communication. The
acceptance made by the plaintiff on the 11th of October could not be
affected by the fact that the defendants letter of revocation was already on
its way. There was a valid contract on the 11th of October. Revocation of
the proposal was only effective on the 20th of October, that is, the day when
TOPIC 1
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the plaintiff received the revocation letter. The defendant therefore was
bound by the contract.
The effect of Section 4(2)(a) and (b) of the CA 1950, on communication of
acceptance and communication of revocation respectively is clearly shown
in Bryne v. Van Tienhoven.
The case of Henthorn v. Fraser (1892) further shows the position of the
principle regarding revocation of proposal. Lord Herschell held that
communication of an acceptance takes place once such letter is posted is
not applicable to communication of revocation of a proposal.
Communication of revocation of a proposal is similar to communication of
a proposal where it is not effective unless brought to the mind of the
promisee.
(b)
By the lapse of the time prescribed in the proposal for its acceptance, or, if
no time is prescribed, by the lapse of a reasonable time, without
communication of the acceptance.
Definition
This provision means that if a proposal has stated a time for an acceptance
and no acceptance has been made within the specified time, the proposal will
lapse or is revoked.
Example: Pak Ali proposed to sell his farm to Pak Abu for RM10,000. Pak
Ali told Pak Abu that the offer is open only for two weeks. If Pak Abu
failed to accept within two weeks, the proposal lapses.
What if there is no fixed time for acceptance of the proposal is made? When
will such proposal lapses? In such cases, a proposal lapses after a
reasonable time. What is reasonable time depends on the discretion of the
court based on the facts of the case and the nature of the subject-matter of
the said contract.
This can be seen from the case of Ramsgate Victoria Hotel Co v. Montefiore
(1866). The defendant applied for shares in the plaintiff company by a letter
dated 8th June. He received no further news until 23rd November by a
letter from the plaintiff which informed him that the shares had been
alloted to him. The defendant refused to accept them.
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X TOPIC 1
The court held that the defendants proposal had lapsed because of the
plaintiffs failure to accept within a reasonable time. So, the defendant was
not bound to accept the shares.
(c)
The case in point is Hyde v. Wrench (1840). A proposed to sell to B his farm
for 1,000. B agreed to buy it for 950. A refused to sell at the said price. B
then agreed to buy it at its original price, which is 1,000. A refused to sell
the said farm to B even though B had agreed to the original proposal.
The Court held that B had refused As proposal and had made a counteroffer instead. There was no contract because the counter-offer caused the
original offer to lapse. A was entitled not to sell his farm to B.
SELF-CHECK 1.3
What do you think is the effect on the original contract, if an acceptor
proposes new conditions into it.
(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.
A proposal will lapse if the proposer dies or is mentally disordered and the
death or the mental disorder is known by the promisee before he makes an
acceptance.
A contract is valid and enforceable if a promisee until he makes an
acceptance is ignorant of the proposers death or mental disorder. This was
decided in Bradbury v. Morgan (1862).
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15
A proposal will also elapse if a promisee has died and the executor or the
estate administrator cannot accept proposals on behalf of the deceaseds
estate or inheritance. This was decided in Re Chesire Banking Co. (1886).
EXERCISE 1.1
1.
By a letter dated 1st of July 2001, Ali proposed to sell Adam his
farm for RM15,000. In it, Ali stated that the proposal was open
until the 1st of August 2001. On the 10th of July 2001, Adam
received the proposal letter. He wrote back to state his acceptance
on the 20th of July. On the 15th of July, Ali posted a letter
revoking the proposal to Adam. The letter of revocation of the
proposal only reached Adam on the 25th of July 2001. Adam
demanded Ali to perform his promise but Ali claimed that he was
not bound by the proposal as he had revoked it before the 1st of
August 2001. Advise both parties.
2.
1.3
1.3.1
A.
B.
C.
D.
ACCEPTANCE
Definition of Acceptance
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X TOPIC 1
1.3.2
Terms of an Acceptance
(b)
1.3.3
Form of Acceptance
Logically, one would think that an act of silence does not amount to acceptance
since an acceptance must be communicated. In Fraser v. Everett (1889), Wood,
Acting CJ, held that there is no rule of law like the saying silence gives consent.
In Felthouse v. Bindley (1862), Felthouse wrote to his nephew offering to buy a horse
for 30 15s. And he added If I hear no more about him, I consider the horse mine at 30
15s. The nephew did not reply. The nephew however told Bindley (an auctioneer) to
keep the horse out of the sale of his farming stocks because he wanted to set it aside for
Felthouse. The auctioneer sold it by mistake. Felthouse sued Bindley.
The Court held that there was no acceptance by the nephew as he had kept silent.
Plaintiff therefore had no right to claim the horse as there was no contract.
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Generally, silence does not amount to an acceptance even if the promisee intends to
accept the proposal. However, silence may amount to an acceptance if the promisee
gains some benefit out of the proposal when he has ample time to reject it.
Example: A proposer sent food to the promisee, prescribing that payment for the
food need to be paid if the promisee accepts the proposal by consuming the said
food. In this situation the act of consuming the food amounted to an acceptance
even if the promisee kept silent (not communicating his acceptance to the
proposer). This principle was held in Weatherby v. Banham (1832).
Definition
If a proposal prescribes a time limit for an acceptance to be made, such a
proposal must be accepted within the prescribed time. Any failure will
nullify the proposal. If no time is prescribed, acceptance then must be made
within a reasonable time. Do refer to Section 6(b) of the CA 1950.
1.3.4
Reasonable time was discussed under the topic of offer earlier. In Ramsgate
Victoria Hotel Co. v. Montefiore (1866), the defendant applied for shares in the
plaintiff company on the 8th of June. He received no further news until 23rd
November. When he was informed that the shares have been alloted to him the
defendant refused to accept them.
The Court held that the plaintiff had allowed too long a time to lapse before
accepting defendants offer. The defendant therefore is not liable to accept the
shares.
It is clearly shown that the delay in making an acceptance in cases which
involves shares will deny the existence of a contract, being subject to price
fluctuations.
The principle of reasonable time is also applicable to contracts involving
perishable goods.
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X TOPIC 1
SELF-CHECK 1.4
Haneef was given 30 days to accept Kennys proposal for a
contract to buy a house. Haneef made his acceptance on the 32nd
day. What is the effect on the contract? Can Kenny revoke his
proposal? Discuss in class.
1.3.5
Communication of Acceptance
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The contract binds both parties, that is the proposer and the promisee at two
different times. Illustration (b) states that the contract binds against A the
moment the promisee posted the letter of acceptance. Whether the letter arrives
to the proposer or not is not a relevant issue.
Ignatius v. Bell (1913) explains this situation. The defendant, Bell, gave an option
to the plaintiff to purchase a piece of land on the condition that the option must
be exercised on or before 20th August 1912. Both parties had contemplated the
use of the post as means of communication. The plaintiff sent a registered letter
on the 16th of August 1912. Because he was not at home, the defendant only
received it on the evening of the 25th of August.
The Court held that the contract bound the defendant on the 16th of August 1912,
that is, when the plaintiff posted the letter of acceptance. The said option was
executed within the specified time.
The contract binds the promisee the moment the posted letter of acceptance is
received by the proposer. It is clearly provided for in the second part of
Illustration (b) of Section 4 of the CA 1950.
What is the position of the proposer and promisee if the said letter does not
arrive or is lost in transmission? The law is of the position that the proposer is
bound by the contract while the promisee is free from the contract until the said
letter is found and sent to the proposer. The court in Byrne v. Van Tienhoven
(1880) held that : if a proposal and acceptance are made by means of transmission
by post, a contract is formed the moment the letter of acceptance was posted,
even if it does not arrive at its destination. As a precaution, a proposer can
include a term in the proposal whereby an acceptance is deemed complete at the
time the proposer receives the acceptance letter.
1.3.6
Revocation of Acceptance
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X TOPIC 1
1.3.7
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21
can bind him (Section 4(2)(b) is complied with, that is, the letter of acceptance
reaches the proposer).
EXERCISE 1.2
1.
Mee wrote to Zul offering to sell his computer for RM2,000. Zul
accepted the offer through a letter posted on the 5th of December
2001. Zul, however changed his mind and wishes to revoke the
acceptance that he had made. Zul is worried that he will not be
able to revoke the acceptance by posting it. Zul therefore
telephoned Mee on the 15th of December 2001 at 10a.m to revoke
his acceptance. On the 15th of December at 11a.m Mee received
the revocation letter which Zul posted. Mee is unhappy and
wishes to sue Zul for breach of contract. Advise both parties.
2.
Nani would like to sell her new Proton Saga Car to Nina for
RM25,000. Nina immediately takes RM20,000 and gives to Nani.
What is the consequence of the above scenario?
1.4
A.
B.
Nani has the right to refuse before she takes the cash from
Nina
C.
D.
CONSIDERATION
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X TOPIC 1
The definition clearly shows that consideration must exist in each and every
contract and is of value according to the offerors wishes. It may consist of a
conduct, or a price to be paid in return for the promise made by, or the conduct
of, the promisor. The conduct need not necessarily to be of a positive nature. In
fact it can also be in the form of an abstinence from doing something.
The court in Curie v. Misa (1875) held that 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.
Example: Jay sold his pen to Bob for RM10. The consideration in this case comes
in the form of the RM10 Bob paid to Jay. The consideration is in monetary value.
Example: Jay promises to present a gift to Bob if Bob wins the athletic event. In
this example, the consideration is Bobs conduct, which is winning the race.
Both forms of consideration are valuable in law.
1.4.1
Types of Consideration
(a)
Executory Consideration
Definition
It is also known as a promise in return for a counter-promise or consideration
in the future from the other party. The consideration is not fulfilled yet but
will be fulfilled as soon as the other party fulfills his promise.
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Executed Consideration
Definition
Such a consideration exists when one party had done his/her part according
to the contract. The other party therefore is under a duty to fulfill his promise.
An executory promise is also known as an executory consideration, that is a
promise made in exchange for the other partys conduct.
Past Consideration
It refers to a subsequent promise made in response to past acts or previous
considerations made.
Example: Uma found Amins identity card and returned it to him. Amin
then promised to reward her RM50. Amins promise is an act of responding
to Umas previous act and is termed as past consideration.
1.4.2
(a)
Third Party
From the principles laid down in the Contracts Act 1950, it is clear that in
Malaysia, consideration may come from another person, a third party, and
not necessarily from the promisee.
Example: Chin promised to pay RM1,000 to Bala if Lai sends the promised
goods at the promised time. If Lai sends the goods at the fixed time but
Chin later refuses to pay Bala, Bala then has the right to sue Chin even if he
has not furnished any consideration to Chins promise. The consideration in
this case comes from a third party which is Lai. This principle is according
to the CA 1950 and it differs from English Law.
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Past Consideration
Based on the words used in Section 2(d) of the CA 1950 the promisee or
any other person has done or abstained from doing, past consideration
is accepted as a form of consideration for a valid contract in Malaysia.
Let us look at Kepong Prospecting Ltd & Ors v. Schmidt (1968), being a case
decided based on Section 2(d). Schmidt, a mining engineer actively assisted a
person to obtain a prospecting permit in Johor. He subsequently helped to
incorporate Kepong Prospecting Ltd and was appointed as managing
director. Upon incorporation, an agreement was made between them
whereby the company agreed to pay Schmidt 1% of the selling price of all
TOPIC 1
25
iron produced and sold. This is in consideration for his services to the
company prior to its formation, after its incorporation and for future services.
The court held that the consideration by Schmidts after the incorporation
of the company but before the agreement was made was a valuable
consideration and could be claimed under the law. Schmidt however could
not claim on the consideration made before incorporation. Refer to
Illustration (c) Section 26 of the CA 1950.
As a general rule, English Law does not recognise past consideration. This is
clearly shown in Roscorla v. Thomas (1842). The plaintiff bought a horse from
the defendant. The sale was executed. After the sale, the defendant guaranteed
that the horse was sound and free from vice. The horse was in fact vicious.
The court held that the guarantee was a promise made on past
consideration. Past consideration will not make a promise binding.
Even though the above explains the general rule, there are however cases
with exceptions to the general rule. Past consideration is still accepted in
English Law as good consideration if the act or omission was done at the
request of the promisor as in Lampleigh v. Braithwait (1615).
The defendant in this case sought the plaintiffs help to seek a Royal pardon
from the King. The plaintiff used his own money for the effort and the
defendant later promised to pay him 100. The defendant failed to pay and
the plaintiff sued for the amount.
The court held that it was past consideration, which was clearly seen from the
facts of the case. The court however agreed to the plaintiffs claim because the
said consideration was done at the desire of the promisor (defendant).
(c)
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27
Definition
Promissory estoppel applies when a creditor based on his representation or
conduct is stopped from denying part payment as a settlement of the whole debt.
1.4.3
The issue is whether the promisee has done something more than what he/she
was legally bound to do. If the promisor does not get more than what he should
get, it does not constitute consideration in law. This usually happens when a
promisee is merely performing a duty already imposed upon him even though
without any promise from the promisor.
(a)
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Glamorgan County Council (1925), the police sued for a sum of 2,200 promised
to them by a mining company. The promise was for the provision of a stationary
guard during a strike. The Court held that the police is entitled to the sum for the
undertaking to provide more protection that what the police thought necessary,
which is something over and above their duties under the law.
(b)
SELF-CHECK 1.5
An organiser of a big-scale heavy-metal group concert held in X
country promised to pay the police RM15,000 if there is a riot
during or after the show. A riot took place during the show and the
police successfully quelled the disturbance. Is the police in law
entitled to the sum promised by the organiser? Give your opinions.
1.4.4
Adequacy of Consideration
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The House of Lords in a majority decision held that the chocolate wrappers has
an economic value and was certainly part of the consideration and therefore
sufficient to create a record sales contract.
1.4.5
You have already noted that consideration need not be adequate to create a contract.
It is sufficient if it is of value and the promisor has freely given his consent.
What will happen if a contract made does not have the element of consideration,
that is the promisee need not do anything which would give any benefit to the
promisor? Refer to Illustration (a) of Section 26 of the CA 1950.
In Macon Works & Trading Sdn. Bhd v. Phang Hon Chin & Anor (1976), the
Court held that the option to purchase a piece of land was not valid due to lack
of consideration.
The CA 1950 however provide exceptions to this general rule. Refer to Section 26 (a),
(b) and (c) to ascertain those exceptions. Those exceptions will be discussed in detail.
An agreement which lacks of consideration but falls under one of the exceptions in
Section 26(a), (b) or (c) is deemed a valid and binding contract.
Section 26(a)
Provision
This section requires a few conditions to be complied with, that is the
agreement:
(i)
Is In Writing;
(ii)
Is Registered Under The Law For The Time Being In Force For The
Registration Of Such Documents (If Any);
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What are the circumstances deemed as natural love and affection between parties
standing in a near relation?
In the case of Re Tan Soh Sim (1951), an agreement to distribute deceaseds (adopted
mother) property to her adopted son was void due to lack of consideration. The court
referred to Chinese customs and traditions as well as circumstances in the said
Chinese family and held that an adopted son only has a near relation to his adopted
father and not to his adopted mother and is thus not within the scope of Section 26.
Even if the element of natural love and affection existed, it must only be between
parties standing in near relation to each other. The agreement therefore is void for
failure to comply with element (iii), natural love and affection between parties
standing in a near relation to each other.
Section 26(b)
Provision
There are three elements or conditions in this exception too:
(i)
(ii)
One who has already voluntarily done something for the promisor; or
Only one part need to be complied with by the promisee for it to fall under
paragraph (ii). Refer to Illustration (c) of Section 26 for a clearer picture.
The important thing to note is that the act was done by the promisee voluntarily
and not at the desire of the promisor.
The issue of whether the plaintiff had voluntarily done something for the defendants
firm arose in J.M Wotherspoon & CO Ltd v. Henry Agency House (1962).
The court held that something which was done on another persons suggestion
cannot be considered as having been done voluntarily. The plaintiff in this case had
acted on the defendants suggestion and therefore the act was not voluntarily done.
Refer to Illustration (d) of Section 26 for a better understanding of paragraph (iii).
Illustration (d) in the CA 1950 Act clearly shows that B is under a legal duty to
take care of his infant son and he can be compelled under the law to execute the
duty. Bs promise to pay As expenses is a binding contract.
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Example: A paid Bs fine. B later promised to compensate A for paying the fine
for him. Bs promise is binding and B must compensate A because paying the
fine is something which B was legally compellable to do.
Section 26 (c)
Provision
The conditions that need to be complied with under the exception in Section
26(c) are:
(i)
(ii)
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33
EXERCISE 1.3
1.
Ahmad promised his wife that he will present their son, Man a
house which he bought last year when Man marries. Ahmad
changed his mind and refused to do so when Man got married.
Can Man sue his father for the house? Advise Man.
2.
1.5
A.
Executory consideration
B.
Executive consideration
C.
Executed consideration
D.
Past consideration
CAPACITY TO CONTRACT
Another element that must be present for a valid contract is capacity. Every party
who wish to enter into a contract must have capacity under the law of contract.
Section 10 of the CA 1950 provides:
Provision
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.
Section 11 provides explanation on who are competent to contract.
Provision
Every person is competent to contract who is of the age of majority according
to the law to which he is subject, and who is of sound mind, and is not
disqualified from contracting by any law to which he is subject.
Section 11 of the CA 1950 states three groups of persons capable of entering into
a contract; that is,
(a)
(b)
Be of sound mind.
(c)
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1.5.1
Age of Majority
TOPIC 1
(a)
35
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(b)
37
Scholarship Agreement
Section 4(a) of the Contracts (Amendment) Act 1976 provides:
Provision
Notwithstanding anything to the contrary contained in the principal
Act 1950, no scholarship agreement shall be invalidated on the ground
that the scholar entering into such agreement is not of the age of
majority.
ACTIVITY 1.1
It cannot be denied that there are cases where students attempt to
avoid paying their loan balances to the government and the
government has resorted to advertising their names in newspapers.
How far do you agree with the provision you have just learned?
(c)
Marriage Contracts
Minors are allowed to enter into a marriage contract. It is clearly shown in
Rajeswary & Anor v. Balakrishnan & Ors (1958), when Good J, held that a
contract to marry is valid and enforceable even if the parties involved were
minors. It is also stated as such in Section 4(a) of Age of Majority Act 1971.
However Section 12 of the Law Reform (Marriage and Divorce) Act 1976
provides that whosoever below the age of 21 cannot enter into a marriage
contract except with the written consent of his father/mother/adopted
father/adopted mother/guardian (according to sequence; if father dies,
then consent must be given by the mother and so on).
(d)
Insurance Contracts
The Insurance Act 1996 provides in Section 153 that a child of 10 years and
above is allowed to sign a life insurance contract for himself or upon
another life in which he has an insurable interest. If a child is below 16
years old, he however, needs to get a written consent from his parents or
guardian. A child above 16 years old can enter into such contracts without
having to get his parents or guardians consent.
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(e)
Apprenticeship Contracts
Section 13 of the Children and Young Persons (Employment) Act 1966
provides that a minor can enter into a contract of apprenticeship or
services. The Act defines a child as any person below the age of 14 while a
young person is one between the age of 14 and 16.
Generally, a contract signed by a minor is void, that is, invalid ab initio. It
cannot be enforced by the minor against the other party or vice versa. What
happens to the benefits passed under the contract? Can it be recovered?
Will the court assist the parties involved?
In the decided cases, the courts would not rule that such benefits be
restored if the plaintiff is a person who has the capacity to contract and is
not a minor. This is to prevent adults from binding a contract upon a minor.
In Mohori Bibee v. Dharmodas Ghose (1903), kid respondent borrowed
20,000 rupees at 12 percent interest from a moneylender and secured the
loan by way of mortgage executed by the kid in favour of the appellant on
some houses belonging to infant respondent. He refused to pay the loan.
The court held that the moneylender was not entitled to enforce the
mortgage in order to force him to pay the loan because he had known at the
time the contract was agreed upon that the borrower was a minor.
In Tan Hee Juan v. The Boon Keat (1934) a minor executed two transfers of
land and received the purchase money for the said land. The Court held
that the transfer was void and the minor allowed to get the return of his
land, and the court denied the buyers claim for refund of the purchase
money. Refer to Section 66.
Section 40 of the Specific Relief Act 1950 on the other hand provides:
Provision
On adjudging the cancellation of an instrument, the court may
require the party to whom the relief is granted to make any
compensation to the other which justice may require.
Section 40 of the Specific Relief Act clearly shows that the court has the
discretion whether to require that the benefits be restored or to make
compensation. This was so decided in Tan Hee Juan (1934) when Hereford
J. refused to use its discretion to order a refund of the purchase price paid
by the defendant for the land.
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39
In another case, Leha binti Jusoh v. Awang Johari bin Hashim (1978) the
Federal Court applied Section 66 of the CA 1950 by ordering the benefits be
returned. The respondent (a minor) bought a piece of land from the
appellant. He paid the purchase price and occupied the land. The Federal
Court held that the contract was void and ordered the respondent to vacate
the land and the appellant to refund the purchase price.
From the above evidence, it is clear that a person has to be careful and
refrain from entering into a contract with a minor because in all probability
the court will not order that any benefits be returned and the other party to
the contract is bound to incur losses.
EXERCISE 1.4
1.
2.
B.
C.
D.
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1.5.2
Be of Sound Mind
Besides being of age, a person who wants to make a contract need also be of
sound mind. Who is regarded as being of sound mind under the CA 1950 and
therefore qualified to make a contract?
Section 12 of the CA 1950 provides:
Provision
A person is said to be of sound mind for the purpose of making a contract if,
at the time when he makes it, he is capable of understanding it and of forming
a rational judgment as to its effect upon his interests.
A person who is usually of unsound mind, but occasionally of sound mind, may
make a contract when he is of sound mind. Refer to Illustration (a) Section 12.
A person who is usually of sound mind, but occasionally of unsound mind, may not
make a contract when he is of unsound mind. Refer to Illustration (b) Section 12.
(a)
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41
A failure to prove that the said person is of unsound mind will mean that
the contract is valid. The contract therefore cannot be made void.
This principle was applied in Che Som bt Yip & Ors v. Maha Pte Ltd. & Ors
(1989). The Court held that the contract made by a person of unsound mind
was voidable at ones option by proving that she was of unsound mind at
the time the contract was signed and the other party knew of her
unsoundness of mind at the time she entered into a contract.
The first and second plaintiff in this case were administrators for the estate
of the third plaintiff who is of unsound mind. The third plaintiff had took
out a mortgage on his property with the defendant. The first and second
plaintiff applied for a declaration that it was a void contract and
successfully proved that the third plaintiff was of unsound mind at the time
they entered into a contract. Did they prove the second limb, that the
defendant knew that he had entered into a contract with a person of
unsound mind?
(b)
The Court also held that the defendant knew of that matter. The declaration
applied for was granted and has the effect of making the contract void.
Contract of Necessaries
We have touched on this topic when discussing contract of necessaries by
minors. Section 69 of the CA 1950 provides:
Provision
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 be reimbursed from the property of such incapable person.
Refer to Illustration (a) and (b) of Section 69 of the CA 1950.
The provision stated that a person of unsound mind can still make a contract of
necessaries.
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EXERCISE 1.5
1.
2.
1.5.3
A.
B.
C.
D.
Not Disqualified
To form a valid contract, a person must not lose the capacity to make a contract
according to whatever law he is subjected to.
It simply means that if there are laws which stipulates that a person is incapable
of entering into contracts, such person is deemed to have lost the capacity to
enter into a contract.
Loss of capacity means that the said party may have the capacity to contract
but lost it due to some circumstances under any laws or he is capable according
to the CA 1950 but lost it according to other laws to which he is subjected to.
Example: Ahmad is an adult and of sound mind. And therefore is capable
making a contract according to the CA 1950. Two months ago Ahmad was
declared a bankrupt. Under the Bankruptcy Act Ahmad cannot enter into a
contract. Ahmad therefore has lost his capacity to contract according to the
Bankruptcy Act.
NOTE: There should be a specific provision in the relevant law which states that
a person has lost his capacity to contract.
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1.6
43
The next element for the formation of a legally valid and enforceable contract is
intention.
Intention is an element of which the court must firstly determine exists before it
decides on the existence of a binding contract
The CA 1950 is silent on intention. How then would the court determine its
existence? It has been the practice of the Malaysian courts to refer to English
cases in determining the existence of intention.
Under English Law, there is no binding contract unless the involved parties in
the agreement have the intention to enter into such relationship under the law.
This was decided in Weeks v. Tybald (1605).
The test used is an objective test, that is what is the the opinion of a reasonable
man. Even if the promisor did not intend to create legal relations, the court
would still presumed an intention exists if a reasonable man is of the opinion that
intention existed to bind the promisor. The promisors real intention is
immaterial. This rule was decided in Carlill v. Carbolic Smoke Balls Co. (1893).
The court would usually look at the types of contracts made in determining
whether there was intention or not. This presumption could be set aside if it
could be proven otherwise by the contracting parties.
1.6.1
Generally, a contract can be divided into two types. Refer to Figure 1.4.
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(a)
TOPIC 1
45
The Court held that both parties in this case did not intend that the
agreement would legally bind them.
Distinguish the above case with Ferris v. Weaven (1952). The presumption
of no intention in domestic agreements was set aside by the courts. The
Court held that a husbands promise to the wife that she could take their
house when they divorced was enforceable by the wife because there was
intention binding in law. This was due to the fact that when the promise
was made they had agreed to a separation.
In Choo Tiong Hin & Ors v. Choo Hock Swee (1951), the Singaporean
Court of Appeal applied the English Law in Balfour v. Balfour. According
to the court, the law did not presume agreement between family members
(adopted son dan adopted father) as binding in law. Family agreements
cannot be enforced as a contract.
The respondent, in this case sued his son and adopted grandson for family
land and home. The defendant alleged that there was a contract between
the respondent and the appellant that they were equally entitled to
possession of the farm and home if they work on the farm and helped
acquire wealth. The Court of Appeal held that the respondent was not
entitled to the property and home because the agreement between them
was not intended as to be binding in law.
In conclusion, if the agreement made is in the normal course of family life,
the law presumes that there is no intention to create legal relations.
However, the court will look at the circumstances of each case as intent is
something subjective and need to be looked at from the conduct of the
parties and the circumstances under which it was made.
In Simpkins v. Pays (1955), an agreement was made between a
houseowner, and a lodger who had lived almost as a member of the family,
to equally share the prize of a newspaper competition was a binding
contract.
(b)
Commercial Agreements
In commercial agreements, the court usually presumes that the parties do
intend to make a legally binding contract. The presumption may be
rebutted if the parties to the contract are able to otherwise prove that there
was no intention to create legal relations. Unlike domestic agreements, the
contracting parties cannot allege that there was no intention to bind them
because the court will decide based on the facts of the case.
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prepared.
No formal contract was entered into by the parties and the court held that
there was no enforceable contract.
The Malaysian court in Low Kar Yit & Ors v. Mohd Isa & Anor (1963)
agreed with Winn v. Bull (1877). The defendant gave an option to the
plaintiffs agent to buy a piece of land subject to a formal contract to be
drawn up and agreed upon by the parties. Plaintiffs agent duly exercised
the option but the defendant refused to sign the agreement of sale. The
court held that there was no contract because there was no formal contract
agreed by both parties.
The clause subject to contract usually indicates no intention to create
legal relations. The courts however in certain circumstances would decide
otherwise. This could be seen from decisions of some cases such as Lim
Keng Siong & Anor v. Yeo Ah Tee (1983). It was held that on the facts of the
case, the parties had agreed to the sales contract and the clause which
indicated a written and signed contract be made was not enough to show
there was no intention to create legal relations by the parties.
However, it must be noted that in most cases the clause subject to
contract gives the effect of denying the existence of intention. This fact was
clear from the decision in Daiman Development Sdn Bhd v. Mathew Lui
Chin Teck & Anor (1981). The Privy Council held that:
has been recognised throughout the cases on the topic that such
words prima facie create an overriding condition, so that what has
been agreed upon must be regarded as the intended basis for the
future contract and not as constituting a contract.
The above decision lays down that the clause subject to contract in a
contract only shows the desire to create a binding contract in the future and
not to make the agreement into a binding contract.
TOPIC 1
47
SELF-CHECK 1.6
Should there be provision for domestic or family agreements in the
law of contract? Justify.
EXERCISE 1.6
Abdul Aziz promised to give RM600 per month to his wife Anis for
a period of two years. Anis brought the matter to the court when
Abdul Aziz failed to fullfil his promise. The court decided that Anis
was not entitled to the amount promised.
Which of the following case provides the principle that was referred
to by the court in deciding the case between Anis and Abdul Aziz?
A.
Winn v Bull
B.
Ferris v Weaven
C.
Balfour v Balfour
D.
1.7
CERTAINTY
Even if other elements which are required in a contract are complied with, an
agreement can sometimes be defective due to the inability of the court to
determine what are the real terms agreed by the parties. Every term or condition
in the contract must therefore be clear and its meaning ascertainable.
Section 30 of the CA 1950 provides:
Provision
Agreements, the meaning of which is not certain, or capable of being made
certain, are void.
Refer to Illustration (a), (c), (d) and (f) of Section 30 of the CA 1950.
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See also the court decision in Karuppan Chetty v. Suah Thian (1916). There was
no certainty when the contracting parties agreed to lease out of the land for
RM35 a month for as long as you like. It was held that the contract was void.
Parties to a contract therefore have to use words which are clear and specific in
meaning for there to be a binding contract.
ACTIVITY 1.2
How can an offer made be void?
In this topic, you were introduced to laws which regulate the formation of a
contract in Malaysia.
The detailed explanation on the six basic elements for the formation of a
contract will enable you to clearly understand the requirements needed in
making an agreement enforceable by law.
Acceptance
Contract
Agreement
Offer
Certainty
Revocation
Consideration