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Topic

Introduction and Elements of a Contract

LEARNING OUTCOMES
By the end of this topic, you should be able to: 1. 2. 3. 4. Identify laws and Acts which govern the formation of a contract in Malaysia; Explain the definition of a contract; Discuss the basic elements in the formation of a contract; and Analyse the legal provisions regarding each element in the formation of a contract.

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.

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INTRODUCTION AND ELEMENTS OF A CONTRACT

1.1

INTRODUCTION, DEFINITION AND BASIC ELEMENTS OF A CONTRACT

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.

Section 10(1) clearly provides the elements where an agreement becomes an enforceable contract in law.

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

Basic Elements in the Formation of a Contract

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 1. 2. 3. Offer Acceptance Consideration Explanation When a person signifies his willingness to enter into a contract with another person. When a person to whom an offer has been made, makes an acceptance to the offer made. A price that needs to be paid for the promise made.

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4.

Capacity

Each contracting party must have the capacity to enter into a contract. Such person must have reached the age of majority according to the Age of Majority Act 1971 and be of sound mind at the time when the contract is made. 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. A person is deemed not to freely consent to enter into a contract if he is influenced by coercion, undue influence, fraud, misrepresentation and mistake when entering into the contract. These will be discussed in detail in Topic 2, i.e. Voidable Contracts. A contract must contain conditions which are clear in meaning and not vague. 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.

5.

Intention

6.

Free Consent

7. 8.

Certainty Valid Object

1.2 DEFINITION OF AN OFFER


Before you continue reading, think of this question. You are talking with your office colleagues and you said that you intend to sell your car, and a colleague states his willingness to buy the said car. Is your offer a contract or just a casual chat? The term offer is also referred to as proposal. It is defined under Section 2(a) CA 1950 as: Definition 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 person to the act or abstinence, he is said to make a proposal.

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
(a) (b)

Whom Can an Offer be Made To?

The folowing are the person an offer can be made to: An individual as in the example of Ahmad and Bakar when Ahmad proposed only to Bakar. A class of persons example: A lecturer, Puan Aminah, made an offer to sell her lecture notes to her students. The class of persons here is Puan Aminahs students. 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.

(c)

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

As discussed earlier, it is sometimes difficult to determine whether it was an offer or an invitation to treat. In several circumstances, based on decided cases where the Courts have determined situations where it is said to be an invitation to treat and not an offer. Please refer to Figure 1.1.

Figure 1.1: Situations which intend an invitation to treat

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(a)

Advertisements in Newspapers Directed to the Public In general, an advertisement is an invitation to treat. An advertisement of a job vacancy in a newspaper is an invitation to treat while the application sent, or a response to the said advertisement, is actually an offer. It constitutes a binding contract once the application is accepted. In the case of Coelho v. Public Service Commission (1964), a post of an Assistant Passport Officer was advertised in the Malay Mail. Coelho applied for the post and was accepted. Later, while still a probationary officer, he was dismissed from the position. Coelho disputed the dismissal and claimed that this was invalid. The Court decided that there was a binding contract when the offer made, by his application to fill up the vacancy, was accepted by the Public Service Commission since it was not stated that Coelho would be on probation when he signed for the job. The dismissal was therefore not valid and in breach of an existing contract. There was also an invitation to treat in the case of Majumder v. Attorney General of Sarawak (1967). The Court ruled that an advertisement in a newspaper for the post of a medical officer was an invitation to treat. In the case of Partridge v. Crittenden (1968), an advertisement which stated bramble finch cocks and hens for sale was also an invitation to treat. It must be noted however that there is an exception to the general rule that an advertisement is an invitation to treat. There are situations however, where an advertisement is made which will still be categorised as an offer and not an invitation to treat. The paragraph below present a case related to this situation. Let us look at the decision made by the Court in the case of Carlill v. Carbolic Smoke Ball Co (1893). The defendant, Carbolic Smoke Ball Co issued an advertisement in which they offered to pay 100 to any person who succumbed to influenza after having used one of their smoke balls in a specified manner and for a specified period. The plaintiff, Mrs. Carlill bought and used the smoke balls as prescribed but still succumbed to influenza. The plaintiff sued the company for the promised 100. The Court of Appeal held that the plaintiff was entitled to the 100 because she had made an acceptance to the defendants offer to the entire world by performing all the conditions stated in the advertisement.

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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) Display of Goods in Self-service Shops It refers to sales made in supermarkets where the shopowners only display goods and invite customers to make an offer. A customer who chooses the goods that he wants to buy and puts them into the basket is said to make an offer. There is an acceptance when the cashier accepts the money as payment for the said goods at the counter, and this therefore constitutes a contract. The case in point is Pharmaceutical Society of Great Britain v. Boots Cash Chemists Ltd (1953). The defendant was charged under the Drugs and Poison Act 1933 which states that it is an offence to sell a scheduled poison except with the supervision of a registered chemist. The decision made was based on whether there was a sale made in a self-service shop where a buyer/customer selecst items displayed on the shelves and puts them in the basket. Payment would be made to a cashier on duty who is stationed at the exit aisle. And for every sale of drugs, a pharmacist would supervise and if necessary, authorised to stop the sale. If there is a sale when goods are put in the basket, the shopowner has breached the provisions of the Act. Otherwise, if there is no sale, the shopowner will be free of such charges. The Court held that the display of goods is deemed as only an invitation to treat. An offer is said to be made when a customer puts the item into the basket and the contract is made at the cash counter. Therefore the shopowner did not make any sale which is against the law. (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.

An example is the decision in Spencer v. Harding (1870) where the court held 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

Example: If A proposed to reward B if B does something, but B did it without knowing A's proposal, B cannot be said to have accepted A's offer as B has no knowledge of the offer. In the case of Fitch v. Snedaker (1868) the Court held that the reward cannot be claimed by the person if he is not aware of the reward for such an act before he did the said act because there is no consensus of mind between the proposer and the promisee. Communication of a proposal is thus crucial. Section 4(1) of the CA 1950 provides: Provision: The communication of a proposal is complete when it comes to the knowledge of the person to whom it is made.

It means that a communication of a proposal is only complete when a proposal comes to the knowledge of the said promisee. If the communication of a proposal is made by telephone, telex, faxsimile or in person, the communication of the proposal is said to be completed when the proposal is communicated to the promisee. The communication of the proposal therefore is only completed when the promisee received the said offer letter. Example: Ah Chong proposed to sell his car to Bala for RM15,000 by a letter posted on the 1st of January 2002. Bala only received the offer letter on the 10th of

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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.

When is a communication of acceptance complete against the proposer? If it is an acceptance under the instantaneous principle, that is by telephone, telex, orally or by facsimile, an acceptance is deemed communicated as soon as it reaches the proposer. A proposal therefore can be revoked at any time before the promisee accepts. It differs for an acceptance by post. Section 4(2) states that communication of an acceptance is complete against both parties (the proposer and the promisee) at different times. Do refer to Section 4(2) of the CA 1950. If you refer to Section 4(2)(a) of the CA 1950, you will find that a proposer binds himself to the contract as soon as the promisee puts the letter of acceptance into the postbox even if the proposer does not know of the acceptance. The proposer therefore cannot revoke his proposal because the letter of acceptance is already in the postbox. Example: A proposed to B by a letter dated 7th January 2002 to sell his farm for RM55,000. A later wished to revoke his proposal and sent a revocation letter dated 10th January 2002. B received the offer letter on the 12th of January. On the

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13th January, B posted an acceptance letter to A. B received the revocation letter on the 15th of January 2002. A later refused to carry on with the contract and informed B he had revoked the offer. The issue is whether a contract has already been formed between A and B. If a contract has been formed, A has to carry on with the contract and if he refuses he could be liable for breach of contract. In the above example, a proposal was communicated on the 12th of January 2002. An acceptance was made on the 13th January 2002 and on the said date, according to Section 4(2)(a), a communication of acceptance is complete against A. There is a contract which binds A (the proposer) on the 13th of January 2002. Based on Section 5(1), A can withdraw his proposal at any time before the 13th of January 2002. Here, A failed to act fast to withdraw his proposal because the revocation of said offer only took place on the 15th of January 2002; that is, the date when B received the revocation letter. Thus, there is a contract and it binds A. A must continue with the contract. Section 6 of the CA 1950 provides four ways in which revocation of an offer are made. We will discuss each of them now. (a) By the communication of notice of revocation by the proposer to the other party. What does this paragraph mean?

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) (ii) Was the revocation of the proposal effective even though it was not communicated? Was the posting of the said letter of revocation of the proposal a communication of revocation against the promisee (the plaintiff in this case)?

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

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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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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) By the failure of the acceptor to fulfil a condition precedent to acceptance. If a proposer specified the conditions of acceptance, the promisee must therefore fulfil it absolutely. Definition If a promisee accepts a proposal by introducing new terms or refuses to accept the terms specified by the proposer, the original proposal therefore lapses. In this situation, an acceptance accompanied by new terms is not an acceptance. It is otherwise deemed as a refusal of the original offer, and is a counter-offer.

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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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. This Act provides the prorisions relating to the application of English Law in Malaysia. Which Act does the above statement refer to? A. B. C. D. The Contract Act 1950 The Civil Law Act 1956 The English Law Act 1956 The Companies Act 1965

2.

1.3
1.3.1

ACCEPTANCE
Definition of Acceptance

Acceptance is defined in Section 2(b) of the CA 1950 as: Definition 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.

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1.3.2

Terms of an Acceptance

There are two conditions to an acceptance. It is stated in Section 7 of the CA 1950. Do refer to Section 7 of the CA 1950 for further discussion of the said provision. (a) Absolute and Unqualified If the proposer stipulated certain terms or rules in his proposal which must be complied with by the promisee, the acceptance by promisee must be absolute. It is not an acceptance if the promisee only agrees to a part of the terms while rejecting the rest. An acceptance will only constitute a contract if all the terms in the proposal are accepted in absolute. A proposal which is not accepted in absolute will become a counter-offer as decided in Hyde v. Wrench (1840). The counter-offer will eliminate the original proposal and the promisee is not able to reenact it. (b) Be Expressed in Some Usual and Reasonable Manner If a proposal dictates a certain manner on how an acceptance should be made, the acceptance must be done in that stated manner. Example: Ali proposed to sell his wristwatch to Abu for RM50. In his proposal Ali stipulated that Abu must pay in cash if he is to accept the proposal. If Abu had paid by way of a postal order, Ali can assert within a reasonable time after the communication of acceptance was made, that payment can only be made in cash. If Ali does not assert as such within a reasonable time and still accepts the postal order, Ali is then deemed to have accepted the manner in which Abu had made his acceptance.

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

Time Limit for an Acceptance

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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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

When a communication of acceptance is complete and constitutes a contract depends on the principle of how communication was made. According to the general principle, if communication of acceptance is made by instantaneous conversation such as face to face, by telephone, telex or facsimile, a contract is formed when communication of acceptance comes to the knowledge of the proposer. Example: A made a proposal to B orally. When B conveys his acceptance to A the communication of acceptance is complete and therefore constitutes a contract. The contract is binding on both parties at the same time. The following case discusses the position of communication of acceptance by telex. As to when the communication of acceptance was complete became the issue that arose in court. The case of Entores Ltd v. Miles Far East Corporation (1955) explained the general principle regarding communication of acceptance. The defendant, in Amsterdam, sent an acceptance by telex. The plaintiff (proposer) received the telex in London. When a dispute on the contract arose the plaintiff brought it to the English Court to get a writ against the defendant. The English Court therefore had to first decide whether there was a contract made in London. The Court held that there was a contract made in London, and the English Court therefore had the jurisdiction to hear the case. Communication of acceptance was deemed to be instantaneous, and was formed the moment the plaintiff received the defendants telex of acceptance in London. It must be noted that the above description is only applicable for instantaneous means of communication. What is the principle for non-instantaneous means of communication (where there is a gap of time between acceptance made by the acceptor and communicated to the proposer)? Refer to Section 4(2) which is the exception to the general rule and illustration (b) of Section 4 for a clearer picture.

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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

A promisee can revoke an acceptance if the revocation is done within the permitted time. Refer to Section 5(2) of the CA 1950. Communication of acceptance is complete when the communication of acceptance comes to the knowledge of the proposer/offeror (refer to Section 4(2)(b) of the CA 1950). The promisee must communicate his revocation of acceptance to the proposer before the letter of acceptance reaches the proposer. Revocation of acceptance can happen in cases where transmission by the use of posts is used for acceptance. To revoke his acceptance, a promisee usually uses a faster means of communication;

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by telephoning, sending a facsimile or other means. A promisee cannot revoke his acceptance where an instantaneous means of acceptance has been used as it has already been communicated to the proposer. Revoking it has the effect of defaulting the contract because in cases of instantaneous communication, a contract exists at the same time for both parties. Example: D made an offer to E through a letter dated 1st January. D gave E two weeks to accept the offer. E posted a letter of acceptance on 10th of January. D received the letter on the 20th of January. E may revoke his acceptance at any time before 20th of January. E may use faster means of communication for the purpose of revocation.

1.3.7

Communication of Revocation of Acceptance

Revocation of acceptance must be communicated to the proposer. The same rule applies as in the communication of revocation of a proposal. Both parties to a contract are bound to the revocation at two different times. Refer to Section 4(3) to determine when communication of revocation is complete. It must be noted that Section 4(2) and Section 4(3) of the CA 1950 may appear to be similar. It differs however as to when different parties to the contract are bound since it is subject to when the letter is posted and when the letter reaches the destination. When the letter is posted, communication of revocation is complete against the party who made the revocation (promisee) whilst when the letter arrives, communication is complete against the party who received the revocation (proposer). Example: Abu accepts Bakars offer by a letter dated 8th of January. Abu revoked his acceptance by telegram on the 10th of January. Communication of revocation is complete against Abu on the 10th of January while against Bakar it is complete when the telegram reaches him. Although Bryne v. Van Tienhoven (1880) is more relevant to cases on communication of revocation of a proposal, its principle is also applicable for communication of revocation of acceptance. The court in this case held that a notice of revocation will only be effective when it comes to proposers knowledge. If the revocation is not communicated to the proposer before there was a contract, it is therefore not complete and will not revoke an existing contract. In his attempts to revoke his acceptance, a promisee must therefore ensure that Section 4(3)(a) and (b) of the CA 1950 must be complied with before a contract

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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. 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? A. B. C. D. A contract was formed when Nina gives RM20,000 to Nani Nani has the right to refuse before she takes the cash from Nina There is no contract between Nani and Nina as the consideration is too low. There is no contract between Nani and Nina as Nina did not comply with the term of offer made by Nani.

2.

1.4

CONSIDERATION

Consideration is an important element for the formation of a valid and binding contract. It is defined in Section 2(d) of the CA 1950. When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise.

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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

There are three types of consideration, as shown in Figure 1.2.

Figure 1.2: 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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Example: A promised B to renovate Bs office and B promised to pay as soon as A finished the renovation works. Bs promise (to pay) is the consideration to As promise (to do the renovation). (b) 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.

Example: Ally promised to issue a reward of RM200 to anyone who finds and returns his lost wallet. Muthu found and returned it to Ally. Muthus act is an executed consideration and thus constitutes a contract which binds Ally. Ally must give the reward to Muthu. (c) 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)

Consideration According to the Contracts Act 1950 and English Law

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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An Indian case, Venkata Chirinaya v. Verikataramaya (1881) which is based on a section similar to Section 2(d) of CA 1950. A sister agreed to pay all his brothers an annuity of 653 rupees. They did not furnish any consideration for such promise. On the same day, however, their mother had given the sister a few pieces of land with a condition that she must pay her brothers the promised annuity. Her brothers sued her when she failed to do so. The court held that she was under a duty to pay. A valid consideration came from their mother and not from the promisee (her brothers). Distinguish this case with the position under English Law. It differs as English Law does not recognise the existence of a contract if consideration comes from a third party and not the promisee, as decided in Tweddle v. Atkinson (1861). Kenneth and Alice were husband and wife. Kenneths father and father-inlaw (Peter and David respectively) both agreed to pay certain sums of money to Kenneth and Kenneth has the right to take legal action if they failed to do so. The agreement was confirmed in writing after Kenneths and Alices marriage. After Peter and Davids death, Kenneth sued Davids executors for the promised money. The court held that the action failed because Kenneth is a stranger to the contract. He did not give any consideration to the contract between Peter and David. Refer to Kepong Prospecting Ltd & Ors v. Schmidt (1968). Based on Section 2(d) the court held that consideration to a contract need not come from a promisee. Let us refer back to the example involved Chin, Bala, and Lai. According to English Law, Bala has no right to sue Chin because Bala did not furnish any consideration for Chins promise. The consideration came from Lai (who delivers the goods on time). (b) 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

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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) Dispense with or Remit the Performance of Promise Section 64 of the CA 1950 allows the promisee to dispense with or remit, wholly or in part, the performance of a promise made to him, or to extend the time for such performance or to accept instead of it any satisfaction which he thinks fit. Refer to Illustration (a) of Section 64. In this situation, the promisee released the promisor from performing the agreed promise. Can a promisee accept part payment as payment for the whole debt? According to Section 64, a promisee may do so. Look at the phrase promisee may dispense with or remit, wholly or in part, the performance of the promise Refer to Illustration (b) and (c) of Section 64 of the CA 1950.

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The illustrations in Section 64 clearly shows that in Malaysia, part payment is sufficient settlement for the whole debt. The case of Kerpa Singh v. Barian Singh (1966) further explains Illustration (c). Barian Singh owed Kerpa Singh RM8,869.94 under a judgement debt. Barian Singhs son wrote to Kerpa Singh offering RM4,000 as full settlement of the debt and enclosed a cheque for that amount. Enclosed too was a condition that should Kerpa Singh refused to accept the offer, he had to return the cheque. Kerpa Singhs lawyer cashed the cheque and kept the money. The Federal Court held that by cashing the cheque it showed that Kerpa Singh had agreed to the RM4,000 as a discharge of the whole debt and therefore cannot claim the balance of RM4,869.94 from Barian Singhs son. English Law differs with on this point, where part payment is not considered as the settlement of the whole debt. It is thus different from the Contracts Act, as shown in Pinnels (1602). In this case Pinnel sued Cole for payment of debt amounting to 8 10s. Cole claimed that he had made a part payment of 5 2s and Pinnel has accepted it as payment of the whole sum. The Court held that payment of a lesser sum in satisfaction of a greater sum could not be any satisfaction for the whole. The principle laid down in Pinnels was accepted by the House of Lords in Foakes v. Beer (1884). Dr Foakes owed Mrs. Beer a sum of 2,090. Mrs. Beer agreed that she would not take any proceeding whatsoever against him if he paid 500 in cash and the balance of 1,590 in instalments. Dr. Foakes agreed and did so. Mrs. Beer however sued him an additional payment of 360 for interest on the debt. When he was sued, Foakes claimed that his obligation to pay the interest was discharged on Mrs. Beers promise that she would not take any legal proceeding. The House of Lords held that Dr. Foakes was under an obligation to pay the interest amounting to 360. Now you know that under English Law in general, part payment is not a satisfaction of the whole debt. There are however exceptions in certain cases where the court would apply the principle of promissory estoppel.

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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.

The principle of promissory estoppel is applicable in Central London Property Trust Ltd v. High Trees House Ltd (1947). The plaintiff leased out a block of flats to the defendants since 1937 for 99 years at a rental rate of 2,500 a year. In 1940, due to the outbreak of war, the defendants found difficulty in letting out the units. The plaintiff agreed to reduce the rent to 1,250 per year. In 1945, war ended and the flats were fully occupied again. The action was brought against the defendant in 1947 by the plaintiff claiming the original rental rate of 2,500 for the future and the last two years from 1945 when the situation returned to normal again. It was held that the plaintiff was entitled to the claim. The court however went further to state the principle that had the plaintiffs sued for the full rent between 1940 and 1945, they would be unsuccessful because they themselves had agreed to reduce the rent. The doctrine of promissory estoppel would be applicable and the plaintiff by their promise would be estopped from suing.

1.4.3

Performance of an Existing Duty - Is it Consideration?

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) Performance of Public Duty If a promisee is merely performing an existing obligation or legal duty, the duty is not considered as valid consideration. In Collins v. Godefroy (1831), the plaintiff received a subpoena to attend court to give evidence for the defendant. The defendant promised him a sum of money if he did so. The Court held that a person who received a subpoena to attend court is under the duty and bound to do so. There was no consideration for the promise as he did not do anything over and above his existing public duty. However, if a promisee had done something over and above their legal duties, it would be considered a valid consideration. In Glassbrook Brothers Ltd v.

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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) Performance of a Duty Owed to the Promisor The principle applied by the courts can be seen in Stilk v. Myrick (1809). In the course of a sea voyage to and from London and the Baltic, two seamen deserted the ship. The captain who failed to find replacements promised the rest of the crew extra wages if they would work the ship home to London. The Court held that such a promise did not bind the ship captain as the crew were already bound in contract to ensure the ship would arrive safe to its specified destination. It was further held that such a promise would bind if there was a new contract with better pay signed between the captain and the remaining crew.

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

The issue here is whether the consideration provided by the promisee is adequate or not. Example: Ahmad sold his motorcycle to Raju for RM10. Is the consideration sufficient? What is its effect on the formation of a valid and binding contract? Refer to the Explanation 2 of Section 26 of the CA 1950. The main issue is whether the agreement made by the promisor was freely given or not. If the promisor stated that his agreement was not freely given, then the fact that consideration was insufficient will be taken into account as a proof that consent was not freely given. Therefore the contract will be set aside. Refer to Illustration (g) of Section 26 of the AC 1950.

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The inadequency of consideration is a fact which must be taken into account by the court in whether As consent was freely given or not. Refer to Illustration (f) of Section 26 of the CA 1950. Reference can be made to the case of Phang Swee Kin v. Beh I Hock (1964), an appeal to the Federal Court. The respondent agreed to transfer part of his land to appellants husband for 20,000 in Japanese currency. The agreement was made orally and no document of transfer was signed. The appellants husband died and she continued to live on the said land. In 1963 the land was sub-divided into two and the appellant paid RM500 to the respondent for transfer of said land which they both agreed orally. The land however was still under the respondents name. The respondent instructed the appellant to vacate the land and for the account of all income received from the land. The appellant counter-claimed that she was entitled to the said land. The High Court held that the oral agreement to transfer the land between the respondent and the appellants husband was void due to inadequancy of consideration. On appeal, the Federal Court however decided otherwise. It was held that consideration is adequate because there was no proof which showed the respondents consent was not given freely. The appellant was entitled to the said land as respondent had agreed to transfer the land on payment of RM500. You should understand from the decided cases that for consideration to be adequate, consent must be given freely. Consideration need to be of value in the legal sense. What is the position under English Law? Must consideration be adequate? This can be seen from the decision in Chappel & Co Ltd v. Nestle Co Ltd (1960). The appellant owned the copyright in a dance tune called Rockin Shoes while the respondent was a chocolate manufacturer. As a publicity stunt, the respondent sold the records to the public at the ordinary retail selling price of 1s/6p each plus 3 Nestle chocolate wrappers. Under Section 8 of the Copyrights Act 1956, any person has an automatic right to use the copyright of any musical works with the condition that a certain percentage from the selling price need to be paid to the owner of the copyright. The question that arose in the court was whether there was a sale according to Section 8, which would give the right to the respondent to offer the record to the public, and whether the three chocolate wrappers were valuable consideration. The appellant contended that the respondent could not rely on Section 8 as there was no sale because the consideration for the record included the three wrappers.

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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

Agreement without Consideration

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) (ii) Is In Writing; Is Registered Under The Law For The Time Being In Force For The Registration Of Such Documents (If Any);

(iii) Is Made On Account Of Natural Love And Affection Between Parties Standing in a near relation to each other. All the three elements or conditions must be fulfilled to use Section 26(a) to make the contract to be valid even without consideration. To have a clear picture about this section, refer to illustration (b) of Section 26 of the CA 1980. Section 26(a) can only be applied to validate a contract which lacks consideration if all the three elements are complied with. Refer to Illustration (b) Section 26 CA 1950 for a clearer picture of this section.

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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) It is a promise to compensate, wholly or in part; One who has already voluntarily done something for the promisor; or

(iii) Something which the promisor was legally compellable to do.

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) The agreement is made in writing The agreement is signed by the debtor or his authorised agent

(iii) The agreement is to pay wholly or in part a debt (iv) The creditor might have enforced payment of the debt but for the law for the limitation of suits Refer to Illustration (e) Section 26 CA 1950. This section provides for a new agreement to be made for payment of debt. It need to be signed separate from the original contract which is barred by the timelimit for bringing suits. The Limitation Act 1953 is applicable in Malaysia. This act provides a period of six years from the date on which the cause of action accrued. If a creditor failed to take any legal action within the period of six years from the date the debtor failed to pay his debts, the creditor may lose his right of action by lapse of time. In Malaysia, Limitation Act 1953 is applicable. This act provides that the time limit for an action in contract is six years from the time the cause of action arises. If the creditor fails to bring a court action within six years from the date of debtor failed to pay his debt, the creditor no longer can bring an action as it was barred by the time-limit. Section 26(c) CA 1950 is thus an exception to the time limitation. Action can still be brought if the conditions in (i) to (iii) are complied with. The written and signed agreement by the debtor or his agent to pay wholly or in part a debt will activate the debt which was barred by the time-limit.

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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. Which of the following is NOT a type of consideration? A. B. C. D. Executory consideration Executive consideration Executed consideration Past consideration

2.

1.5

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) (c) Be of the age of majority. Be of sound mind. Not disqualified from contracting by any laws to which he is subjected to.

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Detailed discussion will be made on the three categories for a better understanding on who may and may not be allowed to enter into a contract.

1.5.1

Age of Majority

In Malaysia, the capacity to contract based on age is determined by the Age of Majority Act 1971. The Act states that all persons attain the age of majority at 18. Only those 18 years and above has capacity to enter into a contract in Malaysia. This is a general rule and can be seen from the decision in the case of Tan Hee Juan v. Teh Boon Keat (1934). A minor executed a transfer of land. The plaintiff applied for a court order to revoke the said transfer. Hereford J. when deciding said: The Privy Council have held that the effect of sections 10 and 11 of the CA of India is that an infant cannot make a contract within the meaning of the Act, and that a contract made by an infant is not only voidable but void (Mohori Bibee v. Dharmodas Ghose, 30 Calcutta 539). That decision of the Privy Council is binding on this court, and therefore there can be no doubt whatever that those transfers are voidand therefore the property is restored to the minor. From the case above it is clear that there are similarities between the Indian law of contracts and the CA 1950, and Indian cases which discussed similar provisions are applicable in the interpretation of the CA 1950. It is clear therefore only a major (of 18 years of age) can enter into a contract. However, there are exceptions to this rule where even a child who has not attained the age of majority may be allowed to enter into a contract, and it is valid. What are those exceptions? There are five exceptions to the general rule. Refer to Figure 1.3 below.

Figure 1.3: Exceptions to the general rule

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(a)

Contract for Necessaries A person who has supplied necessaries to a minor is entitled to be reimbursed from the minors property. Provision Section 69 of CA 1950 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. The contract for necessaries is valid if it is agreed by the minor and it is for the purpose of supplying the said minor with necessaries and not mere luxuries which he does not require. If a person entered into a contract with a minor to supply him with necessaries, the person who supplied him can claim for reimbursement from the minors property. Provision Section 69 CA 1950 provides on what are necessaries for a person who is incapable of entering into a contract. Example: Aiman supplied Bakar who is an orphan and a minor, with food and clothes suited to the condition of his life. Aiman therefore, is entitled to be reimbursed from Bakars property. What are necessaries suited to the condition in life of a person incapable of entering into a contract? Example: Sam, a minor student was supplied with a handphone by Raj, a shopowner. Can Raj claim payment for the handphone? Section 69 cannot be applied here and Raj is not entitled to be reimbursed from Sams property because a handphone is not a necessity suited to the condition in life of the minor student. In Nash v. Inman (1908), a Savile Row tailor supplied a minor, a university student with fancy expensive clothes, and later sued for the price of clothes. Based on the evidence, the Court held that the student, a minor was already adequately supplied with clothes and the tailor had not adduced any evidence that the clothes were suitable to the condition in life of the minor. The action must fail and therefore no reimbursement could be made.

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The court in Malaysia decided that education is a necessity in life for a minor. It was held in Kerajaan Malaysia v. Gurcharan Singh & Ors (1971). It must be noted that this case was decided before an amendment to the CA 1950 was made, which now provides for capacity of a minor to enter into scholarship agreements. Section 2 of the Contracts (Amendment) Act 1976 defines scholarship agreement as: Definition Scholarship agreement means any contract or agreement between an appropriate authority and any person (hereinafter in this Act referred to as a scholar) with respect to, any scholarship, award, bursary, loan, sponsorship, or appointment to a course of study, the provision of leave with or without pay, or any other facility, whether granted directly by the appropriate authority, or by any other person or body, or by any government outside Malaysia, for the purpose of education or learning of any description. An amendment is needed because most scholarship agreements are made between the government and students who are mostly not major yet. It was made in order to avoid students from questioning the validity of scholarship agreements in their attempt to avoid repayment or contractual obligations. It is clear that now a scholarship agreement is valid even if entered by minors. In Gurcharan Singh, the Court had to categorise education as necessaries in life to validate the contract and thus allowed the government to claim damages due from the minors breach of contract. In this case, the plaintiff sued the first defendant as the promisor and the second and third defendants as the guarantors for breach of contract. The claim, amounted to RM11,500, the amount which was said to be the expenses spent for the first defendants education. The first defendant was a minor at the time the contract was made. The Court held that the contract was void. But as the training is to enable him to qualify for and accept the appointment as a teacher, it is a provision of necessaries, and the first defendant was liable to reimburse the amount spent for his education. Logically, we can say that education, food and clothing can be categorised as neccessaries with the condition that it is suited to the condition in life of a minor, and not something which he already has and is adequately supplied with.

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(b)

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.

Due to this amendment, when a scholarship is granted and agreement signed, it is valid even if the other party is a minor. It has retrospective effect and acts to validate all scholarship agreements entered before this amendment to the Act.

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). 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.

(d)

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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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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. Joyah signed a scholarship agreement with the Malaysian Government when she was 17 years old. She was required to serve with the Malaysian Government upon completion of her studies. After finishing her studies, she refused to work in the public sector, choosing instead to work in the private sector. The Malaysian Government sent her a notice of claim for the scholarship amount or legal action will be taken against her. She is not worried because she is of the opinion that the government cannot sue her as the contract is void since it was made before she was 18 years old. Advise Joyah. Azreen is 16 years old and studies in Sekolah Menengah Taman Melawati, Gombak. Which of the following contract will be valid if entered into by Azreen? A. B. C. D. Purchase of computer from Maju Insan Sdn. Bhd. Lease photocopy machine for her fathers business. Contract to be an agent for Easy Study Tuition Centre. Insurance agreement with Etiqa Takaful Sdn. Bhd.

2.

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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) Effects of a Contract Signed by a Person of Unsound Mind Any contract signed by a person of unsound mind is a voidable contract. It means that the said contract can be made void at the option of the person of unsound mind by proving certain conditions to the court. In Imperial Loan Co. v. Stone (1892), Lord Esher put forth a principle as such: When a person enters into a contract, and afterwards alleges that he was so insane at the time that he did not know what he was doing, and proves the allegation, the contract is as binding upon him in every respect, whether it is executory or executed, as if he had been sane when he made it, unless he can prove further that the person with whom he contracted knew him to be so insane as not to be capable of understanding what it was about. The decision of Imperial Loan Co. v. Stone shows that if a person of unsound mind wishes to make void a contract, he needs to prove both conditions in Section 12(1) first. Failure to prove both conditions in the section will make the contract binding as if he was of sound mind at the time it was made.

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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? 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:

(b)

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. Ani who is of unsound mind applied for a personal loan from a bank. The bank was not aware of her state of mind at the time she took the loan. The bank then approved her application. The bank later came to know of her real state and wishes to make the contract void. Can the bank do so? What is the effect of a contract entered into by a person of unsound mind? A. B. C. D. The contract is valid The contract is voidable The contract is void The contract is unenforceable

2.

1.5.3

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

INTENTION TO CREATE LEGAL RELATIONS

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

Presumption of Intention Based on the Type of Contract

Generally, a contract can be divided into two types. Refer to Figure 1.4.

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Figure 1.4: Presumption of intention based on type of contract

(a)

Family or Other Domestic Agreements Generally, the law presumes that there is no intention to create legal relations in these agreements except where there are evidence to show otherwise. For a better understanding on this we shall need to look at a few cases where intention is an issue. In Balfour v. Balfour (1919), a husband was stationed in Ceylon. He and his wife came to England for a holiday. Later he returned to Ceylon but his wife stayed back in England on doctors advice. The husband promised orally to give an allowance of 30 a month until she was able to return to Ceylon. He failed to pay and the wife sued him on the promise.

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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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Usually, a clause of subject to the contract will be inserted in commercial agreements as a way to avoid the existence of a binding contract. The clause indicates that the contractual party do not intend the said agreement to bind until a full and complete contract is signed. In Winn v. Bull (1877) there was a written agreement for the lease of a house subject to and is dependent upon a formal contract being

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.

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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. B. C. D. Winn v Bull Ferris v Weaven Balfour v Balfour Law Kar Yit v Mohd Isa

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. Only agreements enforceable by law is a contract according to the definition given by Section 2(h) of CA 1950.

Acceptance Agreement Certainty Consideration

Contract Offer Revocation