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Table of Contents Course Guide xi - xxi Course Assignment Guide xxv xxix Topic 1 Law of Contract (Proposal and Acceptance) 1

1.1 Definition of Contract and Elements of a Valid Contract 2 1.2 Proposal or Offer 4 1.2.1 To Whom Can the Proposal be Made? 4 1.2.2 The Difference between a Proposal and an Invitation 5 to Treat 1.2.3 Proposal must be Clear and Communicated 7 1.2.4 Revocation of Proposal 7 1.3 Acceptance 11 1.3.1 Acceptance must be Absolute and Unqualified 11 1.3.2 Acceptance must be Communicated 13 1.3.3 Revocation of Acceptance 16

Summary 17 Key Terms 18 References 18

Topic 2 Law of Contract (Consideration) 20

2.1 Executory, Executed and Past Consideration 21 2.2 Exceptions to the Rule of Consideration 24 2.2.1 Agreement Made on Account of Natural Love 24 and Affection 2.2.2 Agreement to Compensate a Past Voluntary Act 26 2.2.3 Agreement to Pay a Statute-Barred Debt 27 2.3 Must Consideration Move From the Promisee? 29 2.4 Adequacy of Consideration 30

Summary 33 Key Terms 33

References 34

Topic 3 Law of Contract (Intention to Create Legal Relations) 35 3.1 Domestic, Family and Social Agreements 36 3.2 Business or Commercial Agreements 41 Summary 45

Key Terms 45 References 45

TABLE OF CONTENTS iv

Topic 4 Law of Contract (Capacity to Contract) 47 4.1 Minors 48 4.1.1 Valid Contracts (Exceptions to Minors) 49 4.2 Person of Sound Mind 54 Summary 57

Key Terms 57 References 58

Topic 5 Law of Contract (Free Consent to Contract) 59 5.1 Coercion 60 5.1.1 Effect of Coercion 61 5.2 Undue Influence 62 5.2.1 Real or Apparent Authority 62 5.2.2 A Fiduciary Relation 63 5.2.3 Mental Capacity is Temporarily or Permanently 64 Affected by Reason of Age, Illness, or Mental; or Bodily Distress 5.2.4 Burden of Proof 64 5.2.5 Effect of Undue Influence 66 5.3 Fraud 68 5.3.1 Effect of Fraud 70 5.4 Misrepresentation 71 5.4.1 Effect of Misrepresentation 72 5.5 Mistakes 74 5.5.1 Mistake of Fact 74 5.5.2 Mistake of Law 76 5.5.3 Mistake as To Document 76 5.5.4 Effect of Mistake 77 Summary 80 Key Terms 82 References 82

Topic 6 Law of Contract (Void and Illegal Contract) 83

6.1 Contracts Forbidden by Law and If Permitted, 84 Defeat the Law 6.2 Fraudulent Contracts 86 6.3 Contracts Injurious to Person or Property of Another 86 6.4 Contracts Immoral or Against Public Policy 87 6.5 Other Void Contracts 89 6.5.1 Contracts in Restraint of Trade 90 6.5.2 Contracts in Restraint of Legal Proceedings 91 6.5.3 Effect of Contracts under Section 28 And 29 92 6.6 Consequences of Illegality 92

TABLE OF CONTENTS v

Summary 96 Key Terms 96 References 96

Topic 7 Law of Contract (Discharge of Contract And Remedies) 98 7.1 Discharge by Consent or Agreement Between Parties 99 7.1.1 Novation, Rescission and Alteration 99 7.1.2 Remission of Performance 100 7.2 Discharge by Performance 101 7.2.1 Time and Place of Performance 102 7.2.2 Performance of Reciprocal Promise 105 7.2.3 Performance by Third Party 105 7.3 Discharge by Impossibility 106 7.3.1 Effect of Frustration 108 7.4 Discharge by Breach 109 7.5 Remedies 111 7.5.1 Rescission of Contract 111 7.5.2 Damages 112 7.5.3 Specific Performance 114 7.5.4 Injunction 117 7.5.5 Quantum Meruit 118 Summary 118 Key Terms 120 References 121

Topic 8 Law of Agency (Part 1) 123 8.1 Capacity 124 8.2 Formation of Agency 124 8.2.1 Agency by Express Appointment 125 8.2.2 Agency by Implied Appointment 125 8.2.3 Agency by Ratification 127 8.2.4 Agency by Necessity 129 8.2.5 Agency by Estoppel or Holding Out 130 8.3 Authority of an Agent 131 8.3.1 Actual Authority 131 8.3.2 Apparent or Ostensible Authority 132 Summary 135 Key Terms 135 References 135

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Topic 9 Law of Agency (Part II) 137 9.1 Duties of Agent to Principal 137 9.2 Duties of Principal to Agent 146 9.3 Effects of Contracts Made by Agents 153 9.3.1 A Named Principal 153 9.3.2 An Undisclosed Principal 153 9.4 Termination of Agency 154 9.4.1 Termination by the Act of the Parties 154 9.4.2 Termination by Operation of Law 156 Summary 157 Key Terms 158 References 158

Topic 10 Law of Partnership (Part I) 159 10.1 Definition of Partnership and its Characteristics 160 10.2 Formation of Partnership 165 10.2.1 Partnership under the Law 165 10.2.2 Lawful Purpose 165 10.2.3 Capacity 166 10.2.4 Partnership Agreement 166 10.2.5 Registration of Partnership 166 10.3 Relationship of Partners and Outsiders (Third Parties) 168 10.3.1 Partner's Authority to Bind the Firm 168 10.3.2 Liability of Partners 170 Summary 177 Key Terms 178 References 178

Topic 11 Law of Partnership (Part II) 180 11.1 Relationship between Partners 181 11.1.1 Mutual Rights and Duties of Partners 184 11.1.2 Obligations of Partners to Act in Utmost Good Faith 186 11.2 Incoming and Outgoing (Retiring) Partners 186 11.3 Assignment of Share 187 11.4 Partnership Property 189 11.5 Dissolution of Partnership 192 11.6 Partnership Accounts Settlement 193 Summary 194 Key Terms 195 References 196

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Topic 12 Law of Sale of Goods (Part I) 197 12.1 Definition of Goods 198 12.2 Contract of Sale 198 12.3 Terms of Contract 199 12.4 Implied Terms 200 12.4.1 Title 201 12.4.2 Sale of Goods by Description 201 12.4.3 Fitness for Purpose and Merchantable Quality 202 12.4.4 Sale by Sample 205 12.5 Transfer of Property in the Goods and Risk 208 12.5.1 Effects of the Contract 209 Summary 212 Key Terms 213 References 213

Topic 13 Law of Sale of Goods (Part II) 215 13.1 Transfer of Title by Seller Who is not the Owner and 216 Its Exceptions 13.1.1 Estoppel 217 13.1.2 Sale by a Merchantile Agent 218 13.1.3 Sale by One of Joint Owners 218 13.1.4 Sale under a Voidable Contract 219 13.1.5 Sale by a Seller in Possession after Sale 219 13.1.6 Sale by a Buyer in Possession after Sale 219 13.2 Performance of Contract 220 13.3 Remedies for Breach 223 13.3.1 Breach by the Buyer 223 13.3.2 Rights of Unpaid Seller against the Goods 224 (Sellers Remedies) 13.3.3 Breach by the Seller and the Buyers Remedies 228 Summary 231 Key Terms 232 References 232

Topic 14 Law of Hire-Purchase 233

14.1 Definition of Hire-purchase 234 14.2 Meaning of Goods under the Hire-purchase Act 1967 234 14.3 Formation of the Hire-purchase Agreement 236 14.3.1 Pre-contractual Obligations 236 14.3.2 Construction of a Hire-purchase Agreement 237 14.3.3 Post-contractual Obligations 238 14.4 Rights and Protections of Hirers 239 14.4.1 Implied Conditions 239

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14.4.2 Implied Warranties 240 14.5 Liability of Owner and Dealer for Misrepresentation 240 14.6 Statutory Rights of the Hirer 240 14.7 Repossession of Goods by the Owner 242 14.7.1 Procedures Prior To Repossession 243 14.7.2 Procedures during Repossession 244 14.7.3 Procedures after Repossession (Rights of The 245 Hirer after Repossession) 14.8 Insurance 246 Summary 249 Key Terms 249 References 250

INTRODUCTION This topic introduces the law which governs the formation of contracts in Malaysia. Throughout the discussion, the relevant provisions of the statute, in particular the Contracts Act 1950 and relevant case-laws will be referred to in order to give us a clear understanding of the topic. The Malaysian law of contract is governed by the Contracts Act 1950. However, the Act does not address all aspects of the law of contract. Thus, in absence of any provision relating to issues arising under the contract, reference may be made to English law by virtue of Section 5 of the Civil Law Act 1956. It is important to note that despite reference being made to English Law, these can only be treated as guidelines or persuasive authority and will not bind the decisions of the courts in Malaysia. Decisions of the courts in India may also be referred to since some of the provisions of the Indian Contracts Act are in pari materia with the Malaysian Contracts Act. However, this will be regarded as a source of reference only.

TTooppiicc Law of Contract (Proposal and Acceptance)

11

6. Discuss the principles relating to revocation of a proposal and anacceptance.

By the end of this topic, you should be able to:

1. Define the meaning of contract; 2. Explain the important elements that constitute a valid contract; 3. Differentiate between a proposal and an invitation to treat; 4. Identify the rules of acceptance and the exceptions; 5. Describe the importance of communication in a proposal and an

acceptance; and

LEARNING OUTCOMES

TOPIC 1 LAW OF CONTRACT (PROPOSAL AND ACCEPTANCE) 2

DEFINITION OF CONTRACT AND ELEMENTS OF A VALID CONTRACT

1.1

Section 2(h) of the Contracts Act defines contract as an agreement enforceable by law. In other words, a contract is an agreement that binds the parties who enter into it and it can be enforced against one another (Refer to Figure 1.1). It can be a contract to sell and purchase land, a contract of leasing, an insurance contract, etc. However, not all agreements are contracts, for example, a social agreement or agreements between family members. (This is also known as a domestic agreement). These agreements are not considered contracts because they are not intended to bind the parties in law.

Figure 1.1: A sample of a contract

Most contracts take the form of simple contracts whereby there are no specific formalities involved in the contract formation. The contracts are made orally or through implied actions of the parties, for example, selling and buying goods at the grocery shop or the market. However, there are contracts which are considered as complex in nature, like contracts entered into by companies doing the business of selling houses and lands, and joint-venture contracts. These contracts are normally drafted and prepared in a written form, containing the details of the terms and conditions agreed by the parties therein. In order to form an agreement enforceable by law, the following elements (Refer to Figure 1.2) must exist:

(a) Proposal or Offer;

(b) Acceptance;

(c) Consideration;

(d) Intention to create legal relations;

(e) Capacity to contract; and

(f) Free consent.


Figure 1.2: Elements of a valid contract

Table 1.1: Explanation on the Elements of a Contract

Elements of contract Explanation

Proposal or Offer When you signify your willingness to be bound by a contract with the other party.

Acceptance When you agree to accept the offer or proposal made by the other party who makes the proposal.

Proposer/Offeror A person who makes the offer.

Acceptor A person who accepts the offer.

Consideration A value to be paid for a promise made.

Intention to create legal relations

Every party to a contract must have the intention to create a legal relation.

Capacity to contract Every party to a contract must have the capacity to enter into a contract.

Free Consent Every party must enter into a contract with free consent; the contract must not be secured through fraud, coercion, undue influence, misrepresentation or mistake.


SELF-CHECK 1.1

1. How do you distinguish between a social agreement and a contract?

2. What are the important elements to form a valid contract?

3. What are the advantages of having a contract in written form?

4. Give two examples of standard forms of contract that are available in Malaysia.

1.2 PROPOSAL OR OFFER

What is a proposal or an offer? According to Section 2(a) of the Contracts Act 1950, as explained in Table 1.1, a proposal is said to exist when one person signifies to another, his willingness to do or to abstain from doing anything, with a view to obtain the assent of that other person to the act or the abstinence. In other words, a proposal is the readiness of the person who makes the offer to create a legal relation and to be bound by the law, whenever the terms of the proposal are agreed upon by the acceptor. There is a difference in the use of word under the Malaysian law and the English law though the meaning is similar. Under the English law, the term offer is used while under the Malaysian Contracts Act, the word proposal is used.

1.2.1 To Whom can a Proposal be Made? A proposal can be made to a specific or particular person and the proposal can be accepted by that person only. For example, A proposes B to sell his Perdana car at RM100,000. As proposal can only be accepted by B and not by other persons. A proposal can also be made to the public. In such situation, the acceptance can be made by any person who knows about the proposal and performs the obligations required by the proposer. The example of a proposal made to the public is illustrated in the case of:


The defendants were proprietors of a medical preparation called The Carbolic Smoke Ball. They inserted advertisements in various newspapers in which they offered to pay 100 to any person who contracted influenza after using the ball three times a day for two weeks. They added that they had deposited 1,000 at the Alliance Bank, Regent Street to show our sincerity in the matter. The claimant, a lady, used the ball as advertised, and was attacked by influenza during the course of treatment. She then sued for 100 as promised in the advertisements. The defendants tried to avoid liability by saying that there was no offer made because the offer was too vague and not sure to whom it was made. Held: The Court rejected the argument and held that the advertisement was an offer to the whole world. It was not an attempt to contract with the whole world but with the portion of the public who came forward and performed the condition in the advertisement. Thus, it was possible to make an offer of this kind and there was a binding contract made between Mrs Carlill and the defendants.

Carlill v. Carbolic Smoke Ball Co Ltd (1893) 1 QB 256.

1.2.2 The Difference between a Proposal and an Invitation to Treat

Usually, before a proposal is made, the parties will hold some negotiations. The negotiation is an invitation to call for a proposal. There are many examples of invitation to treat, for instance, auctions and display of goods on the shelves in shops. The display of goods on the shelves in shops is also an invitation to treat and not a proposal by the shopkeeper. The proposal is made by the buyers when the buyers take the goods from the shelves and bring it to the counter for payment. The acceptance takes place when the seller accepts the payment from the buyer. In short, the contract was formed at the payment counter. A relevant case to explain the above principle is the case of:


Pharmaceutical Society of Great Britain v. Boots Cash Chemist (Southern) Ltd (1953) 1 QB 401. The defendants were charged under the Pharmacy and Poison Act 1933 (UK) which provided that it was unlawful to sell certain poison unless such sale was supervised by a registered pharmacist. Every sale of the drugs on the Poison List was supervised at the cash desk by a qualified pharmacist, who had the authority to prevent customers from taking goods out of the shop if he thought fit. In this case, the question arises whether a sale had occurred in the self-service shop when the customer selected articles which he desired to purchase and placed them in the wire basket. Held: The Court held that the display of goods did not constitute an offer but only an invitation to treat. A proposal to buy was made when the customer placed the articles in the basket. Hence, the contract of sale would be made at the cash desk when the cashier accepted the customers offer to buy what the latter had chosen. By that principle, the defendants (shop owners) had not made an unlawful sale.

In an auction, the auctioneer makes an invitation to bidders who come to the public auction to make a proposal. The proposal to bid at a certain price will come from the bidders and the auctioneer will accept or reject the proposal. Usually, the auctioneer will accept the highest bid or proposal from the bidders. An advertisement is also an invitation to treat by the advertiser. For example, advertisement for jobs in the newspapers.

In the case of Coelho v. The Public Services Commission [1964] MLJ 12, the High Court ruled that the newspaper advertisement was an invitation for qualified persons to apply and the applications were treated as offers.

However, if the advertisement shows the willingness of the advertiser to do or to abstain from doing something, such advertisement is not an invitation to treat but a proposal by the advertiser. In this case, anyone who comes to perform the terms as required in the advertisement is said to have accepted the proposal. You may refer to the above case of Carlill which affirms the rule that the advertisement was an offer to the whole world and the company had the intention to contract with the section of the public who came forward and performed the condition in the advertisement.


1.2.3 Proposal Must be Clear and Communicated In the Contracts Act 1950, Section 4(1) provides that the communication of a proposal is complete when the proposal comes to the knowledge of the person to whom it is made. In order to make the proposal effective, it must be clear and communicated. A proposal which is vague and uncertain may not lead to a binding contract.

A proposal must also be communicated to the acceptor. It can be communicated in any form, either orally or in written or through the implied action of the party. Logically, a person cannot accept a proposal which he does not know exist. Thus, a person who gives any information cannot claim for a reward if he does not know about the reward being offered. The relevant case to explain this principle is the case of:

In the case of Ahmad Meah & Anor v. Nacodah Merican (1890) 4 Ky 583, an agreement to build a suitable house was held by the court as vague to constitute a binding contract.

Williams v. Carwardine (1883) 5C&P 566. The defendant published a handbill with the promise that he would pay the sum of 20 to any person who would provide information leading to the discovery of the murderer of Walter Carwardine. The claimant in this case lived with Williams and was severely beaten by him. As she believed that she was going to die and to ease her conscience, she gave information leading to the conviction of Williams for the murder. In an action to recover the reward, the jury found that the claimant was not induced to give the information by the reward offered, but by motives of revenge. However, the Court held that she was entitled to the reward because she had seen the handbill and had given information.

1.2.4 Revocation of Proposal The proposer may revoke his proposal at any time before acceptance. Under Section 5(1) of the Contracts Act 1950, a proposal may be revoked at any time


before the communication of its acceptance is complete as against the proposer, but not afterwards. The question is: When is the communication of acceptance complete as against the proposer? If the acceptance is made through instantaneous mode of communication such as telephone, telex, fax or oral, the acceptance is said to be communicated once it comes to the knowledge of the person to whom it is made. But, if the acceptance is made by post or telegram, the acceptance is complete as against the proposer at the time when the letter of acceptance is posted. Thus, in such situation, the revocation of the proposal must be made by the proposer before the letter of acceptance is posted by the acceptor. For example:

A may revoke his proposal at any time before or at the moment when B posts his letter of acceptance, but not afterwards.

B accepts the proposal by a letter sent by post. A proposes, by a letter, sent by post, to sell his house to B.

Next, Section 6 provides that a proposal is revoked: (a) When the proposer communicated the revocation of the proposal to the

other party before its acceptance. If the revocation of proposal is made by post, the revocation is only effective when it comes to the knowledge of the acceptor and not at the time when the letter of revocation is posted. One relevant case to illustrate the principle is the case of:


Byrne v. Tienhoven (1880) 5 C.P.D. 344 1 October: Defendant posted a letter of offer from Cardiff to the plaintiff in New York. 8 October: Defendant posted a letter revoking the offer made on October 1. 11 October: Plaintiff received the letter of offer posted on October 1 and sent acceptance by telegram the same day. 15 October: Plaintiff sent letter of acceptance. 20 October: Plaintiff received defendants letter of revocation. The court held that there was a contract between the parties because the revocation of the offer posted on 8 October was only effective on 20 October (when the plaintiff received it). The plaintiff had accepted the offer on 11 October (when he sent the telegram accepting the offer).

The revocation of proposal need not be communicated by the proposer. It can be communicated by a third party who is acting on behalf of the proposer as an agent. For example, in the case of:

Dickinson v Dodds (1876) 2 Ch D 468 The defendant offered to sell houses by letter stating: This offer to be left over until Friday, 9am.

On Thursday afternoon, Mr Berry informed the claimant that the defendant had been negotiating a sale of the property with Allan.

On Thursday evening, the claimant left a letter of acceptance at the defendants house but the letter was not delivered to the defendant.

On Friday morning, at 7am, Berry (acting as the claimants agent) handed the defendant a duplicate letter of acceptance.

However, on Thursday, the defendant had entered into a contract to sell the property to Allan.

The court held that the defendant was free to revoke his offer at any time because there was no consideration given by the claimant for the promise, to keep the offer open. Further, Berrys communication indicated that Dodds (defendant) was no longer interested to sell the property to the claimant. This was a good communication of Doddss revocation of offer. Therefore, there was no binding contract between the parties.


(b) By the lapse of time prescribed in the proposal for its acceptance. If no time is prescribed, by the lapse of a reasonable time. An example of case to illustrate the principle is:

Ramsgate Victoria Hotel Co. v. Montefiore (1866) L.R. 1 Ex.Ch. 109 The defendant offered to take shares in the company by a letter dated 8 June 1864. The company did not reply until 23 November 1864, when it alloted shares to the defendant. The defendant refused to take up the shares. Held: The defendants refusal was justified because the offer had lapsed due to the companys delay in accepting the offer within a reasonable time. The period between June and November was not reasonable.

(c) Where the acceptor fails to fulfil a condition precedent to acceptance.

For example, an employer offers to employ an applicant on the condition that he passes certain tests. If the applicant fails the test, then the proposal is revoked.

(d) By the death or mental disorder of the proposer.

It is important that the acceptor knows about the fact of the death or mental disorder of the proposer. If the acceptance is made without knowledge of the death or mental disorder of the proposer, then it is a good acceptance.

1. Can a proposal be made to the public at large?2.

How do you distinguish between a proposal and an invitation to treat?

3.

Must the acceptor know about the proposal before he can accept it?

4. Can the proposer revoke his proposal?5.

When does the revocation of proposal become effective in cases of revocation made by post?

6. What are the grounds for revocation of a proposal?

SELF-CHECK 1.2


ACTIVITY 1.1

Discuss the following problem by applying the principle of law on proposal:

Browny made an offer of RM1,000 in Looking Times to anyone who returned his Persian cat. Tony, a friend of Browny, found the Persian cat which he knew belonged to Browny. When Tony returned the Persian cat to Browny, Browny was so excited that he forgot all about the offer he had made. The next day, Tony came across the advertisement in Looking Times but when he went to see Browny to claim the reward, Browny refused to pay. Advise Tony.

ACCEPTANCE 1.3

What is an acceptance? According to Section 2(b) of the Contracts Act 1950, when the person to whom the proposal is made signifies his assent thereto, a proposal is said to be accepted: a proposal, when accepted, becomes a promise. This means, an acceptance is an agreement by the acceptor to the terms contained in the proposal made by the proposer. With that acceptance, a binding contract is said to exist. It is important that there is a positive act of acceptance made by the acceptor. If the acceptor keeps silence or fails to respond or totally disregards the proposal, then there is no acceptance because there is no positive act made by the acceptor. To determine whether an acceptance exists, the important rules on acceptance will be discussed below.

1.3.1 Acceptance must be Absolute and Unqualified Section 7(a) of the Contracts Act 1950 provides that an acceptance must be absolute and unqualified. This means, the acceptance must be made on the same terms as provided in the proposal and there must not be any variation or modification. If the party varies or modifies the terms made in the proposal, an acceptance does not exist but that act will amount to a counter-proposal. The case to illustrate the rule is the case of:


Hyde v. Wrench (1840) 3 Beav. 334 The defendant offered to sell his estate to the plaintiff for 1,000. In reply, the plaintiff made a counter-proposal to purchase at 950 but the defendant refused to accept this proposal. The plaintiff then wrote again to the defendant, agreeing to accept the original proposal, but the defendant refused to sell. The court ruled that the counter-offer made by the plaintiff at the price of 950 constituted a rejection to the original proposal (which cannot be revived). Therefore, no acceptance had occurred and the defendant had the right not to sell the estate to the plaintiff.

Next, if the parties are still in the process of negotiation, there is no question of an agreement. An example is the case of:

Lau Brothers & Co v. China Pacific Navigation Co. Ltd. [1965] 1 MLJ 1 The parties in this case conducted negotiations for the delivery of logs, through a series of telegrams and letters. Finally, the defendants withdrew from the negotiations. The issue was whether there was a binding contract between the parties? The court held that the parties were still in a state of negotiations and the defendants had the right to withdraw from it.

Another situation where a contract is not yet concluded is when there is a conditional acceptance. It happens when the acceptance is qualified by the term subject to a contract or subject to a formal contract being drawn up by the solicitors. This means, the parties do not intend to conclude their bargain until they executed a formal contract. The example of a case is:


Low Kar Yit & Ors v. Mohd Isa & Anor [1963] MLJ 165 The defendants gave an option to the plaintiffs agent to purchase a parcel of land subject to a formal contract being drawn up and agreed upon by the parties. The plaintiffs agent exercised the option but the defendant failed to sign the sale agreement. The plaintiff then brought a legal action for breach of contract. The court decided that: there was no binding contract because the option to purchase was conditional and subject to a formal contract to be drawn up and agreed upon by the parties. Thus, the exercise of the option has no legal effect and it was an agreement to enter into an agreement.

1.3.2 Acceptance must be Communicated In order to form a binding contract between the parties, the acceptance of the proposal must be communicated to the proposer. Section 7(b), Contracts Act 1950, provides that the acceptance may be expressed in some usual and reasonable manner, unless the proposal prescribes a manner in which it is to be accepted. If the proposal prescribes a manner in which it is to be accepted, and the acceptance is not made in such manner, the proposer may, within a reasonable time after the acceptance is communicated to him, insist that his proposal shall be accepted in the prescribed manner, and not otherwise; but if he fails to do so, he accepts the acceptance. The principle provided in Section 7(b) means, if no method of acceptance is specified by the proposer, then the acceptance must be communicated and made in a usual and reasonable manner. For instance, if A offers to sell his bicycle to B, who stays next door to A, then the reasonable manner to accept the offer is by B going to As house to give his acceptance. If B wants to send a letter to accept As offer, the manner may be usual but it is unreasonable since they are staying next door. But if the proposal specifies a particular mode of acceptance and the acceptor does not follow it, then the proposer can insist on the mode of acceptance. The proposer must act within reasonable time after the acceptance is communicated. If not, then the proposer is said to have accepted the acceptance. (a) Act of acceptance

In communicating the acceptance, it is not sufficient that the acceptor intends to accept the proposal without doing some positive act that relates to the proposal.


Thus, if the acceptor remains silence after being proposed, then the act of silence cannot constitute an acceptance. As what happened in the case of:

Felthouse v. Bindley (1862) 11 CB (NS) 869 The plaintiff wrote to the defendant, offering to buy a horse for 30.75p and added as follows: If I hear no more about him, I consider the horse is mine at that price. The defendant did not reply. The court held that there was no contract between the plaintiff and the defendant because the defendant had never communicated his acceptance to the plaintiff. Silence is no acceptance.

(b) Exceptions It is clear that the general rule requires the communication of acceptance and this means the acceptance must be brought to the notice of the proposer. However, there are certain exceptions to the general rule, as follows:

Acceptance through post (Postal Rule)

If the parties have agreed to use the post as a means of communication, then the acceptance is complete or effective as soon as the acceptor posted his letter of acceptance, even though it never reaches the proposer. Section 4(2) (a), Contracts Act 1950 provides that: The communication of an acceptance is complete:

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

(b) as against the acceptor, when it comes to the knowledge of the proposer.

Paragraph (a) means, when the acceptor posts his letter of acceptance, the proposer is bound to perform his obligation, even though the proposer does not know about the acceptance (for instance, the letter does not reach the proposer or delay in transit). A case to illustrate this principle is:


Paragraph

Ignatius v. Bell (1913) 2 FMSLR 115 The parties in this case agreed to use the post as a means of communication. The defendant made a proposal to sell his piece of land to the plaintiff and the option to purchase must be exercised on or before the 20 August 1912. The plaintiff sent his acceptance by registered post on 16 August 1912 but it was not delivered to the defendant till 25 August 1912. The court applying Section 4, held that: Communication of acceptance was complete when the notice of acceptance was posted on 16 August 1912, even though the defendant did not know about the acceptance.

Paragraph (b) means, when the acceptor posts his letter of acceptance, he is not bound to perform his obligation until his letter of acceptance is received by the proposer. For example, if A proposes to sell his car to B (by letter) and B accepts the proposal (also by letter), A is bound at the time when B posts his letter of acceptance, but B himself is not bound until A receives the letter of acceptance. It also means that in the meantime, the acceptor may still withdraw his acceptance.

If the proposer wishes to exclude the postal rule, he may provide protection for himself. For instance, the proposer may clearly state in his proposal that any acceptance is deemed completed only upon receipt.

Acceptance through performance of an act stated in the proposal.

In some cases, the acceptance need not be communicated to the proposer. Section 8 of the Contracts Act 1950 provides that performance of the conditions of a proposal is an acceptance of the proposal.

In a unilateral contract (i.e., a proposal to the public at large), the acceptor need not communicate his acceptance to the proposer because when the proposer performs the conditions provided in the proposal, it becomes an acceptance. The situation is that where a proposer advertises to the public at large that a reward is being offered, it will be unreasonable for every person who wants to accept the proposal to inform the proposer of his intention to accept. Thus, performance is sufficient to constitute an acceptance if that is the intention of the proposer. A case example is:


1.3.3 Revocation of Acceptance As explained earlier, when the acceptor posts his letter of acceptance, he is not bound to perform his obligation until his letter of acceptance is received by the proposer. This means the acceptor may still withdraw his acceptance. According to Section 5(2), Contracts Act 1950, an acceptance may be revoked at any time before the communication of the acceptance is complete as against the acceptor, but not afterwards. For example:

A proposes (by a letter sent by post), to sell his house to B. B accepts the proposal (by letter sent by post). B may revoke his acceptance at any time (before or at the time when) his letter of acceptance reaches A

SELF-CHECK 1.3

Carlill v. Carbolic Smoke Ball Co. [1893] 1 QB 256 The Court held that the performance was sufficient to constitute acceptance if that was the intention of the proposer. (Explanation: Mr Carlill need not inform the company that he accepted its offer. By using the product as advertised and meeting all the terms of the offer, he is said to have accepted the offer).

1. What is the importance of an acceptance in a contract and what is the effect of a counter-proposal?

2. How can the acceptor communicate his acceptance to the proposer?

3. In an acceptance made by post, when is the communication of acceptance deemed completed as against the proposer?

4. Can the performance of an act stipulated in the proposal amount to an acceptance?

5. When can the acceptor withdraw his acceptance? 6. What do you understand by the postal rule principle?


Discuss the following cases by applying the principle of law on acceptance:

ACTIVITY 1.2

(a) On Friday 5 September, Hanna sent a telex to Adam offering to buy his piano at RM3,000. The telex was received by Adam at 4pm. Since the telex operator had gone home for the weekend, Adam posted a letter in the last post on Friday, accepting the proposal. The letter reached Hanna at 1.30pm on Monday, 8 September. Meanwhile, at 8.30am on 8 September, Hanna sent a telex to Adam withdrawing her proposal. Hannas telex reached Adam and was read by him immediately at 8.45am on 8 September. Adam sought after your advice. Advise Adam.

(b) T advertised his speed-boat in a newspaper for RM4,000. S wrote back offering to buy the speed-boat for RM3,500. T replied by return of post stating that he would accept RM3,750. Having received no reply from S, T wrote again saying he would accept his offer at RM3,500. Advise T.

Every contract is an agreement but not all agreements are contracts. An invitation to treat is not yet a proposal or an offer. It is an offer to make an

offer.

A proposal can be made to an individual person or to the public at large. A proposal must come to the knowledge of the acceptor before he can accept

it.

A proposal may be revoked at any time before acceptance. Revocation of proposal made by post is only effective when the acceptor

receives the letter of revocation of a proposal.

An acceptance must be made on the same terms as provided in the proposal without any variation or modification.

An acceptance must be communicated to the proposer and made in usual and reasonable manner.

In postal rule, the acceptance is effective upon the posting of the letter by the acceptor, even if the letter of acceptance never reaches the proposer.


In unilateral contract, performance of the act stated in the proposal constitutes an acceptance of the proposal.

The acceptor may revoke his acceptance before his letter of acceptance reaches the proposer.

Acceptance Communication Counter-proposal Invitation to treat

Performance Proposal Postal Rule Revocation

Text Books:

Harlina Mohamed On & Rozanah Ab. Rahman. (2007). Undang-Undang Perniagaan Malaysia. Selangor: Kumpulan Usahawan Muslim Sdn. Bhd.

Keenan, D. (2006). Smith and Keenans Law for Business (13th ed.). UK: Pearson and Longman.

Wu, M. A. & Vohrah, B. (2000). The Commercial Law of Malaysia (2nd ed.). Selangor: Pearson and Longman.

Cases:

Ahmad Meah & Anor. v. Nacodah Merican (1890) 4 KY 583. Byrne v. Tienhoven (1880) 5C.P.D. 344. Carlill v. Carbolic Smoke Ball Co. Ltd. (1893) 1 QB 256. Coelho v. The Public Services Commission [1964] MLJ 12. Dickinson v. Dodds (1876) 2 Ch 468. Felthouse v. Bindley (1862) 11 CB (NS) 869. Hyde v. Wrench (1840) 3 Beav. 334. Ignatius v. Bell (1913) 2 FMSLR 115. Lau Brothers & Co. v. China Pacific Navigation Co. Ltd. [1965] 1 MLJ 1. Low Kar Yit & Ors. v. Mohd. Isa & Anor [1963] MLJ 165.


Pharmaceutical Society of Great Britain v. Boots Cash Chemist (Southern) Ltd. (1953) 1 QB 401.

Ramsgate Victoria Hotel Co. v. Montefiore (1866) L.R. 1 Ex.Ch. 109. Williams v. Carwardine (1883) 5C&P 566.

INTRODUCTION Consideration is another important element of a contract and any agreement made without consideration is a void agreement. Section 26 of the Contracts Act 1950 provides that an agreement made without consideration is void. According to Section 2(d) of the Contracts Act 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 of the promise. It means, if the promisee (i.e., the person accepting the proposal):

Has done or abstained from doing; or Does or abstains from doing; or Promises to do or to abstain from doing,

TTooppiicc

22 Law of

Contract (Consideration)


1. Explain the importance of consideration in contracts;

2. List the exceptions available to the rule of consideration;

3. Discuss the principle relating to the adequacy of consideration; and

4. Compare the difference in principle of consideration under the Malaysian law and the English law.

LEARNING OUTCOMES

TOPIC 2 LAW OF CONTRACT (CONSIDERATION) 21

some acts according to the promisors (person making the proposal) desire, that act or abstinence or promise is called consideration. Therefore, consideration is a price that you pay to buy a promise or an act of the other person. Take an example where you lose your mobile phone while travelling on a train and you offered a RM100 reward to anyone who found and returned the mobile phone to you. Later, A found and returned the mobile phone to you. In such case, you promised to pay RM100 and A paid the price for your promise by performing the act. Thus, the act of returning the mobile phone to you is the consideration for the promise. The case of Osman bin Abdul Ghani & Ors v. United Asian Bank Bhd [1987] 1 MLJ 27 on consideration, where the court held that forbearance to sue could amount to a valid consideration.

EXECUTORY, EXECUTED AND PAST CONSIDERATION 2.1

Consideration can be classified as:

(i) executory;

(ii) executed; and

(iii) past consideration. Consideration may be executory when one promise is made in return for another promise. For example, you (refer to Figure 2.1) agree to sell a fax machine to B for RM2,000. Here, Bs promise to pay RM2,000 is the consideration for your promise to sell the fax machine and your promise to sell the fax machine is the consideration for Bs promise to pay RM2,000. These are lawful considerations. Promises which form the consideration for each other are called reciprocal promise, and every promise and sets of promises forming the consideration for each other is an agreement. Next, consideration may be executed when one promise is made in return for the performance of an act. For instance, you advertise a reward of RM100 to anyone who finds and returns your lost watch. C finds and returns the watch to you in response to the offer. Cs consideration for your promise is executed. Only your liability remains outstanding which is to pay C the RM100 reward. Figure 2.1 demonstrates the difference between these two considerations.


Figure 2.1: Executory and Executed Considerations

Apart from the executory and executed considerations, if a promise is made in return for an act that has already been performed, that act is regarded as past consideration. For example, D found and returned your lost chain and in gratitude, you promised to reward D RM100. Your promise to reward D is made in return for Ds consideration that has passed. Under English law, past consideration will not support a claim in contract because the act which was performed before the promise of reward was made is regarded as gratuitous. However, under the Malaysian Contracts Act 1950, past consideration is sufficient to support a promise because Section 2(d) and Section 26 (b) apply to past consideration. The words has done or abstained from doing referred to an act which has been performed before the promise is made. Thus, the position in Malaysia is that, even though the consideration is past, it is valid if it is done at the desire of the promisor.


The Malaysian case which applied the principle of past consideration is the case of:

Later, an issue arose in this case, whether the services rendered by Schmidt after the incorporation of the company but before the agreement was made, were sufficient to constitute a valid consideration, even though they were past. The Privy Council held that it was a valid consideration and Schmidt was entitled to claim the amount.

Kepong Prospecting Ltd & S.K. Jagatheesan & Ors v. A.E. Schmidt & Marjorie Schmidt [1968] 1 MLJ 170 Schmidt, a consulting engineer, had assisted another in obtaining a prospecting permit for mining iron ore in the state of Johore. He also helped in the formation of the company (Kepong Prospecting Ltd) and was appointed the Managing Director. Subsequently, Schmidt entered into an agreement with the company. In the agreement, the company agreed to pay him one per cent of the value of all ore sold from the mining land. This was in consideration of the services rendered by Schmidt on behalf of the company before its formation, after incorporation and for future services....

SELF-CHECK 2.1

1. What are the differences between executed, executory and past consideration?

2. Can past consideration support a claim in contract?


ACTIVITY 2.1

Discuss the following problem by applying the principle of law on consideration: Intan and Berlian were neighbours. Intan had to go abroad for business arrangements. Before she left, she told Berlian, Please look after my house. After four weeks of Intan being away, Intans house caught fire and Berlian could only save Intans wedding album. When Intan returned home, she thanked Berlian for saving her wedding album which she treasured so much and promised Berlian that she would pay RM100 for what Berlian had done. Now Intan refused to pay what she has promised. Advise Berlian.

EXCEPTIONS TO THE RULE OF CONSIDERATION

2.2

The general rule of consideration under Section 26 of the Contracts Act 1950 provides that an agreement without consideration is void. However, there are exceptions to this general rule. With these exceptions, even though the agreement is made without consideration, the agreement is still valid and will be enforceable. The exceptions include the following:

2.2.1 Agreement made on account of Natural Love and Affection

This exception is provided in Section 26(a) of the Contracts Act 1950. The rule provides that any agreement which is made without consideration is still valid if it is expressed in writing and registered under the law (if any) for the time being in force for the registration of such documents, and is made on account of natural love and affection between parties standing in a near relation to each other.


This means the agreement that is not supported by any consideration is valid if it fulfils the following conditions:

(a) The agreement is made in writing;

(b) The agreement is registered under the existing law which requires its registration; and

(c) The agreement is made on account of natural love and affection between the parties standing in near relation to each other.

For example: A, for natural love and affection, promises to give his son, B, RMl,000. A puts his promise to B into writing and registers it under a law for the time being in force for the registration of such documents. This is a contract.

Under the exception, there is a phrase near relation that is attached to the position of the parties in the agreement. What is meant by near relation? It is not defined in the Act, but a case example in which an attempt was made to define the term is the case of:

An agreement was made on account of natural love and affection; and Three sisters and seven half-sisters and brothers stood in near

relationship to their adopted nephews and nieces.

The court granted that: Chinese adopted children are related to the adoptive parents and brothers, but they were not nearly related to the family of their adoptive mother. Thus, the uncles and aunties of the adoptive mother did not stand in near relation to their nephews and nieces. In such a case, there was no natural love and affection between the signatories and the donees. The agreement was void.

In this case, there was an agreement made between members of a Chinese family governed by their personal laws. The deceased Tan Soh Sim (in her illness) had made a wish that her estate should be divided among her two adopted sons and two adopted daughters. The legal next-of-kin drew up an agreement renouncing all rights in favour of the four adopted children (who were their nephews and nieces). The issues to be resolved in this case were whether:

Re Tan Soh Sim [1951] MLJ 21


Therefore, in order to enforce the agreement made on account of natural love and affection, the court must be satisfied that the parties who enter into the agreement must stand in near relation to each other besides having natural love and affection. The term near relation is not defined in the Act. Thus, what signifies near relation may be different for every social group, depending on the ethnic groups and their customs. This is because the personal law relating to family matters is applicable to the groups.

2.2.2 Agreement to Compensate a Past Voluntary Act This is the exception provided in Section 26(b) of the Contracts Act 1950. The rule provides that an agreement without consideration is valid if it is a promise to compensate, wholly or in part, a person who has already voluntarily done something for the promisor, or something which the promisor was legally compellable to do.

It means, if the promisee has done some act voluntarily on his own will, for the promisor (without being requested by the promisor) and subsequently the promisor promises to compensate the promisee for such act, then that promise is enforceable. Similarly, if the promisee has done some act (an act which the promisor is compellable to do in law, for example, paying tax to the government) voluntarily on his own will for the promisor, the promise made by the promisor to compensate the act is also enforceable.

For example: A supports B's infant son. B promises to pay A's expenses in doing so. This is a contract and A can enforce Bs promise.

Similar to Section 2(d), this exception covers the principle of past consideration which has been explained above. If Section 2(d) covers an act which has been done at the request of the promisor, Section 26(b) covers an act which has been done voluntarily by the promisee (before the promise to compensate the promisee is made by the promisor). What is meant by voluntarily is not defined in the Act but a case example that considered the term is the case of:


The question was whether the plaintiff had already voluntarily done something for the defendant. It was found that the plaintiff had acted on the suggestion of the defendant, so that the action could not be said to have been done voluntarily. Therefore, the promise made by the defendant firm to compensate the plaintiff was not enforceable.

In this case, there were arrangements between a Malaysian and an English firm. The arrangements were that the Malaysian firm would find buyers and inform the English firm, who would then find the sellers. When a sale had been arranged, a commission would be paid to the Malaysian firm. The dispute that arose in this case was that after the Malaysian firm arranged a buyer for confectionery and the English firm found a seller, things went wrong. The English firm then sued the Malaysian firm for the loss it suffered because of non-payment by the buyer. The court found that: there were promises of compensation made by the defendant firm to the plaintiff, but these promises were not supported by consideration. Therefore, the promises cannot be legally enforceable, unless it falls under Section 26(b); a promise to compensate, wholly or in part, a person who has already voluntarily done something for the promisor.

J.M. Wotherspoon & Co Ltd v. Henry Agency House [1962] MLJ 86

Thus, in order to enforce the promise made for past consideration under Section 26(b), the promisee must have acted voluntarily for the promisor in that particular action.

2.2.3 Agreement to Pay a Statute-barred Debt This is another exception provided in Section 26(c) of the Contracts Act 1950. The rule provides that an agreement without consideration is valid if it is a promise, made in writing and signed by the person to be charged therewith, or by his agent generally or specially authorised in that behalf, to pay wholly or in part a debt of which the creditor might have enforced payment but for the law for the limitation of suits. What it means under this exception is that, the promisor is liable to pay a previous debt (which the creditor cannot recover through legal action because the time within which the creditor must commence legal action is limited by statute) if the following conditions arise:


The debtor makes a fresh promise to pay the statute-barred debt; and The promise is made in writing and signed by the person to be charged or his

authorised agent.

For example: A owes B RM1,000, but the debt is barred by limitation. A signs a written promise to pay B RM500 on account of the debt. This is a contract.

What is meant by a statute-barred debt? It is a debt which cannot be recovered because the time allowed to a party to enforce his legal rights is limited by the Limitation Act 1953. The Limitation Act provides six years as the time limit for any party to take legal action in contract. The six years run from the time the cause of action arises (usually from the time of the breach of contract by the contracting party). Therefore, the promise to pay a statute-barred debt under this exception will form a new cause of action although without consideration, and the fresh promise is valid. This is provided in Section 26(2) of the Limitation Act 1953.

SELF-CHECK 2.2

1. What is the general rule of consideration? 2. Is there any exception available to the general rule of

consideration? 3. What was the decision of the court in the case of J.M.

Wotherspoon & Co Ltd v. Henry Agency House [1962] MLJ 86? 4. What are the important conditions required in an agreement to

pay a statute-barred debt?


Discuss the following problems by applying the principle of law on the exception to consideration:

(a) Mr Ajay was a successful business man. One day, he promises his eldest son, Suresh, that he wishes to transfer one of his bungalows to Suresh to show how much he loved him. Mr Ajay made his promise in writing and registered it. A few years later, when Suresh married Salwath, Suresh requested from Mr Ajay the possession of the bungalow for him to start his matrimonial life. However, Mr Ajay was reluctant to accept Salwath as his daughter-in-law and refused to give Suresh the bungalow. Advise Suresh.

(b) Azrai, a bank manager, left for his hometown in haste as his mother passed away. He left his briefcase containing important documents on his table. Unfortunately, a fire broke out at the bank. Baini, the secretary of the bank manager, saw the briefcase and realising that the briefcase was important to her boss, dashed into the room and took the briefcase with her. Azrai reported back to work the subsequent week and felt so relieved that the briefcase was not destroyed in the fire. Azrai promised to give Baini a reward in the sum of RM1,000 in return for Bainis act. Several weeks passed and there was no sign of Azrai giving Baini the reward. Baini came to see Azrai for the reward but Azrai refused to pay her on the basis that it was Bainis duty as his secretary to do so. Advise Baini.

ACTIVITY 2.2

MUST CONSIDERATION MOVE FROM THE PROMISEE? 2.3

After understanding the general rule of consideration and the exceptions, it is important to know from whom the consideration can come. Must the consideration come from the promisee only or can the consideration come from some other persons (who is not the party in the contract)? The principle relating to who should furnish a consideration is different in the Malaysian Contracts Act and the common law of England. Under common law, consideration must move from the promisee. This means, the person who gets the promise must personally give something in return as the consideration for the promise. The idea is that, if a person furnishes no consideration, he takes no part in the contract. Under the Malaysian Contracts Act, the promisee can enforce


the promise even though he personally does not give any consideration. Such consideration can come from some other persons. The authority for this principle is in Section 2(d) of the Contracts Act which provides the words any other person, in the following part of the provision: ........the promisee or any other person has done or abstained from doing...... Therefore, even though the promisee does not give any consideration for a promise made by the promisor, he can still claim for the promise if the consideration is given by some other persons.

For example: A promises to pay B RM1,000 when C paints As house. As soon as C completes the work (paints As house), B can claim the amount of RM1,000 from A although B does not personally give any consideration for As promise. This is because the consideration has moved from C.

A case to illustrate this principle is:

Venkata Chinnaya v. Verikataramaya (1881) I.L.R. 4 Mad. 137. The case was about a sister who agreed to pay an annuity of Rs 653 to her brothers who provided no consideration for the promise. On the same day, their mother gave the sister some land with the requirement that the sister must pay the annuity to her brothers. Later, the sister failed to fulfil her promise to pay the annuity and her brothers sued her on the promise. The court ruled that: The sister was liable to pay the brothers. Even though the consideration did not move from the brothers, there was a valid consideration that was given by their mother.

ADEQUACY OF CONSIDERATION 2.4

Another important principle is the adequacy of consideration. The question is: must consideration be adequate? Can you sell your house worth RM100,000 for only RM100 to Mr Man? Is the amount of RM100 sufficient as consideration for your promise? According to Explanation 2 of Section 26, Contracts Act 1950, an agreement to which the consent of the promisor is freely given is not void merely because the consideration is inadequate...... What is meant by the provision is that, the


adequacy of consideration is immaterial. The consideration given for the promise need not be adequate as long as the agreement has been entered into by the parties with free consent. Free consent means the parties do not enter into such contract under fraud, oppression, misrepresentation, suppression of the value of property, urgent necessity for money, weakness of understanding or ignorance.

For example: A agrees to sell a horse worth RMl,000 for RMl0. A's consent to the agreement was freely given. The agreement is a contract notwithstanding the inadequacy of the consideration.

Thus, if you agree to sell your house that worth RM100,000 to Mr Man for only RM100, this agreement is a contract, provided that your consent to sell at that amount is freely given. You are not under fraud or oppression, etc., to sell at that price. However, Explanation 2 of Section 26 further reads, ......but the inadequacy of the consideration may be taken into account by the court in determining the question whether the consent of the promisor was freely given. This clause means the court will consider the adequacy of consideration, only when the issue of free consent is raised by the contracting party.

For example: A agrees to sell a horse worth RM1,000 for RMl0. A denies that consent to the agreement was freely given. The inadequacy of the consideration is a fact which the court should take into account in considering whether or not A's consent was freely given.

A case to illustrate this principle is:

Phang Swee Kim v. Beh I Hock [1964] MLJ 383. This case involved the respondent who agreed to transfer a parcel of land to the appellant on payment of $500 when the land was subdivided. At that time, the land was worth much more than the price. Subsequently, the respondent refused to honour the promise and claimed that the promise was unenforceable. The trial judge in the case held that the agreement was void because of inadequacy of consideration. However, on appeal, the Federal Court reversed the decision and applied the principle in Explanation 2 of Section 26.


Hence, the agreement to transfer the land to the appellant for the $500 payment was valid and the promise was enforceable because the consent was freely given by the respondent although the consideration was inadequate.

Discuss the following problems by referring to the relevant principle of law on consideration:

(a) Mr J, who decided to make a home improvement to his cottage, had requested K to paint his cottage and to build up certain fences around the cottage. He promised to pay K double the usual payment charged by other contractors for that purpose and the arrangement was agreed to by K. The next day, K sent his nephew, M, to start the work. M managed to complete the said improvement work within two weeks. Upon completion of the work, K came to see Mr J for the payment. However, Mr J refused to pay K because he got to know that it was M who had performed the work and not K. Advise K whether he could claim for the payment from Mr J.

(b) Zaitun, a local trader in the town offered Hana a sale of a slimming apparatus which is worth RM10,000 in the market for only RM1,000, as she decided to clear the stock of that model (SE-101). Hana agreed to buy the apparatus and to collect it from Zaituns office. On the day of collection, Zaitun changed her mind and told Hana that she had wrongly decided to sell the apparatus at that price. Advise Hana as regards the validity of the contract.

ACTIVITY 2.3

1. Can the promisee enforce the promise made by the promisor if the consideration is given by some other persons?

2. Would the principle on the above situation (para (a) above) be the same under the English common law?

3. What is meant by adequacy of consideration?

4. Why is the free consent of the promisor important in considering the adequacy of consideration?

SELF-CHECK 2.3


An agreement made without consideration is a void agreement. When one promise is made in return for another promise, it is known as

executory consideration.

Executed consideration is when one promise is made in return for the performance of an act.

An agreement made on account of natural love and affection is valid without consideration if it is made in writing, registered under the law (if any) and made between parties standing in near relation.

Past consideration is valid under the Malaysian Contracts Act 1950 but not under English common law.

The exception under Section 26(b) of the Contracts Act 1950 requires the promisee to have done an act voluntarily, before the promise to compensate the act is made by the promisor.

An agreement to pay a statute-barred debt is valid without consideration, provided the debtor makes a fresh promise to pay, in writing, and signed by him or his authorised agent.

Consideration can move from the promisee or any other person under the Malaysian Contracts Act 1950.

Consideration need not be adequate so long as the promisor has freely given his consent to the agreement.

Adequate consideration

Executed consideration

Executory consideration

Free consent

Past consideration

Promisee

Promisor

Voluntary act


Text Books:

Harlina Mohamed On & Rozanah Ab. Rahman. (2007). Undang-Undang Perniagaan Malaysia. Selangor: Kumpulan Usahawan Muslim Sdn. Bhd.


Wu, M. A. & Vohrah, B. (2000). The Commercial Law of Malaysia (2nd ed.). Selangor: Pearson and Longman.

Cases:

J.M.Wotherspoon & Co. Ltd. v. Henry Agency House [1962] MLJ 86. Kepong Prospecting Ltd. & S.K. Jagatheesan & Ors v. A.E. Schmidt &

Marjorie Schmidt [1968] 1 MLJ 170.

Lampleigh v. Braithwait (1615) 80 ER 255. Osman bin Abdul Ghani & Ors v. United Asian Bank Bhd [1987] 1 MLJ 27. Phang Swee Kim v. Beh I Hock [1964] MLJ 383. Re Tan Soh Sim [1951] MLJ 21. Venkata Chinnaya v. Verikataramaya (1881) I.L.R. 4 Mad. 137.

INTRODUCTION Any agreement made between the parties (the proposer and the acceptor) will only become a binding contract if both parties intend to make the contract enforceable. The element of intention has not been defined in the Contracts Act 1950 and there is no provision in the Act which clearly provides the element of intention as one of the elements to form a valid contract. The provisions which may imply to the element of intention is the word with a view used in Section 2(a), and the word at the desire used in Section 2(d) of the Act. However, the principles in the English common law will apply in the absence of such provision

TTooppiicc Law of Contract (Intention to Create Legal Relations)

33

3. Analyse the situations in which the presumption of intention is rebuttable; and

4. Compare the presumption of intention in business or commercial agreements.

LEARNING OUTCOMES


1. Explain the importance of intention to create legal relations in an agreement;

2. Discuss the presumption of intention in domestic, family and social agreements;

TOPIC 3 LAW OF CONTRACT (INTENTION TO CREATE LEGAL RELATIONS) 36

under the Contracts Act 1950. In determining whether there is an intention by the parties to create a legally binding contract, the law has divided an agreement into two categories:

(a) Domestic, Family and Social Agreements; and

(b) Business Agreements.

DOMESTIC, FAMILY AND SOCIAL AGREEMENTS

3.1

In domestic, family and social agreements, the presumption made is that the parties in the contract do not intend for their agreement to create legal relations. This means, the parties to the agreement do not contemplate any legal consequence to arise from their agreement. It is because this type of agreement is made every day between the family and social members and between spouses for many arrangements, that no parties would intend to go to court for breach of such arrangements and promises made. The English case which established the principle is the case of:

Balfour v. Balfour [1919] 2 K.B. 571 In the case, the husband was employed in a government post in Ceylon. He returned with his wife to England on leave, but she was unable to go back to Ceylon with him for medical reasons. He consequently promised orally to make her an allowance of 30 a month until she rejoined him. The husband failed to make the payment and the wife sued him. The Court held that although it was not impossible for a husband and wife to enter into a contract for maintenance, in this case they never intended to make a bargain which could be enforced in law. Thus, there was no enforceable contract between the parties.

Therefore, in the above case that involved husband and wife, there is a presumption of no intention to create legal relations. However, if the presumption can be rebutted on the evidence that there was a serious intent, then a different situation will appear. For example, where a husband and wife were living together but not in amity or were separated when the agreement was made, the court may enforce the agreement. The following case illustrates the situation:


Merritt v. Merritt [1970] 2 All ER 760 In this case, a meeting was held between the husband and the wife after the husband had left her to live with another woman. The husband agreed to pay the wife 40 per month for maintenance and wrote and signed a document agreeing that if the wife paid all charges in connection with their matrimonial home until the mortgage repayments had been settled, the husband would transfer the matrimonial home to the wife as a sole owner. The wife paid off the mortgage but the husband did not subsequently transfer the property to her. She then claimed ownership of the property and asked for an order that her husband should transfer the house to her. The husbands defence was that the agreement was a family arrangement and there was no intention to create legal relations. The Court held that: The agreement which was made when the parties were not living together in amity was enforceable. Furthermore, payment of the mortgage balance was a detriment to the wife and the husband has received the benefit of being relieved of liability to the building society, i.e., the financier. Therefore, the wife was entitled to the relief claimed.

The above case shows that the presumption that no intention is present in ordinary domestic or social arrangement may be rebutted if there is a proof of the true intention of the parties which may be inferred from the language they use and the circumstances in which they use it. Apart from the cases involving husband and wife, there were other cases which involved other family and personal relationships. The following cases illustrate the situations in which the court presumed that legal relations were intended.


The Court held that: There was an intention to create legal relations. The evidence showed that it was not merely a friendly domestic arrangement but a joint enterprise. Thus, the parties expected to share any prize that was won.

Parker v. Clark [1960] 1 W.L.R. 286 The defendants in this case, an elderly couple, agreed with the plaintiffs (who were twenty years younger) that if the plaintiffs would sell their cottage and come to live with the defendants and share household expenses, the male defendant would leave them a portion of his estate in his will. The plaintiffs sold their cottage and moved in with the defendants. But difficulties developed between the two couples. The defendants then repudiated the agreement by requiring the plaintiffs to find somewhere else to live. As a result of this, the plaintiffs claimed damages for breach of contract. It was argued by the defendants that the agreement amounted to no more than a family arrangement. The Court held that: The circumstances indicated that the parties intended to affect their legal relations and thus the defendants were liable.

Simpkins v. Pays [1955] 3 All ER 10 The defendant and the defendants granddaughter in this case made an agreement with the claimant that they submitted a weekly coupon in the defendants name to a Sunday newspaper fashion competition. The coupon contained a forecast by each of them. On one occasion, a forecast by the granddaughter was correct and the defendant received a prize of 750. The claimant sued for her share of that sum. The defence given by the defendant was that there was no intention to create legal relations but that the transaction was a friendly arrangement binding in honour only.

Since the true intention of the parties may be inferred from the language they use, it is important that the words used by the parties are certain. If the words are uncertain, then the agreement will not be enforced because the uncertainty may lead to the conclusion that there is no intention to create legal relations. Example of cases are as follows:


Gould v. Gould [1969] 3 All ER 728. In this case, a contractual intention was negatived when a husband (who was leaving his wife) undertook to pay her 15 per week so long as I can manage it.

The word so long as I can manage it in the case of Gould was considered as uncertain and does not create an intention to enter into a legally binding contract.

Jones v. Padavatton [1969] 2 All ER 616 Mrs Jones (the claimant) made an offer to her daughter, Mrs Padavatton (the defendant) that she would provide the daughter a maintenance at the rate of 42 a month if she leave her job in Washington and go to England and read for the Bar. The agreement was an informal one and there was uncertainty as to its exact terms. However, Mrs Padavatton came to England (bringing her child with her) in November 1962 and began to read for the Bar. Her fees and maintenance were paid for by Mrs Jones. Later, Mrs Jones offered to buy a large house in London to be occupied by the daughter and partly by tenants. The income from the rents would go to the daughter in lieu of the maintenance. Again, there was no written agreement. In January 1965, Mrs Padavatton moved into the house and the tenants also arrived. It was still uncertain what was to happen to the surplus of the rent income and what rooms Mrs Padavatton was to occupy. There was an uncertainty as to the utilisation of the surplus of the rent income and the room that Mrs Padavatton would occupy. In 1967, Mrs Jones claimed possession of the house from Mrs Padavatton. Mrs Padavatton counter-claimed for 1,655 18s 9d (the amount she had paid for running the house). Held by the court: The arrangements were family agreements depending upon the good faith of the parties in keeping promise made and not intended to be rigid binding agreements. Furthermore, the agreements were too vague and uncertain to be enforceable as contracts. Although the agreement to maintain while reading for the Bar might be regarded as creating a legal obligation in the mother to pay, the daughter could not claim anything in respect of that agreement. The arrangements in relation to the home were very vague and must be regarded as made without contractual intent. Thus, the mother was entitled to possession of the house and had no liability under the maintenance agreement.


In Padavattons case, although there seemed to be an assumption that there was a contractual intent in the mothers promise because it caused Mrs Padavatton to leave her job to study law, the vagueness of the arrangement with Mrs Jones had negatived that intent.

1. How does the law determine the existence of an intention in any agreement between two parties?

2. What is the presumption on intention to create legal relations in a domestic, family and social agreement?

3. In relation to question (b) above, is this presumption rebuttable? How?

4. What was the principle established by the court in the case of Merritt v. Merritt [1970] 2 All ER 760?

5. Must the words used by the parties in their agreement be certain and unambiguous? Why?

SELF-CHECK 3.1

Discuss the following problems by applying the principle of law on intention to create legal relations:

(a) Three sisters, Viv, Valerie and Victoria, agree to form a syndicate for the purpose of making a weekly entry in a fashion contest in a local newspaper. Viv and Valerie do not know much about fashion and give Victoria RM7.00 each week. Victoria fills in and sends off the contest forms every week and she always fills the forms in her own name. After one month, one of the entries that Victoria sent won a RM10,000 prize. Viv and Valerie are very happy to know about the news and want to claim their share. Victoria now refuses to share. Advise Viv and Valerie.

(b) Mr and Mrs Alan are husband and wife. Lately, they quarrelled over the week because Mr Alan was very busy with his business trips and had no time for a vacation with Mrs Alan. Mrs Alan had expressed her intention to go back to her hometown if the situation remained the same. After a series of argument, Mr Alan promised Mrs Alan that if he got a new business offer, he would take Mrs Alan to Neverland for a vacation. Mrs Alan was very happy and gave up her intention to go back to her hometown. Two months later, Mr Alan was offered a new business contract and Mrs Alan wanted to enforce the promise made by her husband. Explain whether she will succeed in her claim.

ACTIVITY 3.1


BUSINESS OR COMMERCIAL AGREEMENTS

In bu s in th ate legal relations. This means the parties to the agreement coarran t of:

However, st because th y state that t e court will g cases illus

3.2

siness or commercial agreements, the presumption made is that the partiee contract have the intention to cre

ntemplate a legal consequence to arise from their gements. The presumption is a strong one and can be seen in the judgmen

it is not necessary that there is an intention to create legal relations jue parties are in business. The parties to a business transaction mahey do not intend to enter into any legal obligation. In such case, th

then treat their promises as binding in honour only. The followintrate this point:

Edwar In this paymentheir ob d that: the use of the words ex gr di tbecause

ds v. Skyways Ltd [1964] 1 All ER 494

case, the defendants who had promised to make an ex-gratia t to the employees contended that they were not bound to fulfil ligation. However, the Court hel

atia with regards to an airline pilots contractual redundancy payment d no alter the presumption. Therefore, the airline had to make payments

the agreement was enforceable.

Jones v. Vernons Pools Ltd [1938] 2 All ER 626

inding in honour only. The Court held that: This clause was a bar to any action in a court of law.

The claimant in this case had sent a successful football coupon to the defendants but the defendants denied receiving it and relied on a clause printed on every coupon. The clause provided that the transaction should not give rise to any legal relationship.....or be legally enforceable .... but ..... b


there are various other clauses used in business greements that negate contractual intention. The most common is the use of the

wo ontract. Such agreement gives rise to no legal liability. The case to explain this is the case of:

Therefore, the insertion of the words subject to contract renders the agreement to wh , eit

Rose and Frank Co v. Crompton (JR) & Brothers Ltd [1925] AC 445.

The Court held that: The agreement was not binding on the parties.

In this case, the agreement between the claimant and the defendants contained an Honourable Pledge Clause as follows: This arrangement is not entered into nor is this memorandum written as a formal or legal agreement and shall not be subject to legal jurisdiction in the courts of the United States of America or England.....

It is however important to note that most business agreements are to be regarded as binding in the absence of the Honorouble Pledge Clause or anything similar to this, because such clauses are relatively rare in the business world. Apart from the above, a

rds subject to contract or subject to formal c

Winn v. Bull (1877) 7 ChD 29 A written agreement was drawn up whereby the defendant agreed to take a lease of a house for a definite period and at a fixed rent, but subject to

The Court held that: There was no contract.

the preparation and approval of a formal contract.

be unenforceable. It means a binding contract will come into existence onlyen a subsequent formal contract is entered into by the parties. Up to this time

her party is free to re-negotiate or even to withdraw from their arrangements.


The decision in the case of Winn v. Bull was cited in:

owever, the Privy Council had rejected a subject to contract issue in a case volving a booking pro forma signed by the purchaser to purchase a house to be

uilt by a housing developer. The case is:

In most instances like the above cases, the use of the words subject to contract infers that there is no intention by the parties to create legal relations.

Low Kar Yit & Ors v. Mohd. Isa & Anor. [1963] MLJ 165 The defendant in this case gave an option to the plaintiffs agent to buy a parcel of land subject to a formal contract to be drawn up and agreed upon

, the plaintiffs agent exercised the option but e defendant failed to sign the agreement for sale. The plaintiffs brought an

he Court held that: The option was conditional upon and subject to a pon between the parties. Thus,

the exercise of the option amounted to nothing more than an agreement to enter into an agreement.

by the parties. Subsequentlythaction for specific performance or (alternatively) damages for breach ofcontract. Tformal contract to be drawn up and agreed u

Hinb

Daiman Development Sdn Bhd v. Mathew Lui Chin Teck & Anor [1981] 1 MLJ 56

a for the purchase of llants). After the payment

of a deposit was made and the pro forma was signed, the appellants informed the respondent that the price of the house was to be increased. The respondent did not agree and applied to the court for specific performance. The appellant argued that the pro forma was subject to contract. Thus, no contractual obligation arose from the pro forma itself until a further document was agreed and signed. The argument was rejected by the court. The Lordships held that: The appellants were bound by the pro forma and could not argue that it did not create an obligation to purchase and sell the property.

The purchaser (respondent) signed a booking pro forma house to be built by the housing developer (appe


Note: The provision as to booking pro forma has been abolished and under the c

urrent provisions of the Housing Development (Control and Licensing) Act o

t have the intention to be bound by their arrangements?

3. How does the clause subject to contract render the agreement to

lying the principle of law on the intention to create legal relations:

0 July 2002, Mr Ferrera claimed to have submitted two football pool coupons to Bigwood Pools Ltd. Each coupon drew a fee of RM3.24 for football matches played on 11 July and one of the coupons was a winning coupon entitling him to RM174,000. Bigwood, however, refused to pay and denied that they had ever received the winning coupon. Bigwood also relied on a clause printed on each coupon which stated that: The following transaction should not give rise to any legal relationship or legally enforceable. It is binding in honour only. Decide whether there was a binding contract between Mr Ferrera and Bigwood Pools Ltd.

1966, it is an offence to collect any money from a purchaser as a booking prforma.

SELF-CHECK 3.2

1. What is the presumption on intention to create legal relations in a business or commercial agreement?

2. Is there any reason for the parties of a business transaction to say that they do no

be unenforceable?

Discuss the following case by app

ACTIVITY 3.2

On 1


An agreement without an intention to create legal relations does not bind the parties

to the agreement.

In domestic, family and social agreements, the parties are presumed to not have any intention to create legal relations.

The pr tention may be rebutted if there is a proof of true intention of

Uncertainty of words in an agreement may render the agreement un o

In busi e intentio relations.

V us ect that neg intention.

esumption of no inthe parties.

enf rceable.

ness or commercial agreements, the parties are presumed to have thn to create legal

ario clauses used in business or commercial agreements have the effate the contractual

BusinCertainty DomeFamil

Presumption ess agreement Intention to create legal relations

stic agreement y agreement

Rebuttable presumption Social agreement

oks: Text Bo

Guest, A. G. (1988). Ansons Law of Contract (26th ed.). Singapore: Oxford U

Harlin Rozanah Ab. Rahman. (2007). Undang-Undang Perniagaan Malaysia. Selangor: Kumpulan Usahawan Muslim Sdn. Bhd.


Wu M. A. & Vohrah, B. (2000). The Commercial Law of Malaysia (2nd ed.). Selangor: Pearson and Longman.

niversity Press.

a Mohamed On &


Cases:

Balfour v. Balfour [1919] 2 K.B. 571.

9] 2 All ER 616.

rs. v. Mohd. Isa & Anor. [1963] MLJ 165.

& Brothers Ltd [1925] AC 445.

Simpkins v. Pays [1955] 3 All ER 10.

Winn v. Bull (1877) 7 ChD 29.

Daiman Development Sdn Bhd v. Mathew Lui Chin Teck & Anor [1981] 1 MLJ 56.

Edwards v. Skyways Ltd [1964] 1 All ER 494. Gould v. Gould [1969] 3 All ER 728. Jones v. Padavatton [196 Jones v. Vernons Pools Ltd [1938] 2 All ER 626. Low Kar Yit & O Merritt v. Merritt [1970] 2 All ER 760. Parker v. Clark [1960] 1 W.L.R. 286. Rose and Frank Co. v. Crompton (JR)

INTRODUCTION In forming a valid contract, it is paramount that the person who enters into the contract must have the full capacity in terms of age and mind. This means the person who has not reached the age of majority, or is of unsound mind, cannot make a valid contract (Refer to Figure 4). This is provided by Section 11 of the Contracts Act 1950 whereby 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.

TTooppiicc Law of Contract (Capacity to Contract)

44

LEARNING OUTCOMES


1. Explain the importance of contractual capacity of a minor to contract;

2. Describe the types of contract validly entered into by a minor;

3. Examine the effect of a minor contract;

4. Explain the importance of mental capacity for purposes of contract; and

5. Discuss the status of contract made by a person of unsound mind.

TOPIC 4 LAW OF CONTRACT (CAPACITY TO CONTRACT) 48

The following discussion will also look into the status of a contract entered into by a minor and person of unsound mind.

Figure 4.1: Persons who cannot make valid contract

MINORS 4.1

A minor or an infant is a person who is below the age of majority. Under the Age of Majority Act 1971, the age of majority is 18 years. With regards to the minors contractual capacity, the general rule is that all contracts entered into by a minor are void. The authority was derived from the following Indian case of:

Mohori Bibee

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