The Law of Contract

Definition and Meaning of Contract

The word 'contract' can be defined as "an agreement enforceable by law". A contract is an agreement which is legally binding between the parties. The legislation that governs contracts in Malaysia is the Contracts Act 1950. The Contracts Act is differ from English law.

Elements of a Valid Contract

• Offer and Acceptance
• Consideration
• Free Consent
• Intention to Create a Legal Relation
• Lawful and Valid
• Competency to Contract

1. Offer and Acceptance

Section 2(a) provides that '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 to the act or abstinence, he is said to make a proposal'

The promisor (offeror) must have declared his readiness to undertake an obligation upon certain terms, leaving the option of its acceptance to the offerer, the person to whom the offer is made.

Affin Credit (Malaysia) Sdn Bhd v Yap Yuen Fui [1984] 1 MLJ 169

Where there was a lack of offer and acceptance, the purported hire-purchase agreement was declared viod ab initio, or void from the beginning.

Section (4)1 says communication of a proposal is complete when it comes to knowledge of the person to whom is made

Section 9 A proposal made in words (oral or written) is said to be expressed. If a proposal is made other than in words, it is said to be implied 

In the circumstances, a party intends their words or conduct to constitute and offer, then the courts will be  prepared to construe it as such. 

Carlill v Carbolic Smoke Ball Co. Ltd [1893] 1 QB 256

The plaintiff was entitled to the £1000 as she had accepted the offer made to the world at large

An offer must be distinguished from an invitation to treat. An invitation treat is not an offer, but rather is an offer to consider offers which includes

• Auctions
• Advertisement of tenders
• Catalogues
• Price lists
• Goods displayed in shop windows and shelves

Section 7(b) provides that acceptance must be expressed in some usual and reasonable manner, unless  the proposer prescribes the manner in which it is to be accepted. However, the proposer cannot prescribe silence as a manner of acceptance.

Acceptance is only effective when it has been communicated.

Revocation of Offer and Acceptance

1. Communication of the notice of revocation by the proposer to the party to whom the proposal was made.
2. The time prescribed in the proposal for its acceptance elapses.
3. The failure of the acceptor to fulfil a condition precedent.
4. The death or mental disorder of the proposer.

As a general rule, when acceptance is complete, an agreement is formed so that there is no question of revocation.

Section 6(a) A revocation of an offer must be communicated in order to be effective

Section 5(1) A proposal may be revoked at any time before the communication of its acceptance is complete

Section 5(2) An acceptance may be revoked at any time before the communication of the acceptance is complete as against the acceptor, but not afterwards.

2. Consideration 

Section 26 As a general rule, an agreement without consideration is void.

Past Consideration is a Good Consideration

As a general rule, English law does not recognise past consideration. A claim may be founded on an act done prior to the promise. Such a claim would be valid so long as the promisee had done or abstained from doing something pursuant to the desire of the promisor and not necessarily in pursuance of a promise to be made by the promisor.

Natural Love and Affection is Valid Consideration 

An agreement made on account of natural love and affection would be held to be binding in Malaysia if the requirements of section 26(a) are present;

1. It is expressed in writing
2. It is registered (if applicable)
3. The parties stand in a near relation to each other

Accord and Satisfaction  

It is general rule that payment of a smaller sum is not a satisfaction of an obligation to pay a large sum.

Consideration Need Not Move from the Promisee

A party to an agreement can enforce the promise even if he himself has given no consideration as long as somebody has done so.

Venkata Chinnaya v Verikatara Ma'ya [1881] 1 LR 4

Consideration may move from the promisee or any other person (3rd party)

3. Free Consent 

All agreements are contracts if they are made by the free consent of parties.

Section 14 provides consent is said to be free when it is not caused by one or more of the following;

1. Coercion
2. Undue influence
3. Fraud
4. Misrepresentation
5. Mistake

Section 19(1) provides that when consent to an agreement is caused by coercion, fraud or misrepresentation, the agreement is a contract voidable at the option of the party whose consent was so caused

Section 19(2) goes on to say that a party to a contract, whose contract was caused by fraud or misrepresentation, may, if he thinks fit, insist that the contract shall be performed, and that he shall be put in the position in which he would have been if the representation made had been true

Section 14 is that there has been no free consent between the parties

4. Intention to Create Legal Relations

Silent on the intention to create legal relations as one of the requirements of a valid contract, case-law clearly dictates the necessity for this requirement. Besides, cases where no intention to enter into legal relations can be imputed. In domestic arrangements, there is a presumption against the existence of an intention to create legal relations whilst in commercial arrangements the rebuttable presumptions is that legal relationships are intended.

5. Lawful and Valid

Every agreement of which the object or consideration is unlawful is void.

Section 2(g) A void contract is an agreement that is not enforceable by law

Section 24 provides that the consideration or object of an agreement is unlawful if it falls within any of the subsections of the section

The consideration or object of an agreement is lawful unless:

1. It is forbidden by law
2. It is of such a nature that, if permitted, it would defeat any law
3. It is fraudulent
4. It involves or implies injury to the person or property of another
5. The court regards it as immoral or opposed to public policy

6. Competency to Contract

The parties entering into a contract should also be competent to contract.

Section 11 capacity refers to the ability of parties to a contract to fully understand its terms and obligations

Mohori Bibee v Dharmodas Ghose [1903] 1 LR 30

• The appellant in this case loan a sum of money to the respondent,the minor, secured a house which was leased to the appellant
• The minor, through his mother, applied for a court declaration that the lease was void because the minor has no capacity to contract.
• Courts held that agreement made by a minor is void

In Malaysia, the age of majority is 18 years (Age of Majority Act 1971) The Privy Council held that an infant cannot make any valid contracts.

Source: Commercial Law: Second Edition by Oxford Fajar