LAW OF CONTRACT

-​ an agreement between two or more persons or parties that is enforceable by law

●​ Section 2(h) of the Contracts Act 1950 : an agreement enforceable by law is a

contract
●​ It creates rights and obligations for the parties to the contract
●​ Once the contract is formed, the parties involved can legally enforce their rights
●​ Contract may be in writing, oral or by conduct
●​ Primary legislation : Contracts Act 1950

AGREEMENT CONTRACT

Informal arrangement between two or more Formal arrangement between two or more
parties that is not enforceable by law parties that by terms and elements, is
enforceable by law

Section 2(e) of the Contracts Act 1950 Section 2(h) of the Contracts Act 1950

An agreement that lacks any of the required A contract is legally binding and is
elements of a contract has no legal effect enforceable in court
FIRST ELEMENT : PROPOSAL (OFFER)
-​ Section 2(a) of the Contracts Act 1950 :
“...when one person signifies to another his willingness to do or to abstain from doing
anything, with a view of obtaining the assent of that other to the act or abstinence, he is
to make a proposal.”
When someone expresses to another their willingness to perform or refrain from performing an
action in order to seek the other person's agreement, they are making a proposal.

-​ A person is said to make an offer when that person (offeror) promises or proposes
something to another party (offeree), with the intention that his promise or proposal
would be accepted
-​ Proposer, offeror or promisor : person making the proposal
-​ A proposal can be made to an individual, class of persons, company or public at large
-​ Case : Carlill v. Carbolic Smoke Ball [1893] 1 QB 256
The Carbolic Smoke Ball Company said in an ad that if people used their smoke ball as directed
and still got the flu, they would pay them £100. Mrs. Carlill followed the instructions but still got
the flu.When she asked for the £100, the company refused, saying the ad wasn’t a real promise.
Held : The court disagreed and said the company had made a clear and serious promise to the
entire world because the contract will only be made with that limited portion of the public who
came forward and performed the condition on the faith of the advertisement. Since Mrs. Carlill
followed the instructions, she had accepted their offer, so they had to pay her.

COMMUNICATION OF OFFER
-​ Section 3 of the Contracts Act 1950 :
“The communication of proposals…, respectively, are deemed to be made by any act or
omission of the party proposing…, by which he intends to communicate the proposal…,
or which has the effect of communicating it.”
A proposal is considered communicated through any action or inaction by the person making it,
as long as it is intended to convey the proposal or effectively results in its communication.
-​ Communication of offer must be complete
-​ Section 4(1) of the Contracts Act 1950 : communication of offer is only considered
complete when the offer comes to the knowledge of the offeree.
-​ Illustration (a) to section 4 : “A proposes, by letter, to sell a house to B at a certain
price. The communication of the proposal is complete when B receives the letter.”
-​ Whether it is necessary for the promisee to have knowledge of the offer?
It is necessary for the promisee to know about the offer to form a valid contract. If a party
accepting a proposal is not aware of the proposal, then there is no contract.
-​ Case : R v. Clarke [1972] 40 CLR 227
The government offered a reward for information leading to the arrest of certain criminals.
Clarke, who was a suspect, later gave information that helped catch them—but he only did it to
save himself, not because he was trying to claim the reward.
Held : When Clarke later tried to claim the reward, the court said he couldn't get it because he
forgot about the offer and didn’t give the information in response to it.
INVITATION TO TREAT (ITT)
-​ Ad offerendum (Latin) : inviting an offer
-​ Invitation to another person to make an offer and it is not intended to be binding
-​ Expression of willingness to negotiate before an offer could be made
-​ Examples : auction, display of goods in a shop by a shopkeeper, an advertisement for a
job, a tender, supply of information
-​ Case : Pharmaceutical Society of Great Britain v. Boots Cash Chemist Ltd (Southern)
Ltd. [1953] 1 QB 401
Boots, a pharmacy, had a self-service system where customers picked up medicines and paid at
the cashier. The Pharmaceutical Society argued that selling certain medicines required a
pharmacist’s supervision and claimed Boots was breaking the law because customers were
choosing the medicines themselves.
Held : The court ruled that in a self-service store, the offer happens at the cashier, not when the
customer picks up an item. This means the sale only happens when the cashier accepts the
payment, allowing the pharmacist to supervise the sale. Picking up an item is just an invitation
to treat (an invitation to make an offer), not a legally binding purchase.

OFFER INVITATION TO TREAT

When one signifies to another his willingness An invitation to someone to negotiate or

to do or to abstain from doing anything, with a make an offer
view to obtaining the assent of that other to
the act or abstinence

Section 2(a) of the Contracts Act 1950 No relevant section

To invite the offeree to accept the offer and To invite others to make an offer
create a binding contract
SECOND ELEMENT : ACCEPTANCE
-​ Section 2(b) of the Contracts Act 1950 :
“...when a person to whom the proposal is made signifies his assent, the proposal is
said to be accepted, a proposal when accepted becomes a promise.”
When the person receiving a proposal expresses their agreement, the proposal is considered
accepted. Once accepted, it turns into a promise.
-​ If an offer is made by the offeror, and the offeree (to whom the proposal is made) agrees
or accepts the offer, there is acceptance to such offer
-​ Acceptor, promisee or offeree : person accepting the proposal

Conditions for a valid acceptance

1)​ Acceptance must be absolute and unqualified
-​ Section 7(a) of the Contracts Act 1950 : acceptance must be absolute and unqualified
-​ Acceptance is valid if the product or service rendered is exactly what was contained in
the offer (mirror image rule)
-​ There should not be any modification or variation of the proposal
-​ The term “absolute and unqualified” means that the acceptance must be made without
any condition or qualification. The acceptance must be made exactly on the same terms
of the offer without any modification
-​ If an offer is modified, the modification will become a counter offer and not an
acceptance and is considered to be the new proposal
-​ Case : Hyde v. Wrench [1840] 3 Beav 334
Wrench offered to sell his farm to Hyde for £1,000. Hyde replied, offering £950 instead. Wrench
rejected this counteroffer. Later, Hyde changed his mind and said he would buy the farm for
£1,000, but Wrench refused to sell.
Held : The court ruled that there was no valid binding contract when Hyde made a counteroffer
(£950), it canceled the original offer (£1,000). Since the original offer no longer existed, Hyde
couldn’t go back and accept it later.

2)​ Acceptance must be expressed in a usual and reasonable manner

-​ Section 7(b) of the Contracts Act 1950 : the acceptance must be expressed in some
usual and reasonable manner unless the proposal prescribes the manner in which it is
be accepted
Acceptance must be communicated in a customary and reasonable way unless the proposal
specifies a particular method of acceptance.
-​ If there is a mode of acceptance prescribed by the offeror, it must be followed by the
offeree in order to make a valid acceptance
 -​ Acceptance must be communicated (Silence does not amount to an acceptance)
-​ Communication of acceptance means the offeror must have the knowledge that the
offeree is accepting his offer
-​ Mere intention to accept without communicating the acceptance does not give rise to a
valid and binding contract
-​ The proposer cannot, without the consent of the promisee, impose or put a condition that
the promisee’s silence shall amount to acceptance
-​ Case : Felthouse v. Bindley [1826] 142 ER 1037
Felthouse wanted to buy a horse from his nephew. He wrote, "If I don’t hear from you, I’ll
assume the horse is mine." The nephew didn’t reply but planned to sell the horse to him.
However, the auctioneer, Bindley, accidentally sold the horse to someone else.
Held : Felthouse sued Bindley, but the court ruled against him. They said that the nephew never
clearly accepted the offer, and silence is not acceptable in contract law.

Acceptance must be communicated and complete

-​ Section 3 of the Contracts Act 1950 : communication of the acceptance of proposals is
deemed to be made by any act or omission of the accepting party by which he intends to
communicate the acceptance and has the effect of communicating it.
Acceptance of a proposal is considered communicated through any action or inaction by the
accepting party that is intended to convey acceptance and successfully does so.
-​ The offeree must have done something in order to signify his intention to accept the offer
of the offeror
-​ Section 4(2) of the Contracts Act 1950 : When is the communication complete?
​ i) Against the proposer, when it is put in a course of transmission to him [s.4(2)(a)]
​ ii) Against the acceptor, when it comes to the knowledge of the proposer [s.4(2)(b)]

Postal Rule
-​ Section 4(2)(a) and (b) of the Contracts Act 1950 :
the communication of the acceptance where there is a gap of time between the
communication of acceptance by the acceptor and the receiving of that communication
by the proposer.
The acceptance is communicated when there is a time gap between the acceptor's transmission
of acceptance and the proposer's receipt of that communication.
-​ With regards to postal communications and telegraphs, acceptance is complete upon the
posting and dispatching of the telegram.
-​ Postal rule is an exception to the general rule that the acceptance is only complete when
it is communicated.
-​ The proposer becomes bound as soon as the acceptor mails the letter, regardless of
whether the proposer is aware of the acceptance or if the letter is delayed or lost during
transit. This is because, once posted, the acceptor no longer has control over the letter.
 -​ Case : Ignatius v. Bell [1913] 2 FMSLR 115
Ignatius accepted an offer to purchase a piece of land by posting a letter to Bell on 16 August
since the condition to purchase the land was that the option must be exercised on or before 20
August 1912. However, Bell only received the letter on 5 August. The question was whether the
acceptance was valid when the letter was sent or only when Bell received it.
Held : The contract is formed the moment the letter is mailed, even if the other party hasn’t read
it yet.

Revocation of offer
-​ 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
afterward.
A proposal can be withdrawn anytime before the acceptance is communicated to the proposer,
but not after that.
-​ Illustration under Section 5 of the Contracts Act 1950 :
A proposes, by a letter sent by post, to sell his house to B; B accepts the proposal by a
letter sent by a post; and
A may revoke his proposal at any time before or at the moment when B posts his letter
of acceptance, but not afterwards.
A offers to sell his house to B through a letter sent by post. B accepts the offer by sending a
reply letter. A can withdraw his offer anytime before or at the moment B mails the acceptance
letter, but not after that.

Modes of revocation of offer :

-​ Section 6 (a) to (d) of the Contracts Act 1950 :
(a)​ notice of revocation by the proposer to the other party
(b)​ lapse of time or lapse of reasonable time
(c)​ failure of the acceptor to fulfill a condition precedent to the acceptance
(d)​ death or mental disorder (must be known to the acceptor before the acceptance is
made)
Revocation of acceptance
-​ Section 5(2) of the 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.
Acceptance can be withdrawn anytime before it is communicated to the proposer but not after
that.
-​ Illustration under Section 5 of the Contracts Act 1950 :
B accepts A’s proposal by a letter sent by post; and
B may revoke his acceptance at any time before or at the moment when the letter
communicating it reaches A, but not afterwards.
B accepts A’s offer by sending a letter through the post. B can withdraw the acceptance anytime
before or at the moment the letter reaches A, but not after that.
-​ Section 4(3)(a)(b) : the communication of revocation of an acceptance is complete :
a)​ As against the person who makes it when it is communicated to the other person
b)​ As against the person who receives it when it comes to his knowledge
-​ Illustration (b) and (d) to section 4 state :
(b) B accepts A’s proposal by a letter sent by post.
The communication of the acceptance is complete-
As against A, when the letter is posted;
As against B, when the letter is received by A.
(d) B revokes his acceptance by telegram.
B’s revocation is complete as against B when the telegram is dispatched and
as against A when it reaches him.
 THIRD ELEMENT : CONSIDERATION
-​ something which has a value in the eyes the law that is given in return for
something else
-​ the benefit that each party gets or expects to get from the contractual deal
-​ Section 10(1) of the Contracts Act 1950 : all agreements are contracts if they
are made among others for a lawful consideration
-​ 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 promises
to do or to abstain from doing something, such act, abstinence or promise is
called a consideration for the promise.”
When the promisee or any other person, at the request of the promisor, refrains from doing, or
promises to do or not do something, that action, inaction, or promise is considered the
consideration for the promise.
-​ The promisee must give something of value in return for the promise made by the
promisor

Rules governing consideration

1)​ Consideration must be lawful
-​ Section 24 of the Contracts Act 1950 : consideration or object of an agreement is
lawful, unless :
(a)​ forbidden by a law
(b)​ of such nature that, if permitted, it would defeat any law
(c)​ fraudulent
(d)​ involves or implies injury to the person or property of another
(e)​ the court regards it as immoral or opposed to public policy
-​ The legal effect of section 24 is that agreements which have considerations or objects
which are unlawful are void

2)​ Consideration may move from the promisee or any other person
-​ Section 2(d) of the Contracts Act 1950 : a party to an agreement can enforce a
promise even though he himself has given no consideration so long as somebody else
has given a consideration.
A party to an agreement can enforce a promise even if they have not provided consideration, as
long as someone else has given consideration for the promise.
-​ Consideration may flow from the promisee or a third party
-​ Case : Venkata Chinnaya v. Verikatara’ma’ya [1881] 1 LR 4
In this case, a mother gave her daughter some land as a gift. At the same time, the daughter
promised to pay her brother a yearly amount. Later, the daughter refused to pay, saying that her
brother had not given her anything in return, so there was no valid contract.
Held : The court decided that the contract was valid because the mother’s gift of land was
enough consideration, even though it didn’t come from the brother. This case shows that
consideration can come from someone other than the person who is enforcing the promise.
 3)​ Consideration need not be adequate but must be sufficient
-​ Consideration does not need to have a value of adequate or equivalent to what is being
exchanged for it as long it has some value in the eyes of the law
-​ The inadequacy of consideration does not affect the validity of the contract so long as
the consideration is sufficient
-​ Explanation 2 to Section 26 of the Contracts Act 1950 :
“An agreement to which the consent of the promisor is freely given is not void merely
because the consideration is inadequate.”
An agreement is not invalid simply because the consideration is insufficient, as long as the
promisor has given consent freely.
-​ Even though the consideration is not adequate, the contract is still valid
-​ Illustration (f) to Section 26 : “A agrees to sell a horse worth RM1000 for RM10.”
-​ As long as the consideration has some economic value, then the consideration is
sufficient and valid
-​ Case : Phang Swee Kim v. Beh I Hock [1964] MLJ 383
In Phang Swee Kim v. Beh I Hock (1964), Beh I Hock owned a piece of land. Phang Swee Kim
entered the land, but Beh I Hock claimed he had no right to be there. So, Beh I Hock sued
Phang Swee Kim for trespassing and took legal action to get the land back.Phang Swee Kim
argued that he had a right to the land because they had an oral agreement, where Beh I Hock
had agreed to sell him the land for RM 500.
Held : The court ruled that even though RM 500 was a very low price, the contract was still valid.
This is because consideration does not have to be fair or equal—what matters is that both
parties agreed to the deal. Since there was valid consideration and consent, the contract was
legally binding, and Beh I Hock had the right to the land.

General Rule
-​ An agreement without valid consideration is void under Section 26 of the Contracts
Act unless it comes under one of its exceptions.
-​ Illustration to Section 26 of the Contracts Act 1950 :
A promise for no consideration, but give B RM1000 meanwhile B gives A nothing. This is
a void agreement.