Business Law
THE LAW OF CONTRACT
BY MR. MURAD ALQAEFI
Introduction
Contracts are an integral part of our daily lives.
They are constantly being entered into by individuals with
other individuals or businesses, as well as businesses with
other businesses. In order to sell or transfer property, provide
and receive services and other rights and obligations
created.
Types of contracts:
1. The sale and purchase of goods is based on sales
contracts,
2. The hiring of employees is based on employment
contracts,
3. The lease of a property or house is based on a rental or
lease contract; and so the list goes on.
Business cannot exist without enforceable contracts.
The word “Contract” may be defined as, an agreement
enforceable by law.
In other words, a contract is an agreement which is
legally binding between the parties.
The terms “Contract” and “Agreement” are often used to
mean the same thing. But actually these terms can be
distinguished.
Every contract involves an element of agreement, but
not every agreement will result in a contract recognizable
by law.
This is because sometimes the parties to an agreement
may not intend to create legal relations.
Some agreements also do not result in contracts
because one or more of the principles governing
contractual relations may not have been satisfied.
For example, when the purpose of the agreement is
illegal, or there is a lack of consideration.
The legislation in Malaysia governing contract is the
Contracts Act 1950 (Act 136) (Revised 1974).
However, when there are no provisions in this Act then
English law is applied.
THE BASIC ELEMENTS OF A CONTRACT
1. Offer
2. Acceptance
3. Intention to create legal relations
4. Consideration
5. Certainty
6. Capacity
1. Offer
An offer or proposal is necessary for the formation of an
agreement.
Section 2(a) of the Contracts Act 1950 provides that
when one person signifies to another his willingness to
do or to abstain from doing anything, with a view to
obtaining the assent of that other to the act or
abstinence, he is said to make a proposal.
The person making the proposal is called the promisor.
Under the Contracts Act and English law, a proposal or
offer is something which is capable of being converted
into an agreement by its acceptance.
A proposal must be a definite promise to be bounding.
The promisor (sometimes called the ‘offeror’) and the
person to whom the offer is made is called the offeree.
The promisor (offeror) must have declared his
readiness to undertake an obligation upon certain
terms, leaving the option of its acceptance or refusal to
the offeree.
An offer or proposal is effective once it is communicated
to the offeree by the offeror.
A proposal is made in words (oral or written) is said to be
expressed.
If a proposal is made other than in words (e.g. by
conduct), it is said to be implied.
An offer should be contrasted with an option and an
advertisement.
An option is merely an undertaking to keep the offer open for
a certain period of time.
The purpose of an option is usually to give the offeree time to
consider whether they in fact wish to buy the item under
consideration, or to give them time to raise the necessary
finance.
An option arises when the offeror promises to keep the offer
open for a specified period.
However, it will be unenforceable unless it is supported by the
offeree’s consideration (usually a money deposit).
Once consideration is given, the option can be legally binding.
2. Acceptance
Section 2(b) of the Contracts Act 1950 provides that
when the person to whom the proposal is made signifies
his assent thereto, the proposal is said to have been
accepted.
A proposal, when accepted, becomes a promise.
Section 9 of the said Act provides that so far as the
acceptance of any promise is made in words, the
acceptance is said to be expressed,
If the acceptance is made other than words, the
acceptance is side to be implied.
Section 7. reads that, in order to convert a proposal into
a promise the acceptance must be:
a) Absolute and unqualified;
b) Expressed in some usual and reasonable manner,
unless the proposal prescribes the manner in which it is
to be accepted…
Acceptance must be absolute and unqualified so that
there is complete consensus.
If the parties are still negotiating, an agreement is not yet
formed.
In this case, negotiations for the delivery of logs were
conducted through a series of telegrams and letters.
Whilst still in the negotiating stage, the defendants
withdrew. Was there a binding contract between the two
parties?
The court held that the parties were still in a state of
negotiating and no agreement was formed. Therefore,
the defendants were justified in withdrawing.
If acceptance is not absolute or unconditional, that is, it
does not follow the conditions –if any- stated by the
offeror, it will amount to a counter-offer.
A conditional assent is not an acceptance.
For example, if a document contains a clause to the
effect that it is subject to a formal contract to be drawn
up by our solicitors, a contract does not come into
existence until a formal document has been drawn up
and accepted by the parties.
The first document is merely a proposal to enter into a
contract, a tentative agreement that may be disregarded
by either party.
Revocation of Offer and Acceptance
A proposal may be withdrawn in any of the following ways:
1. Communicating the notice of revocation by the
proposer to the party to whom proposal was made.
2. The time prescribed in the proposal for its acceptance
elapses, or if no time is prescribed for acceptance, by
the laps of a reasonable time.
3. The failure of the acceptor to fulfill a condition
precedent to an acceptance.
4. The death or mental disorder of the proposer if the fact
of the proposer’s death or mental disorder comes to the
knowledge of the acceptor before acceptance.
As a general rule, when acceptance is complete, an
agreement is formed so that there is no question of
revocation.
Revocation is possible, however, if the acceptance is not
complete.
A revocation of an offer must be communicated in order
to be effective.
This is provided for under section 6(a) of the Contracts
Act which reads:
6. A proposal is revoked: by the communication of notice
of revocation by the proposer to the other party.
The communication of a revocation is complete as
against the person to whom it is made only when it
comes to his knowledge (Section 4(3)(b) of the Contracts
Act).
Section 5(1) provides that a proposal may be revoked at
any time before the communication of its acceptance is
complete as against the proposer, but not afterwards,
Section 5(2) Provides that an acceptance may be
revoked at any time before the communication of the
acceptance is complete as against the acceptor, but not
afterwards.
The following illustration of section 5 (of the Act) illustrates
the operation of the aforesaid rules:
A proposes, by a letter sent by post, to sell his house to B.
B accepts the proposal by a letter sent by post.
A may revoke his proposal at any time before or at the
moment when B posts his letter of acceptance, but not
afterwards.
B may revoke his acceptance at any time before or at the
moment when the letter communicating it reaches A, but
not afterwards.
3. Intention to Create legal Relations
Although the Contract Act 1950 is silent on the intention
to create legal relations as one of the requirements of a
valid contract, case-law clearly dictates the necessity of
this requirement.
There are, however, cases where no intention to enter
into legal relations can be imputed.
Generally, it is up to the courts to ascertain the intentions
of the parties from the language used and the context in
which they are used.
4. Consideration
Section 26 of the Contracts Act 1950 provides that, as a
general rule, an agreement without consideration is void.
The word ‘Consideration’ is defined in section 2(b) of the
Act as follow:
When, at the desire of the promisor, the promise or any
other person has done or abstained from doing, or does
or abstains from doing, or promises to do or to abstain
from doing, something, such act or abstinence or
promise is called a consideration for the promise.
Consideration need Not be Adequate
Under Malaysian law, the consideration need not be
adequate.
Section 26 of the Contracts Act provides that an
agreement is not void merely because the consideration
is inadequate.
Illustration (f) to Section 26 shows the application of the
rule as it reads:
A agrees to sell a horse worth RM1000 for RM10. As
consent to the agreement was freely given. The
agreement is a contract notwithstanding the inadequacy
of the consideration.
Provision of Consideration
It can implies from section 2(d) of the Contract Act 1950
that consideration may move from a person who is not
the promisee.
It may move from the promisee or any other person.
Accord and Satisfaction – Part Payment may Discharge
an Obligation:
Under English law, it is a general rule that payment of a
smaller sum is not a satisfaction of an obligation to pay a
large sum.
However, the court noted certain exceptions to the
general rule.
Section 64 of the Contracts Act 1950 reads:
Promisee may dispense with or remit performance of
promise.
65. Every promisee may dispense with or remit, wholly
or in part, the performance, or may accept instead of it
any satisfaction which he thinks fit.
Illustrations
A promises to paint a picture for B. B afterwards forbids
him to do so. A is no longer bound to perform the
promise.
A owes B RM5,000. A pays to B, and B accepts in
satisfaction of the whole debt. RM2,000 paid at the time
and place at which the RM5,000 were payable. The
whole debt is discharged.
A owes B under a contract a sum of money, the amount
of which has not been ascertained. A, without
ascertaining the amount, gives to B, and B in satisfaction
thereof accepts the sum of RM2,000. this is a discharge
of the whole debt, whatever may be its amount.
5. Certainty
The terms of an agreement cannot be vague but must be
certain.
An agreement which is uncertain or is not capable of
being made certain is void.
For example, if Ali agrees to sell to Mary a hundred crates
of toys without specifying what kind they are, such an
agreement is void on the grounds of uncertainty.
On the other hand, if Ali is a dealer in plastic toy soldiers
only, and he agrees to sell a hundred crates of toys, the
type of toys dealt with by Ali indicates the meaning of the
word ‘toys’.
6. Capacity
The parties entering into a contract should also be
competent to contract, i.e. they must have the legal
capacity to do so.
Capacity refers to the ability of the parties to a contract
to fully understand its terms and obligations.
Who are competent to contract?
Section 11 of the Malaysian Contracts Act 1950 Reads:
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.
However, there are some exceptions in Malaysia to this
rule, which are the following:
1- Contracts for necessaries
Necessaries are things which are essential to the
existence and reasonable comfort of the infant, e.g. food
clothing, and shelter.
Section 69 of the Contracts Act 1950 provides as follows:
If a person, incapable of entering into a contract, or
anyone whom he is legally bound to support, is supplied
by another person with necessaries suited to his
condition in life, the person who has furnished such
supplies is entitles to be reimbursed from the property of
such incapable person.
2- Contracts of scholarship
The Contracts (Amendment) Act 1976, a scholarship
agreement entered into by an infant is valid when the
scholarship, award, bursary, loan or sponsorship is
granted by the Federal or State Government, a statutory
authority, or an educational institution such as a
university.
3- Contracts of insurance
Under the Insurance Act 1963 (Revised 1972), an infant
over the age of ten may enter into a contract of
insurance.
However, if he is below the age of sixteen, he can only
do so with the written consent of his parents or guardian.
PRIVACY OF CONTRACT
As a general rule, only the persons who are parties to
the contract can acquire rights and incur liabilities under
it.
It is a fundamental principle of common law that, a
person who is not a party to a contract has no right to
sue on the contract.
Thus, if A enters into a contract with B, only A and B can
enforce or sue on the contract. C, who is not a party to
the contract, cannot do so.
The position of third parties is that obligations under a
contract generally cannot be transferred unless all the
parties consent (novation).
If all the parties consent, liability may be transferred by
way of novation.
This is a tripartite agreement where the original parties
agree to rescind their contract in consideration of a new
contract being entered into on the same terms between
one of the original parties and a third party.
This involves substituting one original party with the
third party in what is a new agreement.
For example, if a partner in a partnership dies, the old
partnership is dissolved and replaced by a new one.
If the creditors of the old partnership continue to deal
with the new partnership, they are considered to have
accepted the new partner as their debtor.
Thanks for your attention
Source:
Lee Mei Pheng & Ivan Jeron Detta, Business Law, 1st Ed., OXFORD
University Press, 2009.
