Assignment-EMCM (Contract Management) Q1

Name: Mohd. Norizam Bin Md. Salleh Matriculation No.
: CGS 00534317 Intake: September 2010 Assignment EMCM5103
MAY SEMESTER 2011 CONTRACT MANAGEMENT EMCM5103 ASSIGNMENT (50%) Question 1 Write a short essay on the key elements in the formation of a contract, and how a contract may be invalidated after formation. [TOTAL: 10 MARKS]
Answer 1;
Definition of Contracts A contract is an agreement between two or more parties (individuals, businesses, organizations or government agencies) to do, or to refrain from doing, a particular thing in trade for financial or commodity future. Contracts generally can be written, using formal or informal terms, or entirely verbal. If one side fails to live up to his/her/its part of the bargain, there's a "breach" and certain remedies for solving the differences are available.
Contracts are an important part of developing business relationships. From a legal perspective, they also help both parties understand the requirements and commitments of the agreement and provide documentation for future reference. In addition, contract whether it is oral or in written, form the basic parameters of agreements between individuals and business. The key elements of contract formation i.e. offer, acceptance, consideration and legal shall be discussed further.
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Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Intake: September 2010 Assignment EMCM5103
In terms of a working definition of a contract, a contract is a legally enforceable promise or agreement, which in most circumstances involves a pair of mutual promises or an agreement by one party to do something in exchange for a particular action by another (Shefrin, 2006). In general, contracts involve two-sided agreements between parties, with each party committing to specific obligations. In addition, contracts immerge when parties agree on all terms, they intend to create a legal and contractual relationship, and consideration is promised in return for some provision of the agreement (Morrison, 2005).
The terms of the contract - the who, what, where, when, and how of the agreement - define the binding promises of each party to the contract. A contract requires an offer (example: tender, quotation or purchase order) to be made by one party and to be accepted by the other party. The acceptance must take place before the offer lapse or before it is withdrawn. If a period of validity is stated in the offer, it will lapse at the end of the validity period. The parties of a contract must have a capacity to contract, and the objects of the contract must be legal. The tender submitted for a project represents the contractors offer to carry out the works and, therefore, on general principles, the tender must set out in very definitive and unambiguous terms the particulars of the contractors offer.
A contract is only brought into existence when the offer has been accepted without any condition. If the offeree suggests any new terms and purports to accept the offer on those new terms, then, there is no acceptance, unless the offerer then fully agreed and accepted the counter proposal. The Articles of Agreement forming the beginning of the contract document
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paves the way to the formal opening parts and recitals of the contract form and must be fully and properly completed. It comprises the date of the agreement, the names of the respective parties, the places of business or registered address, and a short description of the works to be completed with reference to the contract bills, drawings and specifications. It further introduces the employer, the contractor and the key personnel in the contract, specifies the scope of works and the consideration payable and contains the operational definitions of the important terms and expressions used in the contract. The dates of commencement of work and completion will need to be filled.
The contracting parties are identified in the recitals of the contract form, which normally are the principle employer and the main contractor. The recitals are introductory to the operative clauses. The recitals include a brief description of the works to be constructed. They indicate the documents which are to be included as the contract documents. The recitals also state that the employer has caused drawings and bill of quantities showing and describing the work to be done to be prepared by or under the direction of his named architect. They also state that a fully priced copy of the bills (contract bills) has been supplied by the contractor to the employer. The recital recognizes the standard procedure of examining the successful tenderers priced bills. This means that when the articles of agreement are executed, an employer (or his appointed agents) will have the priced bills in his possession The law relating to construction contract stems from the general law of contract. All the elements of a simple contract must be present and the general rules of performance and discharge of contract apply to a construction contract.
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Contracts generally can be written, using formal or informal terms, or entirely verbal. If one side fails to live up to his/her/its part of the bargain, there's a "breach" and certain remedies for solving the differences are available. The terms of the contract - who, what, where, when, and how of the agreement - define the binding promises of each party to the contract.
A contract requires an offer (example: tender, quotation or purchase order) to be made by one party and to be accepted by the other party. The acceptance must take place before the offer lapse or before it is withdrawn. If a period of validity is stated in the offer, it will lapse at the end of the validity period. The parties of a contract must have a capacity to contract, and the objects of the contract must be legal. For a contract to be valid, each side must have the capacity to enter into it. If the other side is to be held to the contract, you must give up something in exchange. This is called consideration. No side can have a free way out or the ability to obtain something of value without providing something in exchange. Money is the most common form of compensation, but it can also be property, giving up a right or valid claim, making a promise to do or not to do something, or anything of value.
When you ask someone to do something, or offer to see someone for a price, you are making an offer. An offer is the first step in forming a contract. The middle step is the other party's acceptance of the deal. The last step is performance -- where you each live up to your side of the bargain. Words, gestures, or actions can signal an offer to enter into a contract and an acceptance.
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The configuration of a contract consists of an Offer and an Acceptance once both of these have been fully agreed upon then we has a Consensus ad idem. Once a contract has been configured it then becomes an agreement, which can be enforced by Law.
Contract Validity Establishing a contractual relationship requires more than drafting a simple agreement promising business exchanges; it demands that the drafters account for key elements prior to drafting the agreement. Interestingly, valid and enforceable contracts include mutual consent, an offer, acceptance of the offer, consideration, and the capacity of both parties to understand the terms, consequences, and legal implications of the agreement (Shefrin, 2006). Furthermore, contracts need to cover all the details necessary for both parties to carry out their responsibilities as outlined in the contract (Ewasiuk, 2004).
The parties who want to bind a contract must also cover the following conditions;
Competent Parties - For a contract to be valid, each side must have the capacity to enter into it. Most people and companies have sufficient legal competency. A drugged or mentally spoiled person has impaired capacity and chances are a court may not hold that person to the contract. Minors (e.g., usually those under eighteen) cannot, generally, enter into a binding contract without parental consent, unless it is for the necessities of life, such as food, clothing, or for student loan contracts.
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Capacity - refers to ones ability to enter a legally contractual relationship. Capacity is important because if a party of a contract is deemed to lack the capacity to enter a binding contract, the contract is void or voidable, depending on the agreement and the party (Smith, 2008). An example, shall minor or a mentally disabled person entering a contract, the contract shall be void or voidable. Thus it is important to ensure that all parties have legal capacity prior entering a contract.
Sometimes the capacity of either natural or artificial persons to either enforce contracts, or have contracts enforced against them is restricted. For instance, very small children may not be held to bargains they have made, or errant directors may be prevented from contracting for their company, because they have acted ultra vires (beyond their power).
When the law limits or bars a person from engaging in specified activities, any agreements or contracts to do so are either voidable or void for incapacity. The law on capacity can serve either a protective function or can be a way of restraining people who act as agents for others.
Mutual Assent or Meeting of the Minds - This shall means that each party must be clear to the essential details, rights, and obligations of the contract. Putting the deal down on paper prior to signing it goes a long way to avoid future misunderstandings and disputes. Meeting of the minds sometimes can be expressed by words spoken or body gestures made or can be inferred from the surrounding conditions. There is no meeting of the minds shall: One side is obviously joking or bragging.
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There is no actual agreement (i.e., the farmer who is selling a gelding and the buyer thinks the horse is a brood mare), or
Both sides have made a material mistake as to the terms or details of the contract.
Key Elements in the Formation of Contract are as follows; Offer Acceptance Consideration Intention of to be legally bound
i)
Offer.
An offer is the manifestation of a willingness to enter a bargain by one party that prompts another person to understand that his or her assent to the bargain is invited and will conclude it (Combs, 2000). Some people called offer as proposal.
According to section 2(a), when a 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 proposal. (Law of Malaysia, Act 136 Contract Act 1950, 2006). An offer is made when a person signites to another party his willingness to do or to abstain from doing anything. With a view to obtaining the assent of that other to such abstinence. Thus A, by offering to by Bs car for RM 10,000.00 in the hope B will accept, is making an offer. (Beatrix Vohrah and Wu Min Aun, 2005)
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ii) Acceptance After an offer is made and both parties deem the offer acceptable, the contract moves into the acceptance phase. Acceptance refers to a willingness to be bound to the terms and conditions of the offer, which after accepted, must be absolute and unconditional with respect to the terms of the offer (Smith, 2010).
Under section 2(b), when the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted: a proposal, when accepted, becomes a promise. (Law of Malaysia, Act 136 Contract Act 1950, 2006).
Upon such acceptence by B of buying the car offered by A, an agreement between the parties is created. For instance, the price of the offer cannot change after the offer is accepted. Additionally, the original conditions of the offer are legally binding. Unless the offererer/proposer agreed to the counter offer by the party that they offered (acceptor). See Tan Geok Khoon & Gerard Francis Robles v. Paya Terubung Estate Sdn Bhd (1988) 2 MLJ 672. The contract considered was made when the offerer/proposer accepted part payment of the payment made by the offerer/promisee although earlier he had given the conditional acceptance.
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iii) Consideration Consideration refers to the inducement, price, or motive that causes someone to enter a contract; generally, either or both parties give something of value in exchange for receiving something in return (Ollek, 2010). If the other side is to be held to the contract, you must give up something in exchange. This is called consideration. No side can have a free way out or the ability to obtain something of value without providing something in exchange.
Under section 2(d), when, at the desire of the promisor (offeror) the promisee or any person has done or abstained from doing or does or abstains from doing or promise to do or to abstain from doing something such act or abstinence or promise is called a consideration of promise;(Law of Malaysia, Act 136 Contract Act 1950, 2006).
For example, X has lost his camera while travelling on a train and he offers a reward of RM 50.00 to anyone who finds and returns it to him. Y finds and returns the camera to X. (Beatrix Vohrah and Wu Min Aun, 2005). X pay Y as what he had offered. The performing of the RM 50.00 payment to Y by X means the consideration has been done.
The most common and almost universally accepted form of consideration is cash; however, other forms of consideration exist. For example, someone may enter a contract to do a particular project in exchange for free advertisement. Admittedly, free advertising has monetary value, yet because no money exchanged hands, this example constitutes another form of consideration.
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In Osman bin Abdul Ghani & Ors. V. United Asian Bank Bhd. (1987) 1 MLJ 27, the Supreme Court affirmed a High Court decision that forbearance to sue could be a valid consideration. In this action, the appellants save the 6th appellant, where directors of a company granted overdraft facilities by the bank. The first, second and sixth appellants executed a guarantee. Two years after the execution of the first guarantee, the company executed a guarantee a further debenture for RM 1 Million and all the appellants executed a guarantee for the same. The respondent bank claimed on the second guarantee.
Lee Hun Hoe C.J. (Borneo) (1987) 1 MLJ 28, in delivering he judgement of the Supreme Court, concluded, The respondent bank was on the verge of suing the company but was willing to forbear (hold back) suing the company when the appellants gave the second guarantee. Clearly, the second guarantee was given for the benefit of the company by giving the company time to arrange for the payment debt The authorities are clear that forbearance could either be expressed or implied The consideration is for forbearance to sue. This may be implied from the nature the transaction as between businessmen
Agreeing to perform an illegal or illicit act is not consideration and the contract is void.
iv)
Intention of to be legally bound
There is a presumption for commercial agreements that parties intend to be legally bound. On the other hand, many kinds of domestic and social agreements are unenforceable on the basis of public policy, for instance between children and parents.
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Binding legal contract does not create by itself. The law requires evidence that the parties to an agreement intended it to be legally enforceable. The intention of all parties involve can be either spell out or implied. As the Contract Act is silent on the subject, English Common Law Principles shall be applied. (Beatrix Vohrah and Wu Min Aun, 2005).
The two presumption though rebuttable, have developed in the determination of intention with respect to agreement are as follows; a) In business agreements, there is a presumption that the parties intend legal consequences to follow unless the parties specify otherwise. b) In social, domestic or family agreements, it is implied as a matter of course that no legal relations are contemplated, but such presumption may be rebuttable.
a) Business agreements In business agreements, the intention to create legal relation is readily assumed. It is a heavy burden lie on the party would to challenge the presumption. However it is possible to imagine a variety of informal arrangements where no legal relation is intended. The case Esso Standard Malaya Bhd. v. Southern Cross Airways (Malaysia) Bhd. [1972] 1 MLJ 168, where Raja Azlan Shah J. held on the interpretation of the letters and credit card arrangement, there was a binding contract despite the absence of a formal contract. The casa was based on the sale and supply of aviation fuel for an aircraft. (Beatrix Vohrah and Wu Min Aun, 2005).
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Agreements are made every day in social and family life, where parties would be horrified if they could be taken to court for such arrangement. There is a body of case law in England and other common law countries establishing the principle that parties to such agreements are presumed not to have intended legal consequences to flow from them. There appears to be no local authorities on this point.
b) In social, domestic or family agreements One early example for family agreement is found in Balfour v. Balfour. Using contract-like terms, Mr Balfour had agreed to give his wife 30 a month as maintenance while he was living in Ceylon (Sri Lanka). Once he left, they separated and Mr Balfour stopped payments. Mrs Balfour brought an action to enforce the payments. At the Court of Appeal, the Court held that there was no enforceable agreement as there was not enough evidence to suggest that they were intending to be legally bound by the promise.
However, not all social, domestic or family agreements are not legally enforceable. The case of Merritt v. Merritt is referred. Here the court distinguished the case from Balfour v. Balfour because Mr and Mrs Merritt, although married again, were estranged at the time the agreement was made and the husband has signed the agreement on a piece of paper. Court decided agreement between them was made with the intention to create legal relations. (Beatrix Vohrah and Wu Min Aun, 2005). Therefore the husbands upon completion of the mortgage payments need to transfer the house to his wife.
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Invalidated Contract
Section 10(1), among other things saying that all agreements are contracts if they are made by free consent of parties to contract. Consent must be free and not secured through such means as the following; A. Coercion, defined in section 15. B. Undue influences, defined in section 16 C. Fraud, defined in section 17, D. Misrepresentation, defined in section 18 E. Mistake, defined in sections 21, 22 and 23. (Law of Malaysia, Act 136 Contract Act 1950, 2006).
Any of the above circumstances if proven shall impair the validity of an agreement because consent to it is not free. Shall this happen the contract can be invalidated. Another factor can bring a contract to be invalidated is frustration.
A. Coercion/Duress Section 15, Coercion is the committing, or threatening to commit any act forbidden by the Penal Code, or the unlawful detaining or threatening to detain, any property, to the prejudice of any person whatever, with the intention of causing any person to enter into an agreement.
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A contract is only valid shall it is entered into freely and voluntarily without any force from other party. Duress has been defined as a threat of harm made to compel a person to do something against his/her will or judgment; especially, a wrongful threat made by one person to compel a manifestation of seeming assent by another person to a transaction without real volition.
An example is in Barton v. Armstrong, a decision of the Privy Council. Armstrong threatened to kill Barton if he did not sign a contract, so the court set the contract aside. An innocent party wishing to set aside a contract for duress to the person need only to prove that the threat was made and that it was a reason for entry into the contract; the onus of proof then shifts to the other party to prove that the threat had no effect in causing the party to enter into the contract. There can also be duress to goods and sometimes, the concept of 'economic duress' is used to vitiate contracts.
B. Undue Influence Section 16. (1) A contract is said to be induced by undue influence where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other.
(2) In particular and without prejudice to the generality of the foregoing principle, a person is deemed to be in a position to dominate the will of another (a) where he holds a real or apparent authority over the other, or where he stands in a fiduciary relation to the other; or
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(b) where he makes a contract with a person whose mental capacity is temporarily or permanently affected by reason of age, illness, or mental or bodily distress.
(3) (a) Where a person who is in a position to dominate the will of another, enters into a contract with him, and the transaction appears, on the face of it or on the evidence adduced, to be unconscionable, the burden of proving that the contract was not induced by undue influence shall lie upon the person in a position to dominate the will of the other. (b) Nothing in this subsection shall affect section 111 of the Evidence Act 1950 [Act 56].
Undue influence is an equitable doctrine that involves one person taking advantage of a position of power over another person. The law presumes that in certain classes of special relationship, such as between parent and child, or solicitor and client, there will be a special risk of one party unduly influencing their conduct and motives for contracting. As an equitable doctrine, the court has the discretion to vitiate such a contract. When no special relationship exists, the general rule is whether there was a relationship of such trust and confidence that it should give rise to such a presumption.
In case Salwath Haneem v. Hadjee Abdullah, The plaintiffs husband executed a conveyance of property belonging to himself and the plaintiff to B and C, his brothers. The plaintiff agreed to the conveyance but after her husband death, she brought an action seeking to set aside the agreement and the conveyance. The Straits Settlements Court of Appeal held that a confidential relationship existed between the plaintiff and B and C. The burden of proof thereby lay on B and C to show that the plaintiff fully understood the transaction and executed
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the conveyance freely and without being subject to undue influence. Since both B and C failed to discharge the burden, the transaction was set aside.
C. Fraud/Illegal contracts A contract is void if it is based on an illegal purpose or contrary to public policy. One example, from Canada is Royal Bank of Canada v. Newell. A woman had forged her husband's signature on 40 cheques, the amount totalling over $58,000. To protect her from prosecution, her husband signed a letter of intent prepared by the bank in which he agreed to assume "all liability and responsibility" for the forged cheques. However, the agreement was unenforceable, and struck down by the courts, because of its essential goal, which was to "stifle a criminal prosecution." Because of the contract's illegality, and as a result voided status, the bank was forced to return the payments made by the husband.
In the U.S., one unusual type of unenforceable contract is a personal employment contract to work as a spy or secret agent. This is because the very secrecy of the contract is a condition of the contract (in order to maintain plausible deniability). If the spy subsequently sues the government on the contract over issues like salary or benefits, then the spy has breached the contract by revealing its existence. It is thus unenforceable on that ground, as well as the public policy of maintaining national security (since a disgruntled agent might try to reveal all the government's secrets during his/her lawsuit).
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D. Misrepresentation In Section 18. It stated Misrepresentation includes (a) the positive assertion, in a manner not warranted by the information of the person making it, of that which is not true, though he believes it to be true;
(b) any breach of duty which, without an intent to deceive, gives an advantage to the person committing it, or anyone claiming under him, by misleading another to his prejudice, or to the prejudice of anyone claiming under him; and (c) causing, however innocently, a party to an agreement to make a mistake as to the substance of the thing which is the subject of the agreement.
Misrepresentation refers to a false statement of fact made by one party to another party and has the effect of inducing that party into the contract. For example, under certain circumstances, false statements or promises made by a seller of goods regarding the quality or nature of the product that the seller has may constitute misrepresentation. A finding of misrepresentation allows for a remedy of rescission and sometimes damages depending on the type of misrepresentation.
It is possible to make a misrepresentation either by words or by conduct, although not everything said or done is capable of constituting a misrepresentation. Generally, statements of opinion or intention are not statements of fact in the context of misrepresentation. If one party claims specialist knowledge on the topic discussed, then it is more likely for the courts to hold a statement of opinion by that party as a statement of fact.
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In the case Hedley Byrne & Co Ltd v Heller & Partners Ltd, Hedley Byrne was a firm of advertising agents. A customer, Easipower Ltd, put in a large order. Hedley Byrne wanted to check their financial position, and credit-worthiness, and subsequently asked their bank, National Provincial Bank, to get a report from Easipowers bank, Heller & Partners Ltd., who replied in a letter that was headed, "without responsibility on the part of this bank" It said that Easipower was, "considered good for its ordinary business engagements".
The letter was sent for free. Easipower went into liquidation and Hedley Byrne lost 17,000 on contracts. Hedley Byrne sued Heller & Partners for negligence, claiming that the information was given negligently and was misleading. Heller & Partners argued there was no duty of care owed regarding the statements, and in any case liability was excluded.
The court found that the relationship between the parties was "sufficiently proximate" as to create a duty of care. It was reasonable for them to have known that the information that they had given would likely have been relied upon for entering into a contract of some sort. This would give rise, the court said, to a "special relationship", in which the defendant would have to take sufficient care in giving advice to avoid negligence liability. However, on the facts, the disclaimer was found to be sufficient enough to discharge any duty created by Heller's actions. There were no orders for damages. Lord Morris of Borth-Y-Gest.
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E. Mistake Normally it is very rare for a contract to be held be void or non-voidable for a mistake. A mistake is an incorrect understanding by one or more parties to a contract and may be used as grounds to invalidate the agreement. Common law has identified three different types of mistake in contract: unilateral mistake, mutual mistake, and common mistake.
A unilateral mistake is where only one party to a contract is mistaken as to the terms or subject-matter. The courts will uphold such a contract unless it was determined that the nonmistaken party was aware of the mistake and tried to take advantage of the mistake. It is also possible for a contract to be void if there was a mistake in the identity of the contracting party. An example is in Lewis v Avery where Lord Denning MR held that the contract can only be avoided if the plaintiff can show that at the time of agreement, the plaintiff believed the other party's identity was of vital importance. A mere mistaken belief as to the credibility of the other party is not sufficient. See Lewis v Avery.
A mutual mistake is when both parties of a contract are mistaken as to the terms. Each believes they are contracting to something different. The court usually tries to uphold such a mistake if a reasonable interpretation of the terms can be found. Although a contract based on a mutual mistake in judgement does not cause the contract to be voidable by the party that is adversely affected. See Raffles v. Wichelhaus. A common mistake is where both parties hold the same mistaken belief of the facts.
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This is demonstrated in the case of Bell v. Lever Brothers Ltd., which established that common mistake can only void a contract if the mistake of the subject-matter was sufficiently fundamental to render its identity different from what was contracted, making the performance of the contract impossible.
F. Frustration Contract will only be considered as frustrated if at an end it becomes impossible for it to be performed by reason on an event beyond control of the parties involves. It is not sufficient that its performance for one party becomes more difficult or more expensive. (J. Rodney, 2009).
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Name: Mohd. Norizam Bin Md. Salleh Matriculation No.

: CGS 00534317 Intake: September 2010 Assignment EMCM5103

Intention of to be legally bound

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