LAW OF CONTRACT

LESSON OUTLINE
INTRODUCTION ELEMENTS OF A CONTRACT:

1. Offer 2. Acceptance 3. Intention to create legal relations 4. Consideration 5. Certainty 6. Capacity PRIVITY OF CONTRACT CONTENTS OF A CONTRACT FACTORS VITIATING A CONTRACT VOID AND ILLEGAL CONTRACT DISCHARGE OF CONTRACT REMEDIES

INTRODUCTION
Contract defined by Sec. 2(b) - an agreement

enforceable by law Specific Legislation - Contract Act 1950 - but English law still applicable by virtue of Civil Law Act.
Function of contract: to secure the expectation created by a promise of future performance or expectation will be paid for its breach. facilitate forward planning of the transaction in terms of cost and value, responsibilities of parties and preparation for contingencies.

ELEMENTS OF CONTRACT
1. OFFER
Sec.2 (a) - offer or proposal - when a person signify his willingness to do or

abstain from doing anything. Proposal or offer - something which is capable of being converted into an agreement by its acceptance. Must be a definite promise to be bound - provided that certain specific terms are accepted. Lack of offer and acceptance - contract void ab initio
Sec. 4 (1) -offer must be communicated - effective when it comes to the

knowledge of the offeree. R v. Clarke - communication of proposal regarding capture of convict

Offer can be made to a particular person or to the general public Carlill v. Carbolic Smoke Ball - offer made to the rest of the world but

the contract is made with that limited portion of the public who come forward and perform the condition

 To be an offer, the offeror must not merely feeling his way

towards an agreement if that is the case, then it is not offer but is an invitation to treat Examples of ITT: Advertisements in the paper for the post of a doctor - ITT Auctioneer inviting a bid ITT (but a bidder making a bid is an offer) Catalogue advertising goods for sale Goods on display in a shop Cases: Boots Cash Chemist Ltd sale of poison under pharmacist supervision Gibson v. Manchester City Council sale of council house to tenants Partridge v. Crittenden

2. ACCEPTANCE
Sec.2 (b) - when the person to whom the proposal is made

signify his assent thereto. Acceptance can be expressed or implied (inferred from conduct) Acceptance must be accepted on exactly the same terms as the proposal without any variation or modification it must be absolute and unqualified Any modification / variation to the offer is a counter proposal and is equivalent to rejection
Hyde v Wrench - offer 1000, accept 950 Stevenson v McLean - request for additional

information is not counter proposal

 Acceptance must be communicated with some positive

action silence cannot be imposed as acceptance Felthouse v. Bindley Exception : - proposer dispense with it - acceptance in form of performance

Acceptance must be within reasonable time - Sec.6(b) Acceptance may also be revoked at any time before the

communication of the acceptance is complete against the acceptor

 Sec.4 - Acceptance through post - an exception to the general

rule that acceptance must be communicated a.k.a. The Postal Rule Sec.4 - communication of acceptance is completea. 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 b. As against the acceptor, when it comes to the knowledge of the proposer Illustration to the section: B accept As proposal by a letter sent by post The communication of the communication is complete: as against A, when the letter is posted as against B, when the letter is received by A CASE :- Adams v. Lindsell

Acceptance through telex, phone and e-mail

For acceptance through telex, fax and telephone, the same principle as

that of instantaneous communication applies i.e. it must be communicated to the offeror to be valid See Entores Ltd v. Miles Far East Corp Also case of Brinkibon v. Stahlund Stahl For communication through e-mail the main issue that needs to be addressed is whether acceptance through e-mail constitutes instantaneous communication or delayed communication. If it is non-instantaneous, then the postal rule will apply that is acceptance is deemed complete once the acceptor click the SEND button with his mouse. This is looking at the nature of the e-mail itself where any message send will be channeled to a service provider before it reaches the intended recipient similar to that of using postal service

Termination of Offer
Revocation must also be communicated Byrne v. Van

Tienhoven Revocation of proposal possible if acceptance is not complete. Sec. 6 - A proposal may be withdrawn under four circumstances By communication of notice of revocation by the proposer to the other party By lapse of time (prescribed or reasonable) Ramsgate Victoria Hotel v. Montefiore By failure of acceptor to fulfill a condition precedent to acceptance By death or mental disorder of the proposer if such fact comes to the knowledge of the acceptor before acceptance Bradbury v. Morgan

3. INTENTION TO CREATE LEGAL RELATION

Not provided by Contract Act but by case laws Mere agreement is not enough to contemplate the existence of a legal

contract. Sometimes can be imputed from the nature of the agreement, for e.g : acceptance to a dinner acceptance to an offer to play a game of soccer acceptance of an offer to pay for half of the petrol cost Thus parties to a transaction may state that they do not intend to enter into any binding obligation. Intention is particularly relevant when it comes to cases where legal contracts are not normally made like in domestic arrangements Balfour v. Balfour However in a commercial agreements, the presumption is that there is intention to create legal relations

4. CONSIDERATION
Sec.26 - as a general rule - agreement without consideration is void Sec. 2 (d) defined consideration as - when at the desire of the promisor, the

promisee.do or abstain from doing something.or promises to do or abstain form doing something, such act or abstinence is called a consideration for the promise.

Consideration need not be adequate - Phang Swee Kim v. Beh Hock Consideration need not move from the promisee - Venkata Chinnaya v.

Verikataramaya - consideration provided by mother Past consideration is good consideration - Kepong Prospecting Ltd. V. Schmidt Part payment from the full amount is valid consideration
Exception to the rule that agreement without compensation is void - Section

26:

a. agreement made on account of natural love and affection b. agreement to compensate for past voluntary act c. agreement to compensate act the promisor legally compelled to do d. agreement to pay a statute barred debt.

5. CERTAINTY
The terms of an agreement cannot be vague but must be certain. If uncertain or incapable of being made certain - void.

Intentions of the parties will be frustrated because of uncertainty

and the court will usually not interfere At common law - two aspects of uncertainty:
due to language used

failure to reach agreement on fundamental term of the agreement

In Contract Act - uncertainty provided by Sec. 30 - agreements, the

meaning of which is not certain, or capable of being made certain, are void. Case: - Karuppan Chetty v. Suah Thian - lease at $35.00 per month as long as he likes

6. CAPACITY
Parties to a contract should be competent to contract, i.e. have the legal

capacity to do so. Where one or more of the parties to a contract lack the capacity - contract invalid / void. - Tan Hee Juan Sec. 11 - 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. Age of majority- 18 years - Age of Majority Act 1971 Exception:
contract for necessaries - Nash v. Inman scholarship Govt. of Malaysia v. Gurcharan Singh insurance

Sound mind - Sec 12(1) - .. If at the time of making the contract.capable

of understanding it and forming rational judgment as to its effect upon his interest. Includes incapacity due to sickness, alcohol or drugs

PRIVITY OF CONTRACT
After a valid contract has been formed - to whom

does the obligation extend? What are the limits of the contractual agreement. The general rule under common law - no one but the parties to a contract can be entitled to it, or bound by it. Contract cannot confer rights on third party
Price v. Easton - payment of debt on behalf of another Dunlop Pneumatic Tyre v. Selfridge.

Contract cannot impose liability on third party e.g. relationship between building owner - contractor - sub contractor However, a claim can still lie in tort.

CONTENTS OF A CONTRACT
1. EXPRESS AND IMPLIED TERMS

Contents made up of terms - expressed or implied 1. Express terms - has been specifically agreed upon by the parties orally, in writing or both. Express terms are straightforward and can be identified just by looking at the contract document. 2. Implied terms - term that is read into the contract by the court. Form an integral part of the contract though not expressly provided - necessary to give business efficacy to the contract Terms may be implied by : 1. Custom and usage pertaining to a particular transaction. Preston Corporation - implied a term based on trade usage regarding ownership of film positives used to print books Must satisfy - notoriety, certainty and reasonableness

2. Statutory Provision Statutes that imply terms into a contract: 1. Sales of Goods Act 1957 2. Hire - Purchase Act 1967 3. National Land Code 1965 3. The courts , based by the intention of the parties Cases: Yong Ung Kai v. Enting - implied a term that must have been in the mind of the parties to get license to cut the timber the officious bystander test i.e. oh, of course!.

2. CONDITIONS AND WARRANTIES

Another classification of terms Definition of both terms - given by Sales of Goods Act 1957 Sec 12 (2) SOGA - condition - a stipulation essential to the main

purpose of the contract, the breach of which gives rise to a right to treat the contract as repudiated. Sec 12 (3) SOGA - warranty - a stipulation collateral to the main purpose of the contract, the breach of which gives rise to claim for damages but not a right to reject the goods or repudiate the contract. Whether a term is a condition or warranty - depends on the intention of the parties - the court will help to determine.
Example cases: Poussard v. Spiers and Pond Bettini v. Gye

3. EXEMPTION CLAUSE
Defined as a term of a contract that attempts either to modify the principal

obligation(s) arising out of the contract or to limit / exclude the liability of a party which would otherwise arise as a result of a breach by that party. Common in standard contract - the operation of which depends on the construction of the contract. In case of disputes- court will interpret - contra proferentum. If the clause is ambiguous - will be interpreted to the disadvantage of the party who will benefit from clause. In case of negligence - need clear and unambiguous words to exclude liability. In case of serious / fundamental breach - exemption clause will not cover the parties who made the clause. There are also some statutes which modify the effect of the exemption clause to provide more protection to consumers. Also - exemption clause cannot give benefit to third party nor make another party liable

FACTORS VITIATING CONTRACTS

Sec 10 of Contract Act - agreements are contracts if they are

made by the free consent of the parties. Sec 14 - consent is free when not caused by one or more of the following: 1. Coercion - Sec 15 2. Undue influence - Sec 16 3. Fraud - Sec 17 4. Misrepresentation - Sec 18 5. Mistake - Sec 21, 22 and 23
Void - agreement that lacks any legal effect from the beginning -

void ab initio. Voidable contract - Sec 2 (i) an agreement which is enforceable by law
at the option of one or more parties, but not the others.

1. COERCION
Coercion defined as committing or threatening to

commit any act forbidden by the Penal Code, or the unlawful detaining of any person / property with the intention of causing any person to enter into an agreement. Kesarmal v. Valiappa Chettiar - transfer made under Sultans order in the presence of Japanese officers during the occupation considered voidable. Chin Nam Bee Development payment of extra $4000 under threats to cancel booking of houses

2. UNDUE INFLUENCE
Exist when the relations subsisting between the parties are such that one of the

parties is in the position to dominate the will of the other and uses that position to obtain an unfair advantage over the other. Therefore the elements of undue influence:
Position to dominate Use that position to obtain unfair advantage

Position to dominate exist when:

Has real or apparent authority over the other e.g.: parent-child Morley v. Loughnan Stand in fiduciary relation to the other e.g.: religious leader follower,

solicitor-client Allcard v. Skinner Tate v. Williamson Polygram Records Sdn Bhd v. The Search & Anor Made contract with a mentally incapacitated person by reason of age, illness or distress. Inche Noriah v. Shaikh Allie
Burden of proving no undue influence - on the person in position to dominate

3. FRAUD
Sec 17 Five acts that would constitute fraud: Suggestion of fact that is not true Active concealment of fact - Horsfall v. Thomas - inserting metal plug in a

cannon is active concealment Promise made without intent to perform it Other act fitted to deceive Any acts the law declares to be fraudulent There must be an intention to deceive - that is made knowingly, without belief in its truth or reckless whether it true or false Generally silence does not constitute fraud - the misled party has the duty to exercise ordinary diligence However, under certain circumstances silence or non -disclosure may constitute fraud Takes into account the relationship btw parties and where silence is equivalent to speech Duty to exercise ordinary diligence applies to fraud by silence only not other cases of fraud Weber v. Brown - number of rubber trees

4. MISREPRESENTATION
Misrepresentation refer to certain false statement of existing or past fact

made by a person before or at the time of making the contract which induces a party to enter into a contract. Basic difference between misrepresentation and fraud is that in fraud the person making the representation does not himself believe in its truth - but for misrepresentation - may himself believe it true. Like fraud - when there is a duty to disclose - silence may amount to misrepresentation. However under the Contract Act - Sec 19 - misled party has duty to exercise due diligence Tan Chye Chew v Eastern Mining Metals contract not voidable despite the misrepresentation as the party has means of discovering the truth with ordinary diligence. To be actionable: 1. There must be false representation - Keates v Lord Cardogan 2. The representation is one of fact , not opinion - Bisset v Wilkinson 3. The statement was addressed to the party misled - Peek v Gurney 4. The statement must induce the contract - Attwood v Small

5. MISTAKE
Sec. 21 of the Contract Act - where both the parties under the

agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is void - for lack of free consent. Sec 22 - mistake as to the law - contract not voidable due to mistake of law in force in Malaysia, but if the law not in force in Malaysia - like mistake of fact. Sec 23 - mistake as to one party (unilateral) - contract is valid Mistake of fact made by both parties can be as to : Existence of the subject matter Strickland v. Turner. - annuity for a dead person
Identity of the subject matter Falck v. Williams - identity of charter parties Quality of the subject matter Kennedy v. Panama Royal Mail. - shares in a mail company

VOID AND ILLEGAL CONTRACT

Sec 2 (g) - Contract which is not enforceable by law. Sec 24 Contract with unlawful consideration / object is

void i.e.:
a- forbidden by law - Hee Cheng v Krishnan attempts to transfer TOL land b- of such nature as to defeat the law -Tan Bing Hock attempts to assign logging rights c- fraudulent -Palaniappa Chettiar d-involves / implies injury to person / property. - Syed Ahamed Alhabshee v Puteh e- immoral / against public policy - Pearce v Brooks hire of vehicles for prostitution

 There are also Sec 25 to Sec 31 which provides for other

instances that renders a contract void in law.

consideration unlawful

Sec 25 - any part of a single consideration / any part of several

Chung Khiaw Bank Ltd.

Sec 26 - agreement made without consideration. Sec 27 - agreement in restraint of marriage. Sec 28 - agreement in restraint of trade Wrigglesworth v. Anthony Wilson restrained from practicing as lawyer within five miles from KB for two years Sec 29 - agreement to restraint legal proceeding Corporation Royal Exchange v. Teck Guan Sec 30 - agreement void for uncertainty. Sec 31 - agreement by way of wager.

Consequence Of Void And Illegal Contract. General rule under CA - ex turpi causa non oritur actio no action will arise from a wrong done. Contracts under sec 27, 28 and 29 - not void in toto severable. Sec 66 - Right of restitution - doctrine of unjust enrichment Ahmad b. Udoh paid $1500 as deposit for lease of padi land which was illegal Yeep Mooi v. Chu Chin Chua money deposited with a company carrying unlicensed business is recoverable

DISCHARGE OF CONTRACT
Contract is discharged when it is terminated in one of these ways:

1. By performance. 2. By consent or agreement between the parties 3. By impossibility (frustration) 4. By breach.

1.BY PERFORMANCE.
Performance must be strictly in accordance with terms of the contract. Sec 38 (1) - parties to a contract must either perform or offer to perform their

respective promises unless such performance has been dispensed with by any law. When time is of the essence - Sec 56 Performance by third party - Sec 41
Letchumi Ammal terms of contract that requires personal performance must be done by promissor Haji Nik Ishak v. Nik Zainab if a promisee accepts performance from a third party, cannot afterwards enforce it against promisor

2. BY CONSENT OR AGREEMENT
Contract created by consent can be extinguished by consent

either express or implied. Express consent may be given at time of contract or subsequent to that.
E.g. discharged at the occurrence of an event.

Waiver, release, novation or rescission.

Sec 63 - if the parties to a contract agree to substitute a new

contract for it, or to rescind or alter it, the original contract need not be performed. Sec 64 - every promisee may dispense with or remit, wholly or in part, the performance of the promise made to him, or may extend the time for such performance, or may accept instead of it any satisfaction which he thinks fit.

3. BY IMPOSSIBILITY / FRUSTRATION
Two categories of impossibility of contract When impossibility is at the time of making the contract - an

agreement to do an act impossible in itself is void. A contract is frustrated when there is a change in the circumstances which renders a contract legally or physically impossible of performance not merely difficult or more onerous Sec 57(2) - a contract to do an act which after the contract is made becomes impossible, or by reason of some event which the promisor could not prevent, becomes void when the act becomes impossible or unlawful. In applying the rule - court will examine the circumstances surrounding the frustration including whether it is self induced or not.

 A contract may be discharged in any of the following

circumstances: Destruction of the subject matter - Taylor v. Caldwellthere must be total destruction - not partial due to Sec 12 of SRA

Supervening event defeat the whole purpose / object of the contract - Henry v. Krell. Death or personal incapacity especially in regards of personal obligation. Supervening illegality - Lee Kin v. Chan Suan Eng.

Effect of frustration - automatically end the contract Sec 66 CA provides for restitutionary remedy.

4. BY BREACH
Sec 40 - When a party to a contract has refused to perform, or

disabled himself from performing, his promise in its entirety, the promisee to the contract, unless he has signified, by words or conduct, his acquiescence in its continuance. Party not in breach has the option of continuing with the contract and claim damages or repudiate the contract. Sec 65 - when a person at whose option a contract is voidable rescinds it, the other thereto need not perform any promise therein contained in which he is promisor. The party rescinding a voidable contract shall, if he has received any benefit there under from another party to such contract, restore the benefit, so far as may be, to the person from whom it was received.
Cases : Choo Yin Loo v. Visuvalingam Ban Hong Joo Mine Ltd. V. Chen & Yap

REMEDIES
There are several remedies provided by the law to give relief to

the party not in default in a breach of contract.

1. Rescission of Contract. - Sec 40 2. Damages. - Sec 74 to 76 3. Specific Performance. - The Specific Relief Act 1950 4. Injunction. - Specific Relief Act

1.RESCISSION As dealt with in the previous part under sec. 40 2.DAMAGES Damages are granted to a party as compensation for the damage, loss or injury done / suffered through breach of contract - but damage cant be too remote or indirect. Damages can be classified as substantial, nominal or exemplary

 Sec 74 - when a contract has been broken, the party who suffers is entitled to

receive..compensation for any loss or damage.which naturally arose in the usual course of things..or which the parties knew, when they made the contract, to be likely to result from the breach.

Illustrations to sec74 also indicate that the aggrieved party may recover

damages for other expenses incurred as a result of the breach, for loss of profits arising out of the breach, for the difference btw the price of goods as contracted for and the actual price the goods were sold for as result of the breach.

Sec 75 - When a contract has been broken, if a sum is named in the contract

as the amount to be paid in case of such breachor any other stipulation by way of penaltythe party complaining of the breach is entitled to receivereasonable compensation not exceeding the sum named or the penalty stipulated for. The effect of fixing the sum - to determine the upper limit of compensation. Nevertheless, party seeking damages is also under the duty to mitigate the loss - Kabatasan Timber Extraction Co.

3. SPECIFIC RELIEF
The Specific Relief Act provides for the remedy of specific performance - which is

discretionary by nature. It a decree of the courts directing the contract to be performed according to its terms. Sec 11 in trust cases and where no adequate relief. Sec 12 - presumption in cases of transfer of land Sec 18 - court has power to award damages in lieu of SP Sec 21 - court has discretion to refuse specific performance if cause undue hardship to the defendant. Sec 20 - circumstances where no SP can be enforced: where money is adequate relief. contract with minute details. contract dependant on personal qualification. contract that will need supervision of the court. contract with uncertain terms. contract revocable by nature. contract made by trustee in excess / breach of their power contract made on behalf of public or private corporation in excess of its power. contract the involves performance of continuous duty extending over a period longer than three years from its date. contract which a material part of the subject matter has ceased to exist even before the contract is made

Thats All Folks!