Discuss the six basic elements for a valid binding agreement in the light of the Contract Act 1950

with decided cases.

By Redhuan Index No. 0010/ADLM77/06 LAW OF BUSINESS AND CARRIAGE

Table of Contents

Page

1.0 Introduction 2.0 The Contract Act 1950 3.0 Elements essential for a Valid Binding Agreement 3.1 Offer 3.2 Acceptance 3.3 Consideration 3.4 Intention to create legal relationship 3.5 Certainty 3.6 Capacity

4.0

References Attachments

1.0 Introduction

In his book Principles of the Law of Contracts, Sir William Anson defined a contract as a legally binding agreement made between two or more parties, by which rights are acquired by one or more to acts or forebearances on the part of the other or others. Shortly it may be defined as an agreement between two or more parties which is intended to have legal consequences. 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 agreement referred to in the definition means a meeting of minds, called in law consensus ad idem, signifying that the parties are agreed together about the same thing. The definition also emphasizes that the parties to the contract must intend that their agreement shall be legally enforceable. Unless the law recognizes this and enforces the agreements of parties, it would be impossible to carry on commercial or business life.. These contractual agreements give rise to rights and obligations which the law recognizes and enforces. But certain agreements, such as domestic and social arrangements, are not intended by the parties lo be legally binding. The law allows for this. Thus, if Khairul and Fatimah agree to meet for dinner and Khairul fails to turn up, the law will do nothing in the matter. The agreement was not intended to create legal rights and duties, and, as such, it is not a contract in law. Every contract is an agreement, but not every agreement is a contract. For this reason the law of contract plays a significant role in logistics , transportation, shipping ; areas emphasized in this course , the Advance Diploma in Logistics and in almost everything we do in our daily life.

2.0 The Contract Act 1950

The Law of Contract in Malaysia is found principally in the Contracts Act , 1950 (Act 136) (Revised 1974). However, when there are no provisions in the Contracts Act to deal with a particular subject concerning the law of contract or if a particular subject is covered by the Act but the provisions relating to that subject are not exhaustive, English law applies by virtue of the Civil Law Act. Where the Contracts Act makes certain provisions which differ from English law, the provisions of the Contracts Act must prevail and takes precedence. This is seen in the case of Song Bok Yoong v. Ho Kim Poui . (1) In applying English law, the distinction between Subsections 5(1) and 5(2.) of the Civil Law Act, 1956 must be noted. Under Subsection 5(1), Civil Law Act, when English law is applied in any dispute arising in Peninsular Malaysia other than in the States of Melaka and Penang, 'the law to be administered shall be the same as would be administered in England in the like case' at the date of coming into force of the Civil Law Act, 1956, i.e. on 7 April 1956. On the other hand, if the same matter were to arise in the States of Melaka, Penang, Sabah or Sarawak, 'the law to be administered shall be the same as would be administered in England in the like case at the corresponding period, if such question or issue had arisen or had to he decided in England'. To the purpose of simplifying the above, any development in the English law after 7 April 1956 would not be applicable to the States of Peninsular Malaysia (Penang and Malacca excluded), whereas such changes would apply in the States of Penang, Melaka, Sabah and Sarawak. ____________________________________________________________
(1) [1968] 1 Malaysian Law Journal .56.

3.0 Elements Essential for a Valid Binding Agreement

As mentioned earlier , every contract is an agreement, but not every agreement is a contract. Therefore for an agreement to be valid and binding in the light of the Contract Act 1950, some basic elements need to be present . C.F. Padfield and D.L.A. Barker in their book LAW Made Simple , published by Made Simple Books, reprinted 1988, they advocated seven essentials namely Offer and Acceptance, Intention, Capacity, Consent, Consideration, Legality of Object and finally Possibility of Performance. As this book was published in England and is meant for the application of English Law, I have decided to advocate a different author , notable a Malaysia author for the applicability in the Malaysian context as the basis of my findings. Ms. Lee Mei Pheng, the author of General Principles of Malaysian Law, Published by Fajar Bakti in 1990 advocated six basic elements that is essential for a valid binding agreement or otherwise known as a contract. They are Offer, Acceptance, Consideration, Intention to Create Legal Relationship, Certainty and lastly Capacity. All the above elements must be present for an agreement to be binding i.e a valid contract. If one or more is absent the contract will be (i) void, (ii) -voidable, or (iii) unenforceable. Void Contracts are destitute of legal effect; that is, they are not contracts, and agreements of this kind do not confer legal rights on the parties thereto. For example, a contract by an infant to buy goods other than 'necessaries'. Similarly, if A agrees with B to break into Cs house and steal if B pays A RM1000.00, the contract is void for it is illegal. Neither party can recover from the other on a void contract, but goods delivered may be recovered by an action in tort because no property (ownership) passes. Voidable Contracts are those which may be made void at the instance of one of the parties. For example, a contract which is induced by fraud can be avoided by the party deceived.

Unenforceable Contracts are those which are valid but are unenforceable at law because of the absence of (i) evidence of the contract or (ii) the form required by law. For example, some contracts which are not 'evidenced in writing' are unenforceable at law.

3.1 Offer An offer or proposal is necessary for the formation of an agreement. Section 2(a) of the Contracts Act states 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 first part of Section 2(c| of the Contracts Act calls the person making the proposal the 'promisor'. Another term used is Offeror. An offer must be communicated to the offeree. An offer must be distinguished from an 'Invitation to Treat'. An 'invitation to treat' means an invitation to make offers. For example, a display of price-marked goods in a shop window or on the shelves in a supermarket. When a customer picks up an article in a self-service store and takes it to the cashier's desk to pay, the taker's action is an offer to buy. It is for the cashier/shopkeeper to accept and take the purchase money in payment (Pharmaceutical Society of Gt. Britain v Boots Cash Chemists (Southern) Ltd., 1953). In this case, the defendants were charged under the Pharmacy and Poisons Act, 1953 which made it unlawful to sell certain poisons unless such sale was supervised by a registered pharmacist. The case depended on whether there was a sale when a customer selected items he wished to buy and placed them in his basket. Payment was to be made at the exit where a cashier was stationed and, in every case involving drugs, a pharmacist supervised the transaction and was authorized to prevent a sale.

The court held that the display was only an invitation to treat. A proposal to buy was made when the customer put the articles in the basket. Hence the contract would only be made at the cashier's desk. As such, the shop owners had not made an unlawful sale. In the English cases of Partridge v. Crittenden, Rooke v. Dawson, and Grainger & Sons v. Gough, advertisements of bilateral contracts are held not to be offers. In Carlill v. Carbolic Smoke Ball Co. Ltd., the advertisement of an unilateral contract was held to be an offer. CARLILL v. CARBOLIC SMOKE BALL CO. LTD. [1893] 1 Q.B. 256 Carbolic Smoke Ball Co. Ltd. advertised that they would offer 1,000 to anyone who still succumbed to influenza after using a certain remedy for a fixed period. The plaintiff duly used it but nevertheless, contracted influenza. The plaintiff then sued for the money. The Court of Appeal held that the plaintiff was entitled to the 1,000 as she had accepted the offer made to the world at large. 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 bound provided certain specified terms are accepted. The promisor (sometimes also known as 'offeror') must have declared his readiness to undertake an obligation upon certain terms, leaving the option of its acceptance or refusal to the offeree. The communication of a proposal is complete when it comes to the knowledge of the person to whom it is madeSection 4(1), Contracts Act. This means that an offer or proposal is effective once it is communicated to the offeree by the offeror. The com-

munication of an offer or a proposal is deemed to have been 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 itSection 3, Contracts Act. A proposal made in words (oral or written) is said to he expressed. If a proposal is made other than in words (example, by conduct), it is said to be impliedSection 9, Contracts Act. 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 while an advertisement is an attempt to induce offers. This is seen in the case of Coelho v. The Public Services Commission and Guha Majumder v. Donough. COELHO v. THE PUBLIC SERVICES COMMISSION [1964) M.LJ. 12 Facts: The applicant, a Health Inspector under the Town Board, Tanjong Malim, applied for the post of Assistant Passport Officer in the Federation of Malaya Government Oversea Missions advertised in the Malay Mail dated 19 February 1957 as follows: Applicants will be selected according to the following order of preference: (i) Serving Assistant Passport Officer and serving Junior Assistant Passport Officer in

the Immigration Department who have had not less than 5 years' service and possess School Certificate. (ii) All serving Government Officers who have had 5 years' service and who possess

School Certificate .Applications (those from serving Officers to be submitted through Heads of Department with Confidential Reports and Record of Service) to reach the

Secretary, Public Service Commission (Designate), Young Road, Kuala Lumpur, 28 February 1957. Consequently, the applicant was informed that he was accepted and, after undergoing training, he was posted to the Immigration Office, Kuala Lumpur, where he remained until December 1958 when he was transferred to the Immigration Office at Johore Bahru. On 5 November 1959, the Secretary to the Public Services Commission in a letter addressed to the applicant as 'Assistant Passport Officer on Probation' informed him that, following a report from the Controller of Immigration concerning his conduct in the irregular issue of certain passports, disciplinary action was being taken against him with a view to his dismissal. The applicant made representations as invited by the said letter and, on 24 December 1959, the applicant was informed that the respondent had decided that he should not be dismissed but that his appointment on probation be terminated forthwith by payment of one month's salary in lieu of notice. The applicant now moved the court for an order of certiorari to quash the decision of the respondents on the grounds of error in law, want of jurisdiction, and failure to observe the principles of natural justice. (An order of certiorari is an order of the court directing that something be done, in this case, the court order applied for was one directing that the decision of the respondents be overturned.) Held : 1. that the Malay Mail advertisement was an invitation to qualified persons to apply and the resulting applications were offers. 2. the information conveyed to the applicant was an unqualified acceptance to join the overseas mission and he so understood it. The order was granted.

A statement of price is not necessarily an offer . Harvey v Facey (1893) The following telegraph messages were exchanged between the parties H: F: H: 'Will you sell us Bumper Hall Pen? Telegraph lowest price.' 'Lowest price for Bumper Hall Pen 900.' 'We agree to buy Bumper Hall Pen for 900 asked by you.'

To this F made no reply, H claimed, that there was a contract between himself and F. Held: There was no contract. The second telegram was not an offer in the nature of an invitation to treat ie. the lowest price if it decided to sell. The final message could not be looked upon acceptance. Revocation of offer Withdrawal/revocation of an offer must be communicated to the offeree directly or indirectly before acceptance. Revocation may be communicated either by the offeror or any third who is a sufficiently reliable informant. Dickinson v Dodds (1876) X wrote to Y offering to sell a house; "This offer to be left over until Friday 9 a.m.".On Thursday, Y heard from A that X had sold the house to Z. On Friday at 7 a.m. Y handed to X his acceptance of the offer. Held: There was no contract between X and Y, since Y had revoked his offer and the revocation had been communicated to Y by A.

Termination of an offer An offer can be terminated in four ways. Firstly is on the death of either the offeror or offeree. Secondly is by non-acceptance within the time stipulated or within a reasonable time. Thirdly when the offer is revoked before acceptance. Lastly is when the offer is rejected by the offeree.

3.2

Acceptance

Section 2( b ), Contracts Act 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 2(c) Contracts Act calls the person accepting the proposal the 'promisee'. 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 in words, the acceptance is said to be implied. For a proposal to be converted into a promise, the acceptance of that proposal must be absolute and unqualified. This is provided for in Section 7, Contracts Act which reads: Acceptance must be absolute In order to convert a proposal into a promise the acceptance must (a) be absolute and unqualified; (b) be expressed in some usual and reasonable manner, unless the proposal prescribes the manner in which it is to be accepted. If the

proposal prescribes a manner in which it is to be accepted, and the acceptance is not made in that manner, the proposer may, within a reasonable time after the acceptance is communicated to him, insist that his proposal shall be accepted in the prescribed manner, and not otherwise; but, if he fails to do so, he accepts the acceptance. Acceptance must be absolute and unqualified so that there is complete consensus. If the parties are still negotiating, an agreement is not yet formedLau Brothers & Co. v. China Pacific Navigation Co. Ltd. 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 negotiation and no agreement was formed. Therefore, the defendants were justified in withdrawing. Where acceptance is qualified by words such as 'subject to contract' or 'subject to a formal contract being drawn up by our solicitors', the courts would be inclined to hold in the absence of strong and exceptional circumstances to the contrary that there is but a mere conditional contractLowKar Yit & Ors. v. Mohd Isa & Anor ,Tai Tong Realty Co. (Pte.} Ltd. v. Galstaun & Anor As a general rule, an acceptance has no effect unless and until it is communicated to the offeror or to an agent authorised by him. For example, if the words of acceptance are 'drowned' by aircraft flying overhead or spoken into a telephone which has gone dead, there \s no contract. There are however exceptions to the rule. This is in the case where a reward is offered to any person who does a certain thing eg. find a lost dog, it follows that any person may accept provided the finder knows of the offer.

CARLILL v. CARBOLIC SMOKE BALL CO. LTD. [1893] 1 Q.B. 256 It was held in the above mentioned case quoted earlier that this was an offer capable of acceptance by all who used the smoke ball. The plaintiff accepted by complying with the conditions of the offer and it did not matter that the plaintiff did not communicate her acceptance to the offeror. In the case of Felthouse v Bindley (1862) it was determined that an offeror cannot impose a contract on an offeree against his wishes by deeming that his silence tantamount to an acceptance. The facts surrounding the case is as follows:F offered by letter to buy his nephew's horse for 30. He wrote: " If I hear no more about him, I shall consider the horse is mine at 30." The nephew did not reply but he asked the auctioneer to keep the horse out of the sale. The auctioneer, B, sold the horse mistakenly and F sued B. Held: F had no claim since his offer to buy had only been mentally accepted by the nephew. It had not been communicated to the offeror Method of acceptance prescribed by offer Where the offeror prescribes a particular method of acceptance, that method should normally be followed. Acceptance by post When an offer is made by post, it takes effect only when it reaches the offeree, not when the letter is posted. However, acceptance takes effect as soon as the letter is posted. This is evidenced in the case of Adam v Lindsell (1818)

Where an offer is made and accepted by letters sent through post, the contract is made the moment the letter accepting the is posted, even though it never reaches its destination. The case in question is Household Fire Insurance Co. v Grant (1879). In cases of instantaneous communication such as telephone and telex, the contract is complete only when the acceptance is received by the offeror at his end of the line.

3.3 Consideration Section 26 of the Contracts Act provides that, as a general rule, an agreement without consideration is void. The word 'consideration7 is defined in Section 2(d) of the said Act as follows: When, at the desire of the promisor, the promisee 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 may be executory, executed or past. It is executory when one promise is made in return for another . It is executed when a promise is made in return for the performance of an act. If a promise is made in return for an act that has already been performed, it is past consideration. There are a number of rules of consideration . Firstly under Malaysian law, consideration need not be adequate. Explanation 2 to 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: 'A agrees to sell a horse

worth $1,000 for $10 .... The agreement is a contract notwithstanding the inadequacy of the consideration.' The issue of adequacy of consideration was dealt with by the Federal Court in Phang Swee Kim v. Beh I Hock.37 PHANG SWEE KIM v. BEH I HOCK (1964} M.LJ. 383. Facts: In 1944 in consideration of $20,000 in Japanese currency, the respondent executed a memorandum of transfer of his half-share of the land in question to the appellant's husband, now deceased. The transfer was not registered but the deceased obtained possession of the land, and in 1946 he died intestate. The appellant, the widow of the deceased, extracted grant of letters of administration in 1951 and she continued to be in possession. Sometime in 1963, the land was subdivided into two lots and the respondent became the sole proprietor of the lot occupied by the appellant. Subsequently on 21 January 1963, the respondent's solicitor notified the appellant that she had trespassed on the said land and asked for vacant possession and also for an account of all income received by her from the land. In May 1963, the respondent instituted an action against her claiming the relief stated. The appellant counter-claimed for a declaration that she was entitled to the said land. At the hearing in the court below, the appellant contended that the basis of her claim was an oral agreement made between her and the respondent in 1958. The learned trial judge accepted her evidence, but held that the agreement was void due to inadequacy of consideration. The appellant appealed and the respondent cross-appealed. It was eventually held that there was adequate consideration in this case (there being no evidence of fraud or duress) because the respondent agreed to transfer the land to the appellant on payment of $500 when the land was subdivided. The appellant was therefore entitled to the declaration sought

by her. Secondly, consideration need not move from promisee. This in seen in the case of Venkata Chinnaya v Verikatara'ma'ya (1881). The case in question is as follows:A sister agreed to pay an annuity of Rs 653 to her brothers who provided no consideration for the promise. On the same day their mother had given the sister some land, stipulating that she must pay the annuity to her brothers. The sister subsequently failed to fulfill her obligations. She was sued by her brothers. Held:. She was liable to pay. There was good consideration for the promise even though it did not move from her brothers.

3.4 Intention to Create legal relationship

Although the Contracts Act 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, e.g. in cases where the agreements merely represent family arrangements Choo Tiong Hin & Ors. v. Choo Hock Swee and Phiong Khon v. Chonh Chai Fah and in a case where concessions were made in the course of business negotiations Yap Eng Thong & Anoi. v. Faber Union Ltd. (where there was a 'subject to contract' clause in the agreement), it was held that there were no valid contracts. Circumstances and conduct of parties may also indicate lack of intentionYap Eng Thong & Anor. v. Faber Union Ltd. and Guha Majumderv. Donough. In domestic arrangements there is a presumption against the existence of an intention to create legal relations whilst in commercial .arrangements the rebuttable

presumption is that legal relationships are intendedEsso Petroleum Cc. Ltd. v. Customs & Exercise Commissioner. 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. In general,the parties must intend the agreement to be legally binding. But how can the court find out what is in the parties' minds? The nearest the courts can get to discovering this intention is to apply an objective test and judge the situation by what was said and done. The law divides agreements into two groups, social do me s t ic a gr ee me n ts an d b us i ne s s a gr ee me nt s .

Social & Domestic Agreements This group covers agreements between family members, friends and workmates. The law presumes that social agreements are not intended to be legally binding. Ths can be seen in the case of Lens v Devonshire Club (1914) The Times. However, if it can be shown that the transaction had the opposite intention, the court may be prepared to rebute the presumption and to find the necessary intention for a contract. The cases show it is a difficult task to rebute such a presumption. Agreements between a husband and wife living together as one household are presumed not to be intended to be legally binding, unless the agreement states to the contrary. This is seen in the case of Balfour v Balfour ( 1919 ). The presumption against a contractual intention will not apply where the spouses are not living together in amity at the time of the agreement. The case in question is Merritt v Merritt ( 1970 ).

3.5 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 AH 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. Similarly if Ali agrees to sell to Mary his house for $200,000 or $300,000, such an agreement is also void. 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'. Similarly, if Ali agrees to sell to Mary his house at a price to be fixed by his wife, there is no uncertainty as the price is capable of being made certain. In Kamppan Chetty v. Suah Thian, the requirement of certainty was not met when the parties agreed upon the granting of a lease 'at $35.00 per month for as long as he likes'.

3.6 Capacity The parties entering into a contract should also be competent to contract, i.e. they must have the legal capacity to do so. Section 11 of the Contracts Act 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.

In Malaysia, the age o majority is eighteen yearsAge of Majority Act, 1971. In. Mohori Bibee v. Dharmodas Ghose, the Privy Council held that an infant cannot make any valid contracts. In Tan Hee ]uan v. Teh Boon Keat, the court held that the transfers of land executed by an infant were void. Thus, the general rule in Malaysia is that contracts made by infants are void. However, there are some exceptions to this rule. These are the

following namely contracts for necessaries, contracts of scholarship and contracts of insurance. This is covered under section 69 of the Contracts Act .