Contractual Issues

This topic is designed as a reference on the rules and regulations governing advisory services in the Malaysian capital market. Examination candidates should review the notes for the Module 19 (SIDC – Advisory services) and complete the self-assessment questions and answers in the topics.

Objectives
Learners are expected to have good knowledge, understanding and ability to apply in the following areas:
• The principles of contract law and relevant issues
• The laws which are relevant to the advisory services in the Malaysian capital market
• The system and procedures of licensing of persons who carry on the investment advisory business in Malaysia
• The features and prohibitions of investment advisory activities
• The regulations governing the issue and offer of equity securities, listing of corporations and quotations of securities on the Main Market of Bursa Malaysia Securities Berhad (Bursa Securities) (Main Market) and proposals which result in a significant change in the business direction or policy of corporations listed on the Main Market under the Securities Commission Malaysia’s Equity Guidelines
• The regulations setting out who can act as principal advisers for the submission of corporate proposals and the competency standards required
• The regulations governing the conduct of due diligence for corporate proposals by issuers, advisers and experts
• The activities and current trends connected to money laundering and terrorism financing and the Malaysian regulatory approach towards them
• The characteristics and regulations governing take-overs in Malaysia
• The regulations governing valuations of property assets in conjunction with corporate proposals for submission to the Securities Commission Malaysia or for inclusion in prospectuses and circulars
• The regulations governing the issuance and registration of prospectuses
• The regulations governing the issue, subscription, purchase, invitation to subscribe or purchase corporate bonds or sukuk to retail investors
• The regulations that must be observed for the purposes of exclusively making available unlisted capital market products to sophisticated investors in Malaysia or persons outside Malaysia
• The regulations governing the issuers of structured warrants
• The regulations governing listing of securities under the Bursa Securities Main Market Listing Requirements, Bursa Malaysia Securities Berhad ACE Market Listing Requirements and Bursa Malaysia Securities Berhad LEAP Market Listing Requirement.

Outcomes
These define clearly what you should be able to do on the successful completion of each topic. You should read them carefully before you begin. On completion, check whether you have achieved the objectives.

Contents:
Outline of the law of contract
Essential elements of a contract
Other elements of contract
Exclusion and limitation clauses
Remedies for breach of contract
Self-Assessment Questions & Answers

Contractual Issues
In commercial relationships, contractual agreements play an important role in ensuring services are provided in the time and manner requested by one party and that payments or considerations are timely honoured by the party receiving the services.

1.1 Outline of the law of contract
A contract is a promise or set of promises that give rise to legal obligations. It may arise either by word of mouth, in writing or both. Section 2(h) of the Contracts Acts 1950 (CA) defines a “contract” as “…an agreement enforceable by law.”
In order for an agreement to be enforceable by law, the elements of contract must be satisfied. A valid contract must have:
– The personal signifying the promise by one party in exchange for performance by another party.
– The must be an acceptance to the offer communicated by the party.
-There must be an agreement, that is a promise to which the offer has been duly accepted.
-An agreement must be supported by consideration.
-There must be an intention to enter into a legal relation.

Essential elements of a contract
As a general rule, for an agreement to become a legally recognised contract, it must contain the elements of offer, acceptance, consideration, intention, certainty, capacity to contract, genuine consent and lawfulness of object. These will be discussed below:

Offer, acceptance and consideration
Under section 2(a) of the CA, an offer or a ‘proposal’ (as per the CA) is defined as:

“When one person signifies to another his willingness to do or abstain from doing anything, with a view to obtaining the assent of that other to the act or abstainence, he is said to make s proposal.”

The difference between offer and invitation top treat
As a general rule, an offer must be distinguished from an invitation to treat. Case law has indicated that an agreement to an invitation to treat does not constitute a contract. This is based on the point that an invitation that there is interest in the matter in contention, hence creating the negotiation stage of the agreement. Examples of invitations to treat are advertisements and the exhibition of the price of an item.

The prevailing case is Pharmaceutical Society of Great Britian v Boots cashchemist Ltd. The pharmacy introduced a ‘self-service’ system at their shop. Customers selected items and paid for them at the cash desk. At the cash desk, a registered pharmacist would remove any drugs if necessary. Under the Pharmacy and poison Act 1933, it was unlawful to sell any listed poison ‘unless the sale is effected under the supervision of a registered chemist’. The case was dependent on the point of sale and the issue raised was whether the sale took place when the customer selected the goods or when the payment was made. The court ruled that the display of items was only an invitation to treat.
A proposal to buy arose when the customer placed the goods at the cashier. The cashier and the registered pharmacist would either accept or reject the proposal. The contract of sale would only be concluded at the cashier’s desk.
The placement of goods on a shelf did not constitute an offer but was merely an invitation to make an offer. Contract, therefore, did not arise when the customer selected the goods. When the customer presented the goods to the cashier, the customer was making an offer. The cashier would then accept the offer and that is where the contract was entered into.
In a Malaysian case of Preston Corporation Sdn Bhd v Edward Leong the appellant carried on the business of publishing books and the respondent was a firm of printers. The respondent gave the appellant a quotation. The appellant then placed an order based on the quote given. The appellant paid all the printing charges except for a disputed amount of RM500 and extra charges for the reproduction of the film positives used in the printing of the books of which the respondent claimed ownership.
The ownership was claimed on the basis of express terms of contract, which arose through exchange of letters commencing from the quotations, and based on the precedent trade usage. The Federal Court, in its decision, held that:

“An offer is an intimation of willingness by an offeror to enter into a legally binding contract. Its terms either expressly or impliedly must indicate that it is to become binding on the offeror as soon as it has been accepted by the offeree.”

It was further held that the quotation, being a mere supply of information by the respondent, was an invitation to enter into a contract in response to the inquiry made by the appellants. From the wording of the quotation, they were never intended to be a binding offer so that acceptance of the quotation would result in a contract between them. As such, no contract could come into existence when the appellant’s printing order was issued but only when the order was accepted by the respondent.

Acceptance
A contract is made when there is an acceptance as provided under section 2(b) of the CA which reads “when a person to whom the proposal is made signifies his assert thereto, the proposal is said to be accepted a proposal, when accepted becomes a promise.”
Under section 7(b) of the CA, the acceptance may 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 such 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.

Consideration
An element which binds the offer and acceptance is consideration. In general, consideration is the exchange for the promise given. In a valid contract, each party to the contract must receive a benefit or be better off after the contract is performed. Consideration therefore is 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 an act or abstinence or promise is called a consideration for the promise.

The general rule is that an agreement made without consideration is void. A consideration may have the following characteristics:
(a) Natural love and affection / Section 26(a), CA
Consideration can be in terms of natural love and affection if expressed in writinhg and registered under the law. Please see section 26(a) of the CA.
Parties must be standing in near relation to each other in order to satisfy the ‘natural love and affection’ requirement. In Re Tan Soh Sim 3, an attempt was made to define ‘near relation’. Justice Briggs stated that ‘natural’ means ‘reasonably to be expected having regard to the normal emotional feelings of a human being. If the emotional feelings or the relations are not apparent, an agreement cannot stand under this exception.

(b) It need not be adequate / Section 26, CA
The illustration (f) of section 26 given in the CA provides that:

A agrees to sell a horse worth RM1,000 for RM10. A’s consent to the agreement was freely given. The agreement is a contract notwithstanding the inadequacy of the consideration.

(c) Lawful
It cannot be unlawful

(d) Past consideration is good consideration / Section 26(b), CA
Where past consideration is good consideration
Is stated in section 26(b) of the CA that an agreement made without consideration is void unless there is,
“a promise to compensate… a person who has already voluntarily done something for the promisor or something which the promisor was legally compellable to do…”
Suffian J in the case of J.M. Whiterspoon & Co ltd. V Hendry Agency House reaffirms the former in regard to voluntary work done. The latter can be illustrated by illustration (d) of section 26 which reads: “A supports B’s infant son. B promises to pay A’s expenses in so doing. This is a contract”.

(e) Pay a debt barred by limitation / Section 26(c), CA
An agreement can be made to pay a debt barred by limitation.

A statute barred debt is one that cannot be recovered through legal action because of a lapse of time fixed by law. Section 26(c) of the CA provides an exception to this rule. Illustration (e) supports this contention by stating that where A owes B RM1,000 but the debt is barred by limitation. A signs a written promise to pay B RM500 on account of the debt. This is a contract.

(f) Given by someone / Section 26(c), CA
It must be given by someone, but it needs not be given by the person to whom the promise was made. This is because section 2(d) of the CA clearly states that consideration can be given by ‘any other person.’

1.3 Other elements of contract
Intention / Certainty / Capacity of contract / Genuine consent / Lawfulness of object / Formalities

Intention
For an agreement to be treated as a contract, the parties involved must have intended to enter into a legally binding relationship. A contract will not be enforced if the court is of the opinion that the parties dis not intend to create legal relations. In a commercial situation, however, this intention is presumed until the contrary is shown. Manifestly inadequate consideration in a non-commercial situation may well lead to a court to conclude that there was no intention to create legal relations.
However, section 26(a) of CA stipulates that an agreement that is made on account of natural love and affection and is expressed in writing and registered under the law is good consideration. With that being the case, any arrangement made on that account points to existing intentions to create legal relations.

Certainty
The terms of an agreement must be clear and concise because under section 30 of the CA, “agreement, the meaning of which is not certain, or capable of being made certain, are void”.

Capacity to contract
As a general rule, any natural person can enter into contract. There are some limitations to the rights to contract, for example in the case of minors (see section 11 of the CA), a contract by ‘necessaries’ and a contract pertaining to scholarships.

– Necessaries
As a general rule, a person is competent to contract if he is of the age of majority, is of sound mind, and not disqualified from contracting by any law to which he is subject (section 11 of CA). Thus, certain classes of people do not unsound mind). Despite such incapacity to contract, a contract for necessaries are sold and delivered to a minor, or to be a person who by reason of mental incapacity or drunkenness is incompetent to contract, he must pay a reasonable price for them.
In relation to sales to minors or other incompetent persons, “necessary” mean goods suitable to their condition in life and to their actual requirements at the time of the sale and delivery. Necessaries are those things without which an individual cannot reasonably exist. Thus, articles of mere luxury are always excluded. A contract by an infant for the supply of goods cannot be enforced unless the articles are necessaries.

Genuine contract
Without consent, there can be no agreement and no contract. The giving of consent must be given freely and cannot be secured through unlawful means, such as fraud, coercion, undue influence or misrepresentation. Section 14 of the CA provides that consent is said to be free when it is not caused by:
(a) coercion, as defined in section 15 of the CA
(b) undue influence, as defined in section 16 of the CA;
(c) fraud, as defined in section 17 of the CA;
(d) misrepresentation, as defined in section 18 of the CA; and
(e ) mistake, which is subject to sections 21, 22 and 23 of the CA

Lawfulness of object
Section 2(g) of the CA provides that an agreement not enforceable by law is void. Section 10 of the CA also refers to the need for a lawful object in an agreement. Section 24 of the CA specifically provides the occasions when the object of an agreement is not lawful:
The consideration or object of an agreement is lawful unless:
(a) It is forbidden by law
(b) It is of such nature that, if permitted, it would defeat any law.
(c) It is fraudulent;
(d) It involves or implies injury to the person or property of another; and
(e) the court regards it as immoral or opposed to public policy.

Formalities
The general rule is that a contract can be made orally, in writing or by conduct. However, section 10(2) of the CA should be noted – this section refers to the fact that various laws require certain contracts to be in writing or else it becomes unenforceable.

1.4 Exclusion and limitation clauses.
Parties to a contract would find their own ways to limit or exclude their own liabilities. They attempt to do this by including exclusion or limitation clauses. An exclusion clause is a contract term which purports to limit or exclude obligations which would otherwise attach to one of the parties to the contract. A contracting party who introduces an exclusion clause is usually seeking to limit his liability for breach of contract or for negligence. Exclusion and limitation clauses may be used for the purposes of:
(a) defining the extent of a contracting party’s obligations; or
(b) a defence if and when liability arises. Cases under the common law have shown various effects of excluding and limiting terms.

(a) Under the common law
In practices, limiting clauses are used as defences while excluding clauses are often used to define the obligation of the parties to the contract. These clauses, however, only apply if the party expressly seeks to rely on it and the clause is only effective if that party relying on it has adequately brought it to the attention of the other party before the contract was concluded. It will not be binding if it was communicated after the contract was made as in Olley v Malborough. In other words, the notice must be expressly incorporated in the contract. Any previous dealings between the parties to the contract will be taken into consideration by the court in order to help imply the clause as part of the contract in Spurling v Bradshaw. In the context of the local scene, additional notice may be necessary depending on what is the normal practice in a particular trade, profession or locality.
In addition the drafting of such clauses must be clear and concise. This is to determine the effectiveness of the exclusion clause. The general rule proposes that the question whether, and to want extent, an exclusion clause is to be applied to any breach of contract, is a matter of construction of the contract – Suisse Atlantique D’armement Maritime v N.V. Rotterdarnsche Ltd v Securicor Transport Ltd. Thus, if a clause is designed to excuse one party from a serious breach of contract, that party must clarify and give sufficient notice to the other party of this issue. The same is required o limit liability from negligence.

1.5 Remedies for breach of contract
When there is a breach of contract the innocent party may claim the following remedies: Rescission of contract, damages, Specific performance, and Injunction.

(a) Rescission of contract
Where a contract has been breached, the innocent party may elect to terminate it immediately and sue for damages. Please see section 40,65 and 66 of the CA. If that party elects to terminate the contract, then both parties are released from any future liabilities arising under the contract. If the innocent party insists on performance, then the contract will come to an end only if the defaulting party has rendered its promise incapable of performance.

(b) Damages
Section 76 of the CA allows an innocent party to claim for compensation for any damage sustained by that party when he/she rightly rescinds the contract.
The type of damages recoverable is set out in section 74 CA and also under common law as in the case of Hadley v Baxendale. An injured party is entitled to damages that arise in the usual course or things from the breach, or which parties knew, when they made the contract, to be likely to result from the breach of it. Thus, that party must show that the other party knew at the time of making the contract that special losses was likely to result from the breach. The courts will not award compensation for loss that is too remote and any indirect losses or damages sustained as a result of the breach.

(c) Specific Performance
This is a decree of the court directing that the contract shall be performed according to its terms. For circumstances in which this remedy is available, see section 11 of the specific Relief Act 1950. This remedy will not be granted where monetary compensation is adequate.

(d) Injunction
Injunctions are orders of the court restraining a person from doing something (mandatory injunctions) or compelling a person to do something (mandatory injunctions). In practice, prohibitory injunctions are more popular. The grant of a prohibitory injunction would prevent a defaulting party from doing a wrongful act such as breaking a contract or committing a tort (a wrong). It is a remedy classed in Part III of the Specific Relief Act 1950, as “preventive relief”. There is a large body of case law on the grant of injunctions.

Important Notes:
Contractual Issues
Principal and Agent
A contract of agency is formed when one person, the agent, has
authority to act on behalf of another person, the principal.
The contract of agency is formed by the agreement of the
principal and the agent.
The terms of the instructions are given by the client to the Adviser
(Licensed Person) and therefore, the terms of the contract may be
express or implied, as the following:
(i) Express instructions
(ii) Implied instructions

CMSA 2007
(a) S.91 provides that a licensed person must inform its client of
any interest which may influence its recommendation to the
client.
(b) S.92 sets out the specific requirements which must be followed
when a licensed person provides recommendations to a client.
(c) S.97 provides that a Capital Markets Services Licence (CMSL)
holder must inform the client when it is acting as principal in
the transaction with the client.

Self-Assessment Questions:
Question 1
Which of the following items are the essential elements of a contract, YES or NO?
Elements:
Intention (YES)
Written terms (NO)
Acceptance (YES)
Consideration (YES)
Invitation to treat (NO)
Offer (YES)
Agreement (YES)

Question 2
Brochures – Quotation – Display of goods on a shelf
The above items are all example of AN INVITATION TO TREAT.

Question 3
Identify whether the following statements on limiting and excluding liability under the common law are TRUE or FALSE.

Statements
In practice, limiting clauses are used as a defence while excluding clauses are often used to define the obligation of the parties to the contract. (TRUE / FALSE)
It is sufficient for a party seeking to rely on a limiting or excluding clause if the party implies this intention. (TRUE / FALSE)
The party relying on a limiting or excluding clause must adequately bring it to the attention of the other party before the contract was concluded. (TRUE)

Read More…

Module Outlines – Contractual Issues – Negligent Misstatement – Licensing of Persons Who Carry On The Business Of Investment Advice, Advising On Corporate Finance And Their Representatives – Prohibited Conduct And Insider Trading – Conclusion.

Equity Guidelines