The Law of Contract – Evening Crest Sdn Bhd

Overview

Introduction

Understanding contracts is fundamental to understanding business law because without agreements that are legally binding and enforceable there could be almost no business. Most areas of business life contain contractual elements, e.g. banking,

insurance, investment and partnerships. It is easy to make an arrangement or to enter an understanding, but this is different from being committed to a legally binding contract. Consider life without legally effective contracts: customers could not buy goods using cheques (a cheque comes from the customer’s contract with their bank); employees and employers could not contribute to pension funds to produce a pool of funds to be invested.

A contract is a promise or a set of promises that are enforceable at law. Although the law will enforce it, this does not mean that a contract has to be made solemnly, in writing and witnessed. In fact, usually none of these formalities are required. Instead, there are eight essential elements to a legally enforceable contract in Malaysia. In this topic we examine these elements and also consider what happens when things do not go according to plan.

Objectives

At the end of this topic you will be able to:

• outline the law of contract

• list and describe the essential elements of a contract

• describe the common law remedy for breach of contract.

An offer needs to be distinguished from an invitation to treat. An invitation to treat is not an offer, but a type of preliminary communication between the parties at the stage of negotiation. Examples are a price list, a display of goods with price tags in a self-service supermarket, an advertisement or an auctioneer inviting bids for a particular article.

A display of goods does not amount to an offer. This rule was clearly determined in an English case, Pharmaceutical Society of Great Britain v. Boots Cash Chemists Ltd [1953] 1 QB 401. Boots was prosecuted under the Pharmacy Poisons Act 1933 which stated that drugs could not be sold by anyone other than the registered pharmacist. The Pharmaceutical Society of Great Britain alleged that:

(i) the goods on the display shelf constituted an offer

(ii) by taking the goods from the display, the customer was accepting the offer

(iii) it was at this point that a contract of sale was entered into without the supervision of a registered chemist.

This argument was rejected by the English Court of Appeal. It stated that a display of goods was an invitation to treat and not an offer. The offer occurred when the customer selected the goods and took them to the registered pharmacist who could accept or reject the offer. The offer was accepted by the chemist entering the price of the drug into the cash register, and it was at this point that a contract came into existence. Thus, the contract was entered into in the presence of a registered pharmacist.

In Malaysia it has been held that:

• an advertisement is only an invitation to applicants to make an offer and not an offer itself. Coelho v. The Public Services Commission [1964] MU 12

• quotations for a printing job were merely a supply of information which was really an invitation to enter into a contract. Preston Corp. Sdn. Bhd. v. Edward Leong a Ors. [1982] 2 MU 22.

Every contract is said to be formed by the acceptance of an offer. This process of offer and acceptance may be by express words, followed by words from the other party like, ‘Okay, it’s a deal’, or by actions only such as the offer being made by showing the cashier a newspaper and tendering payment which is accepted by the cashier takirjg the money, or both express words and actions combined.

An offer has certain characteristics.

• It can be made to a particular person or to the general public. If made to a particular person, only that person may accept it. If made to the general public, anyone who meets all the terms of the proposal may accept it.

• It must be communicated. The person who seeks to accept a proposal must be able to demonstrate communication of the proposal to them. The fact that the other party has done something which coincides with the proposal without being aware of its existence, does not bring an agreement into being. For example, a person who casually returns lost property to its owner cannot legally claim a reward if he or she is unaware of it at the time, but subsequently discovers the existence of an offer of reward for its return.

(i) the goods on the display shelf constituted an offer

(ii) by taking the goods from the display, the customer was accepting the offer

(iii) it was at this point that a contract of sale was entered into without the supervision of a registered chemist.

In Malaysia it has been held that:

• an advertisement is only an invitation to applicants to make an offer and not an offer itself. Coelho v. The Public Services Commission [1964] MU 12

• quotations for a printing job were merely a supply of information which was really an invitation to enter into a contract. Preston Corp. Sdn. Bhd. v. Edward Leong a Ors. [1982] 2 MU 22.

Every contract is said to be formed by the acceptance of an offer. This process of offer and acceptance may be by express words, followed by words from the other party like, Okay, it’s a deal’, or by actions only such as the offer being made by showing the cashier a newspaper and tendering payment which is accepted by the cashier taking the money, or both express words and actions combined.

An offer has certain characteristics.

• It can be terminated by:

(i) acceptance, in which case it becomes an agreement

(ii) rejection, in which case it ceases to exist

(iii) being offset by a counter offer (which amounts to rejection of the original offer). Of course, the parties can continue their negotiations with subsequent offers

(iv) being withdrawn prior to acceptance, in which case generally the withdrawal will only be effective when it comes to the notice of the person to whom the proposal was made. This is also known as revocation

(v) lapsing due to the death of one of the parties before acceptance

(vi) lapsing because it was not accepted within a specified time (i.e. the proposal stipulated a time within which it had to be accepted) or generally within a ‘reasonable time.

An acceptance is assent (unconditionally) to the terms of the offer. The Act states that acceptance must be communicated in some usual and reasonable manner if no particular method of acceptance is specified in the offer. If the offer does specify a particular method of acceptance, and it is not followed, the proposer can insist on it within a reasonable time of receiving some other communication of acceptance. If the proposer does nothing, he or she is deemed to have accepted. The duty to object to the manner of acceptance lies with him or her.

There are a few exceptions to the general rule that acceptance must be communicated. These are:

• The offeror has dispensed with the need for it.

• The offeror allows the party to whom the offer is made to accept in the form of an act stated in the offer. This exception requires that something positive be done. Generally, silence, absence of response or just total disregard of the offer is not acceptance as there is no positive act that can be related to the offer.

• The offeror allows the acceptance of any consideration for a reciprocal promise (a promise which forms the, consideration or part of the consideration for another promise) which may be offered with an offer. For example, if A sends B a-theque for RM500 with the offer that it will be the consideration for B’s agreement to sell his motorcycle, B will ‘be deemed to have accepted the offer if he or she cashes the cheque even though he or she has not communicated their acceptance to A. B has accepted a consideration for a reciprocal promise offered with an offer.

• The postal acceptance rule. The illustration given in the Act concerning an acceptance that is mailed is as follows:

(i) B accepts As offer by a letter sent by post

(ii) the communication of the acceptance is complete:

– as against A, when the letter is posted

– as against B, when the letter is received by A.

As with offers, acceptance can be revoked (or withdrawn) before the acceptance is complete, but not afterwards.

2.3 Consideration

Even where the elements of offer and acceptance are present, consideration is essential to any valid contract. Every contract contains at least one promise and consideration is the price paid for a promise.

Under the Act, an agreement without consideration is void (i.e. of no effect), subject to the exceptions noted below.

The most common example of consideration is the money you pay for goods in a shop; however, consideration can also take the form of not doing something you have a right to do.

The Act provides the following exceptions to the general rule concerning consideration:

• An agreement made on account of natural love and affection between parties standing in near relation to each other. In Re Tan Soh Sim [1951] MU 21, an attempt was made to define ‘near relation’. Justice Briggs stated that ‘natural’ meant ‘reasonably to be expected having regard to the normal emotional feelings of human beings. If the emotional feeling or the relation are not apparent, an agreement could not stand under this exception.

• An agreement to compensate for a past voluntary act. This refers to a promise to compensate a person who has already voluntarily done something for the promisor. See J.M. Weatherspoon Et Co Ltd. v. Henry Agency House [1962] MU 86 .

• An agreement to compensate a person who did an act which the pro.misor was legally compelled to do. The illustration in the Act itself is as follows:

• A supports B’s infant son. B promises to pay A’s expenses in so doing. This is a contract.

• An agreement to pay a statute barred debt. A statute barred debt is one that cannot be recovered through legal action because of a lapse of time fixed by law. The illustration contained in the Act is as follows:

• 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.

To be valid, consideration must comply with the following requirements:

• it must be given in exchange for a promise

• it must have some value

• it need not be adequate. The illustration given in the Act is: 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

• it must be given by someone, even if not given by the person to whom the promise was made. Section 2(d) of the Act dearly states that consideration can be given by ‘any other person’.

2.4 Intention to Create Legal Relations

An intention to create legal relations is the third element that is essential to a valid contract.

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 thinks the parties did 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 a court to conclude that there was no intention to create legal relations. It follows that the law will find it difficult to enforce many arrangements made ‘within a family’, as there is frequently no evidence of any intention to create a formal legal relationship.

If an agreement is expressed to be ‘subject to contract’, in other words, if the parties state that they will not be bound until a formal agreement has been prepared and signed, it is clear they had no intention of entering into contractual relations.

The position would be different, however, if the parties intended to be bound by a preliminary agreement that contemplated the preparation of more formal documentation at a later date. A common example of this situation would be the offer and acceptance of finance which are almost always followed by security documents, etc. In other words, it is possible to have a contract to make a contract.

2.5 Certainty

The terms of a contract must not be vague. An agreement that seems to be a contract may not be one due to uncertainty as to what the parties have actually agreed upon. This element is covered by s. 30 of the Act.

If the language used is too vague a court is likely to hold that there is no concluded agreement. The contract is void for uncertainty. If there is a failure to agree on a fundamental or vital term of an agreement, the contract would fail for incompleteness.

2.6 Capacity to Contract

Who can enter into a contract? As a general rule any natural person can enter any contract. Some rights to contract may be qualified or denied, e.g. in the case of minors (younger than 18 years old).

There are some exceptions to this general rule for minors: contracts for ‘necessaries’ (goods and services reasonably necessary to the minor’s actual requirements) and contracts of scholarships. There is also other legislation which allows minors to enter into valid agreements in relation to, for example, insurance and apprenticeship.

A meeting of minds and free consent is the basis of a contract. A person suffering from mental disability at the time of the contract, lacks the capacity to contract. This mental incapacity can be due to a mental disorder or due to sickness, alcohol or other drugs.

Companies can only contract within the limits of their powers found in their memorandum and articles of association. If they act beyond those powers, those acts are ultra vires. Section 20 of the Companies Act 1965 mitigates this harsh rule. It provides that no act of a company is to be invalid by reason only of the fact that the company lacked the capacity or power to do the act. However, the doctrine of ultra vires still applies in certain specified situations.

2.7 Genuine Consent

Without consent, there can be no agreement and no contract. Consent must be free and not secured through such means as fraud, coercion, undue influence or

misrepresentation. Section 14 provides:

‘Consent is said to be free when it is not caused by:

(a) coercion, as defined in Section 15

(b) undue influence, as defined in Section 16

(d) misrepresentation, as defined in Section 18

(e) mistake, subject to Sections 21, 22 and 23.

Consent is said to be so caused when it would not have been given but for the existence of such coercion, undue influence, fraud, misrepresentation or mistake.’

Any of these circumstances, if proven, impair the validity of an agreement because consent is not free. The agreement is either void (as in the case of a mistake essential to the agreement) or voidable (as in all the, others). Voidable’ means that one party can elect to avoid the contract.

2.8 Lawfulness of Object

Section 2(g) of the Act provides that an agreement not enforceable by law is void. Section 10 also refers to lawful object of an agreement and s-. 24 specifically refers when the object of an agreement is not lawful as follows:

“the consideration or object of an agreement is lawful unless-‘

(a) it is forbidden by a law

(b) it is of such a 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.

(e) the court regards it as immoral or opposed to public policy.’

This section is illustrated by four examples of lawful considerations and seven examples of agreements that are unlawful.

2.9 Formalities
The general rule is that a contract can be made orally, in writing, or by conduct. There are exceptions, however, to the general rule in s. 10(2) of the Act. This section refers to the fact that various statutes make some types of contract unenforceable unless they are in writing or some other special requirement is followed. In fact, the Act itself does so concerning agreements made on account of natural love and affection between parties standing in near relation and agreements to pay a statute-barred debt, both of which must be in written form. Sees. 26.

2.10 Remedies for Breach of Contract
When there is a breach of contract the party not in default may claim one or more of the following remedies:
Rescission of Contract — where a contract is breached in a sufficiently serious way, the injured party may elect to terminate it immediately. That party may then sue for breach of contract, and is freed from any future liability under the contract. If it does not elect to terminate, the contract is at an end only if the defaulting party has rendered it incapable of performance.
Damages — the type of damage recoverable is set out in s. 74. An injured party is entitled to damages arising naturally from the breach. If special damages are claimed he or she must show that the other party knew at the time of making the contract that the special toss was likely to result from the breach, but such compensation is not to be given for any remote and indirect loss or damage sustained as a result of the breach. Section 76 confers entitlement to compensation for any damage sustained by the party that has the right to rescind the contract.
Specific Performance — this is a decree of the court directing that the contract shall be performed according to its terms. For the circumstances in which this remedy is available see s. 11 of the Specific Relief Act. This remedy will not be granted where monetary compensation is adequate.
Injunction — injunctions are orders of the court restraining a person from doing something. A grant of an 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 as ‘preventative relief. There is a large body of case law on the grant of injunctions.

Activity 1
Case Study

A charitable foundation (whose objective is the provision of financial and other assistance to employees of fund management companies who have become destitute) requests written proposals from Malaysian fund management companies to be responsible for the management of its investment portfolio of RM 50 million. Mega Fund Managers Bhd. (an investment management group with a social conscience) submits a proposal that includes a nominal RM1 fee each year for its services in place of its normal fee calculated as a percentage of funds under management. No other fees or reward will be charged by Mega Fund Managers for its services.
The chairman of the committee of the charitable foundation telephones the managing director of Mega Fund Managers and advises her that the committee has approved Mega Fund Managers’ submission and that she should ‘go ahead’ and invest the RM 50 million. Mega Fund Managers proceeds to invest the foundation’s funds.
Does a contract between the charitable foundation and Mega Fund Managers exist? Provide reasons for your answer.
(Hint: In relation to the facts presented in the case study, examine each of the essential elements of a contract.)

3.0 Summary
In this topic we considered the law of contract. We defined a contract and examined the essential elements that must be present for the formation of a contract. The law of contract is very important in our everyday lives because it controls everything, from how to buy goods in a shop, to ordering a meal in a restaurant and to buying a house. It is also vital to transactions that occur every day in the business world including the relationship between a fund management company and a client.
We also looked briefly at the remedies available for breach of contract.

In the next topic, we look more closely at another aspect of the legal relatignship between a fund management company and a client — the law relating to negligent misstatement.

Suggested Answer to Activity
(Note: the numbering of the paragraphs below relates to the eight essential elements of a contract described in the same order in the text.)

1. The ‘proposal by Mega Fund Managers is (despite its name) an invitation to treat rather than an offer. The proposal or offer is made by the chairman of the committee on behalf of the charitable foundation to Mega. Mega Fund Managers may accept or reject the offer (or may make a counter offer).
The offer is to be appointed as investment manager to the charitable foundation. It is a verbal offer made specifically to Mega Fund Managers.

By investing the charitable foundation’s funds, Mega Fund Managers has immediately and unconditionally accepted the offer and has communicated its acceptance by so doing. While it would be unusual that the offer and acceptance of a contract of this nature be made verbally, this does not of itself negate the contract. The proposer (the charitable foundation) has dispensed with the need for communication of acceptance by requesting Mega Fund Managers to ‘go ahead’ and invest the foundation’s funds.
The contract therefore incorporates a proposal (offer) and acceptance of that offer.
2. There is consideration for the contract even though it is a nominal RM1. The consideration need not be adequate since Mega Fund Managers has consented to the amount. The consideration may be   provided personally by the chairman rather than, the charitable foundation if required.
3. The parties clearly intended to create legal relations.
4. The terms of-the contract appear’ to be sufficiently certain (as set out in Mega   Fund Managers’ proposal) for   the   committee of the charitable foundation to approve Mega’s appointment.
5. The committee of the charitable foundation would be expected to have the capacity to make a contract with Mega Fund Managers.
6. The charitable foundation and   Mega Fund Managers appear to have freely consented to the agreement and the contract.
7. The agreement    between   the parties has a lawful object, being the investment of the foundation’s funds.
8. The contract is capable of being made orally, in writing or by conduct (and was made verbally by the chairman on behalf of the committee).

Read more...