EUT 440

ENGINEERS IN SOCIETY

TOPIC 2: CONTRACT LAW

LECTURERS:

DR. KHADIJAH MOHAMED

MDM. ROHIZAN HALIM

CONTRACT LAW IN MALAYSIA: BACKGROUND

English law (common law, equity & statute) forms part of

the laws in Malaysia and still applicable

Section 3(1)(a) Civil Law Act 1956 states that courts

should apply Common Law and the Law of Equity as

administered in England:

in Peninsular Malaysia: 7 April 1956.

in Sabah: 1 December 1951.

in Sarawak: 12 December 1949

Section 5(1) Civil Law Act 1956 states that the principles

of English commercial law apply in Peninsular Malaysia

except Penang and Malacca in absence of local

legislations.

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…BACKGROUND

The case law related to the boundaries of

application.

Jamil Bin Harun v. Yang Kamsiah & Anor [1984] 1 MLJ 217.

It was decided that courts have the authority to decide

whether to follow English Law (common law and law of

equity) or Federal law, considering the circumstances and

the scope the written law permits to do so.

Smith Kline & French Laboratories Ltd. v. Salim

(Malaysia) Sdn. Bhd.[1989] 2 CLJ. 228.

It was held that the courts have the authority to put aside

any Common Law or Law of Equity which cannot be applied

in Malaysia.

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CONTRACT LAW IN MALAYSIA

Contract law is governed by the Contracts Act (CA)

1950.

The Act is a re-enactment of the Contracts (MalayStates) Ordinance 1950.

Principles of contract originated from England, but theoriginal Ordinance was a reproduction of the IndianContract Act of 1872.

The functions of the contract law-

establishes what kinds of promises will be legallybinding.

supplies procedures for enforcing legally bindingpromises, or agreement.

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WHAT IS CONTRACT? An agreement between two or more parties that creates

an obligation to perform (or not perform) a particular

duty.

S.2(h) CA 1950 – “an agreement enforceable by law is a

contract”.

S.10(1) CA 1950 – „All agreements are contracts if they

are made by the free consent of parties competent to

contract, for a lawful consideration and with lawful

object, and are not hereby expressly declared to be

void‟.

All contracts must be built upon an agreement although

not all agreements are automatically contracts e.g:

social agreements & domestic agreements.5

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TYPES OF CONTRACT

Formal vs Informal Contracts.

Formal, need a seal v informal, simple & without

seal.

Unilateral vs Bilateral Contracts.

Unilateral, a promise on 1 side v bilateral,

promises on both sides.

Unilateral: Carbolic Smoke Ball case

Forms of Contract

Oral

Written

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ELEMENTS OF CONTRACT

A legally enforceable contract constitutes the

elements of contract -

(1) Offer/proposal (I‟ll fix your sink this weekend, if

you pay me RM50)

(2) Acceptance (You‟ve got a deal)

(3) Consideration (The value received and given –

the money and the sink fixed)

(4) Intention to create legal relations

(5) Certainty

(6) Legal Capacity

(7) Free Consent7

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ESTABLISHING OFFER AND ACCEPTANCE

S.2(a) CA 1950: Proposal – “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 such act or

abstinence”.

S.2(b) CA 1950: Acceptance – “when the person to

whom the proposal is made signifies his assent

thereto, the proposal is said to be accepted: a

proposal, when accepted, becomes a promise”.

A legally recognized offer and an acceptance creates a

“meeting of the minds‟, or mutual assent, between

the parties.8

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EXAMPLE

Ali wants to sell his car. He makes an offer to sell his

car to Rahim for RM25,00.00. If Rahim say yes, the

offer is said to be accepted.

A person who make an offer is now referred as

promisor (offeror) and the party accepting the

proposal as promisee (offeree).

Once the offer has been made and accepted, it

becomes a promise or an agreement.

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TYPES OF OFFER

Specific: the offer only can be accepted by a person

who has been offered.

Boulton v Jones (1857) 2 H & N 564.

Jones used to have business dealings with Brockle Hurst. He sent an

order (offer) to Brockle Hurst for the purchase of certain goods. By

the time the order reached Brockle Hurst, he had sold his business to

Boulton. Boulton receiving the order sent all the goods to Jones as

per the order without informing Jones of the changing of the hands

of the business. When Jones learnt that the goods were not supplied

by Brockle Hurst, he refused to pay for the goods. His contention

was that he had never placed an order to Boulton, the offer being

made to Brockle Hurst, and therefore had no intention to make a

contract with Boulton. Held: Jones was not liable to pay.

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…TYPES OF OFFER

General: the offer is general as it is made to the

public.

Carlill v Carbolic Smoke Ball Co.[1892] EWCA Civ 1

The defendant company advertised that a reward of £ 100 would be

paid to any person who contracted influenza, cold, or any other

disease associated with cold even after using the smoke balls of the

company – a preventive remedy, 3 times a day, for 2 weeks in

accordance with the printed directions. The plaintiff had seen the

advertisement, used the smoke balls according to the printed

directions and for a period as specified, but still contracted

influenza. She sued the defendant company to claim the reward.

Held: that the advertisement constituted the offer to the whole

world at large ( – general offer) which was accepted by the plaintiff

by conduct. ( – by using smoke balls).

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WHEN IS AN OFFER EFFECTIVE?

S.4(1) CA 1950 – A proposal/offer is only effective if it is

communicated to the acceptor.

3 elements are necessary for an offer to be effective(mutual assent):

Intention: There must be serious, objective intentionby the offeror to become bound by the offer.

Non-offer situations include: expressions of opinion,statements of intention, preliminary negotiations &advertisements, catalogues and circulars.

Definiteness: The terms of the offer must bereasonably certain + definite.

Communication: The offer must be communicated tothe offeree.

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OFFER V INVITATION TO TREAT

„Invitation to treat’ - a sort of preliminary

communication which passes between the parties at

the stage of negotiation.

Advertisement in newspapers, catalogues, circulars &

display of goods in self-service mall.

Auction sale.

Invitations to make offers rather than offers, thus,

the „advertisor‟ would have several offers to choose

from and could accept the best one without

incurring any liability for the rest he/she rejected.

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TERMINATION OF THE OFFER

S.6 CA 1950: A proposal is revoked—

(a) by the communication of notice of revocation by the

proposer to the other party;

(b) by the lapse of the time prescribed in the proposal

for its acceptance, or, if no time is so prescribed, by the

lapse of a reasonable time, without communication of

the acceptance;

(c) by the failure of the acceptor to fulfil a condition

precedent to acceptance; or

(d) by the death or mental disorder of the proposer, if

the fact of his death or mental disorder comes to the

knowledge of the acceptor before acceptance.

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ACCEPTANCE

To establish a contract, the acceptance must be

communicated to the offeror/promisor.

Only offeree/agent may accept the offer.

S.2(b) CA 1950: “when the person to whom the

proposal is made signifies his assent thereto, the

proposal is said to be accepted: a proposal,

when accepted, becomes a promise”.

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REQUIREMENTS OF ACCEPTANCE

(1) Acceptance must be unequivocal (absolute and

unqualified).

S.7(a) CA 1950: any modification or variation of the proposal does

not constitute an acceptance but amounts to a counter-proposal

by the party to whom the original proposal was made).

Case: HYDE v. WRENCH [1840] 3 Beav. 344 ER 132

6 June: Def. offered to sell his estate to the Plf. for £100.

8 June: Plf. replied and made a counter offer to purchase at £950

(counter-offer), but the Def. refused.

27 June: Plf. wrote to Def. saying he was prepared to pay the

original sum demanded.

Held: no contract existed between them since Plf. had rejected the

original proposal on 8 June so that he was no longer capable of

accepting it later.16

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…REQUIREMENTS OF ACCEPTANCE

(2)Acceptance must be expressed in some usual and

reasonable manner-

S.7(b) CA 1950: acceptance must 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.

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COMMUNICATION OF ACCEPTANCE

General rule: acceptance of a proposal must becommunicated to the proposer/promisor.

Exception: Postal rule (parties involved are notdealing face to face).

S.4(2) CA 1950: the communication of an acceptance iscomplete –

(a) As against the proposer, when it is put in a courseof transmission to him, so as to be out of the powerof the acceptor; and

(b) As against the acceptor, when it comes to theknowledge of the proposer.

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CONSIDERATION

S.2(d) CA 1950: “when, at the desire of the promisor,the promisee or any other person has done orabstained from doing, or does or abstains fromdoing, or promises to do or to abstain from doing,something, such act or abstinence or promise iscalled a consideration for the promise”.

Consideration is defined as the value given in returnfor a promise.

Sufficiency & adequacy of consideration.

Something of legally sufficient value must be given inexchange for the promise; and

Must be a bargained-for exchange.

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CONTRACTUAL CAPACITY

The legal ability to enter into a contractualrelationship.

S.11 CA 1950: Capacity – “every person is competentto contract who is of the age of majority… , andwho is of sound mind, ….”

Age of Majority Act 1971: the age of majority (adult) in

Malaysia is18 years.

S.12(1) CA 1950: „a person is said to be of sound mind

for the purpose of making a contract if, at the time

when he makes it, he is capable of understanding it

and of forming a rational judgment as to its effect

upon his interest‟.

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…CONTRACTUAL CAPACITY

3 types of people who do not have the capacity to enter

a contract are minors, intoxicated persons and mentally

incompetent persons.

Exception of contract by minors: Contracts for necessity;

scholarship; insurance, and relating to marriage, divorce

and dower.

Sound mind:

(a) A patient in a mental hospital, who is at intervals of sound

mind, may contract during those intervals.

(b) A sane man, who is delirious from fever, or who is so drunk

that he cannot understand the terms of a contract, cannot

contract whilst such delirium or drunkenness lasts.

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INTENTION

2 assumptions of intention-

Social @ domestic agreements – are not

intended to create legal relations unless

proven otherwise.

Commercial agreements – are intended to

create legal relations unless proven otherwise.

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CERTAINTY

The terms of an agreement cannot be vague but must

be certain.

A agrees to sell to Mary a hundred crates of toys without

specifying what kind they are; such an agreement is

void.

S.30 CA 1950: An agreement which is uncertain is

void.

In Karuppan Chetty v. Suah Thian (1916) 1 F.M.S.L.R. 300,

the contract was held void for uncertainty because the

parties agreed to lease of $35 per month „for as long as

he likes‟. The terms are uncertain as the duration of the

lease is not specified or capable of being made certain.

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FREE CONSENT

S.10(1) CA 1950: “agreements are contracts if they are

made by the free consent of parties competent to

contract …”

What constitutes consent?

S.13 CA 1950: Two or more persons are said to consentwhen they agree upon the same thing in the same sense”.

S.14 CA 1950 : Consent is said to be free when it is notcaused by:

(a)Coercion, as defined in s.15

(b)Undue influence, as defined in s.16

(c)Fraud, as defined in section 17

(d)Misrepresentation, as defined in s.18

(e)Mistake, subject to sections 21,22-23.

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VOID AND ILLEGAL CONTRACTS

For a contract to be valid and enforceable, it mustbe formed for a legal purpose.

Contracts contrary to public policy?

Contracts in restraint of trade

Unconscionable clauses

Exculpatory clauses – “once broken considered sold”?

Contract to commit an immoral act & contract thatprohibits marriage.

A offers a young man RM3000 if he refrains frommarrying A’s daughter. If the young man accepts, nocontract is formed (the contract is void) because it iscontrary to public policy.

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…VOID AND ILLEGAL CONTRACTS

Not enforceable by law

S.24 CA 1950: the consideration or object of an

agreement is lawful unless:

forbidden by law

if permitted, would defeat any law

fraudulent

implies injury to a person or property of another

court regards it as immoral or opposed to public

policy

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DISCHARGE OF CONTRACT

Contract that is otherwise VALID may beunenforceable if the parties have not genuinelyassented to the terms or the contract is not in theproper form.

Contract discharge-

Discharge by agreement of the parties ~ byrescission, novation or accord and satisfaction;

Discharge based on impossibility of performance~by complete performance or inadequateperformance (constitutes a material breach ofcontract).

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BREACH OF CONTRACT

Breach of contract is a legal cause of action in which

a binding agreement is not honored by one or more

of the parties to the contract by non-performance or

interference with the other party's performance.

If the party does not fulfill his contractual promise,

or has given information to the other party that he

will not perform his duty as mentioned in the

contract or if by his action and conduct he seems to

be unable to perform the contract, he is said to

breach the contract.

Breach of contract is a type of civil wrong.

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REMEDIES

S.66 CA 1950: When an agreement is discovered to be

void, or when a contract becomes void, any person who

has received any advantage under the agreement or

contract is bound to restore it, or to make compensation

for it, to the person from whom he received it.

A contracts with B to deliver to him 250 gantangs of rice

before the 1st of May. A delivers 130 gantangs only before

that day, and none later. B retains the 130 gantangs after

the 1st of May. He is bound to pay A for them.

A contracts to sing for B at a concert for RM1,000, which

are paid in advance. A is too ill to sing. A is not bound to

make compensation to B for the loss of the profits which B

would have made if A had been able to sing, but must

refund to B the RM1,000 paid in advance.29

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…REMEDIES

Remedies from the court:

Damages - to compensate the innocent party for losses suffered as

result of the contract being breached by the party in breach.

Compensatory, consequential, punitive, nominal, liquidated.

Rescission and restitution

Specific performance - a decree directing a contract or

certain act should be performed specifically according to its

original terms

Injunction - An order of court refrain the party to whom it is

addressed from doing a specified act.

Election of remedies: A common law doctrine under which

a non-breaching party must choose ONE remedy from

those available to prevent double recovery.

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