CONTRACT LAW:

ESSENTIAL ELEMENTS

Thanks to Dr. Abbas for the slides. They have

been slightly modified.

INTRODUCTION

�A contract may be defined simply as ‘a legally

binding agreement between two or more

parties’.

�Generally in Malaysia, the law of contracts is

regulated by the Contracts Act 1950.

� If a particular subject concerning the law of

contract is not dealt with sufficiently or not at all

by the Contracts Act or Malaysian decided cases,

then the English law may be applied.

ESSENTIAL ELEMENTS

�The essential elements or pre-requisites of a valid

contract are:

i. offer

ii. acceptance

iii. genuine intention to create legal relations

iv. consideration

v. capacity

OFFER & ACCEPTANCE

�An agreement is the presence of offer and acceptance.

�OFFER: Section 2(a) of the Contracts Act states: '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, he is said to make a proposal’.

� ‘Proposal’ has the same meaning as ‘offer’. Note that

only the person to whom the proposal is made can

accept the proposal. Other persons cannot accept the

proposal.

�A ‘promisor’ is also known as a ‘proposer’ or an

‘offeror’. A ‘promisee’ is also referred to as an

‘acceptor’ or ‘offeree’.

�An offer or acceptance can be express or implied.

�Express: Generally, an offer (or acceptance) will be in

words, either oral or written.

� Implied: However, in a number of cases, an offer (or

acceptance) may be implied from the conduct

(behaviour) of the parties or from the circumstances

concerned.

CERTAIN FEATURES OF AN OFFER

� An offer may be made to an individual or to a large number of people :

� Carlill v Carbolic Smoke Ball Co. (1892)

� Carbolic smoke Ball Co. Ltd., in its newspaper advertisement,promised to give £100 to anyone who purchased their smoke ballremedy for influenza, and caught illness within 14 days. To showgood faith, the company deposited £1000 with a bank to meet anyclaims. Mr. Carlill bought the remedy, caught influenza and claimed£100. The court held that the advertisement was an offer to the worldat large, and Mrs. Carlill had accepted the offer by purchasing andtaking the remedy.

� An offer must be a definite promise by which the offeror intends to be legally bound by the terms stated.

� The fact that £1000 had been deposited with a bank showed that it was a firm offer and the company intended to be legally bound.

�Carlill v Carbolic Smoke Ball Co. is

an example of advertisement of a

unilateral contract (one party makes

the offer; the other accepts it through

performance).

�Another example: reward for lost

dog.

DIFFERENCES BETWEEN AN OFFER AND AN

INVITATION TO TREAT

� It is important to know which party makes the offer and which

accepts.

� In the case of goods on display in a shop or supermarket, the

law has decided that it is the customer who makes the offer by

taking the goods and placing them on the shopkeeper’s or

cashier’s counter, and the shopkeeper or cashier accepts the

offer by accepting the customer’s money.

� The price displayed on the goods is not the offer, it is only an

invitation for the customer to make an offer; it is only an

invitation to treat.

� The law gives the shopkeeper or cashier the right to accept or

reject a customer’s offer.

DIFFERENCES BETWEEN AN OFFER AND AN

INVITATION TO TREAT

� Pharmaceutical Society of Great Britain v Boots Cash Chemist

Ltd. [1953]

� The law required that the sale of certain pharmaceuticals must be

carried out under the supervision of a qualified pharmacist. Boots

operated a store where the drugs were displayed on a self-service

basis and the customers paid at a cash desk for the goods they

has selected. A pharmacist was present at the cash desk but not at

the shelves where the goods were displayed with a price tag.

� The Pharmaceutical Society claimed that the law was violated by

the shop.

� Was the acceptance at the time the customer put the

medicine in the shopping cart, or when the cashier

entered the amount into the register?

� The court held that the display of goods in the store was

not an offer but an invitation to treat. It was the customer

who made the offer and Boots could either accept or

reject this offer at the cash desk (in the presence of the

qualified pharmacist).

� The acceptance was the ringing up of the price by the

cashier and at that moment a binding contract of sale is

made.

�Invitations to treat generally include:

� Auctions

� Advertisement of tenders (invitation to bid for services)

� Catalogues

� Price lists

�Goods displayed in shop windows and shelves

RELATED CASES

�Partridge v Crittenden

�Harvela Investments v Royal Trust Co of

Canada (1985)

�Blackpool Aero Club v Blackpool Borough

Council (1990)

�Harvey v Facey (1893)

�Fisher v Bell (1959)

ACCEPTANCE

� Section 2(b) of the Contracts Act states:

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.’

� There must be an unconditional consent to the

terms of the offer. In other words, a final and

unqualified acceptance of the terms of an offer.

� It is important to note that if an acceptance contains

any reservations or any variations to the terms of the

offer, then the acceptance’ will be conditional and

thus not form a valid contract.

CONT….

� A conditional acceptance is a new offer known as a

COUNTER-OFFER.

� An acceptance must be communicated to the offeror.

� Entores v Miles Far East Corp [1955] 2 All ER 493-

where Lord Denning stated that acceptance must be

communicated by the offeree or someone authorised by

the offeree. If someone accepts on behalf of the offeree,

without authorisation, this will not be a valid

acceptance.

CONT….

• Merely remaining silent cannot amount toacceptance, unless it is absolutely clearacceptance was intended.

• See Powell v Lee, where the court statedthat the offeror cannot impose a contracton the offeree against his wishes bydeeming that his silence should amount toan acceptance.• But silence is binding if offeree stipulates

that it is, or in counter-offer situation.

THE POSTAL RULE

�The postal rules ONLY apply when the

‘acceptance’ is sent by post.

�Simplified rule: Acceptance here takes effect

when the letter is posted. In other words, where

acceptance by post has been requested or where

it is an appropriate and reasonable means of

communication between the parties, then

acceptance is complete as soon as the letter is

posted, even if the letter is delayed, destroyed or

lost in the post so that it never reaches the

offeror.

�Adams v Lindsell: Lindsell sent an offer to sell

wool to Adams on 2 Sept 1817.

� It was received by Adams on 5 Sept. That

evening, Adams posted a letter accepting

Lindsell’s offer.

�The letter of acceptance was not received by

Lindsell until 9 Sept.

�On 8 Sept, Lindsell not having received the

answer on 7 Sept, as he expected, sold the wool

to another person.

�The issue before the court was when acceptance

took effect. The court held that acceptance took

effect when the letter was posted; i.e., 5 Sept.

REVOCATION OF OFFER/ACCEPTANCE

� Section 5 provides that: A proposal may be revoked at any

time before the communication of its acceptance is complete

as against the proposer, but not afterwards. [see chart]

� In general, an offer terminates:

i. When rejected by the offeree.

ii. When the offeree makes a counter-offer.

iii. On the death of either the offeror or the offeree

before acceptance.

iv. By non-acceptance within the time stipulated for

acceptance, or within a reasonable time.

v. When revoked before acceptance.

GENUINE INTENTION TO CREATE LEGAL RELATIONS

� Although every contract is an agreement, there are manyagreements that are not contracts.

� For example, if A and B agree to meet at 8 o’clock to havedinner together, the agreement is made without intending thatthere will be legal consequences if either A or B in the end,does not turn up. It is merely a social agreement, and not acontract.

� For an agreement to become a contract there must be a genuineintention to create legal relations which has legal implications.For the parties to be bound, they must have finished reachingan agreement, so that it is possible to infer an intention on thepart of both of them to be bound immediately. Kwong KumSun(s) Pte Ltd v Lian Soon Siew & Ors. [1984].

RELATED CASES

� In Rose and Frank Co. v Crompton (1925), a written agreement

between the parties stipulated that it was not a formal or legal

document and should not be subject to the legal jurisdiction of the

court. The House of Lords held that the agreement had no legal effect.

� Parties usually engage in a process of negotiation before they settle

into an agreement. During this process of negotiation, they do not

intend to be legally bound yet. Likewise, when the parties include the

words ‘subject to contract’, it usually means that whatever agreement

that seems to have been reached still needs further deliberation, which

shows that the parties are not ready to be legally bound. In all these

circumstances, there is no contract yet.

� In Balfour v Balfour (1919), the husband went to work in Ceylon and

agreed to pay his wife £30 per month. He did not pay the money and

the wife sued. It was held that there was no contract because the

parties did not intend to create a legal relationship.

CONSIDERATION

� Section 26 provides that an agreement without consideration is

void.

� The word ‘consideration’ is defined in section 2(d). It means

merely the price in a bargain. The price need not be money, but

must have a monetary value.

� Examples: If A enters a shop and buys a packet of groundnuts,

the ‘consideration’ which A provides is the money, whereas the

‘consideration’ moving from the shopkeeper is the packet of

groundnuts. They have each provided ‘consideration’ for the

business transaction.

� Section 25 states that if the consideration or any part of it is

unlawful, the agreement is void.

CONSIDERATION NEED NOT BE ADEQUATE

� In order for consideration to be valid, it must be

measurable in terms of some economic gain or loss. In

legal language, the consideration must be sufficient,

but need not be adequate.

� In Phang Swee Kim v Beh I Hock [1964], the Federal

court held that an agreement to which the consent of the

promisor is freely given is not void merely because the

consideration is inadequate.

�So, if A told B that he would sell his new

Mercedes to her for RM5, and B agreed, there is

a binding contract between A and B for the sale

of A’s new Mercedes. The RM5 is sufficient

consideration, although not adequate.

�However, if A said to B that she could have his

new Mercedes in return for her praying for him

and wishing him good health, there would not be

sufficient consideration even if B actually carried

out the praying and wishing.

CAPACITY

� Generally, any person may make a contract, but the law

sometimes protects certain classes of persons such as minors and

mental patients who, because of an inherent weakness or

disability, cannot be expected to manage their own affairs

adequately.

� Section 11 states that:

� 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.

� Minors and people of unsound mind are disqualified by law

from entering into contracts.

� Exceptions for necessaries, scholarships and insurance.

RELATED CASES

� Nash v Inman (1908):

� A tailor supplied high-class clothing to an undergraduate at Cambridge University. The clothes include 11 fancy waistcoats. The undergraduate’s father was a wealthy architect. The clothes could be said to be suitable to the undergraduate’s ‘station in life’. However, his father proved that the infant was already amply supplied with such clothes when the tailor supplied the clothes concerned. The court held that the goods supplied were not necessaries.

� In Government of Malaysia v Gurcharan Singh & Ors [1971], it was held that education was included under necessaries. Under the Contracts [Amendment] Act 1976, for scholarships or loans given by the government or a statutory body or an educational institution, the scholarship agreement entered into by an infant is valid.