”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 made—Section 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 it—Section 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 implied—Section 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: 'Will you sell us Bumper Hall Pen? Telegraph lowest price.'

F: 'Lowest price for Bumper Hall Pen £900.'

H: '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 formed—Lau 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 contract—LowKar 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 intention—Yap 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 intended—Esso 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 domest ic agreements

and business agreements .

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 years—Age 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 .