CHAPTER 2: LAW OF CONTRACT

2.1 INTRODUCTION
• Knowledge of the basic principles of the law of contract is useful not only for examinations
but also in everyday lives. Most of us have entered into contracts at some point of time.
• compare ‘contract’ with ‘agreement’: contract involves an element of agreement but not
every agreement will result in a contract recognizable by law
• contract is an agreement enforceable by law which is legally binding between the parties
• Malaysian legislation – Contracts Act 1950

2.2 ELEMENTS OF A CONTRACT

• There are six basic elements of a contract:
1. Offer
2. Acceptance
3. Intention to create legal relation
4. Consideration
5. Certainty
6. Capacity
• When all these elements are present, the court will give due effects to the agreements as
contracts which are enforceable.

1. OFFER (PROPOSAL)
• section 2(a), Contracts Act 1950 – ‘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’
• section 2(c), Contracts Act 1950 – ‘the person making the proposal is called the promisor
and the person accepting the proposal is called the promisee
• the ‘promisor’ (‘offeror’) must have declared his readiness to undertake an obligation upon
certain terms, leaving the option of its acceptance or refusal to ‘the offeree’.
• A proposal must be a definite promise to be bound provided certain specified terms are
accepted.

Affin Credit (Malaysia) Sdn Bhd v Yap Yuen Fui [1984]

Held: Where there was a lack of offer and acceptance, the purported hire-purchase agreement
was declared void from the beginning.

• the communication of a proposal is complete when it comes to the knowledge of the

person to whom it is made – section 4(1)of the Contracts Act 1950. This means that an
offer or proposal is effective once it is communicated to the offeree by the offeror.
• compare ‘offer’ with ‘option’ and ‘advertisement’
• option – undertaking to keep the offer open for a certain period of time. The purpose of
option usually to give the offeree time to consider whether they in fact wish to buy the item
in consideration or to give them time to raise the necessary finance.
• whether an advertisement is an offer or an invitation to treat depends on the intention of
the parties in each case
• Advertisements of bilateral contracts are NOT offers whereas advertisements of unilateral
contracts are construed to be offers.
 • if a party intends their words or conduct to constitute an offer, the court will construe as
such

Carlill v Carbolic Smoke Ball Co. Ltd [1893] 1 QB 256

Facts: Carbolic Smoke Ball Co. Ltd advertised that they would offer £100 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.

Held: The plaintiff was entitled to the £100 as she had accepted the offer made to the world at
large

INVITATION TO TREAT
• offer must be distinguished from invitations to treat
• An invitation to treat is NOT an offer, but rather is an offer to consider offers.

Gibson v Manchester City Council [1979] 1 WLR 294

Facts: The Manchester City Council wrote to Mr. Gibson stating that the council ‘may be prepared
to sell’ the council house to him at £2,180 and invited him to make formal application to buy.
Before the process of preparation and exchange of contracts, the control of the council changed
hands and the new council refused to complete sale.

Held: the council’s letter was at most an invitation to treat. The words ‘may be prepared to sell’
appearing in the council’s letter was not a contractual offer.

1. Goods displayed in shop windows and shelves

Pharmaceutical Society of Great Britain v Boots Cash Chemist Ltd [1953] 1 QB 401
Facts: the defendants, who ran a self-service chemist shop were charged with unlawful sell of
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 was authorized to prevent sale.

Held: 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 casher’s desk. As
such, the shop owners had not made an unlawful sale.

2. Advertisement

Partridge v Crittenden [1968] 2 All ER 421

Facts: Partridge advertised live wild bird for sale in a periodical bird magazine. The advertisement
appeared in the classified advertisements section of the magazine. Partridge was charged with
offering live life bird for sale. The issue was whether the advertisement was an invitation to treat
or an offer.

Held: the advertisement was only an invitation to treat because nowhere was there any indication
of an expression of intention to be bound.
3. Auction

Harrison v Nickerson [1873] LR8 QB 286

Facts: an auctioneer advertised an auction in a newspaper. Harrison saw the advertisement and
travelled to the sale only to find that the items on which he was interested in bidding had been
withdrawn. The issue was whether the advertisement to hold the auction was a declaration of
intention to hold the sale or an offer that was accepted by attending.

Held: the advertisement of the auction was not a guarantee that it would be held but simply a
declaration of intention or an invitation to treat. Therefore, there is no contract between the parties.

4. Supply of information

Harvey v. Facey [1893] A.C. 552

Facts: Facey was in negotiations with the Mayor and Council of Kingston regarding the sale of his
store. Harvey sent Facey a telegram stating: “Will you sell us Bumper Hall Pen? Telegraph lowest
cash price-answer paid.” On the same day, Facey sent Harvey a reply by telegram stating:
“Lowest price for Bumper Hall Pen £900.” Harvey sent Facey another telegram agreeing to
purchase the property at the asking price. D refused to sell. The issue is whether a statement of
the minimum price at which a seller would sell an offer.

Held: No. A mere statement of the minimum selling price is an invitation to treat and not an offer
to sell

5. Tenders
6. Catalogues
7. Price lists

2. ACCEPTANCE
• when the person to whom the proposal is made signifies his assent thereto, the proposal
is said to have been accepted – section 2(b) of the Contracts Act 1950
• when a proposal is accepted, it becomes a promise
• if the acceptance is made in words, its expressed acceptance. Whereas, if the acceptance
is made other than words, its implied acceptance – Section 9 of the Contracts Act 1950
• for a proposal to be converted into a promise, the acceptance of that proposal must be
absolute and unqualified – section 7(a) of the Contracts Act 1950
• acceptance must be absolute and unqualified so that there is complete consensus. If the
parties are still negotiating, an agreement is not yet formed.
• a conditional assent is not an acceptance
• if 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 regard it as a
mere conditional contract
• Acceptance which is qualified by the introduction of a new term may be considered as a
counter-offer destroying the original offer.
 Hyde v Wrench [1840] 49 ER 132
Facts: the defendant offered to sell his estate to the plaintiff on 6 June for £1000. on 8 June, in
reply, the plaintiff made a counter-proposal to purchase at £950. when the defendant refused to
accept this offer on 27 June, the plaintiff wrote again that he was prepared to pay the original sum
demanded.

Held: no contract existed between them. The plaintiff had rejected the original proposal on 8 June
so that he was no longer capable of accepting it later.

• acceptance must be expressed in some usual and reasonable manner, unless the
proposer prescribes the manner in which it is to be accepted – section 7(b) of the Contracts
Act 1950
• the proposer cannot prescribe silence as a manner of acceptance
• thus, acceptance must be made in the manner prescribed by the offeror. When the
acceptor deviates from the prescribed manner, the offeror must not keep silent. If he does
so and fails to insist upon the prescribed manner, he is considered as having accepted
the acceptance in the modified manner.

Felthouse v Bindley (1862) 142 ER 1037

Facts: Felthouse wrote to his nephew offering to buy his horse adding ‘if I hear no more about
him I shall consider the horse mine at £40.’ His nephew intended to sell the horse to his uncle but
did not reply to the letter. He told Bindley, who was auctioning his farm, not to include the horse
in the auction as it was already sold. Bindley sold the horse by mistake and Felthouse tried to sue
Bindley for conversion of his property. The issue was whether the offer could have been accepted
by the offeror stating that silence by the offeree would be deemed to be consent.

Held: the nephew’s acceptance had not been communicated to the uncle. The horse did not
therefore belong to him.

• acceptance must be made within a reasonable time.

• ‘reasonable time’ depends on the circumstances of each case, e.g. the nature of the
subject-matter or the method by which the offer is communicated
• an offer is normally short-lived in the case of perishable goods, whereas in the case of
land, provided that there is nothing in the offer to indicate a degree of urgency, the offer
remains open for a longer time.

Ramsgate Victoria Hotel Co Ltd v Montefiore [1866] LR 1 EXCH 109

Facts: Montefiore applied for shares on 8 June but he was not told until 23 November that his
offer had been accepted and that the shares had been allotted to him and that the balance owing
on the shares was now due. Montefiore refused to pay and the company threatened to sue,
alleging breach of contract. The issue was whether the offer lapsed through passage of time.

Held: the offer to purchase shares had not been accepted within a reasonable time and the offer
had therefore lapsed. There was no contract created.

• the acceptance of proposals is deemed to be made by any act or omission of the party
accepting by which he intends to communicate the acceptance or which has the effect of
communicating it – section 3
• the communication of an acceptance is complete as against the proposer when it is put in
a course of transmission to him so as to be out of the power of the acceptor
 • with respect to the acceptor, the communication of an acceptance is complete as against
the acceptor when it comes to the knowledge of the proposer

Postal Rule
• in cases of acceptance through post, acceptance is complete upon posting. However, this
rule that acceptance is complete upon posting may be excluded by the express terms of
the offer.
• the mere posting of the letter of acceptance was not sufficient
• exception to the aforesaid rule as regards acceptance through the post lies in cases of
instantaneous circumstances, e.g. telephone, telex and telefax

Revocation of Offer and Acceptance

• a proposal may be withdrawn in any of the following ways:

1. Communicating the notice of revocation by the proposer to the party to whom the proposal
was made
1. The time prescribed in the proposal for its acceptance elapses, or if no time is prescribed
for acceptance by the lapse of a reasonable time
3. The failure of the acceptor to fulfil a condition precedent to acceptance
4. The death or mental disorder of the proposer if the fact of the proposer’s death or mental
disorder comes to the knowledge of the acceptor before acceptance
• when acceptance is complete, an agreement is formed so that there is no question of
revocation
• revocation is possible if the acceptance is not complete
• revocation of an offer must be communicated to be effective – section 6(a) of the Contract
Act 1950
• the communication of a revocation is also complete at 2 different times:
- As against the person who makes the revocation, when it is put in the course of transmission
to the person to whom it is made, so as to be out of the power of the person who makes it
– section 4(3)(a)
- As against the person to whom it is made, only when it comes to his knowledge – section
4(3)(b)
• a proposal may be revoked at any time before the communication of its acceptance is
complete as against the proposer, but not afterwards – section 5(1)
• an acceptance may be revoked at any time before the communication of the acceptance
is complete as against the acceptor, but not afterwards – section 5(2)
• Example: by using the fastest method

3. INTENTION TO CREATE LEGAL RELATION

• The Contracts Act 1950 is silent on the intention to create legal relations as one of the
requirements of a valid contract, but case law clearly dictates the necessity of this
requirement.
• there are cases where there were no intention to enter into legal relations
– where the agreements merely represent family arrangements
– where concessions were made in the course of business negotiations
• circumstances and conduct of parties may also indicate lack of intention

a) in social/ family/ domestic arrangements – presumption against the existence of an intention

to create legal relations
 Balfour v Balfour [1919] 2 KB 571
Facts: Mr Balfour was a civil engineer, and worked for the government at Ceylon. Mrs Balfour was
living with him. In 1915, they both came back to England during Mr Balfour's leave. But Mrs Balfour
had developed rheumatic arthritis. Her doctor advised her to stay in England. As Mr Balfour's boat
was about to set sail, he promised her £30 a month until she came back to Ceylon. Later, Mr
Balfour wrote saying it was better that they remain apart. Mrs Balfour sued him to keep up with
the monthly £30 payments.

Held: As the agreement involved a family arrangement, no intention to create legal relations
between the parties.

b) in commercial arrangements – presumption is that legal relationships are intended

• 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

4. CONSIDERATION
• as a general rule, an agreement without consideration is void – section 26, Contracts Act
• definition of ‘consideration’ – see section 2(d), Contracts Act

Consideration need NOT be adequate

• an agreement is not void merely because the consideration is inadequate – Explanation
2, section 26. The agreement is a contract notwithstanding the inadequacy of the
consideration.
• for the application of the rule – see Illustration (f) section 26
• the court did not concern on adequacy of consideration or whether the consideration is
harsh, unjust or one sided.

Phang Swee Kim v Beh I Hock [1960] AC 87

Facts: the respondent's solicitor notified the appellant that she had trespassed on the said land
value $20,000 and claimed for vacant possession and 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, the appellant contended that there was an oral agreement made between her and
the respondent in which the respondent agreed to transfer the land to her on payment of $500 in
1958.

Held: on appeal the Federal Court held that by virtue of explanation 2 to Section 26 of Contracts
Act 1950, there was adequate consideration as being no evidence of misrepresentation or fraud.
The appellant was therefore entitled to the declaration sought by her.

Provision of Consideration
• consideration may move from a person who is not the promisee. It may move from ‘the
promisee or any other person’ – section 2(d)

Past Consideration is Good Consideration

• English law does not recognize past consideration
 • exceptions to this rule – an act originally done at the request of the promisor, a promise
made subsequent to the doing of that act, was deemed binding since the act constituted
consideration.
• definition of the word ‘consideration’ in section 2(d) appears extensive enough to cover
the aforementioned rule
• an agreement made without consideration is void unless it is a promise to compensate a
person who has already voluntarily done something for the promisor – section 26(b)

Natural Love and Affection is Valid Consideration

• English law does not recognize natural love and affection as valid consideration
• natural love and affection are valid consideration if certain prerequisites are complied with
– Contracts Act 1950 in Malaysia
• an agreement made on account of natural love and affection would be held to be binding
in Malaysia if the requirements of section 26(a) are present:
– It is expressed in writing
– It is registered (if applicable)
– The parties stand in a near relation to each other

Accord and Satisfaction – Part Payment may Discharge an Obligation

• section 64 is wide enough to cover all the exceptions to the general rule under English
law. Indeed, it goes further to provide that the promisee may do away with the promise
completely – see Illustration (b) of section 64

Kerpa Singh v Bariam Singh [1966] 1 MLJ 38

Facts: Bariam Singh owed $8,869.94 under a judgment debt. Bariam Singh’s son wrote to Kerpa
Singh offering $4000/- in full settlement of his father’s debt and endorsed a cheque for the amount.
He stipulated that should Kerpa Singh refuse to accept, he must return the cheque. Kerpa Singh’s
legal advisers, having cashed the cheque and retain the money.

Held: the acceptance of the cheque from the debtor’s son in full satisfaction precluded them from
claiming the balance.

Consideration Need Not Move from the Promisee

• a party to an agreement can enforce the promise even if he himself has no given no
consideration as long as somebody else has done so – section 2(d)

Venkata Chinnaya v Verikatara Ma’ya [1881] 1 LR 4

Facts: a sister agreed to pay an annuity of Rs653 to her brothers who provided no consideration
for the promise. But 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 pay the annuity and
was sued by her brothers.

Held: she was liable to pay the annuity. There was good consideration for the promise even
though it did not move from her brothers.

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, Bobby agrees to sell to Mary a hundred crates of toys without specifying
what kind they are, such agreement is void on the grounds of uncertainty.

Karuppan Chetty v Suah Thian [1916] FM SLR 300

Held: The requirements of certainty was not met when the parties agreed upon the granting of a
lease at RM35 per month for as long as he likes.

6. CAPACITY
• refers to the ability of the parties to a contract to fully understand its terms and obligations
• 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 – section 11

Mohori Bibee v Dharmodas Ghose [1903] 1 LR 30

Facts: The plaintiff, Dharmodas Ghose, while he was a minor, mortgaged his property in favor of
the defendant, Brahmo Dutt, who was a money lender to secure a loan of Rs. 20,000. At the time
of transaction, the attorney of the defendant was fully aware that the plaintiff was incompetent to
contract. Dharmodas paid only Rs. 8000 and refused to return rest of the money. With his mother
as next friend, Dharmodas commenced an action against Brahmo Dutt, stating that at the time of
contract he was a minor, so the contract is void and he is not bound to return the money.

Held: Unless the parties are competent to contract, no agreement is contract and hence, is not
enforceable by law and is void. Since minor is not competent to contract, every such agreement
entered into by a minor is void ab initio.

• the age of majority is eighteen years – Age of Majority Act 1971

• exceptions to the rule that contracts by minors are void:
1. Contracts for necessaries
2. Contracts of scholarship
3. Contracts of insurance

• ‘necessaries’ are things which are essential to the existence and reasonable comfort of
the infant, e.g. food and clothing, shelter, and education
• a scholarship agreement is valid if granted by the Federal or State Government
• anyone between the age of ten and sixteen may enter into a contract of insurance with
written consent of his parents/guardian
• Besides being of the age of majority, a person is competent to contract if he is mentally
sound. A person is of unsound mind if he is a mental patient.
• Must be no legal disqualification against him such as in the case of an enemy alien.