Table of Contents

Course Guide Course Assignment Guide Topic 1 xi - xxi xxv – xxix 1 2 4 4 5 7 7 11 11 13 16 17 18 18 20 21 24 24 26 27 29 30 33 33 34 35 36 41 45 45 45 Law of Contract (Proposal and Acceptance) 1.1 Definition of Contract and Elements of a Valid Contract 1.2 Proposal or Offer 1.2.1 To Whom Can the Proposal be Made? 1.2.2 The Difference between a Proposal and an Invitation to Treat 1.2.3 Proposal must be Clear and Communicated 1.2.4 Revocation of Proposal 1.3 Acceptance 1.3.1 Acceptance must be Absolute and Unqualified 1.3.2 Acceptance must be Communicated 1.3.3 Revocation of Acceptance Summary Key Terms References Law of Contract (Consideration) 2.1 Executory, Executed and Past Consideration 2.2 Exceptions to the Rule of Consideration 2.2.1 Agreement Made on Account of Natural Love and Affection 2.2.2 Agreement to Compensate a Past Voluntary Act 2.2.3 Agreement to Pay a Statute-Barred Debt 2.3 Must Consideration Move From the Promisee? 2.4 Adequacy of Consideration Summary Key Terms References Law of Contract (Intention to Create Legal Relations) 3.1 Domestic, Family and Social Agreements 3.2 Business or Commercial Agreements Summary Key Terms References

Topic 2

Topic 3

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Topic 4

Law of Contract (Capacity to Contract) 4.1 Minors 4.1.1 Valid Contracts (Exceptions to Minors) 4.2 Person of Sound Mind Summary Key Terms References Law of Contract (Free Consent to Contract) 5.1 Coercion 5.1.1 Effect of Coercion 5.2 Undue Influence 5.2.1 Real or Apparent Authority 5.2.2 A Fiduciary Relation 5.2.3 Mental Capacity is Temporarily or Permanently Affected by Reason of Age, Illness, or Mental; or Bodily Distress 5.2.4 Burden of Proof 5.2.5 Effect of Undue Influence 5.3 Fraud 5.3.1 Effect of Fraud 5.4 Misrepresentation 5.4.1 Effect of Misrepresentation 5.5 Mistakes 5.5.1 Mistake of Fact 5.5.2 Mistake of Law 5.5.3 Mistake as To Document 5.5.4 Effect of Mistake Summary Key Terms References Law of Contract (Void and Illegal Contract) 6.1 Contracts Forbidden by Law and If Permitted, Defeat the Law 6.2 Fraudulent Contracts 6.3 Contracts Injurious to Person or Property of Another 6.4 Contracts Immoral or Against Public Policy 6.5 Other Void Contracts 6.5.1 Contracts in Restraint of Trade 6.5.2 Contracts in Restraint of Legal Proceedings 6.5.3 Effect of Contracts under Section 28 And 29 6.6 Consequences of Illegality

47 48 49 54 57 57 58 59 60 61 62 62 63 64

Topic 5

64 66 68 70 71 72 74 74 76 76 77 80 82 82 83 84 86 86 87 89 90 91 92 92

Topic 6

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Summary Key Terms References Topic 7 Law of Contract (Discharge of Contract And Remedies) 7.1 Discharge by Consent or Agreement Between Parties 7.1.1 Novation, Rescission and Alteration 7.1.2 Remission of Performance 7.2 Discharge by Performance 7.2.1 Time and Place of Performance 7.2.2 Performance of Reciprocal Promise 7.2.3 Performance by Third Party 7.3 Discharge by Impossibility 7.3.1 Effect of Frustration 7.4 Discharge by Breach 7.5 Remedies 7.5.1 Rescission of Contract 7.5.2 Damages 7.5.3 Specific Performance 7.5.4 Injunction 7.5.5 Quantum Meruit Summary Key Terms References Law of Agency (Part 1) 8.1 Capacity 8.2 Formation of Agency 8.2.1 Agency by Express Appointment 8.2.2 Agency by Implied Appointment 8.2.3 Agency by Ratification 8.2.4 Agency by Necessity 8.2.5 Agency by Estoppel or Holding Out 8.3 Authority of an Agent 8.3.1 Actual Authority 8.3.2 Apparent or Ostensible Authority Summary Key Terms References

96 96 96 98 99 99 100 101 102 105 105 106 108 109 111 111 112 114 117 118 118 120 121 123 124 124 125 125 127 129 130 131 131 132 135 135 135

Topic 8

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Topic 9

Law of Agency (Part II) 9.1 Duties of Agent to Principal 9.2 Duties of Principal to Agent 9.3 Effects of Contracts Made by Agents 9.3.1 A Named Principal 9.3.2 An Undisclosed Principal 9.4 Termination of Agency 9.4.1 Termination by the Act of the Parties 9.4.2 Termination by Operation of Law Summary Key Terms References Law of Partnership (Part I) 10.1 Definition of Partnership and its Characteristics 10.2 Formation of Partnership 10.2.1 Partnership under the Law 10.2.2 Lawful Purpose 10.2.3 Capacity 10.2.4 Partnership Agreement 10.2.5 Registration of Partnership 10.3 Relationship of Partners and Outsiders (Third Parties) 10.3.1 Partner's Authority to Bind the Firm 10.3.2 Liability of Partners Summary Key Terms References Law of Partnership (Part II) 11.1 Relationship between Partners 11.1.1 Mutual Rights and Duties of Partners 11.1.2 Obligations of Partners to Act in Utmost Good Faith 11.2 Incoming and Outgoing (Retiring) Partners 11.3 Assignment of Share 11.4 Partnership Property 11.5 Dissolution of Partnership 11.6 Partnership Accounts Settlement Summary Key Terms References

137 137 146 153 153 153 154 154 156 157 158 158 159 160 165 165 165 166 166 166 168 168 170 177 178 178 180 181 184 186 186 187 189 192 193 194 195 196

Topic 10

Topic 11

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Topic 12

Law of Sale of Goods (Part I) 12.1 Definition of Goods 12.2 Contract of Sale 12.3 Terms of Contract 12.4 Implied Terms 12.4.1 Title 12.4.2 Sale of Goods by Description 12.4.3 Fitness for Purpose and Merchantable Quality 12.4.4 Sale by Sample 12.5 Transfer of Property in the Goods and Risk 12.5.1 Effects of the Contract Summary Key Terms References Law of Sale of Goods (Part II) 13.1 Transfer of Title by Seller Who is not the Owner and Its Exceptions 13.1.1 Estoppel 13.1.2 Sale by a Merchantile Agent 13.1.3 Sale by One of Joint Owners 13.1.4 Sale under a Voidable Contract 13.1.5 Sale by a Seller in Possession after Sale 13.1.6 Sale by a Buyer in Possession after Sale 13.2 Performance of Contract 13.3 Remedies for Breach 13.3.1 Breach by the Buyer 13.3.2 Rights of Unpaid Seller against the Goods (SellerÊs Remedies) 13.3.3 Breach by the Seller and the BuyerÊs Remedies Summary Key Terms References Law of Hire-Purchase 14.1 Definition of Hire-purchase 14.2 Meaning of Goods under the Hire-purchase Act 1967 14.3 Formation of the Hire-purchase Agreement 14.3.1 Pre-contractual Obligations 14.3.2 Construction of a Hire-purchase Agreement 14.3.3 Post-contractual Obligations 14.4 Rights and Protections of Hirers 14.4.1 Implied Conditions

197 198 198 199 200 201 201 202 205 208 209 212 213 213 215 216 217 218 218 219 219 219 220 223 223 224 228 231 232 232 233 234 234 236 236 237 238 239 239

Topic 13

Topic 14

8 Insurance Summary Key Terms References 240 240 240 242 243 244 245 246 249 249 250 .7.6 Statutory Rights of the Hirer 14.4.2 Procedures during Repossession 14.5 Liability of Owner and Dealer for Misrepresentation 14.7 Repossession of Goods by the Owner 14.viii  TABLE OF CONTENTS 14.7.3 Procedures after Repossession (Rights of The Hirer after Repossession) 14.1 Procedures Prior To Repossession 14.2 Implied Warranties 14.7.

5. 6. Define the meaning of contract. 3. The Malaysian law of contract is governed by the Contracts Act 1950. you should be able to: 1. in particular the Contracts Act 1950 and relevant case-laws will be referred to in order to give us a clear understanding of the topic. However. the Act does not address all aspects of the law of contract. Describe the importance of communication in a proposal and an acceptance. Decisions of the courts in India may also be referred to since some of the provisions of the Indian Contracts Act are in pari materia with the Malaysian Contracts Act. the relevant provisions of the statute. and Discuss the principles relating to revocation of a proposal and an acceptance. However.Topic  1 Law of Contract (Proposal and Acceptance) LEARNING OUTCOMES By the end of this topic.  INTRODUCTION This topic introduces the law which governs the formation of contracts in Malaysia. Thus. 2. these can only be treated as guidelines or persuasive authority and will not bind the decisions of the courts in Malaysia. Differentiate between a proposal and an invitation to treat. reference may be made to English law by virtue of Section 5 of the Civil Law Act 1956. Identify the rules of acceptance and the exceptions. Throughout the discussion. Explain the important elements that constitute a valid contract. in absence of any provision relating to issues arising under the contract. . this will be regarded as a source of reference only. 4. It is important to note that despite reference being made to English Law.

1). However. In other words. Figure 1. a contract is an agreement that binds the parties who enter into it and it can be enforced against one another (Refer to Figure 1. the following elements (Refer to Figure 1. an insurance contract. for example. and jointventure contracts. It can be a contract to sell and purchase land. etc.2) must exist: (a) (b) (c) (d) (e) (f) Proposal or Offer. containing the details of the terms and conditions agreed by the parties therein. .1 DEFINITION OF CONTRACT AND ELEMENTS OF A VALID CONTRACT Section 2(h) of the Contracts Act defines contract as an agreement enforceable by law. Intention to create legal relations. there are contracts which are considered as complex in nature. Acceptance. a social agreement or agreements between family members. selling and buying goods at the grocery shop or the market. The contracts are made orally or through implied actions of the parties. (This is also known as a „domestic agreement‰). These contracts are normally drafted and prepared in a written form.2  TOPIC 1 LAW OF CONTRACT (PROPOSAL AND ACCEPTANCE) 1. Consideration. and Free consent. for example. like contracts entered into by companies doing the business of selling houses and lands.1: A sample of a contract Most contracts take the form of simple contracts whereby there are no specific formalities involved in the contract formation. These agreements are not considered contracts because they are not intended to bind the parties in law. In order to form an agreement enforceable by law. a contract of leasing. Capacity to contract. not all agreements are contracts. However.

2: Elements of a valid contract Table 1. When you agree to accept the offer or proposal made by the other party who makes the proposal.1: Explanation on the Elements of a Contract Elements of contract Proposal or Offer Acceptance Proposer/Offeror Acceptor Consideration Intention to create legal relations Capacity to contract Free Consent Explanation When you signify your willingness to be bound by a contract with the other party. the contract must not be secured through fraud. Every party must enter into a contract with free consent. misrepresentation or mistake. . Every party to a contract must have the intention to create a legal relation. Every party to a contract must have the capacity to enter into a contract. A value to be paid for a promise made. coercion. undue influence.TOPIC 1 LAW OF CONTRACT (PROPOSAL AND ACCEPTANCE)  3 Figure 1. A person who accepts the offer. A person who makes the offer.

2 PROPOSAL OR OFFER What is a proposal or an offer? According to Section 2(a) of the Contracts Act 1950. with a view to obtain the assent of that other person to the act or the abstinenceÊ. Under the English law. In other words. as explained in Table 1. A proposal can also be made to the public. 1. 3.000. 4. There is a difference in the use of word under the Malaysian law and the English law though the meaning is similar.2.1 1.4  TOPIC 1 LAW OF CONTRACT (PROPOSAL AND ACCEPTANCE) SELF-CHECK 1.1 To Whom can a Proposal be Made? A proposal can be made to a specific or particular person and the proposal can be accepted by that person only. a proposal is said to exist Âwhen one person signifies to another. For example. The example of a proposal made to the public is illustrated in the case of: . whenever the terms of the proposal are agreed upon by the acceptor. A proposes B to sell his Perdana car at RM100. the acceptance can be made by any person who knows about the proposal and performs the obligations required by the proposer. AÊs proposal can only be accepted by B and not by other persons. the word proposal is used. a proposal is the readiness of the person who makes the offer to create a legal relation and to be bound by the law. 2. How do you distinguish between a social agreement and a contract? What are the important elements to form a valid contract? What are the advantages of having a contract in written form? Give two examples of standard forms of contract that are available in Malaysia. 1. the term offer is used while under the Malaysian Contracts Act.1. his willingness to do or to abstain from doing anything. In such situation.

Held: The Court rejected the argument and held that the advertisement was an offer to the whole world. She then sued for £100 as promised in the advertisements. the contract was formed at the payment counter. used the ball as advertised. In short. auctions and display of goods on the shelves in shops. A relevant case to explain the above principle is the case of: . The display of goods on the shelves in shops is also an invitation to treat and not a proposal by the shopkeeper. the parties will hold some negotiations. The acceptance takes place when the seller accepts the payment from the buyer. Regent Street „to show our sincerity in the matter‰. The proposal is made by the buyers when the buyers take the goods from the shelves and bring it to the counter for payment. The defendants were proprietors of a medical preparation called „The Carbolic Smoke Ball‰. for instance. The negotiation is an invitation to call for a proposal. and was attacked by influenza during the course of treatment.2 The Difference between a Proposal and an Invitation to Treat Usually. before a proposal is made.TOPIC 1 LAW OF CONTRACT (PROPOSAL AND ACCEPTANCE)  5 Carlill v. 1. Carbolic Smoke Ball Co Ltd (1893) 1 QB 256. a lady.000 at the Alliance Bank. They added that they had deposited £1. They inserted advertisements in various newspapers in which they offered to pay £100 to any person who contracted influenza after using the ball three times a day for two weeks. There are many examples of invitation to treat. It was not an attempt to contract with the whole world but with the portion of the public who came forward and performed the condition in the advertisement. The claimant.2. it was possible to make an offer of this kind and there was a binding contract made between Mrs Carlill and the defendants. Thus. The defendants tried to avoid liability by saying that there was no offer made because the offer was too vague and not sure to whom it was made.

In an auction. the defendants (shop owners) had not made an unlawful sale. The proposal to bid at a certain price will come from the bidders and the auctioneer will accept or reject the proposal. the auctioneer will accept the highest bid or proposal from the bidders. such advertisement is not an invitation to treat but a proposal by the advertiser. However. In this case. For example. Hence. In the case of Coelho v. The Public Services Commission [1964] MLJ 12. advertisement for jobs in the newspapers. anyone who comes to perform the terms as required in the advertisement is said to have accepted the proposal. An advertisement is also an invitation to treat by the advertiser. the question arises whether a sale had occurred in the self-service shop when the customer selected articles which he desired to purchase and placed them in the wire basket. You may refer to the above case of Carlill which affirms the rule that the advertisement was an offer to the whole world and the company had the intention to contract with the section of the public who came forward and performed the condition in the advertisement. Boots Cash Chemist (Southern) Ltd (1953) 1 QB 401. . the High Court ruled that the newspaper advertisement was an invitation for qualified persons to apply and the applications were treated as offers. Every sale of the drugs on the Poison List was supervised at the cash desk by a qualified pharmacist. Usually. if the advertisement shows the willingness of the advertiser to do or to abstain from doing something. The defendants were charged under the Pharmacy and Poison Act 1933 (UK) which provided that it was unlawful to sell certain poison unless such sale was supervised by a registered pharmacist. the contract of sale would be made at the cash desk when the cashier accepted the customerÊs offer to buy what the latter had chosen. Held: The Court held that the display of goods did not constitute an offer but only an invitation to treat. A proposal to buy was made when the customer placed the articles in the basket. By that principle. who had the authority to prevent customers from taking goods out of the shop if he thought fit. In this case. the auctioneer makes an invitation to bidders who come to the public auction to make a proposal.6  TOPIC 1 LAW OF CONTRACT (PROPOSAL AND ACCEPTANCE) Pharmaceutical Society of Great Britain v.

In an action to recover the reward. it must be clear and communicated. a person who gives any information cannot claim for a reward if he does not know about the reward being offered. she gave information leading to the conviction of Williams for the murder. a person cannot accept a proposal which he does not know exist. A proposal which is vague and uncertain may not lead to a binding contract. However. the Court held that she was entitled to the reward because she had seen the handbill and had given information. 1.4 Revocation of Proposal The proposer may revoke his proposal at any time before acceptance. Carwardine (1883) 5C&P 566. The relevant case to explain this principle is the case of: Williams v. Logically.3 Proposal Must be Clear and Communicated In the Contracts Act 1950.2.TOPIC 1 LAW OF CONTRACT (PROPOSAL AND ACCEPTANCE)  7 1. The defendant published a handbill with the promise that he would pay the sum of £20 to any person who would provide information leading to the discovery of the murderer of Walter Carwardine. In order to make the proposal effective. the jury found that the claimant was not induced to give the information by the reward offered. Section 4(1) provides that „the communication of a proposal is complete when the proposal comes to the knowledge of the person to whom it is made‰. „a proposal may be revoked at any time . Thus. but by motives of revenge. In the case of Ahmad Meah & Anor v. As she believed that she was going to die and to ease her conscience. an agreement to build „a suitable house‰ was held by the court as vague to constitute a binding contract. either orally or in written or through the implied action of the party. Under Section 5(1) of the Contracts Act 1950.2. The claimant in this case lived with Williams and was severely beaten by him. A proposal must also be communicated to the acceptor. Nacodah Merican (1890) 4 Ky 583. It can be communicated in any form.

if the acceptance is made by post or telegram.8  TOPIC 1 LAW OF CONTRACT (PROPOSAL AND ACCEPTANCE) before the communication of its acceptance is complete as against the proposer. One relevant case to illustrate the principle is the case of: . The question is: When is the communication of acceptance complete as against the proposer? If the acceptance is made through instantaneous mode of communication such as telephone. For example: A proposes. If the revocation of proposal is made by post. in such situation. the acceptance is complete as against the proposer at the time when the letter of acceptance is posted. A may revoke his proposal at any time before or at the moment when B posts his letter of acceptance. sent by post. to sell his house to B. fax or oral. But. the revocation of the proposal must be made by the proposer before the letter of acceptance is posted by the acceptor. but not afterwards‰. the acceptance is said to be communicated once it comes to the knowledge of the person to whom it is made. telex. but not afterwards. the revocation is only effective when it comes to the knowledge of the acceptor and not at the time when the letter of revocation is posted. Section 6 provides that a proposal is revoked: (a) When the proposer communicated the revocation of the proposal to the other party before its acceptance. Thus. B accepts the proposal by a letter sent by post. by a letter. Next.

. Tienhoven (1880) 5 C. 344 1 October: Defendant posted a letter of offer from Cardiff to the plaintiff in New York. 11 October: Plaintiff received the letter of offer posted on October 1 and sent acceptance by telegram the same day. the claimant left a letter of acceptance at the defendantÊs house but the letter was not delivered to the defendant. in the case of: Dickinson v Dodds (1876) 2 Ch D 468 The defendant offered to sell houses by letter stating: „This offer to be left over until Friday. 15 October: Plaintiff sent letter of acceptance. Berry (acting as the claimantÊs agent) handed the defendant a duplicate letter of acceptance. 9am. The court held that there was a contract between the parties because the revocation of the offer posted on 8 October was only effective on 20 October (when the plaintiff received it). there was no binding contract between the parties. It can be communicated by a third party who is acting on behalf of the proposer as an agent.TOPIC 1 LAW OF CONTRACT (PROPOSAL AND ACCEPTANCE)  9 Byrne v. BerryÊs communication indicated that Dodds (defendant) was no longer interested to sell the property to the claimant. On Friday morning. on Thursday. On Thursday evening. However. Therefore. the defendant had entered into a contract to sell the property to Allan. The revocation of proposal need not be communicated by the proposer. 8 October: Defendant posted a letter revoking the offer made on October 1. This was a good communication of DoddsÊs revocation of offer.P. at 7am. The court held that the defendant was free to revoke his offer at any time because there was no consideration given by the claimant for the promise. 20 October: Plaintiff received defendantÊs letter of revocation. Further. For example. The plaintiff had accepted the offer on 11 October (when he sent the telegram accepting the offer). Mr Berry informed the claimant that the defendant had been negotiating a sale of the property with Allan.D.‰ On Thursday afternoon. to keep the offer open.

Must the acceptor know about the proposal before he can accept it? 4. By the death or mental disorder of the proposer. then the proposal is revoked. An example of case to illustrate the principle is: Ramsgate Victoria Hotel Co. What are the grounds for revocation of a proposal? . For example. It is important that the acceptor knows about the fact of the death or mental disorder of the proposer. Can the proposer revoke his proposal? 5. If the applicant fails the test.2 1.Ch. The period between June and November was not reasonable. How do you distinguish between a proposal and an invitation to treat? 3.R. Montefiore (1866) L. then it is a good acceptance. The company did not reply until 23 November 1864.10  TOPIC 1 LAW OF CONTRACT (PROPOSAL AND ACCEPTANCE) (b) By the lapse of time prescribed in the proposal for its acceptance. If the acceptance is made without knowledge of the death or mental disorder of the proposer. 109 The defendant offered to take shares in the company by a letter dated 8 June 1864. v. (d) SELF-CHECK 1. If no time is prescribed. when it alloted shares to the defendant. by the lapse of a reasonable time. 1 Ex. (c) Where the acceptor fails to fulfil a condition precedent to acceptance. The defendant refused to take up the shares. When does the revocation of proposal become effective in cases of revocation made by post? 6. Held: The defendantÊs refusal was justified because the offer had lapsed due to the companyÊs delay in accepting the offer within a reasonable time. Can a proposal be made to the public at large? 2. an employer offers to employ an applicant on the condition that he passes certain tests.

1. the important rules on acceptance will be discussed below. With that acceptance.3. an acceptance does not exist but that act will amount to a counter-proposal. Tony. If the party varies or modifies the terms made in the proposal. then there is no acceptance because there is no positive act made by the acceptor.TOPIC 1 LAW OF CONTRACT (PROPOSAL AND ACCEPTANCE)  11 ACTIVITY 1. a binding contract is said to exist. a friend of Browny. an acceptance is an agreement by the acceptor to the terms contained in the proposal made by the proposer.1 Acceptance must be Absolute and Unqualified Section 7(a) of the Contracts Act 1950 provides that „an acceptance must be absolute and unqualified.‰ This means. found the Persian cat which he knew belonged to Browny. „when the person to whom the proposal is made signifies his assent thereto.3 ACCEPTANCE What is an acceptance? According to Section 2(b) of the Contracts Act 1950. Advise Tony. To determine whether an acceptance exists. becomes a promise. The case to illustrate the rule is the case of: .1 Discuss the following problem by applying the principle of law on proposal: Browny made an offer of RM1.‰ This means. the acceptance must be made on the same terms as provided in the proposal and there must not be any variation or modification. 1. Browny refused to pay. Tony came across the advertisement in Looking Times but when he went to see Browny to claim the reward. If the acceptor keeps silence or fails to respond or totally disregards the proposal. when accepted. When Tony returned the Persian cat to Browny. Browny was so excited that he forgot all about the offer he had made.000 in Looking Times to anyone who returned his Persian cat. It is important that there is a positive act of acceptance made by the acceptor. The next day. a proposal is said to be accepted: a proposal.

but the defendant refused to sell. In reply.000. An example is the case of: Lau Brothers & Co v. there is no question of an agreement. The court ruled that the counter-offer made by the plaintiff at the price of £950 constituted a rejection to the original proposal (which cannot be revived). Wrench (1840) 3 Beav. if the parties are still in the process of negotiation. Therefore. 334 The defendant offered to sell his estate to the plaintiff for £1.‰ This means.12  TOPIC 1 LAW OF CONTRACT (PROPOSAL AND ACCEPTANCE) Hyde v. The issue was whether there was a binding contract between the parties? The court held that the parties were still in a state of negotiations and the defendants had the right to withdraw from it. the defendants withdrew from the negotiations. The plaintiff then wrote again to the defendant. Another situation where a contract is not yet concluded is when there is a conditional acceptance. China Pacific Navigation Co. Ltd. no acceptance had occurred and the defendant had the right not to sell the estate to the plaintiff. It happens when the acceptance is qualified by the term „subject to a contract‰ or „subject to a formal contract being drawn up by the solicitors. The example of a case is: . through a series of telegrams and letters. the parties do not intend to conclude their bargain until they executed a formal contract. agreeing to accept the original proposal. Finally. Next. [1965] 1 MLJ 1 The parties in this case conducted negotiations for the delivery of logs. the plaintiff made a counter-proposal to purchase at £950 but the defendant refused to accept this proposal.

If not. then the proposer can insist on the mode of acceptance. 1. but if he fails to do so. then the reasonable manner to accept the offer is by B going to AÊs house to give his acceptance. within a reasonable time after the acceptance is communicated to him.‰ The principle provided in Section 7(b) means. he accepts the acceptance. .2 Acceptance must be Communicated In order to form a binding contract between the parties. who stays next door to A. If the proposal prescribes a manner in which it is to be accepted. (a) Act of acceptance In communicating the acceptance. it is not sufficient that the acceptor intends to accept the proposal without doing some positive act that relates to the proposal. For instance. and the acceptance is not made in such manner. insist that his proposal shall be accepted in the prescribed manner.3. Contracts Act 1950. The court decided that: there was no binding contract because the option to purchase was conditional and subject to „a formal contract to be drawn up and agreed upon‰ by the parties. But if the proposal specifies a particular mode of acceptance and the acceptor does not follow it. Thus. The proposer must act within reasonable time after the acceptance is communicated. then the proposer is said to have accepted the acceptance. The plaintiff then brought a legal action for breach of contract. The plaintiffsÊ agent exercised the option but the defendant failed to sign the sale agreement. if no method of acceptance is specified by the proposer. and not otherwise.TOPIC 1 LAW OF CONTRACT (PROPOSAL AND ACCEPTANCE)  13 Low Kar Yit & Ors v. unless the proposal prescribes a manner in which it is to be accepted. the manner may be usual but it is unreasonable since they are staying next door. the proposer may. Mohd Isa & Anor [1963] MLJ 165 The defendants gave an option to the plaintiffsÊ agent to purchase a parcel of land subject to a formal contract being drawn up and agreed upon by the parties. if A offers to sell his bicycle to B. the exercise of the option has no legal effect and it was an agreement to enter into an agreement. Section 7(b). If B wants to send a letter to accept AÊs offer. provides that „the acceptance may be expressed in some usual and reasonable manner. then the acceptance must be communicated and made in a usual and reasonable manner. the acceptance of the proposal must be communicated to the proposer.

‰ Paragraph (a) means. I consider the horse is mine at that price. offering to buy a horse for £30. However. The court held that there was no contract between the plaintiff and the defendant because the defendant had never communicated his acceptance to the plaintiff. Silence is no acceptance.75p and added as follows: „If I hear no more about him.‰ The defendant did not reply. As what happened in the case of: Felthouse v. and (b) as against the acceptor. the letter does not reach the proposer or delay in transit). A case to illustrate this principle is: . then the act of silence cannot constitute an acceptance. as follows:  Acceptance through post (Postal Rule) If the parties have agreed to use the post as a means of communication. even though the proposer does not know about the acceptance (for instance. Bindley (1862) 11 CB (NS) 869 The plaintiff wrote to the defendant. the proposer is bound to perform his obligation. so as to be out of the power of the acceptor. if the acceptor remains silence after being proposed. when it is put in a course of transmission to him. Contracts Act 1950 provides that: „The communication of an acceptance is complete: (a) as against the proposer. even though it never reaches the proposer. then the acceptance is complete or effective as soon as the acceptor posted his letter of acceptance. when the acceptor posts his letter of acceptance. (b) Exceptions It is clear that the general rule requires the communication of acceptance and this means the acceptance must be brought to the notice of the proposer.14  TOPIC 1 LAW OF CONTRACT (PROPOSAL AND ACCEPTANCE) Thus. there are certain exceptions to the general rule. when it comes to the knowledge of the proposer. Section 4(2) (a).

Section 8 of the Contracts Act 1950 provides that „performance of the conditions of a proposal is an acceptance of the proposal‰. The court applying Section 4. it becomes an acceptance. Thus. a proposal to the public at large). The defendant made a proposal to sell his piece of land to the plaintiff and the option to purchase must be exercised on or before the 20 August 1912. The plaintiff sent his acceptance by registered post on 16 August 1912 but it was not delivered to the defendant till 25 August 1912. if A proposes to sell his car to B (by letter) and B accepts the proposal (also by letter). For example. It also means that in the meantime. it will be unreasonable for every person who wants to accept the proposal to inform the proposer of his intention to accept. A case example is: . Paragraph (b) means. the proposer may clearly state in his proposal that any acceptance is deemed completed only upon receipt. the acceptor need not communicate his acceptance to the proposer because when the proposer performs the conditions provided in the proposal. held that: Communication of acceptance was complete when the notice of acceptance was posted on 16 August 1912. performance is sufficient to constitute an acceptance if that is the intention of the proposer. the acceptor may still withdraw his acceptance.e. The situation is that where a proposer advertises to the public at large that a reward is being offered. For instance.TOPIC 1 LAW OF CONTRACT (PROPOSAL AND ACCEPTANCE)  15 Ignatius v. A is bound at the time when B posts his letter of acceptance. when the acceptor posts his letter of acceptance. he is not bound to perform his obligation until his letter of acceptance is received by the proposer. but B himself is not bound until A receives the letter of acceptance. Bell (1913) 2 FMSLR 115 P a r a g r a p h The parties in this case agreed to use the post as a means of communication. In some cases. the acceptance need not be communicated to the proposer.. If the proposer wishes to exclude the postal rule. he may provide protection for himself. even though the defendant did not know about the acceptance.  Acceptance through performance of an act stated in the proposal. In a unilateral contract (i.

B may revoke his acceptance at any time (before or at the time when) his letter of acceptance reaches A SELF-CHECK 1. This means the acceptor may still withdraw his acceptance. but not afterwards. (Explanation: Mr Carlill need not inform the company that he accepted its offer. Contracts Act 1950. when is the communication of acceptance deemed completed as against the proposer? Can the performance of an act stipulated in the proposal amount to an acceptance? When can the acceptor withdraw his acceptance? What do you understand by the „postal rule‰ principle? .3 1. he is not bound to perform his obligation until his letter of acceptance is received by the proposer. to sell his house to B. 6.‰ For example: A proposes (by a letter sent by post). 1. 2. 5.16  TOPIC 1 LAW OF CONTRACT (PROPOSAL AND ACCEPTANCE) Carlill v. What is the importance of an acceptance in a contract and what is the effect of a counter-proposal? How can the acceptor communicate his acceptance to the proposer? In an acceptance made by post. [1893] 1 QB 256 The Court held that the performance was sufficient to constitute acceptance if that was the intention of the proposer. According to Section 5(2). 4. By using the product as advertised and meeting all the terms of the offer. Carbolic Smoke Ball Co. when the acceptor posts his letter of acceptance. he is said to have accepted the offer). B accepts the proposal (by letter sent by post). „an acceptance may be revoked at any time before the communication of the acceptance is complete as against the acceptor.3 Revocation of Acceptance As explained earlier.3. 3.

even if the letter of acceptance never reaches the proposer.45am on 8 September. . Advise Adam. An acceptance must be made on the same terms as provided in the proposal without any variation or modification. accepting the proposal. It is an offer to make an offer.000.2 Discuss the following cases by applying the principle of law on acceptance: (a) On Friday 5 September. Since the telex operator had gone home for the weekend. Meanwhile. Revocation of proposal made by post is only effective when the acceptor receives the letter of revocation of a proposal. In postal rule.000. Hanna sent a telex to Adam withdrawing her proposal. Advise T. Hanna sent a telex to Adam offering to buy his piano at RM3. An invitation to treat is not yet a proposal or an offer. T advertised his speed-boat in a newspaper for RM4. T replied by return of post stating that he would accept RM3.500.TOPIC 1 LAW OF CONTRACT (PROPOSAL AND ACCEPTANCE)  17 ACTIVITY 1. A proposal can be made to an individual person or to the public at large. Having received no reply from S.500.750. (b)          Every contract is an agreement but not all agreements are contracts. S wrote back offering to buy the speed-boat for RM3. HannaÊs telex reached Adam and was read by him immediately at 8. 8 September. The telex was received by Adam at 4pm. The letter reached Hanna at 1. T wrote again saying he would accept his offer at RM3. A proposal must come to the knowledge of the acceptor before he can accept it. the acceptance is effective upon the posting of the letter by the acceptor.30am on 8 September. Adam posted a letter in the last post on Friday. at 8. An acceptance must be communicated to the proposer and made in usual and reasonable manner.30pm on Monday. A proposal may be revoked at any time before acceptance. Adam sought after your advice.

The Commercial Law of Malaysia (2nd ed. Felthouse v. Ltd.). Low Kar Yit & Ors. 334. Ltd. Bhd. v. Carbolic Smoke Ball Co. Bindley (1862) 11 CB (NS) 869.P. Wrench (1840) 3 Beav. (1893) 1 QB 256. M. (2006). (2007). Smith and KeenanÊs Law for Business (13th ed. Ignatius v. The acceptor may revoke his acceptance before his letter of acceptance reaches the proposer.). Isa & Anor [1963] MLJ 165. performance of the act stated in the proposal constitutes an acceptance of the proposal. Mohd. The Public Services Commission [1964] MLJ 12. Nacodah Merican (1890) 4 KY 583. . v. Tienhoven (1880) 5C. v. Acceptance Communication Counter-proposal Invitation to treat Performance Proposal Postal Rule Revocation Text Books: Harlina Mohamed On & Rozanah Ab. Coelho v. Hyde v. B. Carlill v. Selangor: Kumpulan Usahawan Muslim Sdn. Dodds (1876) 2 Ch 468. Dickinson v. 344. UK: Pearson and Longman. Keenan. Undang-Undang Perniagaan Malaysia. Selangor: Pearson and Longman. Wu. & Vohrah. Bell (1913) 2 FMSLR 115. Byrne v.D. Rahman. D. (2000). China Pacific Navigation Co. A. Cases:           Ahmad Meah & Anor. Lau Brothers & Co.18  TOPIC 1 LAW OF CONTRACT (PROPOSAL AND ACCEPTANCE)   In unilateral contract. [1965] 1 MLJ 1.

TOPIC 1 LAW OF CONTRACT (PROPOSAL AND ACCEPTANCE)  19    Pharmaceutical Society of Great Britain v. . 1 Ex. Williams v.Ch. Montefiore (1866) L. Ramsgate Victoria Hotel Co.R. 109. (1953) 1 QB 401. Carwardine (1883) 5C&P 566. Boots Cash Chemist (Southern) Ltd. v.

Explain the importance of consideration in contracts. the person accepting the proposal):    Has done or abstained from doing. .e. 4. you should be able to: 1. something.Topic  2 Law of Contract (Consideration) LEARNING OUTCOMES By the end of this topic. or does or abstains from doing. the promisee or any other person has done or abstained from doing. or promises to do or to abstain from doing. or Does or abstains from doing. Discuss the principle relating to the adequacy of consideration.‰ It means. at the desire of the promisor.  INTRODUCTION Consideration is another important element of a contract and any agreement made without consideration is a void agreement.. such act or abstinence or promise is called a consideration of the promise. if the promisee (i. List the exceptions available to the rule of consideration. „when. 2. Section 26 of the Contracts Act 1950 provides that „an agreement made without consideration is void‰. or Promises to do or to abstain from doing. According to Section 2(d) of the Contracts Act 1950. and Compare the difference in principle of consideration under the Malaysian law and the English law. 3.

000 is the consideration for your promise to sell the fax machine and your promise to sell the fax machine is the consideration for BÊs promise to pay RM2. Take an example where you lose your mobile phone while travelling on a train and you offered a RM100 reward to anyone who found and returned the mobile phone to you. The case of Osman bin Abdul Ghani & Ors v.1 EXECUTORY. and (iii) past consideration. C finds and returns the watch to you in response to the offer.000. . executed. CÊs consideration for your promise is executed. Here. you promised to pay RM100 and A paid the price for your promise by performing the act. Only your liability remains outstanding which is to pay C the RM100 reward.1 demonstrates the difference between these two considerations. consideration may be executed when one promise is made in return for the performance of an act. Next. BÊs promise to pay RM2.1) agree to sell a fax machine to B for RM2. 2. where the court held that forbearance to sue could amount to a valid consideration. United Asian Bank Bhd [1987] 1 MLJ 27 on consideration. For instance. Thus. These are lawful considerations. In such case. Therefore. Promises which form the consideration for each other are called reciprocal promise. Later. consideration is a price that you pay to buy a promise or an act of the other person. For example. Figure 2. that act or abstinence or promise is called „consideration‰. the act of returning the mobile phone to you is the consideration for the promise.TOPIC 2 LAW OF CONTRACT (CONSIDERATION)  21 some acts according to the promisorÊs (person making the proposal) desire.000. you (refer to Figure 2. you advertise a reward of RM100 to anyone who finds and returns your lost watch. and every promise and sets of promises forming the consideration for each other is an agreement. A found and returned the mobile phone to you. EXECUTED AND PAST CONSIDERATION Consideration can be classified as: (i) (ii) executory. Consideration may be executory when one promise is made in return for another promise.

it is valid if it is done „at the desire of the promisor. Under English law. under the Malaysian Contracts Act 1950.22  TOPIC 2 LAW OF CONTRACT (CONSIDERATION) Figure 2. D found and returned your lost chain and in gratitude. past consideration is sufficient to support a promise because Section 2(d) and Section 26 (b) apply to past consideration. that act is regarded as past consideration. you promised to reward D RM100. the position in Malaysia is that. The words „has done or abstained from doing‰ referred to an act which has been performed before the promise is made. past consideration will not support a claim in contract because the act which was performed before the promise of reward was made is regarded as gratuitous. Your promise to reward D is made in return for DÊs consideration that has passed. Thus. even though the consideration is past.‰ . For example. However.1: Executory and Executed Considerations Apart from the executory and executed considerations. if a promise is made in return for an act that has already been performed.

the company agreed to pay him one per cent of the value of all ore sold from the mining land.E. Jagatheesan & Ors v. were sufficient to constitute a valid consideration. SELF-CHECK 2. a consulting engineer. even though they were past. This was „in consideration of the services rendered by Schmidt on behalf of the company before its formation.. A. Schmidt & Marjorie Schmidt [1968] 1 MLJ 170 Schmidt. He also helped in the formation of the company (Kepong Prospecting Ltd) and was appointed the Managing Director.1 1. Subsequently. after incorporation and for future services. whether the services rendered by Schmidt after the incorporation of the company but before the agreement was made. had assisted another in obtaining a prospecting permit for mining iron ore in the state of Johore..K.. an issue arose in this case. Schmidt entered into an agreement with the company. The Privy Council held that it was a valid consideration and Schmidt was entitled to claim the amount.‰ Later. executory and past consideration? Can past consideration support a claim in contract? . 2. In the agreement.TOPIC 2 LAW OF CONTRACT (CONSIDERATION)  23 The Malaysian case which applied the principle of past consideration is the case of: Kepong Prospecting Ltd & S. What are the differences between executed.

IntanÊs house caught fire and Berlian could only save IntanÊs wedding album.1 Discuss the following problem by applying the principle of law on consideration: Intan and Berlian were neighbours. Advise Berlian. The exceptions include the following: 2. When Intan returned home. Intan had to go abroad for business arrangements.24  TOPIC 2 LAW OF CONTRACT (CONSIDERATION) ACTIVITY 2. With these exceptions. „Please look after my house. and is made on account of natural love and affection between parties standing in a near relation to each other‰.‰ After four weeks of Intan being away. 2. Before she left. Now Intan refused to pay what she has promised. the agreement is still valid and will be enforceable. .1 Agreement made on account of Natural Love and Affection This exception is provided in Section 26(a) of the Contracts Act 1950. The rule provides that any agreement which is made without consideration is still valid if „it is expressed in writing and registered under the law (if any) for the time being in force for the registration of such documents. she told Berlian.2 EXCEPTIONS TO THE RULE OF CONSIDERATION The general rule of consideration under Section 26 of the Contracts Act 1950 provides that an agreement without consideration is void. even though the agreement is made without consideration.2. there are exceptions to this general rule. she thanked Berlian for saving her wedding album which she treasured so much and promised Berlian that she would pay RM100 for what Berlian had done. However.

the uncles and aunties of the adoptive mother did not stand in near relation to their nephews and nieces. Under the exception. there is a phrase „near relation‰ that is attached to the position of the parties in the agreement. The court granted that: Chinese adopted children are related to the adoptive parents and brothers. The issues to be resolved in this case were whether:   An agreement was made on account of natural love and affection. but a case example in which an attempt was made to define the term is the case of: Re Tan Soh Sim [1951] MLJ 21 In this case. For example: A.000. The agreement was void.TOPIC 2 LAW OF CONTRACT (CONSIDERATION)  25 This means the agreement that is not supported by any consideration is valid if it fulfils the following conditions: (a) (b) (c) The agreement is made in writing. B. and Three sisters and seven half-sisters and brothers stood in near relationship to their adopted nephews and nieces. A puts his promise to B into writing and registers it under a law for the time being in force for the registration of such documents. RMl. and The agreement is made on account of natural love and affection between the parties standing in near relation to each other. there was an agreement made between members of a Chinese family governed by their personal laws. there was no natural love and affection between the signatories and the donees. The deceased Tan Soh Sim (in her illness) had made a wish that her estate should be divided among her two adopted sons and two adopted daughters. The legal next-of-kin drew up an agreement renouncing all rights in favour of the four adopted children (who were their nephews and nieces). In such a case. but they were not nearly related to the family of their adoptive mother. . Thus. promises to give his son. What is meant by „near relation‰? It is not defined in the Act. This is a contract. The agreement is registered under the existing law which requires its registration. for natural love and affection.

depending on the ethnic groups and their customs. a person who has already voluntarily done something for the promisor.‰ It means. The rule provides that an agreement without consideration is valid if „it is a promise to compensate. this exception covers the principle of past consideration which has been explained above. Similarly. 2. For example: A supports B's infant son. what signifies „near relation‰ may be different for every social group. B promises to pay A's expenses in doing so. if the promisee has done some act (an act which the promisor is compellable to do in law. Section 26(b) covers an act which has been done voluntarily by the promisee (before the promise to compensate the promisee is made by the promisor). Thus. then that promise is enforceable. for example.2.2 Agreement to Compensate a Past Voluntary Act This is the exception provided in Section 26(b) of the Contracts Act 1950. This is because the personal law relating to family matters is applicable to the groups. the court must be satisfied that the parties who enter into the agreement must stand in near relation to each other besides having natural love and affection. for the promisor (without being requested by the promisor) and subsequently the promisor promises to compensate the promisee for such act.26  TOPIC 2 LAW OF CONTRACT (CONSIDERATION) Therefore. paying tax to the government) voluntarily on his own will for the promisor. wholly or in part. if the promisee has done some act voluntarily on his own will. or something which the promisor was legally compellable to do. the promise made by the promisor to compensate the act is also enforceable. in order to enforce the agreement made on account of natural love and affection. Similar to Section 2(d). The term „near relation‰ is not defined in the Act. This is a contract and A can enforce BÊs promise. What is meant by „voluntarily‰ is not defined in the Act but a case example that considered the term is the case of: . If Section 2(d) covers an act which has been done at the request of the promisor.

in order to enforce the promise made for past consideration under Section 26(b). or by his agent generally or specially authorised in that behalf. 2. unless it falls under Section 26(b). The question was whether the plaintiff had already „voluntarily‰ done something for the defendant. there were arrangements between a Malaysian and an English firm.3 Agreement to Pay a Statute-barred Debt This is another exception provided in Section 26(c) of the Contracts Act 1950. a person who has already voluntarily done something for the promisor‰. a commission would be paid to the Malaysian firm. Therefore. made in writing and signed by the person to be charged therewith. Thus. The dispute that arose in this case was that after the Malaysian firm arranged a buyer for confectionery and the English firm found a seller. wholly or in part.‰ What it means under this exception is that. the promisor is liable to pay a previous debt (which the creditor cannot recover through legal action because the time within which the creditor must commence legal action is limited by statute) if the following conditions arise: .2. the promises cannot be legally enforceable. Therefore. who would then find the sellers.M.TOPIC 2 LAW OF CONTRACT (CONSIDERATION)  27 J. the promisee must have acted voluntarily for the promisor in that particular action. The court found that: there were promises of compensation made by the defendant firm to the plaintiff. but these promises were not supported by consideration. the promise made by the defendant firm to compensate the plaintiff was not enforceable. Henry Agency House [1962] MLJ 86 In this case. „a promise to compensate. It was found that the plaintiff had acted on the suggestion of the defendant. things went wrong. The English firm then sued the Malaysian firm for the loss it suffered because of non-payment by the buyer. The arrangements were that the Malaysian firm would find buyers and inform the English firm. The rule provides that an agreement without consideration is valid if „it is a promise. Wotherspoon & Co Ltd v. so that the action could not be said to have been done voluntarily. When a sale had been arranged. to pay wholly or in part a debt of which the creditor might have enforced payment but for the law for the limitation of suits.

This is a contract. the promise to pay a statute-barred debt under this exception will form a new cause of action although without consideration. The six years run from the time the cause of action arises (usually from the time of the breach of contract by the contracting party). and the fresh promise is valid.M.2 1. A signs a written promise to pay B RM500 on account of the debt. The Limitation Act provides six years as the time limit for any party to take legal action in contract. This is provided in Section 26(2) of the Limitation Act 1953. 3. but the debt is barred by limitation. Wotherspoon & Co Ltd v. 2. 4. Therefore. Henry Agency House [1962] MLJ 86? What are the important conditions required in an agreement to pay a statute-barred debt? . SELF-CHECK 2. What is meant by a statute-barred debt? It is a debt which cannot be recovered because the time allowed to a party to enforce his legal rights is limited by the Limitation Act 1953. and The promise is made in writing and signed by the person to be charged or his authorised agent.28  TOPIC 2 LAW OF CONTRACT (CONSIDERATION)   The debtor makes a fresh promise to pay the statute-barred debt.000. What is the general rule of consideration? Is there any exception available to the general rule of consideration? What was the decision of the court in the case of J. For example: A owes B RM1.

000 in return for BainiÊs act. he takes no part in the contract.2 Discuss the following problems by applying the principle of law on the exception to consideration: (a) Mr Ajay was a successful business man. it is important to know from whom the consideration can come. Several weeks passed and there was no sign of Azrai giving Baini the reward. the promisee can enforce . left for his hometown in haste as his mother passed away.TOPIC 2 LAW OF CONTRACT (CONSIDERATION)  29 ACTIVITY 2. Azrai. Azrai promised to give Baini a reward in the sum of RM1. the secretary of the bank manager. he promises his eldest son. Suresh. a fire broke out at the bank. Suresh requested from Mr Ajay the possession of the bungalow for him to start his matrimonial life. One day. This means. a bank manager.3 MUST CONSIDERATION MOVE FROM THE PROMISEE? After understanding the general rule of consideration and the exceptions. The idea is that. Baini came to see Azrai for the reward but Azrai refused to pay her on the basis that it was BainiÊs duty as his secretary to do so. Mr Ajay was reluctant to accept Salwath as his daughter-in-law and refused to give Suresh the bungalow. consideration must move from the promisee. Mr Ajay made his promise in writing and registered it. when Suresh married Salwath. A few years later. Baini. Must the consideration come from the promisee only or can the consideration come from some other persons (who is not the party in the contract)? The principle relating to who should furnish a consideration is different in the Malaysian Contracts Act and the common law of England. However. dashed into the room and took the briefcase with her. Under common law. saw the briefcase and realising that the briefcase was important to her boss. Unfortunately. the person who gets the promise must personally give something in return as the consideration for the promise. He left his briefcase containing important documents on his table. that he wishes to transfer one of his bungalows to Suresh to show how much he loved him. Under the Malaysian Contracts Act. Advise Baini. (b) 2. Advise Suresh. if a person furnishes no consideration. Azrai reported back to work the subsequent week and felt so relieved that the briefcase was not destroyed in the fire.

B can claim the amount of RM1.30  TOPIC 2 LAW OF CONTRACT (CONSIDERATION) the promise even though he personally does not give any consideration. he can still claim for the promise if the consideration is given by some other persons. even though the promisee does not give any consideration for a promise made by the promisor. there was a valid consideration that was given by their mother.. „an agreement to which the consent of the promisor is freely given is not void merely because the consideration is inadequate. The case was about a sister who agreed to pay an annuity of Rs 653 to her brothers who provided no consideration for the promise. As soon as C completes the work (paints AÊs house).. The authority for this principle is in Section 2(d) of the Contracts Act which provides the words „any other person‰.. Later. Even though the consideration did not move from the brothers..L. 2. 137...000 when C paints AÊs house.the promisee or Âany other personÊ has done or abstained from doing. This is because the consideration has moved from C.. Such consideration can come from some other persons. in the following part of the provision: „.. The court ruled that: The sister was liable to pay the brothers. On the same day.. their mother gave the sister some land with the requirement that the sister must pay the annuity to her brothers.‰. For example: A promises to pay B RM1. the sister failed to fulfil her promise to pay the annuity and her brothers sued her on the promise. Contracts Act 1950....‰ What is meant by the provision is that.4 ADEQUACY OF CONSIDERATION Another important principle is the adequacy of consideration. A case to illustrate this principle is: Venkata Chinnaya v. Therefore..000 for only RM100 to Mr Man? Is the amount of RM100 sufficient as consideration for your promise? According to Explanation 2 of Section 26.R. 4 Mad. VerikataraÊmaÊya (1881) I.. The question is: must consideration be adequate? Can you sell your house worth RM100. the .000 from A although B does not personally give any consideration for AÊs promise...

000 for RMl0. A case to illustrate this principle is: Phang Swee Kim v. A's consent to the agreement was freely given. the land was worth much more than the price.000 to Mr Man for only RM100.but the inadequacy of the consideration may be taken into account by the court in determining the question whether the consent of the promisor was freely given‰. „. Subsequently.. this agreement is a contract. The trial judge in the case held that the agreement was void because of inadequacy of consideration. Beh I Hock [1964] MLJ 383. For example: A agrees to sell a horse worth RM1. Thus.000 for RMl0. on appeal. A denies that consent to the agreement was freely given. The consideration given for the promise need not be adequate as long as the agreement has been entered into by the parties with free consent.. misrepresentation. This case involved the respondent who agreed to transfer a parcel of land to the appellant on payment of $500 when the land was subdivided. This clause means the court will consider the adequacy of consideration. oppression.TOPIC 2 LAW OF CONTRACT (CONSIDERATION)  31 adequacy of consideration is immaterial. the Federal Court reversed the decision and applied the principle in Explanation 2 of Section 26. Free consent means the parties do not enter into such contract under fraud. At that time. if you agree to sell your house that worth RM100. the respondent refused to honour the promise and claimed that the promise was unenforceable. However. Explanation 2 of Section 26 further reads. The agreement is a contract notwithstanding the inadequacy of the consideration.. . to sell at that price. The inadequacy of the consideration is a fact which the court should take into account in considering whether or not A's consent was freely given. etc. provided that your consent to sell at that amount is freely given. However.. For example: A agrees to sell a horse worth RMl. You are not under fraud or oppression.. only when the issue of free consent is raised by the contracting party. weakness of understanding or ignorance. suppression of the value of property.. urgent necessity for money.

M managed to complete the said improvement work within two weeks. as she decided to clear the stock of that model (SE101). Upon completion of the work. 2. He promised to pay K double the usual payment charged by other contractors for that purpose and the arrangement was agreed to by K. Can the promisee enforce the promise made by the promisor if the consideration is given by some other persons? Would the principle on the above situation (para (a) above) be the same under the English common law? What is meant by adequacy of consideration? Why is the free consent of the promisor important in considering the adequacy of consideration? ACTIVITY 2. Zaitun changed her mind and told Hana that she had wrongly decided to sell the apparatus at that price. a local trader in the town offered Hana a sale of a slimming apparatus which is worth RM10. K sent his nephew. Zaitun. who decided to make a home improvement to his cottage. Advise Hana as regards the validity of the contract. On the day of collection. Hana agreed to buy the apparatus and to collect it from ZaitunÊs office. SELF-CHECK 2. the agreement to transfer the land to the appellant for the $500 payment was valid and the promise was enforceable because the consent was freely given by the respondent although the consideration was inadequate. to start the work. M. 4. 3.3 1. However. K came to see Mr J for the payment. Advise K whether he could claim for the payment from Mr J. (b) . The next day.32  TOPIC 2 LAW OF CONTRACT (CONSIDERATION) Hence.000. Mr J refused to pay K because he got to know that it was M who had performed the work and not K.3 Discuss the following problems by referring to the relevant principle of law on consideration: (a) Mr J. had requested K to paint his cottage and to build up certain fences around the cottage.000 in the market for only RM1.

before the promise to compensate the act is made by the promisor. An agreement made on account of natural love and affection is valid without consideration if it is made in writing. The exception under Section 26(b) of the Contracts Act 1950 requires the promisee to have done an act voluntarily. in writing.      Adequate consideration Executed consideration Executory consideration Free consent Past consideration Promisee Promisor Voluntary act . provided the debtor makes a fresh promise to pay.TOPIC 2 LAW OF CONTRACT (CONSIDERATION)  33     An agreement made without consideration is a void agreement. it is known as executory consideration. An agreement to pay a statute-barred debt is valid without consideration. Consideration need not be adequate so long as the promisor has freely given his consent to the agreement. When one promise is made in return for another promise. registered under the law (if any) and made between parties standing in near relation. Past consideration is valid under the Malaysian Contracts Act 1950 but not under English common law. Executed consideration is when one promise is made in return for the performance of an act. and signed by him or his authorised agent. Consideration can move from the promisee or any other person under the Malaysian Contracts Act 1950.

Wu. VerikataraÊmaÊya (1881) I. Re Tan Soh Sim [1951] MLJ 21. v. Kepong Prospecting Ltd. Beh I Hock [1964] MLJ 383. Cases:        J. A. (2007). D. Venkata Chinnaya v. United Asian Bank Bhd [1987] 1 MLJ 27. 137. (2000). Osman bin Abdul Ghani & Ors v. Bhd. The Commercial Law of Malaysia (2nd ed.M.L. UK: Pearson and Longman. Braithwait (1615) 80 ER 255.E. Selangor: Pearson and Longman. Rahman. Ltd. 4 Mad.). Henry Agency House [1962] MLJ 86. . A.).34  TOPIC 2 LAW OF CONTRACT (CONSIDERATION) Text Books: Harlina Mohamed On & Rozanah Ab. & Vohrah. Phang Swee Kim v.Wotherspoon & Co. Jagatheesan & Ors v.K. (2006). & S. Undang-Undang Perniagaan Malaysia. Keenan. B. M. Lampleigh v. Selangor: Kumpulan Usahawan Muslim Sdn. Smith and KeenanÊs Law for Business (13th ed.R. Schmidt & Marjorie Schmidt [1968] 1 MLJ 170.

Analyse the situations in which the presumption of intention is rebuttable. Explain the importance of intention to create legal relations in an agreement. However. 3. The provisions which may imply to the element of intention is the word „with a view‰ used in Section 2(a).  INTRODUCTION Any agreement made between the parties (the proposer and the acceptor) will only become a binding contract if both parties intend to make the contract enforceable. The element of intention has not been defined in the Contracts Act 1950 and there is no provision in the Act which clearly provides the element of intention as one of the elements to form a valid contract. and the word „at the desire‰ used in Section 2(d) of the Act. 2. Discuss the presumption of intention in domestic. the principles in the English common law will apply in the absence of such provision . 4.Topic  3 Law of Contract (Intention to Create Legal Relations) LEARNING OUTCOMES By the end of this topic. you should be able to: 1. and Compare the presumption of intention in business or commercial agreements. family and social agreements.

For example.1 DOMESTIC. where a husband and wife were living together but not in amity or were separated when the agreement was made. FAMILY AND SOCIAL AGREEMENTS In domestic. the presumption made is that the parties in the contract do not intend for their agreement to create legal relations. However. The English case which established the principle is the case of: Balfour v. if the presumption can be rebutted on the evidence that there was a serious intent. there is a presumption of no intention to create legal relations. The husband failed to make the payment and the wife sued him. the husband was employed in a government post in Ceylon. in this case they never intended to make a bargain which could be enforced in law. Balfour [1919] 2 K. there was no enforceable contract between the parties. 3. The following case illustrates the situation: . then a different situation will appear.36  TOPIC 3 LAW OF CONTRACT (INTENTION TO CREATE LEGAL RELATIONS) under the Contracts Act 1950. but she was unable to go back to Ceylon with him for medical reasons. 571 In the case. the parties to the agreement do not contemplate any legal consequence to arise from their agreement. This means. It is because this type of agreement is made every day between the family and social members and between spouses for many arrangements. and Business Agreements. Therefore. Family and Social Agreements. Thus.B. the court may enforce the agreement. He returned with his wife to England on leave. the law has divided an agreement into two categories: (a) (b) Domestic. He consequently promised orally to make her an allowance of £30 a month until she rejoined him. family and social agreements. in the above case that involved husband and wife. The Court held that although it was not impossible for a husband and wife to enter into a contract for maintenance. In determining whether there is an intention by the parties to create a legally binding contract. that no parties would intend to go to court for breach of such arrangements and promises made.

i.e. a meeting was held between the husband and the wife after the husband had left her to live with another woman. Furthermore. The following cases illustrate the situations in which the court presumed that legal relations were intended. The Court held that: The agreement which was made when the parties were not living together in amity was enforceable. The husbandÊs defence was that the agreement was a family arrangement and there was no intention to create legal relations. She then claimed ownership of the property and asked for an order that her husband should transfer the house to her. . The above case shows that the presumption that no intention is present in ordinary domestic or social arrangement may be rebutted if there is a proof of the true intention of the parties which may be inferred from the language they use and the circumstances in which they use it. Merritt [1970] 2 All ER 760 In this case. the wife was entitled to the relief claimed. there were other cases which involved other family and personal relationships. Apart from the cases involving husband and wife. payment of the mortgage balance was a detriment to the wife and the husband has received the benefit of being relieved of liability to the building society. the financier.TOPIC 3 LAW OF CONTRACT (INTENTION TO CREATE LEGAL RELATIONS)  37 Merritt v. the husband would transfer the matrimonial home to the wife as a sole owner.. The wife paid off the mortgage but the husband did not subsequently transfer the property to her. The husband agreed to pay the wife £40 per month for maintenance and wrote and signed a document agreeing that if the wife paid all charges in connection with their matrimonial home until the mortgage repayments had been settled. Therefore.

a forecast by the granddaughter was correct and the defendant received a prize of £750. the parties expected to share any prize that was won. The defendants then repudiated the agreement by requiring the plaintiffs to find somewhere else to live. the male defendant would leave them a portion of his estate in his will. Example of cases are as follows: .L. Pays [1955] 3 All ER 10 The defendant and the defendantÊs granddaughter in this case made an agreement with the claimant that they submitted a weekly coupon in the defendantÊs name to a Sunday newspaper fashion competition. The Court held that: There was an intention to create legal relations. On one occasion. agreed with the plaintiffs (who were twenty years younger) that if the plaintiffs would sell their cottage and come to live with the defendants and share household expenses. then the agreement will not be enforced because the uncertainty may lead to the conclusion that there is no intention to create legal relations. The evidence showed that it was not merely a friendly domestic arrangement but a joint enterprise. it is important that the words used by the parties are certain. Since the true intention of the parties may be inferred from the language they use. Thus. an elderly couple. But difficulties developed between the two couples. Parker v. 286 The defendants in this case. The Court held that: The circumstances indicated that the parties intended to affect their legal relations and thus the defendants were liable. Clark [1960] 1 W.R. The defence given by the defendant was that there was no intention to create legal relations but that the transaction was a friendly arrangement binding in honour only. As a result of this. The claimant sued for her share of that sum. It was argued by the defendants that the agreement amounted to no more than a family arrangement. The plaintiffs sold their cottage and moved in with the defendants. If the words are uncertain. the plaintiffs claimed damages for breach of contract. The coupon contained a forecast by each of them.38  TOPIC 3 LAW OF CONTRACT (INTENTION TO CREATE LEGAL RELATIONS) Simpkins v.

There was an uncertainty as to the utilisation of the surplus of the rent income and the room that Mrs Padavatton would occupy. It was still uncertain what was to happen to the surplus of the rent income and what rooms Mrs Padavatton was to occupy. Mrs Padavatton came to England (bringing her child with her) in November 1962 and began to read for the Bar. the agreements were too vague and uncertain to be enforceable as contracts. The income from the rents would go to the daughter in lieu of the maintenance. . In this case. there was no written agreement. Mrs Padavatton counter-claimed for £1. the daughter could not claim anything in respect of that agreement. Furthermore.655 18s 9d (the amount she had paid for running the house). Jones v. Gould [1969] 3 All ER 728. Later. Her fees and maintenance were paid for by Mrs Jones. The agreement was an informal one and there was uncertainty as to its exact terms. Padavatton [1969] 2 All ER 616 Mrs Jones (the claimant) made an offer to her daughter. Again. Mrs Jones offered to buy a large house in London to be occupied by the daughter and partly by tenants. the mother was entitled to possession of the house and had no liability under the maintenance agreement. Thus. Held by the court: The arrangements were family agreements depending upon the good faith of the parties in keeping promise made and not intended to be rigid binding agreements. The arrangements in relation to the home were very vague and must be regarded as made without contractual intent. Although the agreement to maintain while reading for the Bar might be regarded as creating a legal obligation in the mother to pay.TOPIC 3 LAW OF CONTRACT (INTENTION TO CREATE LEGAL RELATIONS)  39 Gould v. However. In January 1965. a contractual intention was negatived when a husband (who was leaving his wife) undertook to pay her £15 per week „so long as I can manage it‰. Mrs Jones claimed possession of the house from Mrs Padavatton. Mrs Padavatton moved into the house and the tenants also arrived. In 1967. The word „so long as I can manage it‰ in the case of Gould was considered as uncertain and does not create an intention to enter into a legally binding contract. Mrs Padavatton (the defendant) that she would provide the daughter a maintenance at the rate of £42 a month if she leave her job in Washington and go to England and read for the Bar.

Viv and Valerie do not know much about fashion and give Victoria RM7. Viv and Valerie are very happy to know about the news and want to claim their share. 5. family and social agreement? In relation to question (b) above. the vagueness of the arrangement with Mrs Jones had negatived that intent. Viv. Valerie and Victoria. Lately. 2. Victoria now refuses to share. Mr Alan promised Mrs Alan that if he got a new business offer.40  TOPIC 3 LAW OF CONTRACT (INTENTION TO CREATE LEGAL RELATIONS) In PadavattonÊs case. they quarrelled over the week because Mr Alan was very busy with his business trips and had no time for a vacation with Mrs Alan. although there seemed to be an assumption that there was a contractual intent in the motherÊs promise because it caused Mrs Padavatton to leave her job to study law. Mr and Mrs Alan are husband and wife. Victoria fills in and sends off the contest forms every week and she always fills the forms in her own name. SELF-CHECK 3.00 each week. Explain whether she will succeed in her claim. is this presumption rebuttable? How? What was the principle established by the court in the case of Merritt v. How does the law determine the existence of an intention in any agreement between two parties? What is the presumption on intention to create legal relations in a domestic. Mr Alan was offered a new business contract and Mrs Alan wanted to enforce the promise made by her husband. (b) . 3. Mrs Alan had expressed her intention to go back to her hometown if the situation remained the same. 4.1 1. After a series of argument. he would take Mrs Alan to Neverland for a vacation. After one month. agree to form a syndicate for the purpose of making a weekly entry in a fashion contest in a local newspaper.1 Discuss the following problems by applying the principle of law on intention to create legal relations: (a) Three sisters. Advise Viv and Valerie. Mrs Alan was very happy and gave up her intention to go back to her hometown. Merritt [1970] 2 All ER 760? Must the words used by the parties in their agreement be certain and unambiguous? Why? ACTIVITY 3. one of the entries that Victoria sent won a RM10.000 prize. Two months later.

This means the parties to the agreement contemplate a legal consequence to arise from their arrangements. the airline had to make payments because the agreement was enforceable.or be legally enforceable . The following cases illustrate this point: Jones v.. but . Therefore. it is not necessary that there is an intention to create legal relations just because the parties are in business.. However. VernonÊs Pools Ltd [1938] 2 All ER 626 The claimant in this case had sent a successful football coupon to the defendants but the defendants denied receiving it and relied on a clause printed on every coupon.. the defendants who had promised to make an ex-gratia payment to the employees contended that they were not bound to fulfil their obligation. binding in honour only‰.. The parties to a business transaction may state that they do not intend to enter into any legal obligation. . In such case...2 BUSINESS OR COMMERCIAL AGREEMENTS In business or commercial agreements.. The Court held that: This clause was a bar to any action in a court of law.TOPIC 3 LAW OF CONTRACT (INTENTION TO CREATE LEGAL RELATIONS)  41 3. The presumption is a strong one and can be seen in the judgment of: Edwards v... the presumption made is that the parties in the contract have the intention to create legal relations. the Court held that: the use of the words „ex gratia‰ with regards to an airline pilotÊs contractual redundancy payment did not alter the presumption.. The clause provided that the transaction should not „give rise to any legal relationship.. Skyways Ltd [1964] 1 All ER 494 In this case. the court will then treat their promises as binding in honour only. However.

.. The case to explain this is the case of: Winn v. It is however important to note that most business agreements are to be regarded as binding in the absence of the „Honorouble Pledge Clause‰ or anything similar to this. Such agreement gives rise to no legal liability. either party is free to re-negotiate or even to withdraw from their arrangements. but „subject to the preparation and approval of a formal contract‰. the agreement between the claimant and the defendants contained an „Honourable Pledge Clause‰ as follows: „This arrangement is not entered into nor is this memorandum written as a formal or legal agreement and shall not be subject to legal jurisdiction in the courts of the United States of America or England. Up to this time. In this case. Bull (1877) 7 ChD 29 A written agreement was drawn up whereby the defendant agreed to take a lease of a house for a definite period and at a fixed rent. The Court held that: There was no contract. .‰. the insertion of the words „subject to contract‰ renders the agreement to be unenforceable. because such clauses are relatively rare in the business world. It means a binding contract will come into existence only when a subsequent formal contract is entered into by the parties. Therefore. there are various other clauses used in business agreements that negate contractual intention.. Crompton (JR) & Brothers Ltd [1925] AC 445. The most common is the use of the words „subject to contract‰ or „subject to formal contract‰. The Court held that: The agreement was not binding on the parties. Apart from the above.42  TOPIC 3 LAW OF CONTRACT (INTENTION TO CREATE LEGAL RELATIONS) Rose and Frank Co v.

no contractual obligation arose from the pro forma itself until a further document was agreed and signed. The Lordships held that: The appellants were bound by the pro forma and could not argue that it did not create an obligation to purchase and sell the property. the Privy Council had rejected a „subject to contract‰ issue in a case involving a booking pro forma signed by the purchaser to purchase a house to be built by a housing developer. In most instances like the above cases. The respondent did not agree and applied to the court for specific performance. Isa & Anor. After the payment of a deposit was made and the pro forma was signed. The Court held that: The option was conditional upon and subject to a formal contract to be drawn up and agreed upon between the parties. The appellant argued that the pro forma was „subject to contract‰. the appellants informed the respondent that the price of the house was to be increased. Thus. Mathew Lui Chin Teck & Anor [1981] 1 MLJ 56 The purchaser (respondent) signed a booking pro forma for the purchase of a house to be built by the housing developer (appellants). . the use of the words „subject to contract‰ infers that there is no intention by the parties to create legal relations. The plaintiffs brought an action for specific performance or (alternatively) damages for breach of contract. The case is: Daiman Development Sdn Bhd v. However. the plaintiffsÊ agent exercised the option but the defendant failed to sign the agreement for sale.TOPIC 3 LAW OF CONTRACT (INTENTION TO CREATE LEGAL RELATIONS)  43 The decision in the case of Winn v. [1963] MLJ 165 The defendant in this case gave an option to the plaintiffsÊ agent to buy a parcel of land subject to „a formal contract to be drawn up and agreed upon by the parties‰. Subsequently. The argument was rejected by the court. Thus. Bull was cited in: Low Kar Yit & Ors v. Mohd. the exercise of the option amounted to nothing more than an agreement to enter into an agreement.

44  TOPIC 3 LAW OF CONTRACT (INTENTION TO CREATE LEGAL RELATIONS) Note: The provision as to booking pro forma has been abolished and under the current provisions of the Housing Development (Control and Licensing) Act 1966. ACTIVITY 3. It is binding in honour only‰. Bigwood.24 for football matches played on 11 July and one of the coupons was a winning coupon entitling him to RM174. Each coupon drew a fee of RM3.2 Discuss the following case by applying the principle of law on the intention to create legal relations: On 10 July 2002.2 1. however. 2. .000. SELF-CHECK 3. What is the presumption on intention to create legal relations in a business or commercial agreement? Is there any reason for the parties of a business transaction to say that they do not have the intention to be bound by their arrangements? How does the clause „subject to contract‰ render the agreement to be unenforceable? 3. Decide whether there was a binding contract between Mr Ferrera and Bigwood Pools Ltd. Bigwood also relied on a clause printed on each coupon which stated that: „The following transaction should not give rise to any legal relationship or legally enforceable. refused to pay and denied that they had ever received the winning coupon. it is an offence to collect any money from a purchaser as a booking pro forma. Mr Ferrera claimed to have submitted two football pool coupons to Bigwood Pools Ltd.

(2006). In business or commercial agreements. the parties are presumed to not have any intention to create legal relations. Wu M.). G. (2000). Selangor: Pearson and Longman.).TOPIC 3 LAW OF CONTRACT (INTENTION TO CREATE LEGAL RELATIONS)  45       An agreement without an intention to create legal relations does not bind the parties to the agreement. Selangor: Kumpulan Usahawan Muslim Sdn. Keenan. the parties are presumed to have the intention to create legal relations. B. Harlina Mohamed On & Rozanah Ab. In domestic. family and social agreements. & Vohrah.). The presumption of no intention may be rebutted if there is a proof of true intention of the parties. A. Smith and KeenanÊs Law for Business (13th ed. . Bhd. D. AnsonÊs Law of Contract (26th ed. Business agreement Certainty Domestic agreement Family agreement Intention to create legal relations Presumption Rebuttable presumption Social agreement Text Books: Guest. (1988). UK: Pearson and Longman. Rahman. Uncertainty of words in an agreement may render the agreement unenforceable. Undang-Undang Perniagaan Malaysia. Singapore: Oxford University Press. Various clauses used in business or commercial agreements have the effect that negate the contractual intention. The Commercial Law of Malaysia (2nd ed. (2007). A.

Pays [1955] 3 All ER 10. v. Padavatton [1969] 2 All ER 616. Mathew Lui Chin Teck & Anor [1981] 1 MLJ 56. Parker v. Gould [1969] 3 All ER 728. [1963] MLJ 165.L. v. Low Kar Yit & Ors.R. Jones v. Merritt [1970] 2 All ER 760. Balfour [1919] 2 K. Daiman Development Sdn Bhd v. Skyways Ltd [1964] 1 All ER 494. Isa & Anor.B. 286. Gould v. Jones v. Merritt v. Edwards v. Clark [1960] 1 W. Bull (1877) 7 ChD 29. Winn v. Crompton (JR) & Brothers Ltd [1925] AC 445. . VernonÊs Pools Ltd [1938] 2 All ER 626.46  TOPIC 3 LAW OF CONTRACT (INTENTION TO CREATE LEGAL RELATIONS) Cases:             Balfour v. Simpkins v. 571. Rose and Frank Co. Mohd.

you should be able to: 1.Topic  4 Law of Contract (Capacity to Contract) LEARNING OUTCOMES By the end of this topic. cannot make a valid contract (Refer to Figure 4). 3. and who is of sound mind. Explain the importance of mental capacity for purposes of contract. This is provided by Section 11 of the Contracts Act 1950 whereby „every person is competent to contract who is of the age of majority according to the law to which he is subject. This means the person who has not reached the age of majority. 4. 2. Describe the types of contract validly entered into by a minor. and Discuss the status of contract made by a person of unsound mind. Examine the effect of a minor contract. or is of unsound mind. . it is paramount that the person who enters into the contract must have the full capacity in terms of age and mind.  INTRODUCTION In forming a valid contract. Explain the importance of contractual capacity of a minor to contract. 5. and is not disqualified from contracting by any law to which he is subject‰.

the general rule is that all contracts entered into by a minor are void.L. The authority was derived from the following Indian case of: Mohori Bibee v.1 MINORS A minor or an infant is a person who is below the age of majority. the age of majority is 18 years. 30 Cal. The Privy Council held that: the combined effects of Sections 10 and 11 of the Indian Contracts Act (which is similar to the same sections of the local Act) rendered the contracts void.R.1: Persons who cannot make valid contract 4. . With regards to the minorÊs contractual capacity. Figure 4. 539. Dhurmodas Ghose (1903) I. Under the Age of Majority Act 1971.48  TOPIC 4 LAW OF CONTRACT (CAPACITY TO CONTRACT) The following discussion will also look into the status of a contract entered into by a minor and person of unsound mind.

Malaysian Contracts Act) does not apply to a minor contract. „any person who has received any advantage under the agreement or contract is bound to restore it. Later. The transfers were witnessed and registered. Teh Boon Keat [1934] MLJ 96.1. Section 65 of the Indian Contracts Act (similar to Section 66. under Section 66 of the Contracts Act 1950.1 Valid Contracts (Exceptions to Minors) There are certain exceptions available to contracts entered into by a minor. It includes those exceptions under the: . The plaintiff in this case was an infant. the Privy Council in Mohori BibeeÊs case decided that a party who is a minor cannot be compelled to repay any monies that he has received in the contract. 4. The infant executed transfers of land in favour of the defendant. In the case of Tan Hee Juan. The Court ruled that the transactions were void and ordered the restoration of the property to the minor. whereas in a case involving a minor. the contract never exists from the beginning. It applies to a contract between competent parties. However. However. or to make compensation for it. to the person from whom he received it‰. Normally.TOPIC 4 LAW OF CONTRACT (CAPACITY TO CONTRACT)  49 The local case that applied the decision in the Mohori BibeeÊs case was the case of: Tan Hee Juan v. the court refused to order the minor to refund the purchase price paid by the defendant. when the court made an order declaring the transfers void. the plaintiff applied to the court for an order to set aside the transfers and for incidental relief. Thus. when a contract is void. the plaintiff (minor) had received the purchase price for the transfers of land to the defendant.

The above provision shows that minors can enter into contracts of promise of marriage and the contracts are valid. An example of a case where a minor entered into a valid contract of promise of marriage is the case of: . minors can also make a valid contract depending on the statute that provides the age of majority for particular purposes. Exceptions under the Age of Majority Act 1971 The Age of Majority Act provides exceptions to the general rule that minor contracts are void. and any other written law fixing the age of majority). divorce. divorce. dower and adoption. The religion and religious rites and usages of any class of persons within Malaysia. Apart from marriage contracts. religion and religious rites and usages of any class of persons within Malaysia. dower. the age for voting is 21 years and the age of a young person to join a trade union is above 16. The Contracts Act 1950 (contract for necessaries). The exceptions include: (i) (ii) The capacity of any person to act in matters relating to marriage. adoption.. The Contracts (Amendment) Act 1976 (contract of scholarships).50  TOPIC 4 LAW OF CONTRACT (CAPACITY TO CONTRACT) Exceptions to Minors  The Age of Majority Act 1971 (including matters relating to marriage. etc. and    (a) (iii) Any other written law fixing the age of majority. The Insurance Act 1963 (Revised 1972) (contract of insurance). For example.

Later. . Balakrishnan & Ors. is supplied by another person with necessaries suited to his condition in life. and they went through a customary ceremony. incapable of entering into a contract. the person who has furnished such supplies is entitled to be reimbursed from the property of such incapable person‰. The above principles will therefore apply to contract for necessaries entered into by a minor. In the above case. The minor is not personally liable and this means he is liable to pay only if he has the property to do so. (1958) 3 MC 178. According to Section 69 of the Contracts Act 1950. The defendant pleaded that the first plaintiff had no capacity to enter into the marriage contract because she was a minor. It is important to observe the principles in Section 69 as follows:     The necessaries have been supplied to a minor.TOPIC 4 LAW OF CONTRACT (CAPACITY TO CONTRACT)  51 Rajeswary & Anor. They entered into a marriage agreement according to customary practice that provides for a dowry and a penalty for breach. the first defendant repudiated the promise of marriage and the plaintiffs then brought an action for breach of promise of marriage. v. The High Court held that: the age of majority for entering into a marriage contract differed from other minor contracts and were not affected by the general principle established in the Mohori BibeeÊs case. the contract was a valid contract and enforceable although the party to the contract was a minor. food. For example. The contract will be valid if the minor has been supplied with articles which are considered as necessary to the minorÊs actual requirements and suited to the minorÊs condition in life. „if a person. (b) Contract for Necessaries Contract for necessaries is another exception to the general rule. The minor is also liable for necessaries supplied to his dependants (wife and children). The parties in this case were Ceylonese Hindus. A minor who enters into a contract for necessaries is liable for the contract. or anyone whom he is legally bound to support. The supplier of necessaries may only claim for reimbursement (a reasonable price).

medical services.500 were awarded. but a dispute arose between the parties and the defendant refused to go. The Contracts Act 1950 does not define the word „necessaries‰ but the concept has been mentioned by the Lordship in the case of Government of Malaysia v. being the sum spent by the Government for the minorÊs education. a leading professional. such as clothing. The claimant then sued for damages of £6.683 because the minor has served the Government for three years and ten months out of the contractual period of five years. a diamond tiara). the claimant could continue the action for damages for breach of contract. the minor was liable for the repayment of a reasonable sum spent on him. The Court held that: The contract was void but since education was „necessaries‰. Damages of £1. the first defendant was a minor. The claimant went to some trouble in order to organise the tour. and are not merely things of luxury (e. by holding that education was „necessaries‰ for the minors. At the time when the contract was made. then they are basically necessaries. and education.g. clothing. to go on a joint tour.52  TOPIC 4 LAW OF CONTRACT (CAPACITY TO CONTRACT) shelter. The Court held that: The contract was for the minorÊs benefit. However. if the minor is well supplied with the particular articles. The Government sued the first defendant (the minor) and the second and third defendants (the sureties) for breach of contract. The amount ordered as payment to the Government was RM2. In Government of Malaysia v. The amount of claim was RM11.000. Thus.500. Gurcharan Singh & Ors [1971] 1 MLJ 211. then they will no longer be . An example of a contract for the minorÊs benefit is the case of: Roberts v. As far as goods or services are concerned. if the goods or services have a utility value. The defendant in this case wished to become a professional billiards player and entered into an agreement with the claimant. Gray [1913] 1 KB 520. Gurcharan Singh & Ors [1971] 1 MLJ 211.

being an architect with a town and country house. The burden to prove that the goods supplied are necessaries for the minor is on the supplier or the seller. The rule relating to scholarship agreements is provided in the Contracts (Amendment) Act 1976. However. The clothes included 11 fancy waistcoats. and it could be said that the clothes supplied were suitable to the defendantÊs position in life. the father proved that the defendant was adequately supplied with such clothes when the claimant delivered the clothing. Loan. which are not of necessaries for the minor. Cambridge. The claimant then sued the minor for the price of the clothes. with respect to any:      Scholarship. . The claimant sent his agent to Cambridge because he had heard that the defendant was spending money freely. Sponsorship. There was evidence that the minorÊs father was in a good position. The above case shows that a minor will not be bound by a contract of goods supplied. Following the agentÊs visit.TOPIC 4 LAW OF CONTRACT (CAPACITY TO CONTRACT)  53 necessaries even though they are useful for the minor. As illustrated by the following case: Nash v. The „Scholarship Agreements‰ have been defined as any contract or agreement between an appropriate authority and any person. Section 4(a) provides that no scholarship agreements shall be invalidated on the grounds that the scholar entering into such agreement is not of the age of majority‰. Inman [1908] 2 KB 1 The claimant was a Savile Row tailor and the defendant was a minor undergraduate at Trinity College. and might be the sort of person who would be interested in high-class clothing. Award. It was held that: The claim failed because the claimant had not established that the goods supplied were necessaries. Bursary. the claimant supplied the defendant with various articles of clothing to the value of £145. (c) Contract of Scholarships Another exception to the minorÊs contract is the contract of scholarships.

Further. it is important that at the time of making the contract. „Appropriate authority‰ includes:     The Federal Government.. at the time when he makes it.. Section 153 of the Insurance Act 1963 (Revised 1972) provides that „a minor over the age of ten may enter into a contract of insurance but if he or she is under sixteen years. a person who is usually of sound mind. but occasionally of sound mind. (d) Contract of Insurance Contract of insurance also constitutes an exception to the minorÊs contract. . Section 11 is followed by Section 12(1) of the Contracts Act 1950 which provides that „a person is said to be of sound mind for the purpose of making a contract if. Conversely. may not make a contract when he is of unsound mind‰.2 PERSON OF SOUND MIND With regards to capacity to contract. The above rule. and is not disqualified from contracting by any law to which he is subject‰. and An educational institution. however. the contracting party must not suffer from mental disability. and Facility for the purpose of education or learning. A State Government. may make a contract during the period when he is sound. the written consent of the parents or guardians is essential‰. but occasionally of unsound mind. is not applicable to contract of scholarships between minors and private organisations. A statutory authority.54  TOPIC 4 LAW OF CONTRACT (CAPACITY TO CONTRACT)   Appointment to a course of study. Section 11 of the Contracts Act 1950 states that „every person is competent to contract. he is capable of understanding it and of forming a rational judgement as to its effect upon his interests‰. 4. Section 12(2) and (3) state that „a person who is usually of unsound mind.who is of sound mind.

cannot contract whilst such delirium or drunkenness lasts. Baxter (1873) LR 8 Exch 132. may contract during those intervals. Under English common law. when sober. he ratified and confirmed the contract. . Matthews agreed to buy houses from Baxter. Afterwards. He was so drunk as not to know what he was doing. who is delirious from fever. The Contracts Act 1950 does not state the status of contracts entered into by persons of unsound mind. Thus. or form a rational judgment as to its effect on his interest. and the other party knew this. or who is so drunk that he cannot understand the terms of a contract. as in the above case of Matthew. the drunken person can ratify contracts when sober.TOPIC 4 LAW OF CONTRACT (CAPACITY TO CONTRACT)  55 The examples of contracts covered under Section 12 can be seen in Illustrations (a) and (b) as follows: Illustration (b) A sane man. who is at intervals of sound mind. In Matthews v. Illustration (a) A patient in a mental hospital. It was held that both parties were bound by it. the contract is voidable if the fact of mental disorder or intoxication can be proven.

000 are ordered for Norman. 5. Alan failed to come up with the balance and Ismail wanted to claim the payment from Alan. 4. Alan. What is the legal effect of a contract entered into by a minor? Is there any exception to the above principle? What are the important principles laid down in Section 69 of the Contracts Act 1950? Can the contracting party sue a minor for damages under contract for necessaries? What is the effect of a contract entered into by a person who is of unsound mind? ACTIVITY 4. Roy is not happy either and brings an action for damages for breach of contract of RM20. At the same time. who was in need of money. 2. 3. Discuss the legal action that can be taken by Roy against Norman. Norman is given training on marketing the product.1 1.000.56  TOPIC 4 LAW OF CONTRACT (CAPACITY TO CONTRACT) SELF-CHECK 4. Later. An outlet is provided for Norman to carry out this task and goods worth RM10. had disposed the motorcycle to his other friend. Roy has difficulty supervising NormanÊs training and disagreement arises between them. Norman is not happy and decides to withdraw himself from the training. (b) .1 Discuss the following cases by applying the principles of law on capacity to contract: (a) Alan is a college university student. aged 17. enters into a contract of apprenticeship with Roy to become an enterpreneur in a health product. aged 17. For that purpose. Norman. Rani. Can Ismail succeed in his claim? Discuss. He had difficulty in coming to the college and decided to purchase a Modenas (the national motorcycle of Malaysia) from Ismail. After two weeks. Alan paid RM500 as deposit for the motorcycle and promised to pay the balance of the purchase price in two weeks time.

A person who is competent to contract includes a person who is of unsound mind. Marriage contract. A person may make a contract during the period when he is sound.TOPIC 4 LAW OF CONTRACT (CAPACITY TO CONTRACT)  57         Contracts made by minors are void. the supplier of necessaries may only claim a reasonable price from the minor. contract for necessaries. Capacity Insurance Minor Marriage contract Necessaries Reimbursement Scholarship Sound mind . A minor is only liable to pay from his property and is not personally liable. Contract for necessaries include contract to supply goods or services to the minors which suit their condition in life. However. contract of scholarship and contract of insurance constitute valid contracts for minors. The burden to prove that goods or services supplied are necessaries is on the supplier.

D. Inman [1908] 2 KB 1. Bhd. v. (2007). Wu M. A. & Vohrah. Teh Boon Keat [1934] MLJ 96.R. Selangor: Kumpulan Usahawan Muslim Sdn. Baxter (1873) LR 8 Exch 132. (1958) 3 MC 178. The Commercial Law of Malaysia (2nd ed. Undang-Undang Perniagaan Malaysia. Selangor: Pearson and Longman. Roberts v. .). Mohori Bibee v. Nash v.L.58  TOPIC 4 LAW OF CONTRACT (CAPACITY TO CONTRACT) Text Books: Harlina Mohamed On & Rozanah Ab. Dhurmodas Ghose (1903) I. Rahman. (2006). Rajeswary & Anor. 30 Cal. (2000). Keenan. 539. Smith and KeenanÊs Law for Business (13th ed.). Cases:        Government of Malaysia v. Tan Hee Juan v. Gray [1913] 1 KB 520. B. Gurcharan Singh & Ors [1971] 1 MLJ 211. UK: Pearson and Longman. Balakrishnan & Ors. Matthews v.

 INTRODUCTION Previous chapters have discussed the important elements to form a valid contract. misrepresentation and mistake.. Apart from the elements.‰. 3.T op i c  5 Law of Contract (Free Consent to Contract) LEARNING OUTCOMES By the end of this topic.. undue influence... Explain the circumstances under which a contract does not become voidable by reason of lack of free consent. 1950. and Discuss the principle on the burden of proof in contracts made without free consent. 2. There are various factors which can affect an agreement once it has been formed. free consent of the parties to enter into contract is also essential in determining the legality of the contract. 5. As provided by Section 10(1) of the Contracts Act 1950 that „all agreements are contracts if they are made by the free consent of parties competent to contract. fraud. Examine the effect of contracts made under coercion. Explain the importance of free consent to contract. „two or . you should be able to: 1. These factors which affect the true consent of one or both parties may release the party from contractual obligation. Describe the elements that affect the free consent of the contracting parties. Under Section 13 of the Contracts Act. 4.

22 and 23). to the prejudice of any person whatever. then he is said to have employed coercion. Fraud (Section 17). It means.1 COERCION Coercion under Section 15 of the Contracts Act 1950 means „the committing. it is „immaterial whether the Penal Code is or is not in force in the place where the coercion is employed‰. or threatening to commit any act forbidden by the Penal Code. if a person commits or threatens to commit any act forbidden under the Penal Code 1950 (the criminal law of the country) with the intention to make the other party enter into a contract with him. under Section 14. or Mistake (Section 21.1: Factors which affect consent 5.60  TOPIC 5 LAW OF CONTRACT (FREE CONSENT TO CONTRACT) more persons are said to consent when they agree upon the same thing in the same sense‰. Undue influence (Section 16). with the intention of causing any person to enter into an agreement‰. any property. According to Explanation to Section 15. What is meant by the explanation provision is illustrated below: . consent must be free and not caused by :      Coercion (Section 15). Figure 5. Therefore. Misrepresentation (Section 18). or the unlawful detaining or threatening to detain.

causes B to enter into an agreement by an act amounting to criminal intimidation under the Penal Code. The Court held that the payment was not voluntary and had been made under threat.. Section 19(1) of the Contracts Act 1950 provides that „when consent to an agreement is caused by coercion. on board an English ship on the high seas.TOPIC 5 LAW OF CONTRACT (FREE CONSENT TO CONTRACT)  61 A. [1988] 2 MLJ 117. In another case of Chin Nam Bee Development Sdn Bhd v. the respondents purchased houses to be constructed by the appellants. . The respondent was then made to pay an additional amount of RM4. Each respondent had signed a sale and purchase agreement to purchase a house at RM29.500. A has employed coercion.1. although Section 506 of the Penal Code was not in force at the time when or place where the act was done. the Court held that a transfer executed under the order of the Sultan. issued under duress of two Japanese officers during the Japanese Occupation of Malaya was invalid. A afterwards sues B for breach of contract at Taiping. 5. In the case.the agreement is a contract voidable at the option of the party whose consent was so caused‰. The issue was whether the additional payment was made voluntarily or under threat by the appellants to cancel the respondentsÊ booking.000. Tai Kim Choo & 4 Ors.. There was coercion as defined in Section 15 of the Contracts Act 1950. the contract will become voidable at the option of the party whose consent was so caused.1 Effect of Coercion Where there is element of coercion in a contract. Coercion under Section 15 covers the common law „duress‰ which means actual violence or threats of violence to the contracting party. Valiappa Chettiar [1954] MLJ 119. consent was not freely given and the transfer became voidable at the will of the party whose consent was so caused. In the case of: Kesarmal s/o Letchman Das v.

or mental. Further.62  TOPIC 5 LAW OF CONTRACT (FREE CONSENT TO CONTRACT) The term „voidable‰ refers to an agreement which gives one or more parties but not the other. upon B's coming of age. having advanced money to his son. the contract can be rescinded on the ground of undue influence. A employs undue influence. for instance.2. or He makes a contract with a person whose mental capacity is temporarily or permanently affected by reason of age. . the two important aspects of undue influence are: (a) (b) The domination of the will by one party over the other. the choice of either affirming or rejecting it. during his minority. in Section 16(2). For example: Illustration (a) A. and Obtaining an unfair advantage. 5. Thus. the agreement is valid and binding until the party entitled to avoid it chooses to do so. a person is said to be in a position to dominate the will of another where: (a) (b) (c) He holds a real or apparent authority over the other. According to Section 16(1) of the Contracts Act 1950. or He stands in a fiduciary relation to the other. parentsÊ authority over a child and husbandÊs authority over a wife. 5.1 Real or Apparent Authority A person holds a real or apparent authority over the other. obtains. Based on the wording of Section 16(1). „a contract is said to be induced by Âundue influenceÊ where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other‰. B. by misuse of parental influence.2 UNDUE INFLUENCE When a person enters into a contract under the influence exercised by another person. or bodily distress. a bond from B for a greater amount than the sum due in respect of the advance. illness.

Undue influence applies to every case where influence is acquired and abused.2 A Fiduciary Relation A person stands in a fiduciary relation to the other.000.TOPIC 5 LAW OF CONTRACT (FREE CONSENT TO CONTRACT)  63 5. . The great-uncle was unable to advise in person. aged 23. He asked his great-uncle to advise him how he should find the means to pay. owing to ill health. T (an Oxford undergraduate). B employs undue influence. This prevented him from becoming a purchaser of the property without the fullest communication of all material information which he had obtained as to its value. In the case of Tate v. having been asked to give advice. a man enfeebled by disease or age. but proceeded with the purchase. is induced by B's influence over him as his medical attendant. he deputed the defendant (his nephew) to do so. The defendant offered to buy it for £7000. the relationship of a solicitor-client. Williamson (1866) LR 2 Ch App 55. For example: Illustration (b) A. was being pressed to pay his college debts. the defendant obtained a report from a surveyor on the property and it was valued at £20. The defendant. a doctor-patient. Conversations took place between T and the defendant in which T expressed the desire to sell part of his estate. It was held that the purchase must be set aside. stood in a confidential relationship to T. Before the sale was completed. thus. or where confidence is reposed and betrayed.2. a trustee-beneficiary and a religious adviserfollower. The defendant did not disclose this fact to T. for instance. to agree to pay B an unreasonable sum for his professional services.

5. The Court of Appeal set the contract aside. enters into a contract with him.R. the Court held that the charge document that has been signed by the third plaintiff who was of unsound mind could be set aside at his option. or mental or bodily distress. the presumption is that the person will dominate another personÊs will. It was understood that the plaintiff would provide the funds for the centre. 516. or Mental or Bodily Distress When a person makes a contract with another person whose mental capacity is temporarily or permanently affected by reason of age.2. The other person could be old. illness. The defendant induced the plaintiff to buy his (defendantÊs) own house for the purpose at a price which grossly exceeded its market value. For example: .2. Maha Pte Ltd & Ors [1989] 3 MLJ 468. Sperni [1952] 2 T. that affect his mental capability and also physical suffering. on the face of it or on the evidence adduced.4 Burden of Proof According to Section 16(3)(a) of the Contracts Act 1950. and the transaction appears.3 Mental Capacity is Temporarily or Permanently Affected by Reason of Age. Illness. „where a person who is in a position to dominate the will of another.L.64  TOPIC 5 LAW OF CONTRACT (FREE CONSENT TO CONTRACT) Another example of a case where a confidential relationship arises is the case of: Tufton v. In the case of Che Som bt Yip & Ors v. to be unconscionable. or suffering from certain illnesses or diseases. or in a state of unsound mind. The plaintiff and defendant were fellow members of a committee formed to establish a Muslim cultural centre in London. 5. the burden of proving that the contract was not induced by undue influence shall lie upon the person in a position to dominate the will of the other‰. or sick. to obtain advantage which is unfair to the other person.

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Illustration (c)
A, being in debt to B, the moneylender of his village, contracts a fresh loan on terms which appear to be unconscionable. It lies on B to prove that the contract was not induced by undue influence. In case where undue influence is shown to exist, the presumption of its exercise can be rebutted by proof that the party reposing the confidence has formed a free judgement, independent of any kind of control. The way to establish this is by showing that the person has received independent legal advice and took it. However, a transaction will also be upheld despite the absence of independent advice. The essential is to show that the transaction was „the result of the free exercise of independent will‰.

In the case of Lloyds Bank, Ltd. v. Bundy [1975] QB 326,
The defendant, an elderly farmer, and his only son, had been customers of the plaintiff bank for many years. The son founded a company which banked at the same bank. In 1966, the defendant guaranteed the companyÊs overdraft for £1,500 and charged his farm to the bank to secure that sum. Subsequently, the overdraft was increased and the bank sought further security. In May 1969, the defendant took legal advice and signed a further guarantee in favour of the bank for £5,000 and a further charge for £6,000. In December 1969, the bank manager visited the defendant and indicated to him that the continuance of the companyÊs overdraft facility was dependent upon the defendant executing in favour of the bank a further guarantee for £11,000 and a further charge for £3,500. The bank manager did not advise the defendant to seek independent advice, and the defendant signed the required guarantee and charge without such advice. The Court of Appeal held that the last guarantee and charge should be set aside for undue influence because a special relationship of confidence existed between the defendant and the bank in the particular case.

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Other important cases of undue influence are the case of:

Salwath Haneem v. Hadjee Abdullah (1894) 2 SSLR 57.
The plaintiffÊs husband executed a conveyance of property belonging to himself and the plaintiff to his brothers, B and C. The plaintiff agreed to the conveyance but after her husbandÊs death, she brought an action seeking to set aside the agreement and the conveyance. The Court held that a confidential relationship existed between the plaintiff and B and C. The burden of proof therefore lay on B and C to show that the plaintiff fully understood the transaction and executed the conveyance freely and without being subject to undue influence. Since B and C failed to discharge the burden, the transaction was set aside.

In the case of:

Datuk Jaginder Singh & Ors. v. Tara Rajaratnam [1983] 2 MLJ 196.
The respondent was the registered proprietor of a piece of land. She claimed that she was induced by fraud and undue influence of the first and second appellant to transfer her land to the second appellant. The Federal Court held that the appellants and respondent were in a solicitorclient relationship and the transaction was unconscionable. Therefore, the burden was on the appellants to rebut the presumption of undue influence. In this case, the appellants had not discharged that burden and thus the transaction was set aside.

5.2.5

Effect of Undue Influence

Where there is element of undue influence in a contract, the contract will become voidable at the option of the party whose consent was so caused. Section 20 of the Contracts Act 1950 provides that „when consent to an agreement is caused by undue influence, the agreement is a contract voidable at the option of the party whose consent was so caused‰.

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SELF-CHECK 5.1
1. 2. 3. 4. 5. 6. What is meant by coercion? What are the important ingredients to establish undue influence? What is the legal effect of a contract made under coercion and undue influence? Who must prove that a contract is not induced by undue influence? In what type of relationship is a person said to be in a position to dominate the will of another in a contract? What is the importance of independent legal advice in undue influence cases?

ACTIVITY 5.1
Discuss the following cases by applying the principle of law on free consent of contracting parties: (a) Mr Best lived with Mr Hard for many years in a house owned by Mr Best. Mr Hard was a man given to violence. After he threatened Mr Best, Mr Best sold the house to Mr Hard for RM30,000. A year later, Mr Hard died and his widow claimed the ownership of the house. However, Mr Best wanted to set aside the sale of the house to Mr Hard on the ground of duress. Explain whether he can succeed. One evening, Jack met Susan and told her that Adam would sue him for his failure to pay the money he owed Adam, amounting to RM100,000. After Jack revealed his problem to Susan, Susan persuaded Jack to sell his bungalow to her at the price of RM100,000, to enable Jack to pay up his debt to Adam. Jack immediately agreed with SusanÊs proposal because Susan was the only one in his heart. Jack had always listened to Susan and would fulfil SusanÊs wishes. A contract to transfer the bungalow to Susan was done and six months later, Susan left Jack to marry her friend, Mark. Jack was frustrated and happened to know that his bungalow was worth RM300,000 at the time of the transfer. Now, Jack decided to set aside the contract on the ground of undue influence. Discuss.

(b)

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5.3

FRAUD

Fraud refers to acts committed by a party to a contract with the intent to deceive the other contracting party. According to Section 17 of the Contracts Act 1950, „fraud includes any of the following acts committed by a party to a contract, or with his connivance, or by his agent, with intent to deceive another party thereto or his agent, or to induce him to enter into the contract:........‰. (a) „The suggestion, as to a fact, of that which is not true by one who does not believe it to be true.‰ It means fraud will exist when the party to a contract is suggesting a fact which is not true to another party, and he himself knows that the fact is not true. In the case of:

Letchemy Arumugam v. Annamalay [1982] 2 MLJ 198,
The plaintiff, an illiterate Indian woman rubber tapper, claimed to rescind the sale and purchase agreement made with the defendant on the ground of fraudulent misrepresentation. According to the plaintiff, she was induced to enter into the agreement whereby the defendant had fraudulently represented to the plaintiff that she was signing for a loan document and also other documents to free her land from a charge. In actual fact, she was signing a sale agreement relating to her land in Port Dickson. The Court held that the evidence clearly showed that the defendant had exercised fraud and therefore the plaintiff was entitled to rescind the contract. (b) „The active concealment of a fact by one having knowledge of belief of the fact.‰ An example of this act is provided in the following illustration in Section 19 of the Contracts Act 1950.

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Illustration (c)
B, having discovered a vein of ore on the estate of A, adopts means to conceal, and does conceal, the existence of the ore from A. Through AÊs ignorance, B is able to buy the estate at an undervalued price. The contract is voidable at the option of A.

(c) (d) (e)

„A promise made without any intention of performing it.‰ „Any other act fitted to deceive.‰ „Any such act or omission as the law specially declares to be fraudulent.‰

Notwithstanding the above principles, Explanation to Section 17 states that, „mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud‰.

Illustration (a), Section 17
A sells, by auction, to B, a horse which A knows to be unsound. A says nothing to B about the horseÊs unsoundness. This is not fraud in A.

Illustration (d), Section 17
A and B, being traders, enter upon a contract. A has private information of a change in prices which would affect BÊs willingness to proceed with the contract. A is not bound to inform B.

An example of case to illustrate the principles: In Keates v. Lord Cadogan (1851) 10 C.B. 591, The plaintiff sued for damages arising from the defendantÊs fraud in letting to the plaintiff a house which he knew for immediate occupation (without disclosing that it was in a ruinous condition). The Court rejected the claim and held that there was nothing amounting to deceit (fraud).

. where there is a legal duty to disclose the material facts (duty of disclosure) to the other party in a contract. Here. For instance: Illustration (b).70  TOPIC 5 LAW OF CONTRACT (FREE CONSENT TO CONTRACT) However. Section 17 B says to A. fraud.3. Section 17 B is AÊs daughter and has just come of age. regard being had to them. „If you do not deny it.... there are circumstances in which failure by one party to speak out may amount to fraud. the agreement is a contract voidable at the option of the party whose consent was so caused‰. Firstly. in itself. the same Explanation (Section 17) continues to provide that. the contract.. „if such consent was caused by misrepresentation or by silence. equivalent to speech". if the party whose consent was so caused had the means of discovering the truth with ordinary diligence‰. it is the duty of the person keeping silence to speak.. 5.. the relation between the parties would make it AÊs duty to tell B if the horse is sound..1 Effect of Fraud Where there is element of fraud in a contract. Section 19(1) of the Contracts Act 1950 provides that „when consent to an agreement is caused by .. (Here. nevertheless.. where silence is equivalent to speech. A says nothing.... Here. However.. or unless his silence is.unless the circumstances of the case are such that.. I shall assume that the horse is sound‰.. is not voidable. For instance: Illustration (c). 1950. the contract will become voidable at the option of the party whose consent was so caused. This duty arises where the relationship between the contracting parties is in the nature of fiduciary relationship. Secondly. the act of A keeping silence means approving BÊs statement that the horse is sound). AÊs silence is equivalent to speech. fraudulent within the meaning of section 17. The above statement means.. as in a solicitor-client relationship.... „.. . according to Exception to Section 19 of the Contracts Act.

then the untruth facts cannot render the contract void. whether fraudulent or innocent. though he believes it to be true. does not render a contract voidable‰. the false statement does not give rise to a cause of action if it has not induced or caused the other party to enter into the contract. „a fraud or misrepresentation which did not cause the consent to a contract of the party on whom the fraud was practised. The Indian Supreme Court stated that: A false representation.TOPIC 5 LAW OF CONTRACT (FREE CONSENT TO CONTRACT)  71 This means. In the case of: Mithoolal v. is irrelevant if it has not induced the party to whom it is made to act upon it by entering into the contract.4 MISREPRESENTATION Misrepresentation refers to an untrue statement made by a representor and that induces the other party to enter into a contract. 5. Life Insurance Corp of India AIR 1962 SC 814. in a manner not warranted by the information of the person making it. of that which is not true. Thus.‰ . Further. The Court held that the respondent had sufficient means to carry out his own inspection or investigation in determining the truth of the facts in their contract. the contract cannot be rescinded. The representee must have relied on the statement of the representor. Eastern Mining & Metals Co Ltd [1965] 1 MLJ 201. Thus. The burden of proving fraud lies on the party making the claim. there was no fraud on the appellantÊs part. Misrepresentation under Section 18 of the Contracts Act 1950 includes: (a) „The positive assertion. or to whom the misrepresentation was made. This means. Explanation to Section 19 also provides that. In the case of: Tan Chye Chew & Anor v. by taking reasonable appropriate measures. if the party who was deceived has the means or capable of investigating the truth of the facts given by the other party.

gives an advantage to the person committing it. the agreement is a contract voidable at the option of the party whose consent was so caused‰..72  TOPIC 5 LAW OF CONTRACT (FREE CONSENT TO CONTRACT) (b) „Any breach of duty which.4. Wilkinson [1927] AC 177. a party to an agreement to make a mistake as to the substance of the thing which is the subject of the agreement. The claim to rescind the contract failed. . a misrepresentation in which no element of fraud is present. The respondents agreed to purchase from the appellant certain lands at Avondale. In other words. or to the prejudice of anyone claiming under him. The appellant had not.‰ „Causing. The respondents relied on the appellantÊs statement that he estimated the lands to carry two thousand sheep. the contract will become voidable at the option of the party whose consent was so caused. however innocently..‰ In brief. This is because the party making such a statement honestly believes in the truth of the statement.. the respondents counter-claimed to rescind the contract on the ground of misrepresentation.1 Effect of Misrepresentation Where there is element of misrepresentation in a contract. or misrepresentation. misrepresentation is a representation of untrue or misleading statement of fact. When the appellant claimed the balance of the purchase price. in the Southern Island of New Zealand. or negligently or innocently makes such statement which is untrue or causes another to make a mistake of fact.. and no other person had at any time. carried out sheep-farming on the lands in question. In the case of: (c) Bisset v. 5. to induce the other party to enter into the contract.. Section 19(1) of the Contracts Act 1950 provides that „when consent to an agreement is caused by ... made by a party to the contract. for the purpose of sheep-farming. by misleading another to his prejudice. The difference between fraudulent misrepresentation and misrepresentation under Section 18 is that. misrepresentation under Section 18 is made without any intention to deceit. The Court held that the statement was merely of an opinion which the appellant honestly held. without an intent to deceive. or anyone claiming under him. It is important that the statement represented is a statement of fact and not only a statement of opinion.

2.. misrepresentation which did not cause the consent to a contract of the party . to whom the misrepresentation was made... nevertheless. the act of misrepresentation does not give rise to a cause of action if it has not induced or caused the other party to enter into the contract.. according to Exception to Section 19 of the Contracts Act. by a misrepresentation.. After this... What is meant by fraud and misrepresentation? What is the difference between fraudulent misrepresentation and innocent misrepresentation? What is the legal effect of a contract made under fraud and misrepresentation? What is meant by „silence is no fraud‰? Is there any exception to the above principle? Under what circumstance a contract cannot become voidable by reason of fraud and misrepresentation? What is the implication of not exercising oneÊs ordinary diligence to discover the truth of a statement made in a contract under fraud and misrepresentation? .. 4.. Explanation to Section 19 also provides that... leads B erroneously to believe that five hundred gantangs of indigo are made annually at AÊs factory.. is not voidable. does not render a contract voidable‰. For instance: Illustration (b). if the party whose consent was so caused had the means of discovering the truth with ordinary diligence‰... This means. which show that only four hundred gantangs of indigo have been made. SELF-CHECK 5. Further. The contract is not voidable on account of AÊs misrepresentation. 5. 1950. The representee must have relied on the statement of the representor. Section 19 A. 3.... „a . B buys the factory.. 6. B examines the accounts of the factory.TOPIC 5 LAW OF CONTRACT (FREE CONSENT TO CONTRACT)  73 However. the contract.2 1... 7. „if such consent was caused by misrepresentation or .

both parties to the contract are under a mistake of fact. Kyra discovers the true position and seeks to rescind the contract on the ground of fraud.74  TOPIC 5 LAW OF CONTRACT (FREE CONSENT TO CONTRACT) ACTIVITY 5. the directors intended to use the money to pay off the companyÊs existing debts because the creditors were pressing hard for payment.2 Discuss the following problems by applying the principles of law on consent of the contracting parties: (a) Tim is a mechanic who wishes to take a partner into his business. „a contract is not voidable merely because it was caused by one of the parties to it being under a mistake as to a matter of fact‰. the agreement is void‰.000 a year. Advise Tim. The accounts which Tim produces show that the income is not quite RM60. Tim states that the income of the business is RM60. Advise Jade. and under Section 23. Under Section 21.5.1 Mistake of Fact According to Section 21. Later. 5. Jade then discovered that she had been misled and sought the legal advice to sue the directors for damages for fraud and misrepresentation. The above provisions provide that if the mistake of fact is done by both parties in a contract. According to Section 23. Kyra does not examine the accounts in detail and agrees to become a partner. During negotiations between Tim and Kyra. In fact. Jade was induced to lend money to a company by a representation made by its directors that the money would be used to improve the companyÊs buildings and generally expand the business. But if the mistake is done by one of the . „where both parties to an agreement are under a mistake as to a matter of fact essential to the agreement. Tim then produces further accounts to show how the figure is made up. (b) 5. Sections 21 and 23 of the Contracts Act 1950 provide for the effect of a contract entered into under a mistake of fact.5 MISTAKES Mistake under the Contracts Act 1950 includes a mistake as to a matter of fact (by one or both contracting parties) and mistake as to any law in force or not in force in Malaysia. However. the contract will be void.000 a year and Kyra asks about the balance. only one of the parties is under a mistake of fact which is essential to the contract made.

the ship conveying the cargo had been cast away and the goods lost. The agreement is void. agrees to sell it to C. They were both negotiating under a mistake and had in mind of different ships. In the case of: Raffles v. Wichelhaus (1864) H&C 906. Neither party was aware of the facts. It turns out that. Illustration (b). there were two ships of the same name both leaving from Bombay at different times. Two parties agreed to a sale of a cargo of cotton arriving in London by a ship called The Peerless. Section 21 A agrees to sell B a specific cargo of goods supposed to be on its way from England to Kelang. The agreement is void. B was dead at the time of the agreement. But unknown to both parties. but both parties were ignorant of the fact. Section 21 of the Contracts Act 1950 covers the English common law classification of common mistake and mutual mistake. Section 21 A. It turns out that the horse was dead at the time of the bargain. Therefore. the contract of sale was ruled void for mutual mistake. though neither party was aware of the fact. Section 21 A agrees to buy from B a certain horse.TOPIC 5 LAW OF CONTRACT (FREE CONSENT TO CONTRACT)  75 parties to a contract. being entitled to an estate for the life of B. sailing from Bombay. while mutual mistake occurs when both parties misunderstand each other. The agreement is void. Examples of cases are illustrated below: Illustration (a). Common mistake occurs when both parties make the same mistake as to the subject matter of the contract. before the day of the bargain. then the contract will not be voidable. Illustration (c). .

5. „a contract is not voidable because it was caused by a mistake as to any law in force in Malaysia.5. it was not. if the mistake is made by the contracting parties as to the law in force in Malaysia. but a mistake as to a law not in force in Malaysia has the same effect as a mistake of fact‰. . The contract was held to be valid by the English court. The example of case is: Tamplin v. is bound by the terms of the contract.3 Mistake as to Document A party who has made a mistake as to the nature of a document he has signed. the contract is not voidable. But if the mistake is made as to the law not in force in Malaysia. James (1898) 15 ChD 215. then the contract is void. B made a successful bid at an auction for the sale of a public house under the mistaken belief that a certain field was included in the lot when in fact. Thus.5.2 Mistake of Law Mistake of law is provided under Section 22 of the Contracs Act 1950. Section 22 states. For example: Illustration A and B make a contract grounded on the erroneous belief that a particular debt is barred by limitation: the contract is not voidable.76  TOPIC 5 LAW OF CONTRACT (FREE CONSENT TO CONTRACT) Section 23 covers the unilateral mistake in English common law. 5.

C is dead at the time of the promise.4 Effect of Mistake When a contract is void (for mistake). according to Section 66 of the Contracts Act 1950.000 in consideration of BÊs promise to marry C (AÊs daughter). and the Malaysian courts applied the principle in the local cases. .5. „any person who has received any advantage under the agreement is bound to restore it or to make compensation for it to the person from whom he received it‰. to sign a document). but B must repay A the $1.000. 5. However. The High Court ruled that there was a mistake as to the nature of the document signed and therefore. The defendant had signed a written acknowledgment of a loan provided in the English language. Non est factum means „it is not his deed‰. In the case of: Awang bin Omar v. Thus. Retnam [1966] 1 MLJ 172. Haji Omar & Anor [1949] MLJ Supp 28. he was bound by the terms he had signed (provided there was no fraud or misrepresentation). The first defendant did not know English and he was persuaded to sign in the mistaken belief that he was merely witnessing his brotherÊs signature. the first defendant was not liable. An example is illustrated below: Illustration (a) A pays B $1. The agreement is void.TOPIC 5 LAW OF CONTRACT (FREE CONSENT TO CONTRACT)  77 In Subramaniam v. The plaintiff and the second defendant entered into a contract and the performance was guaranteed by the first defendant (who was induced by the second defendant. Even if the defendant was ignorant of the language. there is an exception in English law that allows the defence of non est factum. it is a plea that the agreement is not the act of the person.

may institute a suit to have the instrument rectified. as against B and C. and the predecessors of the claimant-respondent as owners of the middle lot. Under the English common law. the remedy of rectification is available in equity. executes a conveyance prepared by B. be rectified so as to exclude from it the godown given to C. The High Court ruled that the mistake was common to all parties. B gives one to C and lets the other to D for rent. The local case below is a case where rectification of a document was granted to the claimant.. in which. or his representative in interest. Leong Fong Yew (1918) 2 FMSLR 187. . It is also important that the order to rectify must not be prejudicial to the rights of an innocent third party. An example is provided in the illustration below: Illustration (a) A.. Section 30 states. through BÊs fraud. In Lim Hong Shin v. through fraud or a mutual mistake of the parties. either party. Of the two godowns which were fraudulently included. The appellant. intending to sell to B his house and one of three godowns adjacent to it. neither C nor D having any knowledge of the fraud. all three godowns are included. the court may at its discretion rectify the instrument so as to express that intention. „when. a contract or other instrument in writing does not truly express their intention. The conveyance may. A third party and his predecessors had always been in possession of the bottom lot. but it cannot be rectified so as to affect DÊs lease.. By mistake. so far as this can be done without prejudice to rights acquired by third persons in good faith and for value‰. the predecessor of the appellant was registered as owner of the top lot. Lin Hong shin (and his predecessors) had always been in possession of the middle lot. so that it could rectify the instrument so as to express the real intentions..78  TOPIC 5 LAW OF CONTRACT (FREE CONSENT TO CONTRACT) Section 30 of the Specific Relief Act 1950 also provides remedy of rectification in cases where the parties made a contract under a mistake and the contract does not accurately record the true intention of the parties.

2. 5. Kamal then bought the orchard from Mr Sam. Kamal did not read this statement and believed that the field would be included in the sale. What is the effect of a contract made under a mistake of fact? What is the difference between common/mutual mistake and unilateral mistake? What is the effect of a contract made under a mistake of law? What is the meaning of the rule of non est factum? Is the English common law rule of non est factum apply to the Malaysian cases? Is the remedy of rectification available in mistake cases? ACTIVITY 5.TOPIC 5 LAW OF CONTRACT (FREE CONSENT TO CONTRACT)  79 SELF-CHECK 5. 4. After the sale was completed. Nadia believes that he is buying from Vince and not from Hans.3 Discuss the following cases by applying the principles of law on free consent of the contracting parties: (a) Nadia agrees to buy a camera and Hans agrees to sell the same. (b) Mr Sam advertised his „Durian Orchard‰ for sale. Advise Kamal. Kamal was one of those who was interested in the orchard because he had seen Mr Sam using the adjacent field to graze cows. . Kamal obtained the details of the sale advertisement which clearly stated that the field in question was not part of the sale since it did not belong to Mr Sam. Later. 6. Explain how the mistakes in the following would affect the contract: (i) (ii) Nadia believes that she is obtaining credit over four months whereas Hans believes that it is a cash sale.3 1. 3. Kamal always wanted to graze cows that would bring him profit apart from maintaining the orchard. Kamal discovered that the field was not included in the sale and intended to set aside the contract.

Mere silence is no fraud. Innocent misrepresentation in a contract is not made with the intention to deceive but the contract is voidable. Remedy of rectification is allowed in a contract made under mistake. The burden of proving that the contract is not induced by undue influence is on the person dominating the will of another. Contracts made under undue influence will become voidable. with the intention to make the other party enter into a contract. The defence of non est factum is accepted in mistake cases but in exceptional circumstances. Element of fraud makes the contract voidable. The effect of a contract made under coercion is voidable. A contract made under a mistake of law in force in Malaysia is not voidable. Failure by one party to speak out will amount to fraud if there is a duty of disclosure. Unilateral mistake does not render a contract voidable. To establish a contract made under undue influence requires the elements of domination of will and obtaining unfair advantage. A false statement which does not induce or cause the party to enter into a contract does not render the contract voidable. Fraud covers an act committed by one contracting party with the intent to deceive another.                   .80  TOPIC 5 LAW OF CONTRACT (FREE CONSENT TO CONTRACT)  Coercion is the act of committing or threatening to commit any act forbidden by the Penal Code. A contract under fraud is not voidable if the party being the victim of fraud had the means of discovering the truth with ordinary diligence. The presumption of undue influence can be rebutted by proving the other party taking independent legal advice. Mistake of fact will render a contract void if it is a common or mutual mistake. A contract which is void under a mistake of fact requires the party who has received the advantage to restore it to the other party.

Tai Kim Choo & 4 Ors. A. Maha Pte Ltd & Ors [1989] 3 MLJ 468. Tara Rajaratnam [1983] 2 MLJ 196.). Kesarmal s/o Letchman Das v. . Leong Fong Yew (1918) 2 FMSLR 187. (2006). Annamalay [1982] 2 MLJ 198. The Commercial Law of Malaysia (2nd ed.). Cases:          Awang bin Omar v. Chin Nam Bee Development Sdn Bhd v. M. Rahman. Bisset v. Singapore: Oxford University Press. (2000). D. [1988] 2 MLJ 117.TOPIC 5 LAW OF CONTRACT (FREE CONSENT TO CONTRACT)  81 Coercion Fiduciary relation Fraud Free consent Mental capacity Misrepresentation Mistake Ordinary diligence Real/apparent authority Rectification Undue influence Voidable contract Text Books: Guest. AnsonÊs Law of Contract (26th ed. Smith and KeenanÊs Law for Business (13th ed. Datuk Jaginder Singh & Ors. (2007). A. Bhd. Wu. (1988). Selangor: Kumpulan Usahawan Muslim Sdn. Harlina Mohamed On & Rozanah Ab.).B. 591. Che Som bt Yip & Ors v. Haji Omar & Anor [1949] MLJ Supp 28. Undang-Undang Perniagaan Malaysia. Selangor: Pearson and Longman. Letchemy Arumugam v. Keenan. B. Lim Hong Shin v. Wilkinson [1927] AC 177. G. & Vohrah. v. UK: Pearson and Longman. Valiappa Chettiar [1954] MLJ 119. Keates v. Lord Cadogan (1851) 10 C.

82  TOPIC 5 LAW OF CONTRACT (FREE CONSENT TO CONTRACT)          Lloyds Bank. 516.R. Mithoolal v. Life Insurance Corp of India AIR 1962 SC 814. Ltd. Hadjee Abdullah (1894) 2 SSLR 57. Raffles v. Sperni [1952] 2 T. Tamplin v. Tan Chye Chew & Anor v. Retnam [1966] 1 MLJ 172. Wichelhaus (1864) H&C 906. Tufton v. Tate v. Eastern Mining & Metals Co Ltd [1965] 1 MLJ 201. Bundy [1975] QB 326. v. Williamson (1866) LR 2 Ch App 55. Subramaniam v. Salwath Haneem v. .L. James (1898) 15 ChD 215.

Explain the effect of contracts in restraint. implies injury to person or property of others. or is regarded as immoral or opposed to public policy. 4. Describe the importance of reasonable restraint in contracts.  INTRODUCTION Section 2(g) of the Contracts Act 1950 provides that „an agreement not enforceable by law is said to be void‰.1) when it: (a) (b) (c) (d) (e) is forbidden by law. List several kinds of void contracts. you should be able to: 1.Topic  6 Law of Contract (Void and Illegal Contract) LEARNING OUTCOMES By the end of this topic. Under Section 24. Explain the status of contracts with unlawful consideration or object. 2. defeats the provisions of any law. . 5. is fraudulent. and Discuss the consequence of illegal contracts. 3. the consideration or object of the agreement is unlawful (see Figure 6.

It provides that all agreements. No legal action can be taken to recover money or valuable things won out of the same. The same is also stressed in Section 26 of Civil Law Act 1956.84  TOPIC 6 LAW OF CONTRACT (VOID AND ILLEGAL CONTRACT) Figure 6. DEFEAT THE LAW Section 24(a) and (b). The same also applies to an agreement that restricts a person from enforcing his absolute rights under any law or limits the time for a person to enforce his rights. Contracts Act 1950. Some statutes do not provide specific provisions concerning void or illegal contract but some provide that failure to conform to any law provisions would cause the contract to be void. Section 28 makes an agreement that restrains trade transaction as void agreement. . by way of gaming or wagering shall be null and void.1: Elements that make a consideration or an object of an agreement unlawful Whereas Section 27 of the Contracts Act considers an agreement which affects the freedom and stability of marriage of any person as void.1 CONTRACTS FORBIDDEN BY LAW AND IF PERMITTED. These kinds of agreements are regarded as void according to Section 29 of the Contracts Act. 6. An example of this is Section 31 of the Contracts Act 1950 which states that any wager contract is void and no legal action can be taken to recover money won out of such wager. 1950. either made orally or written.

The documents evidencing the loans showed that the hotel whose shares were being purchased by a company had given financial assistance to that company. Therefore. v. The Court held that there was nothing in the rules which provided that verbal agreement was invalid. Lim Tan & Sons Sdn Bhd [1985] 2 MLJ 291. The plaintiff entered into an agreement with the defendant for a purchase of a piece of land held under Temporary Occupational License (TOL). This act contravened Section 67 of the Companies Act 1965. the agreement contravened Rule 12(1) of the Housing DeveloperÊs (Control and Licensing) Rule 1970 which requires every contract of sale to be in writing. . In the case of Hee Cheng v. Such an attempt if allowed would frustrate the law. Therefore. which the respondent undertook to build. the respondent orally agreed to sell and transfer a house to the appellant. The agreement. The defendant breached the contract and the plaintiff claimed for specific performance of the agreement. the appellant-purchaser clearly belonged to a class for whose protection the statutory prohibition was imposed. was in contravention of Rule 41 of the Land Rules 1930 which provides that a licence for temporary occupation of a state land shall not be transferable. The appellants extended loans to the respondents and the loan was secured by documents and guarantees.TOPIC 6 LAW OF CONTRACT (VOID AND ILLEGAL CONTRACT)  85 In the case of Rasiah Munusamy v. Hotel Rasa Sayang Sdn. it was unlawful by reason of Section 24 of the Contracts Act. The Court held that the agreement was an attempt to sell a land under the TOL. Example of cases where contracts are prohibited by statute: Chung Khiaw Bank Ltd. he could enforce it. The court further held that although the oral agreement contravened Rule 12(1). Krishnan [1955] MLJ 103. However. Bhd. & Anor [1990] 1 MLJ 356. The Court held that: The transactions were tainted with illegality. however.

would affect the interest of the minor. had agreed to sell it to the plaintiff. Contracts Act 1950 Any contract which its consideration or object is fraudulent is void. Abu Samah [1968] 1 MLJ 221. Section 24 A. Illustration (e). as its object is unlawful. the Court held that the transaction was void. if allowed. The defendant held a logging licence in Pahang under the Forest Rules 1935 which prohibited transfer without written approval from the District Forest Officer.2 FRAUDULENT CONTRACTS Section 24(c). Puteh bt Sabtu (1922) 5 FMSLR 243). The defendant. . 6.86  TOPIC 6 LAW OF CONTRACT (VOID AND ILLEGAL CONTRACT) In Tan Bing Hock v. The agreement is void. B and C enter into an agreement for the division among them of gains acquired. Contracts Act 1950 Any contract which its consideration or object causes injury to person or property of another is void under the law. The defendant agreed to assign his rights under the licence (to extract timber) to the plaintiff. An example of a fraudulent contract is found in the following illustration.3 CONTRACTS INJURIOUS TO PERSON OR PROPERTY OF ANOTHER Section 24 (d). or to be acquired. In the case of Syed Ahamed Alhabsyee v. by them by fraud. Since the sale of the land. The Court held that the contract was illegal. who was a trustee of a piece of land belonging to a minor. 6.

Contracts Act 1950 Any contract which its consideration or object is regarded as immoral or opposed to public policy is void under the law. Section 24 A agrees to let her daughter be hired to B for concubinage. The agreement is void.000 to A in return. Immoral Contracts Illustration (k). Public Policy (a) Contracts prejudicial to the public service Illustration (f). The plaintiff initiated a claim for the refund of money he lent to a brothel business. because it is immoral. and B promises to pay RM1. Section 24 A promises to obtain for B an employment in the public service. Lim Ah Hang (1894) 2 SSLR 80.TOPIC 6 LAW OF CONTRACT (VOID AND ILLEGAL CONTRACT)  87 6. In Aroomogum Chitty v. . The Court held that the money lent for the purpose of brothel business was not recoverable for illegality. though the letting may not be punishable under the Penal Code.4 CONTRACTS IMMORAL OR AGAINST PUBLIC POLICY Section 24(e). Such an agreement is void as the consideration is unlawful. The object of the agreement was clearly immoral.

(c) Contracts against the interests of the state The kinds of contracts which are detrimental to the state and unlawful include contracts to trade with the enemy of the state during war. (b) Contracts obstructing the course of justice Illustration (h). that provides terms in the event of future separation. Driscoll [1929] 1 KB 470.88  TOPIC 6 LAW OF CONTRACT (VOID AND ILLEGAL CONTRACT) In the case of Parkinson v. The reason for this is simply that it profits the enemy state and is thus against public policy. or promotes any act which weakens the stability of marriage. Also a contract between spouses who are living together. He did with a promise of more should the knighthood be forthcoming. as its object is unlawful.College of Ambulance Ltd & Harrison [1925] 2KB 1. In the case of Foster v. He then sued for the return of the money when he did not receive the honour. and B promises to restore the value of the things taken. The secretary of the defendant charity promised to secure a knighthood for the plaintiff if he would make an adequate donation. A partnership agreement between five persons with the intention to smuggle whisky into the US was held as illegal. it is also void as it is against public policy. . is void because it encourages the parties to get into divorce. Another kind of contract is a marriage brokerage contract to find a spouse for a person in return for a fee. (d) Contracts prejudicial to the freedom and stability of marriage A contract is void if it restricts a personÊs ability to marry. The agreement is void. Section 24 A promises B to drop a prosecution which he has instituted against B for robbery.

Harry has since failed to provide any information to Joey and has indicated that he has no intention of ever doing so. Later. When does a consideration or an object of an agreement become unlawful? What kind of contracts are regarded as against public policy? What is the status of a contract with an unlawful object or consideration? ACTIVITY 6. A contract is void if the consideration for one or more objects is in part unlawful. Contracts Act 1950. paid RM20. 3.5 OTHER VOID CONTRACTS The following provisions provide for other kinds of contracts to be regarded as void: (a) Section 25.000 to Harry.1 1. Section 26. he filed a claim for indemnity against the insurers for the loss of the jewellery at his home through theft. Insider trading is an offence under Section 132A of the Companies Act 1965.TOPIC 6 LAW OF CONTRACT (VOID AND ILLEGAL CONTRACT)  89 SELF-CHECK 6. A contract made without consideration is void except in the circumstances provided.000 paid to Harry. Gesmar had brought into Malaysia certain jewellery which he has failed to declare to the customs. Decide whether Gesmar could enforce the indemnity clause. the Director of a few listed companies.1 1. a remisier. He has also failed to pay customs duty to the authority. 2. 6. Joey. for „insider information‰ which he intended to use in determining how to invest his clientsÊ funds. Advise Joey as to whether he could recover the RM20. 2. Contracts Act 1950. (b) .

„every agreement by which anyone is restrained from exercising a lawful profession. A contract in restraint of marriage of a person other than a minor is void. Contracts Act 1950. trade or any lawful business is enforceable provided the restraint is reasonable. trade or business of any kind. A contract in restraint of trade. In other words.5. However.1 Contracts in Restraint of Trade According to Section 28 of the Contracts Act 1950. in breach of the promise. Section 28. The plaintiff entered into an agreement to restrain the defendant from practising as an advocate and solicitor within five miles of Kota Bharu town for a period of two years after the termination of his service contract with his employer. in Malaysia. The Court held that the restraint is void. Section 30. Section 28 clearly provides that a . any contract that prevents a person from practising a profession. Contracts Act 1950. Contracts Act 1950. Section 31. The plaintiff applied for an injunction to restrain the defendant from practising. Later. Contracts Act 1950. Under common law. Anthony Wilson [1964] MLJ 269. A contract by way of wager is void except a subscription or contribution made in favour of certain prizes for horse-racing. Contracts Act 1950. the defendant left the employment and set up a practice in Kota Bharu town. English common law only invalidates contracts with unreasonable restraint. Section 29. (d) (e) (f) (g) 6. is to that extent void‰.90  TOPIC 6 LAW OF CONTRACT (VOID AND ILLEGAL CONTRACT) (c) Section 27. A contract that is uncertain is void. A contract in restraint of legal proceedings is void except contracts to refer a dispute to arbitration and certain written contracts relating to award of scholarships by the Government. profession or business is void except in certain limited circumstances. In the case of Wrigglesworth v.

„an agreement whereby a person is restricted from enforcing his rights under or in respect of any contract. within specified local limits. Thus. by the usual legal proceedings in the ordinary tribunal. the clause infringed Section 28 of the Contracts Enactment (now Section 29 of the Contracts Act 1950) and was to that extent. Exception 3 Partners may agree that some one or all of them will not carry on any business. upon or in anticipation of dissolution of the partnership. and an action or suit be not commenced within three months after such rejection. carries on a like business therein: Provided that such limits appear to the court reasonable. agree that some or all of them will not carry on a business similar to that of the partnership within such local limits.TOPIC 6 LAW OF CONTRACT (VOID AND ILLEGAL CONTRACT)  91 contract which prevents a person from exercising lawful profession.2 Contracts in Restraint of Legal Proceedings According to Section 29 of the Contracts Act 1950. so long as the buyer. There was a clause in a fire insurance policy which stated: „If the claim be made and rejected. Teck Guan (1912) 2 FMSLR 92. void. is void to that extent‰.‰ The Court held that this clause reduced the period within which an assured might bring a suit for compensation to a period less than that sanctioned by the limitation statute. Exception 2 Partners may. trade or any kind of business is void. or which limits the time within which he may thus enforce his rights. In the case of Corporation Royal Exchange v. other than that of the partnership. all benefit under this policy shall be forfeited. . (b) (c) 6. regard being had to the nature of the business. There are three exceptions under Section 28. during the continuance of the partnership. Those exceptions are as follows: (a) Exception 1 One who sells the goodwill of a business may agree with the buyer to refrain carrying on a similar business.5. or any person deriving title to the goodwill from him.

6.6 CONSEQUENCES OF ILLEGALITY The general rule at common law and under the Contracts Act 1950 is that the courts will not enforce illegal contracts and assist the parties: ex turpi causa non oritur actio (no action will arise from a wrong done).92  TOPIC 6 LAW OF CONTRACT (VOID AND ILLEGAL CONTRACT) There are three exceptions to the general rule. Exception 3 Nor shall this section render illegal any contract in writing between the Government and any person with respect to an award of a scholarship by the Government wherein it is provided that the discretion exercised by the Government under that contract shall be final and conclusive and shall not be questioned by any court. as follows: (a) Exception 1 This section shall not render illegal a contract by which two or more persons agree that any dispute which may arise between them in respect of any subject or class of subjects shall be referred to arbitration. . and that only the amount awarded in the arbitration shall be recoverable in respect of the dispute so referred.3 Effect of Contracts under Section 28 and 29 Contracts in restraint of trade and in restraint of legal proceedings are not void in toto but only void to the extent of the restraints. only the invalid part of the contract is unenforceable but the rest of the contract will be enforceable. Exception 2 Nor shall this section render illegal any contract in writing. Those contracts are void only to the extent of the restraint.5. restraint of trade and restraint of legal proceedings. This means. (b) (c) 6. by which two or more persons agree to refer to arbitration on any question between them which has already arisen. or affect any law as to references to arbitration. The consequences of illegality do not apply to contracts in restraint of marriage.

Ng Aik Chong [1970] 1 MLJ 82. may be applied. the agreement is void‰. The plaintiff sued for the balance but the defendant claimed illegality of the contract.TOPIC 6 LAW OF CONTRACT (VOID AND ILLEGAL CONTRACT)  93 In Seong Sam v. Hence. . the appellants refused to allow the respondent to till the land. Section 66 would apply and the respondent was entitled to recover the deposit paid. contravening Section 3(1) of the Paddy Cultivators Ordinance. Section 66 which is regarded as restitutionary provision. Subsequently. Therefore. The Federal Court held that the parties were ignorant of the fact that they were executing an illegal agreement. restitution is possible provided the illegality is not known to the party seeking it. In Ahmad bin Udoh & Anor v. Goon Food On (1933-34) FMSLR 169. The agreement was illegal. According to Section 25 of the Contracts Act 1950. the plaintiff was a party to an illegal agreement and she could not maintain an action based on the agreement. Under the Contracts Act 1950. Contracts severable and not severable In cases where the contract is illegal in part. Once a contract becomes void. it is either possible or not possible to sever the illegal part from the rest. The respondent and the appellants entered into an agreement for a lease of paddy field for a period of six years and $1500 was paid pursuant to the agreement. or any one or any part of any one of several considerations for a single object. The respondent took legal action to recover the sum paid to the appellants and the appellants claimed illegality of the agreement. being a wager. The Court held that an agreement for the purchase of a share in a ticket in a public lottery was illegal and not merely void. „if any part of a single consideration for one or more objects. is unlawful. The plaintiff bought a share in three tickets from the defendant. One of the tickets won a prize which was not paid in full by the defendant.

. „where persons reciprocally promise.000. A is promised a salary of $1. Accordingly. to do certain other things which are illegal.000 is a contract while the second set is void. if the considerations of the contract are partly lawful and partly unlawful. The agreement is void since the object of AÊs promise and the consideration for BÊs promise being in part unlawful.94  TOPIC 6 LAW OF CONTRACT (VOID AND ILLEGAL CONTRACT) That means.000 a year. a legal manufacture of indigo and an illegal traffic in other articles. the first set of promises is a contract. and secondly. For example: Illustration A agrees to sell a house to B and B agrees to buy it for $10. under specified circumstances. to do certain things which are legal. he will instead pay $50. Section 58 provides that.000. the whole agreement is void if it is not possible to sever the considerations. But if B uses it as a gambling house. The first set of reciprocal promises for sale of the house at $10. This provision applies to contracts which are severable. For both jobs. For example: Illustration A promises to supervise. but the second is a void agreement‰. firstly. on behalf of B.

Robin agreed that for one year after leaving his job. Decide whether there was a breach of contract by Robin. 3. 5. Can a contract be made to restrain a person from marrying another? What is the effect of an uncertain contract? Is contract in restraint of trade enforceable? What are the exceptions to contract in restraint of legal proceedings? Will the court assist the parties to an illegal contract? Can a party to an illegal contract apply for restitution under Section 66 of the Contracts Act 1950? ACTIVITY 6. giving certain undertakings which restricted his business activities. Nothern was a manufacturer of machine guns and other military weapons. In his contract. Robin then took the same milk round as he had worked when he was with Mr White. Decide whether this covenant regarding the business sold was valid and enforceable. 2. Nothern agreed that for 25 years he would not manufacture guns or ammunition in any part of the world. Later. was employed by Mr White to deliver milk to his customers. he would not serve or sell milk or dairy produce to persons who (within six months before he left employment) were customers of his employer. 4.TOPIC 6 LAW OF CONTRACT (VOID AND ILLEGAL CONTRACT)  95 SELF-CHECK 6. Robin left his employment with Mr White in order to work as a roundsman for West Dairies.2 1. and would not compete with the company in any way. The company was amalgamated with another company and Nothern was employed by the new entity as managing director. He sold the business to a company. (b) . 6.2 Discuss the following problems by applying the relevant principles of law: (a) Robin. a milk roundsman.

Rahman. Immoral contracts and contracts opposed to public policy are void. Contracts in restraint of trade and in restraint of legal proceedings are void to the extent of the restraints. G. Illegal contracts Restitution Restraint of legal proceeding Restraint of marriage Restraint of trade Severable contracts Unlawful objects or considerations Void contracts Text Books: Guest. Bhd. . (2007).96  TOPIC 6 LAW OF CONTRACT (VOID AND ILLEGAL CONTRACT)           An agreement not enforceable by law is said to be void. (1988). AnsonÊs Law of Contract (26th ed. Singapore: Oxford University Press.). Selangor: Kumpulan Usahawan Muslim Sdn. Restitution is possible provided the illegality is not known to the party seeking it. A contract made without consideration is void. Any contract which its consideration or object is fraudulent is void. A contract in restraint of marriage of a person other than a minor is void. Contract injurious to person or property of another is void. Undang-Undang Perniagaan Malaysia. The courts will not enforce illegal contracts and assist the parties to the contract. Harlina Mohamed On & Rozanah Ab. A contract that is uncertain is void. A.

Foster v. Aroomogum Chitty v. Syed Ahamed Alhabsyee v. Lim Tan & Sons Sdn Bhd [1985] 2 MLJ 291.). The Commercial Law of Malaysia (2nd ed. Teck Guan (1912) 2 FMSLR 92. (2000). . Hee Cheng v. UK: Pearson and Longman. Krishnan [1955] MLJ 103. M. Bhd. Cases:             Ahmad bin Udoh & Anor v. Selangor: Pearson and Longman. Abu Samah [1968] 1 MLJ 221. v. Goon Food On (1933-34) FMSLR 169. Seong Sam v. Hotel Rasa Sayang Sdn. Driscoll [1929] 1 KB 470. B. Corporation Royal Exchange v. (2006). & Vohrah. Tan Bing Hock v. Rasiah Munusamy v. & Anor [1990] 1 MLJ 356. Wu. Anthony Wilson [1964] MLJ 269. Wrigglesworth v. Chung Khiaw Bank Ltd.College of Ambulance Ltd & Harrison [1925] 2KB 1. A.). Puteh bt Sabtu (1922) 5 FMSLR 243). Ng Aik Chong [1970] 1 MLJ 82. Smith and KeenanÊs Law for Business (13th ed. D.TOPIC 6 LAW OF CONTRACT (VOID AND ILLEGAL CONTRACT)  97 Keenan. Lim Ah Hang (1894) 2 SSLR 80. Parkinson v.

Identify the circumstances under which remedies may not be granted. Discharge by performance. 5. Explain the requirement of principles in various remedies available. Discuss the remedies available to the parties in a contract. Explain the lawful and unlawful ways of discharging a contract. 3. . 2. Describe the various ways by which a contract may be discharged. A contract may be discharged by any one of the following ways: (a) (b) Discharge by consent or agreement between parties. it is said to be discharged and the contracting parties are free from further obligations arising from it.T op i c  7 Law of Contract (Discharge of Contract and Remedies) LEARNING OUTCOMES By the end of this topic. you should be able to: 1. 6. and Distinguish the importance of each remedy in a contract. When a contract is terminated.  INTRODUCTION This topic explains the situations in which contracts can be discharged and the remedies available to the parties in a contract. 4.

release. or to rescind or alter it. The consideration for the new agreement is the mutual discharge of the original contract and consent of all parties is secured. the parties may agree at the time of making the contract that on the occurence of an event. It is agreed between A. instead of A. or Discharge by breach. For example. The effect of novation is to release the obligation of the parties under the earlier contract.1 DISCHARGE BY CONSENT OR AGREEMENT BETWEEN PARTIES A contract that is created by consent can be discharged by consent. B and C that B shall henceforth accept C as his debtor. remission or rescission. The old debt of A to B is at an end. 7.1 Novation. the contract will be discharged. and a new debt from C to B had been contracted. For example: .1. „if the parties to a contract agree to substitute a new contract for it. Consent given subsequent to the contract may be a waiver. Sections 63 and 64 of the Contracts Act 1950 provide for the discharge of contract by consent. Novation is the substitution or replacement of a new contract for an earlier one. For example: Illustration (a) A owes money to B under a contract. 7. the original contract need not be performed‰. Consent may be given at the time of the contract or subsequently.TOPIC 7 LAW OF CONTRACT (DISCHARGE OF CONTRACT AND REMEDIES)  99 (c) (d) Discharge by impossibility. Rescission and Alteration According to Section 63 of the Contracts Act 1950. novation.

$2. wholly or in part.000.000 were payable. or may extend the time for such performance. the performance of the promise made to him. C.000. B owes C $1. This is a new contract and extinguishes the original contract. in satisfaction of the whole debt. The whole debt is discharged. „every promisee may dispense with or remit.000 and a third party.1. An example of alteration of a contract. as follows: Illustration (b) A owes B $10. or may accept instead of it any satisfaction which he thinks fit.100  TOPIC 7 LAW OF CONTRACT (DISCHARGE OF CONTRACT AND REMEDIES) Illustration (c) A owes B $1.000 and B accepts it in satisfaction of his claim on A. . and no new contract has been entered into.000 paid at the time and place at which the $5.000. Illustration (c) A owes B $5. B still owes C $1.000 in place of the debt of $10. pays to B $1.000. For example: Illustration (b) A owes B $5. 7.2 Remission of Performance Section 64 of the Contracts Act 1950 provides that.000. This payment discharge the whole claim.‰ The provision allows the party to remit the performance of the contract. A pays to B.000 in his books. B orders A to credit C with $1. but C does not assent to the agreement.000 under a contract. (b) Payment of a lesser sum by a third party to satisfy a larger debt. A enters into arrangement with B. and B accepts. which will apply to the following situations: (a) Payment of a lesser sum in satisfaction of a larger sum. and gives B a mortgage of his (AÊs) estate for $5.

made an offer of $4. The Court held that the creditorÊs conduct in cashing the cheque and retaining the money would be considered an agreement to discharge the debtor from any futher liability. or offer to perform.000 to the creditorÊs solicitor in discharge of $8. their respective promises. a sum of money. Illustration (d) A owes B under a contract. unless such performance has been dispensed with or excused under this Act or of any other law‰.000 is a discharge of BÊs demand. including B. accepts the sum of $2. Section 38(1) of the Contracts Act 1950 provides that „the parties to the contract must either perform. 7. whatever may be its amount.2 DISCHARGE BY PERFORMANCE A contract is said to be discharged when the parties to the contract has performed what they have agreed to do in the contract. Payment to B of $1. and is also indebted to other creditors.000. gives to B. A case to illustrate further the application of the provision: Kerpa Singh v Bariam Singh [1966] 1 MLJ 38 A third party.000.TOPIC 7 LAW OF CONTRACT (DISCHARGE OF CONTRACT AND REMEDIES)  101 (c) Payment accepted in satisfaction of an unascertained sum. A makes an arrangement with his creditors. A. This is a discharge of the whole debt.650 (on the condition that the creditor could either return the cheque to the offeror or retain it and discharge the debtorÊs debt). to pay them a composition of fifty cents in the dollar upon their respective demands. the amount of which has not been ascertained. . and B. the son of the appellant debtor. without ascertaining the amount. (d) An arrangement between a debtor and his creditors to settle debts. Illustration (e) A owes B $2. in satisfaction thereof.

000. Meanwhile. It means that with the promiseeÊs consent.2. A dies before that day. by word or conduct. According to Section 47 of the Contracts Act 1950.102  TOPIC 7 LAW OF CONTRACT (DISCHARGE OF CONTRACT AND REMEDIES) Further.000 to AÊs representatives. unless he has signified. his acquiescence in its continuance‰. and B is bound to pay the RM1. 7. „promises bind the representatives of the promisors in case of the death of the promisors before performance. the engagement must be performed within a reasonable time‰. or disabled himself from performing. and no time for performance is specified. unless a contrary intention appears from the contract‰. the promisee may put an end to the contract.1 Time and Place of Performance Parties to the contract must perform their obligations according to the time and place that they have agreed in the contract. by the contract. „when a party to a contract has refused to perform. The contract cannot be enforced either by AÊs representatives or by B. AÊs representatives are bound to deliver the goods to B. at a certain price. A dies before the day. . the contract is voidable at the option of the promisee. a contract will continue to exist even though promisorÊs act has already amounted to a breach of the contract. a promisor is to perform his promise without application by the promisee. The following illustrations explain the provision: Illustration (a) A promises to deliver goods to B on a certain day on payment of RM1. Section 38(2) of the Contracts Act 1950 provides that. his promise in its entirety. Section 40 of the Contracts Act 1950 provides. Otherwise. „where. Illustration (b) A promises to paint a picture for B by a certain day.

„when a promise is to be performed on a certain day. A brings the goods to BÊs warehouse. is stated in the case of: .TOPIC 7 LAW OF CONTRACT (DISCHARGE OF CONTRACT AND REMEDIES)  103 The question "what is a reasonable time" is. Whether time of performance is to be „of the essence‰ of the contract. A has not performed his promise. and the promisor has undertaken to perform it without of application by the promisee. and within the hours of business‰. In Section 48. For instance: Illustration A promises to deliver goods at BÊs warehouse on 1st of January. a question of fact. in each particular case. and the promisor has not undertaken to perform it without application by the promisee. the promisor may perform it at any time during the usual hours of business on the day and at the place at which the promise ought to be performed‰. And according to Section 49. and they are not received. „when a promise is to be performed on a certain day. On that day. it is the duty of the promisee to apply for performance at a proper place. but after the usual hour for closing it.

A must apply to B to appoint a reasonable place for the purpose of receiving it. the developer appellant was supposed to perform certain obligations for the respondent. If he treats it either expressly or by conduct as still continuing. Thus. the appellant delayed in performing their obligation. the respondent allowed the delivery dates to pass by agreeing to the work being done by the appellant and by further ordering extra work. Although the appellant was late. . the innocent party has the right either to rescind the contract. and the promise is to be performed without application by the promisee. Nevertheless. The statement of the Lordships: „If in a contract in which time is of the essence. it is the duty of the promisor to ask the promisee where he would like the contract to be performed‰. and must deliver it to B at that place. the respondent had to treat the contract as subsisting. a party fails to perform it by the stipulated time.‰ Place of performance of a contract is provided under Section 50 of the Contracts Act 1950 which provides „where no place is specified for performance. For instance: Illustration If A undertakes to deliver a thousand gantangs of rice to B on a fixed day. or to treat it as still subsisting.104  TOPIC 7 LAW OF CONTRACT (DISCHARGE OF CONTRACT AND REMEDIES) Yeoh Kim Pong (Realty) Ltd v Ng Kim Pong [1962] MLJ 118 In this case. the contract exists but time ceases to be of the essence and becomes at large. Held: The respondent cannot rescind the contract because he had waived his right to do so by allowing the appellant to still perform the obligation after the time had passed.

3 Performance by Third Party Section 41 of the Contracts Act 1950 states. then it must be performed by him personally‰. However. according to Section 42.TOPIC 7 LAW OF CONTRACT (DISCHARGE OF CONTRACT AND REMEDIES)  105 7. no promisor need perform his promise unless the promisee is ready and willing to perform his reciprocal promise.2. „when a contract consists of reciprocal promises to be simultaneously performed.2 Performance of Reciprocal Promise According to Section 52 of the Contracts Act 1950. „if a promisee accepts performance of the promisee from a third party. In the case of: . he cannot afterwards enforce it against the promisor‰. Held : They were reciprocal promises to be performed simultaneously because the plaintiff was ready and willing to perform.2. 7. the defendant was in breach. „if it is the intention of the parties that the contract should be performed by the promisor himself.‰ A case to explain the provision: Central Malaysia Development Ltd v Chin Pak Chin [1967] 2 MLJ 174 There was an agreement for the sale of land where the defendant-vendor was to execute a valid transfer and deliver vacant possession of the land to the plaintiff upon paying the deposit. which entitled the plaintiff to repudiate the contract and obtain the return of the deposit. Since the defendant could not give vacant posession by the due date.

106  TOPIC 7 LAW OF CONTRACT (DISCHARGE OF CONTRACT AND REMEDIES) Chin Swee Onn v Puchong Realty Sdn. an agreement to do an act impossible in itself. Bhd [1990] 1 MLJ 108 The parties agreed to transfer land to each other. he could not under Section 42 of the Contracts Act 1950. or by reason of some event which the promisor could not prevent.3 DISCHARGE BY IMPOSSIBILITY Impossibility of performance covers two situations. the consideration for the appellantÊs parcel being $25. $14. Impossibility after a contract has been made (under Section 57(2)) means. This principle covers the doctrine of frustration in common law. Therefore. The frustration doctrine is applied on the ground that there is supervening impossibility which causes the whole purpose of a contract to be different from what was undertaken by the contract or its performance has become unlawful. Section 57(2) of the Contracts Act 1950 states. Held: As the appellant had agreed to accept performance of the promise from the third party. one would be responsible for $4. where there is no default by the contracting . „a contract to do an act which. a contract becomes impossible to perform subsequent to its making. The $7. For example: Illustration (a) An agreement to discover treasure by magic is void. 7. It was also agreed that the difference of $11.000 and that of the respondentÊs.000 and the other for $7. unlawful. enforce it against the respondent. which is void.000. Impossibility at the time a contract is made and impossibility after it has been made. after the contract is made.000 would be settled by two sons of the respondent.000 was not paid and the appellant thereupon claimed payment from the respondent. frustration refers to circumstances that occur. becomes void when the act becomes impossible or unlawful‰. Impossibility at the time a contract is made (under Section 57(1)) means.000. becomes impossible.

The circumstances under which a contract may be discharged by supervening impossibility are as follows: (a) Destruction of the subject-matter of the contract. The claimant sued for the agreed fee. The procession did not take place because of the KingÊs illness. Before the first concert was due to be held. . H A Berney v Tronoh Mines Ltd [1949] MLJ 4 Held: the contract of employment was discharged by frustration on the outbreak of war when Japan invaded Malaya. The fact that the procession had been cancelled discharged the parties from their obligations. Held: The contract was impossible of performance and the defendant was not liable. Held: The defendant could be excused from paying rent for the room as the contract was frustrated.TOPIC 7 LAW OF CONTRACT (DISCHARGE OF CONTRACT AND REMEDIES)  107 parties to perform their contractual obligations. Caldwell (1863) B&S 826. Supervening impossibility will discharge a contract. (b) Supervening events defeat the whole purpose or object of the contract. The defendant agreed to let the claimant have the use of a music hall for the purpose of holding four concerts. The claimant sued for damages for wasted advertising expenses. the hall was destroyed by fire without negligence by any party. As in the case of: Krell v Henry [1903] 2 KB 740 The claimant owned a room overlooking the proposed route of the Coronation procession of Edward VII. Example of cases: Taylor v. since it was no longer possible to achieve the real purpose of the agreement. and had let it to the defendant for the purpose of viewing the procession.

personal qualification and skill of the person are the basis of the contract. or when a contract becomes void. 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. 7. it must be restored. but must refund to B the RM1. But if the money has actually been paid. Supervening illegality. which is paid in advance. the party to the contract has undertaken a personal obligation.3. . to the person from whom he received it‰. „when an agreement is discovered to be void. or to make compensation for it.108  TOPIC 7 LAW OF CONTRACT (DISCHARGE OF CONTRACT AND REMEDIES) (c) Death or personal incapacity of a party to the contract. the contract becomes void and Section 66 of the Contracts Act 1950 applies. due to a change in the law. According to Section 66. any person who has received any advantage under the agreement or contract is bound to restore it. A is too ill to sing. If the party in the contract has incurred expenses in performing the contract .000. A case for instance: (d) Lee Kin v. For example: Illustration (d) A contracts to sing for B at a concert for RM1.000 paid in advance. Under this circumstance. Therefore.1 Effect of Frustration When a contract is automatically terminated by reason of frustration. Section 15(2) provides that money due but not paid before frustration ceases to be payable.This refers to a contract where its performance becomes unlawful. Chan Suan Eng [1933] MLJ 197 Held: A lease for five yearly renewals was frustrated by the enactment of a new law prescribing annual renewals. Section 15 of the Civil Law Act 1950 (Revised 1972) is also relevant to frustration contract.

the manager of the theatre. there is a breach of the contract which entitles the party not in breach to take appropriate action which may include repudiation. The party not in breach has the option either to continue or repudiate the contract. the court has the discretion to order payment not exceeding the amount of the said expenses. and enters into a contract with B. unless he has signified. to sing at his theatre two nights a week during the next two months. As illustrated below: . This means. For example: Illustration (a) A is a singer. or disabled himself from performing. the obligation of both parties sustains and the party not in breach could still claim for damages. his acquiescence in its continuance‰. On the sixth night.TOPIC 7 LAW OF CONTRACT (DISCHARGE OF CONTRACT AND REMEDIES)  109 before frustration. Chen & Yap Ltd [1969] 2 MLJ 83 Held: The deliberate refusal of the appellants to make fortnightly payments for work already done and their order to the respondents to stop work left the respondents with no option but to treat the contract as having been repudiated. 7. B engages to pay her $100 for each nightÊs performance.4 DISCHARGE BY BREACH Section 40 of the Contracts Act 1950 states. his promise in its entirety. In the case of: Ban Hong Joo Mine Ltd v. and to sue for payment for the work which had been done. B is at liberty to put an end to the contract. „when a party to a contract has refused to perform. the promisee may put an end to the contract. by words or conduct. If the party not in breach chooses to continue with the contract. when a promisor fails to perform his obligations or to tender performance. A wilfully absents herself from the theatre.

On the sixth night. A sings on the seventh night. 7. . the manager of a theatre.1 1. 5.1 Discuss the following problems by applying the relevant principles of law: (a) An action was brought by Mr Fernando for damages for nonacceptance of 5. a singer. 8. Discuss the rights of Mr Fernando and Mr Roshan in the above contract. The sold note stated that the rice was to be shipped during the months of November and/or December 2007. and the remaining 100 bags on 3 November 2007. and cannot now put an end to it. SELF-CHECK 7. Mr Roshan refused to take delivery because the rice was not shipped in accordance with the terms of their contract. 6. enters into a contract with B. 2. B has signified his acquiescence in the continuance of the contract. A wilfully absents herself.200 bags of Moghul rice by Mr Roshan. How can a contract be discharged? What is the effect of novation? Under what situations remission of performance is allowed to the party in contract? Is time of performance essential in a contract? Can the performance of a contract be done by a third party? What is the meaning of frustration in contract? What are the circumstances under which a contract may be discharged by supervening impossibility? What is the effect of frustration? What is meant by breach that entitles the party to discharge a contract? ACTIVITY 7. but is entitled to compensation for the damage sustained by him through AÊs failure to sing on the sixth night. 3. and B engages to pay her at the rate of $100 for each night. 9. With the assent of B.100 bags was put on board ship on 31 October 2007.110  TOPIC 7 LAW OF CONTRACT (DISCHARGE OF CONTRACT AND REMEDIES) Illustration (b) A. to sing at his theatre two nights in every week during the next two months. A total of 5. 4.

The contract provided that the money be payable immediately. and/or Quantum Meruit.‰. his promise. Injunction. Steve agreed in April 2007 to engage Smith as a courier for Malaysian travel. Feeling unsatisfied. 7. „when a party to a contract has refused to perform.. Smith decided to commence an action for breach of contract on 22 May 2007.. the party not in default may claim one or more of the following remedies: (a) (b) (c) (d) (e) Rescission of contract.5. Advise Smith.TOPIC 7 LAW OF CONTRACT (DISCHARGE OF CONTRACT AND REMEDIES)  111 (b) Edward agreed to let Daw have a room for the purpose of viewing the Parade for Visit Malaysia Year 2007 on 1 September 2007. Steve wrote to Smith saying that he no longer required SmithÊs services. his duties to commence on 1 June 2007. Damages.. Steve contended that there was no cause of action until the date due for performance... (c) 7. .5 REMEDIES In cases of breach of contract. Daw who had paid RM300 on account. It means that non-performance of a contract by any of the party to the contract will entitle the other party to rescind the contract. Advise the parties on their rights in the above contract. Specific Performance. On 11 May 2007. left the balance unpaid. The procession did not take place because of heavy rain and flood. Daw sued to recover the RM300 and Edward counter-claimed for RM250.. for RM550.1 Rescission of Contract Under Section 40 of the Contracts Act 1950. the promisee may put an end to the contract. or disabled himself from performing.

.2 Damages provided under Sections the measure of damages common law rule in the provides that an injured The claim for damages in cases of breach of contract is 74 to 76 of the Contracts Act 1950. Held: Plaintiff was entitled to that amount. Section 74 provides recoverable by the claimant.31. (b) If the party is claiming special damages for loss. he must show that the other party knew at the time of making the contract that the special loss is likely to result from the breach. Lee Hin v. according to the usual course of things resulting from the breach. that is.477. The rule party is entitled to the following: (a) Damages arising naturally. Baxendale (1854) 9 Ex 341. the defendant committed breach and the plaintiff had to sell his car to another company at a cheaper price. However.912. This is explained in the case of: East Asiatic Co. This section re-enacts the case of Hadley v. being the difference between the selling price that he could get from the defendant and the actual selling price that he acquired from another company. Mohamed Abubakar [1958] MLJ 25 Held: The loss which arises naturally resulting from the breach by the defendant is the loss of plaintiffÊs profit which is usually the difference between the contract price and the market price. RM4.5.112  TOPIC 7 LAW OF CONTRACT (DISCHARGE OF CONTRACT AND REMEDIES) 7. Ltd v. Plaintiff later claimed damages amounting to RM1. Othman [1966] 2 MLJ 38 The defendant agreed to buy the plaintiffÊs car for RM6.69.390.

TOPIC 7 LAW OF CONTRACT (DISCHARGE OF CONTRACT AND REMEDIES)  113 Tham Chew Toh v. If the party has failed to mitigate losses. This specification was not fulfilled and consequently. Associated Metal Smelters Ltd [1972] 1 MLJ 171 The defendant-appellant had agreed to sell a metal melting furnace to the plaintiff-respondent. Mitigation of loss It is also the duty of the party to take reasonable steps to mitigate losses flowing from a breach. A case to illustrate this: . he cannot later recover any loss flowing from his neglect. Since the appellant knew of the requirement to deliver a furnace capable of producing the specified temperature and the urgency of delivery. Held: The appellant would not normally be liable for payment of damages for loss of profits unless there was evidence that the special object of the furnace had been drawn to their attention and they had contracted on the basis that delay in delivery would make them liable to payment for loss of profits. giving an undertaking that the melting furnace would have a temperature of not lower than 2.600 degrees F. they were liable to pay for certain loss of profits suffered by the respondent. the respondent brought an action alleging breach of condition and claimed damages. (c) The compensation given is not for any remote and indirect loss or damage sustained as a result of the breach. including loss of profits.

However. specific performance may be granted by the court in the following circumstances: . instead of delivering it to the sawmill. Small token of award that is given when the plaintiff has proved there is a breach.3 Specific Performance Specific performance is a discretionary remedy granted by the court. Chong Fah Shing [1969] 2 MLJ 6 The respondent had purchased timbers. Thus.5. v. It is commonly given upon the breach of any duty that has been prescribed by the statute. It is a decree of the court directing that the contract shall be performed specifically according to its terms. A sum awarded which is far greater than the actual pecuniary loss suffered by the plaintiff. Damages that may be assessed by mere arimethic calculation. the respondent had made a second purchase from other sources to make good the shortage. Held: It was the duty of the respondent to take reasonable steps to mitigate the damages caused by the appellant. the court reduced the damages awarded to the respondent. the appellant left it 500 feet away from the sawmill. Damages that cannot be ascertained. which were to be delivered to a sawmill from the appellant. Classification of Damages Substantial It is a pecuniary compensation that put the plaintiff in the position he would have enjoyed if the contract had been performed. There was „no need for the respondent to have gone to the expense and trouble of buying logs from elsewhere when the logs were lying a few hundred feet away and all that required was additional expense for hauling them up to the sawmill.114  TOPIC 7 LAW OF CONTRACT (DISCHARGE OF CONTRACT AND REMEDIES) Kabatasan Timber Extraction Co. but he did not suffer actual loss. The remedy is granted under the Specific Relief Act 1950. Nominal Exemplary Liquidated Damages Unliquidated Damages 7.‰ Therefore. Section 11(1) of the Specific Relief Act 1950 provides that.

and B may enforce specific performance of this obligation. Illustration A holds certain stock in trust for B. and B agrees to sell. A wrongfully disposes of the stock. of a trust. Illustration A agrees to buy. A may compel B specifically to perform this contract. (b) When no standard exists to ascertain the actual damage caused by the nonperformance of the act agreed to be done. for there is no standard for ascertaining the actual damage which would be caused by its non-performance. wholly or partly. The law creates an obligation on A to restore the same quantity of stock to B. .TOPIC 7 LAW OF CONTRACT (DISCHARGE OF CONTRACT AND REMEDIES)  115 (a) When the act agreed to be done is in the performance. a picture by a dead painter and two rare China vases.

(ii) (iii) A contracts to sell.000. a promissory note to B. for C has succeeded to AÊs liabilities and a decree for pecuniary compensation for not endorsing the note would be fruitless. Illustration A transfers without endorsement. to construct a road between certain specified points. to pay a certain annual sum towards the maintenance of this road. and wharf. but for valuable consideration.116  TOPIC 7 LAW OF CONTRACT (DISCHARGE OF CONTRACT AND REMEDIES) (c) An act agreed to be performed is such that its non-performance would not afford adequate relief. siding. Illustrations (i) A contracts with B to sell him a house for RM1. (d) When it is probable that pecuniary compensation cannot be obtained for the non-performance of the act agreed to be done. In consideration of being released from certain obligations imposed on it by its Act of Incorporation. and C is appointed as his assignee. B may compel A specifically to perform this agreement. and their possession carries with it the status of a shareholder. A refuses to complete the sale.000. he paying the purchasemoney. for the shares are limited in number and not always to be had in the market. road. (iv) A contracts with B to paint a picture for B. Z is entitled to have this contract specifically enforced. and the court may appoint a proper person to superintend the construction of the archway. for his interest in its performance cannot be adequately compensated for by money. B is entitled to have it delivered to him on payment or tender of the RM1. which cannot otherwise be procured. and B contracts to buy. who agrees to pay therefore RM1.000. B is entitled to a decree directing A to convey the house to him. B may compel C to endorse the note. . A becomes insolvent. a railway company contracts with Z to make an archway through their railway to connect lands of Z served by the railway. a certain number of railwayshares of a particular description. The picture is painted. and also to construct a siding and a wharf as specified in the contract.

Section 51 of the Specific Relief Act 1950 explains the injunctions as follows: 1. or until the further order of the court. Too Cheng Kwong [1963] MLJ 272 Held: The court granted a perpetual injunction by ordering the defendant who was a landlord of the plaintiff to keep all communication pipes in proper repair and to comply with all regulations of the Waterworks Department so that water supply to the premises rented by the plaintiffs would not be disconnected.TOPIC 7 LAW OF CONTRACT (DISCHARGE OF CONTRACT AND REMEDIES)  117 Further. It is granted at the discretion of the court and it can be either „temporary‰ or „perpetual‰ (Section 50). Temporary injunctions (or interlocutory or interim injunction) are to continue until a specified time.4 Injunction Injunction as a remedy is classified under Part III of the Specific Relief Act 1950 as „Preventive Relief‰.5. For instance: . or from the commission of an act. They may be granted at any period of a suit. Further principles in Section 55 of the Specific Relief Act 1950 provides that where a contract consists of affirmative agreement and negative agreement. 7. which would be contrary to the rights of the plaintiff. the defendant is thereby perpetually enjoined from the assertion of a right. A perpetual injunction (or permanent injunction) can only be granted by the decree made at the hearing and upon the merits of the suit. The temporary injunction is granted by the court to preserve the status quo pending the resolution of a legal action. and the defendant is permanently prohibited from doing the act or asserting a right for which the injunction was granted. A perpetual injunction can only be granted after a full trial and upon the merits of a case. 2. and are regulated by the law relating to civil procedure. the court cannot compel specific performance of the affirmative agreement but shall grant injunction to perform the negative agreement. In the case of: Neoh Siew Eng & Anor v. Section 20(1)(a) of the Specific Relief Act 1950 clearly states that specific performance will not be granted where monetary compensation is adequate.

the singer dishonoured the contract by singing in a rival club. An example of case: Pertama Cabaret Nite Club Sdn. work has been done under a void contract.5 Quantum Meruit This remedy means that the claimant will be awarded as much as he has earned or deserved. quantum meruit may be used to recover a reasonable price or remuneration where there is a contract for the supply of goods or services but the parties have not fixed any precise sum to be paid.118  TOPIC 7 LAW OF CONTRACT (DISCHARGE OF CONTRACT AND REMEDIES) Illustration A contract with B to sing for twelve months at BÊs theatre and not to sing elsewhere. and the contract provided that in the event of a breach. The court had granted an interlocutory injunction. The remedy can be used contractually or quasi-contractually. the respondent should not perform in Kuala Lumpur during the fixed period of the contract. Roman Tam [1981] 1 MLJ 149 A singer had signed a contract to appear and sing at the appellantÊs night club for a number of days. . Later. 7. for instance. Bhd v. Quasi-contractually. Contractually. B cannot obtain specific performance of the contract to sing but he may be able to secure an injunction to restrain A from singing at any other place of public entertainment. a claim of quantum meruit may be made where. The claimant cannot recover damages for breach because no valid contract exists. but he may recover on a quantum meruit basis.5.

The claimant and other directors who appointed him never obtained the required number of shares so that the deed was invalid. Held: He succeeded on a quantum meruit. 2. there being no valid contract. the claimant had rendered services. However. and he is now sued on a quantum meruit for a reasonable sum by way of remuneration. 7.2 1. 5. SELF-CHECK 7. 4. The claimant was employed as managing director by the company under a deed which provided for remuneration. and must obtain these within two months of appointment.TOPIC 7 LAW OF CONTRACT (DISCHARGE OF CONTRACT AND REMEDIES)  119 In the case of Craven-Ellis v. 3. The articles provided that directors must have qualification shares. 6. Canons Ltd [1936] 2 All ER 1066. What are the remedies available to the parties in a contract? Can the plaintiff claim damages more than the amount of his actual loss? What is the importance of mitigating losses in claim for damages? When will the court grant the remedy of specific performance? In what circumstance is specific performance not to be granted? What is injunction? What is the difference between temporary injunction and perpetual injunction? .

Dewi now wishes to claim damages from Kenchana for her losses.2 Discuss the following problems by applying the relevant principles of law: (a) AG Sdn Bhd (AGSB) has been awarded a tender to supply sugar for Yummy Biscuits Factory (YBF) for two years. AGSB managed to deliver only 200 bags of sugar and due to that. Starhill Production. Last month. Advise Famous Production on its chance of success. On 3rd December 2007. Kenchana delivered the said boiler 12 weeks later. Cempaka. Subsequently. Can she succeed? Discuss. According to the agreement. had entered into a contract in which she agreed to act exclusively for the film company (Famous Production) for 18 months. A contract that is created by consent can be discharged by consent. Advise YBF whether they can claim damages from AGSB.120  TOPIC 7 LAW OF CONTRACT (DISCHARGE OF CONTRACT AND REMEDIES) ACTIVITY 7. a distinguished actress. YBF has to reduce production and reject orders from customers. it is said to be discharged and the contracting parties are free from further obligations arising from it. (b) (c)    When a contract is terminated. Famous Production found out about this and asked for an injunction to restrain Cempaka from carrying out the contract with Starhill Production. . after the two monthsÊ period for delivery due. Dewi lost her normal business profits during the period of delay and also the profits from dyeing contracts which were offered to her during the period. The effect of novation is to release the obligation of the parties under the earlier contract. AGSB has to deliver 500 bags of sugar every month to the factory. Kenchana agreed to deliver a new boiler to Dewi in two monthsÊ time but she failed to do so. As a result. she was anxious to obtain more money and thus left Famous Production to enter into a contract with another film company.

There is a general duty requiring that reasonable steps must be taken to mitigate losses flowing from a breach. . & Vohrah B. An injured party is entitled to damages arising naturally resulting from the breach. Bhd. UK: Pearson and Longman. A claim for special damages requires the party to show that the other party knows that special loss is likely to result from the breach.TOPIC 7 LAW OF CONTRACT (DISCHARGE OF CONTRACT AND REMEDIES)  121        A contract is said to be discharged when the parties to the contract have performed what they have agreed to do in the contract. D. Wu M.). Undang-Undang Perniagaan Malaysia. An agreement to do an act impossible in itself is void. (2006). Keenan. Smith and KeenanÊs Law for Business (13th ed. Specific performance is a discretionary remedy granted by the court. Chen & Yap Ltd [1969] 2 MLJ 83. Agreement Breach Damages Discharge of contract Frustration Injunction Performance Quantum Meruit Remedies Specific performance Text Books: Harlina Mohamed On & Rozanah Ab. Injunction as a remedy is classified as “Preventive Relief”. (2000). (2007). Selangor: Pearson and Longman. Rahman. Selangor: Kumpulan Usahawan Muslim Sdn.). Cases:   Ban Hong Joo Mine Ltd v. The Commercial Law of Malaysia (2nd ed. Central Malaysia Development Ltd v Chin Pak Chin [1967] 2 MLJ 174. A.

Associated Metal Smelters Ltd [1972] 1 MLJ 171. Tham Chew Toh v. Pertama Cabaret Nite Club Sdn. . Othman [1966] 2 MLJ 38. Chan Suan Eng [1933] MLJ 197. v. East Asiatic Co. Kabatasan Timber Extraction Co. Neoh Siew Eng & Anor v. Baxendale (1854) 9 Ex 341. Yeoh Kim Pong (Realty) Ltd v Ng Kim Pong [1962] MLJ 118. Taylor v. Krell v Henry [1903] 2 KB 740. Chong Fah Shing [1969] 2 MLJ 6. Hadley v. Bhd v.122  TOPIC 7 LAW OF CONTRACT (DISCHARGE OF CONTRACT AND REMEDIES)               Chin Swee Onn v Puchong Realty Sdn. Ltd v. Bhd [1990] 1 MLJ 108. H A Berney v Tronoh Mines Ltd [1949] MLJ 4. Mohamed Abubakar [1958] MLJ 25. Roman Tam [1981] 1 MLJ 149. Too Cheng Kwong [1963] MLJ 272. Lee Hin v. Kerpa Singh v Bariam Singh [1966] 1 MLJ 38. Caldwell (1863) B&S 826. Lee Kin v.

Explain the statutory requirements for creation of agency contract. From the definition above. and Discuss the scope of authority of the agent.  INTRODUCTION The relationship between a principal and an agent is very important because at times. Define the meaning of agency. For example. 3. it can be said that the contract of agency is divided into two: . 2.Topic  8 Law of Agency (Part 1) LEARNING OUTCOMES By the end of this topic. a person needs help and assistance from another person to act on his behalf or become his proxy to perform certain acts. This is where the agency relationship comes into existence. In Malaysia. Describe the types of agency contract. or who is so represented‰. 4. The owner will then authorise the real estate agent to deal with the land. Explain the purpose of agency contract. the law of agency is governed by Part X of the Contracts Act 1950. Section 135 of the Act defines an „agent‰ as „a person employed to do any act for another or to represent another in dealings with third persons‰. 5. and a „principal‰ as „the person for whom such act is done. where a person intends to sell his land. he may need the service of a real estate agent to sell the land on his behalf. you should be able to: 1.

and A contract between the principal and third party through an agent. By ratification. An agent can therefore enter into contracts with third parties that are binding on the principal. and/or By estoppel or „holding out‰. By necessity. where the agent attains the authority to act for and on behalf of the principal. A cannot deny his responsibility to C on the ground that B is a minor.2 FORMATION OF AGENCY There are several ways for a contract of agency to exist (see Figure 8. . By implied appointment.1 CAPACITY Section 137 of the Contracts Act 1950 provides a requirement for a person to become an agent. 8. C supplies the goods to A through B.1). A hires B.124  TOPIC 8 LAW OF AGENCY (PART 1) (a) (b) A contract between the principal and agent. „any person may become an agent. as follows: (a) (b) (c) (d) (e) By express appointment. A is still liable to C for the payment of the goods and A cannot claim damages from B. According to the provision. but no person who is not of the age of majority and of sound mind can become an agent. 8. to buy goods from C on his behalf. who is 16 years old. For example. so as to be responsible to his principal‰. but B sells the goods for his benefit.

. 8. or act done by the parties in the ordinary course of dealing.1: Elements for formation of agency ty si es ec N 8. which means things that were spoken or written.1 Agency by Express Appointment An agency by express appointment is created through verbal or written authorisation by the principal to the agent. “an authority is said to be express when it is given by words spoken or written”.TOPIC 8 LAW OF AGENCY (PART 1)  125 Ex pr es s Impl ied A ppoi ntme nt Ap po in m en t n tio ica tif Ra FORMATION  OF AGENCY ” ut gO din ol ”H l/ e top Es Figure 8.2 Agency by Implied Appointment The second part of Section 140 of the Contracts Act 1950 provides for implied appointment of an agent. 1950.2. According to Section 140. The appointment is implied when the authority can only be drawn from the circumstances of the case. The principal gives express authority to the agent as stated in the first part of Section 140 of the Contracts Act.2.

„an agent having an authority to do an act has authority to do every lawful thing which is necessary in order to do the act‰. N has the authority to deal with the advertisement. M appointed (either verbally or written) N. B. a real estate agent was instructed by a hotel owner to find a buyer for the hotel. or the order was . The owner then brought an action to cancel the agentÊs act. or the wife was sufficiently provided for with the goods. or usually done in the course of conducting such business‰. Implied appointment of agency also exists between partners in a partnership business. In his appointment. Solomon (1897) AC 22. packaging. as a marketing agent. This principle is laid down in Section 141(1) of the Act that says. The agent did as instructed and received a deposit from a prospective buyer. For instance. Therefore. as an agent to market his product in Kota Bharu. however. using AÊs name. an agency relationship exists between husband and wife. who lives in Kota Bharu. which are connected to the authorised act. Under common law. The assumption is rebuttable if the husband can prove that the wife was given sufficient allowance for buying goods. It is presumed that a wife has the authority to buy necessaries for their living by pledging her husbandÊs credit. Here it is clear that B has an implied authority from A. it did not specify the extent of authority in which N can act. orders and pays for goods from Y. In Summers v. situations where the authority given under the express appointment by the principal does not specify the extent of the agentÊs authority. „an agent having an authority to carry on a business has authority to do every lawful thing necessary for the purpose. will have the authority to do other acts. an agent who has been authorised to do certain acts. In such a case. distribution and transportation of the product as well as other matters that are connected with his appointment. The Court held that even though the agent was not expressly authorised to receive deposits from prospective buyer.126  TOPIC 8 LAW OF AGENCY (PART 1) For example. he was presumed to have acted under the ambit of implied authority of an agent. Also provided in Section 141(2) of the Act. who manages the shop. as an agent to deal with Y in purchasing goods for the shop. There are. A stays in Shah Alam and has a shop in Kuala Lumpur. Most of the time.

E agreed to purchase goods from Z at the price of RM220. Consequently. In the event of the above. P appointed E as an agent to purchase goods at the price of not exceeding RM200. buys goods for B. Therefore. On 5 June. In Muthuchellapa Chettiar v. Afterwards B sells them to C on his own account. If the principal accepts the contract. P had the option to either ratify or reject EÊs contract with Z. the ratified contract is considered valid or effective from the date it was made by the agent and not from the date of ratification. For example. . „where acts are done by one person on behalf of another but without his knowledge or authority. A. In this case.000. Ratification can be done expressly or impliedly as provided in Section 150 of the Contracts Act 1950. such acceptance is known as ratification. on 3 January. 8.000. Ratification renders the principal liable to the contract. without authority. Ratification operates retrospectively. but acted as if he has the authority to act as an agent. Section 149 of the Contracts Act 1950 provides that.TOPIC 8 LAW OF AGENCY (PART 1)  127 unreasonable. Thus. For example. E was not authorised to purchase the goods exceeding the amount given by the principal. or he expressly forbade his wife to pledge his credit or he expressly warned the trader not to supply his wife with the goods.3 Agency by Ratification Agency by ratification can arise if one of the situations below exists: (a) (b) when an agent exceeded his authority. If P accepted EÊs act on 7 June. E would therefore become an agent by ratification. Indian Overseas Bank Ltd [1952] MLJ 25. BÊs conduct implies a ratification of the purchase made for him by A. as if the agent has been authorised to do such act. or when a person is not an agent. the contract entered by E and Z was valid on 5th June and not on 7 June. he may elect to ratify or to disown the acts‰. part payment on an overdraft by the principal (which had been arranged by the agent without the principalÊs authority) was an implied ratification of the loan.2.

„no valid ratification can be made by a person whose knowledge of the facts of the case is materially defective‰. however. The agent exceeded his authority and bought at a higher price. the agent must have acted as an agent for the principal. unless there is evidence to show that he does not care of the facts that he intends to ratify. According to Section 151 of the Contracts Act 1950. the appellants authorised the agent to buy wheat at a certain price. such ratification by the principal can only be done under the following conditions:(a) The unauthorised act must be recognised by the law and not a void contract. the principal must have full knowledge of the material facts to be ratified.128  TOPIC 8 LAW OF AGENCY (PART 1) However. At the time the contract was made. in his own name. At the time of ratification. the agent must have actual principal in existence. He cannot ratify only part which is advantageous to him and reject the rest. . (b) (c) At the time the contract was made. a contract to buy a hotel on behalf of a company by an agent could not be ratified by the company because it did not exist at that time. Durant [1901] AC 240. It was held that the principal (Keighley) was not liable and could not ratify the contract because at the time of the contract. the agent has acted in his own capacity. The principal. In Kelner v. (d) (e) The principal must ratify the whole contract. In the case of Keighley Maxted & Co v. Baxter (1866) LR 2 CP 174. Therefore the agent must disclose that the contract was entered into on behalf of his principal. agreed to take the wheat at the higher price but failed to take delivery. Section 152 of the Contracts Act 1950 provides „a person ratifying any unauthorised act done on his behalf ratifies the whole of the transaction of which the act formed a part‰.

„an agent has authority. (g) (h) At the time the contract was made and at the time of ratification. cannot.. Ratification must be exercised within a reasonable time..which. injure or terminate a third partyÊs rights. Mathews [1910] 2 KB 401.. a fire insurance policy ratified after the event insured against had happened was held to be ineffective. For an agency by necessity to exist.. .2. or of terminating any right or interest of a third person... 8.. Section 142 of the Contracts Act 1950 provides that. the principal must have contractual capacity. in an emergency. in his own case.TOPIC 8 LAW OF AGENCY (PART 1)  129 (f) Ratification must not affect..would have the effect of subjecting a third person to damages. Section 153 of the Contracts Act 1950 provides that „an act done by one person on behalf of another.. to do all such acts for the purpose of protecting his principal from loss as would be done by a person of ordinary prudence. be made to have that effect‰. the following conditions must be fulfilled. by ratification. In Grover & Grover v. under similar circumstances‰.4 Agency by Necessity Agency by necessity arises when there is an emergency situation and it becomes necessary for the agent to act to preserve the principalÊs property.

by his words or conduct. (c) 8. If the goods are not perishable goods like clothes or furniture. However.5 Agency by Estoppel or Holding Out Under Section 190 of the Contracts Act 1950. done acts or incurred obligations to third persons on behalf of his principal. the ship arrived late at Weymouth due to bad weather and some of the tomatoes were found to be bad. The Court held that: The plaintiff was entitled to damages because the defendants were not agents of necessity. The contract was to carry the plaintiffÊs tomatoes from Jersey to Covent Garden market. The agent may be considered has acted in good faith to protect the interest of the principal if he collects the payment from the third party in order to prevent his principal from suffering losses. an agent who acted in such case will be liable for the loss suffered by the principal. They have failed to communicate with the plaintiff. „when an agent has.2. . (b) The agent acted to prevent the principal from incurring loss or damages. The agent acted in good faith for the interest of the principal. induced such third persons to believe that those acts and obligations were within the scope of the agentÊs authority‰. without authority. the principal is bound by those acts or obligations if he has. Without communicating with the plaintiff. it will not give rise to emergency situation that requires disposal of them. Great Western Railway Company [1921] 1 KB 257. the defendants decided to sell the tomatoes locally because it was not possible for them to arrive in Covent Garden market to deliver the tomatoes in a saleable condition. In Springer v.130  TOPIC 8 LAW OF AGENCY (PART 1) (a) It is impossible for the agent to get the principalÊs instructions. Therefore. The plaintiff then claimed for damages in conversion based on the market price of tomatoes in Covent Garden. if the third party does not pay certain amount after using services provided by the principal.

The plaintiff then claimed for the price of the cigars from the defendant.000. (b) . The defendant appointed a manager to run a public house. A licence was taken out in the managerÊs name. which was disregarded by the manager. Implied actual or usual authority Implied actual authority is the proper or necessary authority given to the agent to execute the express authority. T appoints S as his agent to sell TÊs car. and Apparent authority.TOPIC 8 LAW OF AGENCY (PART 1)  131 For instance. E tells X in the presence of P that he is PÊs agent and is authorised to make contract on behalf of P. the plaintiff could rely on the usual authority of the manager if he has no knowledge of the restrictions imposed by the principal. Fenwick [1893] 1 QB 346. 8. In Watteau v. E is not PÊs agent. P does not deny EÊs statement. The Court held that the defendant (as the principal) was liable to pay because a manager of a public house usually had the authority to make such purchases.3. In actual fact.3 AUTHORITY OF AN AGENT It is important to know the extent of an agentÊs authority because any act done by the agent within his authority will bind the principal.1 (a) Actual Authority Express actual authority Express actual authority is expressly given by the principal (orally or in writing) to the agent. Therefore. The agentÊs authority is classified into: (a) (b) Actual authority. SÊs actual authority is to purchase goods on behalf of T. For example. The defendant forbade the manager to buy cigars on credit. and P was estopped from denying the existence of EÊs authority. In such case. When X sold goods to E. not exceeding RM10. For example. S has implied authority to allow the purchaser to test drive the car. 8. X may claim for the payment of the goods from P.000. T appoints S as his agent to purchase goods not exceeding RM10.

.2 Apparent or Ostensible Authority Apparent authority arises where a principal (by words or conduct) makes the third party believe that the agent has the authority to make contracts for the principal. precluded from denying the authority of the agent because the element of estoppel applies. v. induced such third persons to believe that those acts and obligations were within the scope of the agentÊs authority‰.132  TOPIC 8 LAW OF AGENCY (PART 1) 8. by his words or conduct. and it was considered as part of the company administration. Fidelis Furnishing Fabrics Ltd [1971] 3 AllER 16. The principal is. Chai Chee Mein & Ors (1987) Nov. In the case of Graphic Lines Pte Ltd v. therefore. the principal is bound by those acts or obligations if he has. The Court held that the company (defendant) was liable for the contract of hiring of motor vehicles made by the company secretary. Although the company secretary exceeded his actual authority in hiring the motor vehicles from the plaintiffs. done acts or incurred obligations to third persons on behalf of his principal. It is due to the representation made by the principal to the third party that leads the third party to believe that the agent has such authority. ButterwothsÊ Digest. the act was within the usual authority of a company secretary.3. According to Section 190 of the Contracts Act 1950 „when an agent has. The Court held that the assistant manager had apparent authority because the general manager had represented to the plaintiffs that advertisements should be done through the assistant manager. without authority. In Panorama Development (Guilford) Ltd.

1 1. 4. 2. 8. 3.TOPIC 8 LAW OF AGENCY (PART 1)  133 SELF-CHECK 8. 7. 10. 6. 9. 5. Who is an agent? Can a minor become an agent ? What are the ways of formation of agency contract? Must the appointment of an agent be done expressly? Under what circumstances can the principal ratify his agentÊs act? Does ratification of agency contract operate retrospectively? What are the conditions for an agency by necessity to exist? What is meant by agency by estoppel? What is the importance of an authority to an agent? What is the difference between actual authority and ostensible authority? .

Gary told Tan Chong that the car was meant for RichardÊs personal use. Gary went to see Tan Chong. Richard appointed Gary as his agent to buy a car at the price not exceeding RM70. Yuppie went to TE and bought 150 kilograms of salted fish on behalf of Charlie.3 Discuss the following questions. . (b) (c) (ii) On the 10th of February. Later. Zila decided to place an order of 1050 plastic bottles produced by SKB in her own name. Without contacting Charlie for further instruction.000 to Kedai Runcit Tampan (KRT) in Bukit Tinggi on 10th February 2004. On 15 June 2007. upon reaching KRT. The next day. which agreed to buy all the rice bags at the price of RM3.000. Richard has just sold his share in one company and decided to buy a new car for his wife. Yuppie discovered that the shop was closed beginning 9th February and would be opened on 15th February 2004. While carrying out such duty.000 and paid the deposit of RM7. Decide whether Tan Chong could claim for the price of the car from Richard. Richard told Tan Chong that he has never authorised Gary to purchase the car at that price and refused to accept the car. Discuss the effect of ZilaÊs act according to the law of agency. Tan Chong knew about the limitation of GaryÊs authority. a car dealer and booked a car at the price of RM75.134  TOPIC 8 LAW OF AGENCY (PART 1) ACTIVITY 8. Advise Charlie on the legal claims that he can take against Yuppie. Yuppie went to Pasar Mini Sayugia (PMS). (a) Zila was appointed by Jaya to supervise the purchase of 1000 plastic bottles produced by Syarikat Kalis Berhad (SKB). Charlie has appointed Yuppie as his agent to carry out the following: (i) To deliver 200 bags of Taj Mahal rice at the price of RM4.000.1 – 8. To obtain the supply of 100 kilograms salted fish from Tamban Enterprise (TE) after delivery of the rice bags to KRT. One month after the booking date.500. Tan Chong sent the car to Richard and claimed for the balance purchase price of the car.

B. Rahman.). . Apparent authority arises where a principal makes the third party believes that the agent has the authority to make contracts for the principal. Implied actual authority is the proper or necessary authority given to the agent to execute the express authority. Agency by ratification arises when the principal accepts the contract made by the agent who exceeds his authority or acts without authority. The Commercial Law of Malaysia (2nd ed. In the agreement. Bhd. A. Agency by express appointment can be done verbally or in writing. necessity or estoppel. ratification. the principal authorises the agent to do things on behalf of the principal. Undang-Undang Perniagaan Malaysia. A ratified contract is valid and effective from the date the contract was made. Actual authority Agent Apparent authority Estoppel Express appointment Holding out Implied appointment Necessity Principal Ratification Text Books: Harlina Mohamed On & Rozanah Ab. & Vohrah. Wu M. Selangor: Pearson and Longman. Agency by necessity arises when there is an emergency situation which would require the agent to act promptly. The formation of an agency contract can be done through an express or implied appointment.TOPIC 8 LAW OF AGENCY (PART 1)  135          Agency arises from an agreement between the principal and the agent. (2000). Selangor: Kumpulan Usahawan Muslim Sdn. (2007).

v. Kelner v. Solomon (1897) AC 22. Summers v. Springer v. Butterwoths‰ Digest. . Panorama Development (Guilford) Ltd. Keighley Maxted & Co. Watteau v. Fenwick [1893] 1 QB 346. v.136  TOPIC 8 LAW OF AGENCY (PART 1) Cases:          Graphic Lines Pte Ltd v. Baxter (1866) LR 2 CP 174. Indian Overseas Bank Ltd [195] MLJ 25. Chai Chee Mein & Ors (1987) Nov. Great Western Railway Company [1921] 1 KB 257. Fidelis Furnishing Fabrics Ltd [1971] 3All ER 16. Muthuchellapa Chettiar v. Grover & Grover v. Durant [1901] AC 240. Mathews [1910] 2 KB 401.

Describe the rights of agents and principals. 2. 1950 will be applicable. According to Section 164 of the Contracts Act 1950.  INTRODUCTION An agency relationship arises out of an agreement between the principal and the agent. 4. if the contract does not specify the rights and duties of the parties. and Explain the rules of termination of agency contract.Where the agent acts otherwise. if any . Discuss the effect of agency contract. "an agent is bound to conduct the business of his principal according to the directions given by the principal. 3. whether express or implied..Topic  9 Law of Agency (Part II) LEARNING OUTCOMES By the end of this topic.1 DUTIES OF AGENT TO PRINCIPAL As far as the duty of an agent to his principal is concerned. Obey the principalÊs instructions. List the duties of agents and principals. However. the provisions in Sections 164 to 178 of the Contracts Act.. 9. you should be able to: 1. the agent is obliged to do the following for the principal: 1.. The agreement confers the rights and duties to the principal and agent. The provisions in Section 164 to 174 govern the duties of an agent to his principal and the provisions in Section 175 to 178 deals with the principalÂs duties to his agent.

and if any profit accrues. the agent has no obligation to obey the order. he must account for it‰. For example. Therefore. the court decided that the agent was liable for the losses. the provision requires the agent to act according to the customs which prevail in doing business of the same kind if there is no clear instruction from the principal. an agent failed to insure his principalÊs ship although he had been ordered to do so. Bilton (1843) 5 Man & G 455. the agent was to be personally liable for the payment of the price of the goods. in the absence of any such directions. the agent will be liable for any loss sustained by the principal.138  TOPIC 9 LAW OF AGENCY (PART II) loss sustained. the principal instructed his agent to purchase certain goods at a certain price. according to the custom which prevails in doing business of the same kind at the place where the agent conducts the business‰. However. he has to make good any loss sustained by the principal. "an agent is bound to conduct the business of his principal according to the directions given by the principal. According to Section 164 of the Contracts Act 1950. If the principalÊs order is clearly illegal. he must make it good to his principal. Otherwise. the agent purchased at more than the authorised price and as a result. . The provision provides that an agent who fails to carry out his principalÊs instructions will result in breach of contract and consequently. Act according to the customs prevailing if there is no instruction from the principal. When the ships lost. 2. In the case of Turpin v. or.

a broker. whose credit at the time was very high. It means if an agent failed to carry out his duty diligently. sells goods of A on credit to C. Section 165 of the Contracts Act 1950 provides that ‰an agent is bound to conduct the business of the agency with as much skill as is generally possessed by persons engaged in similar business. want of skill or misconduct‰. C. want of skill. 3. The following case and illustrations explain the provision above. skilfully and with due care. in whose business it is not the custom to sell on credit. and to use such skill as he possesses. omits to make the investment. Exercise care and diligence in carrying out his work and to use skill as he possesses. or misconduct. . at interest. an agent engaged in carrying on for B a business. and to make compensation to his principal in respect of the direct consequences of his own neglect. the moneys which may be in hand. but not in respect of loss or damage which are indirectly or remotely caused by such neglect. the agent must make good any loss sustained by the principal as result of his act. unless the principal has notice of his want of skill. Illustration (b) B.TOPIC 9 LAW OF AGENCY (PART II)  139 Illustration (a) A. The agent is always bound to act with reasonable diligence. A must make good to B the interest usually obtained by such investments. before payment. in which it is the custom to invest from time to time. becomes insolvent. B must make good the loss to A.

In consequence of the omission of the clauses. having authority to sell on credit. the first offer was signed. B. according to the usual rate. an insurance-broker employed by B to effect an insurance on a ship. The plaintiff received an offer and accepted it „subject to contract‰. Illustration (b) A. at the time of the sale. The court held that the defendant was liable to the plaintiff for the difference between the two offers. Illustration (c) A..140  TOPIC 9 LAW OF AGENCY (PART II) In the case of Keppel v Wheeler [1927] 1 KB 577. nothing can be recovered from the underwriters. a merchant in Kuala Lumpur. A few days later. in consequence of not receiving the money. A must make compensation to his principal in respect of any loss sustained. but not further. B retains the money for a considerable time. has an agent. A is bound to make good the loss to B. by variation of rate of exchange). sells to B on credit. As a result. is insolvent. and for any further direct loss (e. A. omits to see that the usual clauses are inserted in the policy. . to whom a sum of money is paid on AÊs account. B is liable for the money and interest from the day on which it ought to have been paid. B. without making proper and usual enquiries as to the solvency of B. with orders to remit. The ship is afterwards lost. Illustration (a) A. the plaintiff employed the defendant to sell his house. X made a higher offer for the property but the defendant did not communicate this offer to the plaintiff. in London. becomes insolvent.g. an agent for the sale of goods.

5. the price of cotton rises. The ship arrives safely in England. his agent at Kelang. having it in his power to send the cotton. . Section 174 of the Contracts Act 1950 also gives the agent the right to retain his principalÊs property in his possession until his remuneration is paid. until the amount due to himself for commission. „an agent is bound to render proper accounts to his principal on demand‰. According to Section 170. omits to do so. According to Section 174. all moneys due to himself in respect of advances made or expenses properly incurred by him in conducting such business. This means the agentÊs duty is to account for all monies and the property handled by him as agent for the principal and to produce such accounts when demanded by the principal. 4. directs B. B is bound to make good to A the profit which he might have made by the 100 bales of cotton at the time the ship arrived. who accepts the agency. Soon after her arrival. and also such remuneration as may be payable to him for acting as agent‰. of the principal received by him. an agent is entitled to retain goods. B. to send him 100 bales of cotton by a certain ship. Pay the principal all sums received on his behalf. „in the absence of any contract to the contrary. but not any profit he might have made by the subsequent rise. out of any sums received on account of the principal in the business of the agency. a merchant in England. According to Section 166 of the Contracts Act 1950. papers and other properties. whether movable or immovable.TOPIC 9 LAW OF AGENCY (PART II)  141 Illustration (d) A. „an agent may retain. Render proper accounts when required. Section 171 of the Contracts Act 1950 provides that „the agent is bound to pay to his principal all sums received on his account (subject to the deductions in Section 170)‰.

may repudiate the sale if he can show that B has dishonestly concealed any material fact. an agent must not become a party in a transaction and he must act solely for the benefit of the principal. „it is the duty of an agent. or the sale has been disadvantageous to the principal. „if an agent. According to Section 168 of the Contracts Act 1950. 7. the principal is entitled to claim from the agent any benefit which may have resulted to him from the transaction‰. Consequently. Thus. in cases of difficulty. As provided in Section 167 of the Contracts Act 1950. It is the duty of an agent to communicate with his principal. without first obtaining the consent of his principal and acquainting him with all material circumstances which have come to his own knowledge on the subject. 6. the principal may repudiate the transaction. Avoid conflict of interest with own duty. „if an agent deals on his own account in the business of the agency. he has the right to repudiate the transaction. . A directs B to sell AÊs estate. but B buys the estate for himself in the name of C. For the example above. For instance. A on discovering that B has bought the estate for himself. if the principal discovers the truth. Communicate with the principal. Obviously. without the knowledge of his principal.142  TOPIC 9 LAW OF AGENCY (PART II) disbursements and services in respect of the same has been paid or accounted for to him‰. to use all reasonable diligence in communicating with his principal. and in seeking to obtain his instructions‰. or that the dealings of the agent have been disadvantageous to him‰. the principal has the right to claim any benefit gained by the agent from the transaction. deals in the business of the agency on his own account instead of on account of his principal. As laid down in Section 169 of the Contracts Act 1950. if the case shows either that any material fact has been dishonestly concealed from him by the agent. It is the agentÊs duty not to let his personal interest conflict with his duty.

Recover the amount of the secret commission from the agent (Section 169 of the Contracts Act 1950). . On discovering this. An agent can only keep the profit if the principal consents to it.TOPIC 9 LAW OF AGENCY (PART II)  143 For instance. Refuse to pay the agent his commission or other remuneration as illustrated in the following case: (b) (c) In the case of Andrews v Ramsay & Co [1903] 2 KB 635. 8. above the commission or remuneration agreed by the parties. Later. the plaintiff discovered that the defendant received 20 pounds as commission from the purchaser. Not to make any secret profit out of the performance of his duty. Secret profit may include payment of a secret commission or any financial advantage received by the agent. for damages for any loss he may have sustained through entering into the contract. the principal may take the following actions: (a) Repudiate the contract if it is disadvantages to him (Section 168 of the Contracts Act 1950). The defendant received 100 pounds from a purchaser as deposits for the property. An agent is also under a duty not to make secret profit out of the performance of his duty. The defendant paid 50 pounds to the plaintiff and kept the other 50 pounds in payment of his commission with the plaintiffÊs consent. It was held that he could recover both sums. (d) (e) Dismiss the agent for breach of duty. Sue the agent and third party giving the secret commission. and buys the house for himself. A may compel B to sell it to him at the price he gave for it. B tells A it cannot be brought. the plaintiff instructed the defendant to sell property and agreed to pay him 50 pounds as commission. The plaintiff sued to recover the 20 pounds and also the 50 pounds he had paid the defendant. A directs B to buy a certain house for him. Otherwise.

the respondent society bought land at a price of $944. The Privy Council held that the Housing Society could recover either the bribe or the amount of the actual loss suffered by it as a result of entering into the contract. an agent must not disclose or reveal this information to other persons. In the case of Boardman v. The appellant knew of this fact but failed to inform the society. it matters not that the principal lost no profit or suffered no damage⁄. Malaysia Govt. He gained unjust benefit by the use of his principalÊs property or his position and must account for it‰. Not to disclose confidential information or documents entrusted to him by his principal. Officers Co-operative Housing Society Ltd. After the sale was completed. Thus.000 for it.000 as a bribe or secret commission from the vendor for the sale of the said land. [1978] 1 MLJ 149. Lord Denning said: „Once it is found that the agent has used his principalÊs property or his position so as to make money for himself. Phipps [1966] 3 All ER 721. he is usually entrusted with the principalÊs confidential information or documents.144  TOPIC 9 LAW OF AGENCY (PART II) In Mahesan v. 9. . the society discovered the fact that the appellant had received $122. As an agent for the principal.000 from the vendor who had paid earlier $456.the reason is simply because it is money which the agent ought not to be allowed to keep.

Not to delegate his authority. the court held that the agentÊs action revealing the information about the defendantÊs fire insurance policy had given right to the defendant to terminate the contract and sued for damages. be employed‰. Where it is presumed from the conduct of the parties that the agent shall have power to delegate his authority. Where the nature of the agency is such that delegation of the authority to another person is necessary to complete the business. . This principle is in line with the maxim "delegatus non potest delegare" which means "a delegate cannot delegate‰. "an agent cannot lawfully employ another to perform acts which he has expressly or impliedly undertaken to perform personally. Power Packing Services (Hermit Road) Ltd (1970) 2 LloydÊs Rep 65. 10. placed by the principal on his agent. a sub-agent must.S Harris Trustee Ltd v. In cases of necessity or unforeseen emergency (for instance. It is also provided in Section 143 of the Contracts Act 1950 that. An agent must not delegate his authority to another person because an agency relationship is personal in nature and involves trust and confidence. unless by the ordinary custom of trade a sub-agent may. from the nature of the agency. to this rule there are exceptions. Where the customs of the trade or business permits delegation. an agent may delegate his authority or appoint a sub agent under the following circumstances: (a) (b) (c) (d) (e) (f) Where the principal approves of the delegation of authority.TOPIC 9 LAW OF AGENCY (PART II)  145 In the case of L. However. or. due to sickness of agent). Thus. or Where the act to be done is purely ministerial or clerical and does not involve the exercise of discretion.

000 from C and to invest in good securities. The amount of commission to be payable to an agent depends on the terms of the contract of agency. As a result. .000 in securities which he ought to have known to be bad. Not to wilfully prevent or hinder the agent from earning his commission A principal cannot employ another agent if an agent has already been appointed to carry out certain duties. However. B recovers the $100. Another example.000 and he must make good the $2000 loss to A. 3. 2. Indemnify the agent for acts done in the exercise of his duties According to Section 175 of the Contracts Act 1950. Generally.000 from C. Pay the agent any commission or other remuneration unless the agency relationship is gratuitous.000 and for investing the $90. B is entitled to the remuneration for recovering the $100. B is entitled to no remuneration for his services.000 and invests $90.2 DUTIES OF PRINCIPAL TO AGENT As far as the duty of a principal to his agent is concerned. For example. the right to receive commission or other remuneration arises when the agent has done all that he had agreed to do. Where no amount is agreed. Through BÊs misconduct. A employs B to recover $1. Particularly. and must make good the loss.000.000 in good securities and the other $10. an agent loses his right to remuneration if there is misconduct (wrongful or improper conduct) in the business of the agency. A loses $2000. A employs B to recover $100.146  TOPIC 9 LAW OF AGENCY (PART II) 9. Section 173 of the Contracts Act 1950 provides that. the principal is obliged to do the followings in carrying out his duties under the agency contract: 1. the money is not recovered. But he is not entitled to any remuneration for investing the $10. the agent is entitled to reasonable remuneration. "an agent who is guilty of misconduct in the business of the agency is not entitled to any remuneration in respect of that part of the business which he has misconducted‰. if the appointed agent is already in the midst of negotiations and the act of appointing another agent is to deprive the original agent from earning his commission.

a merchant there. Subsequently. and C sues B. and the agent does the act in good faith. For example: Illustration (a) B. B defends but is unsuccessful. and has to pay damages and costs. and A authorises him to defend the suit. It means the agent has the right to be indemnified by his principal for any expenses incurred and consequences of any act. contracts with C for the purchase of 10 casks of oil for A. who repudiates the contract altogether. at Kelang. . under instructions from A. It means the principal must indemnify the agent when he incurred loss or liability in exercising his authority. „where one person employs another to do an act. in Taiping. and incurs expenses. A is liable to B for such damages. by the orders of A. and is compelled to pay damages and costs.TOPIC 9 LAW OF AGENCY (PART II)  147 „the employer of an agent is bound to indemnify him against the consequences of all lawful acts done by the agent in exercise of the authority conferred upon him‰. B defends the suit. A does not send the goods to B. costs and expenses. Illustration (b) B. the employer is liable to indemnify the agent against the consequences of that act. A refuses to receive the oil. B informs A of the suit. costs and expenses. Afterwards. and incurs expenses. A is liable to B for such damages. even if it causes injury to third person. while the agent is acting in good faith in the execution of his authority. though it cause an injury to the rights of third person‰. Section 176 of the Contracts Act 1950 provides that. B informs A. a broker at Taiping. and C sues B for breach of contract. contracts with C to deliver certain goods to him.

the true owner of the goods. „where one person employs another to do an act which is criminal. the true owner of the goods. A is liable to indemnify the officer for the sum which he is compelled to pay to C. For example: Illustration (b) B. and hands over the proceeds of the sale to A. This is provided in Section 177 of the Contracts Act 1950. Section 178 of the Contracts Act 1950 provides that. B does not know this. sues B and recovers the value of the goods and costs.148  TOPIC 9 LAW OF AGENCY (PART II) For example: Illustration (a) A. the principal is not bound to indemnify the agent against the consequences of the act. and all costs and damages of any action in respect thereof. B is sued by C and has to pay damages. sells goods in the possession of A. and A agrees to indemnify B against the consequences of the publication. A is not liable to B upon the indemnity. in consequence of obeying AÊs directions. and is sued by C. A is liable to indemnify B for what he has been compelled to pay to C and for BÊs own expenses. either upon an express or an implied promise. requires the officer of the court to seize certain goods. representing them to be the goods of B. a libel upon C in the paper. if the agent suffers injury during the course of his duty due to his principalÊs neglect or want of skill. if the agent is employed to do a criminal act. a decree-holder and entitled to execution of BÊs goods. . the proprietor of a newspaper. at the request of A. to indemnify him against the consequences of that act‰. However. Illustration (b) B. publishes. and also incurs expenses. at AÊs request. but which A had no right to dispose of. the employer is not liable to the agent. Afterwards C. Consequently. The officer seizes the goods.

An agent loses his right to an indemnity if he acts beyond his authority or negligently performs his duty. Fernandes (1889) 6 TLR 73. the Privy Council held that agents who engaged in a fraudulent scheme to defraud their principals. v. The defendant then authorised the plaintiff to sell the stock. The defendant in this case asked the plaintiff to quote the price of some stock ex dividend. and puts up the scaffolding himself. For example. . he failed to inform the defendant accordingly. The scaffolding is unskilfully put up. hurt. McLaughlin [1938] MLJ 23. This can be seen in following case of: Davison v. A employs B as a bricklayer in building a house. will forfeit their right to an indemnity in respect of transactions which form part of the fraud.TOPIC 9 LAW OF AGENCY (PART II)  149 „the principal must make compensation to his agent in respect of injury caused to the agent by the principalÊs neglect or want of skill‰. in consequence. The plaintiff sold and had to pay the dividend to the purchaser (under the rules of the London Stock Exchange). Due to plaintiffÊs negligence. The Court held that: The plaintiff was not entitled to be indemnified by the defendant. A must make compensation to B. but the plaintiff quoted the price cum dividend. In case of Solloway and Anor. and B is.

What are the legal duties of a principal to his agent? Under what situations will an agent lose his right to remuneration? What are the conditions under which a principal is not bound to indemnify his agent? ACTIVITY 9. 3. What are the agentÊs duties towards his principal under the law? What is the liability of an agent who breaches the duty? What actions can be taken by a principal who discovers his agent making a secret profit? Can an agent delegate his authority to another person? Why? Under what circumstance can an agent appoint a sub-agent? Give at least one example. Lenny received discounts from the printers and advertisers but charge Hasnan the full amount of the contract price and kept the discounts for himself.1 1. Decide whether Lenny is bound to account Hasnan for the discounts that he received. From the contract. 6. 7. to sell certain property for him and agreed to pay Lenny a commission on the sale and other miscellaneous expenses including printing and advertising costs.1 Discuss the following questions: (a) Hasnan employed Lenny. 5.150  TOPIC 9 LAW OF AGENCY (PART II) SELF-CHECK 9. 4. . 8. an auctioneer. 2.

this was quite untrue because the bungalow had been underpinned several times to prevent it from falling down.TOPIC 9 LAW OF AGENCY (PART II)  151 (b) Mr Kim employed a firm of estate agents to sell his bungalow for him. Can Mr Kye succeed? (c) (d) . Ryder & Co stopped payment and did not settle the payment to Mr Kye. represented to Mrs Irene that the property was of considerable value that any financier would easily provide financial assistance to the purchaser of the bungalow. Goh himself had no knowledge of the underpinning. Ryder & Co bought the goods in their own names from Mr Kye. Upon discovering the agency. In actual fact. Mr Kye did not inquire whether they were acting as agents or principals. In actual fact. Advise Mrs Irene whether her action would succeed. Goh himself had no knowledge of the underpinning. Mrs Irene bought the bungalow on the faith of the representation and on discovering the underpinning. Mr Kim knew that the bungalow was in poor condition but did not authorise Goh to make the representation. sued Mr Kim for damages for fraud. Mr Kim employed a firm of estate agents to sell his bungalow for him. a member of the firm. Ramoo and Santhi paid Ryder & Co for the goods in the ordinary course of business. Mr Kye sued Ramoo and Santhi for the price. represented to Mrs Irene that the property was of considerable value that any financier would easily provide financial assistance to the purchaser of the bungalow. Mr Kim knew that the bungalow was in poor condition but did not authorise Goh to make the representation. this was quite untrue because the bungalow had been underpinned several times to prevent it from falling down. A fortnight later. Advise Mrs Irene whether her action would succeed. a firm of merchants to buy goods for them. Goh. Mrs Irene bought the bungalow on the faith of the representation and on discovering the underpinning. Goh. and supplied the goods on credit. a member of the firm. Ramoo and Santhi employed Ryder and Co. sued Mr Kim for damages for fraud.

Mr Kye did not inquire whether they were acting as agents or principals.152  TOPIC 9 LAW OF AGENCY (PART II) (e) Mr Kim employed a firm of estate agents to sell his bungalow for him. this was quite untrue because the bungalow had been underpinned several times to prevent it from falling down. Ryder & Co stopped payment and did not settle the payment to Mr Kye. Mrs Irene bought the bungalow on the faith of the representation and on discovering the underpinning. A fortnight later. Ramoo and Santhi paid Ryder & Co for the goods in the ordinary course of business. The third party knows that the agent is contracting as an agent and knows the principal for whom the agent is acting. a firm of merchants to buy goods for them. Goh. Thus. sued Mr Kim for damages for fraud.3. and An undisclosed principal. Ryder & Co bought the goods in their own names from Mr Kye.1 A Named Principal A named principal is a principal whose name has been revealed to the third party by the agent.3 EFFECTS OF CONTRACTS MADE BY AGENTS The effect of contracts made by agents will be discussed in relation to the categories of principal. Goh himself had no knowledge of the underpinning. a member of the firm. Upon discovering the agency. Advise Mrs Irene whether her action would succeed. A disclosed principal but not the name. . In actual fact. 9. Can Mr Kye succeed? (f) 9. However. the agent is not liable for the contract and the contract is binding on the principal. Mr Kye sued Ramoo and Santhi for the price. Ramoo and Santhi employed Ryder and Co. Mr Kim knew that the bungalow was in poor condition but did not authorise Goh to make the representation. and supplied the goods on credit. represented to Mrs Irene that the property was of considerable value that any financier would easily provide financial assistance to the purchaser of the bungalow. The kinds of principals include:    A named principal.

. Where the agent signs a negotiable instrument in his own name. The third party who enters into a contract with the agent of undisclosed principal is bound by it if he discovers that the contract is actually made on behalf of undisclosed principal. they were personally liable. where an agent would be personally liable for the contract as follows: (a) (b) (c) (d) Where the agent agrees to accept personal liability. Where the agent executes a deed in his own name. In the case of Pernas Trading Sdn Bhd v. A may sue either B or C. and afterwards discovers that B was acting as agent for C. and/or Where the agent exceeds his authority and the principal does not ratify the contract. If the third party does not know that a person he deals with is acting as an agent. the respondents ordered chemicals and fertilisers for themselves (rather than on behalf of the principal). for the price of the cotton. or both. "in cases where an agent is personally liable. they had contracted for themselves. The agent may be held personally liable on the contract because the third party does not know that the agent is acting for someone. The Federal Court held that although the respondents were agents for a principal. but they denied liability when the appellants sued for the balance of the price. Illustration A enters into a contract with B to sell him 100 bales of cotton.TOPIC 9 LAW OF AGENCY (PART II)  153 there are exceptions under Section 183 of the Contracts Act 1950. Section 186 of the Contracts Act 1950 says. liable‰. a person dealing with him may hold either him or his principal. he has the right to sue the agent or the principal or both.3. Persatuan Peladang Bakti Melaka [1979] 2 MLJ 124. 9. Therefore. or both of them.2 An Undisclosed Principal An undisclosed principal is the principal whose identity and existence is not disclosed by the agent to the third party at the time of contract.

agency contract may be terminated in the following ways: (a) (b) Act of the parties. be terminated to the prejudice of such interest‰. Generally. nor can it be terminated by his unsoundness of mind or death. A gives authority to B to sell AÊs land. and to pay himself. or by the principal being adjudicated or declared a bankrupt or an insolvent‰.4. where agent has an interest in subject matter. „an agency is terminated by the principal revoking his authority. in the absence of an express contract. the agency cannot. For example. out of the proceeds. 9. the debts due to him from A. 9. A cannot revoke this authority. the agent is presumed to be personally liable.1 (a) (b) (c) Termination by the Act of the Parties The termination by the act of the parties may be made in the following ways: By mutual agreement of both principal and agent By revocation of authority by the principal By renunciation of the agency by the agent According to Section 154 of the Contracts Act 1950. or Operation of law. if the agent does not disclose the name of the principal.4 TERMINATION OF AGENCY Termination of agency is dealt with under Sections 154 to 163 of the Contracts Act 1950. or by the agent renouncing the business of the agency.154  TOPIC 9 LAW OF AGENCY (PART II) According to Section 183(b) of the Contracts Act 1950. or by either the principal or agent dying or becoming of unsound mind. Section 155 of the Contracts Act 1950 states: „Where the agent has himself an interest in the property which forms the subject-matter of the agency. (i) Termination of agency. . or by the business of the agency being completed.

must be made good to the one by the other‰. Section 158 of the Contracts Act 1950 stipulates: „Where there is an express or implied contract that the agency should be continued for any period of time. as the case may be. A authorises B to buy 1. as the case may be. Section 157 of the Contracts Act 1950 stipulates: „The principal cannot revoke the authority given to his agent after the authority has been partly exercised. Section 159 of the Contracts Act 1950 states: „Reasonable notice must be given of such revocation or renunciation.000 bales of cotton on account of A. the principal must make compensation to the agent. for any previous revocation or renunciation of the agency without sufficient cause. (iv) Compensation for revocation by principal or renunciation by agent. or the agent to the principal. revoke the authority given to his agent at any time before the authority has been exercised so as to bind the principal‰. (iii) Revocation where authority has been partly exercised. . Section 156 of the Contracts Act 1950 states: „The principal may. otherwise the damage thereby resulting to the principal or the agent. so as to make himself personally liable for the price. For example. A cannot revoke BÊs authority so far as regards payment for the cotton. B buys 1. and to pay for it out of AÊs money remaining in BÊs hands.000 bales of cotton in his own name.‰ (v) Notice of revocation or renunciation. save as is otherwise provided by the last preceding section.TOPIC 9 LAW OF AGENCY (PART II)  155 (ii) When principal may revoke agentÊs authority. so far as regards such acts and obligations as arise from acts already done in the agency‰.

or by the agent renouncing the business of the agency. or by either the principal or agent dying or becoming of unsound mind.2 Termination by Operation of Law Termination by operation of law is also provided in Section 154 of the Contracts Act 1950. By the expiration of the period fixed in the contract of agency. A lets it himself. or by the principal being adjudicated or declared a bankrupt or an insolvent. Section 160 of the Contracts Act 1950 states: „Revocation and renunciation may be expressed or may be implied in the conduct of the principal or agent. termination by operation of law may be made in the following ways: (a) (b) (c) (d) (e) (f) By the performance of the contract of agency. By the death of the principal or agent. This is an implied revocation of BÊs authority.4. or by the business of the agency being completed. respectively‰. By the principal becoming insolvent or being made a bankrupt. „an agency is terminated by the principal revoking his authority. in cases of frustration). Afterwards. A empowers B to let AÊs house.‰ Thus. 9. . or By the happening of an event which renders the agency unlawful (for example.156  TOPIC 9 LAW OF AGENCY (PART II) (vi) Revocation and renunciation may be expressed or implied. For example. By the insanity of the principal or agent.

             An agency contract confers rights and duties to the principal and agent. A principal is bound to indemnify his agent for acts done within his scope of authority. 3.TOPIC 9 LAW OF AGENCY (PART II)  157 SELF-CHECK 9. . An agent must not disclose confidential information or documents entrusted to him by his principal. An agent must exercise care and diligence. 4. A principalÊs duty is to pay the agent his commission or remuneration. An agent is bound to conduct the business of his principal according to the principalÊs instruction. A principal must not wilfully prevent his agent from earning his commission. An agent must act according to the customs prevailent in the absence of instruction from the principal. An agent must communicate with his principal to get further instructions. An agent cannot delegate his authority to another person without permission or approval from the principal. What is the effect of contract made by an agent who named his principal to the third party? Under what circumstance will an agent be personally liable for a contract? How can an agency contract be terminated? Is there any situation under which a principal cannot revoke the authority of his agent? Describe the ways of termination of agency by way of operation of law. An agent must not make any secret profit out of the performance of his duty. and use his skill in carrying out his work. It is an agentÊs duty not to let his personal interest conflict with his own duty. An agentÊs duty is to render proper accounts to his principal. 2. 5.2 1.

). Wu. Phipps [1966] 3 All ER 721. Officers Co-operative Housing Society Ltd. Duties Named principal Notice Mutual agreement Termination Renunciation Revocation Undisclosed principal Text Books Harlina Mohamed On & Rozanah Ab. M. (2007). The Commercial Law of Malaysia (2nd ed. Davison v. Undang-Undang Perniagaan Malaysia. Turpin v. Pernas Trading Sdn Bhd v. & Vohrah. Malaysia Govt. Keppel v Wheeler [1927] 1 KB 577. Power Packing Services (Hermit Road) Ltd (1970) 2 LloydÂs Rep 65. Rahman. (2000). L.A. Bilton (1843) 5 Man & G 455. Persatuan Peladang Bakti Melaka [1979] 2 MLJ 124. McLaughlin [1938] MLJ 23. Selangor: Kumpulan Usahawan Muslim Sdn. Cases          Andrews v Ramsay & Co [1903] 2 KB 635. [1978] 1 MLJ 149. Mahesan v. . B.S Harris Trustee Ltd v. Selangor: Pearson and Longman.158  TOPIC 9 LAW OF AGENCY (PART II)   An agent is not liable for contracts done for a named principal. An agency contract may be terminated by the act of the parties or by operation of law. Bhd. Solloway and Anor. v. Fernandes (1889) 6 TLR 73. Boardman v.

Discuss the rules on formation of partnership. you should be able to: 1. Partnership.  INTRODUCTION There are various types of business that are widely being carried out in Malaysia. 2. the law that governs partnership is the Partnership Act 1961. 5. Explain the important characteristics of partnership. 4. In Malaysia. Define the meaning of partnership. Describe the relations of partners to outsiders.Topic  10 Law of Partnership (Part I) LEARNING OUTCOMES By the end of this topic. 3. and Describe the liabilities of partners to third parties. . The Act is similar to the English Partnership Act 1890 and Section 47(1) of the Partnership Act 1961 provides for the application of rules of equity and common law in partnership so long as they are not inconsistent with the express provisions of the Act. The most common types of business are:    Sole Proprietorship. and Company.

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10.1

DEFINITION OF PARTNERSHIP AND ITS CHARACTERISTICS

It is important to establish a partnership between parties since the formation of it entails certain obligations and liabilities for the partners. Section 3(1) of the Partnership Act 1961 defines partnership as "the relation which subsists between persons carrying on a business in common with a view of profit". Partnership, however, does not include clubs, societies, mutual benefit organisations and building societies (see Figure 10.1). (a) The relation between parties In order to form a partnership, there must be a minimum of two persons. Therefore, there is usually an agreement to be made by the parties which lay down certain terms and conditions relating to the partnership business, and duties and responsibilities of the partners involved. This agreement will be binding upon every partner and enforceable in law. The agreement is for business purpose Section 2 of the Partnership Act 1961 defines „business‰ as includes every trade, occupation or profession. Thus, the persons must have an agreement to have a business in common. The business is for purpose of gaining profit This means the partners agree to carry on business for profit. Thus, if a person is excluded from sharing any profit in a partnership, then he is not a partner. Similarly, the relationship between persons to do voluntary or welfare works is not a partnership.

(b)

(c)

Figure 10.1: Characteristics of partnership

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Section 3(2) of the Partnership Act 1961 therefore excludes the following list from the definition of partnership:  The relation between members of a company or association which is registered as a company under the Companies Act 1965 or a co-operative society under any written law relating to co-operative societies; or The relation between members of a company or association which is formed or incorporated by or in pursuance of any other law having effect in Malaysia or letters patent, Royal Charter or Act of Parliament of the UK.

Existence of partnership: Some considerations
Where a partnership agreement does not exist, Section 4 of the Partnership Act 1961 provides a number of tests in determining the existence of a partnership, as follows:
Section 4(a) Joint tenancy, tenancy in common, joint property, or part ownership does not of itself form a partnership. The sharing of gross returns does not of itself establish a partnership, whether the parties who share the returns have or do not have a joint right or interest in the property from which or from the use of which the returns are derived. Sharing of business profit by a person is prima facie evidence of partnership. However, the presumption may be rebutted if the sharing is for some other reasons:  Payment of a debt out of profits of the business to a creditor by instalments does not make the creditor a partner in the business.  Remuneration to a servant or an agent of the business from the profit of their employer's business.  Payment of an annuity or a portion of the profits to a widow or child of a deceased partner in the business.  Payment of interest which varies with the profits on a loan advanced for use in the business under a written contract.  Payment to a seller of the goodwill of a business in the form of a share of the profits of the business.

Section 4(b)

Section 4(c)

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Section 4(a)
Partnership does not exist between tenants regardless whether they share or not the profit gained through the use of the land. In the case of jointly owned property, it does not of itself form a partnership between the owners. In Davis v. Davis (1894) 70 LT 265, a father gave his business and three houses to be shared together by his two sons. Two of the houses were rented out. The sons used part of the money earned from the rental of the house to improve the business and shared the other remaining portion equally. The Court held that the business was a partnership between the sons but the joint ownership of the houses and equal share on the earnings did not make them partners.

Section 4(b)
In Cox v. Coulson (1916) 114 LT 599, the defendant, a manager of a theatre entered into an agreement with Mill whereby Mill would prepare and pay for the theatre show while the defendant would prepare and pay for the rent of the stage and lighting services for the show. It was agreed that the defendant would receive 60% from the gross returns and Mill would receive the remaining 40%. The plaintiff suffered injury during the show and he sued the defendant for liability as a partner of Mill. The Court decided that even though the defendant and Mill shared the gross returns from the business, it did not make the defendant and Mill partners. Both had separate responsibility and liability. The defendant was liable to pay for the rent of the stage and lighting services from the 60% returns he received. Mill, on the other hand, would settle the journey expenses, salaries of the actors and the cost incurred during the show from the 40% returns he received. This showed that no partnership was formed between the defendant and Mill. Thus, the defendant was not liable to the plaintiff.

Section 4(c)(i)
Payment of a debt out of profits of the business to a creditor by instalments does not make the creditor a partner in the business. For instance, A lends B a sum of RM15,000 and A receives a sum RM1,000 per month from the business as

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repayment of the loan. Though the payment of RM1,000 per month to A comes from the profit of the business, A is not a partner to B in the business. In Badeley v. Consolidated Bank (1888) 38 ChD 238, X intended to build a railway transportation and borrowed money from Y to finance the project. As security for the loan, X charged his machineries and agreed to pay an interest of 10% of the loan amount and 10% from the profit of the project to Y. The Court held that the advance given by Y to X creates a lender-borrower relationship. Y is not a partner to X though he received the payment from the profit of the business. Section 4(c)(ii) Remuneration to a servant or an agent of the business from the profit of their employer's business. Any form of payment to a servant or an agent which comes from the employerÊs business profit constitutes salary or wages. Therefore, a servant or an agent is not a partner in the employerÊs business and has no partnership liability. In Abdul Gaffoor v. Mohamed Kassim & Ors [1931-32] FMSLR 19, the plaintiff was a despatch clerk in the defendantÊs firm. He was then appointed as a manager in one of the firmÊs branch office. One of the firmÊs documents stated that the profit from the firm would be divided into 79.4 parts and would be shared between the plaintiff, the defendant and others partners. The plaintiff contended that he was a partner but the defendant argued that the relationship was a mere employer-employee relationship. The Court held that the receipt of salary from the profit did not make the plaintiff a partner of the firm.

Section 4(c)(iii)
Payment of an annuity or a portion of the profits to a widow or child of a deceased partner in the business. Some partnership agreements provide a term on payment of annuity to the dependants of a deceased partner. The annuity comes from the profit of the partnership. In this situation, although the widow or the child receives payment from the profit of the partnership, it did not make them partners in the business.

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In Commissioners of Inland Revenue v. LebusÊs Trustees [1964] 1 All ER 475, A, a partner in a firm bequeathed that his right to profit would be given to his wife upon his death. However, the partner did not perform the bequest and thereafter, the Inland Revenue imposed certain tax for the amount which the widow was supposed to receive. The Court held that AÊs widow is not a partner of the firm. Therefore, her portion of money must not be taxable.

Section 4(c)(iv)
Payment of interest which varies with the profits on a loan advanced for use in the business under a written contract. A person who gives advance payment by way of a loan and receives a payment of interest which varies according to the profit of the business is not a partner in the business. In the case of Re Young Ex p Jones (1896) 75 LT 278, Y and J entered into an agreement whereby J advanced £500 to Y and in consideration, J would receive £1 a week out of the profit gained from YÊs business. J also helped in the management of the business and was given certain power to manage. The Court held that the receipt of the payment from the profit in YÊs business does not make J a partner although J was authorised to deal with the business.

Section 4(c)(v)
Payment to a seller of the goodwill of a business in the form of a share of the profits of the business. For example, A, a solicitor agreed to sell his firm to B and agreed to introduce his clients to B. In consideration, B agreed to give A 10% out of the profit of the business for the period of three years. In this case, although A receives payment out of the profit of the business, it does not make him a partner to B in the business. In Rawlinson v. Clarke (1860) 15 M&M 292, a doctor sold his business and introduced his clients to the buyer. In consideration, he received certain payment and shares from the profit made in the first year of the business. The Court held that he was not a partner to the buyer.

For example. must be present. it is.2.2 Lawful Purpose A partnership must be formed for a lawful purpose.2. Hence. an action against all the partners. The name under which a firm carries on business is the name applicable to the persons who are partners of the firm. Also the relations between partners concerning rights and duties will usually be contained in an agreement or defined by the Partnership Act 1961. A partnership is the relationship between individuals who intend to do a business in common together. Under Section 47(2) of the Partnership Act 1961. the elements of a valid contract including consideration. A partnership is said to be illegal when it is formed with the intention to carry out business activities against the law. carrying on business under the name of HAS Enterprise. Husain. Akbar and Chua. in fact. It is not a legal persona but a label used by a number of individuals trading under that particular name. Akbar and Chua are partners. a partnership firm has no separate legal entity from its founder under the law. Section 6 of the Partnership Act 1961 allows persons to form a partnership to be called a firm under the name in which the business is carried on. lawful purpose. 10. when an action is brought against the firmÊs name. if any person brings an action against HAS Enterprise.2 FORMATION OF PARTNERSHIP In formation of a partnership. competency. it is an action against Husain. a partnership is also considered as illegal if the number of partners exceeds 20 persons. Thus.TOPIC 10 LAW OF PARTNERSHIP (PART I)  165 10. free consent.1 Partnership under the Law Distinct from a company. 10. .

2. In partnership. 1948 (in Sabah). But if he remains in the firm. Yong. the provisions of the Partnership Act 1961 will be applicable to the partners. 10. of sound mind and has not lost capacity to enter into contracts under any laws.3 Capacity In William Jacks & Co. usually known as Articles of Partnership which provides for particulars of the firm and the terms of the partnership. registered address of business.2. (Malaya) Ltd v. No.5 Registration of Partnership A partnership must be registered under the Registration of Businesses Act 1956 (in Peninsular Malaysia). Jacks claimed a sum of RM12. A partner is competent to contract if he is an adult.64 (Business Names) and Cap. The partners must have the capacity to enter into contract. Trades Licensing Ordinance. a minor partner is not liable for all the firmÊs debt and contractual liabilities. type and nature of the business. they may be varied by the partner's consent as provided under Section 21 of the Partnership Act 1961.166  TOPIC 10 LAW OF PARTNERSHIP (PART I) 10. 10. he was also liable as a partner. For mutual rights and duties of partners. Professions and Trade Licensing)(in Sarawak). 16. other partners were not liable for the claim. did not defend his case but Chan denied that the goods were for YongÊs personal use.4 Partnership Agreement Partnership agreement may be in the form of oral or written agreement. shall be submitted to the Registrar of Business for .91 being the payment of the goods sold to the defendant who were partners in a firm. he can exonerate himself from liability by withdrawing himself from the firm. Therefore. Chan & Yong Trading Co (1964) MLJ 105. he will be liable with other partners. When a minor partner reaches his age of majority.2. However. it did not mean that the firm and other partners were not liable and since Yong did not take any action to terminate his partnership upon attaining majority age. a minor can become a partner. The partners may have partnership agreements in writing. who was a minor partner at the time of the purchase of the goods.33 (Business. The Court held that even though the goods were bought for YongÊs personal use. Sarawak Cap. name of business. Particulars as to the date of operation of business.734. name of partners. In absence of a partnership agreement.

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registration. Any changes to the above particulars are to be reported to the Registry Department. In the event of dissolution of partnership or death or retirement of a partner, a report on the same shall be made to avoid liability to third party after the occurrence of any of the above.

SELF-CHECK 10.1
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. What is the meaning of partnership? How do you determine the existence of partnership in absence of a partnership agreement? Does joint tenancy and tenancy in common create a partnership between the tenants? Does sharing of gross returns in a business between two persons establish a partnership? Sharing of business profit by a person is prima facie evidence of partnership. Is the presumption rebuttable? Is partnership a legal persona? What is the effect of a partnership formed for unlawful purposes? Can a minor become partner in a partnership business? What is the importance of a partnership agreement? Must a partnership be registered? Why?

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ACTIVITY 10.1
Discuss the following questions: (a) The partnership business plans to engage Niza to manage the business and one of the terms is that Niza will receive remuneration from the profit of the business. Is Niza a partner? Discuss. S lends a sum of RM5,000 to firm Y and receives repayment by 12 monthly instalments of RM500 per repayment from the profits of the firm. Does that make S a partner of firm Y? Discuss. T and H has entered into an agreement whereby H would lend a sum of RM1,000 to T and as a consideration, H would receive RM50 a week from the profit of T's business. H would also assist in the administration of the firm and was given certain authority to manage the business of the firm. Is H a partner of T? Discuss. R and F are partners of a restaurant business. They intend to expand their business and make a loan from G. G will receive 20% from the nett profit of the business. Is G a partner of R and F? Discuss.

(b)

(c)

(d)

10.3 RELATIONSHIP OF PARTNERS AND OUTSIDERS (THIRD PARTIES)
The agency principle is significant in the relationship of partners to outsiders because a partner is an agent for the firm. When a partner carries out activities within the ordinary course of the partnershipÊs business, his act will bind the other partners, so long as he has the authority to act and does not act beyond the authority given.

10.3.1

Partner's Authority to Bind the Firm

A partner has an authority to bind the firm if he carries out the partnership business within his scope of authority. Section 7 of the Partnership Act 1961 provides that every partner is an agent for the firm and other partners for the purpose of the business of partnership. This means any act done by a partner in the course of the partneship business binds the firm and other partners; unless the partner has no authority or is unauthorised to act for the firm; and the third party

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knows that the partner has no authority or does not know or believe him to be a partner. Therefore, for a partner to bind the firm and other partners, his act must have been carried out within his scope of authority and in the usual way of the partnership business. Consequently, outsiders or third parties dealing with the partner may assume that the partner has the authority to do such acts usually done by partners in that particular kind of business. This is an implied authority of a partner as an agent for the firm, as illustrated in the following cases: In Mercantile Credit Ltd. v. Garrod [1962] 3 All ER 1103, P and G were partners in a garage business. One of the terms of their partnership agreement prohibited the partners from buying and selling cars. Without the knowledge of G, P sold a car to Mercantile Credit for a sum of £700 and the money was deposited into the firmÊs account. When Mercantile Credit initiated a suit to claim the money back, the Court held that G was liable to the plaintiff. Even though P was prohibited by the partnership agreement to engage in buying and selling cars, the act of P was usually done by those who engaged in a garage business.

In another case, Chan King Yue v. Lee & Wong [1962] 28 MLJ 379, the plaintiff lent RM35,000 to her husband who was a partner in a firm. The husband issued a receipt under the firmÊs name and used the money to pay the firmÊs debt. The plaintiff took an action to recover her money but other partners refused to pay on the grounds that the plaintiffÊs husband had no authority to borrow money. The Court held that the act of borrowing money by the plaintiffÊs husband was important for the firmÊs continuous business. Therefore, the firm was liable.

Section 7 also provides that the partner who has no authority or is unauthorised to act for the firm will not bind the firm if the third party knows that the partner has no authority or does not know or believe him to be a partner. For example, A has been informed about B's limited authority and B was unauthorised to order goods exceeding RM15,000. A made a contract with B for the supply of electrical goods worth of RM17,000 to the firm. The firm was not bound by the contract. According to Section 8 of the Partnership Act 1961, an act or instrument relating to the business of the firm and done or executed in the firmÊs name, or in any other

170  TOPIC 10 LAW OF PARTNERSHIP (PART I)

manner showing an intention to bind the firm, by any person thereto authorised, whether a partner or not, is binding on the firm and all the partners. In the case of Hock Hin Chan v. Ng Kee Woo [1966] 1 MLJ 223, H gave a loan to one of the partners in a firm. As a security, a bill of sale was issued bearing the signature and seal „by Ng Teng Tuan, a partner to Wan Lee Chan, for and on behalf of Wan Lee Chan⁄‰. The issue that arose was whether the bill of sale issued by the firm was valid and binding on the firm. The Court held that a partner in a firm had an implied authority to issue a bill of sale on behalf of other partners. Therefore, the bill of sale was valid and binding on the firm.

According to Section 9 of the Partnership Act 1961, where one partner pledges the credit of the firm for a purpose apparently not connected with the firm's ordinary course of business, the firm is not bound, unless he is, in fact, specially authorised by the other partners. However, this section does not affect any personal liability incurred by an individual partner. This means, a partner cannot misuse the trust given to him by the firm to make debt which is not connected with the firm's business. The partner who misuses the trust shall be personally liable unless he has been given the express authority to do as such. For instance, A and B are partners carrying on the business of printing and selling „batik‰. A, without the knowledge of B bought a dishwasher under the firmÊs name. The supplier requested payment from the firm. In this case, B may deny liability under Section 9 and A would be personally liable. In other words, A cannot bind the firm because his act was not carried out within the usual course of the partnership business. Another example where a firm will not be liable is where a partner issues the firm's cheque for the purpose of settling personal debt.

10.3.2

Liability of Partners

As far as liability of partners is concerned, under the Partnership Act 1961, there are several types of liabilities (see Figure 10.2) namely contractual liability, tortious liability, liability for improper use of trust property and for holding out, criminal liability and liability of incoming and retiring partners.

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Figure 10.2: Types of partnership liabilities (a) Contractual Liability According to Section 11 of the Partnership Act 1961, „every partner in a firm is liable jointly with the other partners for all debts and obligations of the firm incurred while he is a partner; and after his death, his estate is also severally liable in a due course of administration for such debts and obligations, so far as they remain unsatisfied but subject to the prior payment of his separate debts.‰ In the case of Osman b. Haji Mohamed Usop v. Chang Kang Swi (1924) 4 FMSLR 292, a partnership has been formed by six partners including the appellant. Three of the partners borrowed RM10,000 from a third party by effecting a promissory note. The loan was guaranteed by the respondent (Chan Kang Swi). Later, the firm failed to pay the debt and Chan was called to pay for the debt on his own account. He then initiated action against the six partners for recovery of his money and five partners accepted their liability, except the appellant. The Court decided that the debt was a firmÊs debt and was obtained for the purpose of partnership. The partners who signed the promissory note had acted for the firm and they were authorised to do so. Therefore, the firm or the six partners were liable.

loss or injury is caused to any person not being a partner in the firm. For instance A.” Tort is a civil wrong. he can recover from the administrator of the estates of the deceased partner. B and C who are partners in a printing business bought a printing machine worth RM15. the firm and other partners were liable to the customer. This means if a creditor sues the firm for the firmÊs debt but fails to recover full satisfaction of his claim. In this case. A. had done illegitimately that which was part of his business to do legitimately. by any wrongful act or omission of any partner acting in the ordinary course of the business of the firm or with the authority of his copartners. If A. defamation. C repaired a washing machine for a customer but due to his negligence. the deceased partner is jointly liable for the firmÊs debt incurred during his term as a partner of the firm. as the partner. trespass and negligence. In partnership. However. C was negligent in performing his work and therefore. Section 11 also provides the liability of a deceased partner. Hence. B and C shall be jointly liable for the payment of the sum. Under the provision. H bribed a clerk of another firm to get secret information on contracts and tenders of the said firm. (b) Tortious Liability Section 12 of the Partnership Act 1961 provides for liability of firm for wrongs or tortious liability of partners: ”Where.172  TOPIC 10 LAW OF PARTNERSHIP (PART I) Section 11 provides joint liability of partners in matters concerning contracts entered into by the firm with third parties. the firm is liable therefore to the same extent as the partner so acting or omitting to act. In Hamlyn v. H and S were partners in a firm.000 by credit. The Court held that H. the customer was electrocuted when using the washing machine. B and C are partners carrying out business of repairing electrical equipment. The examples of tortious acts are nuisance. The joint liability under this section means that every partner is liable for all debts and obligations of the firm. Houston & Co [1903] 2 KB 82. payment to the creditor is subject to the settlement of the deceased partnerÊs personal debt. the firm was liable for his act. . if any. or any penalty is incurred. tort may occur in the following situation.

A who has been appointed as a trustee. improperly employs trust property in the business or on the account of the partnership. Other partners. (d) Liability for holding out A person who is not a partner of a firm may become liable for the firmÊs debt if he represents himself or allow himself to be represented as a partner in the firm. (c) Liability for improper use of trust property Liability for improper employment of trust property for partnership purposes is provided under Section 15 of the Partnership Act 1961. The sons used the trust property for the purpose of the firmÊs business. and nothing in this section shall prevent trust money from being followed and recovered from the firm. When the firm became bankrupt. B and C are not liable for the trust property. It provides that: „If a partner. In Ex parte Heaton (1819) Buck 386. no other partner is liable for the trust property to the persons beneficially interested therein: Provided as follows: (i) (ii) this section shall not affect any liability incurred by any partner by reason of his having notice of a breach of trust.‰ For example. the firm was liable because the bribe was part of the firmÊs money and such information was for the purpose of the partnership business and would have been legitimate if obtained by proper means. they cannot avoid liability and the trust money may be recovered from the firm if it is still in possession and under the control of the firm. if still in its possession or under its control. the Court held that the money which had been misappropriated could not be recovered from the partnership property because the father had no knowledge of the breach of trust committed by his sons. He will therefore be liable like a partner to the persons who give credit to the firm. B and C are partners of a firm. a father and sons were partners in a firm. being a trustee. However. Section 16 of the Partnership Act 1961 provides: .TOPIC 10 LAW OF PARTNERSHIP (PART I)  173 In the above case. A. improperly uses the trust property in the business. if B and C have notice of a breach of trust.

When a person makes a representation that induces third party to believe and rely on such representation that he is a partner. on the faith of any such representation. A and B are partners of a saloon business. D. then C would be personally liable as a partner for holding out. is liable as a partner to any one who has. (1876) 4 QSCR 202. . If the firm or the partners knew about CÊs contract on behalf of the firm and did not deny it in due course. A is entrusted to look after the account of the firm while B is in charge of the administration of the firm. by words spoken or written or by conduct. after a partner's death. C was a partner by holding out and is liable for the payment of the product supplied to the firm. they employ C as the customer relations officer. Relying on CÊs representation.‰ The liability is based on the principle of estoppel. came to the saloon. But if they have no knowledge about the contract. if the holding out or representation is made without the knowledge or consent from the real partner. given credit to the firm. In the case of Re Buchanan & Co. or who knowingly suffers himself to be represented as a partner in a particular firm. and introduced a slimming product. whether the representation has or has not been made or communicated to the person so giving credit by or with the knowledge of the apparent partner making the representation or suffering it to be made: Provided that where. only the person holding out as a partner shall be liable to the third party acting in reliance of the representation. Whether A and B are jointly liable with C depends on their knowledge of the transaction. One day. the continued use of that name or of the deceased partner's name as part thereof shall not of itself make his executor's or administrator's estate or effects liable for any partnership debts contracted after his death. the person is estopped from denying or contradicting the statement.174  TOPIC 10 LAW OF PARTNERSHIP (PART I) „Everyone who. a salesman. In such situation. For instance. then the firm or partners would be jointly liable for the payment of the product to D. represents himself. During the course of the business. D agreed to sell the product on credit to C. C. the partnership business is continued in the old firmÊs name. who was at the saloon introduced himself as a partner and expressed his interest in the product.

he is not free from liabilities before his retirement. This means the use of the deceased partnerÊs name for the partnership business does not constitute holding out. For a person retiring from the firm. the continued use of that name or of the deceased partner's name as part thereof shall not of itself make his executor's or administrator's estate or effects liable for any partnership debts contracted after his death‰. . & Ker. Pendakwaraya [1980] 2 MLJ 246. it was held that for a new incoming partner. except as to become a partner in the business. In the case of Duke v. „where. if the liability was for a continuous contract (which was made before he became a partner and continue to exist after he became a partner). (f) Liability of incoming and outgoing (retiring) partners A person who is admitted as a partner into a firm is not liable for liabilities incurred before he became a partner. A retiring partner may only be discharged from liabilities by a novation agreement between himself. „a person who is admitted as a partner into an existing firm does not thereby become liable to the creditors of the firm for anything done before he became a partner‰. then he shall be liable for the same. Other partners shall not be liable unless there is evidence to prove their participation in the commission of the crime. as provided under Section 19(2) of the Act. after a partner's death. He remains liable for the partnership debts incurred before his retirement. In the case of Chung Shin Kian & Anor v. the new firm and the creditors. Thus. two partners in a firm had used a trade name („Texwood‰) that belonged to another company on their products. (e) Liability for criminal offences Any partner who commits criminal offences shall be personally liable. Brewer (1848) 2 Car. There was no evidence to prove that the second appellant was involved in the crime. According to Section 19(1) of the Partnership Act 1961. 828.TOPIC 10 LAW OF PARTNERSHIP (PART I)  175 Section 16 of the Partnership Act 1961 further states that. the appeal of the second appellant was allowed. „a partner who retires from a firm does not thereby cease to be liable for partnership debts or obligations incurred before retirement‰. the partnership business is continued in the old firm-name.

Dewi has bought oil amounting to RM15. 6. 2. . In the course of running the firm. 7.176  TOPIC 10 LAW OF PARTNERSHIP (PART I) SELF-CHECK 10. and partners must not involve in trading of secondhand goods.000 without the consent of the other partner. Chandra provided the capital and only visits the garage twice a month whereas Dewi works full time for the firm. The terms of the partnership agreement provide that no partner shall incur any debt exceeding RM10. 5. 3. Advise Chandra on his liability as a partner.000 from RiverinOil Company and has also bought a second-hand car on his own account but in the name of the firm. 4. How can a partner bind the firm for his act? What is the liability of a partner in contracts? Are partners jointly liable in tortious liability? What is the liability of a partner in the case of improper use of trust property in a firm? What is the effect of holding out by a person who is not a partner? What are the liabilities of incoming and outgoing partners? Will a partner be liable for the criminal offence committed by other partners? ACTIVITY 10.2 Discuss the following problems: (a) Chandra and Dewi are partners in a garage business.2 1. partners must purchase oil only from RushOil Company.

to recover his money. In dealing with the bank. The sharing of gross returns from a business does not. Malik and Noor. form a partnership. Joint tenancy. The firm failed to pay the loan and Azmin had to pay instead. of itself.          Formation of partnership entails certain obligations and liabilities for the partners. he brought along his brother. However. Discuss the liabilities of all parties involved by referring to the Partnership Act 1961 and the relevant case-laws.TOPIC 10 LAW OF PARTNERSHIP (PART I)  177 (b) Malik and Noor were partners in a firm operating a Cyber Café business. joint property. the firm failed to pay the loan. Noor did not admit the said liability and decided to walk away from the partnership. A partnership is the relation which subsists between persons carrying on a business in common with a view of profit. Mr Zuki. A partnership is not a legal persona but a label used by a number of individuals trading under that particular name. Jefri intended to get a bank loan for the firm. Azmin took a civil action against both partners. The said loan was guaranteed by Azmin.000. Believing the representation made by Jefri.000 from Aiman as capital for the business. Remuneration to a servant or an agent of the business from the profit of their employer's business does not make the servant or the agent a partner. tenancy in common. Malik made a friendly loan amounting to RM8. a well-known businessman and introduced his brother as one of the partners in the firm. of itself. Then. . However. Payment of an annuity to a widow or child of a deceased partner does not make the widow or the child a partner in the business. Malik invited Jefri as a new partner to replace Noor. the bank agreed to approve the loan amounting to RM50. After Noor withdrew from the partnership. Payment to a seller of the goodwill of a business in the form of a share of the profits of the business does not make the seller a partner. or part ownership does not. Payment of a debt out of profits of the business to a creditor by instalments does not make the creditor a partner in the business. In helping to settle the debt. establish a partnership.

Selangor: Pearson and Longman. Any partner who commits criminal offences shall be personally liable. (2000). The Commercial Law of Malaysia (2nd ed. Every partner in a firm is liable jointly with the other partners for all debts and obligations of the firm incurred while he is a partner. & Vohrah. (2007). . B.   Articles of partnership Business in common Contractual liability Criminal liability Incoming and outgoing partner Misappropriation Partnership Profit Registration Tortious liability Text Books: Harlina Mohamed On & Rozanah Ab. A person who is not a partner of a firm may become liable for the firms debt if he represents himself or allow himself to be represented as a partner in the firm. A partner has an authority to bind the firm if he carries out the partnership business within his scope of authority. Bhd. Partnership agreement may be in the form of oral or written agreement. A person who is admitted as a partner into a firm is not liable for liabilities incurred before he became a partner.178  TOPIC 10 LAW OF PARTNERSHIP (PART I)       A partnership must be formed for a lawful purpose. of sound mind and has not lost capacity to enter into contracts under any laws. Rahman.A.). A partner is competent to contract if he is an adult. Wu M. Undang-Undang Perniagaan Malaysia. Selangor: Kumpulan Usahawan Muslim Sdn.

Re Buchanan & Co. Chan & Yong Trading Co (1964) MLJ 105. 828. (Malaya) Ltd v. Haji Mohamed Usop v. Mohamed Kassim & Ors [1931-32] FMSLR 19. Ng Kee Woo [1966] 1 MLJ 223. Davis v. Rawlinson v. Chan King Yue v. Hock Hin Chan v. Clarke (1860) 15 M&M 292. . Houston & Co [1903] 2 KB 82. Consolidated Bank (1888) 38 ChD 238. Commissioners of Inland Revenue v. Coulson (1916) 114 LT 599. Garrod [1962] 3 All ER 1103.TOPIC 10 LAW OF PARTNERSHIP (PART I)  179 Cases:                  Abdul Gaffoor v. Osman b. Pendakwaraya [1980] 2 MLJ 246. & Ker. v. Chang Kang Swi (1924) 4 FMSLR 292. Re Young Ex p Jones (1896) 75 LT 278. Ex parte Heaton (1819) Buck 386. Hamlyn v. Duke v. LebusÊs Trustees [1964] 1 All ER 475. (1876) 4 QSCR 202. Cox v. Davis (1894) 70 LT 265. Brewer (1848) 2 Car. Mercantile Credit Ltd. Badeley v. Chung Shin Kian & Anor v. Lee & Wong [1962] 28 MLJ 379. William Jacks & Co.

and Explain the consequences of dissolution of partnership. 2. you should be able to: 1.Topic  11 Law of Partnership (Part II) LEARNING OUTCOMES By the end of this topic. Discuss the rules on partnership property.  5. the relations of partners to outsiders and the liabilities of partners to third parties. the liabilities of incoming and outgoing partners. duties and liabilities of partners. 4. the important characteristics of partnership. the rules on formation of partnership. this topic focuses on:      the relation of partners to one another.  INTRODUCTION The previous topic discusses and explains the meaning of partnership. As a continuation. 3. Describe the grounds for dissolution of partnership. List the obligations of partners to one another. the assignment of a partner's share in the partnership property. . the mutual rights and duties of the partners. and the dissolution of partnership. Explain the rights.

11. and must contribute equally to losses. the court ordered the legal fees incurred by the respondent to be paid out of the partnership assets. may be varied by the consent of all the partners and such consent may be either expressed or inferred from a course of dealing. etc. whereby: (a) Every partner is entitled to equal share of capital and profits of the business. (b) . The respondent engaged a solicitor and managed to reduce the payment of damages in the legal suit.50. The appellant refused to pay and went for appeal. In the case of Kok Hok Leong & Anor v. the principle of utmost good faith towards each other is implicit in the partnership agreement. Seow Kah Cheng & Anor (1950) 16 MLJ 87.246. When the partnership was dissolved. The Court rejected the appeal on the ground that the respondentÊs action in the defence was an act to protect the firmÊs assets. Therefore. Section 21 of the Partnership Act 1961 provides that the mutual rights and duties of partners. he was entitled to be indemnified from the firm's assets. and Every partner who made any payment and incurred personal liabilities in the course of the firmÊs business is entitled to be indemnified by the firm.1 Mutual Rights and Duties of Partners In the absence of a specific partnership agreement between the partners. division of capital and profits of each partner. the appellant and respondent were partners in a firm which has been sued for breach of contract and ordered to pay for damages of RM4. whether ascertained by agreement or defined by the Act. The provisions contained in Part IV (Sections 21 to 33) of the Partnership Act 1961 will only apply where partners did not provide the terms of partnership in their partnership agreement.TOPIC 11 LAW OF PARTNERSHIP (PART II)  181 11.1. the following provisions relating to rights and duties of partners are found in Section 26 of the Partnership Act 1961. Above all.1 RELATIONSHIP BETWEEN PARTNERS The relationship between partners may be regulated by a partnership agreement made by the partners which outlines the rights and duties and other terms relating to business management.

Tucker (1907) 5 CLR 1. By the said agreement. (g) No partner may introduce another (new) partner without the consent of other existing partners. (e) Every partner may participate in the management of the firm. . Thus. In this case. (d) In Rishton v. In Kelly v. to be sold in South Africa. Grissell (1868) LR 5 Eq 326. Reason being is the existence of the fiduciary relationship between partners. any partner who is assigned to manage the business is duty bound to exercise such duty for the interest of the partnership. TÊs participation in the management of the partnership was denied by the agreement of both parties. K and T had entered into a partnership agreement verbally whereby they agreed to involve in the business of buying horses from Australia. (f) No partner is entitled to remuneration for acting in the partnership business. No partner is entitled to interest on capital before the ascertainment of profits. is entitled to 8% interest per annum from the date of the payment of the advance. T would provide the capital while K was entrusted to manage the business. beyond the capital amount he subscribed.182  TOPIC 11 LAW OF PARTNERSHIP (PART II) (c) Every partner who made any advance for the purpose of the firm's business. the Court held that a principal in a business was not entitled to the interest on capital until the employees and the agentsÊ remuneration has been ascertained. The partners are not entitled to any salary or wages because they are performing their duties as partners in the course of the partnership business.

the plaintiff had no right to claim his money back. In Highley v. On 26 March 1959. Two of the partners agreed to train one of the partner's son in the business. there were three partners in a firm. carrying on business in worsted clothes. The agreement signed on 26 March 1959 was only a transfer of GohÊs interests in the partnership but not his right as a partner in the firm. Senanayake [1962] 1 MLJ 204. The plaintiff then acted as if he was a partner in the firm.TOPIC 11 LAW OF PARTNERSHIP (PART II)  183 In Wong Peng Yuen v. they signed a partnership agreement whereby Goh transferred part of his interests in the partnership to his two children who were minors. .000 in consideration of the firm taking him as a partner. the plaintiff claimed for the return of RM20. Walker (1910) 26 TLR 685. The Court held that there was evidence to show that Tan's consent had been obtained and that consent from GohÊs children was not necessary. Tan joined the partnership as a new partner and on 30 April 1959 the plaintiff paid the defendant a sum of RM20. the firm suffered unexpected losses and when the firm was dissolved. Therefore. The plaintiff opposed to the agreement and applied to the court for an injunction to prevent the two partners from proceeding with their plan. The court dismissed the application on the ground that the dispute or disagreement between partners is usual in a partnership business. Later. Thus. (h) The majority partners may decide any differences as to ordinary matters connected with the firm's business but the changes in the nature of the firm's business must be made with consent of all the existing partners. the defendant and Goh were partners in a share-brokerage firm. majority agreement is sufficient to resolve the dispute.000 he had paid on the ground that he was not a partner because Tan and the children of Goh had never agreed to take him as a partner in the firm. On 3 April 1959.

a partner transferred part of his shares to another partner for £21. 11.2 Obligations of Partners to Act in Utmost Good Faith Every partner must act honestly because the relationship between partners is based on the principle of uberrimae fidei (utmost good faith). The partner who bought the shares knew that the partnership assets comprised securities and charges but concealed the facts from the partner's knowledge. the Court held that the right to examine and make copies of the partnership books is not limited to partners.184  TOPIC 11 LAW OF PARTNERSHIP (PART II) However. . (i) The partnership books are to be kept at the place of partnership business.000. In the existence of the partnership agreement. Law (1904) All ER 526. otherwise the sale of the shares may be set aside. Further obligations of partners in a firm are provided in the following provisions: Section 30.1. It is important to note that Section 26 of the Partnership Act 1961 is only applicable in the absence of the partnership agreement between the partners. the Court held that the act of the first. The Court held that the partner who had the information must disclose it. the above provisions are not applicable. Low Pui Heng [1966] 2 MLJ 52. in the case of Tham Kok Cheong & Ors v. The right can be exercised through an authorised agent appointed by the partners. In Gan Khuan v. Tan Jin Luan [1939] MLJ 286. In Law v. 31 and 32 of the Partnership Act 1961. or at the principal place if there is more than one place of business. every partner is obliged to render true accounts and full information on all things affecting the partnership. second and third partners who sold the partnership business to a company without informing the fourth partner was invalid. (a) Under Section 30.

a dispute arose between two partners who were the marketing agents for Caltex Ceylon company. Benham [1891] 2 Ch 244. name or business connection. The defendant gave three monthsÊ notice to terminate the partnership. a partner in a ship-brokerage firm assisted in the incorporation of a ship building company using information he obtained from the firm's business.TOPIC 11 LAW OF PARTNERSHIP (PART II)  185 (b) According to Section 31. must account to the firm for any secret profit or benefit derived by him. Ariya Pathirana [1967] 1 AC 233. without the consent of other partners. The Court held that other partners had no right to claim for the benefit since the ship building business was of a different nature from the ship-brokerage business. the defendant entered into a new agency contract with Caltex under his own name. he must account for and render all profits made by him to the firm. In Ass v. He was then appointed a director in the said company and received a salary in consideration for the services he rendered. Thus. Other partners claimed for the benefit to be given to the firm. (c) Section 32 covers the obligation of a partner not to compete with the firm in business of the same nature without consent of the other partners. or involve in any transaction concerning the partnership. In Pathirana v. every partner who uses the partnership property. if a partner opens a competing business without the consent of other partners. . The Court held that the profit gained by the defendant from the agency contract belonged to the firm because the defendant had used the firmÊs goodwill to obtain the new contract before the partnership was dissolved. However. before the period of the notice ended.

186  TOPIC 11 LAW OF PARTNERSHIP (PART II)

11.2

INCOMING AND OUTGOING (RETIRING) PARTNERS

A partner takes up the liability as a partner upon joining an existing firm. However, he will not be liable before he became a partner, as provided under Section 19(1) of the Partnership Act 1961 whereby "a person who is admitted as a partner into an existing firm does not thereby become liable to the creditors of the firm for anything done before he became a partner". The incoming partner will only be liable to the creditors of the firm under a contract of novation whereby the creditors agree to accept the liability of the incoming partners. On the other hand, a partner who retires from the firm continues to be liable for the partnership debt incurred before he retires, as provided under Section 19(2) of the Partnership Act 1961, whereby: "A partner who retires from a firm does not thereby cease to be liable for partnership debts or obligations incurred before his retirement." (Also refer to Topic 10, sub-topic 10.3.2). After a partner retires, he is still liable to any person who deals with the firm after a change in its constitution unless he has given express notice to the person that he is no longer a partner. According to Section 38(1) of the Partnership Act 1961, "where a person deals with a firm after a change in its constitution, he is entitled to treat all apparent members of the old firm as still being members of the firm until he has notice of the change". Further in Section 38(2), "an advertisement as to a firm in the Federal Gazette, Sabah Gazette or Sarawak Gazette shall be notice to persons who had no dealings with the firm before the date of dissolution or changed so advertised".

TOPIC 11

LAW OF PARTNERSHIP (PART II)

 187

In the case of Re Siew Inn Steamship Co. [1934] MLJ 180, a retired partner had inserted a notice of his retirement in several issues of a newspaper to which certain old customers were proved to be regular subscribers. After his retirement, these old customers lent money to the firm on the security of promissory notes executed by the remaining partners. One of the lenders later sued the retired partner on these notes, denying having actually seen notice of his retirement in the papers. The Court held that the retired partner was liable on the notes, actual notice being necessary so far as old customers were concerned.

In relation to dismissal under Section 27, the majority partners cannot expel any partner unless the power to do so has been conferred by express agreement between the partners.

11.3

ASSIGNMENT OF SHARE

Under Section 33(1) of the Partnership Act, 1961, a partner may assign his share if there is no agreement among the partners prohibiting the assignment. However, the assignee is not entitled to interfere in the management of the partnership business or to require any accounts of the partnership transactions or to inspect the partnership books. The assignee is only entitled to receive the share of profits to which the assigning partner would be entitled. In Ong Kian Loo v. Hock Wah Trading Co. & Ors [1990] 1 MLJ 315, Ong contended that he was a partner in the defendant's firm after taking over all his mother's shares in the partnership. Thus, he had the right to interfere in the administration of the partnershipÊs business. The defendant denied it on the ground that Ong was only an assignee of his motherÊs shares and he had no locus standi to contend as such. The Court decided that Section 33(1) of the Partnership Act 1961 was applicable in this case. Ong was only an assignee to the share of his mother in the firm. Therefore, he had no right to interfere in the administration of the partnership including the right to inspect the partnership books.

188  TOPIC 11 LAW OF PARTNERSHIP (PART II)

SELF-CHECK 11.1
1. 2. 3. 4. 5. 6. What is the important underlying principle inherent in all partnership agreements? What is the distribution of share of each partner in the capital, profits and losses in the business? Is a partner entitled to be indemnified by the firm for his personal liabilities? What is the right of a partner who gives advance to the firm for its business? Can a partner participate in the management of the business and receive wages or salary? What is the consequence of a partner who uses the partnership property, name or business connection to make secret profit for himself? What is the liability of a partner who competes with the firm in business of the same nature without the consent of other partners? Can a partner assign his share to other persons?

7.

8.

TOPIC 11

LAW OF PARTNERSHIP (PART II)

 189

ACTIVITY 11.1
Discuss the following problem by applying the principle of law on partnership: Car Universal Partners (CUP) was registered in 2004 to carry out the business of the trading of national cars. The partners of the firm are Mark, Cathy and Sarah. The firm managed to acquire a handsome profit due to the national campaign which encouraged people to buy national cars. In the year 2006, the firm agreed to sell their branch at Beruntung since the business was not doing well. Sarah offered to purchase the business in Beruntung as she has knowledge that the state government intended to develop the place as a mass housing project and there was the opportunity to have a good market for cartrading. Sarah purchased the branch and withdrew from being the partner of CUP. The fact that Sarah has been very successful in Beruntung and with the development in Beruntung itself, has come to the knowledge of all other partners in CUP. The partners claimed that Sarah has not disclosed the information to the firm with the intention to get the sole profit for herself. Advise Mark and Cathy.

11.4

PARTNERSHIP PROPERTY

It is important to determine whether the property used in the course of the firm's business is the property of partnership or the individual partnerÊs property. Section 22 and 23 of the Partnership Act, 1961 provide the rules on this issue. Section 22(1) states that, "all property and rights and interests in property originally brought into the partnership stock or acquired, whether by purchase or otherwise, on account of the firm or for the purposes and in the course of the partnership business, are called in this Act as partnership property and must be held and applied by the partners exclusively for the purposes of the partnership and in accordance with the partnership agreement....". According to Section 23, unless the contrary intention appears, property bought using firmÊs money is deemed to have been bought on account of the firm.

190  TOPIC 11 LAW OF PARTNERSHIP (PART II)

From the statutory provisions and the decided case-laws, the following conclusions may be made: (a) Whether the property brought into the firm is a partnership property or property of an individual partner depends on the partnership agreement between the partners. In Miles v. Clark [1953] 1WLR 537, a photographer who carried out his own business brought in a new partner who had many business contacts. There was no clear agreement between the partners. Later, a dispute arose between them and the partnership was dissolved. The Court decided that since there was no clear agreement pertaining to the use of the assets in the partnership, the assets were not partnership properties but owned individually by the partners who brought them into the firm. (b) If there is no agreement provided for the partnership property, the partners must have the intention to regard the property as a partnership property. The property is intended to be a partnership property when it is purchased using the partnership money, even though it was purchased under a partnerÊs name. The property remains as a partnership property even though it is not used for the partnership business.

In the case of Murtagh v. Castello (1881) T LR Ir 428, it was held that a property bought using partnership asset, although not used in the business, was regarded as a partnership property.

If the property is obtained using an individual partner's money, the property will remain the individual partner's property.

But if a creditor obtains judgement against an individual partner only. In the absence of specific provisions or proof to show that the property is intended for the partnership. however. However. Jebaratnam [1980] 1 MLJ 283. then the property is regarded as the property of an individual partner. Therefore. The court. he cannot seize all the partnership property. a creditor who has obtained judgement against a firm may seize partnership property. the appellant had formed a partnership with the respondent to develop a land into a housing area. The appellant applied for a court declaration that the respondent held the land as a trustee to the partnership. the creditor is entitled to obtain an order of court charging that partner's interest in the partnership property (Section 25(1)(2)). dismissed the application on the following grounds:    there was no agreement between the parties that the land was purchased or owned as a partnership property. However. The facts of every case will be considered in ascertaining whether the property is a partnership property or property of an individual partner. efforts to get the bank to purchase the land failed and the respondent decided to purchase the land using his money. such asset is regarded as partnership property. the intention of the firm was to develop the land and not necessarily the land must be owned by the firm to carry out its business. . (d) (e) Consequently. (c) If certain asset is acquired for the firm. in the execution of judgement. the said land was owned by the respondent as his personal property and was not regarded as a partnership property. and the respondent personally financed the purchase of the land and did not use any partnership money.TOPIC 11 LAW OF PARTNERSHIP (PART II)  191 In Ponnukon v.

By death. charge By court order .1: Dissolution of Partnership By expiration of term or notice Section 34 Subject to any agreement between the partners. Section 37(a) When a partner is lunatic. or by the termination of an adventure or undertaking. Section 37(d) When a partner wilfully or persistently commits a breach of the partnership agreement. Section 37(f) Whenever any circumstance arises that renders it just and equitable (in the opinion of the court) for the partnership to be dissolved. or by any partner giving notice to the other of his intention to dissolve the partnership. A partnership may also be dissolved if any partner suffers his share of the partnership property to be charged under this Act for his separate debt. bankruptcy. Section 35 Subject to any agreement between the partners. Section 37(b) When a partner becomes permanently incapable of performing his part in the partnership contract.5 DISSOLUTION OF PARTNERSHIP A firm ceases to exist when it is dissolved. or of permanently unsound mind. or conducts himself in a manner that is not reasonably practicable for the other partner/s to carry on the business in partnership with him. By supervening illegality Section 36 A partnership is dissolved by the happening of any event which makes it unlawful for the business of the firm to be carried on or for the members of the firm to carry it on in partnership. Section 37(c) When a partner has been guilty of any conduct which affect prejudicially the carrying on of the business. This means all the firm's business cease to operate upon dissolution of a partnership.1 below: Table 11. a partnership is dissolved by the expiration of the term fixed. Section 37(e) When the partnership business can only be carried on at a loss. There are several ways in which a partnership may be terminated as shown in the Table 11. except the obligations of the partners to continue to do the necessaries for purpose of dissolution and completing the incomplete activities.192  TOPIC 11 LAW OF PARTNERSHIP (PART II) 11. every partnership is dissolved by the death or bankruptcy of any partner.

2 1. in absence of a specific agreement between partners? . Paying each partner rateably what is due from the firm to him for advances (other than the capital). Paying debts and liabilities of the firm to non-partners. 4. Capital. Profits. Ultimate residue (if any) to be divided among the partners according to the division of profits. By the partners individually according to their proportion in the sharing of profits.2: Partnership Accounts Settlement Losses (including losses and deficiencies of capital) Assets of the firm (including sums contributed by the partners to make up for losses or deficiencies of capital) To be paid first out of: 1. What is meant by a partnership property? If a certain asset is acquired for the firm. 2. Paying each partner rateably what is due from the firm in respect of capital. 3. is the property regarded as a partnership property? If a property is obtained using an individual partnerÊs money. 6. as simplified in Table 11.2 below: Table 11. 3. SELF-CHECK 11. To be applied in: 1. is the property regarded as a partnership property? What are the ways of termination of a partnership? What is the effect of dissolution of partnership? What are the rules for the settlement of a partnership account after dissolution. 4. the rules to settle the partnership accounts after dissolution are provided in Section 46 of the Partnership Act 1961. 5. 2. 2. 3.TOPIC 11 LAW OF PARTNERSHIP (PART II)  193 11.6 PARTNERSHIP ACCOUNTS SETTLEMENT Except in situations where there is a specific agreement between the partners.

The notice only arrived and was received by D on 10am. the partners bought a shop-house using partnership money.2 Discuss the following problems by applying the principle of law on partnership: (a) Gemilang & Co. beyond the capital amount he subscribed. Every partner who made any advance for the purpose of the firm's business. On 23 March 1927. In 2005. Decide whether the partnership dissolved due to the notice or the death of M. Joyce. Why? M and D were partners in a law firm. Every partner who made any payment and incurred personal liabilities in the course of the firmÊs business is entitled to be indemnified by the firm. is a trading firm comprising four partners. of 24 March 1927. The partnership agreement provided that on the death of a partner during the partnership period.15am on 24 March 1927. Mulan signed the transaction with the consent of the other partners. is entitled to 8% interest per annum from the date of the payment of the advance.194  TOPIC 11 LAW OF PARTNERSHIP (PART II) ACTIVITY 11. Wan. the business and goodwill of the partnership should become an exclusive right of the surviving partner. The partnership was established under Wan's name. In the year 2000. M served a notice of dissolution to D on the stated date. Wan died and his widow took his position as a partner. Meanwhile M died at 3. When Mulan died. having still carried on the business under the name of Wan. Mulan and Sam. . and must contribute equally to losses. (b)    Every partner is entitled to equal share of capital and profits of the business. Decide whether the shop-house is a partnership property. the three surviving partners applied for a court declaration that the shophouse belonged to them.

death.TOPIC 11 LAW OF PARTNERSHIP (PART II)  195      No partner is entitled to interest on capital before the ascertainment of profits. The partnership books are to be kept at the place of partnership business or at the principal place if there is more than one place of business. No partner may introduce another (new) partner without the consent of other existing partners. Whether a property brought into a firm is a partnership property depends on the partnership agreement between the partners. No partner is entitled to remuneration for acting in the partnership business. Every partner may participate in the management of the firm. All the partnership businesses cease to operate upon dissolution of a partnership. bankruptcy and charge. The majority partners may decide any differences as to ordinary matters connected with the firm's business but the changes in the nature of the firm's business must be made with consent of all existing partners. A partnership may be dissolved by expiration of a partnership term or notice. Every partner must act honestly because the relationship between partners is based on the principle of uberrimae fidei (utmost good faith).       Assignment of share Dissolution Incoming partner Outgoing (retiring) partner Partnership accounts Partnership property Uberrimae fidei Utmost good faith . A partner may assign his share if there is no agreement among the partners prohibiting the assignment. supervening illegality or court order.

Clark [1953] 1WLR 537. Walker (1910) 26 TLR 685. & Vohrah. (2000). Castello (1881) T LR Ir 428. Hock Wah Trading Co. Tucker (1907) 5 CLR 1. Pathirana v. Tan Jin Luan [1939] MLJ 286. Law v. Jebaratnam [1980] 1 MLJ 283. Senanayake [1962] 1 MLJ 204. Murtagh v. B. (2007). Wu M. Wong Peng Yuen v. Selangor: Kumpulan Usahawan Muslim Sdn. .196  TOPIC 11 LAW OF PARTNERSHIP (PART II) Text Books: Harlina Mohamed On & Rozanah Ab. Bhd. Ariya Pathirana [1967] 1 AC 233. Benham [1891] 2 Ch 244. The Commercial Law of Malaysia (2nd ed.A. Highley v. Selangor: Pearson and Longman. Kelly v. Miles v. [1934] MLJ 180. Rishton v.). Low Pui Heng [1966] 2 MLJ 52. Undang-Undang Perniagaan Malaysia. Tham Kok Cheong & Ors v. Seow Kah Cheng & Anor (1950) 16 MLJ 87. Ong Kian Loo v.               Gan Khuan v. Kok Hok Leong & Anor v. Rahman. Re Siew Inn Steamship Co. Grissell (1868) LR 5 Eq 326. Law (1904) All ER 526. & Ors [1990] 1 MLJ 315. Ponnukon v. Cases:  Ass v.

wholesale and retail. It provides that: „The law to be administered shall be the same as would be administered in England in the like case at the corresponding period. Explain the implied terms in a contract of sale of goods.  INTRODUCTION The Sale of Goods Act 1957 (Revised 1989) is the statute applicable to sale of goods in Peninsular Malaysia. you should be able to: 1.Topic  12 Law of Sale of Goods (Part I) LEARNING OUTCOMES By the end of this topic. 5.‰ In effect. For Sabah and Sarawak. 3. Describe the classification of goods. and to commercial and private sales. 2. The Sale of Goods Act 1957 was enacted based on the English Sale of Goods Act 1893 (which was replaced by the Sale of Goods Act 1979). Sabah and Sarawak continue to apply principles of English law relating to the sale of goods. and Identify the importance of transfer of property in the goods. The Sale of Goods Act 1957 applies to contracts for the sale of all types of goods including second-hand goods. the law of sale of goods is governed by Section 5(2) of the Civil Law Act 1956. Define the meaning of goods. 4. Differentiate a contract of sale and an agreement to sell. The general law of contract will continue to apply to contracts for the sale of goods as Section 3 of the Sale of Goods Act 1957 expressly provides for the continual application to contracts for the sale of goods of the .

goods which form the subject of a contract of sale may be either existing goods or future goods. 12. 1957 means „every kind of movable property other than actionable claims and money and includes stocks and shares. and things attached to or forming part of the land which agreed to be severed before sale or under the contract of sale. Section 4(1) of the Sale of Goods Act 1957 defines a contract of sale of goods as: „A contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. Existing goods are goods already owned or possessed by the seller and may comprise specific or unascertained goods.1 DEFINITION OF GOODS Goods under Section 2 of the Sale of Goods Act. Future goods consist of goods to be manufactured or produced or acquired by the seller after the making of the contract of sale.     Goods are specific if they are identified and agreed upon at the time a contract of sale is made.‰ A contract of sale includes a sale and an agreement to sell.2 CONTRACT OF SALE A contract of sale is the transfer of ownership of the goods to the buyer for a money consideration. but where the transfer of the . 12. Ascertained goods are those unascertained goods which have been identified and appropriated to the contract after the contract has been made. the contract is called a sale. grass. Unascertained goods are goods not identified and agreed upon at the time a contract of sale is made.198  TOPIC 12 LAW OF SALE OF GOODS (PART I) provisions of the Contracts Act 1950 „in so far as they are not inconsistent with the express provision of this Act‰.‰ In Section 6 of the Sale of Goods Act 1957. What is the difference between a sale and an agreement to sell? According to Section 4(3) of the Sale of Goods Act 1957: „Where under a contract of sale the property in the goods is transferred from the seller to the buyer. growing crops.

TOPIC 12 LAW OF SALE OF GOODS (PART I)  199 property in the goods is to take place at a future time or subject to some condition thereafter to be fulfilled. if the buyer breaches an agreement to sell. the goods still belong to the seller. In an agreement to sell. the seller can sue for the contract price because ownership has passed to the buyer. an owner of certain goods may not have the goods in his possession. 12. if the buyer fails to pay. Consequently.3 TERM OF CONTRACT The conditions and warranties in contract of sale of goods are provided in Section 12 of the Sale of Goods Act 1957. A condition under Section 12(2) is: „A stipulation essential to the main purpose of the contract. A contract is a sale when the ownership or the property in the goods passes to the buyer and it is an agreement to sell where the transfer of the property in the goods is to take place at a future time or subject to some condition to be fulfilled. An ownership must also be distinguished from possession. the breach of which gives rise to a right to treat the contract as repudiated.‰ . Whereas in a sale.‰ Under Section 4(4): „An agreement to sell becomes a sale when the time elapses or the conditions are fulfilled subject to which the property in the goods is to be transferred. the buyer has only a personal remedy for damages against the seller. the contract is called an agreement to sell.‰ The above provisions distinguished a sale from an agreement to sell in terms of ownership or „the property in the goods‰. the seller may sue for unliquidated damages. A person who possesses certain goods may not be the owner of the goods. Alternately. If the seller breaches an agreement to sell.

Similarly. The kind of terms implied by statute for the contract of sale of goods are the conditions and warranties provided under the Sale of Goods Act 1957. under Section 13(2). if the usage is to bind both parties to the contract. 12. The stipulation may be a condition. the buyer cannot reject the goods and repudiate the contract. It provides that: „Where a contract of sale is subject to any condition to be fulfilled by the seller. duty or liability that would arise under a contract of sale by implication of law may be negatived or varied by express agreement or by the course of dealings between the parties. the buyer may waive the condition or elect to treat the breach of the condition as a breach of warranty and not as a ground for treating the contract as repudiated.‰ However.4 IMPLIED TERMS Implied terms are those conditions and warranties implied by the statute into particular contracts. where a contract is not severable and the buyer has accepted the goods or part thereof. Therefore. or by usage. However.‰ There are circumstances which permit the buyer to treat a breach of condition as a breach of warranty. are generally accepted incidents of the contract and therefore imported by the courts. the breach of condition must be treated as a breach of warranty. . though not expressly found in the contract.200  TOPIC 12 LAW OF SALE OF GOODS (PART I) A warranty under Section 12(3) is: „A stipulation collateral to the main purpose of the contract.‰ This means the parties to a contract of sale may exclude the implied terms by the express agreement or by previous dealings or by usage. the breach of which give rise to a claim for damages but not a right to reject the goods and treat the contract as repudiated. though called a warranty in the contract. the buyer and the seller. in a case where the contract is for specific goods and the property has passed to the buyer. The terms. These conditions and warranties implied in a contract of sale of goods bind the contracting parties.‰ According to Section 12(4): „Whether a stipulation in a contract of sale is a condition or a warranty depends in each case on the construction of the contract. according to Section 62 of the Sale of Goods Act 1957: „This right. as provided in Section 13(1) of the Sale of Goods Act 1957.

„unless the circumstances of the contract indicate a different intention. It provides that: „Where there is a contract for the sale of goods by description. 12. An implied warranty that the goods shall be free from any charge or encumbrance in favour of any third party not declared or known to the buyer before or at the time when the contact is made. In the case of Rowland v Divall [1923] 2 KB 500.‰ (b) (c) A breach of condition entitles the buyer to treat the contract as repudiated and recover the price in full even though he has used the goods. and in the case of an agreement to sell. there is: (a) An implied condition on the part of the seller that in the case of a sale.1 Title Section 14 of the Sale of Goods Act 1957 provides the implied undertaking as to title in a contract of sale.TOPIC 12 LAW OF SALE OF GOODS (PART I)  201 12. the plaintiff discovered that it was a stolen car and he had to return it to the true owner. This is because the buyer pays the price of the goods in order to enjoy the ownership as well as the use of the goods. An implied warranty that the buyer shall have and enjoy quiet possession of the goods. According to the provision. The Court of Appeal held that the defendant had breached the condition as to title and the plaintiff could recover the full price because of total failure of consideration. After using the car for four months. he has a right to sell the goods. there is an implied condition that the goods shall correspond with the description. the plaintiff bought a car from the defendant.‰ .4.4. he will have a right to sell the goods at the time when the property or ownership is to pass.2 Sale of Goods by Description The rule relating to sale of goods by description is provided in Section 15 of the Sale of Goods Act 1957.

the buyers were entitled to reject the goods because half of the cases contained only 24 tins. The contract was for 3100 cases of Australian canned fruit packed „30 tins to case‰. 12. Later. v Mitsui Bussan Kaisha Ltd (1911) 12 SSLR 67. goods ordered from a catalogue or if ordered over the counter. he discovered that the rear of the car was part of a 1961 Herald Convertible while the front half was part of an earlier model. the seller advertised a car as „Herald Convertible. In the case of Moore & Co v. described as „the same as our previous contract‰.3 Fitness for Purpose and Merchantable Quality Section 16 of the Sale of Goods Act 1957 provides that there is no implied warranty or condition as to the quality or fitness for any particular purpose of goods supplied under a contract of sale except in the following situations: . In another case of Beale v. for example. The buyer saw the car before he agreed to buy. Further flour was ordered. by a trade name.‰ Sale of goods by description covers all cases where the buyer has not seen the goods but is relying on the description alone.4. it is not sufficient that the bulk of the goods corresponds with the sample if the goods do not also correspond with the description. Landauer & Co [1921] 2 KB 519. Thus. 1961. It was held that he was entitled to claim damages for breach of the condition. twin carb⁄‰. it includes all contracts for the sale of unascertained goods and sale of specific goods which the buyer has not seen prior to the contract. previous contracts between the parties for the sale of flour had been sold in bags bearing a well-known trade mark.202  TOPIC 12 LAW OF SALE OF GOODS (PART I) In addition. white. Taylor [1967] 1 WLR 1193. „If the sale is by sample as well as by description. It was held that it did not comply with the description. In the case of Nagurdas Purshotumdas & Co. Flour identical in quality was delivered but it did not bear the same well-known trade mark. even though the total quantity was met.

then it requires no further indication. there is no breach of the implied condition if the goods are suitable for their general and normal purpose. the buyer must clearly indicate the special purpose for which the goods are to be used. Thus. „Where the buyer. a hot water bottle is meant to contain hot boiling water. expressly or by implication. then it is not fit for its purpose. so as to show that the buyer relies on the sellerÊs skill or judgement.TOPIC 12 LAW OF SALE OF GOODS (PART I)  203   (a) Goods must be reasonably fit for the purpose for which the buyer wants them (Section 16(1)(a)). they must be bought under their trade name or patent. The buyer may invoke Section 16(1)(a) if he makes known to the seller the particular purpose for which he acquires the goods and the buyer is relying on the sellerÊs skill and judgement. and the goods are of a description which is in the course of the sellerÊs business to supply (whether he is the manufacturer or producer or not). The goods must also be a description which is in the course of the sellerÊs business to supply and if the goods are specific. a woman with an abnormally sensitive skin bought a Harris Tweed coat without disclosing to the seller about her abnormality. if it breaks upon filling of hot water. there is no implied condition as to its fitness for any particular purpose. Goods must be reasonably fit for the buyerÊs purpose. . Otherwise. She could not claim under this section because the coat would not harm a normal person. there is an implied condition that the goods shall be reasonably fit for such purpose. makes known to the seller the particular purpose for which the goods are required. For example. If the description of the goods is only for one purpose. Peter Conway Ltd.‰ But in the case of a contract for the sale of a specified article under its patent or other trade name. or Goods must be of merchantable quality (Section 16(1)(b)). The above requirements are explained in the following cases: In Griffiths v. [1939] 1 All ER 685.

But if the buyer purchases specific goods under a trade name and gives the impression that he is not relying on the sellerÊs skill. Later. In Baldry v. Therefore. which such examination ought to have revealed.‰ „Merchantable quality‰ means the goods are fit for the particular use in which they were sold. The propeller supplied complied with the specification and design but did not suit the shipÊs engine. A was held liable for breach of an implied condition since the buyer had informed the seller of the purpose for which he needed the goods and relied on the sellerÊs skill and judgement to provide them. Manganese Bronz and Brass Co Ltd [1934] AC 402. A contract for the sale of the car was made.204  TOPIC 12 LAW OF SALE OF GOODS (PART I) In the case of Cammell Laird & Co v. there is an implied condition that the goods shall be of merchantable quality. then he cannot claim under this section. Hence. The Court of Appeal held that the dealer was liable because the buyer had relied on the dealerÊs judgement in selecting a suitable car for the specific purpose stated by the buyer (even though the car was bought under its trade name). (b) Goods must be of merchantable quality „Where goods are bought by description from a seller who deals in goods of that description (whether he is the manufacturer or producer or not). there was a contract by A to build a propeller for B in accordance with BÊs specification and to fit a particular ship and its engine. . the buyer asked the dealer for a car suitable for touring and the dealer recommended a Bugatti car. they are considered unmerchantable. the buyer found that the car was unsuitable for touring. there shall be no implied condition as regards defects. „If the buyer has examined the goods.‰ However. if they are defective for their purpose. if the buyer purchases goods under its trade name but at the same time relies on the sellerÊs recommendation. it means the buyer is still relying on the sellerÊs skill. Marshall [1925] 1 KB 260.

the implied condition does not apply „where the buyer has examined the goods as regards defects which such examination ought to have revealed. the buyer had conducted a superficial look at the outside of some barrel of glue. having defects making it unfit for burning. the implied condition as to merchantable quality is applicable although the implied condition as to fitness is excluded. In the proviso to Section 16(1)(b). there is an implied condition: (a) (b) That the bulk shall correspond with the sample in quality. Ricket. 12. and . Beers & Sons [1913] 1 KB 486. the buyer need not make known to the seller the particular purpose for which he requires the goods.4. It was held that there was an examination and thus the implied condition as to merchantable quality did not apply. The consignment was contaminated in that a detonator was embedded in the coal.4 Sale by Sample Section 17 of the Sale of Goods Act 1957 provides that „in a contract for the sale of goods by sample. fuel by its trade name ÂCoaliteÊ was ordered from a fuel merchant. Ltd [1954] 1 All ER 868. In the case of Thornett & Fehr v. The Court held that the consignment as a whole was unmerchantable. Cockerall & Co. That the buyer shall have reasonable opportunity of comparing the bulk with the sample.TOPIC 12 LAW OF SALE OF GOODS (PART I)  205 For implied condition as to merchantable quality.‰ This means if the buyer has conducted some examination before or at the time of the contract. the buyer cannot later complain about the defects which would be revealed by a proper examination. resulting in an explosion in the fire-place when used. In Wilson v. The section only requires the goods to be bought by description and bought from a seller dealing with the goods of that description. Where goods are sold under their trade name.

1 1. the cloth supplied by the seller was equal to sample previously examined but because of a latent defect not discoverable by a reasonable examination.206  TOPIC 12 LAW OF SALE OF GOODS (PART I) (c) That the goods shall be free from any defect rendering them unmerchantable which would not be apparent on reasonable examination of the sample. SELF-CHECK 12. If the bulk corresponds with the sample but there is a latent defect rendering the goods unmerchantable. . Cas. future goods. What is the difference between a sale and an agreement to sell? What are the kind of implied conditions and warranties incorporated in a contract of sale of goods? What is the effect of breach of implied condition and warranty in a contract of sale of goods? Can the party to the contract of sale of goods exclude the implied terms? 2. 284. 3. Van Ingen (1887) 12 App. 4. the Court found the seller in breach of the condition. 5. What is the meaning of existing goods. In the case of Drummond v. specific goods and unascertained goods? Provide examples in your explanation. the buyer is still entitled to reject them. The three conditions above are independent of one another.

TOPIC 12 LAW OF SALE OF GOODS (PART I)  207 ACTIVITY 12. they visited a furniture shop Antique Design. Michael informed the seller that he wanted a double bed made from good quality wood. Nevertheless.000 o. brown in colour and consist of one coffee table. the portable air conditioner that Michael bought produced a strong noise when it was switched on. B placed an advertisement in a local newspaper offering for sale. The offer was accepted by B. On the day of moving. were busy shopping for new furniture for their new house.000. After checking the goods and satisfied with their condition. Meanwhile. Both the husband and wife also agreed to buy a double bed for their daughters. The seller assured Michael that he would meet MichaelÊs request. a shop selling air conditioners. The seller managed to attract Michael to buy a portable air-conditioner at the price of RM2.n. as he was an expert and experienced in selling furniture. Betty was very interested in a sofa set from Italy worth RM15. the seller promised to deliver the furniture on the day that they were supposed to move into their new house. Michael and Betty also went to Cool Air-Cond. and they agreed to buy the set. they were disappointed to see that the sofa set that was delivered was not brown and did not include the coffee table and that the double bed ordered was not of good quality wood. Q now wishes to rescind the contract and seeks your advice on the matter. The set was made from soft leather. Three days before moving. After payment.000. Advise Q on her rights under the Sale of Goods Act 1957. The seller promised to deliver the air conditioner on the day they move to the new house. a second-hand car at RM40. Q responded by offering to buy the car at RM37. with a guarantee that the air conditioner could be used for the next five years without any problem.o. (b) (c) . After driving the car for almost three months. Michael made a payment. The car was described as „Toyota. all of the goods ordered by Michael and Betty were delivered.000. late 2000‰ model. Michael and Betty were very disappointed with what had happened and seek your legal advice on what action can be taken on the sellers of the goods. Q discovered that only the body of the car was of „late 2000‰ model while the engine was from a much earlier model.1 Discuss the following questions: (a) Michael and his wife Betty.

but when the property therein is transferred to the buyer. 12. a well-known fashion designer in town. After the contest. According to Section 26 of the Sale of Goods Act 1957: „Unless otherwise agreed. the goods are at the buyerÊs risk whether delivery has been made or not: Provided that where delivery has been delayed through the fault of either buyer or seller. Sally paid RM3. on the choice of fabric for the dress because she had sensitive skin and was allergic to certain types of fabric. Sally consulted Robin. the goods will remain at the sellerÊs risk until the property in the goods is transferred to the buyer. Thus. She went to see the doctor and was told that her skin was sensitive to the fabric used for the dress that she had worn for the contest. the risk passes when the property in the goods passes (notwithstanding whether delivery has been made). Sally discovered red spots on her skin. When the title or ownership is transferred to the buyer. Sally went to see Robin and returned the dress because the fabric used for the dress was not fit for the purpose she made known to Robin and caused her skin complaint. a contestant in one of the top reality shows in TVReality was preparing for the final contest to become the winner for the new season 2008. The transfer of property in the goods is very important because it determines the risk. then the goods are at the buyerÊs risk.5 TRANSFER OF PROPERTY IN THE GOODS AND RISK Property in the goods means title or ownership. Sally also claimed for the refund of the cost of the dress from Robin and the medical expenses incurred by her. the goods remain at the sellerÊs risk until the property therein is transferred to the buyer. Decide whether Sally could claim for the refund of her money from Robin as well as the cost for her medical expenses. Sally engaged a professional tailor to sew the dress suitable for the contest. As a general rule.000 for the cost of the dress. the goods are at the risk of the party in fault as regards any loss which might not have occurred but for such fault.‰ .208  TOPIC 12 LAW OF SALE OF GOODS (PART I) (d) Sally.

(d) Specific goods to be put into a deliverable state Under Section 21 of the Sale of Goods Act 1957. where there is a contract for the sale of specific or ascertained goods the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred. Sale of specific or ascertained goods Under Section 19 of the Sale of Goods Act 1957. the general rule is that title passes when the parties to a contract of sale intend it to pass. if delivery has been delayed through the fault of either party. the goods are at the risk of the party in fault as regards any loss which might not have occurred but for such fault. the following rules are the rules for ascertaining the intention of the parties as to the time of passing of property in the goods.TOPIC 12 LAW OF SALE OF GOODS (PART I)  209 This means. It is immaterial whether the time of payment of the price or the time of delivery of the goods is postponed. Unless a different intention appears. the property in the goods passes to the buyer when the contract is made. 12. Thus. is it essential to know when the title passes.1 Effects of the Contract Since the risk passes when the property in the goods passes. no property in the goods is transferred to the buyer unless and until the goods are ascertained. The title in the book passes to A on the sale even though the payment is postponed. (a) Sale of unascertained goods Under Section 18 of the Sale of Goods Act 1957. where there is a contract for the sale of specific goods and the seller is bound to do something to the (b) .5. (c) Specific goods in a deliverable state Under Section 20 of the Sale of Goods Act 1957. where there is a contract for the sale of unascertained goods. Section 18 to 23 provide certain rules that determine the time when property in the goods passes to the buyer. where there is an unconditional contract for the sale of specific goods in a deliverable state. For example. Under the Sale of Goods Act 1957. A agrees to buy a specific book entitled „Business Law‰ on credit.

but the seller is bound to weigh. where there is a contract for the sale of unascertained or future goods by description and goods of that description and in a deliverable state are unconditionally appropriated to the contract. The appropriation must be unconditional and it should pass property in the goods without further requirements (such as payment or price). The title does not pass to B until A weighs the flour and B knows that the flour has been weighed. where there is a contract for the sale of specific goods in a deliverable state. and it must be approved by the other party. Future goods mean goods to be manufactured or produced or acquired by the seller after the making of the contract of sale. separating or weighing from a bulk by the buyer or the seller. the property does not pass until such act or thing is done and the buyer has notice thereof. measure. the property does not pass until such thing is done and the buyer has notice thereof. The ownership in the computer does not pass to B until A installs the specific software as promised and B must know about the fact that A has done the installation. A agrees to sell a specific computer to B and promises to install the specific software in the disk. For example. Appropriation may involve the act of selecting. the property in the goods thereupon passes to the buyer. A contract for the sale of unascertained goods is an agreement to sell and not a sale. A agrees to sell to B all the flour contained in a specific sack for RM3 per kilogram. (e) Specific goods in a deliverable state when the seller has to do anything thereto in order to ascertain price Under Section 22 of the Sale of Goods Act 1957. The assent may be expressed or implied and may be given either before or after the appropriation is made. either by the seller with the assent of the buyer or by the buyer with the assent of the seller. Section 23(2) of the Sale of Goods Act 1957 provides that where (in pursuance of the contract) the seller delivers the goods to the buyer or to a . test. The duty to appropriate may be placed on the buyer or the seller. Further. „Unconditionally appropriated to the contract‰ in the provision above means a clear act showing the intention to identify certain goods as attached to the contract and without any condition.210  TOPIC 12 LAW OF SALE OF GOODS (PART I) goods for the purpose of putting them into a deliverable state. For example. (f) Sale of unascertained goods and appropriation Under Section 23 of the Sale of Goods Act 1957. or do some other act or thing with reference to the goods for the purpose of ascertaining the price.

or other similar terms. 4. (ii) Under the second situation above. a transportation company such as shipping. 6. and if no time has been fixed. on the expiration of a reasonable time. trucking or railway). he is deemed to have unconditionally appropriated the goods to the contract. SELF-CHECK 12. if a time has been fixed for the return of goods. 3.2 1. property in the goods passes upon the expiration of a reasonable time. if a time is fixed for the return of the goods. on the expiration of such time. or if he does not signify his approval or acceptance to the seller but retains the goods without giving notice of rejection. 5. (g) Goods sent on approval or „on sale or return‰ Under Section 24 of the Sale of Goods Act 1957. when goods are delivered to the buyer on approval or „on sale or return‰. then. then property in the goods passes upon the expiration of the time. But if no time is fixed.TOPIC 12 LAW OF SALE OF GOODS (PART I)  211 carrier or other bailee for the purpose of transmission to the buyer. The carrier is the buyerÊs agent for the purpose of delivery. But if the carrier is the agent of the seller. 2. then property in the goods will not pass until the goods are actually delivered to the buyer. The effect is that property in the goods passes to the buyer at the time when the goods are handed over to a carrier (for example. What is the meaning of property in the goods? What is the significance of the transfer of title or ownership in the goods? When does the risk pass to the buyer in a contract of sale of goods? How would you determine the time when the property in the goods passes to the buyer? When is the property in the goods transferred to the buyer in a contract for sale of unascertained goods? When is the title or ownership transferred to the buyer in a contract for sale of a specific or ascertained goods? . the property in the goods passes to the buyer: (i) when the buyer signifies his approval or acceptance to the seller or does any other act adopting the transaction. and does not reserve the right of disposal.

the contract is called an agreement to sell. Mr IsaacÊs godown caught by fire and it destroyed the whole stock of the flour. the breach of which give rise to a claim for damages but not a right to reject the goods and treat the contract as repudiated. Mr Isaac had already set aside the 200 tonne metric of the flour. The carrier handed the delivery order to Mr Isaac who gave instructions for loading to commence.    A contract of sale is the transfer of ownership of the goods to the buyer for a money consideration. The parties to a contract of sale may exclude the implied terms by the express agreement or by previous dealings or by usage.2 Discuss the following question: 500 tonne metric of flour belonging to a vendor were stored in a godown belonging to Mr. A warranty is a stipulation collateral to the main purpose of the contract. What distinguishes a sale from an agreement to sell is in terms of ownership or „the property in the goods‰. Where the transfer of the property in the goods is to take place at a future time or subject to some condition thereafter to be fulfilled. the breach of which gives rise to a right to treat the contract as repudiated. A condition is a stipulation essential to the main purpose of the contract. Isaac. Discuss when did the property in the goods pass and who shall bear the loss.212  TOPIC 12 LAW OF SALE OF GOODS (PART I) ACTIVITY 12. Before the loading could commence. the contract is called a sale. The conditions and warranties implied in a contract of sale of goods bind the contracting parties. The vendor sold 200 tonne metric of the flour to Mr Hans and gave him a delivery order addressed to Mr Isaac. the buyer and the seller. Where the property in the goods is transferred from the seller to the buyer.      . When Mr HansÊ carrier arrived at the godown.

thus the goods will remain at the sellerÊs risk until the property in the goods is transferred to the buyer. there is an implied condition on the part of the seller that in the case of a sale.TOPIC 12 LAW OF SALE OF GOODS (PART I)  213   In a contract of sale of goods. he has a right to sell the goods. There is an implied warranty that the buyer shall have and enjoy quiet possession of the goods and that the goods shall be free from any charge or encumbrance in favour of any third party not declared or known to the buyer before or at the time when the contact is made. & Vohrah B. Bhd. Selangor: Kumpulan Usahawan Muslim Sdn. sample.    Beale v. A. The Commercial Law of Malaysia (2nd Ed. Taylor [1967] 1 WLR 1193. Manganese Bronz and Brass Co Ltd [1934] AC 402. and in the case of an agreement to sell. Unless the circumstances of the contract indicate a different intention. Undang-Undang Perniagaan Malaysia. (2000). Selangor: Pearson and Longman. Cases:  Baldry v. Marshall [1925] 1 KB 260. 284. fitness for particular purpose and merchantable quality. Van Ingen (1887) 12 App.   Agreement to sell Fitness for purpose Implied terms Merchantable quality Property in goods Sample Title Sale of goods Transfer of title Text Books: Harlina Mohamed On & Rozanah Ab. Wu M. there are implied conditions as regards to title. Cammell Laird & Co v. (2007). he will have a right to sell the goods at the time when the property or ownership is to pass.). Rahman. description. Cas. The risk passes when the property in the goods passes. . Drummond v.

v Mitsui Bussan Kaisha Ltd (1911) 12 SSLR 67. . Wilson v. Beers & Sons [1913] 1 KB 486. Nagurdas Purshotumdas & Co. Cockerall & Co. Rowland v Divall [1923] 2 KB 500. Thornett & Fehr v. Landauer & Co [1921] 2 KB 519. Ltd [1954] 1 All ER 868. Peter Conway Ltd.214  TOPIC 12 LAW OF SALE OF GOODS (PART I)       Griffiths v. [1939] 1 All ER 685. Ricket. Moore & Co v.

the rules relating to the performance of contract of sale of goods are important in determining the rights of the seller and buyer in cases of breach by either party to the contract. and Discuss the remedies available to the seller and buyer for breach of contract of sale of goods. the rule of nemo dat quod non habet and the exceptions.Topic  13 Law of Sale of Goods (Part II) LEARNING OUTCOMES By the end of this topic.  INTRODUCTION This topic is a continuation of the previous topic on the law of sale of goods. Explain the rules relating to the performance of contract of sale. Explain the effect of sale by a person other than the owner. you should be able to: 1. Describe the rule of nemo dat quod non habet. Identify the exceptions to the rule of nemo dat quod non habet. However. Subsequently. there are certain circumstances provided by the law in which a sale by a person other than the owner may confer a good title in the goods to a bona fide purchaser. 5. . 4. The rule relating to the transfer of title protects the right of ownership whereby the right of the original owner is preserved. the performance of the contract of sale of goods and the remedies available to the seller and buyer for breach of contract. It focuses on the transfer of title. 3. 2.

Zeno Ltd would provide Ahmad with all the materials for the culverts construction. the buyer will not acquire a title in the goods he purchases. and who does not sell them under the authority or with the consent of the owner. there are a few exceptions to the rule of nemo dat quod non habet (refer to Figure 13. In an action for conversion. Under the contract. This means the buyer can only acquire a good title in the goods if he purchases from the owner of the goods. When they attempted to sell the materials. the appellant in this action. Consequently. Since Ahmad had no title to the goods or authority to sell them. the buyer acquires no better title to the goods than the seller had.. AhmadÊs contracts with Petaling Jaya Authority were cancelled whereupon Zeno Ltd informed the authority that the materials on the site belonged to them.. They brought the materials for the projects and delivered them to the construction site. The right of the original owner is preserved and the suit for the tort of conversion can be taken against an unauthorised seller and an innocent purchaser.1.1 TRANSFER OF TITLE BY SELLER WHO IS NOT THE OWNER AND ITS EXCEPTIONS For the purpose of the transfer of title in the contract of sale of goods. Zeno Ltd entered into an agreement with a contractor named Ahmad who had secured contracts from the Petaling Jaya Authority for construction of culverts. The maxim is nemo dat quod non habet. Zeno Ltd [1964] 30 MLJ 314. if the buyer purchases the goods from a person who is not the owner of the goods or a person who does not sell the goods under the ownerÊs authority. the Federal Court held that Ahmad was merely the bailee and not the owner of the goods at the time he sold them to the appellant. Section 27 provides the rule that no one can transfer a better title than the seller himself. where goods are sold by a person who is not the owner thereof. However.216  TOPIC 13 LAW OF SALE OF GOODS (PART II) 13.‰ This rule protects the right of ownership. Later. The wordings of Section 27 are as follows: „Subject to this Act and of any other law for the time being in force. In the case of Lim Chui Lai v. they discovered that the materials had been sold by Ahmad to Lim Chui Lai. he therefore could not transfer any title to the appellant.. The exceptions are provided in the following provisions under the Sale of Goods Act 1957. .

C then sued A for conversion and was successful in claiming that A was precluded by his conduct from denying BÊs authority to sell.. Securities & Finance Ltd v. The title had passed to C.Z. A agreed to sell a car to B. This means if the owner of the goods through his conduct makes the buyer believes that the person who sells the goods has the authority to sell. N.1.. B sold the car to C. However. The parties agreed that the ownership of the car was not to pass until A received the price.. the cheque given to A by B was dishonoured and A repossessed the car. The following case illustrates the estoppel principle. then the buyer will acquire a good title of the goods. Wrightcars Ltd [1925] 1 NZLR 77.TOPIC 13 LAW OF SALE OF GOODS (PART II)  217 Figure 13.unless the owner of the goods is by his conduct precluded from denying the sellerÊs authority to sell‰. . Before the sale to C was finalised. B tendered a cheque as payment and was given possession of the car.1 Estoppel The provision for estoppel can be found under Section 27 of the Sale of Goods Act 1957 which states that „. Later. C contacted AÊs office and C was informed by AÊs employee that B had paid for the car.1: Exceptions to the rule of nemo dat quad non habet 13..

Later. Sheila and Tracey are joint-owners of one refrigerator which they bought a year ago. Also. provided that the buyer acts in good faith and has not. A broker. or to buy goods. According to Section 28: „If one of several joint-owners of goods has the sole possession of them by permission of the co-owners. any sale made by him when acting in the ordinary course of business of a merchantile agent shall be as valid as if he were expressly authorised by the owner of the goods to make the same. an auctioneer or a dealer of goods for commission are the examples of merchantile agents.218  TOPIC 13 LAW OF SALE OF GOODS (PART II) 13. or to raise money on the security of goods.2 Sale by a Merchantile Agent An agent under the agency contract may pass a good title when selling his principalÊs goods provided he is acting within his actual or usual (apparent) authority. in possession of the goods or of a document of title to the goods. The relevant provision is found in the Proviso to Section 27 of the Sale of Goods Act 1957: „Provided that where a merchantile agent is. the disposition must be made when acting in the ordinary course of business of a merchantile agent and the buyer must not have notice of the agentÊs lack of authority to sell.‰ It is important that the merchantile agent must be in possession of the goods or the documents of title to goods at the time of disposition and the possession must be with the consent of the owner. with the consent of the owner. Sheila agreed at the time when she moved out that the refrigerator is to be kept and used by Tracey who will still occupy the house. Tracey sold the refrigerator to a friend of hers (Dewi) who bought it in good faith and did not know that the refrigerator was jointly owned by Tracey and Sheila. or to consign goods for the purpose of sale. notice that the seller has no authority to sell.1. 13.1. A merchantile agent is an agent having in the customary course of business authority either to sell goods. the property in the goods is transferred to any person who buys them in good faith and has no notice at the time of the contract that the seller has no authority to sell. . Mr Justin.‰ For example.3 Sale by One of Joint Owners The provision for this exception is found in Section 28 of the Sale of Goods Act 1957. Sheila has just moved out from the house that they both rented from the landlord. The ownership of the refrigerator is transferred to Dewi. at the time of the contract of sale.

but the contract has not been rescinded at the time of the sale. the second buyer gets a good title while the original buyer loses his.1. fraud.1. when the consent of the original owner is caused by coercion. pledge or other disposition thereof to any person receiving the same in good faith and without notice of the previous sale shall have the same effect as if the person making the delivery or transfer were expressly authorised by the owner of the goods to make the same‰. 13. which states that: „Where a person.6 Sale by a Buyer in Possession after Sale The exception is provided in Section 30(2) of the Sale of Goods Act 1957. a seller who remains in possession of the goods or of the documents of title for the goods which he had sold can pass a good title to a bona fide purchaser. misrepresentation or undue influence. Under this exception. The seller must have sold the goods to the buyer before the original owner rescinded the voidable contract. the delivery or transfer by that person or by a mercantile agent acting for him. but the contract has not been avoided at the time of the sale. It provides that: „Where the seller of goods has obtained possession under a contract voidable under Section 19 or Section 20 of the Contracts Act 1950. This provision applies to contracts which are voidable. having sold goods. continues or is in possession of the goods or of the documents of title to the goods. the buyer acquires a good title to the goods provided he buys them in good faith and without notice of the sellerÊs defect of title. the buyer acquires a good title to the goods provided he buys them in good faith and without notice of the seller's defect of title. whereby: .4 Sale under a Voidable Contract Sale by a person in possession of goods under a voidable contract is provided in Section 29 of the Sale of Goods Act 1957. 13. Thus.‰ Where the seller of goods has obtained possession under a voidable contract.1. of the goods or documents of title under any sale.5 Sale by a Seller in Possession After Sale The exception is provided in Section 30(1) of the Sale of Goods Act 1957.TOPIC 13 LAW OF SALE OF GOODS (PART II)  219 13.

13. it was agreed that the property would not pass until the cheque was honoured. he could pass a good title to B who then transferred it to the defendant. the delivery or transfer by that person or by a mercantile agent acting for him of the goods or documents of title under any sale. having bought or agreed to buy goods. and acceptance of goods. The plaintiffs attempted to recover the car from the defendant. . The Court of Appeal held that A. obtains possession of the goods or the documents of title with the consent of the seller. Williams [1965] 1 QB 560. with the consent of the seller. delivery to carrier or wharfingers. he can pass a good title to a subsequent bona fide purchaser. pledge. or other disposition thereof to any person receiving the same in good faith and without notice of any lien or other right of the original seller in respect of the goods shall have effect as if such lien or right did not exist. Duties of seller and buyer (Section 31) It is the duty of the seller to deliver the goods and of the buyer to accept and pay for them in accordance with the terms of the contract of sale. The cheque was dishonoured and the plaintiffs rescinded the contract but A had sold the car to B who bought it without knowledge of the fact. time of delivery.‰ This means if a buyer having bought or agreed to buy goods.2 PERFORMANCE OF CONTRACT Chapter IV of the Sale of Goods Act 1957 deals with the performance of contract of sale of goods that covers the rules relating to:       delivery of goods. B then resold the car to the defendant. place of delivery. In the case of Newtons of Wembley Ltd v. the original buyer was in possession with consent of the plaintiffs. the plaintiffs sold a car to A who paid by cheque. possession of the goods or the documents of title to the goods. wrong quantity or mix of goods delivered.220  TOPIC 13 LAW OF SALE OF GOODS (PART II) „Where a person. obtains. Hence. Although he was given possession of the car. delivery by instalments.

Unless otherwise agreed. Where the goods at the time of sale are in the possession of a third person. Buyer to apply for delivery (Section 35) Apart from any express contract. at the place at which they are manufactured or produced. Demand or tender of delivery may be treated as ineffectual unless made at a reasonable hour. Where under the contract of sale the seller is bound to send the goods to the buyer. Apart from any such contract. and the buyer shall be ready and willing to pay the price in exchange for possession of the goods. the expenses of and incidental to putting the goods into a deliverable state shall be borne by the seller. and goods agreed to be sold are to be delivered at the place at which they are at the time of the agreement to sell. the seller shall be ready and willing to give possession of the goods to the buyer in exchange for the price. or. (b) (c) (d) (e) (f) .TOPIC 13 LAW OF SALE OF GOODS (PART II)  221 Payment and delivery are concurrent conditions (Section 32) Unless otherwise agreed. that is to say. there is no delivery by seller to buyer unless and until such third person acknowledges to the buyer that he holds the goods on his behalf: Provided that nothing in this section shall affect the operation of the issue or transfer of any document of title to goods. but no time for sending them is fixed. Delivery (Section 33) Delivery of goods sold may be made by doing anything which the parties agree shall be treated as delivery or which has the effect of putting the goods in the possession of the buyer or of any person authorised to hold them on his behalf. delivery of the goods and payment of the price are concurrent conditions. if not then in existence. the seller of goods is not bound to deliver them until the buyer applies for delivery. between the parties. express or implied. Rules as to delivery (Section 36) (a) Whether it is for the buyer to take possession of the goods or for the seller to send them to the buyer is a question depending in each case on the contract. What is a reasonable hour is a question of fact. goods sold are to be delivered at the place at which they are at the time of the sale. the seller is bound to send them within a reasonable time.

the buyer may reject them. he shall pay for them at the contract rate. If the buyer accepts the whole of the goods so delivered. whether the breach of contract is a repudiation of the whole contract. or the buyer neglects or refuses to take delivery of or pay for one or more instalments. is prima facie deemed to be a delivery of the goods to the buyer. the buyer of goods is not bound to accept delivery thereof by instalments. delivery of the goods to a carrier. (b) Delivery to carrier or wharfingers (Section 39) (a) Where in pursuance of a contract of sale. the buyer may accept the goods included in the contract and reject the rest. or he may reject the whole. or whether it is a severable breach giving rise to a claim for compensation but not to a right to treat the whole contract as repudiated. Where the seller delivers to the buyer the goods he contracted to sell mixed with goods of a different description not included in the contract. whether named by the buyer or not. it is a question in each case depending on the terms of the contract and the circumstances of the case. for the purpose of transmission to the buyer. the buyer may accept the goods which are in accordance with the contract and reject the rest. or delivery of the goods to wharfinger for safe custody. but if the buyer accepts the goods so delivered. and the seller makes no delivery or defective delivery in respect of one or more instalments. (b) (c) (d) Instalment deliveries (Section 38) (a) Unless otherwise agreed. Where the seller delivers to the buyer a quantity of goods larger than he contracted to sell. . This section is subject to any usage of trade. or may reject the whole. special agreement or course of dealing between the parties. Where there is a contract for the sale of goods to be delivered by stated instalments which are to be separately paid for.222  TOPIC 13 LAW OF SALE OF GOODS (PART II) Delivery of wrong quantity (Section 37) (a) Where the seller delivers to the buyer a quantity of goods less than he contracted to sell. the seller is authorised or required to send the goods to the buyer. he shall pay for them at the contract rate.

(b) Acceptance (Section 42) The buyer is deemed to have accepted the goods when he intimates to the seller that he has accepted them. or when. on request. he is bound. Unless otherwise agreed. 13. and the goods are lost or damaged in course of transit or whilst in the custody of the wharfinger. the buyer may decline to treat the delivery to the carrier or wharfinger as a delivery to himself.3. when the seller tenders delivery of goods to the buyer. the seller shall give such notice to the buyer as may enable him to insure them during sea transit. to accept goods and to pay for the goods. where goods are sent by the seller to the buyer by a route involving sea transit. the seller shall make such contract with the carrier or wharfinger on behalf of the buyer as may be reasonable having regard to the nature of the goods and the other circumstances of the case. in circumstances in which it is usual to insure. he retains the goods without intimating to the seller that he has rejected them. the goods shall be deemed to be at his risk during such sea transit. . or may hold the seller responsible in damages. or when the goods have been delivered to him and he does any act in relation to them which is inconsistent with the ownership of the seller. to afford the buyer a reasonable opportunity of examining the goods for the purpose of ascertaining whether they are in conformity with the contract.1 Breach by the Buyer Breach of contract of sale of goods by the buyer includes the buyerÊs failure to take delivery.TOPIC 13 LAW OF SALE OF GOODS (PART II)  223 (b) Unless otherwise authorised by the buyer. (c) Buyer's right of examining the goods (Section 41) (a) Where goods are delivered to the buyer which he has not previously examined. he is not deemed to have accepted them unless and until he has had a reasonable opportunity of examining them for the purpose of ascertaining whether they are in conformity with the contract. Unless otherwise agreed.3 REMEDIES FOR BREACH 13. and if the seller fails to do so. If the seller omits to do so. after the lapse of a reasonable time.

and the buyer does not. Suit for price (Section 55) (a) Where under a contract of sale the property in the goods has passed to the buyer and the buyer wrongfully neglects or refuses to pay for the goods according to the terms of the contract.3. he is liable to the seller for any loss occasioned by his neglect or refusal to take delivery. the seller may sue him for the price of the goods. as follows: Unpaid seller defined (Section 45) (a) The seller of goods is deemed to be an "unpaid seller" within the meaning of this Act: (i) when the whole of the price has not been paid or tendered. the seller may sue him for the price although the property in the goods has not passed and the goods have not been appropriated to the contract.224  TOPIC 13 LAW OF SALE OF GOODS (PART II) Liability of buyer for neglecting or refusing delivery of goods (Section 44) When the seller is ready and willing to deliver the goods and requests the buyer to take delivery. A seller of goods is deemed to be an unpaid seller within the meaning of the Act and the rights of the unpaid seller are detailed out in the following provisions of the Act. 13. take delivery of the goods.2 Rights of Unpaid Seller against the Goods (Seller’s Remedies) The Sale of Goods Act 1957 provides remedies to the seller who can sue the buyer for the price of the goods or damages for non-acceptance of the goods. (b) Damages for non-acceptance (Section 56) Where the buyer wrongfully neglects or refuses to accept and pay for the goods the seller may sue him for damages for non-acceptance. within a reasonable time after such request. Where under a contract of sale the price is payable on a day certain irrespective of delivery and the buyer wrongfully neglects or refuses to pay such price. and also for a reasonable charge for the care and custody of the goods: Provided that nothing in this section shall affect the rights of the seller where the neglect or refusal of the buyer to take delivery amounts to a repudiation of the contract. .

by implication of law: (i) (ii) a lien on the goods for the price while he is in possession of them. as such. or (iii) where the buyer becomes insolvent. . in case of the insolvency of the buyer. has. (b) In this topic. notwithstanding that the property in the goods may have passed to the buyer. (b) The seller may exercise his right of lien notwithstanding that he is in possession of the goods as agent or bailee for the buyer. the unpaid seller of goods. Unpaid seller's rights (Section 46) (a) Subject to this Act and of any law for the time being in force. a right of withholding delivery similar to and co-extensive with his rights of lien and stoppage in transit where the property has passed to the buyer. I. an agent of the seller to whom the bill of lading has been endorsed or a consignor or agent who has himself paid. in addition to his other remedies. the unpaid seller has. but the term of credit has expired. LIEN Seller's lien (Section 47) (a) Subject to this Act. namely: (i) (ii) where the goods have been sold without any stipulation as to credit.TOPIC 13 LAW OF SALE OF GOODS (PART II)  225 (ii) when a bill of exchange or other negotiable instrument has been received as conditional payment and the condition on which it was received has not been fulfilled by reason of the dishonour of the instrument or otherwise. or is directly responsible for the price. where the goods have been sold on credit. the unpaid seller of goods who is in possession of them is entitled to retain possession of them until payment or tender of the price in the following cases. the term "seller" includes any person who is in the position of a seller. and/or (iii) a right of resale as limited by this Act. (b) Where the property in goods has not passed to the buyer. for instance. a right of stopping the goods in transit after he has parted with the possession of them.

(b) The unpaid seller of goods. the transit is at an end and it is immaterial that a further destination for the goods may have been indicated by the buyer. Termination of lien (Section 49) (a) The unpaid seller of goods loses his lien thereon: (i) when he delivers the goods to a carrier or other bailee for the purpose of transmission to the buyer without reserving the right of disposal of the goods. II. If the buyer or his agent in that behalf obtains delivery of the goods before their arrival at the appointed destination. he may resume possession of the goods as long as they are in the course of transit. the carrier or other bailee acknowledges to the buyer or his agent that he holds the goods on his behalf and continues in possession of them as bailee for the buyer or his agent. he may exercise his right of lien on the remainder. when the buyer or his agent lawfully obtains possession of the goods. unless such part delivery has been made under such circumstances as to show an agreement to waive the lien. the transit is at an end. or (ii) (iii) by waiver thereof. does not lose his lien by the only reason that he has obtained a decree for the price of the goods. If after the arrival of the goods at the appointed destination. and may retain them until payment or tender of the price. Duration of transit (Section 51) (a) Goods are deemed to be in course of transit from the time when they are delivered to a carrier or other bailee for the purpose of transmission to the buyer. (b) (c) . STOPPAGE IN TRANSIT Right of stoppage in transit (Section 50) Subject to this Act when the buyer of goods becomes insolvent the unpaid seller who has parted with the possession of the goods has the right of stopping them in transit. until the buyer or his agent in that behalf takes delivery of them from such carrier or other bailee. having a lien thereon.226  TOPIC 13 LAW OF SALE OF GOODS (PART II) Part delivery (Section 48) Where an unpaid seller has made part delivery of the goods. that is to say.

may communicate it to his servant or agent in time to prevent a delivery to the buyer. if such last-mentioned transfer was by way of sale. Such notice may be given either to the person in actual possession of the goods or to his principal. the unpaid seller's right of lien or stoppage in transit is (b) .TOPIC 13 LAW OF SALE OF GOODS (PART II)  227 (d) If the goods are rejected by the buyer and the carrier or other bailee continues in possession of them. the unpaid seller's right of lien or stoppage in transit is not affected by any sale or other disposition of the goods which the buyer may have made unless the seller has assented thereto: Provided that where a document of title to goods has been issued or lawfully transferred to any person as buyer or owner of the goods and that person transfers the document to a person who takes the document in good faith and for consideration. by the exercise of reasonable diligence. The expenses of such redelivery shall be borne by the seller. Where part delivery of the goods has been made to the buyer or his agent in that behalf. In the latter case. it is a question depending on the circumstances of the particular case. the transit is deemed to be at an end. then. the remainder of the goods may be stopped in transit. (e) (f) (g) How stoppage in transit is effected (Section 52) (a) The unpaid seller may exercise his right of stoppage in transit either by taking actual possession of the goods. Where the carrier or other bailee wrongfully refuses to deliver the goods to the buyer or his agent in that behalf. to be effectual. even if the seller has refused to receive them back. the notice. (b) Effect of sub-sale or pledge by buyer (Section 53) (a) Subject to this Act. unless such part delivery has been given in such circumstances as to show an agreement to give up possession of the whole of the goods. whether they are in the possession of the master as a carrier or as agent of the buyer. When the goods are delivered to a ship chartered by the buyer. shall be given at such time and in such circumstances that the principal. When notice of stoppage in transit is given by the seller to the carrier or other bailee in possession of the goods. the transit is not deemed to be at an end. or by giving notice of his claim to the carrier or other bailee in whose possession the goods are. he shall redeliver the goods to or according to the directions of the seller.

if the buyer does not within a reasonable time pay or tender the price. the original contract of sale is thereby rescinded. a contract of sale is not rescinded by the mere exercise by an unpaid seller of his right of lien or stoppage in transit. Where the seller expressly reserves a right of resale in case the buyer should make default and. or where the unpaid seller who has exercised his right of lien or stoppage in transit gives notice to the buyer of his intention to resell. resell the goods within a reasonable time and recover from the original buyer damages for any loss occasioned by his breach of contract. If such notice is not given. Where an unpaid seller who has exercised his right of lien or stoppage in transit resells the goods. the unpaid seller's right of lien or stoppage in transit can only be exercised subject to the rights of the transferee. notwithstanding that no notice of the resale has been given to the original buyer. Where the goods are of a perishable nature. as far as possible. and. on the resale. III. if such last-mentioned transfer was by way of pledge or other disposition for value.3 Breach by the Seller and the Buyer’s Remedies The Sale of Goods Act 1957 provides certain remedies to the buyer when the seller breaches the contract of sale of goods. if any. the buyer acquires a good title thereto as against the original buyer.3. RESALE Sale not generally rescinded by lien or stoppage in transit (Section 54) (a) Subject to this section. resells the goods. the unpaid seller may. out of any other goods or securities of the buyer in the hands of the pledgee and available against the buyer. on the buyer making default. (b) (c) (d) 13. but without prejudice to any claim which the seller may have for damages. the unpaid seller may require the pledgee to have the amount secured by the pledge satisfied in the first instance. as follows: . the unpaid seller shall not be entitled to recover such damages and the buyer shall be entitled to the profit. but the buyer shall not be entitled to any profit which may occur on the resale. (c) Where the transfer is by way of pledge.228  TOPIC 13 LAW OF SALE OF GOODS (PART II) defeated.

if it thinks fit. the court may. as the court may deem just. and the application of the plaintiff may be made at any time before the decree. or sue the seller for damages for breach of warranty. The fact that a buyer has set up a breach of warranty in diminution of the price does not prevent him suing for the same breach of warranty if he has suffered further damage. the buyer may sue the seller for damages for non-delivery. The decree may be unconditional. Remedy for breach of warranty (Section 59) (a) Where there is a breach of warranty by the seller. or upon such terms and conditions as to damages. without giving the defendant the option of retaining the goods on payment of damages. the buyer is not by reason only of such breach of warranty entitled to reject the goods. by its decree direct that the contract shall be performed specifically. or where the buyer elects or is compelled to treat any breach of a condition on the part of the seller as a breach of warranty.TOPIC 13 LAW OF SALE OF GOODS (PART II)  229 Damages for non-delivery (Section 57) Where the seller wrongfully neglects or refuses to deliver the goods to the buyer. on the application of the plaintiff. Specific performance (Section 58) Subject to Chapter II of the Specific Relief Act 1950. . in any suit for breach of contract to deliver specific or ascertained goods. but he may: (i) (ii) (b) set up against the seller the breach of warranty in diminution or extinction of the price. payment of the price or otherwise.

Che Wan had agreed to this arrangement after being shown samples of the items by an agent of Cik Jah. 30 kg of coconut milk. Advise Che Wan and Cik Jah on their legal rights under the contract of sale of goods. 2. 10 kg of cucumbers and 8 kg of vegetables were delivered in bad condition and could not be used.1 1. She entered into a contract with Cik Jah. What is the meaning of the maxim nemo dat quod non habet? Can a seller other than the owner transfer an ownership in the goods to a purchaser? What is the effect of a transfer of property in the goods by a seller who is not the owner? Are there any exceptions to the rule of nemo dat quod non habet? Can a buyer acquire a good title to the goods from a seller under a voidable contract? What is meant by a bona fide purchaser? What are the rights of an unpaid seller under the statute? What are the remedies available to the buyer when the seller breaches the contract of sale of goods? ACTIVITY 13. the remaining 10 kg of coconut milk. 5. Che Wan refused to pay for all the items to Cik Jah.230  TOPIC 13 LAW OF SALE OF GOODS (PART II) SELF-CHECK 13. On the sixth day of his business. a seller specialising in the supply of coconut milk and fresh vegetables. . 3. 7.1 Discuss the following questions: (a) Che Wan has just started her food catering business and served some common Malaysian specialties. 5 kg of cucumbers and 2 kg of vegetables were completely destroyed when the van used to deliver them skidded into a river. 15 kg of cucumbers and 10 kg of vegetables. Cik Jah agreed to supply Che Wan (on daily basis) with 40 kg of coconut milk. 4. Under the contract. 8. Later the same day. 6.

place and time of delivery and quantity of goods delivered. which disappointed her very much.TOPIC 13 LAW OF SALE OF GOODS (PART II)  231 (b) Last August. Sarah wished to obtain the car and went to see Samuel for such purpose. The sale was made without the knowledge of Sarah. to accept goods and to pay for the goods. Purchaser can only acquire a good title in the goods if he purchases from the owner of the goods. Breach of contract of sale of goods by the buyer includes the buyerÊs failure to take delivery. the buyer acquires a good title to the goods provided he buys them in good faith and without notice of the sellerÊs defect of title.000. A merchantile agent is an agent having in the customary course of business authority either to sell goods. A seller who remains in possession of the goods or of the documents of title of the goods can pass a good title to a bona fide purchaser. Samuel refused to allow Sarah to take the car for the reason that the payment for the car had been given to Rafique and he had no knowledge about Sarah not consenting to the sale.    Nemo dat quod non habet means no one can transfer a better title than he has himself. or to raise money on the security of goods. The performance of contract of sale of goods covers the rules relating to delivery of goods. or to consign goods for the purpose of sale.        . Purchaser will acquire a good title of the goods if the owner of the goods makes the buyer believe that the person who sells the goods has the authority to sell. Rafique sold a car that he possessed as joint-owner with his wife (Sarah) to Samuel at the price of RM30. However. If a seller of goods obtained possession under a voidable contract. Advise Samuel on his right to retain the car. or to buy goods. A buyer who obtains possession of the goods or the documents of title with the consent of the seller can pass a good title to a subsequent bona fide purchaser. Remedies available to the seller include a suit against the buyer for the price of the goods or damages for non-acceptance of the goods.

232  TOPIC 13 LAW OF SALE OF GOODS (PART II) Delivery Estoppel Lien Performance Remedies Resale Stoppage in transit Nemo dat quod non habet Payment Unpaid seller Text Books: Harlina Mohamed On & Rozanah Ab. . (2007). Undang-Undang Perniagaan Malaysia.A. (2000). Selangor: Pearson and Longman. N. Newtons of Wembley Ltd v. & Vohrah. Cases:    Lim Chui Lai v. Wu M.). Rahman. Wrightcars Ltd [1925] 1 NZLR 77. The Commercial Law of Malaysia (2nd ed. Bhd. Williams [1965] 1 QB 560. B.Z. Selangor: Kumpulan Usahawan Muslim Sdn. Securities & Finance Ltd v. Zeno Ltd [1964] 30 MLJ 314.

4. a financial institution) will hire the goods to the hirer (purchaser) and the hirer has an option to return the goods and terminate the contract or buy the goods upon completion of the agreed period. the Moneylenders Act 1957.  INTRODUCTION Hire-purchase is part of consumer credits. In Malaysia. Takaful Act 1963 and Cooperative Societies Act 1948.Topic  Law of 14 14 Hire-Purchase LEARNING OUTCOMES By the end of this topic. Understand the important terms in hire-purchase agreement. Islamic Banking Act 1983. Insurance Act 1963. Pawn Brokers Act 1974. Banking and Financial Institutions Act 1989. The HirePurchase Act provides for standard form of agreement for hire-purchase. and Explain the procedure for repossession of goods under hire-purchase agreement. Describe the formation and nature of hire-purchase agreement. For instance. 5. you should be able to: 1. The owner (for instance. 2.  3. Describe the parties involved in hire-purchase. Identify the rights and liabilities of owner and hirer. the hire-purchase transaction is governed by the Hire-Purchase Act 1967. regulates the rights and liabilities of the owner and hirer and procedures for repossession of the goods. Hire-purchase is basically a purchase through credit in which the hirer purchases by way of instalment. Define the meaning of hire-purchase. . Consumer credits in Malaysia are governed by various statutes depending on the types of goods involved. 6.

but does not include any agreement: (a) whereby the property in the goods comprised therein passes at the time of the agreement or upon or at any time before delivery of the goods.‰ (b) The above provision explains that hire-purchase is: (a) (b) Letting of goods with an option to purchase.1 DEFINITION OF HIRE-PURCHASE In Section 2(1) of the Hire-Purchase Act 1967. there will be an original sale between a seller and and a finance company and a hire-purchase agreement between a purchaser and a finance company.234  TOPIC 14 LAW OF HIRE-PURCHASE 14. In hire-purchase. before delivery of the goods or at the time of delivery. „A letting of goods with an option to purchase and an agreement for the purchase of goods by instalments (whether the agreement describes the instalments as rent or hire or otherwise). hire-purchase is defined as. and An agreement for the purchase of goods by instalments. motor cycles. . or under which the person by whom the goods are being hired or purchased is a person who is engaged in the trade or business of selling goods of the same nature or description as the goods comprised in the agreement. Thus. there would be a seller or dealer who offers the goods for sale to a purchaser. goods vehicles (the maximum permissible laden weight does not exceed 2540 kilograms) and buses (including stage buses).2 MEANING OF GOODS UNDER THE HIRE PURCHASE ACT 1967 The First Schedule of the Hire-Purchase Act 1967 lists down several types of goods that come within the meaning of goods under the Act. the seller will sell the goods to a finance company which will subsequently hire the goods to the purchaser under the hire-purchase terms. Therefore. motor cars (for example taxi cabs and hire cars). this seller does not offer payment by instalment to the purchaser. and Motor vehicles including invalid carriages. property in the goods does not pass at the time of the agreement. as follows: (a) (b) All consumer goods. In hirepurchase agreement. 14. However.

According to the agreement. but the respondent had again defaulted in making payments. if they do not agree. The respondent had paid the deposit but it had defaulted in making instalment payments. In the case of Tractors Malaysia Bhd v Kumpulan Pembinaan Malaysia Sdn. Under common law. Therefore. . Thus. it was clearly the intention of the parties that the property in the tractor was not to pass until full payment is made.TOPIC 14 LAW OF HIRE-PURCHASE  235 Can a purchaser purchase the goods according to the hire-purchase agreement under the Act even though the said goods do not fall within the above schedule? The answer is in the affirmative. provided that both the owner and the hirer agreed to be bound by the Hire-Purchase Act 1967. The respondent then paid all the instalments due and other incidental costs. On the other hand. the appellantÊs action in taking possession of the tractor when the respondent defaulted in making instalment payments was against the law. the hire-purchase agreement shall be governed by the common law principles. Consequently. The respondent contended that the agreement between the respondent and the appellant was not a hire-purchase but an ordinary sale of goods. the appellant agreed to hire the said tractor to the respondent subject to terms and conditions of the agreement and the Hire-Purchase Act 1967. the hire-purchase transaction is a form of contract in which the owner releases the goods to the buyer for hire-purchase with the option given to the buyer whether he wants to return the goods and terminate the contract or opt to purchase upon completion of payment of the said goods. the appellant and the respondent had entered into an agreement to purchase a tractor. The appellant claimed for the balance of the amount the respondent had to pay including costs and damages. the appellant took possession of the tractor. The Court held that: On a proper construction of the agreement.Bhd. The appellant therefore had the right to repossess the tractor on breach of the terms of the agreement by the respondent. This is due to the fact that the purchase of any other goods which do not fall within the ambit of the First Schedule is controlled by the common law principles. [1979] 1 MLJ 129. The respondent paid all the amount claimed by the appellant and the ownership of the tractor had been transferred to the respondentÊs name. it was not a sale on instalment terms but rather in the nature of a hire-purchase.

failure to observe the obligations shall render the hire-purchase agreement void. he is not obliged to enter into a transaction and therefore is not bound to make any payment for the preparation or service of such statement.1: Formation of a hire-purchase contract 14.1 Pre-contractual Obligations Section 4(1) of the Hire-Purchase Act 1967 requires an owner to give a prospective hirer a written statement in accordance with the form set out in the Second Schedule of the 1967 Act. Under Section 4(3). In the case of a dealer.3. Construction of a hire-purchase agreement. and Post-contractual obligations.3 FORMATION OF THE HIRE-PURCHASE AGREEMENT The formation of a hire-purchase agreement (refer to Figure 14. as follows: (a) (b) (c) Pre-contractual obligations. . the schedule requires information on the description of goods and a summary of the financial obligations of the prospective hirer. Figure 14.236  TOPIC 14 LAW OF HIRE-PURCHASE 14.1) covers three different stages. According to Section 4(4).

Insurance. the hire-purchase agreement must include a table with the following particulars: (a) (b) (c) (d) (e) Cash price of the goods. Delivery cost. if any part of the consideration is in the form of other than cash money.‰ According to Section 4B(3) of the Hire-Purchase Act 1967. and Address where the goods are kept.2 Construction of a Hire-Purchase Agreement Section 4A(1) of the Hire-Purchase Act 1967 states that any hire-purchase agreement must be in writing. It is important that the hirer must not sign a blank form as the requirement under Section 4B(1) provides that „No owner. failure to observe this requirement would render the agreement void and the owner will be guilty of an offence. Section 4C(1)(c) of the Hire-Purchase Act 1967 further provides that the following information shall be included in the hire-purchase agreement and failure to comply with this provision will render the agreement void: (a) (b) (c) (d) (e) (f) Date of the commencement of hiring. dealer.TOPIC 14 LAW OF HIRE-PURCHASE  237 14. form or document has been duly completed. Amount of each instalment. the description of such consideration shall be stated in the agreement. Number of instalments to be paid by the hirer. Additionally. to the agreement. According to Section 4C(1)(b).3. Amount of deposit paid in cash and other type of consideration given (other than cash). Section 4B(1) of the Hire-Purchase Act 1967 requires a hire-purchase agreement to be signed by. agent or person acting on behalf of the owner shall require or cause any intending hirer or his agent to sign a hire-purchase agreement or any other form or document relating to a hire-purchase agreement unless such hire-purchase agreement. Time for payment for each instalment. Hence. Description of the goods. or on behalf of all parties. Payment for vehicle (if any). failure to comply with the above requirements shall render the agreement void. .

Term charges. Total amount in (f) and (g). As required under Section 5(3). 6. Otherwise. 14. less the deposit. if any part of the total amount payable consists of an amount paid or to be paid under a policy of insurance. What is the meaning of hire-purchase? How is a hire purchase agreement different from an ordinary contract of sale of goods? How do you describe the relationship between all parties involved in the hire purchase agreement? What is the importance of hire purchase as one of the consumer credits in Malaysia? What are the types of goods that fall within the First Schedule of the Hire Purchase Act 1967? What are the important requirements for the formation of a hirepurchase agreement? . such agreement will be unenforceable by the owner.238  TOPIC 14 LAW OF HIRE-PURCHASE (f) (g) (h) (i) (j) Total amount in (a) to (e) above. (the balance originally payable under the agreement). 4. 5. according to Section 5(1A). The owner must also serve a copy of the policy within seven days of its receipt.1 1. 2. Section 4D(1) of the Hire-Purchase Act 1967 requires a separate hire-purchase agreement to be prepared for every item. Failure to observe the requirement will render the agreement void under Section 4D(2). SELF-CHECK 14.3. the owner must serve on the hirer a copy of the insurance payment receipt. If there are more than one goods. and Total amount payable.3 Post-Contractual Obligations Section 5(1) of the Hire-Purchase Act 1967 requires a copy of the hire-purchase agreement to be sent to the hirer and guarantors (if any) within 14 days after it is made. 3. Annual percentage rate for term charges.

4. the condition of merchantable quality shall not be implied under the following situations: (i) (ii) Where the hirer has examined the goods or a sample and the examination ought to have revealed the defects.1 Implied Conditions Under the Hire-Purchase Act 1967. and The owner proves that the hirer has acknowledged in writing that the statement was brought to his notice. There is no definition of merchantable quality under the Hire-Purchase Act 1967 but it means the same as Section 16 of the Sale of Goods Act 1957.4 RIGHTS AND PROTECTIONS OF HIRERS Once a hire-purchase agreement has been concluded in accordance with the requirements of the Hire-Purchase Act 1967.TOPIC 14 LAW OF HIRE-PURCHASE  239 14. In general. 14. the following implied conditions shall be observed in a hire-purchase agreement: (a) The owner has the right to sell the goods at the time when the property is to pass (Section 7(1)(b)). Those rights and protections derived from the implied conditions and warranties as to the goods hired. This is provided in Section 7 of the Hire-Purchase Act 1967. 15 and 16 of the Sale of Goods Act 1957. If the goods are used items (second-hand goods) and the agreement contains a statement that the goods are second-hand and all conditions and warranties as to quality are expressly negated. The implied condition as to fitness shall not apply to second-hand goods and where exclusion of the implied conditions and warranties as to fitness is expressly spelt out in the agreement. However. (b) (iii) (c) The goods must be fit for the hirerÊs purpose (Section 7(3)). . a hirer shall enjoy rights and protections that are available under the statute. the implied conditions and warranties are similar to the implied conditions and warranties contained in Sections 14. The goods sold to the hirer must be of merchantable quality (Section 7(2)).

entitled to be indemnified by the agent or dealer responsible for a misrepresentation.5 LIABILITY OF OWNER AND DEALER FOR MISREPRESENTATION Apart from the above rights and protections.240  TOPIC 14 LAW OF HIRE-PURCHASE 14. 14.6 STATUTORY RIGHTS OF THE HIRER Sections 9 to 15 of the Hire-Purchase Act 1967 laid down statutory rights of a hirer under the hire-purchase agreement. Similar to Section 14(b) of the Sale of Goods Act 1957. the right to rescind the hire-purchase agreement. The goods are free from any charge or encumbrance created by the owner in favour of any third party (Section 7(1)(c)). (b) 14.2 Implied Warranties The implied warranties to be observed in a hire-purchase agreement are as follows: (a) The hirer must enjoy quiet possession of the goods (Section 7(1)(a)).1: . This is provided in Section 8 of the HirePurchase Act 1967. The remedies which the hirer may claim are the right to sue for damages against the dealer or its agent. The owner is.4. The rights are summarised in Table 14. however. a hirer is also entitled to claim against the owner or any person making misrepresentation in the negotiations leading to the hire-purchase agreement. and against the owner. quiet possession includes interference by the seller and interference arising from lawful acts of third parties. This right of hirer cannot be excluded or limited by any contractual term.

or without his consent. Passing of right by operation of law Upon the death of a hirer. However. and (d) the amount derived from interest on overdue instalments. If there is no instruction by the hirer. all his rights.TOPIC 14 LAW OF HIRE-PURCHASE  241 Table 14. However. a hirer may seek permission to move the goods to another location by applying to a Magistrate for an order to remove the goods to the new place. a hirer has a right to instruct payment to a particular agreement or make payment to any two or more agreements in such proportion as he thinks fit. Section 10 Section 11 Section 12 Section 13 . if it is unreasonably withheld. (ii) Observe all conditions of the hire-purchase agreement. Right to appropriation of payment when more than one agreement A hirer has a right to appropriate payments when he has more than one agreement. and (b) The hirer and the assignee to execute and deliver an assignment whereby the assignee is personally liable to: (i) Pay the balance of the instalments. Right to apply for an order to remove goods A hirer is obliged to keep the goods in a place mentioned in the agreement. The request must be made in writing and the statement must be supplied by the owner to the hirer within fourteen days after the request is received. In such circumstance. (b) the amount due to the owner. Failure of the owner to comply with the provision without reasonable cause will deny the ownerÊs right to enforce the following: (a) The agreement against the hirer.1: Summary of Statutory Rights of Hirer Section 9 Right to a copy of statement of financial position A hirer has a right to request (in writing) the owner to supply him (within fourteen days) a statement containing the following: (a) the amount paid to the owner by the hirer. and (c) Any contract of guarantee relating to the agreement. titles and interests under the hire-purchase agreement shall pass to his personal representative who shall comply with the agreement. title and interest under a hire-purchase agreement with the consent of an owner. (c) the amount payable under the hire-purchase agreement. and the payment is insufficient to discharge the total amount due. the owner may require that: (a) All defaults under the agreement be made good. prior to that. Right to assign hirerÊs rights under the agreement A hirer may assign his rights. (b) Any right to recover the goods from the hirer. and (iii) Pay reasonable costs incurred by the owner in stamping or registering the assignment agreement. payment is to be appropriated to satisfy the payment due.

or (d) at a place fixed by the court (upon application by the hirer to the Magistrate). the owner has the right to repossess the goods from the hirer under the following events: (a) (b) When the hirer has defaulted in making payments for two consecutive months. and (iii) the statutory rebate for insurance (if any). if the value of the goods is less than the balance outstanding under the agreement. (ii) the statutory rebate for term charges. 14. . or (b) at any other place specified for that purpose in the agreement. The „net balance‰ due refers to the balance payable under the agreement less: (i) the total amount already paid. Failure to observe such procedures gives the right to the hirer to challenge the validity of the repossession by the owner.7 REPOSSESSION OF GOODS BY THE OWNER According to Section 16 of the Hire-Purchase Act 1967. he may terminate the hire-purchase agreement by returning the goods to the owner: (a) at the ownerÊs usual place of business. or When the hirer has defaulted in making the last payment. or (b) Recover part of his payments where the value of the goods is more than the balance outstanding under the agreement. the hirer may: (a) Introduce a buyer who will pay in cash at a price agreeable to the owner. Section 15 Right to terminate the agreement If the hirer cannot afford to proceed with the instalment payment. or (c) Must pay the owner the difference in sum.242  TOPIC 14 LAW OF HIRE-PURCHASE Section 14 Right to early completion of agreement A hirer has a right to make early settlement of the full purchase price under the hire-purchase agreement provided that the hirer: (a) (b) Gives a written notice to the owner of his intention. or (c) at a place mutually agreed by the parties. The Act lays down certain procedures that require mandatory compliance. and Pays the owner the „net balance‰ due under the agreement. Upon termination of the agreement.

the owner can repossess the goods after there have been four consecutive defaults of payment. Exception to the requirement of Fourth Schedule notice. The agent introduced himself to the hirer and informed the hirer of his intention but the agent had been forced to leave the house of the hirer. According to Section 16(2) of the Hire-Purchase Act 1967. Held: The act of KUBB to repossess the car without giving any 4th Schedule Notice was considered as invalid procedure under section 16(1) of the Hire-Purchase Act 1967. At that time. the owner will have the right to repossess.7. Section 43 of the HirePurchase Act 1967 stipulates that the service may be done by way of personal service or registered post to the last written address or by substituted service. the owner has to comply with certain procedures as clearly provided by the Hire-Purchase Act 1967. under Section 16(1A).1 Procedures Prior to Repossession Even though the owner has the right to repossess the goods upon occurrence of any of the above situations. the owner must serve a Fourth Schedule notice to the hirer. In the case of death of the hirer. as follows: (a) Service of Fourth Schedule notice (Section 16(1)). Mohamed Nor (1988). The notice period must not be less than 21 days after the service of the said notice. The hirer defaulted in making monthly instalments and the KUBB had assigned its agent to repossess the car from the hirer without issuing any 4th Schedule Notice to him. If the hirer fails to act within the period.TOPIC 14 LAW OF HIRE-PURCHASE  243 14. the hirer was holding a sword and another weapon in his hands. . the accused was a hirer under the hire-purchase agreement with the Finance Company of KUBB. the service of the Fourth Schedule notice is not necessary if the owner has reasonable ground to believe that the hirer will conceal or remove the goods to another place unknown to the owner. Before the owner proceeds with the repossession. In Public Prosecutor v.

The notice of repossession has been served two days less of the required notice period under section 16(1) of the Hire-Purchase Act 1967. Lee Aik Seng [1978] 1 MLJ 179. After 14 days of the service of the Fourth Schedule notice. whenever approaching the hirer for repossession. In Pang Brothers Motors Sdn Bhd v. Held: The Hire-Purchase Act 1967 did not specify any time limit within which an owner must repossess goods after the service of the notice.2 Procedures during Repossession There are certain procedures that the owner must comply with. Sulaiman bin Ahmad &Anor [1989] 1 MLJ 482. This notice is intended to inform the intention of the owner to take possession of the goods. the hirer contended that the 4th Schedule Notice under Section 16(1) has ceased to have effect. a notice under Rule 3 of the Regulation shall be served on the hirer. (b) Notice under Rule 3 of the Hire-Purchase (Recovery of Possession and Maintenance of Records by Owners) Regulation 1976. cost incidental to repossession and cost of storage. This was due to the repossession that has been effected only after 2 years after the service of notice to the hirer. Failure to issue this notice is an offence under Rule 9 of the Regulation. If the hirer returns the goods or voluntarily surrenders the goods within 21 days of the Fourth Schedule notice. the appellant repossessed the car purchased by the respondent through hirepurchase. 14. the hirer shall not be liable for the cost of repossession.7. as follows: (a) Personal service of a document acknowledging receipt of the goods (Section 16(4)). (c) Compliance or non-compliance of the hirer to the notice (Section 16A). The court held that: The notice which was served less than 21 days before repossession was invalid.244  TOPIC 14 LAW OF HIRE-PURCHASE In United Manufacturers Sdn Bhd v. .

The purpose of this notice is to inform the hirer of his rights after repossession. or If the repossession is being carried out by the ownerÊs agent or servant.3 Procedures after Repossession (Rights of the Hirer after Repossession) The following are the rights of the hirer after repossession (refer to Figure 14. the hirer may give a written notice to the owner to request the owner to redeliver the goods that have been repossessed. such an agent or servant must likewise produce and show his identity card and also his authority card to the hirer. he must produce and show his identity card and provide the name and address of the company. Within 21 days of the service of the Fifth Schedule notice. (b) Rule 4 of the Hire-Purchase (Recovery of Possession and Maintenance of Records by Owners) Regulation 1976. his servant or agent or occupant or person who is in possession of the goods. Restriction of selling or disposal of goods on the owner (Section 17). body or organisation to which he belongs. The goods may be redelivered to the hirer upon payment of the amount due by the hirer to the owner or when the hirer had remedied any breach of the agreement or had paid the owner the costs and expenses incurred by the owner in remedying the breach. (b) (c) . his servant or agent or person who is in possession of the goods. to the hirer. the owner cannot sell or dispose the goods until the expiration of the 21 days notice in the Fifth Schedule. Rule 4 lays down the following procedures to be observed by the owner: (i) If the repossession is being carried out by the owner personally.TOPIC 14 LAW OF HIRE-PURCHASE  245 After the goods had been repossessed by the owner. Within 21 days after repossession. firm. (ii) 14. he must prepare a short description of the goods and the date. time and place where the repossession of the goods had taken place.2): (a) The service of Fifth Schedule notice (Section 16(3)). Without the consent of the hirer. Recovery of goods by the hirer (Section 18(1)(a)(i)). the owner is required to serve the Fifth Schedule notice on the hirer and every guarantor (if any).7.

14.8 INSURANCE According to Section 26(1) of the Hire-Purchase Act 1967. Option to purchase (Section 18(4)(b)). the owner has to take the insurance cover in the name of the hirer for the goods under the hirepurchase agreement. For motor vehicles. the hirer is under the duty to insure (Section 26(2)).2: Timeline for the normal procedure of repossession by owner. The hirer has the right to recover the difference in sum where the value of the goods repossessed exceeds the money owed. the obligation of the owner to take insurance cover is for the first year of the agreement. at a price less than the ownerÊs estimated value. The hirer can require the owner to sell the goods to a cash buyer introduced by the hirer by giving written notice to the owner. a hirer must inform the owner that he has renewed the policy not less than 14 days before its expiry (Section 26(5)). The hirer shall be given an option to purchase where the owner intends to sell the goods repossessed otherwise than by public auction. A notice must be given to the hirer if the owner intends to sell the goods repossessed through public auction. Recovery of part of hirerÊs payment (Section18(b)). For other goods.246  TOPIC 14 LAW OF HIRE-PURCHASE (d) Introduction of cash buyer (Section 18(1)(a)(ii)). (e) (f) (g) Figure 14. If the . For renewal of motor vehicle insurance. the cover is taken out throughout the duration of the goods remain under hire-purchase. Notice of auction (Section 18(4)(a)). For the following years.

2. 7. What are the implied terms contained in a hire-purchase agreement? Under what situation is a condition of merchantable quality not implied in hire-purchase? What are the rights of a hirer against a dealer or an owner who makes a misrepresentation? What are the statutory rights of a hirer under the hire-purchase agreement? What are the situations that give the right to the owner to repossess goods under hire-purchase? Can the owner repossess goods from the hirer without giving notice? Why? Is the service of notice of repossession under the Fourth and Fifth Schedule mandatory? What are the rights of a hirer after repossession? What is the effect of non-compliance of the repossession procedures laid down under the Hire-Purchase Act 1967? . SELF-CHECK 14. 5. the owner may proceed to insure the motor vehicle and the hirer must bear the cost (Section 26(6)).TOPIC 14 LAW OF HIRE-PURCHASE  247 hirer fails to renew the policy. 4. 9.2 1. 3. 6. 8.

One day. while Zakri was driving his car. he bought a car from Citra Merdeka Cycle & Carriage and for the purpose of financing. Ashraf has defaulted in making two monthly instalments for the car. JJ was sent by Jimat Kira Finance to AshrafÊs house to repossess his car. Ashraf. Discuss the legality of the repossession and the sale of the car to Ali. „Get out or youÊll die‰. Unfortunately.1 Discuss the following questions: (a) Explain the procedures for the repossession of goods under a hire purchase agreement as provided in the Hire-Purchase Act 1967. three men stopped him. Since then. (b) (c) . As a result of the default in payment. The three men told Zakri that if he wanted to claim his car. he was informed by the financier that his car had already been sold to Ali. Zakri had no other financial means and was unable to pay the monthly instalments for his Myvi car. when he was retrenched. They claimed that they were instructed by ZakriÊs financier to repossess the car due to his failure to pay the monthly instalments. Zakri managed to borrow money from his friend for the settlement of the arrears. Zakri. Ashraf had no problem paying the instalment of the car until the end of February 2007. without any notice. Zakri was shocked and immediately surrendered the keys of the car to the three men. showed JJ his „parang‰ and said. Due to his financial difficulty. Ashraf has just started working with a new company after his employment was terminated from the previous company for reason of retrenchment. Three months before he was terminated. a clerk was terminated from his company two months ago. he had to settle the instalment arrears with the financier.248  TOPIC 14 LAW OF HIRE-PURCHASE ACTIVITY 14. in upholding his right. Discuss whether Ashraf has the right to evict JJ. Ashraf obtained a loan from Jimat Kira Finance Berhad.

A hire-purchase agreement must be in writing. There are conditions and warranties implied in a hire-purchase agreement. A hirer can sue for damages and rescind the hire-purchase agreement in cases of misrepresentation by the owner and dealer. Repossession of goods in hire-purchase requires certain procedures to be followed by the owner. The hire-purchase goods must be free from any charge or encumbrance. Conditions Dealer Goods Hirer Hirer-purchase Owner Repossession Warranties .TOPIC 14 LAW OF HIRE-PURCHASE  249                The hire-purchase transaction in Malaysia is governed by the Hire-Purchase Act 1967. A hirer is entitled to the statutory rights under the Hire-Purchase Act 1967 once a hire-purchase agreement is concluded. The hire-purchase goods must be fit for the hirerÊs purpose. There are certain formalities and procedures to be observed in constructing a valid hire-purchase agreement. A copy of the hire-purchase agreement must be served on the hirer and guarantor within 14 days after it is made. Default in payment of instalment by the hirer gives the owner the right to repossess the goods. The hire-purchase goods sold to the hirer must be of merchantable quality. Not all types of goods fall under a hire-purchase agreement. The owner must have right to sell the hire-purchase goods at the time when the property is to pass. The hirer must enjoy quiet possesssion of the hire-purchase goods.

250  TOPIC 14 LAW OF HIRE-PURCHASE Text Books:  Harlina Mohamed On & Rozanah Ab. & Vohrah.  Wu M. (2007). The Commercial Law of Malaysia (2nd ed. B. [1979] 1 MLJ 129 United Manufacturers Sdn. v Sulaiman bin Ahmad & Anor [1989] . Bhd. Cases:     Pang Brothers Motors Sdn Bhd.A.Bhd. v Lee Aik Seng [1978] 1 MLJ 179 Public Prosecutor v Mohamed Nor [1988] 3 MLJ 119 Tractors Malaysia Bhd v Kumpulan Pembinaan Malaysia Sdn. Selangor: Pearson and Longman. Rahman. Undang-Undang Perniagaan Malaysia. (2000). Bhd. Selangor: Kumpulan Usahawan Muslim Sdn.).

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