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

7 Repossession of Goods by the Owner 14.viii  TABLE OF CONTENTS 14.2 Procedures during Repossession 14.1 Procedures Prior To Repossession 14.7.7.6 Statutory Rights of the Hirer 14.5 Liability of Owner and Dealer for Misrepresentation 14.2 Implied Warranties 14.7.4.8 Insurance Summary Key Terms References 240 240 240 242 243 244 245 246 249 249 250 .3 Procedures after Repossession (Rights of The Hirer after Repossession) 14.

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

In other words. Acceptance. (This is also known as a „domestic agreement‰). Intention to create legal relations. However. an insurance contract. there are contracts which are considered as complex in nature. and jointventure contracts.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. for example. for example. The contracts are made orally or through implied actions of the parties.1). .2) must exist: (a) (b) (c) (d) (e) (f) Proposal or Offer. These agreements are not considered contracts because they are not intended to bind the parties in law. and Free consent.2  TOPIC 1 LAW OF CONTRACT (PROPOSAL AND ACCEPTANCE) 1. Consideration.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. selling and buying goods at the grocery shop or the market. the following elements (Refer to Figure 1. These contracts are normally drafted and prepared in a written form. not all agreements are contracts. a social agreement or agreements between family members. It can be a contract to sell and purchase land. In order to form an agreement enforceable by law. like contracts entered into by companies doing the business of selling houses and lands. However. 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. containing the details of the terms and conditions agreed by the parties therein. Figure 1. etc. Capacity to contract. a contract of leasing.

Every party to a contract must have the intention to create a legal relation. the contract must not be secured through fraud. . A person who accepts the offer. A value to be paid for a promise made. A person who makes the offer.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.TOPIC 1 LAW OF CONTRACT (PROPOSAL AND ACCEPTANCE)  3 Figure 1. undue influence. coercion. misrepresentation or mistake. Every party must enter into a contract with free consent. Every party to a contract must have the capacity to enter into a contract.

In other words. a proposal is said to exist Âwhen one person signifies to another. 3.1. the acceptance can be made by any person who knows about the proposal and performs the obligations required by the proposer. Under the English law. the word proposal is used. 4. 2. 1. In such situation.2. A proposal can also be made to the public. AÊs proposal can only be accepted by B and not by other persons. his willingness to do or to abstain from doing anything. There is a difference in the use of word under the Malaysian law and the English law though the meaning is similar. 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 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. as explained in Table 1.4  TOPIC 1 LAW OF CONTRACT (PROPOSAL AND ACCEPTANCE) SELF-CHECK 1. For example.000. whenever the terms of the proposal are agreed upon by the acceptor. with a view to obtain the assent of that other person to the act or the abstinenceÊ.2 PROPOSAL OR OFFER What is a proposal or an offer? According to Section 2(a) of the Contracts Act 1950. a proposal is the readiness of the person who makes the offer to create a legal relation and to be bound by the law. The example of a proposal made to the public is illustrated in the case of: . the term offer is used while under the Malaysian Contracts Act.1 1. A proposes B to sell his Perdana car at RM100. 1.

1. The proposal is made by the buyers when the buyers take the goods from the shelves and bring it to the counter for payment. Thus. it was possible to make an offer of this kind and there was a binding contract made between Mrs Carlill and the defendants. 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. They added that they had deposited £1. auctions and display of goods on the shelves in shops.2.000 at the Alliance Bank. 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. before a proposal is made. The negotiation is an invitation to call for a proposal. the parties will hold some negotiations. Regent Street „to show our sincerity in the matter‰. for instance. The defendants were proprietors of a medical preparation called „The Carbolic Smoke Ball‰. Carbolic Smoke Ball Co Ltd (1893) 1 QB 256. a lady. A relevant case to explain the above principle is the case of: . Held: The Court rejected the argument and held that the advertisement was an offer to the whole world.2 The Difference between a Proposal and an Invitation to Treat Usually. used the ball as advertised. The acceptance takes place when the seller accepts the payment from the buyer. the contract was formed at the payment counter. There are many examples of invitation to treat. The display of goods on the shelves in shops is also an invitation to treat and not a proposal by the shopkeeper. In short. 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. and was attacked by influenza during the course of treatment.TOPIC 1 LAW OF CONTRACT (PROPOSAL AND ACCEPTANCE)  5 Carlill v. The claimant. She then sued for £100 as promised in the advertisements.

For example. In this case. the auctioneer makes an invitation to bidders who come to the public auction to make a proposal. such advertisement is not an invitation to treat but a proposal by the advertiser. the High Court ruled that the newspaper advertisement was an invitation for qualified persons to apply and the applications were treated as offers. In the case of Coelho v. Hence. if the advertisement shows the willingness of the advertiser to do or to abstain from doing something. the auctioneer will accept the highest bid or proposal from the bidders. who had the authority to prevent customers from taking goods out of the shop if he thought fit. anyone who comes to perform the terms as required in the advertisement is said to have accepted the proposal. the defendants (shop owners) had not made an unlawful sale. Usually. The proposal to bid at a certain price will come from the bidders and the auctioneer will accept or reject the proposal. A proposal to buy was made when the customer placed the articles in the basket. Boots Cash Chemist (Southern) Ltd (1953) 1 QB 401. In an auction. An advertisement is also an invitation to treat by the advertiser. advertisement for jobs in the newspapers. 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. The Public Services Commission [1964] MLJ 12. Held: The Court held that the display of goods did not constitute an offer but only an invitation to treat. 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. However. Every sale of the drugs on the Poison List was supervised at the cash desk by a qualified pharmacist. By that principle.6  TOPIC 1 LAW OF CONTRACT (PROPOSAL AND ACCEPTANCE) Pharmaceutical Society of Great Britain v. In this case. 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. . 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.

It can be communicated in any form. 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. Nacodah Merican (1890) 4 Ky 583. As she believed that she was going to die and to ease her conscience. the jury found that the claimant was not induced to give the information by the reward offered.2. Under Section 5(1) of the Contracts Act 1950. a person cannot accept a proposal which he does not know exist. The claimant in this case lived with Williams and was severely beaten by him. but by motives of revenge.TOPIC 1 LAW OF CONTRACT (PROPOSAL AND ACCEPTANCE)  7 1. 1. Carwardine (1883) 5C&P 566. Thus. In the case of Ahmad Meah & Anor v. it must be clear and communicated. The relevant case to explain this principle is the case of: Williams v. 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 must also be communicated to the acceptor. an agreement to build „a suitable house‰ was held by the court as vague to constitute a binding contract.3 Proposal Must be Clear and Communicated In the Contracts Act 1950. a person who gives any information cannot claim for a reward if he does not know about the reward being offered. Logically. she gave information leading to the conviction of Williams for the murder. In order to make the proposal effective. either orally or in written or through the implied action of the party. „a proposal may be revoked at any time . In an action to recover the reward. A proposal which is vague and uncertain may not lead to a binding contract.4 Revocation of Proposal The proposer may revoke his proposal at any time before acceptance. However. the Court held that she was entitled to the reward because she had seen the handbill and had given information.2.

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

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

The company did not reply until 23 November 1864. 109 The defendant offered to take shares in the company by a letter dated 8 June 1864. when it alloted shares to the defendant. Can a proposal be made to the public at large? 2. 1 Ex.R. When does the revocation of proposal become effective in cases of revocation made by post? 6.2 1. Held: The defendantÊs refusal was justified because the offer had lapsed due to the companyÊs delay in accepting the offer within a reasonable time. (d) SELF-CHECK 1. then it is a good acceptance. What are the grounds for revocation of a proposal? . If no time is prescribed. by the lapse of a reasonable time. By the death or mental disorder of the proposer. For example. (c) Where the acceptor fails to fulfil a condition precedent to acceptance. How do you distinguish between a proposal and an invitation to treat? 3. Can the proposer revoke his proposal? 5. then the proposal is revoked.10  TOPIC 1 LAW OF CONTRACT (PROPOSAL AND ACCEPTANCE) (b) By the lapse of time prescribed in the proposal for its acceptance. It is important that the acceptor knows about the fact of the death or mental disorder of the proposer. If the applicant fails the test. An example of case to illustrate the principle is: Ramsgate Victoria Hotel Co. Must the acceptor know about the proposal before he can accept it? 4. an employer offers to employ an applicant on the condition that he passes certain tests. v.Ch. Montefiore (1866) L. If the acceptance is made without knowledge of the death or mental disorder of the proposer. The defendant refused to take up the shares. The period between June and November was not reasonable.

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

Therefore. through a series of telegrams and letters.12  TOPIC 1 LAW OF CONTRACT (PROPOSAL AND ACCEPTANCE) Hyde v. agreeing to accept the original proposal. the defendants withdrew from the negotiations. 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). Ltd. China Pacific Navigation Co. Next. Another situation where a contract is not yet concluded is when there is a conditional acceptance.000. [1965] 1 MLJ 1 The parties in this case conducted negotiations for the delivery of logs. In reply. 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. 334 The defendant offered to sell his estate to the plaintiff for £1. no acceptance had occurred and the defendant had the right not to sell the estate to the plaintiff. The plaintiff then wrote again to the defendant. 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 plaintiff made a counter-proposal to purchase at £950 but the defendant refused to accept this proposal. if the parties are still in the process of negotiation. but the defendant refused to sell. Wrench (1840) 3 Beav. An example is the case of: Lau Brothers & Co v. there is no question of an agreement.‰ This means. Finally. the parties do not intend to conclude their bargain until they executed a formal contract. The example of a case is: .

The plaintiff then brought a legal action for breach of contract. then the proposer is said to have accepted the acceptance. . within a reasonable time after the acceptance is communicated to him.TOPIC 1 LAW OF CONTRACT (PROPOSAL AND ACCEPTANCE)  13 Low Kar Yit & Ors v. Section 7(b). the proposer may. If not. and the acceptance is not made in such manner.‰ The principle provided in Section 7(b) means. if no method of acceptance is specified by the proposer. For instance. then the acceptance must be communicated and made in a usual and reasonable manner.3. 1. who stays next door to A. But if the proposal specifies a particular mode of acceptance and the acceptor does not follow it. (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. and not otherwise. provides that „the acceptance may be expressed in some usual and reasonable manner. Thus. the manner may be usual but it is unreasonable since they are staying next door. then the reasonable manner to accept the offer is by B going to AÊs house to give his acceptance. insist that his proposal shall be accepted in the prescribed manner. The proposer must act within reasonable time after the acceptance is communicated. the exercise of the option has no legal effect and it was an agreement to enter into an agreement. but if he fails to do so. 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. he accepts the acceptance.2 Acceptance must be Communicated In order to form a binding contract between the parties. If B wants to send a letter to accept AÊs offer. Contracts Act 1950. then the proposer can insist on the mode of acceptance. If the proposal prescribes a manner in which it is to be accepted. if A offers to sell his bicycle to B. the acceptance of the proposal must be communicated to the proposer. unless the proposal prescribes a manner in which it is to be accepted. The plaintiffsÊ agent exercised the option but the defendant failed to sign the sale agreement. 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.

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

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

This means the acceptor may still withdraw his acceptance. B may revoke his acceptance at any time (before or at the time when) his letter of acceptance reaches A SELF-CHECK 1.3. Contracts Act 1950. he is said to have accepted the offer). 4.‰ For example: A proposes (by a letter sent 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).16  TOPIC 1 LAW OF CONTRACT (PROPOSAL AND ACCEPTANCE) Carlill v. 5. „an acceptance may be revoked at any time before the communication of the acceptance is complete as against the acceptor. 2. but not afterwards. Carbolic Smoke Ball Co. 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? . when the acceptor posts his letter of acceptance.3 1. (Explanation: Mr Carlill need not inform the company that he accepted its offer. 3. to sell his house to B. 1. he is not bound to perform his obligation until his letter of acceptance is received by the proposer. 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. B accepts the proposal (by letter sent by post). 6.3 Revocation of Acceptance As explained earlier. By using the product as advertised and meeting all the terms of the offer.

000. Having received no reply from S. Advise T. HannaÊs telex reached Adam and was read by him immediately at 8. A proposal may be revoked at any time before acceptance. at 8.45am on 8 September. T wrote again saying he would accept his offer at RM3.30am on 8 September. S wrote back offering to buy the speed-boat for RM3. Advise Adam.TOPIC 1 LAW OF CONTRACT (PROPOSAL AND ACCEPTANCE)  17 ACTIVITY 1. Adam posted a letter in the last post on Friday. T advertised his speed-boat in a newspaper for RM4. accepting the proposal.500. Revocation of proposal made by post is only effective when the acceptor receives the letter of revocation of a proposal. Since the telex operator had gone home for the weekend. 8 September. . The letter reached Hanna at 1. A proposal must come to the knowledge of the acceptor before he can accept it.2 Discuss the following cases by applying the principle of law on acceptance: (a) On Friday 5 September. Hanna sent a telex to Adam withdrawing her proposal. An acceptance must be communicated to the proposer and made in usual and reasonable manner.500. The telex was received by Adam at 4pm. It is an offer to make an offer. (b)          Every contract is an agreement but not all agreements are contracts.750.000. Hanna sent a telex to Adam offering to buy his piano at RM3. A proposal can be made to an individual person or to the public at large. In postal rule. Adam sought after your advice. T replied by return of post stating that he would accept RM3. An acceptance must be made on the same terms as provided in the proposal without any variation or modification. even if the letter of acceptance never reaches the proposer.30pm on Monday. An invitation to treat is not yet a proposal or an offer. the acceptance is effective upon the posting of the letter by the acceptor. Meanwhile.

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

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

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

For instance. Promises which form the consideration for each other are called reciprocal promise. consideration may be executed when one promise is made in return for the performance of an act. that act or abstinence or promise is called „consideration‰. and (iii) past consideration. EXECUTED AND PAST CONSIDERATION Consideration can be classified as: (i) (ii) executory. For example. Thus. Therefore. United Asian Bank Bhd [1987] 1 MLJ 27 on consideration. A found and returned the mobile phone to you. you (refer to Figure 2. BÊs promise to pay RM2. Only your liability remains outstanding which is to pay C the RM100 reward. . and every promise and sets of promises forming the consideration for each other is an agreement.TOPIC 2 LAW OF CONTRACT (CONSIDERATION)  21 some acts according to the promisorÊs (person making the proposal) desire. Consideration may be executory when one promise is made in return for another promise. The case of Osman bin Abdul Ghani & Ors v. These are lawful considerations. Later. consideration is a price that you pay to buy a promise or an act of the other person.000. In such case. 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. you advertise a reward of RM100 to anyone who finds and returns your lost watch. CÊs consideration for your promise is executed. Next. the act of returning the mobile phone to you is the consideration for the promise. 2. Here.1 demonstrates the difference between these two considerations. C finds and returns the watch to you in response to the offer.1 EXECUTORY.000. Figure 2.000 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. executed. you promised to pay RM100 and A paid the price for your promise by performing the act.1) agree to sell a fax machine to B for RM2. where the court held that forbearance to sue could amount to a valid consideration.

Under English law. even though the consideration is past. the position in Malaysia is that. it is valid if it is done „at the desire of the promisor. 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. However. you promised to reward D RM100. D found and returned your lost chain and in gratitude. Thus. that act is regarded as past consideration. under the Malaysian Contracts Act 1950. For example. past consideration is sufficient to support a promise because Section 2(d) and Section 26 (b) apply to past consideration. if a promise is made in return for an act that has already been performed.22  TOPIC 2 LAW OF CONTRACT (CONSIDERATION) Figure 2. Your promise to reward D is made in return for DÊs consideration that has passed. The words „has done or abstained from doing‰ referred to an act which has been performed before the promise is made.‰ .1: Executory and Executed Considerations Apart from the executory and executed considerations.

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

Now Intan refused to pay what she has promised.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. the agreement is still valid and will be enforceable.24  TOPIC 2 LAW OF CONTRACT (CONSIDERATION) ACTIVITY 2. „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‰. even though the agreement is made without consideration. With these exceptions. Advise Berlian. Intan had to go abroad for business arrangements. there are exceptions to this general rule.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. IntanÊs house caught fire and Berlian could only save IntanÊs wedding album. However. Before she left. . she told Berlian. The exceptions include the following: 2. When Intan returned home.‰ After four weeks of Intan being away. 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.1 Discuss the following problem by applying the principle of law on consideration: Intan and Berlian were neighbours.2. 2.

B. The agreement is registered under the existing law which requires its registration. there was an agreement made between members of a Chinese family governed by their personal laws. there is a phrase „near relation‰ that is attached to the position of the parties in the agreement. and The agreement is made on account of natural love and affection between the parties standing in near relation to each other. In such a case. but they were not nearly related to the family of their adoptive mother.000. 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). 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. Thus. and Three sisters and seven half-sisters and brothers stood in near relationship to their adopted nephews and nieces. This is a contract. For example: A. The court granted that: Chinese adopted children are related to the adoptive parents and brothers. 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. RMl. What is meant by „near relation‰? It is not defined in the Act. The agreement was void. promises to give his son. . for natural love and affection. Under the exception. there was no natural love and affection between the signatories and the donees.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. The issues to be resolved in this case were whether:   An agreement was made on account of natural love and affection. the uncles and aunties of the adoptive mother did not stand in near relation to their nephews and nieces. 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.

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

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

28  TOPIC 2 LAW OF CONTRACT (CONSIDERATION)   The debtor makes a fresh promise to pay the statute-barred debt. Therefore. A signs a written promise to pay B RM500 on account of the debt. 4. the promise to pay a statute-barred debt under this exception will form a new cause of action although without consideration. The Limitation Act provides six years as the time limit for any party to take legal action in contract. and the fresh promise is valid.2 1. Henry Agency House [1962] MLJ 86? What are the important conditions required in an agreement to pay a statute-barred debt? .000. SELF-CHECK 2. This is provided in Section 26(2) of the Limitation Act 1953. Wotherspoon & Co Ltd v. 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. This is a contract. 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). 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. and The promise is made in writing and signed by the person to be charged or his authorised agent. 2.M. For example: A owes B RM1. 3. but the debt is barred by limitation.

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

137. there was a valid consideration that was given by their mother. As soon as C completes the work (paints AÊs house). their mother gave the sister some land with the requirement that the sister must pay the annuity to her brothers.000 from A although B does not personally give any consideration for AÊs promise... This is because the consideration has moved from C. 2. Contracts Act 1950. Later. The court ruled that: The sister was liable to pay the brothers..‰.R.000 for only RM100 to Mr Man? Is the amount of RM100 sufficient as consideration for your promise? According to Explanation 2 of Section 26.000 when C paints AÊs house..the promisee or Âany other personÊ has done or abstained from doing. VerikataraÊmaÊya (1881) I. he can still claim for the promise if the consideration is given by some other persons. in the following part of the provision: „.. Even though the consideration did not move from the brothers. Such consideration can come from some other persons.. A case to illustrate this principle is: Venkata Chinnaya v. For example: A promises to pay B RM1. The question is: must consideration be adequate? Can you sell your house worth RM100. even though the promisee does not give any consideration for a promise made by the promisor... the sister failed to fulfil her promise to pay the annuity and her brothers sued her on the promise..30  TOPIC 2 LAW OF CONTRACT (CONSIDERATION) the promise even though he personally does not give any consideration. On the same day. „an agreement to which the consent of the promisor is freely given is not void merely because the consideration is inadequate. the ..‰ What is meant by the provision is that.. B can claim the amount of RM1.. Therefore. 4 Mad... 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...4 ADEQUACY OF CONSIDERATION Another important principle is the adequacy of consideration. The authority for this principle is in Section 2(d) of the Contracts Act which provides the words „any other person‰.L.

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

K came to see Mr J for the payment. as she decided to clear the stock of that model (SE101). (b) . Mr J refused to pay K because he got to know that it was M who had performed the work and not K. Zaitun changed her mind and told Hana that she had wrongly decided to sell the apparatus at that price. who decided to make a home improvement to his cottage. Advise Hana as regards the validity of the contract. Zaitun. had requested K to paint his cottage and to build up certain fences around the cottage. 4. M managed to complete the said improvement work within two weeks. 3. 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. He promised to pay K double the usual payment charged by other contractors for that purpose and the arrangement was agreed to by K. The next day. Hana agreed to buy the apparatus and to collect it from ZaitunÊs office. a local trader in the town offered Hana a sale of a slimming apparatus which is worth RM10. Advise K whether he could claim for the payment from Mr J.32  TOPIC 2 LAW OF CONTRACT (CONSIDERATION) Hence. On the day of collection.000.000 in the market for only RM1. SELF-CHECK 2. M.3 Discuss the following problems by referring to the relevant principle of law on consideration: (a) Mr J. to start the work. However. Upon completion of the work. 2.3 1. K sent his nephew. 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.

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

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

Analyse the situations in which the presumption of intention is rebuttable. the principles in the English common law will apply in the absence of such provision . and Compare the presumption of intention in business or commercial agreements. 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. However. 4. Discuss the presumption of intention in domestic. 2. you should be able to: 1.Topic  3 Law of Contract (Intention to Create Legal Relations) LEARNING OUTCOMES By the end of this topic. 3. family and social agreements. 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. Explain the importance of intention to create legal relations in an agreement. and the word „at the desire‰ used in Section 2(d) of the Act.

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

Apart from the cases involving husband and wife. Therefore. Merritt [1970] 2 All ER 760 In this case. 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.e. 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. .TOPIC 3 LAW OF CONTRACT (INTENTION TO CREATE LEGAL RELATIONS)  37 Merritt v. The following cases illustrate the situations in which the court presumed that legal relations were intended. i.. Furthermore. 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. 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. a meeting was held between the husband and the wife after the husband had left her to live with another woman. the wife was entitled to the relief claimed. there were other cases which involved other family and personal relationships. The wife paid off the mortgage but the husband did not subsequently transfer the property to her. the husband would transfer the matrimonial home to the wife as a sole owner.

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

The arrangements in relation to the home were very vague and must be regarded as made without contractual intent. Padavatton [1969] 2 All ER 616 Mrs Jones (the claimant) made an offer to her daughter. Furthermore. Her fees and maintenance were paid for by Mrs Jones. Mrs Jones claimed possession of the house from Mrs Padavatton. 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. Gould [1969] 3 All ER 728. It was still uncertain what was to happen to the surplus of the rent income and what rooms Mrs Padavatton was to occupy. Mrs Jones offered to buy a large house in London to be occupied by the daughter and partly by tenants. Again. There was an uncertainty as to the utilisation of the surplus of the rent income and the room that Mrs Padavatton would occupy. In this case. However. 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. the daughter could not claim anything in respect of that agreement. 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. Although the agreement to maintain while reading for the Bar might be regarded as creating a legal obligation in the mother to pay. Thus. The income from the rents would go to the daughter in lieu of the maintenance. Later. the mother was entitled to possession of the house and had no liability under the maintenance agreement. In January 1965. The agreement was an informal one and there was uncertainty as to its exact terms. Mrs Padavatton came to England (bringing her child with her) in November 1962 and began to read for the Bar. 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‰.TOPIC 3 LAW OF CONTRACT (INTENTION TO CREATE LEGAL RELATIONS)  39 Gould v. Jones v. the agreements were too vague and uncertain to be enforceable as contracts. there was no written agreement. Mrs Padavatton counter-claimed for £1. .655 18s 9d (the amount she had paid for running the house).

Advise Viv and Valerie.00 each week. Mr Alan was offered a new business contract and Mrs Alan wanted to enforce the promise made by her husband. 4. he would take Mrs Alan to Neverland for a vacation. After a series of argument.1 1. 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. Merritt [1970] 2 All ER 760? Must the words used by the parties in their agreement be certain and unambiguous? Why? ACTIVITY 3. Viv. one of the entries that Victoria sent won a RM10. Valerie and Victoria.000 prize. the vagueness of the arrangement with Mrs Jones had negatived that intent. Mr Alan promised Mrs Alan that if he got a new business offer. agree to form a syndicate for the purpose of making a weekly entry in a fashion contest in a local newspaper. 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. Lately. Two months later. Mrs Alan had expressed her intention to go back to her hometown if the situation remained the same. Mr and Mrs Alan are husband and wife. Viv and Valerie are very happy to know about the news and want to claim their share. is this presumption rebuttable? How? What was the principle established by the court in the case of Merritt v. Explain whether she will succeed in her claim. Mrs Alan was very happy and gave up her intention to go back to her hometown. 2. Victoria now refuses to share. 5.40  TOPIC 3 LAW OF CONTRACT (INTENTION TO CREATE LEGAL RELATIONS) In PadavattonÊs case. 3. Viv and Valerie do not know much about fashion and give Victoria RM7. Victoria fills in and sends off the contest forms every week and she always fills the forms in her own name. (b) . After one month.1 Discuss the following problems by applying the principle of law on intention to create legal relations: (a) Three sisters. 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. family and social agreement? In relation to question (b) above. SELF-CHECK 3.

TOPIC 3 LAW OF CONTRACT (INTENTION TO CREATE LEGAL RELATIONS)  41 3. it is not necessary that there is an intention to create legal relations just because the parties are in business. The following cases illustrate this point: Jones v. 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 defendants who had promised to make an ex-gratia payment to the employees contended that they were not bound to fulfil their obligation.. Skyways Ltd [1964] 1 All ER 494 In this case...2 BUSINESS OR COMMERCIAL AGREEMENTS In business or commercial agreements. the presumption made is that the parties in the contract have the intention to create legal relations. the court will then treat their promises as binding in honour only. The clause provided that the transaction should not „give rise to any legal relationship. Therefore. . but ... binding in honour only‰.. The parties to a business transaction may state that they do not intend to enter into any legal obligation. the airline had to make payments because the agreement was enforceable. The Court held that: This clause was a bar to any action in a court of law.or be legally enforceable ..... However. In such case. However. This means the parties to the agreement contemplate a legal consequence to arise from their arrangements.. The presumption is a strong one and can be seen in the judgment of: Edwards v. 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 most common is the use of the words „subject to contract‰ or „subject to formal contract‰. the insertion of the words „subject to contract‰ renders the agreement to be unenforceable.‰. The Court held that: There was no contract. but „subject to the preparation and approval of a formal contract‰. 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.. Such agreement gives rise to no legal liability. In this case. 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. there are various other clauses used in business agreements that negate contractual intention. either party is free to re-negotiate or even to withdraw from their arrangements. The case to explain this is the case of: Winn v. because such clauses are relatively rare in the business world. . The Court held that: The agreement was not binding on the parties. It means a binding contract will come into existence only when a subsequent formal contract is entered into by the parties. Therefore. Apart from the above. Up to this time.42  TOPIC 3 LAW OF CONTRACT (INTENTION TO CREATE LEGAL RELATIONS) Rose and Frank Co v. 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.. Crompton (JR) & Brothers Ltd [1925] AC 445.

Subsequently. The respondent did not agree and applied to the court for specific performance. the plaintiffsÊ agent exercised the option but the defendant failed to sign the agreement for sale. The plaintiffs brought an action for specific performance or (alternatively) damages for breach of contract. 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). Thus.TOPIC 3 LAW OF CONTRACT (INTENTION TO CREATE LEGAL RELATIONS)  43 The decision in the case of Winn v. 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. After the payment of a deposit was made and the pro forma was signed. Thus. However. The appellant argued that the pro forma was „subject to contract‰. 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 appellants informed the respondent that the price of the house was to be increased. Mohd. . [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‰. Bull was cited in: Low Kar Yit & Ors v. In most instances like the above cases. the use of the words „subject to contract‰ infers that there is no intention by the parties to create legal relations. the exercise of the option amounted to nothing more than an agreement to enter into an agreement. The case is: Daiman Development Sdn Bhd v. 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. no contractual obligation arose from the pro forma itself until a further document was agreed and signed. Isa & Anor. The argument was rejected by the court.

ACTIVITY 3. refused to pay and denied that they had ever received the winning coupon. Bigwood.000. Mr Ferrera claimed to have submitted two football pool coupons to Bigwood Pools Ltd.2 1. 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. 2. It is binding in honour only‰. Decide whether there was a binding contract between Mr Ferrera and Bigwood Pools Ltd.24 for football matches played on 11 July and one of the coupons was a winning coupon entitling him to RM174. however. Each coupon drew a fee of RM3. it is an offence to collect any money from a purchaser as a booking pro forma.2 Discuss the following case by applying the principle of law on the intention to create legal relations: On 10 July 2002.44  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. . 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. SELF-CHECK 3.

Keenan. the parties are presumed to have the intention to create legal relations. Wu M. Singapore: Oxford University Press.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. UK: Pearson and Longman. Uncertainty of words in an agreement may render the agreement unenforceable.). In domestic. AnsonÊs Law of Contract (26th ed. Selangor: Kumpulan Usahawan Muslim Sdn. B.). the parties are presumed to not have any intention to create legal relations. Undang-Undang Perniagaan Malaysia. In business or commercial agreements. D. Business agreement Certainty Domestic agreement Family agreement Intention to create legal relations Presumption Rebuttable presumption Social agreement Text Books: Guest. (2000). The Commercial Law of Malaysia (2nd ed. (2006). Harlina Mohamed On & Rozanah Ab. . G. (2007). A. Bhd. Smith and KeenanÊs Law for Business (13th ed. & Vohrah. Rahman. Selangor: Pearson and Longman. (1988).). family and social agreements. The presumption of no intention may be rebutted if there is a proof of true intention of the parties. Various clauses used in business or commercial agreements have the effect that negate the contractual intention. A.

Isa & Anor. Jones v. Merritt [1970] 2 All ER 760. 286. 571. v. Clark [1960] 1 W.B. Winn v. Merritt v. Mohd. Padavatton [1969] 2 All ER 616. [1963] MLJ 165. Balfour [1919] 2 K. Simpkins v. Edwards v. Parker v. Gould v. Low Kar Yit & Ors. v. Jones v.46  TOPIC 3 LAW OF CONTRACT (INTENTION TO CREATE LEGAL RELATIONS) Cases:             Balfour v.L. Daiman Development Sdn Bhd v. . Bull (1877) 7 ChD 29.R. VernonÊs Pools Ltd [1938] 2 All ER 626. Pays [1955] 3 All ER 10. Rose and Frank Co. Mathew Lui Chin Teck & Anor [1981] 1 MLJ 56. Crompton (JR) & Brothers Ltd [1925] AC 445. Gould [1969] 3 All ER 728. Skyways Ltd [1964] 1 All ER 494.

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

The authority was derived from the following Indian case of: Mohori Bibee v. Under the Age of Majority Act 1971. Dhurmodas Ghose (1903) I. the age of majority is 18 years.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. the general rule is that all contracts entered into by a minor are void.R. Figure 4.1: Persons who cannot make valid contract 4.1 MINORS A minor or an infant is a person who is below the age of majority. 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. With regards to the minorÊs contractual capacity. 30 Cal.L. . 539.

Section 65 of the Indian Contracts Act (similar to Section 66.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. However. Malaysian Contracts Act) does not apply to a minor contract. the contract never exists from the beginning. The infant executed transfers of land in favour of the defendant. whereas in a case involving a minor.1 Valid Contracts (Exceptions to Minors) There are certain exceptions available to contracts entered into by a minor. In the case of Tan Hee Juan. under Section 66 of the Contracts Act 1950. when a contract is void. It applies to a contract between competent parties. It includes those exceptions under the: . Thus. when the court made an order declaring the transfers void. The transfers were witnessed and registered. the plaintiff applied to the court for an order to set aside the transfers and for incidental relief. Later. 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. Teh Boon Keat [1934] MLJ 96. „any person who has received any advantage under the agreement or contract is bound to restore it. Normally.1. or to make compensation for it. The plaintiff in this case was an infant. The Court ruled that the transactions were void and ordered the restoration of the property to the minor. 4. the plaintiff (minor) had received the purchase price for the transfers of land to the defendant. However. to the person from whom he received it‰.

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

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

Gurcharan Singh & Ors [1971] 1 MLJ 211. Damages of £1. such as clothing. The Government sued the first defendant (the minor) and the second and third defendants (the sureties) for breach of contract. by holding that education was „necessaries‰ for the minors.500. As far as goods or services are concerned. medical services. The claimant went to some trouble in order to organise the tour. The amount of claim was RM11. clothing.500 were awarded. then they are basically necessaries. The defendant in this case wished to become a professional billiards player and entered into an agreement with the claimant. and education. the minor was liable for the repayment of a reasonable sum spent on him. if the goods or services have a utility value.g.000. 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. then they will no longer be . to go on a joint tour. The Court held that: The contract was for the minorÊs benefit.683 because the minor has served the Government for three years and ten months out of the contractual period of five years. but a dispute arose between the parties and the defendant refused to go. The claimant then sued for damages of £6. a diamond tiara). the claimant could continue the action for damages for breach of contract. At the time when the contract was made. The amount ordered as payment to the Government was RM2. Gray [1913] 1 KB 520. In Government of Malaysia v. However. Thus.52  TOPIC 4 LAW OF CONTRACT (CAPACITY TO CONTRACT) shelter. The Court held that: The contract was void but since education was „necessaries‰. if the minor is well supplied with the particular articles. Gurcharan Singh & Ors [1971] 1 MLJ 211. An example of a contract for the minorÊs benefit is the case of: Roberts v. the first defendant was a minor. and are not merely things of luxury (e.

TOPIC 4 LAW OF CONTRACT (CAPACITY TO CONTRACT)  53 necessaries even though they are useful for the minor. 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‰. and it could be said that the clothes supplied were suitable to the defendantÊs position in life. and might be the sort of person who would be interested in high-class clothing. The claimant then sued the minor for the price of the clothes. The rule relating to scholarship agreements is provided in the Contracts (Amendment) Act 1976. with respect to any:      Scholarship. The claimant sent his agent to Cambridge because he had heard that the defendant was spending money freely. The burden to prove that the goods supplied are necessaries for the minor is on the supplier or the seller. The „Scholarship Agreements‰ have been defined as any contract or agreement between an appropriate authority and any person. Cambridge. The above case shows that a minor will not be bound by a contract of goods supplied. Award. 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. Loan. Bursary. which are not of necessaries for the minor. Following the agentÊs visit. There was evidence that the minorÊs father was in a good position. The clothes included 11 fancy waistcoats. Sponsorship. being an architect with a town and country house. However. the father proved that the defendant was adequately supplied with such clothes when the claimant delivered the clothing. It was held that: The claim failed because the claimant had not established that the goods supplied were necessaries. Inman [1908] 2 KB 1 The claimant was a Savile Row tailor and the defendant was a minor undergraduate at Trinity College. As illustrated by the following case: Nash v. .

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

The Contracts Act 1950 does not state the status of contracts entered into by persons of unsound mind. Under English common law. It was held that both parties were bound by it. may contract during those intervals.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. . when sober. Matthews agreed to buy houses from Baxter. Baxter (1873) LR 8 Exch 132. who is delirious from fever. the drunken person can ratify contracts when sober. He was so drunk as not to know what he was doing. as in the above case of Matthew. he ratified and confirmed the contract. Thus. In Matthews v. Afterwards. Illustration (a) A patient in a mental hospital. cannot contract whilst such delirium or drunkenness lasts. who is at intervals of sound mind. 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. the contract is voidable if the fact of mental disorder or intoxication can be proven.

Alan paid RM500 as deposit for the motorcycle and promised to pay the balance of the purchase price in two weeks time. Norman is not happy and decides to withdraw himself from the training. had disposed the motorcycle to his other friend. For that purpose. 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. Can Ismail succeed in his claim? Discuss.56  TOPIC 4 LAW OF CONTRACT (CAPACITY TO CONTRACT) SELF-CHECK 4. At the same time. After two weeks. who was in need of money. enters into a contract of apprenticeship with Roy to become an enterpreneur in a health product. 5.1 1. Roy has difficulty supervising NormanÊs training and disagreement arises between them. Norman. aged 17. He had difficulty in coming to the college and decided to purchase a Modenas (the national motorcycle of Malaysia) from Ismail. aged 17. 3. Discuss the legal action that can be taken by Roy against Norman. Rani. Later. 4.1 Discuss the following cases by applying the principles of law on capacity to contract: (a) Alan is a college university student.000. Alan. Roy is not happy either and brings an action for damages for breach of contract of RM20. Norman is given training on marketing the product. An outlet is provided for Norman to carry out this task and goods worth RM10.000 are ordered for Norman. (b) . Alan failed to come up with the balance and Ismail wanted to claim the payment from Alan. 2.

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

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

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

or the unlawful detaining or threatening to detain.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‰. 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. to the prejudice of any person whatever.1: Factors which affect consent 5. then he is said to have employed coercion. According to Explanation to Section 15. Therefore. or Mistake (Section 21. with the intention of causing any person to enter into an agreement‰. or threatening to commit any act forbidden by the Penal Code. What is meant by the explanation provision is illustrated below: . it is „immaterial whether the Penal Code is or is not in force in the place where the coercion is employed‰.1 COERCION Coercion under Section 15 of the Contracts Act 1950 means „the committing. any property. 22 and 23). Undue influence (Section 16). consent must be free and not caused by :      Coercion (Section 15). Figure 5. Misrepresentation (Section 18). It means. under Section 14. Fraud (Section 17).

A afterwards sues B for breach of contract at Taiping. In the case of: Kesarmal s/o Letchman Das v. In the case.000. 5.500. the respondents purchased houses to be constructed by the appellants. The issue was whether the additional payment was made voluntarily or under threat by the appellants to cancel the respondentsÊ booking. Valiappa Chettiar [1954] MLJ 119. on board an English ship on the high seas.. The respondent was then made to pay an additional amount of RM4. although Section 506 of the Penal Code was not in force at the time when or place where the act was done. . [1988] 2 MLJ 117. In another case of Chin Nam Bee Development Sdn Bhd v. causes B to enter into an agreement by an act amounting to criminal intimidation under the Penal Code.TOPIC 5 LAW OF CONTRACT (FREE CONSENT TO CONTRACT)  61 A. There was coercion as defined in Section 15 of the Contracts Act 1950.1. The Court held that the payment was not voluntary and had been made under threat. issued under duress of two Japanese officers during the Japanese Occupation of Malaya was invalid. Coercion under Section 15 covers the common law „duress‰ which means actual violence or threats of violence to the contracting party. Section 19(1) of the Contracts Act 1950 provides that „when consent to an agreement is caused by coercion.. A has employed coercion. consent was not freely given and the transfer became voidable at the will of the party whose consent was so caused. the Court held that a transfer executed under the order of the Sultan. Tai Kim Choo & 4 Ors. Each respondent had signed a sale and purchase agreement to purchase a house at RM29.1 Effect of Coercion Where there is element of coercion in a contract. the contract will become voidable at the option of the party whose consent was so caused.the agreement is a contract voidable at the option of the party whose consent was so caused‰.

1 Real or Apparent Authority A person holds a real or apparent authority over the other. Thus. by misuse of parental influence. illness.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.2. or He makes a contract with a person whose mental capacity is temporarily or permanently affected by reason of age. „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‰. or bodily distress. 5. the agreement is valid and binding until the party entitled to avoid it chooses to do so. the contract can be rescinded on the ground of undue influence. a bond from B for a greater amount than the sum due in respect of the advance. According to Section 16(1) of the Contracts Act 1950. Based on the wording of Section 16(1). For example: Illustration (a) A. the two important aspects of undue influence are: (a) (b) The domination of the will by one party over the other. and Obtaining an unfair advantage.2 UNDUE INFLUENCE When a person enters into a contract under the influence exercised by another person. the choice of either affirming or rejecting it. upon B's coming of age. having advanced money to his son. for instance. or He stands in a fiduciary relation to the other. or mental. parentsÊ authority over a child and husbandÊs authority over a wife. obtains. B. 5. during his minority. in Section 16(2). . 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. A employs undue influence. Further.

He asked his great-uncle to advise him how he should find the means to pay. The defendant offered to buy it for £7000. aged 23. for instance. Undue influence applies to every case where influence is acquired and abused. 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.000. thus. It was held that the purchase must be set aside. The defendant. For example: Illustration (b) A. The great-uncle was unable to advise in person.TOPIC 5 LAW OF CONTRACT (FREE CONSENT TO CONTRACT)  63 5. . a doctor-patient. having been asked to give advice. he deputed the defendant (his nephew) to do so. a man enfeebled by disease or age. Conversations took place between T and the defendant in which T expressed the desire to sell part of his estate. is induced by B's influence over him as his medical attendant. The defendant did not disclose this fact to T. owing to ill health. stood in a confidential relationship to T. the relationship of a solicitor-client.2 A Fiduciary Relation A person stands in a fiduciary relation to the other. the defendant obtained a report from a surveyor on the property and it was valued at £20. to agree to pay B an unreasonable sum for his professional services. Williamson (1866) LR 2 Ch App 55. B employs undue influence. a trustee-beneficiary and a religious adviserfollower. or where confidence is reposed and betrayed. but proceeded with the purchase.2. T (an Oxford undergraduate). Before the sale was completed. In the case of Tate v. was being pressed to pay his college debts.

Sperni [1952] 2 T.3 Mental Capacity is Temporarily or Permanently Affected by Reason of Age. or in a state of unsound mind. The Court of Appeal set the contract aside.2. that affect his mental capability and also physical suffering.L. 516. The plaintiff and defendant were fellow members of a committee formed to establish a Muslim cultural centre in London. to be unconscionable. 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‰.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. The defendant induced the plaintiff to buy his (defendantÊs) own house for the purpose at a price which grossly exceeded its market value. to obtain advantage which is unfair to the other person. Illness. 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. For example: .2. 5. It was understood that the plaintiff would provide the funds for the centre. and the transaction appears. 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. the presumption is that the person will dominate another personÊs will. or sick. or suffering from certain illnesses or diseases. or mental or bodily distress. In the case of Che Som bt Yip & Ors v. on the face of it or on the evidence adduced. 5. The other person could be old. illness.R.4 Burden of Proof According to Section 16(3)(a) of the Contracts Act 1950. „where a person who is in a position to dominate the will of another. Maha Pte Ltd & Ors [1989] 3 MLJ 468. enters into a contract with him.

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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).

Secondly. where there is a legal duty to disclose the material facts (duty of disclosure) to the other party in a contract.70  TOPIC 5 LAW OF CONTRACT (FREE CONSENT TO CONTRACT) However. the contract.. the relation between the parties would make it AÊs duty to tell B if the horse is sound. if the party whose consent was so caused had the means of discovering the truth with ordinary diligence‰. according to Exception to Section 19 of the Contracts Act. the agreement is a contract voidable at the option of the party whose consent was so caused‰. „if such consent was caused by misrepresentation or by silence.. there are circumstances in which failure by one party to speak out may amount to fraud. regard being had to them. However. Section 19(1) of the Contracts Act 1950 provides that „when consent to an agreement is caused by . is not voidable. the same Explanation (Section 17) continues to provide that.. Section 17 B is AÊs daughter and has just come of age.. equivalent to speech". 1950. For instance: Illustration (b)... The above statement means. (Here. Here... Firstly. Here. A says nothing.unless the circumstances of the case are such that. as in a solicitor-client relationship. 5.3.. or unless his silence is.. „If you do not deny it. .. it is the duty of the person keeping silence to speak. fraudulent within the meaning of section 17. AÊs silence is equivalent to speech. nevertheless.. Section 17 B says to A. . I shall assume that the horse is sound‰. fraud..... This duty arises where the relationship between the contracting parties is in the nature of fiduciary relationship. the act of A keeping silence means approving BÊs statement that the horse is sound). the contract will become voidable at the option of the party whose consent was so caused. in itself... „.. For instance: Illustration (c).1 Effect of Fraud Where there is element of fraud in a contract. where silence is equivalent to speech..

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

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

.. to whom the misrepresentation was made. This means. The representee must have relied on the statement of the representor.. 7.. B examines the accounts of the factory. Section 19 A..2 1. „if such consent was caused by misrepresentation or . 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? . nevertheless.. B buys the factory.. 6. Further. After this.. 4.. The contract is not voidable on account of AÊs misrepresentation... Explanation to Section 19 also provides that. 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. if the party whose consent was so caused had the means of discovering the truth with ordinary diligence‰. the contract.. which show that only four hundred gantangs of indigo have been made. SELF-CHECK 5. misrepresentation which did not cause the consent to a contract of the party .. 2. 1950. does not render a contract voidable‰. 3. is not voidable. For instance: Illustration (b)... leads B erroneously to believe that five hundred gantangs of indigo are made annually at AÊs factory...TOPIC 5 LAW OF CONTRACT (FREE CONSENT TO CONTRACT)  73 However. „a . according to Exception to Section 19 of the Contracts Act. by a misrepresentation... 5..

Sections 21 and 23 of the Contracts Act 1950 provide for the effect of a contract entered into under a mistake of fact. The above provisions provide that if the mistake of fact is done by both parties in a contract. „where both parties to an agreement are under a mistake as to a matter of fact essential to the agreement. Advise Jade. only one of the parties is under a mistake of fact which is essential to the contract made. 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.5. But if the mistake is done by one of the . Tim then produces further accounts to show how the figure is made up. Kyra does not examine the accounts in detail and agrees to become a partner. Later. Advise Tim. (b) 5. the contract will be void. 5. Jade then discovered that she had been misled and sought the legal advice to sue the directors for damages for fraud and misrepresentation. and under Section 23. Under Section 21. The accounts which Tim produces show that the income is not quite RM60. „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‰. However. the directors intended to use the money to pay off the companyÊs existing debts because the creditors were pressing hard for payment. Tim states that the income of the business is RM60. Kyra discovers the true position and seeks to rescind the contract on the ground of fraud. During negotiations between Tim and Kyra.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. According to Section 23. the agreement is void‰.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.1 Mistake of Fact According to Section 21. both parties to the contract are under a mistake of fact.000 a year. In fact.000 a year and Kyra asks about the balance.74  TOPIC 5 LAW OF CONTRACT (FREE CONSENT TO CONTRACT) ACTIVITY 5.

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

2 Mistake of Law Mistake of law is provided under Section 22 of the Contracs Act 1950.3 Mistake as to Document A party who has made a mistake as to the nature of a document he has signed.5. if the mistake is made by the contracting parties as to the law in force in Malaysia. then the contract is void. 5. is bound by the terms of the contract. but a mistake as to a law not in force in Malaysia has the same effect as a mistake of fact‰. „a contract is not voidable because it was caused by a mistake as to any law in force in Malaysia.76  TOPIC 5 LAW OF CONTRACT (FREE CONSENT TO CONTRACT) Section 23 covers the unilateral mistake in English common law. 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. The example of case is: Tamplin v. But if the mistake is made as to the law not in force in Malaysia. James (1898) 15 ChD 215. 5.5. the contract is not voidable. Thus. 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. Section 22 states. The contract was held to be valid by the English court. . it was not.

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. Thus. The agreement is void. Non est factum means „it is not his deed‰. C is dead at the time of the promise. The High Court ruled that there was a mistake as to the nature of the document signed and therefore. according to Section 66 of the Contracts Act 1950. In the case of: Awang bin Omar v. 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. Haji Omar & Anor [1949] MLJ Supp 28. However. An example is illustrated below: Illustration (a) A pays B $1. but B must repay A the $1. and the Malaysian courts applied the principle in the local cases. the first defendant was not liable. „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‰.4 Effect of Mistake When a contract is void (for mistake). it is a plea that the agreement is not the act of the person.000 in consideration of BÊs promise to marry C (AÊs daughter). . there is an exception in English law that allows the defence of non est factum.5.000. to sign a document). 5. Retnam [1966] 1 MLJ 172. he was bound by the terms he had signed (provided there was no fraud or misrepresentation). Even if the defendant was ignorant of the language. The defendant had signed a written acknowledgment of a loan provided in the English language.TOPIC 5 LAW OF CONTRACT (FREE CONSENT TO CONTRACT)  77 In Subramaniam v.

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

6.TOPIC 5 LAW OF CONTRACT (FREE CONSENT TO CONTRACT)  79 SELF-CHECK 5. Kamal then bought the orchard from Mr Sam.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. 5. Kamal did not read this statement and believed that the field would be included in the sale. After the sale was completed. 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. Later. 3. 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. Kamal discovered that the field was not included in the sale and intended to set aside the contract. Kamal was one of those who was interested in the orchard because he had seen Mr Sam using the adjacent field to graze cows. Advise Kamal. (b) Mr Sam advertised his „Durian Orchard‰ for sale.3 1. 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. Nadia believes that he is buying from Vince and not from Hans. 2. Kamal always wanted to graze cows that would bring him profit apart from maintaining the orchard. 4. .

The presumption of undue influence can be rebutted by proving the other party taking independent legal advice.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. The burden of proving that the contract is not induced by undue influence is on the person dominating the will of another. A false statement which does not induce or cause the party to enter into a contract does not render the contract voidable. Contracts made under undue influence will become 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. with the intention to make the other party enter into a contract. Remedy of rectification is allowed in a contract made under mistake. Mere silence is no fraud. 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. Innocent misrepresentation in a contract is not made with the intention to deceive but the contract is voidable. The defence of non est factum is accepted in mistake cases but in exceptional circumstances. Fraud covers an act committed by one contracting party with the intent to deceive another. To establish a contract made under undue influence requires the elements of domination of will and obtaining unfair advantage. Element of fraud makes the contract voidable. Unilateral mistake does not render a contract voidable. 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. Failure by one party to speak out will amount to fraud if there is a duty of disclosure. Mistake of fact will render a contract void if it is a common or mutual mistake.

Che Som bt Yip & Ors v. UK: Pearson and Longman. Maha Pte Ltd & Ors [1989] 3 MLJ 468. . (2000). [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. Lim Hong Shin v. Datuk Jaginder Singh & Ors. A. Valiappa Chettiar [1954] MLJ 119. M. Undang-Undang Perniagaan Malaysia. Keates v.). Rahman. D. Tara Rajaratnam [1983] 2 MLJ 196. 591. AnsonÊs Law of Contract (26th ed. Letchemy Arumugam v. Harlina Mohamed On & Rozanah Ab. Wu. v. B. Smith and KeenanÊs Law for Business (13th ed. Selangor: Pearson and Longman. Haji Omar & Anor [1949] MLJ Supp 28.). & Vohrah. Cases:          Awang bin Omar v. Wilkinson [1927] AC 177.B. (2007). G.). Tai Kim Choo & 4 Ors. Annamalay [1982] 2 MLJ 198. Bhd. Leong Fong Yew (1918) 2 FMSLR 187. Kesarmal s/o Letchman Das v. Singapore: Oxford University Press. Lord Cadogan (1851) 10 C. (1988). The Commercial Law of Malaysia (2nd ed. Keenan. Bisset v. Selangor: Kumpulan Usahawan Muslim Sdn. Chin Nam Bee Development Sdn Bhd v. (2006). A.

Williamson (1866) LR 2 Ch App 55. Sperni [1952] 2 T. Mithoolal v. Subramaniam v.L. 516. James (1898) 15 ChD 215. . Wichelhaus (1864) H&C 906. Tufton v. Ltd. Tan Chye Chew & Anor v. Eastern Mining & Metals Co Ltd [1965] 1 MLJ 201. v. Bundy [1975] QB 326. Retnam [1966] 1 MLJ 172. Tate v. Raffles v.R. Life Insurance Corp of India AIR 1962 SC 814. Hadjee Abdullah (1894) 2 SSLR 57.82  TOPIC 5 LAW OF CONTRACT (FREE CONSENT TO CONTRACT)          Lloyds Bank. Tamplin v. Salwath Haneem v.

or is regarded as immoral or opposed to public policy. Describe the importance of reasonable restraint in contracts. List several kinds of void contracts. Explain the effect of contracts in restraint. is fraudulent. and Discuss the consequence of illegal contracts. 5.  INTRODUCTION Section 2(g) of the Contracts Act 1950 provides that „an agreement not enforceable by law is said to be void‰. defeats the provisions of any law. implies injury to person or property of others. 3. 2. you should be able to: 1. Explain the status of contracts with unlawful consideration or object. . 4. the consideration or object of the agreement is unlawful (see Figure 6.1) when it: (a) (b) (c) (d) (e) is forbidden by law.Topic  6 Law of Contract (Void and Illegal Contract) LEARNING OUTCOMES By the end of this topic. Under Section 24.

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. 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.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. . by way of gaming or wagering shall be null and void.84  TOPIC 6 LAW OF CONTRACT (VOID AND ILLEGAL CONTRACT) Figure 6. 1950. either made orally or written. 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. 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. 6. Contracts Act 1950. These kinds of agreements are regarded as void according to Section 29 of the Contracts Act. DEFEAT THE LAW Section 24(a) and (b). It provides that all agreements.1 CONTRACTS FORBIDDEN BY LAW AND IF PERMITTED. Section 28 makes an agreement that restrains trade transaction as void agreement.

however. However. Krishnan [1955] MLJ 103. it was unlawful by reason of Section 24 of the Contracts Act. Bhd. The Court held that: The transactions were tainted with illegality. v. This act contravened Section 67 of the Companies Act 1965. The plaintiff entered into an agreement with the defendant for a purchase of a piece of land held under Temporary Occupational License (TOL). The appellants extended loans to the respondents and the loan was secured by documents and guarantees. The court further held that although the oral agreement contravened Rule 12(1). Example of cases where contracts are prohibited by statute: Chung Khiaw Bank Ltd. The Court held that the agreement was an attempt to sell a land under the TOL. he could enforce it. In the case of Hee Cheng v. the respondent orally agreed to sell and transfer a house to the appellant. & Anor [1990] 1 MLJ 356. Hotel Rasa Sayang Sdn. The agreement. 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. The documents evidencing the loans showed that the hotel whose shares were being purchased by a company had given financial assistance to that company. Lim Tan & Sons Sdn Bhd [1985] 2 MLJ 291. Therefore. The defendant breached the contract and the plaintiff claimed for specific performance of the agreement. 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. . Therefore. Such an attempt if allowed would frustrate the law.TOPIC 6 LAW OF CONTRACT (VOID AND ILLEGAL CONTRACT)  85 In the case of Rasiah Munusamy v. which the respondent undertook to build. the appellant-purchaser clearly belonged to a class for whose protection the statutory prohibition was imposed. The Court held that there was nothing in the rules which provided that verbal agreement was invalid.

the Court held that the transaction was void. 6. . Abu Samah [1968] 1 MLJ 221. would affect the interest of the minor.86  TOPIC 6 LAW OF CONTRACT (VOID AND ILLEGAL CONTRACT) In Tan Bing Hock v. In the case of Syed Ahamed Alhabsyee v. The Court held that the contract was illegal.2 FRAUDULENT CONTRACTS Section 24(c). 6. An example of a fraudulent contract is found in the following illustration. who was a trustee of a piece of land belonging to a minor. Section 24 A. had agreed to sell it to the plaintiff. Puteh bt Sabtu (1922) 5 FMSLR 243). The defendant agreed to assign his rights under the licence (to extract timber) to the plaintiff. B and C enter into an agreement for the division among them of gains acquired. The agreement is void. Contracts Act 1950 Any contract which its consideration or object is fraudulent is void. or to be acquired. Since the sale of the land. 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. as its object is unlawful. if allowed. by them by fraud. The defendant held a logging licence in Pahang under the Forest Rules 1935 which prohibited transfer without written approval from the District Forest Officer. Illustration (e).3 CONTRACTS INJURIOUS TO PERSON OR PROPERTY OF ANOTHER Section 24 (d).

The Court held that the money lent for the purpose of brothel business was not recoverable for illegality. Contracts Act 1950 Any contract which its consideration or object is regarded as immoral or opposed to public policy is void under the law. The agreement is void. and B promises to pay RM1. though the letting may not be punishable under the Penal Code. . Public Policy (a) Contracts prejudicial to the public service Illustration (f). In Aroomogum Chitty v.000 to A in return. Lim Ah Hang (1894) 2 SSLR 80.4 CONTRACTS IMMORAL OR AGAINST PUBLIC POLICY Section 24(e). Section 24 A promises to obtain for B an employment in the public service.TOPIC 6 LAW OF CONTRACT (VOID AND ILLEGAL CONTRACT)  87 6. Section 24 A agrees to let her daughter be hired to B for concubinage. The object of the agreement was clearly immoral. Immoral Contracts Illustration (k). The plaintiff initiated a claim for the refund of money he lent to a brothel business. because it is immoral. Such an agreement is void as the consideration is unlawful.

He then sued for the return of the money when he did not receive the honour. (b) Contracts obstructing the course of justice Illustration (h). The secretary of the defendant charity promised to secure a knighthood for the plaintiff if he would make an adequate donation. (d) Contracts prejudicial to the freedom and stability of marriage A contract is void if it restricts a personÊs ability to marry. Driscoll [1929] 1 KB 470. The reason for this is simply that it profits the enemy state and is thus against public policy. it is also void as it is against public policy.88  TOPIC 6 LAW OF CONTRACT (VOID AND ILLEGAL CONTRACT) In the case of Parkinson v. (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. Another kind of contract is a marriage brokerage contract to find a spouse for a person in return for a fee. A partnership agreement between five persons with the intention to smuggle whisky into the US was held as illegal. is void because it encourages the parties to get into divorce. Section 24 A promises B to drop a prosecution which he has instituted against B for robbery. or promotes any act which weakens the stability of marriage. In the case of Foster v. The agreement is void.College of Ambulance Ltd & Harrison [1925] 2KB 1. as its object is unlawful. Also a contract between spouses who are living together. and B promises to restore the value of the things taken. He did with a promise of more should the knighthood be forthcoming. that provides terms in the event of future separation. .

Later. Section 26. he filed a claim for indemnity against the insurers for the loss of the jewellery at his home through theft. 6. a remisier. A contract is void if the consideration for one or more objects is in part unlawful. 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 6.5 OTHER VOID CONTRACTS The following provisions provide for other kinds of contracts to be regarded as void: (a) Section 25.TOPIC 6 LAW OF CONTRACT (VOID AND ILLEGAL CONTRACT)  89 SELF-CHECK 6. 3. Harry has since failed to provide any information to Joey and has indicated that he has no intention of ever doing so. Joey.000 to Harry. for „insider information‰ which he intended to use in determining how to invest his clientsÊ funds. the Director of a few listed companies.000 paid to Harry.1 1. Contracts Act 1950. He has also failed to pay customs duty to the authority. 2.1 1. Advise Joey as to whether he could recover the RM20. 2. Contracts Act 1950. Insider trading is an offence under Section 132A of the Companies Act 1965. A contract made without consideration is void except in the circumstances provided. Decide whether Gesmar could enforce the indemnity clause. Gesmar had brought into Malaysia certain jewellery which he has failed to declare to the customs. (b) . paid RM20.

Under common law. 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. Contracts Act 1950.90  TOPIC 6 LAW OF CONTRACT (VOID AND ILLEGAL CONTRACT) (c) Section 27. Later. (d) (e) (f) (g) 6. Contracts Act 1950. Anthony Wilson [1964] MLJ 269. any contract that prevents a person from practising a profession. profession or business is void except in certain limited circumstances. Section 29. Contracts Act 1950. A contract in restraint of marriage of a person other than a minor is void. Section 31.5. Section 30. Section 28 clearly provides that a . trade or any lawful business is enforceable provided the restraint is reasonable. in breach of the promise. the defendant left the employment and set up a practice in Kota Bharu town. is to that extent void‰. A contract by way of wager is void except a subscription or contribution made in favour of certain prizes for horse-racing. A contract in restraint of trade. „every agreement by which anyone is restrained from exercising a lawful profession. Section 28.1 Contracts in Restraint of Trade According to Section 28 of the Contracts Act 1950. In the case of Wrigglesworth v. English common law only invalidates contracts with unreasonable restraint. In other words. The plaintiff applied for an injunction to restrain the defendant from practising. in Malaysia. The Court held that the restraint 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. Contracts Act 1950. A contract that is uncertain is void. Contracts Act 1950. However. trade or business of any kind.

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

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. by which two or more persons agree to refer to arbitration on any question between them which has already arisen. (b) (c) 6. 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.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).5. This means. The consequences of illegality do not apply to contracts in restraint of marriage. 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. restraint of trade and restraint of legal proceedings. or affect any law as to references to arbitration. .92  TOPIC 6 LAW OF CONTRACT (VOID AND ILLEGAL CONTRACT) There are three exceptions to the general rule. 6. Those contracts are void only to the extent of the restraint. 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.

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. „if any part of a single consideration for one or more objects. 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. the agreement is void‰. . or any one or any part of any one of several considerations for a single object. The agreement was illegal. The plaintiff sued for the balance but the defendant claimed illegality of the contract. Contracts severable and not severable In cases where the contract is illegal in part. One of the tickets won a prize which was not paid in full by the defendant. Goon Food On (1933-34) FMSLR 169. may be applied. Ng Aik Chong [1970] 1 MLJ 82. 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. the appellants refused to allow the respondent to till the land. is unlawful. Once a contract becomes void.TOPIC 6 LAW OF CONTRACT (VOID AND ILLEGAL CONTRACT)  93 In Seong Sam v. being a wager. The respondent took legal action to recover the sum paid to the appellants and the appellants claimed illegality of the agreement. Therefore. Section 66 would apply and the respondent was entitled to recover the deposit paid. Subsequently. Under the Contracts Act 1950. Hence. Section 66 which is regarded as restitutionary provision. 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. contravening Section 3(1) of the Paddy Cultivators Ordinance. In Ahmad bin Udoh & Anor v. it is either possible or not possible to sever the illegal part from the rest. The plaintiff bought a share in three tickets from the defendant.

to do certain things which are legal. Section 58 provides that. But if B uses it as a gambling house. For example: Illustration A promises to supervise. on behalf of B. The first set of reciprocal promises for sale of the house at $10. to do certain other things which are illegal. he will instead pay $50. firstly. . For example: Illustration A agrees to sell a house to B and B agrees to buy it for $10.94  TOPIC 6 LAW OF CONTRACT (VOID AND ILLEGAL CONTRACT) That means. „where persons reciprocally promise. if the considerations of the contract are partly lawful and partly unlawful. a legal manufacture of indigo and an illegal traffic in other articles.000. and secondly.000 a year. Accordingly. A is promised a salary of $1. the first set of promises is a contract. The agreement is void since the object of AÊs promise and the consideration for BÊs promise being in part unlawful.000 is a contract while the second set is void. under specified circumstances. This provision applies to contracts which are severable.000. but the second is a void agreement‰. For both jobs. the whole agreement is void if it is not possible to sever the considerations.

Decide whether there was a breach of contract by Robin. 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. 3. He sold the business to a company. and would not compete with the company in any way. Nothern was a manufacturer of machine guns and other military weapons. In his contract. Robin left his employment with Mr White in order to work as a roundsman for West Dairies. Nothern agreed that for 25 years he would not manufacture guns or ammunition in any part of the world.2 Discuss the following problems by applying the relevant principles of law: (a) Robin. 6. 4. 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. was employed by Mr White to deliver milk to his customers. The company was amalgamated with another company and Nothern was employed by the new entity as managing director.TOPIC 6 LAW OF CONTRACT (VOID AND ILLEGAL CONTRACT)  95 SELF-CHECK 6. Robin then took the same milk round as he had worked when he was with Mr White. (b) . 5. a milk roundsman. giving certain undertakings which restricted his business activities. Later.2 1. 2. Decide whether this covenant regarding the business sold was valid and enforceable. Robin agreed that for one year after leaving his job.

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

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

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

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

but C does not assent to the agreement. and gives B a mortgage of his (AÊs) estate for $5.000 paid at the time and place at which the $5. and B accepts.000 in his books.1.000.000 were payable.000. An example of alteration of a contract.000. $2.000 and B accepts it in satisfaction of his claim on A. or may accept instead of it any satisfaction which he thinks fit.000 in place of the debt of $10.000 and a third party. . B still owes C $1. pays to B $1. the performance of the promise made to him. This payment discharge the whole claim. or may extend the time for such performance. (b) Payment of a lesser sum by a third party to satisfy a larger debt. B orders A to credit C with $1. This is a new contract and extinguishes the original contract. C. as follows: Illustration (b) A owes B $10.000. A enters into arrangement with B. 7.‰ The provision allows the party to remit the performance of the contract. A pays to B. which will apply to the following situations: (a) Payment of a lesser sum in satisfaction of a larger sum. and no new contract has been entered into. Illustration (c) A owes B $5. The whole debt is discharged. „every promisee may dispense with or remit.2 Remission of Performance Section 64 of the Contracts Act 1950 provides that. in satisfaction of the whole debt. B owes C $1. For example: Illustration (b) A owes B $5.100  TOPIC 7 LAW OF CONTRACT (DISCHARGE OF CONTRACT AND REMEDIES) Illustration (c) A owes B $1.000.000 under a contract. wholly or in part.

000 is a discharge of BÊs demand. A makes an arrangement with his creditors.650 (on the condition that the creditor could either return the cheque to the offeror or retain it and discharge the debtorÊs debt). A. Illustration (d) A owes B under a contract. without ascertaining the amount. Section 38(1) of the Contracts Act 1950 provides that „the parties to the contract must either perform.TOPIC 7 LAW OF CONTRACT (DISCHARGE OF CONTRACT AND REMEDIES)  101 (c) Payment accepted in satisfaction of an unascertained sum. a sum of money. This is a discharge of the whole debt.000.2 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. including B.000 to the creditorÊs solicitor in discharge of $8. to pay them a composition of fifty cents in the dollar upon their respective demands. gives to B. and is also indebted to other creditors. unless such performance has been dispensed with or excused under this Act or of any other law‰. 7. and B. Payment to B of $1. or offer to perform. A case to illustrate further the application of the provision: Kerpa Singh v Bariam Singh [1966] 1 MLJ 38 A third party. whatever may be its amount. the son of the appellant debtor. in satisfaction thereof.000. the amount of which has not been ascertained. (d) An arrangement between a debtor and his creditors to settle debts. 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. Illustration (e) A owes B $2. . their respective promises. accepts the sum of $2. made an offer of $4.

his promise in its entirety. Section 40 of the Contracts Act 1950 provides.000 to AÊs representatives. a promisor is to perform his promise without application by the promisee. the promisee may put an end to the contract. and no time for performance is specified. the contract is voidable at the option of the promisee. „when a party to a contract has refused to perform. unless a contrary intention appears from the contract‰.102  TOPIC 7 LAW OF CONTRACT (DISCHARGE OF CONTRACT AND REMEDIES) Further. by the contract. It means that with the promiseeÊs consent. Otherwise. and B is bound to pay the RM1.000. AÊs representatives are bound to deliver the goods to B. . 7. Section 38(2) of the Contracts Act 1950 provides that. A dies before the day.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. „where. „promises bind the representatives of the promisors in case of the death of the promisors before performance. unless he has signified. the engagement must be performed within a reasonable time‰. or disabled himself from performing. Illustration (b) A promises to paint a picture for B by a certain day. According to Section 47 of the Contracts Act 1950. at a certain price.2. The contract cannot be enforced either by AÊs representatives or by B. his acquiescence in its continuance‰. Meanwhile. The following illustrations explain the provision: Illustration (a) A promises to deliver goods to B on a certain day on payment of RM1. A dies before that day. by word or conduct. a contract will continue to exist even though promisorÊs act has already amounted to a breach of the contract.

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

or to treat it as still subsisting. the innocent party has the right either to rescind the contract.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. Although the appellant was late. and must deliver it to B at that place. Nevertheless. A must apply to B to appoint a reasonable place for the purpose of receiving it. the contract exists but time ceases to be of the essence and becomes at large. a party fails to perform it by the stipulated time. the developer appellant was supposed to perform certain obligations for the respondent. The statement of the Lordships: „If in a contract in which time is of the essence. 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. If he treats it either expressly or by conduct as still continuing. Thus.‰ 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. the appellant delayed in performing their obligation. For instance: Illustration If A undertakes to deliver a thousand gantangs of rice to B on a fixed day. the respondent had to treat the contract as subsisting. it is the duty of the promisor to ask the promisee where he would like the contract to be performed‰. and the promise is to be performed without application by the promisee. the respondent allowed the delivery dates to pass by agreeing to the work being done by the appellant and by further ordering extra work. .

7. Held : They were reciprocal promises to be performed simultaneously because the plaintiff was ready and willing to perform.3 Performance by Third Party Section 41 of the Contracts Act 1950 states. no promisor need perform his promise unless the promisee is ready and willing to perform his reciprocal promise. according to Section 42. However.‰ 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. „if it is the intention of the parties that the contract should be performed by the promisor himself.2 Performance of Reciprocal Promise According to Section 52 of the Contracts Act 1950.TOPIC 7 LAW OF CONTRACT (DISCHARGE OF CONTRACT AND REMEDIES)  105 7. he cannot afterwards enforce it against the promisor‰.2. „if a promisee accepts performance of the promisee from a third party. then it must be performed by him personally‰. Since the defendant could not give vacant posession by the due date. „when a contract consists of reciprocal promises to be simultaneously performed. the defendant was in breach.2. In the case of: .

he could not under Section 42 of the Contracts Act 1950.000. or by reason of some event which the promisor could not prevent. enforce it against the respondent.000. the consideration for the appellantÊs parcel being $25. 7. The $7. becomes void when the act becomes impossible or unlawful‰. Bhd [1990] 1 MLJ 108 The parties agreed to transfer land to each other. This principle covers the doctrine of frustration in common law. which is void. It was also agreed that the difference of $11.000 would be settled by two sons of the respondent. where there is no default by the contracting . $14. Impossibility at the time a contract is made and impossibility after it has been made.106  TOPIC 7 LAW OF CONTRACT (DISCHARGE OF CONTRACT AND REMEDIES) Chin Swee Onn v Puchong Realty Sdn. Held: As the appellant had agreed to accept performance of the promise from the third party.000 and the other for $7. 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. „a contract to do an act which. Therefore. Impossibility after a contract has been made (under Section 57(2)) means. unlawful. a contract becomes impossible to perform subsequent to its making. an agreement to do an act impossible in itself. becomes impossible. Impossibility at the time a contract is made (under Section 57(1)) means. Section 57(2) of the Contracts Act 1950 states.000 was not paid and the appellant thereupon claimed payment from the respondent. one would be responsible for $4. after the contract is made. frustration refers to circumstances that occur. For example: Illustration (a) An agreement to discover treasure by magic is void.3 DISCHARGE BY IMPOSSIBILITY Impossibility of performance covers two situations.000 and that of the respondentÊs.

Supervening impossibility will discharge a contract. The fact that the procession had been cancelled discharged the parties from their obligations. The procession did not take place because of the KingÊs illness. 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. Held: The defendant could be excused from paying rent for the room as the contract was frustrated. The circumstances under which a contract may be discharged by supervening impossibility are as follows: (a) Destruction of the subject-matter of the contract. . Caldwell (1863) B&S 826. 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. The claimant sued for the agreed fee. 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.TOPIC 7 LAW OF CONTRACT (DISCHARGE OF CONTRACT AND REMEDIES)  107 parties to perform their contractual obligations. the hall was destroyed by fire without negligence by any party. (b) Supervening events defeat the whole purpose or object of the contract. Example of cases: Taylor v. and had let it to the defendant for the purpose of viewing the procession. since it was no longer possible to achieve the real purpose of the agreement. Before the first concert was due to be held. Held: The contract was impossible of performance and the defendant was not liable.

A is too ill to sing.000. the party to the contract has undertaken a personal obligation. . which is paid in advance.000 paid in advance. it must be restored. 7. 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. Under this circumstance. But if the money has actually been paid. For example: Illustration (d) A contracts to sing for B at a concert for RM1.108  TOPIC 7 LAW OF CONTRACT (DISCHARGE OF CONTRACT AND REMEDIES) (c) Death or personal incapacity of a party to the contract.1 Effect of Frustration When a contract is automatically terminated by reason of frustration. Therefore. A case for instance: (d) Lee Kin v. or to make compensation for it. personal qualification and skill of the person are the basis of the contract. due to a change in the law. If the party in the contract has incurred expenses in performing the contract . 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. to the person from whom he received it‰.3. any person who has received any advantage under the agreement or contract is bound to restore it. Section 15 of the Civil Law Act 1950 (Revised 1972) is also relevant to frustration contract. the contract becomes void and Section 66 of the Contracts Act 1950 applies. „when an agreement is discovered to be void. 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. Supervening illegality. or when a contract becomes void. According to Section 66. but must refund to B the RM1.

unless he has signified. 7. „when a party to a contract has refused to perform. there is a breach of the contract which entitles the party not in breach to take appropriate action which may include repudiation. the court has the discretion to order payment not exceeding the amount of the said expenses. when a promisor fails to perform his obligations or to tender performance. In the case of: Ban Hong Joo Mine Ltd v. As illustrated below: . This means. the manager of the theatre. or disabled himself from performing. B is at liberty to put an end to the contract.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. B engages to pay her $100 for each nightÊs performance. the obligation of both parties sustains and the party not in breach could still claim for damages. For example: Illustration (a) A is a singer. the promisee may put an end to the contract. his promise in its entirety.4 DISCHARGE BY BREACH Section 40 of the Contracts Act 1950 states. and to sue for payment for the work which had been done. by words or conduct. On the sixth night. If the party not in breach chooses to continue with the contract. to sing at his theatre two nights a week during the next two months. and enters into a contract with B. his acquiescence in its continuance‰. A wilfully absents herself from the theatre. The party not in breach has the option either to continue or repudiate the contract.

100 bags was put on board ship on 31 October 2007. to sing at his theatre two nights in every week during the next two months.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. 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. Mr Roshan refused to take delivery because the rice was not shipped in accordance with the terms of their contract. Discuss the rights of Mr Fernando and Mr Roshan in the above contract. enters into a contract with B. the manager of a theatre. 7. and B engages to pay her at the rate of $100 for each night. a singer. 6. With the assent of B. and the remaining 100 bags on 3 November 2007. 2. 8. 9. SELF-CHECK 7. A wilfully absents herself. 5. . A sings on the seventh night. A total of 5. On the sixth night. B has signified his acquiescence in the continuance of the contract.1 1.200 bags of Moghul rice by Mr Roshan. The sold note stated that the rice was to be shipped during the months of November and/or December 2007. 4. and cannot now put an end to it. but is entitled to compensation for the damage sustained by him through AÊs failure to sing on the sixth night. 3.110  TOPIC 7 LAW OF CONTRACT (DISCHARGE OF CONTRACT AND REMEDIES) Illustration (b) A.

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

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.390. 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.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. Ltd v. However.477. Othman [1966] 2 MLJ 38 The defendant agreed to buy the plaintiffÊs car for RM6. The rule party is entitled to the following: (a) Damages arising naturally. Plaintiff later claimed damages amounting to RM1. the defendant committed breach and the plaintiff had to sell his car to another company at a cheaper price. Baxendale (1854) 9 Ex 341. Held: Plaintiff was entitled to that amount.112  TOPIC 7 LAW OF CONTRACT (DISCHARGE OF CONTRACT AND REMEDIES) 7.5. Section 74 provides recoverable by the claimant.912. RM4.69. This section re-enacts the case of Hadley v. (b) If the party is claiming special damages for loss. according to the usual course of things resulting from the breach. This is explained in the case of: East Asiatic Co.31. that is. 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. .

600 degrees F. giving an undertaking that the melting furnace would have a temperature of not lower than 2. (c) The compensation given is not for any remote and indirect loss or damage sustained as a result of the breach. If the party has failed to mitigate losses. Associated Metal Smelters Ltd [1972] 1 MLJ 171 The defendant-appellant had agreed to sell a metal melting furnace to the plaintiff-respondent. the respondent brought an action alleging breach of condition and claimed damages. A case to illustrate this: . he cannot later recover any loss flowing from his neglect. Mitigation of loss It is also the duty of the party to take reasonable steps to mitigate losses flowing from a breach. they were liable to pay for certain loss of profits suffered by the respondent. Since the appellant knew of the requirement to deliver a furnace capable of producing the specified temperature and the urgency of delivery. This specification was not fulfilled and consequently.TOPIC 7 LAW OF CONTRACT (DISCHARGE OF CONTRACT AND REMEDIES)  113 Tham Chew Toh v. 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. including loss of profits.

114  TOPIC 7 LAW OF CONTRACT (DISCHARGE OF CONTRACT AND REMEDIES) Kabatasan Timber Extraction Co. Damages that may be assessed by mere arimethic calculation. 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. Damages that cannot be ascertained.‰ Therefore. which were to be delivered to a sawmill from the appellant. It is a decree of the court directing that the contract shall be performed specifically according to its terms. instead of delivering it to the sawmill.3 Specific Performance Specific performance is a discretionary remedy granted by the court. Nominal Exemplary Liquidated Damages Unliquidated Damages 7. The remedy is granted under the Specific Relief Act 1950.5. specific performance may be granted by the court in the following circumstances: . Thus. Chong Fah Shing [1969] 2 MLJ 6 The respondent had purchased timbers. However. Small token of award that is given when the plaintiff has proved there is a breach. Held: It was the duty of the respondent to take reasonable steps to mitigate the damages caused by the appellant. the appellant left it 500 feet away from the sawmill. v. but he did not suffer actual loss. Section 11(1) of the Specific Relief Act 1950 provides that. A sum awarded which is far greater than the actual pecuniary loss suffered by the plaintiff. the court reduced the damages awarded to the respondent. 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. the respondent had made a second purchase from other sources to make good the shortage. It is commonly given upon the breach of any duty that has been prescribed by the statute.

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

A becomes insolvent. to construct a road between certain specified points. (iv) A contracts with B to paint a picture for B. A refuses to complete the sale. Illustration A transfers without endorsement. The picture is painted. a promissory note to B. . B may compel C to endorse the note. B is entitled to a decree directing A to convey the house to him. and wharf. siding.000. and the court may appoint a proper person to superintend the construction of the archway. (d) When it is probable that pecuniary compensation cannot be obtained for the non-performance of the act agreed to be done.000.116  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. for his interest in its performance cannot be adequately compensated for by money. but for valuable consideration. and also to construct a siding and a wharf as specified in the contract. (ii) (iii) A contracts to sell. In consideration of being released from certain obligations imposed on it by its Act of Incorporation. and B contracts to buy. to pay a certain annual sum towards the maintenance of this road. for the shares are limited in number and not always to be had in the market. for C has succeeded to AÊs liabilities and a decree for pecuniary compensation for not endorsing the note would be fruitless. who agrees to pay therefore RM1. road. Illustrations (i) A contracts with B to sell him a house for RM1.000. a certain number of railwayshares of a particular description. and C is appointed as his assignee. Z is entitled to have this contract specifically enforced. he paying the purchasemoney. and their possession carries with it the status of a shareholder. B may compel A specifically to perform this agreement. B is entitled to have it delivered to him on payment or tender of the RM1. a railway company contracts with Z to make an archway through their railway to connect lands of Z served by the railway. which cannot otherwise be procured.

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

An example of case: Pertama Cabaret Nite Club Sdn. 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. for instance. Later. the singer dishonoured the contract by singing in a rival club. but he may recover on a quantum meruit basis. The claimant cannot recover damages for breach because no valid contract exists. The court had granted an interlocutory injunction. a claim of quantum meruit may be made where. the respondent should not perform in Kuala Lumpur during the fixed period of the contract. 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. 7.5. 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. work has been done under a void contract. Bhd v. The remedy can be used contractually or quasi-contractually. Quasi-contractually.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. .5 Quantum Meruit This remedy means that the claimant will be awarded as much as he has earned or deserved. and the contract provided that in the event of a breach. Contractually.

5. The articles provided that directors must have qualification shares. 4. Canons Ltd [1936] 2 All ER 1066. Held: He succeeded on a quantum meruit. and he is now sued on a quantum meruit for a reasonable sum by way of remuneration. 3. However. 7. SELF-CHECK 7. there being no valid contract.2 1. the claimant had rendered services. 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. The claimant and other directors who appointed him never obtained the required number of shares so that the deed was invalid. 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? . 6. 2. The claimant was employed as managing director by the company under a deed which provided for remuneration.

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

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

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

 INTRODUCTION The relationship between a principal and an agent is very important because at times. it can be said that the contract of agency is divided into two: . Explain the purpose of agency contract. and Discuss the scope of authority of the agent. you should be able to: 1. the law of agency is governed by Part X of the Contracts Act 1950. he may need the service of a real estate agent to sell the land on his behalf. Define the meaning of agency. Describe the types of agency contract. In Malaysia. From the definition above. 2. The owner will then authorise the real estate agent to deal with the land. 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‰. This is where the agency relationship comes into existence. 5. 3.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. and a „principal‰ as „the person for whom such act is done. Explain the statutory requirements for creation of agency contract. For example. where a person intends to sell his land. or who is so represented‰. 4.

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

which means things that were 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. “an authority is said to be express when it is given by words spoken or written”.2. The principal gives express authority to the agent as stated in the first part of Section 140 of the Contracts Act. The appointment is implied when the authority can only be drawn from the circumstances of the case.2 Agency by Implied Appointment The second part of Section 140 of the Contracts Act 1950 provides for implied appointment of an agent.2. According to Section 140. . or act done by the parties in the ordinary course of dealing. 8.1: Elements for formation of agency ty si es ec N 8. 1950.1 Agency by Express Appointment An agency by express appointment is created through verbal or written authorisation by the principal to the agent.

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

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

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

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

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

Therefore.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.000.1 (a) Actual Authority Express actual authority Express actual authority is expressly given by the principal (orally or in writing) to the agent. 8.TOPIC 8 LAW OF AGENCY (PART 1)  131 For instance. P does not deny EÊs statement. For example. the plaintiff could rely on the usual authority of the manager if he has no knowledge of the restrictions imposed by the principal. and P was estopped from denying the existence of EÊs authority.000. The defendant appointed a manager to run a public house. T appoints S as his agent to purchase goods not exceeding RM10. not exceeding RM10. The defendant forbade the manager to buy cigars on credit. Fenwick [1893] 1 QB 346. T appoints S as his agent to sell TÊs car. A licence was taken out in the managerÊs name. S has implied authority to allow the purchaser to test drive the car. 8. In Watteau v. The agentÊs authority is classified into: (a) (b) Actual authority. SÊs actual authority is to purchase goods on behalf of T. Implied actual or usual authority Implied actual authority is the proper or necessary authority given to the agent to execute the express authority. 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. E is not PÊs agent.3. The plaintiff then claimed for the price of the cigars from the defendant. and Apparent authority. (b) . In actual fact. When X sold goods to E. For example. In such case. E tells X in the presence of P that he is PÊs agent and is authorised to make contract on behalf of P. which was disregarded by the manager. X may claim for the payment of the goods from P.

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

9. 5. 7. 4.TOPIC 8 LAW OF AGENCY (PART 1)  133 SELF-CHECK 8. 6. 10. 8. 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? . 2.1 1. 3.

Richard has just sold his share in one company and decided to buy a new car for his wife. Advise Charlie on the legal claims that he can take against Yuppie.3 Discuss the following questions. which agreed to buy all the rice bags at the price of RM3. To obtain the supply of 100 kilograms salted fish from Tamban Enterprise (TE) after delivery of the rice bags to KRT. 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. The next day. Zila decided to place an order of 1050 plastic bottles produced by SKB in her own name. (b) (c) (ii) On the 10th of February. While carrying out such duty. (a) Zila was appointed by Jaya to supervise the purchase of 1000 plastic bottles produced by Syarikat Kalis Berhad (SKB). One month after the booking date.000 and paid the deposit of RM7. Yuppie went to Pasar Mini Sayugia (PMS). Tan Chong sent the car to Richard and claimed for the balance purchase price of the car. . Yuppie went to TE and bought 150 kilograms of salted fish on behalf of Charlie. upon reaching KRT. a car dealer and booked a car at the price of RM75. 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. Tan Chong knew about the limitation of GaryÊs authority.500.134  TOPIC 8 LAW OF AGENCY (PART 1) ACTIVITY 8.000. Without contacting Charlie for further instruction. Gary told Tan Chong that the car was meant for RichardÊs personal use.1 – 8. Decide whether Tan Chong could claim for the price of the car from Richard. Gary went to see Tan Chong.000. Yuppie discovered that the shop was closed beginning 9th February and would be opened on 15th February 2004. Richard appointed Gary as his agent to buy a car at the price not exceeding RM70. On 15 June 2007. Later.000 to Kedai Runcit Tampan (KRT) in Bukit Tinggi on 10th February 2004.

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

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

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

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

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

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

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

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

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

000 as a bribe or secret commission from the vendor for the sale of the said land. Not to disclose confidential information or documents entrusted to him by his principal. . [1978] 1 MLJ 149. In the case of Boardman v. Officers Co-operative Housing Society Ltd. After the sale was completed. the society discovered the fact that the appellant had received $122. As an agent for the principal. 9. Thus. the respondent society bought land at a price of $944.000 for it. 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. it matters not that the principal lost no profit or suffered no damage⁄.144  TOPIC 9 LAW OF AGENCY (PART II) In Mahesan v. The appellant knew of this fact but failed to inform the society. he is usually entrusted with the principalÊs confidential information or documents.000 from the vendor who had paid earlier $456. an agent must not disclose or reveal this information to other persons. He gained unjust benefit by the use of his principalÊs property or his position and must account for it‰.the reason is simply because it is money which the agent ought not to be allowed to keep. Malaysia Govt. 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.

In cases of necessity or unforeseen emergency (for instance.TOPIC 9 LAW OF AGENCY (PART II)  145 In the case of L. or. "an agent cannot lawfully employ another to perform acts which he has expressly or impliedly undertaken to perform personally. be employed‰. Thus. This principle is in line with the maxim "delegatus non potest delegare" which means "a delegate cannot delegate‰. a sub-agent must. 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. 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. Where the nature of the agency is such that delegation of the authority to another person is necessary to complete the business. 10. unless by the ordinary custom of trade a sub-agent may. Not to delegate his authority. from the nature of the agency. However. or Where the act to be done is purely ministerial or clerical and does not involve the exercise of discretion. placed by the principal on his agent. to this rule there are exceptions. Where the customs of the trade or business permits delegation. due to sickness of agent). Where it is presumed from the conduct of the parties that the agent shall have power to delegate his authority. Power Packing Services (Hermit Road) Ltd (1970) 2 LloydÊs Rep 65. . 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.S Harris Trustee Ltd v.

A employs B to recover $100. the principal is obliged to do the followings in carrying out his duties under the agency contract: 1.000 and for investing the $90. A loses $2000. . an agent loses his right to remuneration if there is misconduct (wrongful or improper conduct) in the business of the agency. A employs B to recover $1.000 from C and to invest in good securities.000 and invests $90. Another example. Indemnify the agent for acts done in the exercise of his duties According to Section 175 of the Contracts Act 1950. 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. For example. "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‰. B is entitled to the remuneration for recovering the $100.000 in good securities and the other $10.2 DUTIES OF PRINCIPAL TO AGENT As far as the duty of a principal to his agent is concerned. Particularly. But he is not entitled to any remuneration for investing the $10. Pay the agent any commission or other remuneration unless the agency relationship is gratuitous. Generally. B recovers the $100.000 and he must make good the $2000 loss to A. the agent is entitled to reasonable remuneration. the money is not recovered. 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.000. and must make good the loss.146  TOPIC 9 LAW OF AGENCY (PART II) 9. However. 2. The amount of commission to be payable to an agent depends on the terms of the contract of agency. Through BÊs misconduct. As a result. Section 173 of the Contracts Act 1950 provides that. 3. B is entitled to no remuneration for his services. Where no amount is agreed.000 in securities which he ought to have known to be bad. the right to receive commission or other remuneration arises when the agent has done all that he had agreed to do.000 from C.

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

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

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

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.150  TOPIC 9 LAW OF AGENCY (PART II) SELF-CHECK 9. 4. From the contract. 7. . Decide whether Lenny is bound to account Hasnan for the discounts that he received. 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. 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. 5. 8. Lenny received discounts from the printers and advertisers but charge Hasnan the full amount of the contract price and kept the discounts for himself. 6. 3.1 1. 2.1 Discuss the following questions: (a) Hasnan employed Lenny. an auctioneer.

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

Ryder & Co bought the goods in their own names from Mr Kye. a member of the firm. a firm of merchants to buy goods for them. Ramoo and Santhi employed Ryder and Co. 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. However. . The kinds of principals include:    A named principal. Upon discovering the agency. A fortnight later.3.3 EFFECTS OF CONTRACTS MADE BY AGENTS The effect of contracts made by agents will be discussed in relation to the categories of principal. The third party knows that the agent is contracting as an agent and knows the principal for whom the agent is acting. Can Mr Kye succeed? (f) 9. Goh. Mr Kye sued Ramoo and Santhi for the price. In actual fact. Thus. Ramoo and Santhi paid Ryder & Co for the goods in the ordinary course of business.1 A Named Principal A named principal is a principal whose name has been revealed to the third party by the agent. sued Mr Kim for damages for fraud. this was quite untrue because the bungalow had been underpinned several times to prevent it from falling down. the agent is not liable for the contract and the contract is binding on the principal.152  TOPIC 9 LAW OF AGENCY (PART II) (e) Mr Kim employed a firm of estate agents to sell his bungalow for him. Mr Kim knew that the bungalow was in poor condition but did not authorise Goh to make the representation. 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. and supplied the goods on credit. and An undisclosed principal. Advise Mrs Irene whether her action would succeed. Goh himself had no knowledge of the underpinning. Mr Kye did not inquire whether they were acting as agents or principals. 9. A disclosed principal but not the name.

for the price of the cotton. Section 186 of the Contracts Act 1950 says. If the third party does not know that a person he deals with is acting as an agent. where an agent would be personally liable for the contract as follows: (a) (b) (c) (d) Where the agent agrees to accept personal liability. A may sue either B or C. Therefore.TOPIC 9 LAW OF AGENCY (PART II)  153 there are exceptions under Section 183 of the Contracts Act 1950. they had contracted for themselves. he has the right to sue the agent or the principal or both. the respondents ordered chemicals and fertilisers for themselves (rather than on behalf of the principal). and afterwards discovers that B was acting as agent for C. or both. Where the agent executes a deed in his own name. 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 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. liable‰. Where the agent signs a negotiable instrument in his own name. Persatuan Peladang Bakti Melaka [1979] 2 MLJ 124.2 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.3. 9. . "in cases where an agent is personally liable. they were personally liable. In the case of Pernas Trading Sdn Bhd v. but they denied liability when the appellants sued for the balance of the price. or both of them. Illustration A enters into a contract with B to sell him 100 bales of cotton. The Federal Court held that although the respondents were agents for a principal. a person dealing with him may hold either him or his principal. and/or Where the agent exceeds his authority and the principal does not ratify the contract.

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

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

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

An agentÊs duty is to render proper accounts to his principal.              An agency contract confers rights and duties to the principal and agent. 3.2 1. 5. An agent must communicate with his principal to get further instructions. and use his skill in carrying out his work. A principal is bound to indemnify his agent for acts done within his scope of authority. An agent must not make any secret profit out of the performance of his duty. 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. . A principalÊs duty is to pay the agent his commission or remuneration. An agent must not disclose confidential information or documents entrusted to him by his principal. 2. 4. It is an agentÊs duty not to let his personal interest conflict with his own duty.TOPIC 9 LAW OF AGENCY (PART II)  157 SELF-CHECK 9. An agent cannot delegate his authority to another person without permission or approval from the principal. An agent must act according to the customs prevailent in the absence of instruction from the principal. 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 exercise care and diligence.

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

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. In Malaysia. the law that governs partnership is the Partnership Act 1961. Define the meaning of partnership. Explain the important characteristics of partnership. 5. Discuss the rules on formation of partnership. 2. Partnership. 3. Describe the relations of partners to outsiders. The most common types of business are:    Sole Proprietorship. and Describe the liabilities of partners to third parties. 4.Topic  10 Law of Partnership (Part I) LEARNING OUTCOMES By the end of this topic.  INTRODUCTION There are various types of business that are widely being carried out in Malaysia. and Company. . you should be able to: 1.

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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.

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

other partners were not liable for the claim. type and nature of the business. name of business. Jacks claimed a sum of RM12.2. In partnership.2. he was also liable as a partner. of sound mind and has not lost capacity to enter into contracts under any laws. usually known as Articles of Partnership which provides for particulars of the firm and the terms of the partnership. 10. A partner is competent to contract if he is an adult. he will be liable with other partners. a minor can become a partner.734. 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.3 Capacity In William Jacks & Co. When a minor partner reaches his age of majority. The partners must have the capacity to enter into contract. But if he remains in the firm. Chan & Yong Trading Co (1964) MLJ 105. Yong. (Malaya) Ltd v. a minor partner is not liable for all the firmÊs debt and contractual liabilities.33 (Business. they may be varied by the partner's consent as provided under Section 21 of the Partnership Act 1961. 10.64 (Business Names) and Cap. name of partners. Sarawak Cap. For mutual rights and duties of partners. However. Trades Licensing Ordinance. registered address of business. who was a minor partner at the time of the purchase of the goods. No.91 being the payment of the goods sold to the defendant who were partners in a firm. 1948 (in Sabah). the provisions of the Partnership Act 1961 will be applicable to the partners.5 Registration of Partnership A partnership must be registered under the Registration of Businesses Act 1956 (in Peninsular Malaysia).4 Partnership Agreement Partnership agreement may be in the form of oral or written agreement. Therefore. The partners may have partnership agreements in writing. In absence of a partnership agreement. The Court held that even though the goods were bought for YongÊs personal use. he can exonerate himself from liability by withdrawing himself from the firm.166  TOPIC 10 LAW OF PARTNERSHIP (PART I) 10. did not defend his case but Chan denied that the goods were for YongÊs personal use. Professions and Trade Licensing)(in Sarawak). shall be submitted to the Registrar of Business for .2. 16. Particulars as to the date of operation of business.

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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.

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

(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. The sons used the trust property for the purpose of the firmÊs business. However. It provides that: „If a partner. When the firm became bankrupt. Other partners. a father and sons were partners in a firm. and nothing in this section shall prevent trust money from being followed and recovered from the firm. 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. (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. B and C are partners of a firm.TOPIC 10 LAW OF PARTNERSHIP (PART I)  173 In the above case. if still in its possession or under its control. 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. In Ex parte Heaton (1819) Buck 386. A who has been appointed as a trustee. being a trustee. 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. Section 16 of the Partnership Act 1961 provides: . improperly employs trust property in the business or on the account of the partnership. if B and C have notice of a breach of trust. A. B and C are not liable for the trust property. improperly uses the trust property in the business.

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

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. This means the use of the deceased partnerÊs name for the partnership business does not constitute holding out. He remains liable for the partnership debts incurred before his retirement. Pendakwaraya [1980] 2 MLJ 246. two partners in a firm had used a trade name („Texwood‰) that belonged to another company on their products. . Other partners shall not be liable unless there is evidence to prove their participation in the commission of the crime. Thus. then he shall be liable for the same. he is not free from liabilities before his retirement. (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. For a person retiring from the firm. the appeal of the second appellant was allowed. In the case of Duke v. 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‰. it was held that for a new incoming partner. & Ker. In the case of Chung Shin Kian & Anor v. 828. (e) Liability for criminal offences Any partner who commits criminal offences shall be personally liable. the partnership business is continued in the old firm-name. A retiring partner may only be discharged from liabilities by a novation agreement between himself. as provided under Section 19(2) of the Act.TOPIC 10 LAW OF PARTNERSHIP (PART I)  175 Section 16 of the Partnership Act 1961 further states that. Brewer (1848) 2 Car. „where. „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 new firm and the creditors. except as to become a partner in the business. after a partner's death. „a partner who retires from a firm does not thereby cease to be liable for partnership debts or obligations incurred before retirement‰. 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).

000 without the consent of the other partner. and partners must not involve in trading of secondhand goods. 6.000 from RiverinOil Company and has also bought a second-hand car on his own account but in the name of the firm. Chandra provided the capital and only visits the garage twice a month whereas Dewi works full time for the firm. 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 1. partners must purchase oil only from RushOil Company. In the course of running the firm. 5. 7. 2. 3.176  TOPIC 10 LAW OF PARTNERSHIP (PART I) SELF-CHECK 10. Dewi has bought oil amounting to RM15. Advise Chandra on his liability as a partner. The terms of the partnership agreement provide that no partner shall incur any debt exceeding RM10. 4. .2 Discuss the following problems: (a) Chandra and Dewi are partners in a garage business.

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

Partnership agreement may be in the form of oral or written agreement. Any partner who commits criminal offences shall be personally liable.A. Selangor: Kumpulan Usahawan Muslim Sdn. Bhd. 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. . B. A person who is admitted as a partner into a firm is not liable for liabilities incurred before he became a partner. (2007). 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. The Commercial Law of Malaysia (2nd ed. Rahman.). Wu M. of sound mind and has not lost capacity to enter into contracts under any laws.   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 partner is competent to contract if he is an adult. Selangor: Pearson and Longman. A partner has an authority to bind the firm if he carries out the partnership business within his scope of authority. Undang-Undang Perniagaan Malaysia.178  TOPIC 10 LAW OF PARTNERSHIP (PART I)       A partnership must be formed for a lawful purpose. & Vohrah. (2000).

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

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

and must contribute equally to losses. 11. whereby: (a) Every partner is entitled to equal share of capital and profits of the business. Section 21 of the Partnership Act 1961 provides that the mutual rights and duties of partners. the following provisions relating to rights and duties of partners are found in Section 26 of the Partnership Act 1961. In the case of Kok Hok Leong & Anor v. Therefore. may be varied by the consent of all the partners and such consent may be either expressed or inferred from a course of dealing. the principle of utmost good faith towards each other is implicit in the partnership agreement.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 Court rejected the appeal on the ground that the respondentÊs action in the defence was an act to protect the firmÊs assets. etc. When the partnership was dissolved. the court ordered the legal fees incurred by the respondent to be paid out of the partnership assets.246. (b) . whether ascertained by agreement or defined by the Act.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.1. Above all. 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. he was entitled to be indemnified from the firm's assets. The respondent engaged a solicitor and managed to reduce the payment of damages in the legal suit.50.TOPIC 11 LAW OF PARTNERSHIP (PART II)  181 11. 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. Seow Kah Cheng & Anor (1950) 16 MLJ 87. 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. The appellant refused to pay and went for appeal.

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

Therefore.000 in consideration of the firm taking him as a partner. On 26 March 1959. The court dismissed the application on the ground that the dispute or disagreement between partners is usual in a partnership business. . the plaintiff had no right to claim his money back. Later. On 3 April 1959.000 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. carrying on business in worsted clothes. Thus. Tan joined the partnership as a new partner and on 30 April 1959 the plaintiff paid the defendant a sum of RM20. majority agreement is sufficient to resolve the dispute. there were three partners in a firm. 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. the defendant and Goh were partners in a share-brokerage firm. (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 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. Two of the partners agreed to train one of the partner's son in the business. the plaintiff claimed for the return of RM20. Walker (1910) 26 TLR 685. 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 plaintiff then acted as if he was a partner in the firm. they signed a partnership agreement whereby Goh transferred part of his interests in the partnership to his two children who were minors. Senanayake [1962] 1 MLJ 204. In Highley v.TOPIC 11 LAW OF PARTNERSHIP (PART II)  183 In Wong Peng Yuen v. the firm suffered unexpected losses and when the firm was dissolved.

The Court held that the partner who had the information must disclose it. the Court held that the right to examine and make copies of the partnership books is not limited to partners. In the existence of the partnership agreement. In Law v. Further obligations of partners in a firm are provided in the following provisions: Section 30. every partner is obliged to render true accounts and full information on all things affecting the partnership. (a) Under Section 30. 31 and 32 of the Partnership Act 1961. the above provisions are not applicable.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 Court held that the act of the first.000. second and third partners who sold the partnership business to a company without informing the fourth partner was invalid. Low Pui Heng [1966] 2 MLJ 52. The right can be exercised through an authorised agent appointed by the partners. In Gan Khuan v. a partner transferred part of his shares to another partner for £21. 11. Law (1904) All ER 526.1. otherwise the sale of the shares may be set aside. (i) The partnership books are to be kept at the place of partnership business.184  TOPIC 11 LAW OF PARTNERSHIP (PART II) However. Tan Jin Luan [1939] MLJ 286. or at the principal place if there is more than one place of business. The partner who bought the shares knew that the partnership assets comprised securities and charges but concealed the facts from the partner's knowledge. in the case of Tham Kok Cheong & Ors v. 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. .

However. 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. He was then appointed a director in the said company and received a salary in consideration for the services he rendered. In Ass v. 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. Benham [1891] 2 Ch 244. a dispute arose between two partners who were the marketing agents for Caltex Ceylon company. must account to the firm for any secret profit or benefit derived by him. name or business connection. if a partner opens a competing business without the consent of other partners. Other partners claimed for the benefit to be given to the firm. or involve in any transaction concerning the partnership.TOPIC 11 LAW OF PARTNERSHIP (PART II)  185 (b) According to Section 31. the defendant entered into a new agency contract with Caltex under his own name. In Pathirana v. before the period of the notice ended. Ariya Pathirana [1967] 1 AC 233. . (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. every partner who uses the partnership property. Thus. 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. The defendant gave three monthsÊ notice to terminate the partnership. without the consent of other partners. he must account for and render all profits made by him to the firm.

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.

Therefore. in the execution of judgement. efforts to get the bank to purchase the land failed and the respondent decided to purchase the land using his money. the appellant had formed a partnership with the respondent to develop a land into a housing area. The facts of every case will be considered in ascertaining whether the property is a partnership property or property of an individual partner. (c) If certain asset is acquired for the firm. In the absence of specific provisions or proof to show that the property is intended for the partnership. (d) (e) Consequently. However. then the property is regarded as the property of an individual partner. But if a creditor obtains judgement against an individual partner only. the creditor is entitled to obtain an order of court charging that partner's interest in the partnership property (Section 25(1)(2)). 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. The appellant applied for a court declaration that the respondent held the land as a trustee to the partnership. The court. and the respondent personally financed the purchase of the land and did not use any partnership money. . the said land was owned by the respondent as his personal property and was not regarded as a partnership property. However. he cannot seize all the partnership property. 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. a creditor who has obtained judgement against a firm may seize partnership property. however.TOPIC 11 LAW OF PARTNERSHIP (PART II)  191 In Ponnukon v. Jebaratnam [1980] 1 MLJ 283.

Section 37(e) When the partnership business can only be carried on at a loss. 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. There are several ways in which a partnership may be terminated as shown in the Table 11. or by the termination of an adventure or undertaking. Section 37(b) When a partner becomes permanently incapable of performing his part in the partnership contract. 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.1: Dissolution of Partnership By expiration of term or notice Section 34 Subject to any agreement between the partners. a partnership is dissolved by the expiration of the term fixed. Section 37(d) When a partner wilfully or persistently commits a breach of the partnership agreement. 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(a) When a partner is lunatic. This means all the firm's business cease to operate upon dissolution of a partnership.5 DISSOLUTION OF PARTNERSHIP A firm ceases to exist when it is dissolved. charge By court order . except the obligations of the partners to continue to do the necessaries for purpose of dissolution and completing the incomplete activities. bankruptcy.192  TOPIC 11 LAW OF PARTNERSHIP (PART II) 11.1 below: Table 11. Section 35 Subject to any agreement between the partners. Section 37(c) When a partner has been guilty of any conduct which affect prejudicially the carrying on of the business. or of permanently unsound mind. or by any partner giving notice to the other of his intention to dissolve the partnership. By death. every partnership is dissolved by the death or bankruptcy of any partner.

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

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

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

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

the law of sale of goods is governed by Section 5(2) of the Civil Law Act 1956. and to commercial and private sales. Explain the implied terms in a contract of sale of goods. wholesale and retail. Sabah and Sarawak continue to apply principles of English law relating to the sale of goods. 3. For Sabah and Sarawak. 2. 5.Topic  12 Law of Sale of Goods (Part I) LEARNING OUTCOMES By the end of this topic. 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). you should be able to: 1.‰ In effect. 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. 4.  INTRODUCTION The Sale of Goods Act 1957 (Revised 1989) is the statute applicable to sale of goods in Peninsular Malaysia. 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 . Define the meaning of goods. Differentiate a contract of sale and an agreement to sell. The Sale of Goods Act 1957 applies to contracts for the sale of all types of goods including second-hand goods. and Identify the importance of transfer of property in the goods. Describe the classification of goods.

Existing goods are goods already owned or possessed by the seller and may comprise specific or unascertained goods. goods which form the subject of a contract of sale may be either existing goods or future goods. Ascertained goods are those unascertained goods which have been identified and appropriated to the contract after the contract has been made. but where the transfer of the . 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. 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. 12.198  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‰.2 CONTRACT OF SALE A contract of sale is the transfer of ownership of the goods to the buyer for a money consideration. 1957 means „every kind of movable property other than actionable claims and money and includes stocks and shares. Unascertained goods are goods not identified and agreed upon at the time a contract of sale is made. 12. grass.‰ In Section 6 of the Sale of Goods Act 1957.‰ A contract of sale includes a sale and an agreement to sell. the contract is called a sale. Future goods consist of goods to be manufactured or produced or acquired by the seller after the making of the contract of sale.1 DEFINITION OF GOODS Goods under Section 2 of the Sale of Goods Act.     Goods are specific if they are identified and agreed upon at the time a contract of sale is made. and things attached to or forming part of the land which agreed to be severed before sale or under the contract of sale.

A person who possesses certain goods may not be the owner of the goods.‰ 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. if the buyer breaches an agreement to sell. an owner of certain goods may not have the goods in his possession. if the buyer fails to pay. Whereas in a sale. Consequently. 12. If the seller breaches an agreement to sell. the seller can sue for the contract price because ownership has passed to the buyer. the buyer has only a personal remedy for damages against the seller.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. the breach of which gives rise to a right to treat the contract as repudiated. 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 contract is called an agreement to sell. Alternately.‰ The above provisions distinguished a sale from an agreement to sell in terms of ownership or „the property in the goods‰.‰ . A condition under Section 12(2) is: „A stipulation essential to the main purpose of the contract. the goods still belong to the seller. the seller may sue for unliquidated damages. In an agreement to sell.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.

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. 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. 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. though called a warranty in the contract.‰ There are circumstances which permit the buyer to treat a breach of condition as a breach of warranty. 12. 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. However. are generally accepted incidents of the contract and therefore imported by the courts. The stipulation may be a condition. 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. . according to Section 62 of the Sale of Goods Act 1957: „This right. 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.‰ 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. or by usage. The terms. where a contract is not severable and the buyer has accepted the goods or part thereof. in a case where the contract is for specific goods and the property has passed to the buyer. as provided in Section 13(1) of the Sale of Goods Act 1957.4 IMPLIED TERMS Implied terms are those conditions and warranties implied by the statute into particular contracts. the buyer and the seller. Similarly. These conditions and warranties implied in a contract of sale of goods bind the contracting parties. under Section 13(2).‰ However. the breach of condition must be treated as a breach of warranty. Therefore. if the usage is to bind both parties to the contract.‰ 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.

there is an implied condition that the goods shall correspond with the description. 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.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. It provides that: „Where there is a contract for the sale of goods by description.4. 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.‰ (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. After using the car for four months. the plaintiff discovered that it was a stolen car and he had to return it to the true owner. An implied warranty that the buyer shall have and enjoy quiet possession of the goods. In the case of Rowland v Divall [1923] 2 KB 500.TOPIC 12 LAW OF SALE OF GOODS (PART I)  201 12. and in the case of an agreement to sell.‰ . the plaintiff bought a car from the defendant. „unless the circumstances of the contract indicate a different intention. he has a right to sell the goods. there is: (a) An implied condition on the part of the seller that in the case of a sale. According to the provision. 12.4.1 Title Section 14 of the Sale of Goods Act 1957 provides the implied undertaking as to title in a contract of sale. he will have a right to sell the goods at the time when the property or ownership is to pass. 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.

Further flour was ordered.‰ Sale of goods by description covers all cases where the buyer has not seen the goods but is relying on the description alone. 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. In another case of Beale v. 1961. white. v Mitsui Bussan Kaisha Ltd (1911) 12 SSLR 67. Taylor [1967] 1 WLR 1193. The buyer saw the car before he agreed to buy. described as „the same as our previous contract‰. Later. 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. Thus. by a trade name. for example. Flour identical in quality was delivered but it did not bear the same well-known trade mark. 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. even though the total quantity was met. previous contracts between the parties for the sale of flour had been sold in bags bearing a well-known trade mark. It was held that he was entitled to claim damages for breach of the condition. 12. „If the sale is by sample as well as by description. twin carb⁄‰. It was held that it did not comply with the description. the seller advertised a car as „Herald Convertible.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 the case of Nagurdas Purshotumdas & Co. 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‰.4. In the case of Moore & Co v.202  TOPIC 12 LAW OF SALE OF GOODS (PART I) In addition. goods ordered from a catalogue or if ordered over the counter.

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

the buyer found that the car was unsuitable for touring. which such examination ought to have revealed. if the buyer purchases goods under its trade name but at the same time relies on the sellerÊs recommendation. A contract for the sale of the car was made. . if they are defective for their purpose. 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. Marshall [1925] 1 KB 260. it means the buyer is still relying on the sellerÊs skill. (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). Hence. Manganese Bronz and Brass Co Ltd [1934] AC 402.‰ However. In Baldry v. there shall be no implied condition as regards defects.‰ „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. the buyer asked the dealer for a car suitable for touring and the dealer recommended a Bugatti car. Therefore. Later. then he cannot claim under this section. they are considered unmerchantable. But if the buyer purchases specific goods under a trade name and gives the impression that he is not relying on the sellerÊs skill.204  TOPIC 12 LAW OF SALE OF GOODS (PART I) In the case of Cammell Laird & Co v. 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). 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. there is an implied condition that the goods shall be of merchantable quality. „If the buyer has examined the goods.

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

the buyer is still entitled to reject them. the cloth supplied by the seller was equal to sample previously examined but because of a latent defect not discoverable by a reasonable examination. The three conditions above are independent of one another. 4. 284. 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. . 5. If the bulk corresponds with the sample but there is a latent defect rendering the goods unmerchantable. specific goods and unascertained goods? Provide examples in your explanation. SELF-CHECK 12. future goods. Cas. What is the meaning of existing goods. the Court found the seller in breach of the condition. In the case of Drummond v.1 1.206  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. Van Ingen (1887) 12 App. 3.

a second-hand car at RM40. Betty was very interested in a sofa set from Italy worth RM15. Michael and Betty also went to Cool Air-Cond. all of the goods ordered by Michael and Betty were delivered. The seller promised to deliver the air conditioner on the day they move to the new house. (b) (c) . they visited a furniture shop Antique Design. the seller promised to deliver the furniture on the day that they were supposed to move into their new house. late 2000‰ model. a shop selling air conditioners.1 Discuss the following questions: (a) Michael and his wife Betty. Michael made a payment. On the day of moving. The set was made from soft leather. with a guarantee that the air conditioner could be used for the next five years without any problem. B placed an advertisement in a local newspaper offering for sale. were busy shopping for new furniture for their new house. The car was described as „Toyota.000. After checking the goods and satisfied with their condition. Nevertheless. After payment. brown in colour and consist of one coffee table. The offer was accepted by B. Michael informed the seller that he wanted a double bed made from good quality wood. Advise Q on her rights under the Sale of Goods Act 1957.o. Q responded by offering to buy the car at RM37. 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. as he was an expert and experienced in selling furniture. After driving the car for almost three months. Meanwhile.000. and they agreed to buy the set. The seller managed to attract Michael to buy a portable air-conditioner at the price of RM2. the portable air conditioner that Michael bought produced a strong noise when it was switched on. The seller assured Michael that he would meet MichaelÊs request.TOPIC 12 LAW OF SALE OF GOODS (PART I)  207 ACTIVITY 12. 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. Three days before moving. Both the husband and wife also agreed to buy a double bed for their daughters. Q now wishes to rescind the contract and seeks your advice on the matter. Q discovered that only the body of the car was of „late 2000‰ model while the engine was from a much earlier model.000.n.000 o.

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

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

„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. The title does not pass to B until A weighs the flour and B knows that the flour has been weighed. Future goods mean goods to be manufactured or produced or acquired by the seller after the making of the contract of sale. A agrees to sell a specific computer to B and promises to install the specific software in the disk. 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. 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 . but the seller is bound to weigh. and it must be approved by the other party. The duty to appropriate may be placed on the buyer or the seller. A agrees to sell to B all the flour contained in a specific sack for RM3 per kilogram. Appropriation may involve the act of selecting. either by the seller with the assent of the buyer or by the buyer with the assent of the seller. For example. 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 property in the goods thereupon passes to the buyer. test. The appropriation must be unconditional and it should pass property in the goods without further requirements (such as payment or price). separating or weighing from a bulk by the buyer or the seller. or do some other act or thing with reference to the goods for the purpose of ascertaining the price. A contract for the sale of unascertained goods is an agreement to sell and not a sale. where there is a contract for the sale of specific goods in a deliverable state. the property does not pass until such act or thing is done and the buyer has notice thereof. (f) Sale of unascertained goods and appropriation Under Section 23 of the Sale of Goods Act 1957. For example. measure. The assent may be expressed or implied and may be given either before or after the appropriation is made. the property does not pass until such thing is done and the buyer has notice thereof. Further. (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.

when goods are delivered to the buyer on approval or „on sale or return‰. 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. if a time is fixed for the return of the goods. property in the goods passes upon the expiration of a reasonable time. then property in the goods will not pass until the goods are actually delivered to the buyer. 6. on the expiration of such time. SELF-CHECK 12. 3. and if no time has been fixed. But if the carrier is the agent of the seller. trucking or railway). or other similar terms. he is deemed to have unconditionally appropriated the goods to the contract. 5. on the expiration of a reasonable time. (ii) Under the second situation above. But if no time is fixed. or if he does not signify his approval or acceptance to the seller but retains the goods without giving notice of rejection.TOPIC 12 LAW OF SALE OF GOODS (PART I)  211 carrier or other bailee for the purpose of transmission to the buyer. 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? . 4. The carrier is the buyerÊs agent for the purpose of delivery. 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. then. (g) Goods sent on approval or „on sale or return‰ Under Section 24 of the Sale of Goods Act 1957. if a time has been fixed for the return of goods. 2.2 1. and does not reserve the right of disposal. a transportation company such as shipping. then property in the goods passes upon the expiration of the time.

   A contract of sale is the transfer of ownership of the goods to the buyer for a money consideration. The vendor sold 200 tonne metric of the flour to Mr Hans and gave him a delivery order addressed to Mr Isaac. What distinguishes a sale from an agreement to sell is in terms of ownership or „the property in the goods‰. When Mr HansÊ carrier arrived at the godown. The conditions and warranties implied in a contract of sale of goods bind the contracting parties. Discuss when did the property in the goods pass and who shall bear the loss. Mr IsaacÊs godown caught by fire and it destroyed the whole stock of the flour.212  TOPIC 12 LAW OF SALE OF GOODS (PART I) ACTIVITY 12. Isaac.      . A condition is a stipulation essential to the main purpose of the contract. The parties to a contract of sale may exclude the implied terms by the express agreement or by previous dealings or by usage. 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. Before the loading could commence.2 Discuss the following question: 500 tonne metric of flour belonging to a vendor were stored in a godown belonging to Mr. Where the property in the goods is transferred from the seller to the buyer. the contract is called a sale. the buyer and the seller. 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 warranty is a stipulation collateral to the main purpose of the contract. 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. the contract is called an agreement to sell. the breach of which gives rise to a right to treat the contract as repudiated.

Selangor: Kumpulan Usahawan Muslim Sdn. Marshall [1925] 1 KB 260. there are implied conditions as regards to title. . (2000). Cammell Laird & Co v. (2007). A.TOPIC 12 LAW OF SALE OF GOODS (PART I)  213   In a contract of sale of goods. sample. description. he will have a right to sell the goods at the time when the property or ownership is to pass. Wu M. Drummond v. Undang-Undang Perniagaan Malaysia.   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. Taylor [1967] 1 WLR 1193. & Vohrah B. Selangor: Pearson and Longman. Manganese Bronz and Brass Co Ltd [1934] AC 402. thus the goods will remain at the sellerÊs risk until the property in the goods is transferred to the buyer. The risk passes when the property in the goods passes. fitness for particular purpose and merchantable quality. The Commercial Law of Malaysia (2nd Ed. Unless the circumstances of the contract indicate a different intention. there is an implied condition on the part of the seller that in the case of a sale. 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. Van Ingen (1887) 12 App. 284. Cases:  Baldry v.    Beale v. Cas. and in the case of an agreement to sell. Rahman.). Bhd.

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

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

In the case of Lim Chui Lai v. When they attempted to sell the materials. the buyer acquires no better title to the goods than the seller had. In an action for conversion.216  TOPIC 13 LAW OF SALE OF GOODS (PART II) 13. the buyer will not acquire a title in the goods he purchases. The wordings of Section 27 are as follows: „Subject to this Act and of any other law for the time being in force. 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. 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. where goods are sold by a person who is not the owner thereof. Since Ahmad had no title to the goods or authority to sell them. This means the buyer can only acquire a good title in the goods if he purchases from the owner of the goods. 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. there are a few exceptions to the rule of nemo dat quod non habet (refer to Figure 13. Consequently. he therefore could not transfer any title to the appellant. Zeno Ltd [1964] 30 MLJ 314.... the appellant in this action. However. . Section 27 provides the rule that no one can transfer a better title than the seller himself. and who does not sell them under the authority or with the consent of the owner. they discovered that the materials had been sold by Ahmad to Lim Chui Lai. Under the contract. The maxim is nemo dat quod non habet. Zeno Ltd would provide Ahmad with all the materials for the culverts construction. Zeno Ltd entered into an agreement with a contractor named Ahmad who had secured contracts from the Petaling Jaya Authority for construction of culverts. They brought the materials for the projects and delivered them to the construction site. AhmadÊs contracts with Petaling Jaya Authority were cancelled whereupon Zeno Ltd informed the authority that the materials on the site belonged to them. The exceptions are provided in the following provisions under the Sale of Goods Act 1957.1.1 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. Later.‰ This rule protects the right of ownership.

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

1. 13. 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. . in possession of the goods or of a document of title to the goods. Sheila and Tracey are joint-owners of one refrigerator which they bought a year ago. Sheila has just moved out from the house that they both rented from the landlord. 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. A merchantile agent is an agent having in the customary course of business authority either to sell goods. 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.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. at the time of the contract of sale. 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. According to Section 28: „If one of several joint-owners of goods has the sole possession of them by permission of the co-owners.‰ For example. or to raise money on the security of goods. with the consent of the owner. 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. Later.218  TOPIC 13 LAW OF SALE OF GOODS (PART II) 13. A broker. Mr Justin. Also. or to buy goods. or to consign goods for the purpose of sale. 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. an auctioneer or a dealer of goods for commission are the examples of merchantile agents. provided that the buyer acts in good faith and has not. notice that the seller has no authority to sell. The ownership of the refrigerator is transferred to Dewi.‰ 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.3 Sale by One of Joint Owners The provision for this exception is found in Section 28 of the Sale of Goods Act 1957.1.

1. the second buyer gets a good title while the original buyer loses his. 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.5 Sale by a Seller in Possession After Sale The exception is provided in Section 30(1) of the Sale of Goods Act 1957.4 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. Under this exception. the delivery or transfer by that person or by a mercantile agent acting for him. 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. This provision applies to contracts which are voidable. continues or is in possession of the goods or of the documents of title to the goods. of the goods or documents of title under any sale.6 Sale by a Buyer in Possession after Sale The exception is provided in Section 30(2) of the Sale of Goods Act 1957. whereby: . misrepresentation or undue influence. but the contract has not been rescinded at the time of the sale. but the contract has not been avoided at the time of the sale. 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.‰ Where the seller of goods has obtained possession under a voidable contract. having sold goods.1.TOPIC 13 LAW OF SALE OF GOODS (PART II)  219 13. 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. 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. fraud. The seller must have sold the goods to the buyer before the original owner rescinded the voidable contract. Thus.1. when the consent of the original owner is caused by coercion. which states that: „Where a person. 13.

obtains. delivery to carrier or wharfingers. Hence. The plaintiffs attempted to recover the car from the defendant. and acceptance of goods. 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. obtains possession of the goods or the documents of title with the consent of the seller. wrong quantity or mix of goods delivered. 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. place of delivery. Williams [1965] 1 QB 560. 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. time of delivery. he can pass a good title to a subsequent bona fide purchaser. 13. pledge. B then resold the car to the defendant. the plaintiffs sold a car to A who paid by cheque. In the case of Newtons of Wembley Ltd v. Although he was given possession of the car.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. he could pass a good title to B who then transferred it to the defendant. The Court of Appeal held that A. it was agreed that the property would not pass until the cheque was honoured.‰ This means if a buyer having bought or agreed to buy goods. having bought or agreed to buy goods. 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. . the original buyer was in possession with consent of the plaintiffs.220  TOPIC 13 LAW OF SALE OF GOODS (PART II) „Where a person. delivery by instalments. possession of the goods or the documents of title to the goods. with the consent of the seller.

between the parties. goods sold are to be delivered at the place at which they are at the time of the sale. Where the goods at the time of sale are in the possession of a third person. at the place at which they are manufactured or produced. Unless otherwise agreed. Apart from any such contract. the seller of goods is not bound to deliver them until the buyer applies for delivery. but no time for sending them is fixed. that is to say. Demand or tender of delivery may be treated as ineffectual unless made at a reasonable hour. 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. express or implied. the seller is bound to send them within a reasonable time. if not then in existence. Buyer to apply for delivery (Section 35) Apart from any express contract. 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.TOPIC 13 LAW OF SALE OF GOODS (PART II)  221 Payment and delivery are concurrent conditions (Section 32) Unless otherwise agreed. 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. and the buyer shall be ready and willing to pay the price in exchange for possession of the goods. Where under the contract of sale the seller is bound to send the goods to the buyer. the expenses of and incidental to putting the goods into a deliverable state shall be borne by the seller. delivery of the goods and payment of the price are concurrent conditions. or. (b) (c) (d) (e) (f) . 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.

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

where goods are sent by the seller to the buyer by a route involving sea transit. Unless otherwise agreed. to afford the buyer a reasonable opportunity of examining the goods for the purpose of ascertaining whether they are in conformity with the contract. he retains the goods without intimating to the seller that he has rejected them. Unless otherwise agreed. (c) Buyer's right of examining the goods (Section 41) (a) Where goods are delivered to the buyer which he has not previously examined. 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. 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. .3 REMEDIES FOR BREACH 13. or when. 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. and if the seller fails to do so. in circumstances in which it is usual to insure. the buyer may decline to treat the delivery to the carrier or wharfinger as a delivery to himself. If the seller omits to do so. to accept goods and to pay for the goods.3. on request.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. or may hold the seller responsible in damages. 13. 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. after the lapse of a reasonable time. (b) Acceptance (Section 42) The buyer is deemed to have accepted the goods when he intimates to the seller that he has accepted them. and the goods are lost or damaged in course of transit or whilst in the custody of the wharfinger. he is bound. the goods shall be deemed to be at his risk during such sea transit.

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. take delivery 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.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. 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. 13. 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. 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. (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. 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.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. and the buyer does not.3.

by implication of law: (i) (ii) a lien on the goods for the price while he is in possession of them. as such. I. or (iii) where the buyer becomes insolvent. where the goods have been sold on credit. . (b) In this topic. namely: (i) (ii) where the goods have been sold without any stipulation as to credit. but the term of credit has expired. the term "seller" includes any person who is in the position of a seller. Unpaid seller's rights (Section 46) (a) Subject to this Act and of any law for the time being in force. in addition to his other remedies. an agent of the seller to whom the bill of lading has been endorsed or a consignor or agent who has himself paid. a right of stopping the goods in transit after he has parted with the possession of them.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. in case of the insolvency of the buyer. 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. and/or (iii) a right of resale as limited by this Act. LIEN Seller's lien (Section 47) (a) Subject to this Act. or is directly responsible for the price. the unpaid seller of goods. notwithstanding that the property in the goods may have passed to the buyer. the unpaid seller has. has. 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. (b) Where the property in goods has not passed to the buyer. for instance. (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.

does not lose his lien by the only reason that he has obtained a decree for the price of the goods.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. 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. the transit is at an end and it is immaterial that a further destination for the goods may have been indicated by the buyer. 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. he may resume possession of the goods as long as they are in the course of transit. having a lien thereon. (b) The unpaid seller of goods. when the buyer or his agent lawfully obtains possession of the goods. he may exercise his right of lien on the remainder. or (ii) (iii) by waiver thereof. unless such part delivery has been made under such circumstances as to show an agreement to waive the lien. II. (b) (c) . and may retain them until payment or tender of the price. that is to say. If the buyer or his agent in that behalf obtains delivery of the goods before their arrival at the appointed destination. the transit is at an end. 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. until the buyer or his agent in that behalf takes delivery of them from such carrier or other bailee. If after the arrival of the goods at the appointed destination. 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.

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) . it is a question depending on the circumstances of the particular case. or by giving notice of his claim to the carrier or other bailee in whose possession the goods are. by the exercise of reasonable diligence. then. 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. to be effectual. Where part delivery of the goods has been made to the buyer or his agent in that behalf. he shall redeliver the goods to or according to the directions of the seller. (b) Effect of sub-sale or pledge by buyer (Section 53) (a) Subject to this Act. When notice of stoppage in transit is given by the seller to the carrier or other bailee in possession of the goods. the remainder of the goods may be stopped in transit. Where the carrier or other bailee wrongfully refuses to deliver the goods to the buyer or his agent in that behalf. 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. (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. The expenses of such redelivery shall be borne by the seller. When the goods are delivered to a ship chartered by the buyer.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. shall be given at such time and in such circumstances that the principal. the transit is not deemed to be at an end. whether they are in the possession of the master as a carrier or as agent of the buyer. if such last-mentioned transfer was by way of sale. the notice. In the latter case. may communicate it to his servant or agent in time to prevent a delivery to the buyer. the transit is deemed to be at an end. even if the seller has refused to receive them back.

Where the goods are of a perishable nature. on the resale.3.228  TOPIC 13 LAW OF SALE OF GOODS (PART II) defeated. RESALE Sale not generally rescinded by lien or stoppage in transit (Section 54) (a) Subject to this section. Where an unpaid seller who has exercised his right of lien or stoppage in transit resells the goods. if any. (b) (c) (d) 13. the unpaid seller may require the pledgee to have the amount secured by the pledge satisfied in the first instance. resells the goods. resell the goods within a reasonable time and recover from the original buyer damages for any loss occasioned by his breach of contract. as far as possible. if such last-mentioned transfer was by way of pledge or other disposition for value. and. out of any other goods or securities of the buyer in the hands of the pledgee and available against the buyer. the original contract of sale is thereby rescinded. but without prejudice to any claim which the seller may have for damages. but the buyer shall not be entitled to any profit which may occur on the resale. III. 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. if the buyer does not within a reasonable time pay or tender the price. notwithstanding that no notice of the resale has been given to the original buyer. as follows: . (c) Where the transfer is by way of pledge. the unpaid seller shall not be entitled to recover such damages and the buyer shall be entitled to the profit. on the buyer making default. If such notice is not given. the unpaid seller may. Where the seller expressly reserves a right of resale in case the buyer should make default and. the buyer acquires a good title thereto as against the original buyer. a contract of sale is not rescinded by the mere exercise by an unpaid seller of his right of lien or stoppage in transit. the unpaid seller's right of lien or stoppage in transit can only be exercised subject to the rights of the transferee.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.

and the application of the plaintiff may be made at any time before the decree. 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. but he may: (i) (ii) (b) set up against the seller the breach of warranty in diminution or extinction of the price. or sue the seller for damages for breach of warranty. in any suit for breach of contract to deliver specific or ascertained goods.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. the buyer is not by reason only of such breach of warranty entitled to reject the goods. or upon such terms and conditions as to damages. by its decree direct that the contract shall be performed specifically. payment of the price or otherwise. Remedy for breach of warranty (Section 59) (a) Where there is a breach of warranty by the seller. . 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. if it thinks fit. without giving the defendant the option of retaining the goods on payment of damages. the buyer may sue the seller for damages for non-delivery. on the application of the plaintiff. the court may. as the court may deem just. Specific performance (Section 58) Subject to Chapter II of the Specific Relief Act 1950. The decree may be unconditional.

Cik Jah agreed to supply Che Wan (on daily basis) with 40 kg of coconut milk.1 1. 5 kg of cucumbers and 2 kg of vegetables were completely destroyed when the van used to deliver them skidded into a river. 6. Later the same day. Under the contract. 15 kg of cucumbers and 10 kg of vegetables.230  TOPIC 13 LAW OF SALE OF GOODS (PART II) SELF-CHECK 13. 7. 30 kg of coconut milk. Che Wan had agreed to this arrangement after being shown samples of the items by an agent of Cik Jah. Advise Che Wan and Cik Jah on their legal rights under the contract of sale of goods. 10 kg of cucumbers and 8 kg of vegetables were delivered in bad condition and could not be used. 5.1 Discuss the following questions: (a) Che Wan has just started her food catering business and served some common Malaysian specialties. . the remaining 10 kg of coconut milk. On the sixth day of his business. Che Wan refused to pay for all the items to Cik Jah. a seller specialising in the supply of coconut milk and fresh vegetables. 8. 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. She entered into a contract with Cik Jah. 4. 2. 3.

to accept goods and to pay for the goods. However.TOPIC 13 LAW OF SALE OF GOODS (PART II)  231 (b) Last August. which disappointed her very much.    Nemo dat quod non habet means no one can transfer a better title than he has himself. The performance of contract of sale of goods covers the rules relating to delivery of goods. Advise Samuel on his right to retain the car. 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. 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. or to buy goods. or to consign goods for the purpose of sale. If a seller of goods obtained possession under a voidable contract. Sarah wished to obtain the car and went to see Samuel for such purpose. 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. Rafique sold a car that he possessed as joint-owner with his wife (Sarah) to Samuel at the price of RM30.        . Breach of contract of sale of goods by the buyer includes the buyerÊs failure to take delivery. 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. 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. The sale was made without the knowledge of Sarah. 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. place and time of delivery and quantity of goods delivered. Purchaser can only acquire a good title in the goods if he purchases from the owner of the goods. or to raise money on the security of goods.000.

Rahman. Securities & Finance Ltd v. Undang-Undang Perniagaan Malaysia. Williams [1965] 1 QB 560.Z.A. N.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. Cases:    Lim Chui Lai v. Selangor: Kumpulan Usahawan Muslim Sdn. Bhd. Zeno Ltd [1964] 30 MLJ 314. B. (2000). Wu M. (2007). Selangor: Pearson and Longman. & Vohrah.). . Newtons of Wembley Ltd v. Wrightcars Ltd [1925] 1 NZLR 77. The Commercial Law of Malaysia (2nd ed.

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

the seller will sell the goods to a finance company which will subsequently hire the goods to the purchaser under the hire-purchase terms. In hirepurchase agreement. Thus.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. Therefore. motor cars (for example taxi cabs and hire cars). and Motor vehicles including invalid carriages. and An agreement for the purchase of goods by instalments. property in the goods does not pass at the time of the agreement. 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.1 DEFINITION OF HIRE-PURCHASE In Section 2(1) of the Hire-Purchase Act 1967. 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. goods vehicles (the maximum permissible laden weight does not exceed 2540 kilograms) and buses (including stage buses). 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). there would be a seller or dealer who offers the goods for sale to a purchaser. 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. motor cycles. In hire-purchase. this seller does not offer payment by instalment to the purchaser. hire-purchase is defined as.‰ (b) The above provision explains that hire-purchase is: (a) (b) Letting of goods with an option to purchase. as follows: (a) (b) All consumer goods. . 14. However.234  TOPIC 14 LAW OF HIRE-PURCHASE 14.

The respondent contended that the agreement between the respondent and the appellant was not a hire-purchase but an ordinary sale of goods. it was clearly the intention of the parties that the property in the tractor was not to pass until full payment is made. Therefore. the appellantÊs action in taking possession of the tractor when the respondent defaulted in making instalment payments was against the law. The appellant therefore had the right to repossess the tractor on breach of the terms of the agreement by the respondent. provided that both the owner and the hirer agreed to be bound by the Hire-Purchase Act 1967. The respondent paid all the amount claimed by the appellant and the ownership of the tractor had been transferred to the respondentÊs name. According to the agreement. The appellant claimed for the balance of the amount the respondent had to pay including costs and damages. . 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.Bhd. The respondent had paid the deposit but it had defaulted in making instalment payments. On the other hand. the hire-purchase agreement shall be governed by the common law principles. the appellant and the respondent had entered into an agreement to purchase a tractor. [1979] 1 MLJ 129. 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. but the respondent had again defaulted in making payments. Thus. In the case of Tractors Malaysia Bhd v Kumpulan Pembinaan Malaysia Sdn. The respondent then paid all the instalments due and other incidental costs. Consequently. the appellant took possession of the tractor. 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. if they do not agree. Under common law. it was not a sale on instalment terms but rather in the nature of a hire-purchase.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. The Court held that: On a proper construction of the agreement.

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.236  TOPIC 14 LAW OF HIRE-PURCHASE 14. .3. 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. In the case of a dealer.1: Formation of a hire-purchase contract 14. Construction of a hire-purchase agreement. Figure 14. and Post-contractual obligations.3 FORMATION OF THE HIRE-PURCHASE AGREEMENT The formation of a hire-purchase agreement (refer to Figure 14. the schedule requires information on the description of goods and a summary of the financial obligations of the prospective hirer.1) covers three different stages. as follows: (a) (b) (c) Pre-contractual obligations. Under Section 4(3). failure to observe the obligations shall render the hire-purchase agreement void. According to Section 4(4).

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

If there are more than one goods. 2. As required under Section 5(3). Annual percentage rate for term charges. Otherwise. Section 4D(1) of the Hire-Purchase Act 1967 requires a separate hire-purchase agreement to be prepared for every item. 6. the owner must serve on the hirer a copy of the insurance payment receipt. 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. 4. 5. SELF-CHECK 14. Failure to observe the requirement will render the agreement void under Section 4D(2). 3. The owner must also serve a copy of the policy within seven days of its receipt.3.1 1. 14. (the balance originally payable under the agreement). less the deposit. 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? . Term charges.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. according to Section 5(1A). and Total amount payable. Total amount in (f) and (g). if any part of the total amount payable consists of an amount paid or to be paid under a policy of insurance.

In general. 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. and The owner proves that the hirer has acknowledged in writing that the statement was brought to his notice. 14. 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. This is provided in Section 7 of the Hire-Purchase Act 1967. 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. 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)).1 Implied Conditions Under the Hire-Purchase Act 1967. 15 and 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 1967.4. a hirer shall enjoy rights and protections that are available under the statute. (b) (iii) (c) The goods must be fit for the hirerÊs purpose (Section 7(3)). the implied conditions and warranties are similar to the implied conditions and warranties contained in Sections 14.TOPIC 14 LAW OF HIRE-PURCHASE  239 14. The goods sold to the hirer must be of merchantable quality (Section 7(2)). However. 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. Those rights and protections derived from the implied conditions and warranties as to the goods hired.

The rights are summarised in Table 14. (b) 14. a hirer is also entitled to claim against the owner or any person making misrepresentation in the negotiations leading to the hire-purchase agreement.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.1: . The remedies which the hirer may claim are the right to sue for damages against the dealer or its agent. 14. Similar to Section 14(b) of the Sale of Goods Act 1957. The owner is. quiet possession includes interference by the seller and interference arising from lawful acts of third parties.4. and against the owner.240  TOPIC 14 LAW OF HIRE-PURCHASE 14.5 LIABILITY OF OWNER AND DEALER FOR MISREPRESENTATION Apart from the above rights and protections.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)). The goods are free from any charge or encumbrance created by the owner in favour of any third party (Section 7(1)(c)). This is provided in Section 8 of the HirePurchase Act 1967. entitled to be indemnified by the agent or dealer responsible for a misrepresentation. This right of hirer cannot be excluded or limited by any contractual term. however. the right to rescind the hire-purchase agreement.

and the payment is insufficient to discharge the total amount due. 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. the owner may require that: (a) All defaults under the agreement be made good. (b) Any right to recover the goods from the hirer. prior to that. payment is to be appropriated to satisfy the payment due. 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. (c) the amount payable under the hire-purchase agreement. In such circumstance. Right to apply for an order to remove goods A hirer is obliged to keep the goods in a place mentioned in the agreement. title and interest under a hire-purchase agreement with the consent of an owner. If there is no instruction by 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.TOPIC 14 LAW OF HIRE-PURCHASE  241 Table 14. 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. 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. (b) the amount due to the owner. and (d) the amount derived from interest on overdue instalments. However. Section 10 Section 11 Section 12 Section 13 . or without his consent. if it is unreasonably withheld. and (c) Any contract of guarantee relating to the agreement. However. (ii) Observe all conditions of the hire-purchase agreement. and (iii) Pay reasonable costs incurred by the owner in stamping or registering the assignment agreement. Right to assign hirerÊs rights under the agreement A hirer may assign his rights. all his rights. titles and interests under the hire-purchase agreement shall pass to his personal representative who shall comply with 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. Passing of right by operation of law Upon the death of a hirer.

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

as follows: (a) Service of Fourth Schedule notice (Section 16(1)). the owner can repossess the goods after there have been four consecutive defaults of payment. If the hirer fails to act within the period. . Mohamed Nor (1988). At that time.TOPIC 14 LAW OF HIRE-PURCHASE  243 14. In Public Prosecutor v. 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 notice period must not be less than 21 days after the service of the said notice. the owner will have the right to repossess. 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. In the case of death of the hirer. the accused was a hirer under the hire-purchase agreement with the Finance Company of KUBB. under Section 16(1A). the hirer was holding a sword and another weapon in his hands. the owner has to comply with certain procedures as clearly provided by the Hire-Purchase Act 1967. 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.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 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. 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. the owner must serve a Fourth Schedule notice to the hirer. According to Section 16(2) of the Hire-Purchase Act 1967. Exception to the requirement of Fourth Schedule notice.7. Before the owner proceeds with the repossession.

cost incidental to repossession and cost of storage. (b) Notice under Rule 3 of the Hire-Purchase (Recovery of Possession and Maintenance of Records by Owners) Regulation 1976. the hirer shall not be liable for the cost of repossession. This was due to the repossession that has been effected only after 2 years after the service of notice to the hirer. In Pang Brothers Motors Sdn Bhd v. a notice under Rule 3 of the Regulation shall be served on the hirer. as follows: (a) Personal service of a document acknowledging receipt of the goods (Section 16(4)).244  TOPIC 14 LAW OF HIRE-PURCHASE In United Manufacturers Sdn Bhd 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. After 14 days of the service of the Fourth Schedule notice.7. Failure to issue this notice is an offence under Rule 9 of the Regulation. the hirer contended that the 4th Schedule Notice under Section 16(1) has ceased to have effect. Lee Aik Seng [1978] 1 MLJ 179. whenever approaching the hirer for repossession. 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. 14. the appellant repossessed the car purchased by the respondent through hirepurchase. Sulaiman bin Ahmad &Anor [1989] 1 MLJ 482.2 Procedures during Repossession There are certain procedures that the owner must comply with. . (c) Compliance or non-compliance of the hirer to the notice (Section 16A). If the hirer returns the goods or voluntarily surrenders the goods within 21 days of the Fourth Schedule notice. This notice is intended to inform the intention of the owner to take possession of the goods. The court held that: The notice which was served less than 21 days before repossession was invalid.

(b) (c) . his servant or agent or person who is in possession of the goods. the hirer may give a written notice to the owner to request the owner to redeliver the goods that have been repossessed. Recovery of goods by the hirer (Section 18(1)(a)(i)).3 Procedures after Repossession (Rights of the Hirer after Repossession) The following are the rights of the hirer after repossession (refer to Figure 14. to the hirer. 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.2): (a) The service of Fifth Schedule notice (Section 16(3)). the owner is required to serve the Fifth Schedule notice on the hirer and every guarantor (if any). Within 21 days of the service of the Fifth Schedule notice. the owner cannot sell or dispose the goods until the expiration of the 21 days notice in the Fifth Schedule.TOPIC 14 LAW OF HIRE-PURCHASE  245 After the goods had been repossessed by the owner. his servant or agent or occupant or person who is in possession of the goods. The purpose of this notice is to inform the hirer of his rights after repossession. (b) Rule 4 of the Hire-Purchase (Recovery of Possession and Maintenance of Records by Owners) Regulation 1976. time and place where the repossession of the goods had taken place. Within 21 days after repossession. Restriction of selling or disposal of goods on the owner (Section 17). Without the consent of the hirer. or If the repossession is being carried out by the ownerÊs agent or servant. 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.7. firm. 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. he must prepare a short description of the goods and the date. (ii) 14.

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

TOPIC 14 LAW OF HIRE-PURCHASE  247 hirer fails to renew the policy. 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? . 9. 4. 7. 3. SELF-CHECK 14. the owner may proceed to insure the motor vehicle and the hirer must bear the cost (Section 26(6)). 5. 8. 6. 2.2 1.

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

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

(2000).250  TOPIC 14 LAW OF HIRE-PURCHASE Text Books:  Harlina Mohamed On & Rozanah Ab. [1979] 1 MLJ 129 United Manufacturers Sdn.  Wu M.Bhd. Selangor: Pearson and Longman. Bhd. (2007). B.A. & Vohrah. The Commercial Law of Malaysia (2nd ed.). 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. v Sulaiman bin Ahmad & Anor [1989] . Selangor: Kumpulan Usahawan Muslim Sdn. Bhd. Undang-Undang Perniagaan Malaysia. Rahman. Cases:     Pang Brothers Motors Sdn Bhd.

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